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Registration Number 333-30196
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 3
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
SHELBOURNE PROPERTIES III, INC.
(Exact name of registrant as specified in its charter)
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DELAWARE 6798 04-3502381
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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 III, 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 III, Inc.
1,173,998 Shares of common stock
If you are a limited partner in High Equity Partners L.P. - Series 88,
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 III,
Inc. If the conversion is approved, you will receive three shares of Shelbourne
common stock, on a tax-free basis, for each of your partnership units.
Shelbourne's common stock will be listed on the American Stock Exchange.
We are making this proposal to satisfy the final requirement of a class
action settlement approved by the California Superior Court. Holders of a
majority of the limited partnership units must vote "YES" on the enclosed
consent form for the proposal to be approved. If you have any questions, you may
call (888) 448-5554.
While you may realize a number of potential benefits from the
conversion, there are material risks and potential disadvantages associated with
the conversion as described in "Risk Factors," starting on page 16. In
particular, you should consider that:
o Unlike your partnership, Shelbourne will have perpetual existence
with no specific timing for liquidation of its assets.
o The estimated range of values for shares of common stock is less
than the range of estimated liquidation values for your units.
However, we are not proposing a liquidation of your partnership
and a liquidation at this time would not be approved by our
affiliates which own approximately 26.3% 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 $3.31 per unit, or $1,229,811
in the aggregate, upon liquidation of your partnership as
repayment of fees previously received. Our obligation is reduced
by approximately $0.40 per unit each year, and is eliminated in
2008.
o We have a conflict in recommending the conversion because our
affiliate, Shelbourne Management LLC, will continue to receive
fees for managing Shelbourne.
o If you vote against the conversion and the conversion is
approved by your partnership, you will not be entitled to
dissenters' or appraisal rights for your units.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
accuracy or adequacy of this consent solicitation statement. Any representation
to the contrary is a criminal offense.
The date of this consent solicitation statement is ________ __, 2000.
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TABLE OF CONTENTS
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SUMMARY ........................................................................................................................1
Background Of The Proposal...................................................................................................1
Your Partnership..........................................................................................................1
The Class Action Settlement...............................................................................................1
Shelbourne...................................................................................................................2
Risk Factors.................................................................................................................3
Benefits of the Conversion...................................................................................................4
Comparison of Your Partnership and Shelbourne................................................................................5
Allocation of Common stock..................................................................................................11
Alternatives to the Conversion..............................................................................................11
Liquidation and Dissolution of Your Partnership..........................................................................11
Continuation of Your Partnership.........................................................................................12
Comparison Valuation Analysis...............................................................................................12
General Partners'Recommendation.............................................................................................12
Voting......................................................................................................................14
Limited Partner List........................................................................................................15
RISK FACTORS...................................................................................................................16
The conversion will result in a fundamental change in the nature of your investment
to an interest in an entity with perpetual existence that may change its investments without
your approval............................................................................................................16
Shelbourne's common stock may trade at prices below the estimated value of your units
or below the value of Shelbourne's net assets............................................................................16
Shelbourne's ability to incur debt increases Shelbourne's risk of default on its obligations
which could, in turn, adversely affect Shelbourne's results of operations and distributions to stockholders..............17
Shelbourne may make investments which have a higher degree of risk than the investments
held by your partnership.................................................................................................17
Dividend levels are not guaranteed and may fluctuate.....................................................................17
If the conversion is approved our obligations to repay fees previously received by us upon
liquidation of your partnership will be eliminated.......................................................................17
We have a conflict of interest in recommending the conversion because we are affiliated with Shelbourne Management
which will continue to receive fees for managing Shelbourne..............................................................18
You will not have any dissenters'or appraisal rights if you vote against the conversion..................................18
The estimated value of Shelbourne's common stock is based upon anticipated growth that
will take time to achieve................................................................................................18
Stockholders will be diluted by any subsequent equity issuances..........................................................18
Shelbourne may enter into transactions with our affiliates which may not solely serve your
interests as a stockholder...............................................................................................19
Provisions in the Certificate, Bylaws and Shareholder Rights Agreement could inhibit changes
in control...............................................................................................................19
Shelbourne is subject to risks of default by borrowers and interest rate risks associated with
investments in mortgage loans............................................................................................20
Shelbourne's performance and value are subject to risks associated with the real estate industry.........................20
Shelbourne may not be able to re-lease properties upon the expiration of leases..........................................21
Shelbourne will be managed by a third-party advisor and will therefore have less control over
its operations...........................................................................................................21
Shelbourne Management will have conflicts of interest in managing Shelbourne's business
and may therefore make decisions or take actions that do not solely reflect your interests as a stockholder..............21
Shelbourne's retention of an external manager could adversely affect the value of your shares............................21
Shelbourne's ability to grow could be adversely affected if Shelbourne is not successful in
raising capital..........................................................................................................21
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Fluctuations in interest rates could adversely affect the value of your shares...........................................22
Illiquidity of real estate investments could adversely affect Shelbourne's financial condition...........................22
The uncertainty of the outcome of lawsuits pending against your partnership could adversely
affect Shelbourne's financial condition..................................................................................22
Liability for environmental matters could adversely affect Shelbourne's financial condition..............................22
Stockholder approval is not required for Shelbourne to discontinue its status as a real estate
investment trust.........................................................................................................23
Uninsured losses could adversely affect Shelbourne's financial condition.................................................23
FEDERAL INCOME TAX RISKS.......................................................................................................23
Failure to qualify or remain qualified as a real estate investment trust would cause Shelbourne
to be taxed as a corporation.............................................................................................23
Shelbourne will be subject to a 4% nondeductible excise tax if it fails to distribute required
amounts..................................................................................................................24
There are potential tax disadvantages to conducting business as a real estate investment trust...........................24
BENEFITS OF THE CONVERSION.....................................................................................................26
Greater Market Value........................................................................................................26
Tax-Free Receipt of Common Stock............................................................................................26
Greater Liquidity and More Efficient Market.................................................................................26
Ability to Make New Investments.............................................................................................26
Required Dividends..........................................................................................................26
Beneficial Company Structure................................................................................................26
Elected Governance..........................................................................................................27
Ability to Raise Capital....................................................................................................27
No Unrelated Business Taxable Income........................................................................................27
Simplified Tax Reporting....................................................................................................27
Reduced State Income Tax Reporting..........................................................................................27
COMPARISON OF YOUR PARTNERSHIP AND SHELBOURNE..................................................................................27
Form of Organization........................................................................................................28
General Business............................................................................................................29
Duration of Existence.......................................................................................................29
Voting Rights...............................................................................................................30
Fiduciary Duties, Limitation of Liability and Indemnification...............................................................31
Review of Books and Records.................................................................................................32
Management..................................................................................................................32
Distributions; distribution policy..........................................................................................33
Leverage; borrowing policy..................................................................................................34
Lending Policy..............................................................................................................34
Management Fees to Affiliates...............................................................................................35
Taxation of Taxable Limited Partners........................................................................................38
Taxation of Tax-Exempt Limited Partners.....................................................................................38
BACKGROUND OF THE CONVERSION...................................................................................................39
General.....................................................................................................................39
Your Partnership............................................................................................................39
The Class Action............................................................................................................42
The Class Action Settlement.................................................................................................43
ALTERNATIVES TO THE CONVERSION.................................................................................................45
Appraisals..................................................................................................................45
Valuation Analyses..........................................................................................................49
General..................................................................................................................49
Continuation.............................................................................................................50
Liquidation Analysis.....................................................................................................51
Conversion and Comparable Company Analysis...............................................................................52
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RECOMMENDATION AND FAIRNESS....................................................................................................53
General Partners'Recommendation.............................................................................................53
Fairness of the Conversion..................................................................................................53
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.................................................................55
SELECTED FINANCIAL DATA........................................................................................................56
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS..........................................57
General.....................................................................................................................57
Liquidity and Capital Resources.............................................................................................57
Capital Improvements and Capitalized Tenant Procurement Costs...............................................................58
Real Estate Market..........................................................................................................58
THE CONVERSION.................................................................................................................63
Mechanics of the Conversion.................................................................................................63
Effective Time..............................................................................................................63
Conditions to the Conversion................................................................................................63
Fees And Expenses...........................................................................................................64
Accounting Treatment........................................................................................................64
VOTING ........................................................................................................................64
General.....................................................................................................................64
Vote Required...............................................................................................................65
Voting Procedure............................................................................................................65
Record Date and Outstanding Units...........................................................................................66
Effect of Voting to Approve the Conversion..................................................................................66
Solicitation of Votes; Solicitation Expenses................................................................................66
Limited Partner Lists.......................................................................................................66
CONFLICTS OF INTEREST..........................................................................................................67
Conflicts Relating to the Conversion........................................................................................67
Conflicts Following the Conversion..........................................................................................68
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.................................................................................69
AP-PCC III, L.P. Services Agreement.........................................................................................69
Management Fees To Affiliates...............................................................................................69
Olympia Agreement...........................................................................................................69
SHELBOURNE.....................................................................................................................70
General.....................................................................................................................70
The Operating Partnership...................................................................................................70
Objectives and Strategies...................................................................................................72
The Properties..............................................................................................................74
Other Assets and Liabilities................................................................................................79
Cash Dividend Policy........................................................................................................79
Management..................................................................................................................79
PRO FORMA FINANCIAL INFORMATION OF SHELBOURNE..................................................................................84
DESCRIPTION OF CAPITAL STOCK...................................................................................................93
General.....................................................................................................................93
Common Stock................................................................................................................93
Preferred Stock.............................................................................................................94
Listing, Price and Trading..................................................................................................94
Restrictions on Transfers...................................................................................................94
Additional Issuances........................................................................................................97
Shareholder Rights Agreement................................................................................................97
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MATERIAL PROVISIONS OF DELAWARE LAW AND SHELBOURNE'S
CERTIFICATE AND BYLAWS.........................................................................................................99
Amendment of Certificate and Bylaws........................................................................................100
Dissolution of Shelbourne..................................................................................................100
Meetings of Stockholders...................................................................................................100
The Board of Directors.....................................................................................................100
Limitation of Liability and Indemnification................................................................................101
Business Combinations......................................................................................................101
Indemnification Agreements.................................................................................................102
FEDERAL INCOME TAX CONSEQUENCES...............................................................................................102
The Conversion.............................................................................................................103
Taxation of Shelbourne as a Real Estate Investment Trust...................................................................103
General.................................................................................................................103
Requirements for Qualification..........................................................................................105
Organizational Requirements.............................................................................................105
Income Tests............................................................................................................106
Asset Tests.............................................................................................................108
Annual Distribution Requirements........................................................................................109
Failure of Shelbourne to Qualify as a Real Estate Investment Trust......................................................110
Taxation of Taxable U.S. Stockholders......................................................................................110
Distributions by Shelbourne.............................................................................................110
Passive Activity Losses and the Investment Interest Limitation..........................................................111
Sale of Common Stock....................................................................................................111
Backup Withholding......................................................................................................111
Taxation of Tax-Exempt Stockholders........................................................................................111
Taxation of Non-U.S. Stockholders..........................................................................................112
Distributions by Shelbourne.............................................................................................112
Sale of Common Stock....................................................................................................113
Backup Withholding Tax and Information Reporting........................................................................113
Tax Status of the Operating Partnership....................................................................................114
Other Taxes................................................................................................................114
Transfer Taxes.............................................................................................................114
Possible Tax Law Changes...................................................................................................114
Importance of Obtaining Professional Tax Assistance........................................................................115
AVAILABLE INFORMATION.........................................................................................................115
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE...............................................................................116
FORWARD-LOOKING STATEMENTS....................................................................................................116
EXPERTS ......................................................................................................................116
LEGAL MATTERS.................................................................................................................117
APPENDIX A - Consent Form.....................................................................................................A-1
APPENDIX B - Agreement and Plan of Merger.....................................................................................B-1
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SUMMARY
The following is a summary of information relating to your partnership
and the conversion. This summary highlights selected information from this
consent solicitation statement and may not contain all of the information
regarding the conversion that is important to you. We are Resources High Equity,
Inc. and Presidio AGP Corp., the general partners of your partnership, High
Equity Partners L.P. - Series 88. The conversion will be accomplished by merging
your partnership into a newly-formed limited partnership called Shelbourne
Properties III L.P. Shelbourne Properties III L.P. will function as the
operating partnership through which Shelbourne Properties III, 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 III, Inc. and Shelbourne Properties III 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 1987 to invest in and hold existing or
to-be-constructed income-producing properties. Your partnership currently owns
interests in an office building, a group of retail stores, a group of warehouses
and three shopping centers. Units in your partnership were publicly offered and
sold between 1987 and 1989. Your partnership invested substantially all of the
capital raised from the sale of units in the six 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, 2017.
Units in your partnership are not listed on any national stock exchange
or traded in any formal trading market. There is, however, a limited and
informal secondary market for your units.
In November 1994, Presidio Capital Corp. acquired control of your
general partners as part of a Chapter 11 reorganization of Integrated Resources,
Inc., the entity which originally owned and controlled your general partners. In
August 1998, NorthStar Capital Investment Corp. acquired control of Presidio. In
October 1999, Presidio retained AP-PCC III, L.P. to provide asset management and
investor relations services to your partnership on behalf of your general
partners. AP-PCC III, L.P. is an affiliate of Winthrop Financial Associates, a
Boston-based partnership and property management company which is not affiliated
with NorthStar.
THE CLASS ACTION SETTLEMENT
In 1993 limited partners commenced an action against your general
partners in the California Superior Court. The action included claims for breach
of fiduciary duty; breach of contract; unfair and fraudulent business practices;
negligence; dissolution, accounting, receivership and removal of general
partner; fraud; and negligent misrepresentation. This action was brought years
before NorthStar acquired control of your general partners in August 1998. Your
general partners at all times considered the action to be without merit.
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In February 1996, your general partners submitted a settlement proposal
to the court but the court declined to grant final approval to the proposal,
indicating that it did not consider that settlement proposal to be fair. After
further negotiations, in January 1999 the parties agreed on the terms of a
revised settlement. In February 1999, you received a notice containing a
detailed description of the terms of the settlement. In April 1999, the court
approved the revised settlement after finding it to be fair, reasonable and
adequate and in the best interest of the limited partners.
Under the terms of the settlement:
1. In July 1999, we proposed amendments to your partnership's
agreement of limited partnership to provide for:
o a $160,993 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 IV LLC, made
a tender offer to acquire up to 25,034 units at a price of
$113.15 per unit. The offer closed in January 2000 and Millennium
acquired all 25,034 units subject to the offer.
4. We agreed to propose and use our best efforts to complete a
conversion of your partnership into a real estate investment
trust or other entity with shares traded on a national securities
exchange or the NASDAQ National Market. We are proposing the
conversion to satisfy this requirement of the settlement.
SHELBOURNE
Following the conversion, Shelbourne's outstanding shares of common
stock will be owned by you and us in proportion to our respective partnership
interests. Limited partners will receive 95% of the outstanding common stock in
exchange for their partnership units and we will receive 5% of the outstanding
common stock in exchange for our general partnership interest.
Shelbourne's primary business objective will be to maximize the value
of its common stock. Shelbourne will seek to achieve this objective by making
capital improvements to and/or selling properties and by making additional real
estate-related investments. Shelbourne intends to employ a strategy of
opportunistic investing by seeking undervalued assets and value-enhancing
situations in a broad range of property types and geographical locations.
Shelbourne may raise additional capital by mortgaging existing
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properties or by selling equity or debt securities. Shelbourne may acquire its
investments for cash or by issuing equity securities, including limited
partnership interests in Shelbourne Properties III L.P., the operating
partnership.
Shelbourne will have a Board of Directors consisting of seven
directors, three of whom will be independent directors. Directors of Shelbourne
will be elected in the future by holders of common stock. The settlement
contemplated that Shelbourne would be externally managed. Accordingly,
Shelbourne Management will manage the day-to-day affairs of Shelbourne under an
advisory agreement. However, the Board of Directors will be ultimately
responsible for the management, control and investment activities of Shelbourne.
Shelbourne was formed under the Delaware General Corporations Law.
Shelbourne's principal executive offices are located at 5 Cambridge Center, 9th
floor, Cambridge, MA 02142.
RISK FACTORS
There are risks associated with the conversion of your partnership,
which are more fully discussed beginning on page 16 in "RISK FACTORS", that you
should consider in determining whether to vote in favor of the conversion. The
following list summarizes the risks of the conversion that we believe to be most
material to you:
o The nature of your investment will change from an interest in a
specified portfolio of income-producing properties required to be
sold by December 31, 2017 to an interest in a real estate company
with perpetual existence that may change its investments from
time to time without your approval. In addition, unlike your
partnership, Shelbourne will be permitted to reinvest sale and
financing proceeds in new investments. This means that these
amounts may not be available for distribution to stockholders.
o The estimated range of values for shares of common stock is less
than the range of estimated liquidation values for your units.
This means that the estimated amount that you would receive if
your partnership were currently liquidated is greater than the
estimated amount you would receive by selling your shares.
However, you cannot currently realize the liquidation value of
your units since a liquidation of your partnership is not being
proposed at this time. Shares of common stock may also trade
below the net asset value of Shelbourne or below the going
concern value of your partnership.
o Shelbourne will likely incur significant amounts of indebtedness
to finance future investments. This use of debt will subject
Shelbourne to the risk of default in its obligations, which could
in turn adversely affect Shelbourne's results of operations.
o Shelbourne may make investments which have a higher degree of
risk than your partnership's present investments. These
investments may include interests in real property, mortgage
loans and other real estate companies.
o The amount of Shelbourne's dividends may be less than prior
distributions by your partnership. The amount of dividends will
depend upon factors such as the profitability of present and
future investments, the terms of any indebtedness, working
capital fluctuations and prevailing economic conditions.
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o If the conversion is approved we no longer will have any
obligation to pay limited partners an amount which presently
equals $3.31 per unit, or $1,229,811 in the aggregate, upon
liquidation of your partnership as repayment of fees previously
received. The obligation is reduced each year by approximately
$0.40 per unit, or $148,000 in the aggregate, and is completely
eliminated in 2008. Our affiliates, as owner of 26.3% of the
units would receive 26.3% of any amounts paid.
o We have a conflict in recommending the conversion since our
affiliate, Shelbourne Management, will continue to receive fees
for managing Shelbourne's business.
o Shelbourne Management will have a conflict of interest following
the conversion because it will receive an asset management fee
for managing Shelbourne that is based on Shelbourne's gross
assets and it will have the ability to increase Shelbourne's
gross assets by causing Shelbourne to acquire additional assets
funded by debt or the issuance of new securities.
o If you vote against the conversion and the conversion is
approved, you will not have the right to receive cash based on an
appraisal of your interest in your partnership or otherwise.
o The estimated range of values of Shelbourne's common stock is
based upon anticipated growth that will take time to achieve. The
growth is anticipated to result from Shelbourne leveraging its
assets and investing the proceeds obtained from leveraging.
Although Shelbourne intends to actively pursue investment
opportunities, we cannot guarantee when investments will be made
or the terms of those investments. We also cannot guarantee the
terms on which Shelbourne will be able to borrow.
o Maintaining qualification as a real estate investment trust will
require Shelbourne to satisfy requirements that do not apply to
your partnership such as distributing substantially all of its
taxable income other than capital gains. If Shelbourne fails to
qualify or remain qualified as a real estate investment trust, it
will be subject to federal, state and local income tax on its
taxable income at regular corporate rates. This would reduce the
cash available for distribution to stockholders and could
materially reduce the value of your common stock.
o Until you sell all of your common stock in Shelbourne, you will
be unable to offset your unused passive activity losses from your
partnership against dividends or capital gains from your common
stock.
BENEFITS OF THE CONVERSION
We believe that the conversion will provide you the following benefits
which are more fully described on page 25 in "BENEFITS OF THE CONVERSION."
o The range of estimated values for shares of common stock is
significantly greater than recent secondary market prices for
units.
o You will not be taxed on common stock you receive in the
conversion.
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o Common stock will be traded on the American Stock Exchange, which
should provide you with significantly greater liquidity and a
more efficient market than the limited trading market on which
your units may currently be sold.
o Unlike your partnership, Shelbourne will have the ability to make
new investments. The ability to make new investments will enable
Shelbourne to change its investment portfolio in response to
changing market conditions and to avail itself of potentially
favorable investment opportunities.
o Shelbourne will be required to distribute 95% of its taxable
income - 90% after 2000 - other than capital gains, to maintain
its status as a real estate investment trust. Your partnership is
not required to make distributions.
o By conducting its operations through the operating partnership,
Shelbourne can offer either common stock or limited partnership
interests in the operating partnership to potential sellers of
real estate. This increases Shelbourne's flexibility in
structuring future acquisitions on a tax efficient basis.
o Following the conversion, Shelbourne's board of directors will be
elected by holders of common stock.
o Shelbourne will have the ability to borrow money and issue equity
securities. The proceeds from such loans or equity issuances may
be used to finance future investments, to improve existing
properties or for other purposes. Indebtedness incurred by
Shelbourne will not result in unrelated business taxable income
to tax-exempt stockholders.
o The conversion will result in simplified tax administration for
you. You no longer will receive a Schedule K-1 which complicates
tax return preparation, but instead will receive a Form 1099-DIV.
o Unlike your investment in your partnership, you generally will
not be subject to state income tax or be required to file
individual state income tax returns in states other than in your
state of residence solely as a result of an investment in
Shelbourne.
COMPARISON OF YOUR PARTNERSHIP AND SHELBOURNE
There are differences between an investment in your partnership and an
investment in Shelbourne. The following chart summarizes some of these
differences.
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CHARACTERISTIC YOUR PARTNERSHIP SHELBOURNE
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Types of Investments Interests in an office building, a Interests in an office building, a group of
group of retail stores, a group of retail stores, a group of warehouses and three
warehouses and three shopping shopping centers as well as new real estate
centers; no ability to make new investments including real property,
investments mortgages and securities of other real estate
companies; no restrictive investment criteria
such as property use or geographic location
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CHARACTERISTIC YOUR PARTNERSHIP SHELBOURNE
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Form of Ownership of Investments in two properties The operating partnership will own its
Investments through joint-ventures; four investments directly and through joint-
additional properties owned ventures. All of Shelbourne's investments
directly by your partnership will be owned through the operating
partnership
Method of Acquisition of All of your partnership's Shelbourne may acquire properties for cash,
Investments properties were acquired for cash on a leveraged or unleveraged basis, or
on an unleveraged basis equity securities, including through the
issuance of limited partnership interests in
the operating partnership
Liquidity of Your Relatively illiquid Listed for trading on the American Stock
Investment Exchange
Investment Portfolio Fixed portfolio Investment flexibility; ability to acquire new
properties and sell existing properties; ability
to acquire and sell other real estate-related
investments such as mortgages and securities
of other real estate companies
Transactions with Our Prohibited from selling or leasing Subject to applicable provisions of Delaware
Affiliates properties to, or purchasing law; transactions with our affiliates must be
properties from, our affiliates or on terms comparable to transactions with
receiving long-term secured or unaffiliated third parties and approved by a
unsecured loans from our majority of Shelbourne's independent
affiliates directors
Borrowing Policy Borrowing to finance capital Shelbourne may borrow on a secured and
expenditures not permitted unsecured basis to acquire new investments
or to finance capital expenditures; such
borrowing will not result in unrelated
business taxable income; Shelbourne
currently intends not to borrow in excess of
75% of its gross assets
Issuances of Additional Prohibited from issuing additional Ability to raise additional capital or acquire
Securities securities additional properties or other investments
through issuances of debt or equity securities
Duration of Entity December 31, 2017; originally Perpetual, no fixed liquidation date
contemplated holding period for
properties expires in 2000
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
CHARACTERISTIC YOUR PARTNERSHIP SHELBOURNE
-------------- ---------------- ----------
<S> <C> <C>
Federal Taxation Not subject to Federal tax Generally not subject to Federal tax on
income distributed to stockholders, but
subject to entity-level tax on any
undistributed income; significant adverse tax
consequences if it fails to qualify or remain
qualified as a real estate investment trust
Your allocable share of your Generally taxed on amounts distributed to
partnership's taxable income or you, which distributions will be made pro
loss is included in calculating rata to all holders of common stock
your taxable income, regardless
of whether your partnership
makes any cash distributions;
there are special allocations of
depreciation deductions to taxable
unitholders
Tax Characterization of Generally passive activity income Dividends and capital gains from common
Income stock are not passive activity income and
generally cannot be offset by unused passive
activity losses from your partnership or other
sources
Tax Reporting Schedule K-1, generally mailed to Form 1099-DIV must be mailed to you by
you by March 15 of each year, January 31 of each year
typically increasing your cost of
tax return preparation
You generally are required to file You generally will not have to file tax
state tax returns, and pay taxes, in returns or pay taxes in states other than your
various states where properties state of residence
are located
Distributions; Quarterly historical distributions; Quarterly dividends; dividend rate
distribution policy distributions suspended as of determined by the Board of Directors based
September 30, 1999 on Shelbourne's results of operations, cash
flow and capital requirements; mandatory
distributions required to satisfy REIT
requirements and/or avoid entity-level taxes
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
CHARACTERISTIC YOUR PARTNERSHIP SHELBOURNE
-------------- ---------------- ----------
<S> <C> <C>
Management Vested in general partners; AP- Vested in Board of Directors elected by
PCC III, L.P. performs asset holders of common stock; Board of Directors
management and investor ultimately responsible for management,
relations services for your control and investment activities of
partnership on behalf of your Shelbourne; Shelbourne Management
general partners retained to manage Shelbourne's day-to-day
business; AP-PCC III, L.P. to perform asset
management and investor relations services
for Shelbourne on behalf of Shelbourne
Management
Voting Majority vote of units required Majority or two-thirds vote of common stock
for significant actions specified in required for significant transactions specified
the partnership agreement in Shelbourne's certificate of incorporation;
annual shareholder vote for election of
directors
Partnership Asset Partnership asset management fee Partnership asset management fee equal to
Management Fees paid to us equal to 1.25% of gross 1.25% of gross value of assets will be paid to
value of assets Shelbourne Management
Property Management Up to 6% of property revenues Up to 6% of property revenues but no more
Fees Payable to Us or to but no more than competitive rate than competitive rate for similar services,
Our Affiliates for similar services will be paid to Shelbourne Management
Property Disposition Generally, 3% subordinated fee None
Fees Payable to Us or plus subordinated incentive
Our Affiliates management fees
Reimbursement of All expenses paid by your All expenses paid by Shelbourne;
Expenses to Us or partnership; we are reimbursed for Shelbourne Management will be reimbursed
Our Affiliates expenses incurred for your for expenses incurred for Shelbourne plus a
partnership plus a $200,00 non- $200,000 non-accountable expense
accountable expense reimbursement per annum
reimbursement per annum
</TABLE>
8
<PAGE>
The following depicts the structure of your partnership before and
after the conversion:
BEFORE THE CONVERSION:
----------------------
----------------------------
NORTHSTAR CAPITAL
INVESTMENT CORP.
----------------------------
MANAGING MEMBER |
(INDIRECT) |
\|/
----------------------------
PRESIDIO CAPITAL
INVESTMENT COMPANY, LLC ----------
---------------------------- |
----------------------- | |
AP-PCC III, L.P.(1) | |
| |
----------------------- | 100% |
SERVICES | | |
AGREEMENT | | |
| ---------------------------- |
|------------> PRESIDIO CAPITAL CORP. |
|
---------------------------- |
| |
| 100% |
\|/ |
---------------------------- |
GENERAL PARTNERS |
---------------- |
|
RESOURCES HIGH EQUITY, INC. |
|
PRESIDIO AGP CORP. |
---------------------------- |
----------------------- | |
LIMITED PARTNERS | |
(NOT AFFILIATED WITH | 5% |
GENERAL PARTNERS) | (GENERAL PARTNER) |
----------------------- | |
| ---------------------------- | 24.95%
70.05% | YOUR PARTNERSHIP | (LIMITED
(Limited | ---------------- | PARTNER
Partner) | |
|----------> HIGH EQUITY PARTNERS L.P. - |
SERIES 88 <-----
----------------------------
-------------
(1) Provider of asset management and investor relations services for your
partnership on behalf of your general partners.
9
<PAGE>
<TABLE>
<S> <C> <C>
AFTER THE CONVERSION:
---------------------
-------------------------------
NORTHSTAR CAPITAL
INVESTMENT CORP.
------------------------------- ------------------------
| MANAGING MEMBER AP-PCC III, L.P. (5,6)
| (INDIRECT) ------------------------
| |
------------------------------- |
PRESIDIO CAPITAL |
---- INVESTMENT COMPANY, |
| LLC |
| ------------------------------- | -----------------------
| | | AFFILIATE OF
| | | NORTHSTAR
| 100.00% | | CAPITAL
| | | INVESTMENT CORP.
| | | -----------------------
24.95% | ------------------------------- | |
STOCKHOLDER | SERVICES AGREEMENT | |
(FORMER | PRESIDIO CAPITAL CORP. <--------------------| |
LIMITED | |
PARTNER) | ------------------------------- 100% |
| 100% | |
| | |
| ------------------------------- ----------------------------- |
| RESOURCES HIGH EQUITY, FORMER LIMITED |
| INC. PARTNERS |
| PRESIDIO AGP CORP. (NOT AFFILIATED WITH FORMER |
| (FORMER GENERAL PARTNERS) GENERAL PARTNERS) |
| ------------------------------- ----------------------------- |
| 5% | | 70.05% |
| STOCKHOLDER | | STOCKHOLDER |
| \|/ \|/ \|/
| ------------------------ ADVISORY ----------------------
| AGREEMENT SHELBOURNE(4,6)
|----------------------> SHELBOURNE(1) <---------> MANAGEMENT
(EXTERNAL ADVISOR)
------------------------ ----------------------
100% | |
\|/ |
------------------------------- |
SHELBOURNE | 99%
PROPERTIES III GP INC.(3) |(LIMITED PARTNER)
------------------------------- |
1% | |
(GENERAL | |
PARTNER) \|/ \|/
--------------------------------
OPERATING PARTNERSHIP(2)
------------------------
SHELBOURNE PROPERTIES III L.P.
(PROPERTY OWNER)
--------------------------------
</TABLE>
-------------
(See notes to chart beginning on following page)
10
<PAGE>
-------------
1 Shelbourne is the publicly-traded real estate investment trust in which
you will own shares.
2 All of Shelbourne's real estate investments will be owned by the operating
partnership. Following the conversion, Shelbourne will own 100% of the
operating partnership.
3 As general partner of the operating partnership, Shelbourne Properties III
GP Inc. is responsible for the management, operation and control of the
operating partnership. Shelbourne owns 100% of the general partner.
4 Shelbourne Management is the external advisor to be retained by Shelbourne
to perform day to day management, advisory and property management
services.
5 Provider of asset management and investor relations services to Shelbourne
on behalf of Shelbourne Management.
6 Consents are currently being solicited from limited partners in each of
Integrated Resources High Equity Partners, Series 85, A California Limited
Partnership and High Equity Partners L.P. - Series 86 to convert those
partnerships into separate real estate investment trusts. If the
conversions of those partnerships are approved, Shelbourne Management and
AP-PCC will also provide similar services to the real estate investment
trusts resulting from those conversions.
ALLOCATION OF COMMON STOCK
Units in your partnership will be exchanged for shares of common stock
on a three-for-one basis. We and our affiliates who own units, Millennium
Funding IV Corp., Millennium Funding I LLC and Millennium Funding IV LLC, will
be allocated common stock on the same basis as unitholders.
We own a 5% general partnership interest in your partnership
corresponding to 19,567 units in your partnership. Our affiliates, Millennium
Funding IV Corp, Millennium Funding I LLC and Millennium Funding IV LLC, own a
total of 97,628 units in your partnership. We and our affiliates will therefore
receive 351,585 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 $3.31
per unit from us as repayment of fees previously received.
11
<PAGE>
CONTINUATION OF YOUR PARTNERSHIP
Continuation of your partnership in its current form would have the
following effects:
o Your partnership would pursue its original investment objectives
consistent with the provisions of your partnership agreement;
o Your partnership would sell its properties and distribute the net
proceeds to you not later than December 31, 2017; and
o There would be no change in the nature of your voting rights
COMPARISON VALUATION ANALYSIS
We retained Insignia/ESG, Inc., a nationally recognized commercial real
estate service provider, to perform four separate valuation analyses: a
liquidation analysis, a going concern analysis, a secondary market trading
history analysis and a conversion and comparable company analysis. The range of
liquidation values and going concern values estimated by Insignia/ESG were based
on June 30, 2000 appraisals of your partnership's properties performed by
Cushman & Wakefield, Inc., a nationally recognized real estate appraisal firm,
and information provided by your partnership. The secondary market trading
history analysis was based on secondary market trading data for the most recent
bi-monthly period reported by Partnership Spectrum, an independent industry
publication. The range of values for Shelbourne's common stock was estimated by
applying trading multiples for real estate investment trusts with a market
capitalization of less than $250,000,000 to Shelbourne's projected funds from
operations assuming Shelbourne leverages its assets and invests the proceeds
obtained from leveraging. The following table sets forth the results of the
comparative valuation analyses. For ease of comparison, we have presented the
respective values on a per share of Shelbourne common stock basis. The estimated
values on a per unit basis would be three times the per share values.
COMPARATIVE VALUATION ANALYSIS
------------------------------
Estimated range of going concern values $31.67 - $35.71
Estimated range of liquidation values $43.65 - $49.22
Range of implied secondary market values $31.52 - $35.55
Estimated range of values for
Shelbourne common stock $32.06 - $39.78
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:
12
<PAGE>
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 2017.
We note that the current appraised value of your partnership's
properties is $58,692,820, or approximately 9.6% higher than the
1998 appraised value of your partnership's properties and
approximately 20.9% higher than the 1996 appraised value of your
partnership's properties. In addition, our affiliates, Millennium
Funding IV Corp., Millennium Funding I LLC and Millennium Funding
IV LLC, which own in the aggregate 26.3% of the outstanding
units, would not vote in favor of a proposal to liquidate your
partnership at this time.
o An aggressive bulk sale or gradual liquidation of your
partnership's properties would reduce the portion of net sales
proceeds available for distribution to you.
13
<PAGE>
o Your partnership's interest in two 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 the properties owned by your partnership and will incur
substantially identical expenses in its operation of those
properties.
o There currently is not an efficient market on which to realize
the value of your units. Following the conversion, the American
Stock Exchange should provide an efficient market for
shareholders who wish to dispose of their shares.
VOTING
Your vote is important. Please complete and sign the enclosed consent
form and return it to the depositary by mail in the enclosed pre-addressed,
postage paid envelope or by facsimile to (718) 236-2641.
This consent solicitation statement is accompanied by a separate
consent form in the form of Appendix A. You may take one of the following
actions:
Vote "YES" -- I vote to approve the conversion.
or
Vote "NO" -- I vote not to approve the conversion.
or
Abstain from voting which will constitute a "NO" vote
WE STRONGLY URGE YOU TO VOTE "YES" TO APPROVE THE CONVERSION.
If the conversion is approved, you will receive three shares of common
stock in exchange for each of your partnership units whether or not you voted to
approve the conversion.
Please complete, sign and return the enclosed consent form to the
depositary no later than the ________ __, 2000 expiration date. You may withdraw
your consent form at any time before the expiration date by delivering written
notice of your withdrawal to the depositary. You may change your consent form at
any time before the expiration date by delivering to the depositary a duly
completed and signed substitute consent form, together with a letter indicating
that your prior consent form has been revoked.
You must vote all of your units in the same way. If you return a signed
consent form but do not indicate a vote, you will be deemed to have voted "YES"
for approval of the conversion.
14
<PAGE>
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.
15
<PAGE>
RISK FACTORS
You should carefully consider the following risk factors and the other
information set forth or incorporated by reference in this consent solicitation
statement before voting on the conversion.
THE CONVERSION WILL RESULT IN A FUNDAMENTAL CHANGE IN THE NATURE OF YOUR
INVESTMENT TO AN INTEREST IN AN ENTITY WITH PERPETUAL EXISTENCE THAT MAY CHANGE
ITS INVESTMENTS WITHOUT YOUR APPROVAL.
The nature of your investment will change fundamentally. Shelbourne
plans to operate indefinitely, has no required date by which it must liquidate
its assets and may change its investments from time to time without your
approval. Shelbourne does not intend to distribute proceeds of any sales of its
assets except as necessary to maintain its status as a real estate investment
trust and to avoid the imposition of income and excise taxes on Shelbourne.
Instead, Shelbourne intends to reinvest the proceeds of any sales or financings.
Currently, after establishing reserves for existing property requirements, net
property sales proceeds would be distributed to you since your partnership is
not permitted to make new investments.
Shelbourne's common stock may trade at prices below the estimated value of your
units or below 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 $32.06 and $39.78 whereas the estimated
range of liquidation values estimated by Insignia/ESG is between $43.65 and
$49.22. The common stock may also trade at prices below the value of
Shelbourne's net assets or below the going concern value of your partnership. We
believe that following the conversion the market price of shares of common stock
will depend on several factors. Such factors include:
o how the market perceives Shelbourne and its growth potential;
o whether Shelbourne maintains or increases its dividend level;
o the size of Shelbourne in terms of its assets and market
capitalization;
o the timing and terms of Shelbourne's new investments;
o the degree to which leverage is used in Shelbourne's capital
structure;
o the historical performance of Shelbourne;
o external factors such as the creditworthiness of tenants of
Shelbourne's properties, market interest rates, conditions of the
real estate and stock markets, performance of our investments in
mortgages and other real estate companies; and
o technical factors relating to the supply and demand for shares of
common stock.
16
<PAGE>
Shelbourne's ability to incur debt increases Shelbourne's risk of default on its
obligations which could, in turn, adversely affect Shelbourne's results of
operations and distributions to stockholders.
Shelbourne will likely incur significant indebtedness to finance future
investments. The use of leverage creates the risk that Shelbourne could default
on its obligations which, in turn, could adversely affect Shelbourne's results
of operations and ability to pay dividends to its stockholders. Your partnership
did not incur any indebtedness in connection with raising capital or acquiring
its properties. In contrast, Shelbourne may borrow on a secured and unsecured
basis to finance future investments, to improve existing properties or for other
purposes. However, Shelbourne's current intention is not to borrow in excess of
75% of its gross assets. The properties owned by Shelbourne could be subject to
foreclosure if required principal and interest payments are not made when due.
Shelbourne may be unable to make distributions because of the obligation to make
principal payments, thereby jeopardizing Shelbourne's qualification as a real
estate investment trust or subjecting Shelbourne to entity-level taxes. Finally,
any default by Shelbourne in any of its debt obligations may cause other debt
obligations to become immediately due and payable.
Shelbourne may make investments which have a higher degree of risk than the
investments held by your partnership.
Shelbourne may make investments which are riskier than your
partnership's present investments. Your partnership is presently invested in
unencumbered real estate. Shelbourne's investments may include mortgage loans,
joint venture interests, interests in other real estate-related companies and
other real estate-related investments. These types of investments are typically
subject to greater outside factors such as general market conditions and
reliance on third parties. If such additional risks were to materialize,
Shelbourne's performance could be adversely affected.
DIVIDEND LEVELS ARE NOT GUARANTEED AND MAY FLUCTUATE.
The amount of Shelbourne's dividends may be less than prior
distributions by your partnership. The amount of dividends will depend upon
numerous factors, some of which are beyond the control of management. These
factors include profitability, interest and principal payments on any
indebtedness, the cost of acquisitions including related debt service payments,
issuances of debt and equity securities, fluctuations in working capital,
capital expenditures, adjustments in reserves and prevailing economic
conditions. Shelbourne will not adhere to any particular formula in determining
what dividends it will declare and pay. The Board of Directors of Shelbourne
will determine the actual dividend rate based on Shelbourne's results of
operations, cash flow and capital requirements, economic conditions, tax
considerations and other factors. Shelbourne, however, will be required to
distribute at least 95% of its taxable income, excluding net capital gain, for
the year 2000 in order to maintain its status as a real estate investment trust,
and 90% for each year thereafter.
IF THE CONVERSION IS APPROVED OUR OBLIGATIONS TO REPAY FEES PREVIOUSLY RECEIVED
BY US UPON LIQUIDATION OF YOUR PARTNERSHIP WILL BE ELIMINATED.
If the conversion is approved, we no longer will be obligated to pay
you additional amounts when your partnership is liquidated. If your partnership
were currently liquidated we would be required to pay limited partners $3.31 per
unit, or an aggregate of $1,229,811, as repayment of fees previously received.
Our obligation is reduced each year by approximately $0.40 per unit, or $148,000
in the aggregate, and is completely eliminated in 2008. Elimination of our
obligation to pay you this additional amount was an agreed-upon element of the
settlement.
17
<PAGE>
WE HAVE A CONFLICT OF INTEREST IN RECOMMENDING THE CONVERSION BECAUSE WE ARE
AFFILIATED WITH SHELBOURNE MANAGEMENT WHICH WILL CONTINUE TO RECEIVE FEES FOR
MANAGING SHELBOURNE.
We have an economic interest in the conversion since Shelbourne
Management will have a contractual right to receive fees for managing
Shelbourne's business for ten years after the conversion. Although we currently
receive fees for managing your partnership, your general partners originally
expected to receive these fees through the end of an anticipated holding period
that expires in 2000. In addition, your partnership agreement gives limited
partners the right to remove us as general partners.
SHELBOURNE MANAGEMENT WILL HAVE A CONFLICT OF INTEREST BECAUSE ITS ASSET
MANAGEMENT FEE WILL BE BASED ON SHELBOURNE'S GROSS ASSET VALUE AND SHELBOURNE
MANAGEMENT WILL HAVE THE ABILITY TO INCREASE THE GROSS ASSET VALUE BY INCURRING
DEBT AND ACQUIRING NEW INVESTMENTS.
Shelbourne Management will receive an asset management fee for managing
Shelbourne. The asset management fee will be based on the gross assets of
Shelbourne and will therefore increase if Shelbourne's gross assets increase. To
that extent, Shelbourne Management will benefit if Shelbourne retains properties
and leverages its properties to acquire new investments, while Shelbourne's
shareholders may be better served by Shelbourne's disposing of a property or
holding a property on an unleveraged basis. However, the Board of Directors will
be ultimately responsible for the management, control and investment activities
of Shelbourne.
YOU WILL NOT HAVE ANY DISSENTERS' OR APPRAISAL RIGHTS IF YOU VOTE AGAINST THE
CONVERSION.
If you vote against the conversion and the conversion is nevertheless
approved by limited partners holding a majority of the outstanding units, you
will not have the right to receive cash based on an appraisal of your interest
in your partnership or otherwise. This means that if you do not wish to
participate in the conversion, you would either have to sell your units prior to
the conversion or sell your common stock after the conversion.
THE ESTIMATED VALUE OF SHELBOURNE'S COMMON STOCK IS BASED UPON ANTICIPATED
GROWTH THAT WILL TAKE TIME TO ACHIEVE.
Insignia/ESG has estimated the value of shares of Shelbourne's common
stock at between $32.06 and $39.78. This range of estimated values assumes that
Shelbourne has grown its asset base through the use of leverage such that
Shelbourne has a ratio of total indebtedness to total assets of 75%. Other
assumptions, including investment performance and interest rates, were made in
arriving at the range of estimated values. Although Shelbourne intends to
actively pursue investment opportunities, we cannot guarantee the actual timing
or terms of any new investments or the timing or terms of any borrowing. In
addition, there is substantial uncertainty as to the price at which the shares
of Shelbourne's common stock will trade. The shares of common stock may trade
below the range estimated by Insignia/ESG.
STOCKHOLDERS WILL BE DILUTED BY ANY SUBSEQUENT EQUITY ISSUANCES.
The issuance of additional equity securities to raise capital or make
new investments would reduce your percentage interest in Shelbourne and could
reduce dividends you would receive from Shelbourne. Unlike your partnership,
Shelbourne will have the ability to raise capital by issuing additional shares
of common stock and causing the operating partnership to issue additional
limited partnership interests.
18
<PAGE>
SHELBOURNE MAY ENTER INTO TRANSACTIONS WITH OUR AFFILIATES WHICH MAY NOT SOLELY
SERVE YOUR INTERESTS AS A STOCKHOLDER.
Shelbourne will be permitted to purchase properties from, sell
properties to, borrow money from or enter into other transactions with,
companies in which our beneficial owner, NorthStar Capital Investment Corp. has
an economic interest. Therefore, such transactions may not solely serve your
interests as a stockholder. Although these affiliated transactions must be on
terms comparable to those obtainable from third parties and must be approved by
a majority of Shelbourne's independent directors, any transactions between
Shelbourne and affiliates of ours may not be reached through arms-length
negotiation.
PROVISIONS IN THE CERTIFICATE, BYLAWS AND SHAREHOLDER RIGHTS AGREEMENT COULD
INHIBIT CHANGES IN CONTROL.
Some of the provisions of Shelbourne's certificate of incorporation,
bylaws and shareholder rights agreement described below, may have the effect of
discouraging a third party from making an acquisition proposal for Shelbourne
and may therefore inhibit a change in control of Shelbourne. In order to
maintain its qualification as a real estate investment trust for federal income
tax purposes, not more than 50% in value of the outstanding stock of Shelbourne
may be owned, directly or indirectly, by five or fewer individuals, as defined
in the Internal Revenue Code.
In order to facilitate maintenance of its qualification as a real
estate investment trust for federal income tax purposes, and to otherwise
address concerns relating to concentration of capital stock ownership,
Shelbourne generally has prohibited ownership, directly or by virtue of the
attribution provisions of the Internal Revenue Code, by any single stockholder
of more than 8% of the issued and outstanding shares of Shelbourne's common
stock. However, the ownership limit will not apply to NorthStar Capital
Investment Corp. or any of its officers, directors and affiliates provided that
their ownership in excess of this limit will not jeopardize Shelbourne's
qualification as a real estate investment trust for Federal income tax purposes.
The Board of Directors may waive the ownership limitation described above or
modify the ownership limit with respect to one or more persons if it is
satisfied, based upon the advice of tax counsel, that ownership in excess of
this limit will not jeopardize Shelbourne's qualification as a real estate
investment trust for federal income tax purposes or if it determines that it is
no longer in the best interests of Shelbourne's shareholders for Shelbourne to
continue to qualify as a real estate investment trust. The ownership limit may
have the effect of inhibiting or impeding a change in control and, therefore,
could adversely affect the stockholders' ability to realize a premium over the
then-prevailing market price for the common stock.
In addition, the Board of Directors has been divided into three
classes, the initial terms of which expire in 2001, 2002 and 2003, with
directors of a given class chosen for three-year terms upon expiration of the
terms of the members of that class. The staggered terms of the members of the
Board of Directors may adversely affect the stockholders' ability to effect a
change in control of Shelbourne, even if such a change in control were in the
best interests of some, or a majority, of Shelbourne's stockholders.
The certificate of incorporation authorizes the Board of Directors to
issue shares of preferred stock in series and to establish the rights and
preferences of any series of preferred stock so issued. The issuance of
preferred stock also could have the effect of delaying or preventing a change in
control of Shelbourne, even if such a change in control were in the best
interests of some, or a majority, of Shelbourne's stockholders. No shares of
preferred stock will be issued or outstanding immediately subsequent to the
conversion and Shelbourne has no present intention to issue any such shares.
19
<PAGE>
Shelbourne has also adopted a shareholder rights agreement. Under the
terms of the shareholder rights agreement, in general, if a person or group
becomes an "acquiring person" meaning such person or group acquires more than
15% of the outstanding shares of common stock, all other stockholders will have
the right to purchase securities from Shelbourne at a discount to such
securities' fair market value, thus causing substantial dilution to the
acquiring person. The shareholder rights agreement may have the effect of
inhibiting or impeding a change in control and, therefore, could adversely
affect the stockholders' ability to realize a premium over the then- prevailing
market price for the common stock in connection with such a transaction. In
addition, since the Board of Directors of Shelbourne can prevent the shareholder
rights agreement from operating in the event the Board approves of an acquiring
person, the shareholder rights agreement gives the Board significant discretion
over whether a potential acquiror's efforts to acquire a large interest in
Shelbourne will be successful. Because the shareholder rights agreement contains
provisions that are designed to assure that NorthStar Capital Investment Corp.
and its affiliates will never, alone, be considered a group that is an acquiring
person, the shareholder rights agreement provides NorthStar Capital Investment
Corp. and its affiliates with some advantages under the shareholder rights
agreement that are not available to other stockholders. For instance, NorthStar
Capital Investment Corp. and its affiliates could acquire greater than 15% of
the outstanding shares of common stock of Shelbourne without triggering the
purchase right described above.
Some provisions of the Delaware General Corporation Law also may have
the effect of inhibiting a third party from making an acquisition proposal for
Shelbourne or of impeding a change in control of Shelbourne under circumstances
that otherwise could provide the holders of shares of common stock with the
opportunity to realize a premium over the then-prevailing market price of such
shares. For instance, Section 203 of the Delaware General Corporation Law
generally prohibits a Delaware corporation from engaging in a broad range of
business combinations with an interested stockholder for a period of three years
from the date such person became an interested stockholder.
SHELBOURNE IS SUBJECT TO RISKS OF DEFAULT BY BORROWERS AND INTEREST RATE RISKS
ASSOCIATED WITH INVESTMENTS IN MORTGAGE LOANS.
Shelbourne may invest in mortgage loans and is therefore subject to
risks inherent in the business of lending, such as the risk of default by or
bankruptcy of the borrower. Upon a default by a borrower, Shelbourne may not be
able to sell the property securing a mortgage loan at a price that would enable
it to recover the balance of a defaulted mortgage loan. In addition, the
mortgage loans could be subject to regulation by federal, state and local
authorities which could interfere with Shelbourne's administration of the
mortgage loans and any collections upon a borrower's default.
By investing in mortgage loans Shelbourne is also subject to interest
rate risks. Market interest rates have recently fluctuated and may rise in the
future. Accordingly, if interest rates rise to a greater percentage rate than
that received by Shelbourne from its mortgage loans, Shelbourne's public
valuation is likely to be adversely affected.
SHELBOURNE'S PERFORMANCE AND VALUE ARE SUBJECT TO RISKS ASSOCIATED WITH THE REAL
ESTATE INDUSTRY.
Following the conversion, Shelbourne may make additional real
estate-related investments including investments in additional properties, joint
ventures and other real estate companies. These investments will be subject to
the general risks associated with the ownership of real estate investments. Such
risks include adverse changes normally associated with changes in national,
regional and local economic and market conditions, changes in laws and
governmental regulations including those governing usage, zoning and
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<PAGE>
taxes, changes in interest rates and the availability of financing. Other
factors affecting real estate, which would impact on Shelbourne's properties and
could have an impact on its other investments, include acts of God, property
damage or casualty losses, unexpected capital expenditures, changes in market
rents and the creditworthiness of tenants.
SHELBOURNE MAY NOT BE ABLE TO RE-LEASE PROPERTIES UPON THE EXPIRATION OF LEASES.
Most of the leases of your partnership's existing properties expire on
dates ranging from 2000 to 2009. In addition, leases representing approximately
21% and 19% of the gross annual rents at the 568 Broadway and Sunrise
Marketplace properties, respectively, expire in or before 2001. Upon the
expiration of a lease, Shelbourne may not be able to re-lease the related
property at a comparable lease rate or without incurring additional expenses.
SHELBOURNE WILL BE MANAGED BY A THIRD-PARTY ADVISOR AND WILL THEREFORE HAVE LESS
CONTROL OVER ITS OPERATIONS.
Shelbourne will rely on Shelbourne Management to manage its business
and assets. Subject to the control of Shelbourne's Board of Directors,
Shelbourne Management will make all decisions with respect to the management of
the company. Thus, the success of Shelbourne's business will depend in large
part on the ability of Shelbourne Management to manage Shelbourne's day-to-day
operations. Any adversity experienced by Shelbourne Management could adversely
impact the operation of Shelbourne's properties and, consequently, Shelbourne's
cash flow and ability to make distributions to its stockholders.
SHELBOURNE MANAGEMENT WILL HAVE CONFLICTS OF INTEREST IN MANAGING SHELBOURNE'S
BUSINESS AND MAY THEREFORE MAKE DECISIONS OR TAKE ACTIONS THAT DO NOT SOLELY
REFLECT YOUR INTERESTS AS A STOCKHOLDER.
Shelbourne Management manages the assets of other entities, including
entities which may seek to make investments which may also be potential
acquisition targets for Shelbourne. Shelbourne Management may not always take
the actions in advising Shelbourne that would be expected of Shelbourne
Management if its business had been limited to managing Shelbourne's assets.
Shelbourne Management will also manage two other publicly traded real estate
investment trusts if the conversion of the other High Equity partnerships are
approved and may manage other public real estate investment trusts. Shelbourne
Management has discretion to allocate investment opportunities among the
companies it manages.
SHELBOURNE'S RETENTION OF AN EXTERNAL MANAGER COULD ADVERSELY AFFECT THE VALUE
OF YOUR SHARES.
Instead of being self-managed Shelbourne will pay a third party,
Shelbourne Management, to manage its operations. Shares of externally managed
real estate investment trusts typically trade at a lower valuation than shares
of internally managed real estate investment trusts.
SHELBOURNE'S ABILITY TO GROW COULD BE ADVERSELY AFFECTED IF SHELBOURNE IS NOT
SUCCESSFUL IN RAISING CAPITAL.
Shelbourne's ability to grow is largely dependent on its ability to
raise additional capital to acquire additional properties and make new
investments. While Shelbourne has the ability to raise additional capital in a
variety of ways, including through the issuance of debt and equity securities,
it may not be successful in raising such capital in the capital and financial
markets. For example, since Shelbourne must distribute substantially all of its
taxable income to maintain its status as a real estate investment trust, lenders
may be
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<PAGE>
unwilling to lend money to it. Also, Shelbourne's ability to raise additional
capital by selling additional equity securities may be adversely affected by
equity market trends resulting in higher yields for non-real estate securities.
If Shelbourne is unable to raise additional capital on favorable terms,
Shelbourne's ability to achieve its objectives and the value of your investment
could be adversely affected.
FLUCTUATIONS IN INTEREST RATES COULD ADVERSELY AFFECT THE VALUE OF YOUR SHARES.
One of the factors that may be expected to influence the prevailing
market price of the common stock is the annual yield on the stock price from
distributions by Shelbourne. Accordingly, an increase in market interest rates
may lead purchasers of shares in common stock in the secondary market to demand
a higher annual yield, which could adversely affect the market price of the
common stock. For instance, if interest rates are greater than the percentage
return you receive on a share of common stock, the price of a share of common
stock will likely decrease because potential investors may not be willing to
invest in shares of Shelbourne's common stock that would yield less than the
market rate on interest-bearing securities, such as bonds. Interest rates have
fluctuated over the past several months and may rise in the near future.
ILLIQUIDITY OF REAL ESTATE INVESTMENTS COULD ADVERSELY AFFECT SHELBOURNE'S
FINANCIAL CONDITION.
Real estate investments are illiquid relative to some other investments
such as publicly traded securities. The illiquidity of Shelbourne's assets may
limit its ability to buy or sell property in response to changes in economic or
other conditions. In addition, some significant costs and expenses attendant to
real estate ownership are fixed, such as principal and interest payments on
debt, real estate taxes, and operating and maintenance costs. As a result,
Shelbourne's ability to respond to adverse changes in the performance of its
investments may be limited, which could have an adverse effect on Shelbourne's
financial condition and results of operations.
THE UNCERTAINTY OF THE OUTCOME OF LAWSUITS PENDING AGAINST YOUR PARTNERSHIP
COULD ADVERSELY AFFECT SHELBOURNE'S FINANCIAL CONDITION.
Your partnership is involved in two litigations both involving the
joint venture which owns the 568 Broadway property. One litigation involves a
number of present or former tenants at 568 Broadway who are in default of their
lease obligations. Several of these tenants have brought claims or counterclaims
seeking total damages of over $20,000,000 plus additional damages of an
indeterminate amount. The plaintiffs' allegations include but are not limited
to, claims for breach of contract, failure to provide some services,
overcharging of expenses and loss of profits and income.
In the second litigation, a former retail tenant of 568 Broadway filed
a lawsuit against the joint venture that owns 568 Broadway alleging that by
erecting a sidewalk shed which the joint venture was required to do by law, the
joint venture deprived the plaintiffs of light, air and visibility to their
customers. The lawsuit seeks $20,000,000 in compensatory damages and $10,000,000
in punitive damages.
Although your partnership believes that both claims are without merit,
an unsuccessful outcome to either of these lawsuits could adversely affect
Shelbourne's financial condition.
LIABILITY FOR ENVIRONMENTAL MATTERS COULD ADVERSELY AFFECT SHELBOURNE'S
FINANCIAL CONDITION.
Shelbourne may acquire properties that have unknown environmental
problems or develop environmental problems after acquisition that could require
substantial expenditures to remedy. In addition,
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Shelbourne could be found to have environmental problems in some of its existing
properties. Often, federal and state laws impose liability on property owners or
operators for the clean-up or removal of hazardous substances on their
properties even if the present owner did not know of, or was not responsible
for, the contamination caused by the substances. In addition to the costs of
clean-up, contamination can affect the value of a property, Shelbourne's ability
to lease and sell the property, and Shelbourne's ability to borrow funds using
the property as collateral. Environmental laws typically allow the government to
place liens for such liabilities against affected properties, which liens would
be senior in priority to other liens. Costs that Shelbourne incurs to remedy
environmental problems in existing properties or to perform environmental
compliance due diligence on newly-acquired properties would reduce Shelbourne's
cash available for distribution to you as a shareholder. Your partnership has
not been notified by any governmental authority of any noncompliance, liability
or other claim in connection with any of its properties.
STOCKHOLDER APPROVAL IS NOT REQUIRED FOR SHELBOURNE TO DISCONTINUE ITS STATUS AS
A REAL ESTATE INVESTMENT TRUST.
Shelbourne's Board will have the authority to determine whether
Shelbourne should continue to qualify as a real estate investment trust.
Although Shelbourne currently intends to operate in a manner designed to enable
it to qualify as a real estate investment trust, it is possible that future
economic, market, legal, tax or other considerations may cause Shelbourne to
fail to qualify as a real estate investment trust or may cause Shelbourne's
Board to revoke Shelbourne's REIT election. If that were to happen, Shelbourne
would be required to pay corporate-level income tax which could reduce the cash
available for distribution to stockholders and could materially reduce the value
of your common stock.
UNINSURED LOSSES COULD ADVERSELY AFFECT SHELBOURNE'S FINANCIAL CONDITION.
Your partnership carries, and Shelbourne will continue to carry
comprehensive liability, fire, flood, extended coverage and rental loss
insurance, as applicable, with respect to its properties as customarily carried
for similar properties. There are, however, some types of losses such as from
wars or catastrophic acts of nature that may be either uninsurable or not
economically insurable. Any uninsured loss could result in both loss of cash
flow from, and asset value of, the affected property.
We do not anticipate obtaining new owner's title insurance policies in
connection with the conversion. Each of your partnership's properties has
previously been insured by title insurance policies. However, each such title
insurance policy may be in an amount less than the current value of the
applicable property. In the event of a loss with respect to a property relating
to a title defect, Shelbourne could lose both its capital invested in and
anticipated profits from such property.
FEDERAL INCOME TAX RISKS
FAILURE TO QUALIFY OR REMAIN QUALIFIED AS A REAL ESTATE INVESTMENT TRUST WOULD
CAUSE SHELBOURNE TO BE TAXED AS A CORPORATION.
Shelbourne intends to elect to be treated for tax purposes and to
operate so as to qualify as a real estate investment trust under the Internal
Revenue Code effective for its taxable year ending December 31, 2000. If
Shelbourne qualifies as a real estate investment trust, it generally will not be
subject to corporate-level income tax on income that it currently distributes to
its stockholders as long as it makes current distributions of at least 95% - 90%
for taxable years after 2000 - of its taxable income excluding net capital gain.
This treatment substantially eliminates the "double taxation," i.e., taxation at
both the corporate and stockholder levels, that ordinarily results from
investment in a corporation. No assurance can be given that
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Shelbourne will qualify or remain qualified as a real estate investment trust,
or that legislation, new regulations, administrative interpretations or court
decisions will not significantly change the tax laws with respect to
qualification as a real estate investment trust or the Federal income tax
consequences of such qualification. Shelbourne has received an opinion of
Rosenman & Colin LLP to the effect that, commencing with Shelbourne's taxable
year ending on December 31, 2000, Shelbourne will be organized in conformity
with the requirements for qualification as a real estate investment trust, and
Shelbourne's proposed method of operation will enable it to meet the
requirements for qualification and taxation as a real estate investment trust,
provided that (1) the conversion and the procedural steps described under
"FEDERAL INCOME TAX CONSEQUENCES - REQUIREMENTS FOR QUALIFICATION -
ORGANIZATIONAL REQUIREMENTS" are completed in a timely fashion and (2)
Shelbourne and the operating partnership operate in accordance with the
customary representations and assumptions for transactions of this nature,
including representations with respect to their organization, business,
properties and operations. However, an opinion of counsel is not binding on the
Internal Revenue Service or the courts.
If Shelbourne were to fail to qualify as a real estate investment trust
in any taxable year, it would not be allowed a deduction for distributions to
stockholders in computing its taxable income, and its taxable income would be
subject to Federal income tax at regular corporate rates. Unless entitled to
relief, Shelbourne also would be disqualified from treatment as a real estate
investment trust for the four taxable years following the year during which
qualification was lost. The resulting taxes imposed on Shelbourne would reduce
the funds available for distribution to its stockholders for each of the years
involved, and could materially reduce the value of your common stock.
SHELBOURNE WILL BE SUBJECT TO A 4% NONDEDUCTIBLE EXCISE TAX IF IT FAILS TO
DISTRIBUTE REQUIRED AMOUNTS.
Shelbourne will be subject to a 4% nondeductible excise tax if its
distributions during each calendar year do not equal at least the sum of:
(1) 85% of its ordinary income for that year;
(2) 95% of its capital gain net income for that year less any
capital gains that Shelbourne elects to retain and pay
taxes on; and
(3) any undistributed taxable income from prior periods less any
capital gains that Shelbourne elected to retain and pay
taxes on.
While Shelbourne intends to make distributions to its stockholders in
amounts sufficient to comply with the foregoing distribution requirement and
also avoid the 4% excise tax, the occurrence of an excise tax would adversely
affect the value of shares.
THERE ARE POTENTIAL TAX DISADVANTAGES TO CONDUCTING BUSINESS AS A REAL ESTATE
INVESTMENT TRUST.
Maintaining qualification as a real estate investment trust will
require Shelbourne to comply with restrictions with respect to its assets,
income and distributions that are not applicable to your partnership. See
"FEDERAL INCOME TAX CONSEQUENCES REQUIREMENTS FOR QUALIFICATION. Unlike your
partnership, Shelbourne may be subject to entity-level income taxes even while
remaining qualified as a real estate investment trust. Unlike your partnership,
Shelbourne will be unable to pass through losses to its stockholders.
Unlike your investment in your partnership, your ownership of common
stock will not be a passive activity for purposes of the passive activity loss
limitation, and dividends and capital gains from common
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stock may not be offset by your unused passive activity losses from your
partnership or other investments. However, unused passive activity losses from
your partnership generally may be deducted when you sell all of your common
stock. If you bought your units in your partnership's original offering, we
estimate that you may have unused passive activity losses from your partnership
of up to $10 per unit. This amount is reduced if you have previously used any of
these losses to offset your passive activity income from other investments.
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BENEFITS OF THE CONVERSION
As discussed under "BACKGROUND OF THE CONVERSION," we are proposing the
conversion as required by the settlement of the class action litigation
involving your partnership. We expect that the following benefits will result
from the conversion.
GREATER MARKET VALUE
The estimated range of values for shares of common stock is between
$32.06 and $39.78, 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 $31.52 and $35.55. 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, 3,666 units, or less than 1% of the outstanding units, were traded on
the secondary market.
The American Stock Exchange should also provide stockholders in
Shelbourne with a more efficient market to sell their shares than limited
partners currently have in the secondary market for units. Payment for shares
sold on the American Stock Exchange is required to be made within three business
days from the date that shares are sold. Currently it can take a significant
amount of time to complete the sale of units on the secondary market and receive
payment.
ABILITY TO MAKE NEW INVESTMENTS
Shelbourne will have the ability to make new investments. Shelbourne
may acquire new properties, interests in joint ventures and other real estate
companies, mortgages and other real estate-related assets. The ability to make
new investments will enable Shelbourne to change its investment portfolio in
response to changing market conditions and to avail itself of potentially
favorable investment opportunities. Through such additional investments,
Shelbourne will attempt to maximize the value of the common stock.
REQUIRED DIVIDENDS
Shelbourne will be required to distribute 95% of its taxable income -
90% after 2000 - other than capital gains, to maintain its status as a real
estate investment trust. Your partnership is not required to make distributions.
BENEFICIAL COMPANY STRUCTURE
Shelbourne's "UPREIT" structure will enhance its ability to make future
acquisitions. Shelbourne, through the operating partnership, may issue
additional partnership interests in transactions which would allow prospective
sellers to defer recognizing gain on their transfer of property to the operating
partnership.
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ELECTED GOVERNANCE
Following the conversion, directors of Shelbourne will be elected by
holders of common stock. In addition, a vote of stockholders holding two-thirds
of the outstanding common stock generally may remove a 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 General Corporation Law. Shelbourne intends to
treated as a partnership for Federal income tax qualify as a real estate investment trust under the
purposes, and is not subject to entity-level taxes. Internal Revenue Code, thereby generally avoiding
Federal taxation of income distributed to stockholders.
Maintaining real estate investment trust status will
require ongoing satisfaction of various tests and
restrictions that do not apply to your partnership.
Shelbourne may be subject to entity-level taxes even
while remaining qualified as a real estate investment
trust, including if Shelbourne fails to distribute 100%
of its real estate investment trust taxable income,
including its net capital gain.
</TABLE>
Your partnership is a limited partnership governed by Delaware
partnership law. Shelbourne is a corporation governed by Delaware corporate law.
Qualification of Shelbourne as a real estate investment trust will enable
Shelbourne to avoid much of the double taxation normally associated with
corporations.
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<PAGE>
<TABLE>
<CAPTION>
YOUR PARTNERSHIP SHELBOURNE
----------------------------------------------------------- --------------------------------------------------------
<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, 2017, 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 2017, 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 requiring a The bylaws and Delaware law provide that the stockholders of
vote of limited partners. Limited partners generally may Shelbourne shall be entitled to vote, subject to any voting
vote on: rights which may be granted to holders of preferred stock,
on all matters submitted to a vote of the stockholders. In
o removal of a general partner and the election of a determining the number of shares entitled to vote, each
successor general partner; share of common stock is entitled to one vote.
o election of an additional general partner; Generally, matters submitted to the stockholders require the
affirmative vote of stockholders holding a majority of the
o termination and dissolution of your partnership; number of votes cast either present in person or by proxy at
a duly convened meeting of stockholders, except that the
o amendments to your partnership's partnership agreement removal of directors and the amendment of some sections of
other than amendments relating to actions which are the certificate of incorporation requires the affirmative
under the sole authority of your managing general vote of stockholders holding two-thirds of the number of
partner; votes entitled to be cast on such proposals.
o material changes in your partnership's investment The bylaws of Shelbourne require Shelbourne to send notice
objectives; at least 10 days and not more than 60 days before the annual
meeting of stockholders to each stockholder entitled to vote
o sale of substantially all of the assets of your at such meeting or to each stockholder who, by law, under
partnership; the certificate of incorporation or under the bylaws is
entitled to such notice.
o the pledge or encumbrance of substantially all of the
assets of your partnership; and
o the extension of the term of your partnership.
A vote of 50% or more of the outstanding units is required
to approve any of the foregoing actions.
</TABLE>
You will be entitled to vote on more matters as a stockholder of Shelbourne
than you are as a limited partner in your partnership, including the entitlement
to vote in the annual election of directors.
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<PAGE>
<TABLE>
<CAPTION>
YOUR PARTNERSHIP SHELBOURNE
------------------------------------------------------------- --------------------------------------------------------------
<S> <C>
FIDUCIARY DUTIES, LIMITATION OF LIABILITY AND INDEMNIFICATION
We are accountable to your partnership as fiduciaries and At least one Delaware court has stated that the fiduciary
are required to exercise good faith and integrity in all our duties of a general partner are comparable to those of a
dealings in your partnership's affairs. Your partnership director to a stockholder. Other courts, however, have
agreement generally provides that neither we nor any of our indicated that the fiduciary duties of a general partner are
affiliates performing services on behalf of your partnership greater than those of a director to a stockholder, and other
will be liable to your partnership or any of their Delaware courts have held that the fiduciary duties of a
respective partners for any loss suffered by your general partner can be determined or modified by the
partnership that arises out of any action or inaction of us partnership agreement.
or our affiliates if we in good faith determine that such
course of conduct was in the best interests of your Accordingly, although it is unclear whether or to what
partnership, provided that such course of conduct did not extent there are any differences in such fiduciary duties,
constitute negligence or misconduct of us and our it is possible that the fiduciary duties of directors of
affiliates. Shelbourne to its stockholders could be less than our
fiduciary duties to you. This may result in decreased
Your partnership agreement generally requires your potential liability of the directors of Shelbourne and less
partnership to indemnify us to the maximum extent permitted recourse available to stockholders who believe that
by law from any liability, loss or damage incurred by reason Shelbourne's Board did not act properly in managing
of an act performed or omitted to be performed by them, Shelbourne's affairs. Shelbourne's certificate of
including costs and expenses, provided that (1) the course incorporation limits the liability of Shelbourne's directors
of conduct was determined to be in the best interest of your to the fullest extent permitted from time to time by
partnership, and (2) the course of conduct did not Delaware law. The certificate of incorporation presently
constitute negligence or misconduct. permits the liability of directors to Shelbourne or its
stockholders for money damages to be limited, except for
liability:
o for any transaction from which the director derived an
improper benefit;
o for any breach of the director's duty of loyalty to
Shelbourne or its stockholders;
o acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law;
and
o under Section 174 of the General Corporation Law of the
State of Delaware.
Shelbourne's bylaws require Shelbourne to indemnify its
directors and officers to the fullest extent permitted by
Delaware law.
Delaware law permits indemnification against expenses and
liabilities arising out of legal actions brought or
threatened against directors for their conduct on behalf of
a corporation, provided that they acted in good faith and in
a manner reasonably believed was in or not opposed to such
corporation's best interests and in the case of a criminal
proceeding, that they had no reasonable cause to believe
their conduct was unlawful. Delaware does not allow
indemnification of directors in the case of an action by or
in the right of a corporation, including stockholder
derivative suits, unless the directors successfully defend
the action or indemnification is ordered by the court.
Shelbourne has agreed to indemnify its directors and
executive officers to the fullest extent permitted by law
and to advance to the directors and executive officers all
related expenses, including legal costs, subject to
reimbursement, if it is subsequently determined that the
indemnification is not permitted.
</TABLE>
The rights of stockholders against management of Shelbourne in some
circumstances may be more limited than the rights you have against us or your
general partners.
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<PAGE>
<TABLE>
<CAPTION>
YOUR PARTNERSHIP SHELBOURNE
----------------------------------------------------------- ---------------------------------------------------------------
<S> <C>
REVIEW OF BOOKS AND RECORDS
Under your partnership agreement and applicable law, you are Under Delaware General Corporation Law, a stockholder is
entitled to review and obtain a copy of a current list of entitled, upon written demand, to inspect for any proper
the names and addresses of limited partners in your purposes during usual business hours, Shelbourne's stock
partnership as well as other information maintained at the ledger, a list of Shelbourne's stockholders and its other
principal offices of your partnership. books and records and to make copies or extracts therefrom.
In addition, Shelbourne is required to prepare, at least 10
days before every meeting of stockholders, a complete list
of the stockholders entitled to vote at the meeting,
arranged in alphabetical order, and showing the address of
each stockholder and the number of shares registered in the
name of each stockholder. Such list must be open to the
examination of any stockholder, for any purpose germane to
the meeting, during ordinary business hours, for at least 10
days prior to the meeting either at the place where the
meeting is to be held or at a place in the city which is
specified in the notice of the meeting.
</TABLE>
The rights of stockholders to obtain an investor list is somewhat more
limited than your corresponding right in your partnership.
<TABLE>
<CAPTION>
YOUR PARTNERSHIP SHELBOURNE
----------------------------------------------------------- --------------------------------------------------------
<S> <C>
MANAGEMENT
With the exception of some significant transactions which Shelbourne will be managed by its Board of Directors and
require your approval such as a sale of all of your executive officers. Management of the day-to-day affairs of
partnership's assets, we have exclusive authority and Shelbourne will be performed by Shelbourne Management. The
control over the management and operation of your Board of Directors will be elected by the holders of common
partnership. You do not have the right to annually elect the stock.
management of your partnership. However, we may be removed
at any time by a vote of a majority of the outstanding units
in your partnership.
</TABLE>
Unlike limited partners in your partnership, holders of Common Stock
will vote to elect management of Shelbourne.
32
<PAGE>
<TABLE>
<CAPTION>
YOUR PARTNERSHIP SHELBOURNE
----------------------------------------------------------- -------------------------------------------------------------
DISTRIBUTIONS; DISTRIBUTION POLICY
<S> <C>
Your partnership generally distributes available cash on a Shelbourne intends to make quarterly dividend payments to
quarterly basis. Amounts distributed to you historically its stockholders. The amount of such dividends will be
have been derived from your share of adjusted cash from established by the Board of Directors, taking into account
operations. We may, under your partnership agreement, create the cash needs of Shelbourne, the requirements of the
working capital and other reserves that may have the effect Internal Revenue Code for qualification as a real estate
of decreasing cash distributions. You also are entitled to investment trust and the amount of distributions necessary
receive your share of cash from sales or financings upon the to avoid becoming subject to non-deductible excise tax. See
sale or, in limited circumstances, financing of your "FEDERAL INCOME TAX CONSEQUENCES." Under the Internal
partnership's properties. However, except for the sale of Revenue Code, Shelbourne is required to distribute ordinary
two properties, your partnership has not to date sold or income dividends of at least 95% - 90% after taxable year
financed any of its real estate investments. 2000 - of its taxable income other than net capital gain in
order to maintain its qualification as a real estate
investment trust. Unlike your partnership, Shelbourne is not
required to distribute net proceeds from a financing of
properties or from sales of properties. For a summary of
Shelbourne's dividend policy, see, "SHELBOURNE -- CASH
DIVIDEND POLICY".
</TABLE>
Shelbourne will pay dividends when declared by the Board of Directors
of Shelbourne. The amount of such dividends will depend upon Shelbourne's
operating expenses, debt service payments, capital expenditures and other
factors. To maintain its qualification as a real estate investment trust,
Shelbourne must distribute 95% - 90% after 2000 - of its taxable income other
than net capital gain.
33
<PAGE>
<TABLE>
<CAPTION>
YOUR PARTNERSHIP SHELBOURNE
----------------------------------------------------------- --------------------------------------------------------------
<S> <C>
LEVERAGE; BORROWING POLICY
Your partnership did not incur any indebtedness in Shelbourne will likely incur significant indebtedness on a
connection with raising capital or acquiring its properties. secured and unsecured basis to finance future investments,
Your partnership is permitted to encumber with mortgage to improve existing properties or for other purposes.
financing any properties which have been owned by your Shelbourne will not be limited as to the amount of
partnership for at least five years, provided that your indebtedness it may incur with respect to any of its
partnership has obtained an opinion of counsel that such properties, but currently does not intend to borrow, in the
financing will not result in income derived from your aggregate, more than an amount equal to 75% of its gross
partnership's properties constituting "unrelated business assets.
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 making Shelbourne may make loans, including mortgage loans, as part
loans and is not permitted to make new investments. 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.
34
<PAGE>
<TABLE>
<CAPTION>
YOUR PARTNERSHIP SHELBOURNE
------------------------------------------------------ -------------------------------------------------------------
<S> <C>
MANAGEMENT FEES TO AFFILIATES
Your partnership agreement provides for the payment of the Shelbourne Management will manage Shelbourne under an advisory
following fees to us and our affiliates: agreement and will be paid:
o Asset Management Fee. A per annum partnership asset o Asset Management Fee. An asset management fee equal to
management fee equal to 1.25% of the gross assets of 1.25% of gross assets of Shelbourne. Since the asset
your partnership per annum; management fee is based on gross assets, the amount
payable to Shelbourne Management will increase to the
o Non-accountable Expense Reimbursement. $200,000 per extent Shelbourne acquires new investments, whether for
year for non-accountable expenses of your managing cash, by causing Shelbourne to incur indebtedness or
general partner relating to the administration of your otherwise;
partnership;
o Non-accountable Expense Reimbursement. $200,000 per
o Property Management Fee. Competitive property year for reimbursement of non-accountable
management fees not in excess of 6% of revenues payable administrative expenses;
to us and our affiliates;
o Property Management Fee. Competitive property
o Accountable Expense Reimbursement. Reimbursement for management fees not in excess of 6% of revenues; and
accountable expenses incurred in connection with the
performance of administrative services for your o Accountable Expense Reimbursement. Reimbursements for
partnership; and accountable expenses incurred in connection with the
performance of administrative services for Shelbourne.
o Subordinated Incentive Fee. A fee equal to 15% of the
proceeds of any sales or financings after limited Under the advisory agreement, Shelbourne Management will be
partners are distributed their total original invested responsible to do the following:
capital plus an amount that would equal a 10% annual
return on their adjusted invested capital. We do not o manage Shelbourne's day-to-day operations;
expect that limited partners will receive the required
amount upon liquidation of your partnership and o provide or arrange for customary property management
therefore we do not expect to receive any subordinated services to be provided at Shelbourne's properties;
incentive fees.
o supervise Shelbourne's financings including any sales
of Shelbourne's securities;
o conduct relations for Shelbourne with the American
Stock Exchange or with dealers which make markets in
Shelbourne's securities;
o select and conduct relations with lenders, lawyers,
consultants, accountants, mortgage loan originators,
brokers, participants, attorneys, appraisers, insurers,
and others who may be relevant to Shelbourne's
activities;
o administer day-to-day bookkeeping and accounting
functions;
o prepare reports to stockholders which may be required
by governmental authorities for the ordinary conduct 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
$3.31 per unit, or an aggregate of $1,229,811, which we would otherwise be
required to pay if your partnership were liquidated. In addition, to the extent
Shelbourne increases its gross assets, including through acquisitions and
through leverage, the asset management fee payable to Shelbourne Management
would increase.
35
<PAGE>
The following information compares (1) the compensation and distributions
paid by your partnership to us and our affiliates and (2) the compensation and
distributions that would have been paid to us and our affiliates if the
conversion had been in effect during the periods presented below.
36
<PAGE>
<TABLE>
<CAPTION>
HISTORICAL AND PRO FORMA PAYMENTS TO THE GENERAL PARTNERS
-----------------------------------------------------------------------------------------------------
Year Ended December 31,
------------------------------------ ---------------------------------------- -----------------------
1997 1998 1999
---- ---- ----
----------- ------------ ----------- -------------- ------------ ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Net
Historical Shelbourne Increase Historical Shelbourne Increase Historical Shelbourne
Partnership Pro Forma (Decrease) Partnership Pro Forma (Decrease) Partnership Pro Forma
----------- ------------ ----------- -------------- ------------ ------------ ----------- -----------
Asset Management Fee (1)
No leverage $880,404 $643,051 ($237,353) $880,404 $697,989 ($182,415) $719,411 $752,083
75% leverage -- $2,572,204 -- -- $2,791,957 -- -- $3,008,331
Property Management Fees (2) $305,203 $305,203 0 $270,074 $270,404 0 $231,040 $231,040
General Partners' $189,603 $151,993 ($37,610) $199,584 $120,312 ($79,272) $99,790 $59,921
Distributions (3) (4)
Distributions on $78,051 $62,569 ($15,482) $493,066 $297,226 ($195,840) $328,552 $197,287
Units/Shares
Held by our Affiliates
(4)
Non-Accountable Expense $200,000 $200,000 0 $200,000 $200,000 0 $200,000 $200,000
Reimbursement
Accountable Expense $42,997 $42,997 0 $102,019 $102,019 0 $56,018 $56,018
Reimbursement
----------- ------------ ----------- -------------- ------------ ------------ ----------- -----------
<CAPTION>
------------- --------------------------------------
Six Months Ended
------------- --------------------------------------
1999 June 30, 2000
---- -------------
------------- ----------- ------------ -------------
<C> <C> <C> <C>
Net Net
Increase Historical Shelbourne Increase
(Decrease) Partnership Pro Forma (Decrease)
------------- ----------- ------------ -------------
$32,672 $334,840 $334,840 0
-- $1,544,246 $1,544,246
--
0 $99,898 $99,898 0
($38,869) 0 $57,115 $57,115
($131,265) 0 $238,967 $238,967
0 $100,000 $100,000 0
0 0 0 0
- ----------- ----------- ------------ -------------
</TABLE>
(1) Amounts under Historical Partnership represent the actual fee paid by
your partnership for the period indicated. Amounts under Shelbourne Pro
Forma were determined based on a fee of 1.25% of Shelbourne's gross
asset value both with and without the effects of borrowing. The amounts
under Shelbourne Pro Forma for the six months ended June 30, 2000 do
not reflect additional amounts payable based on the June 2000 property
appraisals. The fees based on 75% leverage assume that Shelbourne's
gross assets were $205,776,288, $223,356,592, $240,666,440 and
$247,079,352, as of December 31, 1997, 1998 and 1999 and June 30, 2000,
respectively
(2) Historical cost includes $305,203, $270,074, $231,040 and $99,898, of
Supervisory Management Fees paid to our affiliate, Resources
Supervisory Management Corp. for the years ended December 31, 1997,
1998 and 1999, and the six months ended June 30, 2000, respectively, of
which $108,247, $129,580, $115,352 and $99,898, respectively, was paid
to unaffiliated management companies.
(3) The amount under Historical Partnership represents distributions
actually paid to your general partners on account of their 5% interest
in your partnership. On a pro forma basis the general partner interest
in your partnership will be converted into shares of Shelbourne. The
amount listed under Shelbourne Pro Forma represents dividends which
would be paid to the general partners as 5% shareholders.
(4) Amounts under Shelbourne Pro Forma represent the distribution of 95% of
taxable income in order to qualify as a real estate investment trust.
37
<PAGE>
<TABLE>
<CAPTION>
YOUR PARTNERSHIP SHELBOURNE
----------------------------------------------------------- -------------------------------------------------------------
<S> <C>
TAXATION OF TAXABLE LIMITED PARTNERS
Your partnership, which is treated as a partnership for Dividends paid to taxable stockholders generally will be
Federal income tax purposes, is not subject to tax, but you taxable to them as ordinary dividend income except for
must report your allocable share of partnership income and distributions properly designated as capital gain
loss on your tax return. Partnership distributions are not distributions. Dividends and capital gains from common stock
taxable to you except to the extent such distributions cannot be offset by passive activity losses, including any
exceed your adjusted tax basis in your partnership units. unused passive activity losses from your partnership, in the
Your partnership specially allocates depreciation deductions case of stockholders who are subject to the passive activity
to taxable unitholders. Losses from your partnership loss limitation. Unused passive activity losses from your
constitute passive activity losses which, under the passive partnership generally may be deducted when you sell all of
activity loss limitation rules, cannot be deducted currently your common stock. Tax losses of Shelbourne will not pass
except to the extent of your passive activity income, if through to stockholders, but will reduce Shelbourne's future
any, from other investments. Income from your partnership taxable income subject to applicable limitations. Each
generally constitutes passive activity income which, subject January, stockholders will be mailed the familiar Form
to applicable limitations, can be offset by unused passive 1099-DIV for corporate dividends.
activity 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 file
Schedule K-1 forms with respect to information for inclusion state income tax returns or pay state income taxes outside
on your Federal income tax returns. your state of residence with respect to Shelbourne's
operations. Shelbourne must pay state income taxes in
You generally must file state income tax returns and may certain states where it owns properties.
incur state income tax in various states in which your
partnership owns property.
</TABLE>
Shelbourne's dividends generally will be taxable to taxable stockholders as
ordinary income which is not passive activity income. Stockholders will receive
a Form 1099-DIV rather than a Schedule K-1.
<TABLE>
<CAPTION>
----------------------------------------------------------- ---------------------------------------------------------
<S> <C>
TAXATION OF TAX-EXEMPT LIMITED PARTNERS
Leveraged acquisitions by your partnership would give rise The Service has ruled that distributions by a real estate
to unrelated business taxable income under the Internal investment trust to a tax-exempt pension trust generally
Revenue Code. will not constitute unrelated business taxable income.
Accordingly, dividends received from Shelbourne by a
stockholder whose income is exempt from Federal income
taxation generally should not constitute unrelated business
taxable income assuming the stockholder does not hold its
shares subject to acquisition indebtedness.
</TABLE>
Shelbourne's dividends generally will not constitute unrelated business
taxable income to tax-exempt stockholders.
38
<PAGE>
BACKGROUND OF THE CONVERSION
GENERAL
We are proposing the conversion as part of the court-approved
settlement of the class action litigation involving your partnership. The
following summarizes the history of your partnership and the events leading
toward and surrounding the settlement.
Your Partnership
Your partnership was formed in 1987 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 September 1987 and
September 1989 resulting in the sale of 371,766 partnership units for aggregate
gross proceeds to your partnership of $92,941,500. Substantially all of the
capital raised by your partnership through the sale of units, net of offering
costs, fees and some distributions, was invested in the properties currently
owned by your partnership as well as two other properties which have since been
sold. A complete description of the properties currently owned by your
partnership is set forth under "SHELBOURNE -- THe PROPERTIES."
The stated investment objectives of your partnership were to (1)
preserve its capital, (2) provide quarterly distributions to partners, and (3)
create the potential for capital gains through appreciation of its properties.
We believe that your partnership has, to some extent, achieved its objectives of
providing quarterly distributions to partners. Prior to the quarter ended
September 30, 1999, your partnership has made quarterly distributions to limited
partners. For a discussion of the operating history and performance of your
partnership, see "SELECTED FINANCIAL DATA" and "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS."
The following table sets forth (1) equity balances on a total and per
unit basis for all partners in your partnership as of the date of the original
offering of units in your partnership and as of June 30, 2000, (2) income
allocated by your partnership during such period, (3) distributions from your
partnership during such period, and (4) losses allocated by your partnership
during such period. The beginning equity account of the general partners
includes a reallocation of $4,331,074, representing 5% of the gross proceeds
originally raised by your partnership, to reflect the general partners' 5%
equity interest in your partnership.
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------
ORGANIZATION
BEGINNING EQUITY COSTS CHARGED TO DISTRIBUTIONS ON
BALANCE CAPITAL INCOME ALLOCATED EQUITY LOSSES ALLOCATED
----------------------------------------------------------------------------------------------------------
TOTAL PER TOTAL PER TOTAL PER TOTAL PER UNIT TOTAL PER
UNIT UNIT UNIT UNIT
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Limited $88,610,426 238.35 (2,648,763) (7.12) 25,506,580 68.61 (46,457,390) (124.96) (13,572,924) 36.51
Partners
----------------------------------------------------------------------------------------------------------------------
General 4,332,074 -- (139,408) -- 1,342,446 -- (2,113,469) -- (714,364) --
Partners
----------------------------------------------------------------------------------------------------------------------
<CAPTION>
---------------------
EQUITY BALANCES AS
OF 6/30/00
---------------------
TOTAL PER
UNIT
---------------------
<C> <C>
51,437,929 138.26
---------------------
2,707,279 --
---------------------
</TABLE>
Your partnership has two general partners. The Managing General Partner
is Resources High Equity, Inc., a Delaware corporation, and the Associate
General Partner is Presidio AGP Corp. As the managing
39
<PAGE>
general partner, Resources High Equity, Inc. is responsible for evaluating and
negotiating all property dispositions as well as for management of your
partnership's properties, and 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 $3.31 per unit, or $1,229,811 in the aggregate, upon
liquidation of your partnership. See the discussion of such contingent
obligation included in "ALTERNATIVES TO THE CONVERSION -- LIQUIDATION AND
DISSOLUTION OF YOUR PARTNERSHIP."
Your managing general partner was 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 managing general partner. In August 1998,
Presidio, which also owns Presidio AGP Corp., was acquired by Presidio Capital
Investment Company, LLC, which in turn is controlled by NorthStar Capital
Investment Corp.
In October 1999, Presidio Capital Corp. entered into an agreement with
AP-PCC III, L.P., an affiliate of Winthrop Financial Associates. Winthrop is a
Boston-based partnership and property management company which is not affiliated
with Presidio Capital Corp. Under the agreement, AP-PCC III, L.P. is responsible
for providing your partnership with asset management and investor relation
services on behalf of your general partners. In order to facilitate the
provision of these services, nominees of AP-PCC III, L.P. were elected as
officers and directors of your general partners. Following the conversion AP-PCC
III, L.P. will continue to furnish the foregoing services on behalf of
Shelbourne Management. In addition, nominees of AP-PCC III, L.P. have been
elected as officers and directors of Shelbourne Management. Accordingly, since
Shelbourne will be managed by one or more individuals who also manage Winthrop,
Shelbourne and Winthrop will be affiliates under common control.
Your partnership's properties were acquired between September 1988 and
June 1989. Although your partnership's original management anticipated holding
your partnership's properties for seven to ten years following the time such
properties were acquired, your partnership agreement provided your general
partners with the discretion and authority to determine the actual timing of
sales. Your general partners determined not to meet your partnership's original
timetable for liquidation based on their assessment of the condition of the real
estate markets in the areas where your partnership's properties were located as
well as the condition of some of your partnership's properties. Liquidation of
your partnership within the originally anticipated time frame would not have
accomplished your partnership's stated investment objective of preserving
capital or creating capital gains.
The following table sets forth the number and prices of units sold from
February 1, 1996 through May 31, 2000 as reported by Partnership Spectrum, an
independent industry publication. These prices do not take into account
commissions and other transactional costs which sellers of units may be required
to pay and which typically range between 8% and 10% of the reported selling
price.
40
<PAGE>
SECONDARY MARKET TRADING VOLUME AND
UNIT PRICES (Except as otherwise indicated all
price information on a per unit basis)
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------
Total Units Number of Weighted Weighted Average Per
Date Traded Trades High Low Average Share
---- ------ ------ ---- --- ------- -----
<S> <C> <C> <C> <C> <C> <C>
2/96-3/96 1,884 23 $77.81 $67.50 $73.03 $24.34
4/96-5/96 2,123 18 $76.00 $70.00 $72.43 $24.14
6/96-7/96 14,271 21 $82.75 $65.00 $81.35 $27.12
8/96-9/96 1,041 24 $80.42 $70.00 $74.10 $24.70
10/96-11/96 1,179 25 $77.00 $71.75 $73.79 $24.60
12/96-1/97 381 5 $86.00 $77.50 $80.64 $26.88
2/97-3/97 1,975 40 $93.00 $75.00 $88.57 $29.52
4/97-5/97 2,330 22 $96.58 $83.40 $90.28 $30.09
6/97-7/97 2,369 40 $94.13 $84.00 $88.80 $29.60
8/97-9/97 1,989 28 $97.00 $84.00 $89.87 $29.96
10/97-11/97 671 9 $109.50 $84.00 $93.89 $46.95
12/97-1/98 2,374 44 $111.33 $88.00 $99.18 $33.06
2/98-3/98 2,216 47 $120.00 $110.00 $110.30 $36.77
4/98-5/98 1,547 35 $120.00 $100.00 $111.89 $37.30
6/98-7/98 1,626 28 $140.52 $100.00 $115.68 $38.56
8/98-9/98 2,402 41 $131.11 $110.00 $120.17 $40.06
10/98-11/98 6,158 19 $132.00 $122.00 $127.02 $42.34
12/98-1/99 1,988 27 $130.88 $105.00 $124.31 $41.44
2/99-3/99 2,412 42 $131.00 $110.00 $117.74 $39.25
4/99-5/99 1,212 24 $137.00 $102.50 $119.24 $39.75
6/99-7/99 2,192 46 $132.05 $102.50 $116.41 $38.80
8/99-9/99 1,960 30 $125.00 $93.45 $117.11 $39.04
10/99-11/99 1,328 24 $117.88 $100.00 $112.51 $37.50
12/99-1/00 690 11 $112.70 $104.33 $109.14 $36.38
2/00-3/00 1,324 18 $118.08 $100.00 $113.71 $37.90
4/00-5/00 3,666 69 $112.00 $94.00 $100.61 $33.54
-----------------------------------------------------------------------------------------------------------------------
</TABLE>
41
<PAGE>
The Class Action
In May 1993, Mark Erwin, Trustee, Mark Erwin Sale, Inc. Defined Benefit
Plan and Leonard Drescher, Trustee of Drescher Family Trust Account, limited
partners in your partnership, Integrated Resources High Equity Partners, Series
85, A California Limited Partnership and High Equity Partners L.P. - Series 86
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
42
<PAGE>
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.
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.
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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 $719,411 which is $160,993 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 IV,
LLC, made a tender offer to limited partners of your partnership to acquire
25,034 units of your partnership at a price of $113.15 per unit. The offer
closed in January 2000 and Millennium acquired all 25,034 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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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
2017;
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 three 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.
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.
The following table sets forth the June 30, 2000 appraised value
determined by Cushman & Wakefield. The adjusted appraised value column reflects
a 25% 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.
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APPRAISED ADJUSTED APPRAISED
PROPERTY VALUE VALUE
568 Broadway (1) $11,075,000 $7,198,750
Livonia Plaza $9,250,000 $9,250,000
Melrose Crossing - $2,200,000 $2,200,000
Phase II
Sunrise Marketplace $11,300,000 $11,300,000
SuperValu Stores (2) $7,175,000 $5,381,250
TMR Warehouses (3) $17,692,820 $13,265,000
---------- ----------
TOTAL $58,692,820 $48,595,000
---------------
(1) Your partnership has a 22.15% interest in this property and the amount
listed in the table represents 22.15% of the applicable values.
(2) Your partnership has a 50% interest in this property and the amount
listed in the table represents 50% of the applicable values.
(3) Your partnership has a 79.34% interest in this property and the amount
listed in the table represents 79.34% of the applicable values.
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.
INCOME CAPITALIZATION APPROACH
The income capitalization approach is a method of converting the
anticipated economic benefits of owning property into a value estimate through
capitalization. The principle of "anticipation" underlies this approach in that
investors recognize the relationship between an asset's income and its value. In
order to value the anticipated economic benefits of a particular property,
potential income and expenses must be estimated, and the most appropriate
capitalization method must be selected. The two most common methods of
converting net income into value are direct capitalization and discounted cash
flow analysis. In the direct capitalization approach, net operating income is
divided by an overall rate extracted from market sales to indicate a value. In
the discounted cash flow method, anticipated future net income streams and a
future sale
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value are discounted to an estimate of net present value at a chosen yield rate.
The following table sets forth the values determined by Cushman & Wakefield
using the income approach:
<TABLE>
<CAPTION>
Property Income Capitalization Approach
----------------------------------------------------------
<S> <C> <C>
DISCOUNTED DIRECT
CASH FLOW METHOD CAPITALIZATION METHOD
568 Broadway (1) $11,075,000 --
Livonia Plaza $9,250,000 --
Melrose Crossing - -- --
Phase II
Sunrise Marketplace $11,300,000 $11,500,000
SuperValu Stores (2) -- $7,175,000 (3)
TMR Warehouses (4) -- $17,811,830
</TABLE>
---------------
(1) Your partnership has a 22.15% interest in this property and the amount
listed in the table represents 22.15% of the applicable values.
(2) Your partnership has a 50% interest in this property and the amount
listed in the table represents 50% of the applicable values.
(3) This property consists of four parcels located in Indianapolis, IN,
Atlanta, GA, Edina, MN and Toledo, OH. Cushman & Wakefield determined
the value of the Toledo parcel under the income approach using the
discounted cash flow method. The values of the other three parcels
under the income approach were determined using the direct
capitalization method.
(4) Your partnership has a 79.34% interest in this property and the amount
listed in the table represents 79.34% of the applicable values.
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:
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SALES COMPARISON
PROPERTY APPROACH
568 Broadway (1) $11,296,500
Livonia Plaza $9,300,000
Melrose Crossing - $2,200,000
Phase II
Sunrise Marketplace $11,000,000 to $11,500,000
SuperValu Stores (2) (3) --
TMR Warehouses (4) $17,494,470
---------------
(1) Your partnership has a 22.15% interest in this property and the amount
listed in the table represents 22.15% of the applicable values.
(2) Your partnership has a 50% interest in this property and the amount
listed in the table represents 50% of the applicable values.
(3) This property consists of four parcels located in Indianapolis, IN,
Atlanta, GA, Edina, MN and Toledo, OH. Using the sales comparison
approach, Cushman & Wakefield determined the value of your
partnership's interest in the Indianapolis, Atlanta, and Edina parcels
to be $1,700,000, $2,250,000 and $1,275,000, respectively. Cushman &
Wakefield did not determine a value for the Toledo parcel using the
sales comparison approach.
(4) Your partnership has a 79.34% interest in this property and the amount
listed in the table represents 79.34% of the applicable values.
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 $2,100,000.
VALUATION ANALYSES
GENERAL
The following discussion includes a description of the analyses
performed by Insignia/ESG for your partnership. The full text of Insignia/ESG's
written valuation analysis report, dated August 31, 2000, which describes the
assumptions made, matters considered and limitations on the analyses is filed as
an exhibit to the Registration Statement of which this consent solicitation is a
part. You should read the report in its entirety. We will provide free of charge
a copy of the report upon your written request or that of your
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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,
2017. 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 $31.67 and $35.71 per share as of June 30, 2000. In this analysis,
Insignia/ESG made the following adjustments to the $58,692,820 appraised value
of your partnership's properties:
1. Insignia/ESG added $7,246,894 representing the amount as of
June 30, 2000 of your partnership's cash and cash equivalents
and other non-real estate assets that we believed would have
value upon liquidation reduced by your partnership's
outstanding current liabilities.
2. Insignia/ESG subtracted $854,356 representing the present
value of the estimated cost of maintaining a $1,000,000
reserve in your partnership through 2017.
3. Insignia/ESG also subtracted $3,934,946 representing our
estimate of the cost of maintaining an additional reserve for
anticipated capital requirements over the next five years at
the TMR Warehouse and SuperValu properties. The additional
reserve was required because the appraisals for those
properties did not make provisions for capital improvements.
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4. Insignia/ESG subtracted $17,751,159 representing the present
value of the estimated cost of operating your partnership.
Insignia/ESG derived this estimated cost by discounting the
anticipated amount of your partnership's asset management fee
and administrative costs for the life of your partnership.
5. Insignia/ESG subtracted $4,020,026 representing a discount
attributable to your partnership's joint venture investments.
This reduction results from the application of the joint
venture discount used by Cushman & Wakefield to the future
sale value component of the appraised value for each joint
venture investment.
Insignia/ESG then applied a 6% margin of error to establish the range
of estimated going concern values of your partnership.
For the reasons set forth in "RECOMMENDATION AND FAIRNESS," we did not
give significant weight to the estimated going concern value of your partnership
in recommending the conversion.
LIQUIDATION ANALYSIS
If your partnership were liquidated, it would sell its assets at the
best available price, pay off existing liabilities, distribute the cash proceeds
in accordance with your partnership agreement, and then dissolve. Liquidation of
your partnership would provide liquidity to you as properties are sold and net
sales proceeds are distributed. If your partnership were liquidated you would no
longer be subject to the risks associated with owning real estate. If your
partnership were liquidated as of August 31, 2000, we would pay to limited
partners $3.31 per unit or an aggregate of $1,229,811, 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 $43.65 and $49.22 per share as of June 30, 2000. In this analysis,
Insignia/ESG made the following adjustments to the $48,599,615 adjusted
appraised value of your partnership's properties:
1. Insignia/ESG subtracted $2,154,975 representing the estimated
costs of disposing of your partnership's properties and
dissolving your partnership. Disposition costs generally
consist of transfer taxes, brokerage commissions and closing
costs and were assumed to be the amounts used by Cushman &
Wakefield in determining the future sale values of each
property. For your partnership's TMR Warehouse, Melrose
Crossing and SuperValu properties, which were appraised using
either the direct capitalization approach or the sales
comparison approach, disposition costs were assumed to be 5%
of each property's adjusted appraised value or the sales
comparison approach. Dissolution costs include professional
fees and administrative costs and were estimated by us to be
$500,000.
2. Insignia/ESG added $7,246,894 representing the net amount as
of June 30, 2000 of your partnership's cash and cash
equivalents and other non-real estate assets that we believed
would have value upon liquidation reduced by your
partnership's outstanding current liabilities.
3. Insignia/ESG added $1.12 per share representing the amount we
would be required to pay limited partners if your partnership
were liquidated as of June 30, 2000 as repayment of fees
previously receivable.
Insignia/ESG then applied a 6% margin of error to establish the range
of estimated liquidation values of your partnership.
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For the reasons set forth in "RECOMMENDATION AND FAIRNESS," we did not
give significant weight to the estimated liquidation value of your partnership
in recommending the conversion.
SECONDARY MARKET TRADING HISTORY ANALYSIS
The units in your partnership are not listed on any national stock
exchange or traded in any formal trading market. There is, however, a limited
and informal secondary market for units.
Insignia/ESG estimated the per share secondary market value, based on
recent secondary market trading activity of units, to be between $31.52 and
$35.55. To estimate the secondary market value, Insignia/ESG used the weighted
average trading price for units traded between April 1 and May 31, 2000.
Insignia/ESG then applied a 6% margin of error to establish the range of
estimated per share secondary market prices. Secondary market trading data was
provided by your partnership based on information reported by Partnership
Spectrum, an independent industry publication.
CONVERSION AND COMPARABLE COMPANY ANALYSIS
Insignia/ESG estimated the value of the shares of common stock of
Shelbourne to be between $32.06 and $39.78 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 medium current trading multiple for those trusts
based on projected 2001 funds from operations. Insignia/ESG then applied a
margin of error to the estimate indicating a range of multiples for Shelbourne
from 5.4 to 6.7.
Insignia/ESG applied the foregoing range of multiples to Shelbourne's
projected funds from operations. Shelbourne's projected funds from operations
were estimated by us as follows:
1. We projected Shelbourne's funds from operations from the
properties now owned by your partnership. Our projections were
based on actual operating results for the twelve months ended
June 30, 2000 as adjusted to reflect an increase in expenses
resulting previously from higher asset management fees based
on the new Cushman & Wakefield appraisals. The resulting
projected funds from operations for Shelbourne from the
properties currently owned by your partnership was $3,949,705.
2. We projected Shelbourne's funds from operations from
additional investments that Shelbourne anticipates making in
the future by leveraging its existing assets and any newly
acquired assets. In estimating the amount of additional
investments by Shelbourne, we assumed that Shelbourne would
achieve a 75% debt to asset ratio and would use approximately
80% of its current cash reserves to acquire more investments.
We also assumed that the debt would bear interest at an
average rate of 8% per year and that the new investments would
generate annual net operating income of 10.5% of their cost.
The resulting projected funds from operations from the
additional investments is $3,020,970.
Applying this methodology, Insignia/ESG established the range of
estimated values for shares of common stock of Shelbourne. The estimated value
is not intended to be a prediction of the price at which the shares of common
stock will trade on the American Stock Exchange. The common stock may trade at
prices below the estimated range of values.
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RECOMMENDATION AND FAIRNESS
GENERAL PARTNERS' RECOMMENDATION
We believe that the conversion is fair and in your best interest and we
recommend that you vote "YES" to approve the conversion.
Our recommendation is based on the following:
o We believe that the value of an investment in Shelbourne will
have a greater potential for appreciation than the value of an
investment in your partnership.
o The range of estimated values for common stock is
significantly higher than the recently reported secondary
market price for units.
o You cannot currently realize the liquidation value of your
units since a liquidation of your partnership is not currently
contemplated and would, in any event, occur over a significant
period of time.
o The American Stock Exchange will provide you with greater
liquidity and a more efficient market to sell common stock as
compared to the inefficient and limited secondary market for
your partnership units.
FAIRNESS OF THE CONVERSION
We believe that the conversion is fair and in the best interests of
limited partners. Our belief that the conversion is fair is based on the
following factors:
o After the conversion you will own the same percentage interest
in Shelbourne that you presently own in your partnership.
o Shelbourne will initially own the identical properties owned
by your partnership prior to the conversion.
o Limited partners and general partners will receive common
stock in the conversion on the same basis.
o While fees payable by Shelbourne may increase over current
levels, the method of determining those fees will remain the
same.
o The conversion will be tax-free to you.
We gave greatest weight to the first three factors listed above in
determining that the conversion is fair to you.
We did not give significant weight to the estimated continuation and
liquidation value derived by Insignia/ESG in determining that the conversion is
fair for the following reasons:
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LIQUIDATION
o You cannot currently realize the liquidation value since we
are not proposing a liquidation of your partnership at this
time. We believe that your partnership's properties will
appreciate in value before your partnership is required to
liquidate in 2017. We note that the current appraised value of
your partnership's properties is $58,692,820, or approximately
9.6% higher than the 1998 appraised value of your
partnership's properties, and approximately 20.9% higher than
the 1996 appraised value of your partnership's properties. In
addition, our affiliates, Millennium Funding IV Corp.,
Millennium Funding I LLC and Millennium Funding IV LLC, which
own in the aggregate 26.3% 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 Two 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% 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 $31.67 and $36.31, 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.
54
<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>
TITLE OF
NAME OF BENEFICIAL OWNER SECURITIES ADDRESS
------------------------ ---------- -------
<S> <C> <C>
NorthStar Capital Investment Corp. (1) Common Stock 527 Madison Avenue
New York, New York 10022
<CAPTION>
AMOUNT AND NATURE OF
BENEFICIAL OWNERSHIP
OF COMMON STOCK % OF CLASS
------ -----
<C> <C>
351,585 (2)(3) 29.95%
</TABLE>
------------
(1) NorthStar Capital Investment Corp. is the general partner of NorthStar
Partnership, L.P., the sole shareholder of NorthStar Presidio Capital
Holding Corp. NorthStar Presidio Capital Holding Corp. is the majority
owner of Presidio Capital Investment Company, LLC, the sole shareholder
of Presidio Capital Corp.
(2) Comprised of (a) 201,198 shares which will be held by Millennium
Funding IV Corp., a wholly-owned subsidiary of Presidio Capital Corp.,
(b) 16,410 shares which will be held by Millennium Funding I LLC, a
wholly-owned subsidiary of Presidio Capital Investment Company, LLC,
(c) 75,276 shares which will be held by Millennium Funding IV LLC, a
wholly-owned subsidiary of Presidio Capital Investment Company, LLC and
(d) 58,701 shares which will be received by us in exchange for our 5%
general partnership interest in your partnership.
(3) Does not include 7,478 units in your partnership, representing 22,434
shares of Shelbourne, or 1.9% of the class, which are subject to a
"buy/sell" agreement with a third party. See "CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS."
55
<PAGE>
SELECTED FINANCIAL DATA (1)
Set forth below is selected financial data for the periods indicated,
on a historical basis and on a pro forma basis as if the conversion was
consummated on January 1, 1999. The pro forma balance sheet information is
presented as if the conversion was consummated as of June 30, 2000. The
information set forth below should be read in conjunction with the Financial
Statements of your partnership, the Pro Forma Financial Information of
Shelbourne and Management's Discussion and Analysis of the Financial Condition
and Results of Operations, appearing elsewhere in this consent solicitation
statement or incorporated herein by reference.
<TABLE>
<CAPTION>
SHELBOURNE PRO
FORMA
FOR THE YEAR
HISTORICAL HIGH EQUITY PARTNERS L.P. - SERIES 88 ENDED
FOR THE YEAR ENDED DECEMBER 31, DECEMBER 31,
------------------ ----------------------------------------- -------------
1995 1996 1997 1998 1999 1999
---- ---- ---- ---- ---- ----
Income Statement Data
<S> <C> <C> <C> <C> <C> <C>
Total Revenues $7,657,237 $7,986,083 $9,524,410 $8,210,920 $7,989,276 $7,989,276
Total Costs and Expenses $14,917,736 $5,833,911 $5,815,723 $5,215,289 $6,094,120 $6,094,120
Net Income (Loss) ($7,260,499) $2,152,172 $3,708,687 $2,995,631 $1,895,156 $1,895,156
Balance Sheet Data
Cash and Cash Equiv. $3,898,548 $5,353,731 $6,540,252 $6,520,698 $6,433,530
Total Assets $56,305,498 $56,381,690 $56,296,853 $55,087,481 $54,187,702
Total Liabilities $1,682,399 $2,345,747 $2,344,238 $2,130,831 $1,331,694
L.P. Equity $51,891,920 $51,334,121 $51,254,962 $50,308,799 $50,213,189
G.P. Equity (Deficit) $2,731,179 $2,701,822 $2,697,653 $2,647,851 $2,642,819
Total Common Stockholders Equity
Other Financial Data
Net Increase (Decrease) $136,158 $1,455,183 $1,186,521 ($19,554) ($87,168) $710,202
in Cash and Cash Equiv.
Net Cash Provided By $3,828,533 $4,485,245 $4,780,276 $4,436,169 $2,959,813 $2,959,813
Operating Activities
Distributions $2,739,328 $2,739,328 $3,478,948 $3,991,596 $2,993,697 $2,196,327
Per Unit/Share Data
Net Income (loss)/units ($18.55) $5.50 $9.48 $7.65 $4.84
Basic and diluted income per share $1.61
Pro Forma Taxable income per share $1.97
Book Value Per Unit $139.58 $138.08 $137.87 $135.32 $135.07
Book Value - Pro forma per share $45.70
Distributions as a return of $7.00 $7.00 $9.69 $10.20 $7.65
capital per unit
Proforma Shelbourne REIT $1.87
distributions
from earnings and profits per
share
Proforma Shelbourne REIT $0
distributions
as a return of capital per share
Ratio of earnings to total assets -12.89% 3.82% 6.59% 5.44% 3.50% 3.45%
<CAPTION>
HISTORICAL PARTNERSHIP FOR SHELBOURNE PRO
THE FORMA FOR THE
SIX MONTHS ENDED SIX MONTHS
JUNE 30, ENDED JUNE 30,
--------------------------- --------
1999 2000 2000
---- ---- ----
<C> <C> <C>
$4,012,936 $3,963,054 $3,963,054
$3,093,416 $2,673,854 $2,705,844
$919,520 $1,289,200 $1,257,210
$6,563,858 $8,036,758 $6,895,468
$54,713,460 $55,139,591 $53,998,301
$2,833,088 $994,383 $1,026,373
$49,286,337 $51,437,929
$2,594,035 $2,707,279
$52,871,928
$43,160 $1,603,228 $460,938
$2,060,781 $1,627,530 $1,627,530
$1,995,798 0 $1,142,290
$2.35 $3.29
$1.07
$0.99
$132.57 $138.36
$45.12
$5.10 0
0 $0.94
$0.03
1.68% 2.34% 2.33%
</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.
56
<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 $8,036,758 of cash and cash equivalents at June
30, 2000, as compared to $6,433,530 at December 31, 1999. During the six months
ended June 30, 2000 cash and cash equivalents increased $1,603,228 as a result
of $1,627,530 of net cash provided by operating activities which was partially
offset by $24,302 of net cash used in investing activities. 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 $1,627,530 for the six months ended June 30, 2000. Your
partnership used $24,302 for capital expenditures related to tenant improvements
to the properties for the six months ended June 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 further affected by the trading value of its stock, the
planned leveraging of its assets and reinvestment of sale and financing proceeds
for the acquisition of additional assets.
For the six months ended June 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 each of the last
57
<PAGE>
three fiscal years, your partnership's expenditures at each of its properties
for capital improvements and capitalized tenant procurement costs:
CAPITAL IMPROVEMENTS AND CAPITALIZED TENANT PROCUREMENT COSTS
<TABLE>
<CAPTION>
6/30/2000 1999 1998
--------- ---- ----
<S> <C> <C> <C> <C>
568 Broadway $ 37,032 $ 87,985 $ 166,742
Sunrise 13,791 74,738 140,388
Livonia Plaza 10,525 12,868 149,894
Melrose-Phase II -- -- 90,633
TMR Warehouse 74,473 112,560 23,207
Super Valu -- -- --
-- ---------------- -- ------------- -- -------------
TOTALS $ 135,821 $ 288,151 $ 570,864
-- ---------------- -- ------------- -- -------------
</TABLE>
Your partnership has budgeted expenditures for capital improvements and
capitalized tenant procurement costs of $247,000 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 that cannot be predicted with certainty.
Following the conversion, it is anticipated that Shelbourne's cash flow from
operations together with its other sources of capital including cash reserves,
financing proceeds and the issuance of additional equity will be sufficient to
fund its capital improvements and tenant procurement costs. However, because it
is expected that Shelbourne will have significant mortgage indebtedness and a
substantially larger pool of real estate assets, the risk that it may be unable
to fund the necessary capital and tenant procurement costs at its properties
will likely be increased.
Except as discussed herein, management is not aware of any other
trends, events, commitments or uncertainties that will have a significant impact
on Shelbourne's liquidity. If, however, real estate market conditions
deteriorate in any areas where your partnership's properties are located, there
is substantial risk that future cash flow may be insufficient to fund the
capital improvements and lease procurement costs of the properties. In that
event, Shelbourne would utilize its remaining working capital reserves, reduce
distributions, raise additional capital through financing or the issuance of
equity, or sell one or more properties.
REAL ESTATE MARKET
In the markets in which your partnership's properties are located, the
market values of existing properties continue to recover from the effects of the
substantial decline in the real estate market in the early 1990's. However, in
select markets, values have been slow to recover, and high vacancy rates
continue to exist in some areas. The geographic diversity of your partnership's
properties decreases the risk of a significant partnership devaluation resulting
from an isolated market slump in a particular region. The overall economic
outlook for the specific markets in which your partnership's properties are
located continues to be stable to improving.
The outlook is particularly positive for 568 Broadway as office and
retail space in the Midtown South sub-market in which 568 Broadway is located is
becoming increasingly popular. Little new office space inventory has 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.
58
<PAGE>
The expectations are positive, but more tempered, for improving market
conditions in several other regions in which your partnership owns or has an
interest in properties. Indications are that the Columbus, Ohio, Norcross,
Georgia, Indianapolis, Indiana and Edina, Minnesota markets will continue to
show moderate increases in real estate values for properties comparable to those
in which your partnership has an interest. Your partnership's properties in
these locations seem to be well positioned to benefit from the growth in these
markets. However, the realization of any market appreciation will 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.
Your partnership also owns a property in Livonia, Michigan, a suburb of
Detroit. After suffering significant losses in the early 1980's, the regional
economy has diversified and is in the midst of a continuing steady recovery. The
property is located on an established commercial and retail corridor near both
downtown Detroit and the Detroit Metropolitan Airport. Accordingly, indications
are that the property is well positioned to benefit from the anticipated growth
in the area.
The Las Vegas sub market in which Sunrise Marketplace is located is
likewise improving with strong population growth and household development. A
recent review of the property's position suggests however that Sunrise
Marketplace is not located within one of the region's primary growth paths, and
its competition continues to be traditional neighborhood shopping centers with
grocery or discount store anchors. It is therefore not anticipated that Sunrise
Marketplace will fully benefit from the expected general appreciation in the
real estate market in the area.
Your partnership's property in Melrose Park, Illinois continues to
experience extremely poor operating conditions. While the broader Chicago market
is experiencing economic and population growth which is creating a positive
environment for real estate appreciation, the trade area in which the property
is located is experiencing a decline in population. This decline coupled with
the related flight from the area by big box retailers has left many retail
properties, including your partnership's property, suffering from high vacancy
and low rental rates. Vehicular access to your partnership's property is also
difficult, further contributing to the negative outlook for the property in the
foreseeable future. Your partnership recently received an unsolicited offer to
purchase this property. Although the purchase price of the offer is higher than
the appraised value of the Melrose center, the offer is subject to numerous
conditions. These conditions include a 90 to 150 day due diligence period after
the date that a binding agreement is signed. While we intend to explore this
opportunity, there can be no assurance that this will result in a sale of the
property.
Your partnership owns an interest in a former Wigest Supermarket that
is located in Toledo, Ohio. Toledo is experiencing moderate but sustained growth
in the general economy. Accordingly, real estate values have been stable to
improving in the recent past and demographic trends suggest the likelihood of
continued moderate appreciation. Nonetheless, the tenant at the property, Wigest
Corporation, has recently become in default of its leasehold obligations and has
indicated that it will be unable to either cure the default or meet its future
responsibilities under the lease. Your partnership through its joint venture
position in the property has terminated Wigest's lease and is pursuing all
available remedies thereunder. As a result of these developments, your
partnership is pursuing a new tenant for the property and early marketing
efforts indicate that the rental rates that will likely be achieved at the
property are below the scheduled rental rates under the Wigest lease. Should the
terms of any new lease be less favorable than those previously in place under
the Wigest lease, the properties near term value would be adversely affected.
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
59
<PAGE>
ultimately Shelbourne's, potential for realizing the full value of its
investment in the properties is at continued risk.
IMPAIRMENT OF ASSETS
Your partnership evaluates the recoverability of the net carrying value
of its real estate and related assets at least annually, and more often if
circumstances dictate as required by SFAS No. 121 "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." If there is
an indication that the carrying amount of a property may not be recoverable,
your partnership prepares an estimate of the future undiscounted cash flows
expected to result from the use of the property and its eventual disposition,
generally over a five-year holding period. In performing this review, management
takes into account, among other things, the existing occupancy, the expected
leasing prospects of the property and the economic situation in the region where
the property is located.
If the sum of the expected future undiscounted cash flow is less than
the carrying amount of the property, your partnership recognizes an impairment
loss, and reduces the carrying amount of the asset to its estimated fair value
as required by SFAS No. 121 "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of." Fair value is the amount at which
the asset could be bought or sold in a current transaction between willing
parties, that is, other than in a forced or liquidation sale. Management
estimates fair value using discounted cash flows or market comparables, as most
appropriate for each property. Independent certified appraisers are utilized to
assist management, when warranted.
Impairment adjustments to reduce the carrying value of the real estate
assets recorded by your partnership do not affect the tax basis of the assets
and are not included in the determination of taxable income or loss.
Management is not aware of any other current trends, events, or
commitments that will have a significant impact on the long-term value of the
properties. However, because the cash flows used to evaluate the recoverability
of the assets and their fair values are based upon projections of future
economic events such as property occupancy rates, rental rates, operating cost
inflation and market capitalization rates which are inherently subjective, the
amounts ultimately realized at disposition may differ materially from the net
carrying values at the balance sheet dates. The cash flows and market
comparables used in this process are based on good faith estimates and
assumptions developed by management. Unanticipated events and circumstances may
occur and some assumptions may not materialize. Actual results may vary from the
estimates and the variances may be material. Shelbourne may provide additional
adjustments to reduce the carrying value of the properties, which could be
material in subsequent years if real estate markets or local economic conditions
change.
All of your partnership's properties have experienced varying degrees
of operating difficulties and your partnership recorded significant impairment
adjustments in prior years. Improvements in the real estate market and in
property operations resulted in no adjustments for impairment being needed from
1997 through June 30, 2000.
60
<PAGE>
The following table represents the impairment adjustments recorded to
date against your partnership's properties held as of June 30, 2000:
Property
568 Broadway $ 6,157,700
Sunrise 8,500,000
Livonia Plaza 2,100,000
Melrose-Phase II 2,881,000
-----------
$19,638,700
RESULTS OF OPERATIONS
JUNE 30, 2000 VS. JUNE 30, 1999
Your partnership experienced an increase in net income for the six
months ended June 30, 2000 of $369,680 in comparison to the same period in 1999
due to a decrease in costs and expenses and an increase in interest income
offset slightly by a decrease in rental revenue and other income.
Rental revenues for the six months ended June 30, 2000 decreased to
$3,781,700 from $3,795,463 for the same period in 1999 due to lower common area
maintenance and real estate tax reimbursements offset by increased occupancy at
Tri-Columbus.
Costs and expenses decreased by $419,562 or 13.6% for the six months
ended June 30, 2000 as compared to 1999 due to decreases in all expense items.
Administrative expenses decreased as legal expenses associated with the
conversion of the 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 two quarters of 2000
as compared to the first two quarters of 1999 as a result of an amendment to the
partnership agreement which changed the calculation of such fee. Operating
expenses decreased due to lower non-recurring repairs and maintenance expenses.
The decrease in property management fees is the result of lower rental revenues.
Interest income increased due to higher cash balances during the six
months ended June 30, 2000 as compared to the same period in 1999. Other income
decreased for the six months ended June 30, 2000 due to less transfer fee income
received during the first six months of 2000 as compared to the same period in
1999.
Inflation is not expected to have a material impact on the
Partnership's operations or financial position.
1999 VS. 1998
Your partnership experienced a decrease in net income of 36.7% for the
year ended December 31, 1999 compared to 1998. Net income decreased to
$1,895,156 for the year ended December 31, 1999 from net income of $2,995,631
for the year ended December 31, 1998 primarily due to a decrease in rental
revenues and increases in operating and administrative expenses during 1999.
Rental revenue decreased by 3.3% during the year ended December 31,
1999 to $7,625,731 from $7,882,248 as compared to the prior year, primarily due
to the departure of a significant tenant at Tri-Columbus in July 1998.
61
<PAGE>
Costs and expenses increased by 16.9% for the year ended December 31,
1999 to $6,094,120 compared to $5,215,289 in 1998 due to the higher operating
expenses and administrative expenses, which more than offset reductions in
depreciation and amortization, partnership asset management fees and property
management fees. Operating expenses increased $885,719 or 62.3% during the year
ended December 31, 1999 compared to 1998 due primarily to 1998 reflecting the
receipt of insurance proceeds that lowered repairs and maintenance costs at
Sunrise by $344,000. Operating expenses for 1999 also reflected increases in
security expenses of $53,285 and a provision for doubtful accounts at Livonia
and Sunrise totaling $166,000. Administrative expenses for the year ended
December 31, 1999 increased by 28.2% or $269,840 compared to 1998 due to higher
professional fees related to the settlement of the litigation and reorganization
of your partnership. Depreciation and amortization decreased $76,701 or 4.5% due
to higher depreciation recorded in 1998 on certain capitalized tenant
improvements. Partnership asset management fees decreased 18.3% in 1999 to
$719,411 due to an amendment to the partnership agreement provided for in the
terms of the settlement. Beginning with the third quarter of 2000, it is
expected that your partnership's asset management fees will increase by
approximately 10% to $733,660 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 decreased by 8.7% to $270,439 in 1999 due to lower cash
balances during the current year compared to 1998. Other income increased
$60,516 during the year ended December 31, 1999 to $93,106 compared to $32,590
in 1998 due to an increase in fees from investor servicing primarily related to
an increase in investor transfers, while interest income decreased $25,643 for
the comparable periods.
1998 VS. 1997
Your partnership experienced an decrease in net income of 19.2% for the
year ended December 31, 1998 to $2,995,631 compared to 1997 net income of
$3,708,687 primarily due to a decrease in rental revenues during 1998, partially
offset by a decrease in costs and expenses.
Rental revenue decreased by 14.2% during the year ended December 31,
1998 to $7,882,248 from $9,189,172 for the same period in 1997 primarily due the
departure of a significant tenant at Tri-Columbus in July 1998 and to the
approximately $1.5 million received in April, 1997 pursuant to the bankruptcy
settlement of Handy Andy, the former sole tenant at Melrose II.
Costs and expenses decreased by 10.3% for the year ended December 31,
1998 to $5,215,289 compared to $5,815,723 in 1997 due to lower operating
expenses, administrative expenses and property management fees, partially offset
by higher depreciation and amortization. Operating expenses decreased $480,518
or 25.3% during the year ended December 31, 1998 due primarily to lower repair
and maintenance costs at Sunrise due to the receipt of $344,000 of insurance
proceeds in 1998 (offsetting previously incurred costs) and a decrease in
insurance expenses at all of the properties due to the payment of lower premiums
while coverage remained the same. Administrative expenses for the year ended
December 31, 1998 decreased by 17.3% or $199,947 compared to 1997 due to lower
legal and accounting fees related to the ongoing litigation and possible
reorganization of your partnership. Property management fees decreased by
$35,129 during the year ended December 31, 1998 due to the decrease in revenues,
as previously discussed. Depreciation and amortization expense increased
$115,160 in the current year due to higher depreciation recorded in 1998 on
certain capitalized tenant improvements.
Interest income and other income represented by transfer fees received
from limited partner ownership transfers remained relatively consistent during
the year ended December 31, 1998 as compared to 1997.
62
<PAGE>
THE CONVERSION
MECHANICS OF THE CONVERSION
The conversion will be accomplished by merging your partnership into
Shelbourne Properties III 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 III L.P.,
will survive the merger as the operating partnership. As part of the merger,
each unit in your partnership will be converted into three shares of common
stock. As a result of the conversion, Shelbourne will own 100% of the operating
partnership. Shelbourne will own a 1% partnership interest in the operating
partnership through its wholly-owned subsidiary, which will be the general
partner of the operating partnership.
EFFECTIVE TIME
The conversion will become effective as soon as practicable after the
later of (a) the last date on which consent forms may be received by the
depositary in order to be valid or (b) the last of the conditions to the
conversion are fulfilled or waived.
The conversion will become effective upon filing certificates of merger
and other documents and instruments required by Delaware law with the Office of
the Secretary of State of the State of Delaware.
CONDITIONS TO THE CONVERSION
Our obligation to effect the conversion is subject to satisfaction of
the following conditions:
o Approval of the conversion by limited partners holding a
majority of the outstanding units in your partnership
o This consent solicitation statement has become effective and
is not subject to any stop order or a proceeding seeking a
stop order
o The issuance of securities in the conversion complies with all
requirements of state securities or "blue sky" laws
o Shelbourne has at least 100 shareholders and not more than 50%
in value of the outstanding common stock is owned, directly or
indirectly, by five or fewer individuals as defined in the
Internal Revenue Code to include certain entities
o No pension trust individually owns more than 25% in value of
the common stock of Shelbourne, and all pension trusts that
individually own 10% in value or more of the common stock of
Shelbourne own in the aggregate less than 50% in value of the
common stock of Shelbourne
o Less than 50% in value of the common stock will be held
directly or indirectly by foreign persons
o The common stock has been approved for listing upon issuance
on the American Stock Exchange
o Rosenman & Colin LLP has rendered tax opinions concerning the
conversion and Shelbourne's qualification as a real estate
investment trust. See "FEDERAL INCOME TAX CONSEQUENCES -- THE
CONVERSIOn" and "-- TAXATION OF SHELBOURNE AS A REal ESTATE
INVESTMENT TRUST - GENERAL."
63
<PAGE>
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........ $28,761
Legal Fees................................... 250,000
Appraisals and Valuation Fees................ 121,500
Accounting Fees and Expenses................. 50,000
Solicitation Fees and Expenses............... 50,000
Printing and Engraving Expenses.............. 30,000
Postage...................................... 40,000
Miscellaneous................................ 15,739
--------
Total................................. $586,000
ACCOUNTING TREATMENT
The conversion will be accomplished by merging your partnership into
Shelbourne Properties III L.P., a limited partnership wholly-owned by Shelbourne
Properties III, 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 three 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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<PAGE>
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 IV Corp., Millennium Funding I LLC and
Millennium Funding IV LLC who own an aggregate of 26.3% of the units, intend to
vote "YES" to approve the conversion. In addition, in 1998 Presidio Capital
Corp. entered into an agreement with a limited partner owning 7,478 units,
representing approximately 1.9% of the outstanding units, in which the limited
partner agreed to vote all of its units in favor of a conversion, such as the
one which we are proposing, which results in limited partners receiving
securities listed on a national securities exchange.
VOTING PROCEDURE
The consent form and power of attorney are filed as Appendix A to this
consent solicitation statement. Please note that we refer, collectively, to the
power of attorney and consent as the consent form. The consent form consists of
two parts. The first part seeks your consent to the conversion and related
matters. The second part of the consent form is a power of attorney, which must
be signed separately. The power of attorney appoints each of Michael L. Ashner
and Peter Braverman as your attorneys-in-fact for the purpose of executing all
other documents and instruments advisable or necessary to complete the
conversion. The power of attorney is intended solely to ease the administrative
burden of completing the conversion without needing to obtain your signature on
multiple documents. Please complete, sign and return the enclosed consent form
to the depositary in the enclosed pre-addressed, postage paid envelope no later
than __________ __, 2000. The depositary is:
American Stock Transfer & Trust Company
40 Wall Street
New York, New York 10005
You may withdraw a consent form at any time before the expiration date
by delivering to the depositary written notice of your withdrawal. You may
change a consent form at any time before the expiration date by delivering to
the depositary a duly completed and signed substitute consent form, together
with a letter indicating that your prior consent form(s) have been revoked.
You must vote all of your units in the same way. If you return a signed
consent form but do not indicate a "YES" or "NO" vote or an abstention, you will
be deemed to have voted "YES" for approval of the conversion.
The conversion will be approved at such time as limited partners
holding a majority of the outstanding units shall have consented to the
conversion but in no event prior to the expiration date. The depositary will
tabulate the consent forms received from you.
The conversion will apply prospectively from and after the date it
becomes effective. You will be bound by the conversion, if it becomes effective,
whether or not you vote in favor of the conversion. Delivery of a consent form
is at your risk. The consent form will be effective only when it is actually
received by the depositary. A pre-addressed, postage paid envelope to be used in
returning completed consent forms has been included with this consent
solicitation statement.
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<PAGE>
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 371,766 units outstanding held by 6,521
limited partners, including 97,628 units, representing 26.3% of the outstanding
units, owned by our affiliates Millennium Funding IV Corp., Millennium Funding I
LLC and Millennium Funding IV LLC.
EFFECT OF VOTING TO APPROVE THE CONVERSION
Your vote of "YES" on the conversion form will constitute your approval
to the merger of your partnership on substantially the terms provided in the
merger agreement attached as Appendix B. By executing the enclosed power of
attorney, you authorize Michael L. Ashner and Peter Braverman to execute any and
all documents in connection with the conversion.
SOLICITATION OF VOTES; SOLICITATION EXPENSES
We may solicit your approval of the conversion. Our employees may
solicit approval of the conversion by use of the mails, by telephone, telegram,
or other means. Solicitation expenses will be paid as set forth under "THE
CONVERSION -- FEES AND EXPENSEs." No party soliciting approval of the conversion
will receive compensation contingent on the outcome of their solicitation
efforts or the approval of the conversion.
LIMITED PARTNER LISTS
You may obtain a copy of a current list of limited partners by
delivering a written request to us at 5 Cambridge Center, 9th Floor, Cambridge,
Massachusetts 02142. You will be required to pay applicable duplicating charges.
Under Rule 14a-7 of the Exchange Act, we will, at your option, either:
o mail at your expense to the limited partners you designate
copies of any proxy statement, proxy form or other soliciting
material that you furnished to us; or
o deliver to you at your expense, within five business days of
the receipt of the request, a reasonably current list of the
names and addresses of the limited partners. In connection
with a request under Rule 14a-7 of the Exchange Act, we are
obligated, upon your written request, to deliver to you (1) a
statement of the approximate number of limited partners in
your partnership, and (2) the estimated cost of mailing a
proxy statement, form of proxy or other similar communication
to such limited partners.
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CONFLICTS OF INTEREST
The following describes the conflicts of interest resulting from the
relationships among us, Shelbourne Management and Shelbourne which exist in
connection with the conversion or which may potentially exist after the
conversion.
CONFLICTS RELATING TO THE CONVERSION
In determining whether to recommend the conversion to you we have an
inherent conflict of interest for the following reasons:
ELIMINATION OF FEE GIVE BACK AMOUNT
We have a conflict of interest in recommending the conversion because
if the conversion is approved, we no longer will be obligated to pay you
additional amounts when your partnership is liquidated. If your partnership were
liquidated at this time we would be required to pay limited partners an
aggregate of $3.31 per unit, or an aggregate of $1,229,811, 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
$0.40 per unit, or an aggregate of $148,000, and is eliminated in 2008.
Elimination of our obligation to pay you this additional amount was an
agreed-upon element of the settlement.
OUR AFFILIATION WITH SHELBOURNE MANAGEMENT
We have a conflict of interest in recommending the conversion because
an affiliate of Presidio Capital Investment Company, LLC, our beneficial owner,
has an economic interest in the conversion since it also beneficially owns
Shelbourne Management. Shelbourne Management will have a contractual right to
receive fees for managing Shelbourne's business for ten years. These fees will
include:
o an asset management fee equal to 1.25% of Shelbourne's gross
assets;
o $200,000 per year for non-accountable expenses relating to the
administration of Shelbourne; and
o competitive property management fees not in excess of 6% of
revenues.
Although we, as your general partners, currently have the right to
receive fees from your partnership based on its gross assets, your partnership
agreement gives limited partners the right to remove us as general partners.
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<PAGE>
CONFLICTS FOLLOWING THE CONVERSION
The following describes the conflicts of interest which will exist
following the conversion:
ALLOCATION OF INVESTMENT OPPORTUNITIES AMONG SHELBOURNE AND OTHER
ENTITIES MANAGED BY SHELBOURNE MANAGEMENT
Shelbourne Management may manage other real estate investment trusts
with investment objectives similar to Shelbourne's. Therefore, Shelbourne
Management could be subject to a conflict of interest in determining whether to
present an investment opportunity to Shelbourne or another real estate
investment trust which it manages. Shelbourne Management will determine how to
allocate investment opportunities among the entities it manages based on the
type and characteristics of the investment opportunity, the financial condition
of each of the entities it manages and the availability of capital of such
entities. Shelbourne Management may also propose that potential investments be
acquired on a joint venture basis by Shelbourne and other real estate investment
trusts managed by Shelbourne Management.
POTENTIAL TRANSACTIONS WITH OUR AFFILIATES
Shelbourne will be permitted to purchase properties from, sell
properties to, borrow money from or enter into other transactions with,
companies in which our beneficial owner, NorthStar Capital Investment Corp. has
an economic interest. Therefore, such transactions may not solely serve your
interests as a stockholder. Although these affiliated transactions must be on
terms comparable to those obtainable from third parties and must be approved by
a majority of Shelbourne's independent directors, any transactions between
Shelbourne and affiliates of ours may not be reached through arms-length
negotiation.
SHELBOURNE MANAGEMENT WILL RECEIVE AN ASSET MANAGEMENT FEE BASED ON
SHELBOURNE'S GROSS ASSETS
Shelbourne Management will receive an asset management fee based on
Shelbourne's gross assets. The asset management fee will increase if
Shelbourne's gross assets increase. To that extent, Shelbourne Management will
benefit if Shelbourne retains ownership of properties, leverages its properties
or acquires new properties, while Shelbourne's shareholders may be better served
if Shelbourne disposes of properties or holds properties on an unleveraged
basis.
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<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
AP-PCC III, L.P. SERVICES AGREEMENT
We are wholly-owned by Presidio Capital Corp. Effective October 21,
1999, Presidio Capital Corp. entered into a services agreement with AP-PCC III,
L.P. under which AP-PCC III was retained to provide asset management and
investor relation services to your partnership and other entities affiliated
with your partnership. Under this agreement, following the conversion AP-PCC III
will provide asset management and investor relation services to Shelbourne for
Shelbourne Management, a subsidiary of Presidio Capital Corp.
As a result of the services agreement AP-PCC III has the duty to direct
the day to day affairs of your partnership, including, without limitation,
reviewing and analyzing potential sale, financing or restructuring proposals
regarding your partnership's assets, preparation of all reports, maintaining
records and maintaining bank accounts of your partnership. AP-PCC III is not
permitted, however, without the consent of Presidio Capital Corp., or as
otherwise required under the terms of your limited partnership agreement to,
among other things, cause your partnership to sell or acquire an asset or file
for bankruptcy protection.
Similarly, as a result of this agreement AP-PCC III will have the duty
to direct the day to day affairs of Shelbourne for Shelbourne Management,
including, without limitation, reviewing and analyzing potential sale, financing
or restructuring proposals regarding Shelbourne's assets, preparation of all
reports, maintaining records and maintaining bank accounts of Shelbourne.
In order to facilitate the provision of asset management services and
investor relation services by AP-PCC III, effective October 25, 1999, nominees
of AP-PCC III were elected as officers and directors of your general partners.
Nominees of AP-PCC III will also serve as officers and directors of Shelbourne
and Shelbourne Management. AP-PCC III is compensated for its services by
Presidio Capital Corp.
AP-PCC III is an affiliate of Winthrop Financial Associates, a
Boston-based company that provides asset management services, investor relation
services and property management services to over 150 limited partnerships which
own commercial property and other assets.
From August 28, 1997 until October 21, 1999, the services currently
being provided by AP-PCC were provided by NorthStar Presidio Management Company
LLC, an affiliate of Presidio Capital Corp. For the years ended December 31,
1999 and December 31, 1998, reimbursable expenses incurred by NorthStar Presidio
Management Company LLC in respect of your partnership amounted to approximately
$56,018 and $102,019, respectively.
MANAGEMENT FEES TO AFFILIATES
We receive various fees and are entitled to various reimbursements for
managing the affairs of your partnership and Shelbourne Management will receive
various fees and be entitled to various reimbursements for managing the affairs
of Shelbourne. See "COMPARISON OF YOUR PARTNERSHIP AND SHELBOURNE - MANAGEMENT
FEES TO AFFILIATES," for a detailed description of these fees.
OLYMPIA AGREEMENT
In connection with a tender offer for units of your partnership made on
March 12, 1998 by Olympia Investors, L.P., Olympia and Presidio Capital Corp.
entered into an agreement dated March 6, 1998. After the Olympia offer expired
Olympia announced that it had accepted for payment 14,955 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 7,478 units, for $132.26 per
unit. In addition, Olympia has the right to cause Presidio to purchase its
remaining units for a price based on appraisal procedures set forth in the
agreement. Olympia recently exercised this right. Presidio has retained
Insignia/ESG to represent it in connection with this matter.
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<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 III GP, Inc., 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 III 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 III 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 III 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 III GP, Inc., a wholly-owned subsidiary of
Shelbourne, as the sole general partner of the operating partnership, has full,
exclusive and complete responsibility and discretion in the management,
operation and control of the operating partnership. Shelbourne has retained
Shelbourne Management to provide day-to-day management and administrative
services following the conversion.
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Shelbourne Management will generally provide the services that we provided prior
to the conversion. See "SHELBOURNE -- MANAGEMENT - THE ADVISORY AGREEMENT AND
THE ADVISOR."
BUSINESS OPERATIONS
The operating partnership's partnership agreement provides that all
business activities of Shelbourne, including all activities pertaining to the
acquisition and operation of properties, must be conducted through the operating
partnership. Unless otherwise determined by Shelbourne's Board, the operating
partnership will be operated in a manner that is intended to enable Shelbourne
to satisfy the requirements for classification as a real estate investment
trust.
ISSUANCE OF ADDITIONAL PARTNERSHIP INTERESTS
Shelbourne may from time to time after the conversion contribute
additional capital to, or make loans to, the operating partnership for a variety
of purposes including the funding of future acquisitions, the funding of capital
expenditures or the establishment of reserves. In addition, the operating
partnership's partnership agreement will further provide that Shelbourne
Properties III GP, Inc., 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 III GP, Inc., 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 IIII GP, Inc.
carried out its duties in good faith. In addition, Shelbourne Properties III GP,
Inc. is not responsible for any misconduct or negligence on the part of its
agents, provided it appointed such agents in good faith. Shelbourne Properties
III GP, Inc. 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 III GP, Inc. 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 III GP, Inc., the directors and
officers of Shelbourne Properties III GP, Inc., and such other persons as
Shelbourne Properties III GP, Inc. may from time to time designate against any
judgments, penalties, fines, settlements and reasonable expenses, including
legal fees, actually incurred by such person in connection with the preceding
unless it is established that: (1) the act or omission of the indemnified person
was material to the matter giving rise to the preceding and either was committed
in bad faith or was the result of active and deliberate dishonesty; (2) the
indemnified person actually received an improper personal benefit in money,
property or services; or (3) in the case of any criminal proceeding, the
indemnified person had reasonable cause to believe that the act or omission was
unlawful.
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TAX MATTERS
Shelbourne Properties III GP, Inc. will be the tax matters partner of
the operating partnership and, as such, will have the authority to make tax
elections and other tax-related decisions on behalf of the operating
partnership.
OBJECTIVES AND STRATEGIES
Shelbourne's primary business objective following the conversion will
be to maximize the value of common stock. Shelbourne will seek to achieve this
objective by making capital improvements to and/or selling its properties and by
making additional real estate related investments. Shelbourne intends to employ
a strategy of opportunistic investing by seeking undervalued assets and
value-enhancing situations in a broad range of property types and geographical
locations. To achieve these objectives, Shelbourne may need to raise additional
capital. Shelbourne will raise capital either by selling or leveraging
properties, by otherwise borrowing money, or by selling additional equity or
debt securities.
We believe that favorable investment opportunities exist within the
current real estate environment for investors with cash or access to capital.
Shelbourne may pursue a variety of types of real estate investments including
acquiring properties, investing in mortgage loans, and investing in other real
estate companies. We have not identified or executed commitments for any
additional investments at the current time. While Shelbourne will seek to
implement its investment strategies as soon as practicable following the
conversion, the ultimate timing and extent of any new investments will depend
upon various factors. These factors include Shelbourne's capitalization and
ability to raise debt and/or equity financing, the availability of attractive
investments, expected investment returns and other similar economic factors
generally considered when making real estate-related investments. Shelbourne
also will consider the effect that such investments will have on its ability to
satisfy the various income, asset and distribution tests applicable to real
estate investment trusts, and will use reasonable efforts to avoid making any
investments that might jeopardize its ability to maintain qualification as a
real estate investment trust, unless the Board of Directors determines that
maintaining such qualification is no longer in the best interests of
Shelbourne's stockholders. See "FEDERAL INCOME TAX CONSEQUENCES -- TAXATION OF
SHELBOURNE AS A REAL ESTATE INVESTMENT TRUST -REQUIREMENTS FOR QUALIFICATION."
Shelbourne Management is responsible for seeking out and evaluating
potential investment opportunities for Shelbourne. Shelbourne's Board will make
the ultimate determination as to whether or not Shelbourne should pursue an
investment opportunity. Shelbourne's Board may determine to establish a more
specific investment strategy for Shelbourne than that initially contemplated or,
from time to time, change Shelbourne's investment strategy without a vote of
shareholders.
Shelbourne's investments may include:
o Interests in real estate. Shelbourne does not intend to limit
its investment portfolio to any particular type of real estate
assets. Instead, Shelbourne will consider investment
opportunities in all types of real estate, including
investments in office buildings, apartment buildings, shopping
centers, industrial and commercial properties, special purpose
buildings and undeveloped acreage. In addition, Shelbourne
does not currently intend to focus its real estate investment
activity in any particular market or geographic region.
Shelbourne intends to acquire interests in real estate with
its cash reserves, through the issuance of additional units in
the operating partnership, through the issuance of additional
equity securities in Shelbourne or by borrowing money.
Shelbourne will not be limited as to the amount of
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indebtedness it may incur with respect to, or number of
mortgages it may place on, any of its properties, but
currently does not intend to borrow, in the aggregate, more
than an amount equal to 75% of its gross assets. Shelbourne
will acquire interests in real estate for the purpose of
generating income and realizing capital gain. Shelbourne will
not be limited as to the amount or percentage of assets which
may be invested in any specific property.
o Interests in real estate mortgages. Shelbourne may invest in
first or second mortgages and will not be limited to investing
in guaranteed or insured mortgages. Subject to complying with
the requirements of the Internal Revenue Code for
qualification as a real estate investment trust, Shelbourne
will not be limited as to the proportion of its assets which
may be invested in any type of mortgage or in any single
mortgage. Shelbourne may acquire mortgages which encumber any
of various types of properties, including residential
buildings, office buildings, shopping centers, industrial and
commercial properties and unimproved land.
o Investments in other real estate companies. Shelbourne may
invest in equity or debt securities of other real estate
companies, including other real estate investment trusts.
Subject to limitations applicable to qualification as a real
estate investment trust, Shelbourne may also seek to exercise
control over other real estate companies in which it invests
and will not be limited as to the proportion of its assets
which may be invested in other real estate companies.
Shelbourne does not have any pre-determined investment
criteria for its investments in other real estate companies.
Shelbourne does not intend to underwrite the securities of any
other company.
Shelbourne may pursue the foregoing types of investments
through joint ventures with other real estate investors.
The ability of Shelbourne to make new investments will depend in part
upon it raising additional capital or obtaining financing following the
conversion. Shelbourne may seek to raise additional capital through placing
mortgages on existing properties and the public and/or private sale of debt
and/or equity securities. The ability of Shelbourne to raise additional capital,
and the manner in which Shelbourne raises such capital, may depend in part on
the trading price of common stock following the conversion. Shelbourne may raise
additional capital by issuing debt or equity securities with rights and
preferences that are senior to those of common stock. By conducting its
operations through the operating partnership, Shelbourne will be able to offer
either common stock or limited partnership interests in the operating
partnership to potential property sellers thereby increasing Shelbourne's
flexibility in structuring acquisitions on a tax-efficient basis. Shelbourne may
from time to time offer to repurchase shares of its outstanding capital stock.
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THE PROPERTIES
The operating partnership will own and operate the properties your
partnership currently owns. All of the properties are owned free of any mortgage
indebtedness.
The following table contains information on your partnership's
properties.
<TABLE>
<CAPTION>
ORIGINAL COST
LESS 6/30/00 7/1/00
ACCUMULATED ADJUSTMENT FOR CARRYING APPRAISED DATE
DEPRECIATION IMPAIRMENT VALUE (1) VALUE (2) ACQUIRED
------------ ---------- --------- ----- --------
DESCRIPTION
<S> <C> <C> <C> <C> <C>
Livonia Plaza, Shopping Center, Livonia, MI $10,259,612 $2,100,000 $8,159,612 $9,250,000 6/89
568 Broadway, Office Building, New York, New $9,470,637 $6,157,000 $3,312,937 7,198,750 2/89
York (22.15% owned)
Sunrise Marketplace, Shopping Center, Clark $16,135,968 $8,500,000 $7,635,968 11,300,000 2/89
County, NV
SuperValu Stores, Retail, Atlanta, GA, $7,264,574 -- $7,264,574 5,381,250 3/89
Indianapolis, IN, Toledo, OH,
Edina, MN (3)
TMR Warehouses, Industrial Buildings, $16,824,111 -- $16,824,111 13,265,000(5) 9/88
Hillard, Grove City & Delaware, Ohio (79.34%
owned)
Melrose Crossing - Phase II Melrose Park, $4,959,658 $2,881,000 $2,078,658 2,200,000 2/89
========== ========== ========== ===========
Illinois (4)
TOTAL $64,914,559 $19,638,700 $45,275,859 $48,595,000
<CAPTION>
TOTAL
RENTABLE
SQUARE
FOOTAGE
-------
<C>
133,198
300,832
176,661
258,552
1,010,500
88,616
=========
1,968,359
</TABLE>
(1) Carrying value is the amount shown on your partnership's June 30, 2000
balance sheet. It represents the historical cost of each property
reduced by depreciation, amortization and adjustments for impairment in
the value of the property. Impairment adjustments reduce the carrying
value to a property's estimated fair value. No impairment adjustment
has been taken by your partnership since 1995.
(2) The adjusted appraised value is the value determined in the most
current appraisal performed by Cushman & Wakefield. The adjusted value
of the three properties owned by your partnership in joint venture
reflect a discount from the appraised value of each property which
Cushman & Wakefield attributed to the illiquidity of your partnership's
interest in the joint venture. See "ALTERNATIVES TO THE CONVERSION -
APPRAISALS."
(3) The Toledo, OH parcel is vacant and the tenant has defaulted on its
lease.
(4) 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.
(5) 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.
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The following table lists the occupancy rates of your partnership's
properties at the beginning of each of the last 5 years.
<TABLE>
<CAPTION>
Occupancy
--------------------------------------------------------------------------------------
Property 1/1/2000 1/1/1999 1/1/1998 1/1/1997 1/1/1996
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
568 Broadway Office Building 100% 100% 100% 100% 95%
Livonia Plaza 89% 95% 100% 100% 100%
Melrose Crossing Phase II 0% 0% 100% 100% 100%
Sunrise Marketplace 94% 92% 99% 94% 91%
SuperValu Stores 100% 100% 100% 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 $26.10 $21.77 $20.69 $16.19 $15.90
Livonia Plaza $10.96 $11.17 $12.16 $8.75 $10.47
Melrose Crossing Phase II $-- $-- $63.54 $3.40 $20.47
Sunrise Marketplace $10.86 $10.22 $9.47 $7.48 $8.24
SuperValu Stores $6.45 $6.21 $6.85 $6.16 $6.71
Tri-Columbus $1.65 $2.04 $2.07 $1.97 $2.10
</TABLE>
The following tables contain information on leases at your
partnership's properties that are scheduled to expire over the next ten years.
The annual rent numbers were determined based on scheduled base rent for the
calendar year 2000.
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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 $1,246,605 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%
LIVONIA PLAZA
NUMBER OF EXPIRING SQUARE FOOTAGE OF ANNUAL RENT OF PERCENTAGE OF
YEAR LEASES EXPIRING LEASES EXPIRING LEASES GROSS ANNUAL RENT
---- ------ --------------- --------------- -----------------
2000 2 3,500 $45,200 4.08%
2001 1 1,370 $24,660 2.22%
2002 5 17,837 $223,055 20.12%
2003
2004 4 28,600 $244,382 22.05%
2005 5 11,540 $139,841 12.62%
2006
2007
2008
2009 1 56,337 $431,304 38.91%
</TABLE>
76
<PAGE>
SUNRISE MARKETPLACE
<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 2,125 $38,796 2.18%
2001 4 18,935 $299,526 16.82%
2002 3 4,735 $85,224 4.79%
2003 4 7,965 $140,823 7.91%
2004 2 2,700 $61,154 3.43%
2005 4 31,199 $409,386 22.99%
2006 2 16,750 $224,868 12.63%
2007 1 10,347 $118,980 6.68%
2008 1 71,240 $402,240 22.59%
SUPERVALU STORES
NUMBER OF EXPIRING SQUARE FOOTAGE OF ANNUAL RENT OF PERCENTAGE OF
YEAR LEASES EXPIRING LEASES EXPIRING LEASES GROSS ANNUAL RENT
---- ------ --------------- --------------- -----------------
2000
2001
2002
2003 3 184,602 $1,231,579 73.31%
2004
2005 1 73,950 $448,431 26.69%
TMR WAREHOUSE INDUSTRIAL BUILDINGS (TRI-COLUMBUS)
NUMBER OF EXPIRING SQUARE FOOTAGE OF ANNUAL RENT OF PERCENTAGE OF
YEAR LEASES EXPIRING LEASES EXPIRING LEASES GROSS ANNUAL RENT
---- ------ --------------- --------------- -----------------
2000
2001
2002 1 583,000 $1,416,690 61.2%
2003 1 175,000 $160,417 15.45%
2004 1 190,000 $541,500 23.36%
</TABLE>
77
<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>
PRINCIPAL SQUARE FEET LEASE
BUSINESS OF LEASED BY ANNUAL EXPIRATION
PROPERTY 10% TENANT TENANT TENANT RENT DATE RENEWAL OPTIONS
-------- ---------- ------ ------ ---- ---- ---------------
<S> <C> <C> <C> <C> <C> <C>
568-578 Broadway Scholastic Publishing 87,000 $1,254,723 4/30/08 One 5 yr. option.
Livonia Plaza Kroger Grocery 56,337 $431,304 8/31/09 Six 5 yr. terms.
retailer
TJ Maxx Department 23,800 $176,200 1/31/04 One 5 yr. term.
store retailer
Melrose Crossing - Phase II N/A N/A N/A N/A N/A N/A
Sunrise Marketplace Smith's Grocery 71,240 $402,240 10/31/08 Six 5 yr. options.
retailer
Good Value Furniture Furniture 18,974 $214,272 10/31/05 One 5 yr. option.
retailer
Hollywood Video Video rental 15,000 $189,432 7/31/06 None.
Clark County Health Public health 10,347 $118,980 12/31/07 One 5 yr. option.
department
House of Fabrics Fabrics 12,000 $115,464 5/31/01 One 3 yr. option.
retailer
SuperValu Stores Byerly's Grocery 61,900 $229,769 6/30/03 Three 5 yr. options.
retailer
Cub Foods Grocery 73,950 $448,431 5/14/05 Five 5 yr. options.
retailer
SuperValu Grocery 60,300 $315,000 8/30/03 Five 5 yr. options.
retailer
Tri-Columbus Computer Associates Computer 175,000 $402,500 1/31/03 One 4 yr. option.
distributor
Simmons USA Mattress 190,000 $541,500 4/30/04 One 5 yr. option.
wholesaler
Volvo Truck parts 583,000 $1,418,825 12/31/02 One 5 yr. option.
distributor
</TABLE>
You can find additional information about your partnership's properties in your
partnership's Annual Report on Form 10-K for 1999 which is incorporated by
reference in this consent solicitation.
78
<PAGE>
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 $8,036,758, as of June 30, 2000. The
operating partnership will be subject to the liabilities of your partnership.
These liabilities, totaling approximately $994,383 as of June 30, 2000, consist
primarily of your partnership's accounts payable. The assets of the operating
partnership as of the date of the conversion will be reduced by the expenses of
the conversion.
CASH DIVIDEND POLICY
Following the conversion, the sole partners of the operating
partnership will be Shelbourne as the 99% limited partner and Shelbourne
Properties III GP, Inc., 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 III GP, Inc., as the general
partner of the operating partnership, will have the exclusive right to declare
and cause the operating partnership to make distributions. For so long as
Shelbourne elects to qualify as a real estate investment trust, Shelbourne will
use reasonable efforts to cause the operating partnership to make distributions
to Shelbourne in amounts such that Shelbourne will be able to pay dividends that
will satisfy the requirements for qualification as a real estate investment
trust and avoid any Federal income or excise tax liability for Shelbourne. See
"FEDERAL INCOME TAX CONSEQUENCES -- TAXATION OF SHELBOURNE AS A REAL ESTATE
INVESTMENT TRUST - REQUIREMENTS FOR QUALIFICATION - ANNUAL DISTRIBUTION
REQUIREMENTS."
The operating partnership expects to make regular quarterly cash
distributions to Shelbourne. Shelbourne, in turn, will pay cash dividends to
holders of common stock. We expect Shelbourne to pay quarterly dividends within
45 days after the end of each calendar quarter to holders of record of common
stock on the record date determined by Shelbourne's Board of Directors. The
first dividend on the shares of common stock will be paid for the period from
the effective date of the conversion through the end of the calendar quarter in
which such effective date occurs.
The amount of funds actually available for the payment of dividends
will be affected by a number of factors and circumstances, including the revenue
actually received from properties and other investments, operating expenses, the
interest expense incurred in borrowings, the ability of tenants to meet their
obligations, unanticipated capital expenditures, general economic conditions and
a large number of other factors and circumstances, including those discussed
under "RISK FACTORS." Many of these factors are not within Shelbourne's control.
Shelbourne's dividend policy may be altered by Shelbourne's Board of
Directors without the approval of its stockholders.
MANAGEMENT
GENERAL. Following the conversion, all management, advisory and
property management services that we or our affiliates currently perform for
your partnership will be performed by one of our affiliates, Shelbourne
Management LLC, under an advisory agreement. Shelbourne will retain Shelbourne
Management pursuant to the authority of its Board of Directors. Pursuant to
Shelbourne's organizational documents, responsibility for operation of
Shelbourne's business and affairs is vested in the Board of Directors.
Accordingly, the Board of Directors is ultimately responsible for the
management, control and investment activities of Shelbourne's business and
operations, as well as the general supervision of
79
<PAGE>
Shelbourne's officers, agents, employees, advisors, managers, and independent
contractors, including the advisor. The settlement contemplated that Shelbourne
would be externally managed and that your partnership's fee structure would
continue in effect for Shelbourne after the conversion. Under an agreement
between AP-PCC III, L.P., an affiliate of Winthrop Financial Associates, and
Presidio Capital Corp., the sole shareholder of your general partners, AP-PCC
III, L.P. will be responsible for providing asset management and investor
relation services to Shelbourne for Shelbourne Management.
DIRECTORS. The certificate of incorporation divides the Board of
Directors into three classes of directors. The initial terms of the three
classes will expire in 2001 (two directors who have not yet been identified),
2002 (Michael L. Ashner and Robert Martin) and 2003 (David T. Hamamoto, W.
Edward Scheetz and David G. King, Jr.), respectively. In order to facilitate the
provisions of the services agreement between Presidio Capital Corp. and AP-PCC
III, L.P., Mr. Ashner was elected to serve on the Board as a nominee of AP-PCC
III, L.P. Beginning in 2001, directors of each class will be chosen for
three-year terms upon the expiration of their current terms and each year one
class of directors will be elected by the stockholders. Shelbourne believes that
classification of the Board of Directors helps to assure the continuity and
stability of Shelbourne's business strategies and policies as determined by the
Board of Directors. Holders of shares of common stock have no right to
cumulative voting in the election of directors. Consequently, at each annual
meeting of stockholders, the holders of a majority of the shares of common stock
will be able to elect all of the successors of the class of directors whose
terms expire at that meeting.
OFFICERS. Officers of Shelbourne will be elected by and serve at the
discretion of the Board of Directors. There are no arrangements or
understandings between or among any of the officers or directors and any other
person pursuant to which any officer or director was selected as such. There are
no family relationships among any directors and officers of Shelbourne.
THE ADVISORY AGREEMENT AND THE ADVISOR. The advisory agreement with
Shelbourne Management will commence on the effective date of the conversion and
terminate ten years after such date. During that period, Shelbourne Management
will manage the day-to-day operations of Shelbourne and the operating
partnership and will be responsible to do the following:
o manage Shelbourne's day-to-day operations;
o provide or arrange for customary property management services
to be provided at Shelbourne's properties;
o supervise Shelbourne's financings including any sales of
Shelbourne's securities;
o conduct relations for Shelbourne with the American Stock
Exchange or with dealers which make markets in Shelbourne's
securities;
o select and conduct relations with lenders, lawyers,
consultants, accountants, mortgage loan originators, brokers,
participants, attorneys, appraisers, insurers, and others who
may be relevant to Shelbourne's activities;
o administer day-to-day bookkeeping and accounting functions;
o prepare reports to stockholders which may be required by
governmental authorities for the ordinary conduct of
Shelbourne's business;
o negotiate and enter into leases of space at Shelbourne's
properties;
o supervise the development and improvement of properties,
including capital and tenant improvements.
80
<PAGE>
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 to 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 III GP, Inc., 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>
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,
81
<PAGE>
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).
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.
82
<PAGE>
ROBERT MARTIN. Mr. Martin is a Senior Managing Director at
Insignia/ESG. He has been actively involved in the real estate business for more
than 15 years.
W. EDWARD SCHEETZ. Mr. Scheetz is a Co-Chief Executive Officer of
NorthStar Capital Investment Corp., having co-founded the firm in July 1997. At
NorthStar Capital Investment Corp., Mr. Scheetz has overseen the investment of
more than $1 billion in real estate assets and operating companies with an
aggregate cost exceeding $2 billion. In his capacity as Co-Chief Executive
Officer, Mr. Scheetz is responsible for capital raising, setting investment
strategy, creating deal flow, advising on financing, asset management, and
acquisition issues, and overseeing the day-to-day activities of NorthStar
Capital Investment Corp.'s investment professionals. Prior to founding NorthStar
Capital Investment Corp., Mr. Scheetz was a partner from 1993 to 1997 at Apollo
Real Estate Advisors where he was responsible for the investment activities of
Apollo Real Estate Investment Fund I and II. From 1989 to 1993, Mr. Scheetz was
a principal with Trammell Crow Ventures where he was responsible for that firm's
opportunistic real estate investment activities. Mr. Scheetz received an A.B. in
economics from Princeton University.
LARA SWEENEY. Ms. Sweeney has been a Vice President and Secretary of
your general partners since November 1999. Ms. Sweeney has been a Senior Vice
President of Winthrop Financial Associates since 1996. Ms. Sweeney was Director
of Investor Relations for National Property Investors, Inc. from 1994 until
1996.
CAROLYN TIFFANY. Ms. Tiffany has been a Vice President and Treasurer of
your general partners since November 1999. Ms. Tiffany has been with Winthrop
Financial Associates since January 1993. From 1993 to September 1995, Ms.
Tiffany was a Senior Analyst and Associate in Winthrop Financial Associate's
accounting and asset management departments. Ms. Tiffany was a Vice President in
the asset management and investor relations departments of Winthrop Financial
Associates from October 1995 to December 1997, at which time she became the
Chief Operating Officer of Winthrop Financial Associates. In addition, Ms.
Tiffany is the Chief Operating Officer of The Newkirk Group.
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.
83
<PAGE>
BENEFICIAL OWNERSHIP OF SHARES BY CERTAIN PERSONS
We own, together with our affiliates, a 29.95% interest in your
partnership comprised of a 5% general partnership interest owned by us and
97,628 units owned by our affiliates. Accordingly, we, together with our
affiliates, will be entitled to receive 351,585 shares of common stock in the
conversion, representing approximately 29.95% of the total number of shares of
common stock that will be outstanding immediately following the conversion.
PRO FORMA FINANCIAL INFORMATION OF SHELBOURNE
The following pro forma statements of operations and cash flows of
Shelbourne for the six months ended June 30, 2000 and the year ended December
31, 1999 assume that the conversion was consummated on January 1, 1999 and have
been prepared based on the historical financial statements of your partnership
and Shelbourne. The pro forma balance sheet has been prepared as if the
conversion was consummated on June 30, 2000.
The following pro forma financial information should be read in
conjunction with the financial statements of your partnership which are
incorporated by reference in this consent solicitation statement and which form
the basis of the pro forma financial statements for Shelbourne. These statements
do not purport to be indicative of the results of operations or cash flows that
actually would have occurred had the conversion been consummated on January 1,
1999 or that may be expected to occur in the future.
84
<PAGE>
SHELBOURNE PROPERTIES III, INC.
PRO FORMA BALANCE SHEET
JUNE 30, 2000
<TABLE>
<CAPTION>
Pro Forma Other
Shelbourne Partnership Capitalization Pro Forma Shelbourne
Historical Historical of Shelbourne Adjustments Pro Forma
------------- --------------- ------------------ ------------------- --------------
<S> <C> <C> <C> <C> <C>
ASSETS
REAL ESTATE $45,275,859 $45,275,859
CASH AND CASH EQUIVALENTS $1,000 8,036,758 ($1,142,290) 6,895,468
OTHER ASSETS 1,600,751 1,600,751
RECEIVABLES 226,223 226,223
------------- --------------- ------------------ ------------------- --------------
$1,000 $55,139,591 ($1,142,290) $59,998,301
============= =============== ================== =================== ==============
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND PARTNERS' EQUITY:
<S> <C> <C> <C> <C> <C>
ACCOUNTS PAYABLE AND $780,746 31,990 (e) $812,736
ACCRUED EXPENSES
DUE TO AFFILIATES 213,637 213,637
------------- --------------- ------------------ ------------------- ---------------
994,383 31,990 (e) 1,026,373
------------- --------------- ------------------ ------------------- ---------------
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
COMMITMENTS AND
CONTINGENCIES
PARTNERS' EQUITY
LIMITED PARTNERS' EQUITY 51,437,929 (51,437,929) (a)
(371,766 UNITS ISSUED AND
OUTSTANDING)
GENERAL PARTNERS' EQUITY 2,707,279 (2,707,279) (a)
COMMON STOCK, PAR VALUE
$.01 (1,173,998 SHARES ISSUED
AND OUTSTANDING) 1 11,739 (b) 11,740
PAID-IN CAPITAL (31,990)
999 54,133,469 (b) (1,142,290) (c) 52,960,188
------------- --------------- ------------------ ------------------- ---------------
1,000 54,145,208 (1,174,280) 52,971,928
------------- --------------- ------------------ ------------------- ---------------
$1,000 $55,139,591 ($1,142,290) $53,998,301
============= =============== ================== =================== ===============
</TABLE>
85
<PAGE>
SHELBOURNE PROPERTIES III, INC. PRO FORMA STATEMENT OF
OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2000
<TABLE>
<CAPTION>
Shelbourne Partnership Pro Forma Shelbourne
Historical Historical Adjustments Pro Forma
-------------- --------------- -------------- ---------------
<S> <C> <C> <C> <C>
REVENUES:
RENTAL INCOME $3,781,700 $3,781,700
-------------- --------------- -------------- ---------------
COST AND EXPENSES
OPERATING EXPENSES 901,687 901,687
DEPRECIATION AND AMORTIZATION 770,670 770,670
PARTNERSHIP MANAGEMENT FEE 334,840 31,990 (e) 366,830
ADMINISTRATIVE EXPENSES 566,759 566,759
PROPERTY MANAGEMENT FEE 99,898 99,898
-------------- --------------- -------------- ---------------
2,673,854 31,990 2,705,844
-------------- --------------- -------------- ---------------
INCOME BEFORE INTEREST AND OTHER INCOME: $1,107,846 31,990 $1,075,856
INTEREST INCOME 173,154 173,154
OTHER INCOME 8,200 8,200
-------------- --------------- -------------- ---------------
NET INCOME $1,289,200 31,990 $1,257,210
============== =============== ============== ===============
BASIC AND DILUTED NET INCOME PER UNIT (371,766 UNITS $3.29
OUTSTANDING)
============== =============== ============== ===============
BASIC AND DILUTED NET INCOME PER SHARE (1,173,998 $1.07
SHARES) OUTSTANDING)
============== =============== ============== ===============
</TABLE>
86
<PAGE>
SHELBOURNE PROPERTIES III, INC.
PRO FORMA STATEMENT OF CASH FLOWS FOR
THE SIX MONTHS
ENDED JUNE 30, 2000
<TABLE>
<CAPTION>
Historical Partnership Pro Forma Shelbourne
Shelbourne Historical Adjustments Pro Forma
---------------- --------------- ------------------ -----------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $1,289,200 ($31,990) (e) $1,257,210
Adjustment to reconcile net income to
net
cash provided by operating
activities:
Depreciation and amortization 770,670 770,670
Straight-line adjustment for (21,048) (21,048)
stepped
lease rentals
Changes in asset and liabilities
Receivables 111,875 111,875
Accounts payable and accrued (102,718) 31,990 (e) (70,728)
expenses
Due to affiliates (234,593) (234,593)
Other assets (185,856) (185,856)
---------------- ------------------ -----------------
---------------
Net cash provided by operating 1,627,530 1,627,530
activities
---------------- --------------- ------------------ -----------------
CASH FLOWS FROM INVESTING ACTIVITIES
Improvements to real estate (24,302) (24,302)
---------------- --------------- ------------------ -----------------
CASH FLOWS FROM FINANCING ACTIVITIES
Distribution to partners 0 (1,142,290) (c) (1,142,290)
---------------- --------------- ------------------ -----------------
Increase (decrease) in cash and cash 1,603,228 (1,142,290) 460,938
equivalents
Cash and cash equivalents, beginning of 1,000 6,433,530 6,434,530
period
================ =============== ================== =================
Cash and cash equivalents, end of period $1,000 $8,036,758 ($1,142,290) $6,895,468
================ =============== ================== =================
</TABLE>
87
<PAGE>
SHELBOURNE PROPERTIES III, INC.
COMPUTATION OF PRO FORMA EARNINGS PER SHARE
For the six months ended
June 30, 2000
------------------------
Average number of pro forma common and common 1,173,998
equivalent shares outstanding during the period
Pro forma net income $1,257,210
Pro forma basic and diluted income per share $1.07
====
88
<PAGE>
SHELBOURNE PROPERTIES III, 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 $7,625,731 $7,625,731
---------------- --------------- ---------------- ---------------
COST AND EXPENSES
OPERATING EXPENSES 2,306,635 2,306,635
DEPRECIATION AND AMORTIZATION 1,609,183 1,609,183
PARTNERSHIP MANAGEMENT FEE 719,411 719,411 (d)
ADMINISTRATIVE EXPENSES 1,227,851 1,227,851
PROPERTY MANAGEMENT FEE 231,040 231,040
---------------- --------------- ---------------- ---------------
6,094,120 6,094,120
---------------- --------------- ---------------- ---------------
INCOME (LOSS) BEFORE INTEREST AND OTHER INCOME: $1,531,611 $1,531,611
INTEREST INCOME 270,439 270,439
OTHER INCOME 93,106 93,106
---------------- --------------- ---------------- ---------------
NET INCOME $1,895,156 $1,895,156
================ =============== ================ ===============
NET INCOME PER UNIT (371,766 UNITS OUTSTANDING) $4.84
================ =============== ================ ===============
NET INCOME PER SHARE (1,173,998 SHARES) OUTSTANDING) $1.61
================ =============== ================ ===============
</TABLE>
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SHELBOURNE PROPERTIES III, INC. PRO FORMA STATEMENT
OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
Shelborune Partnership Pro Forma Shelbourne
Historical Historical Adjustments Pro Forma
--------------- ------------ -----------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $1,895,156 $1,895,156
Adjustment to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 1,609,183 1,609,183
Straight-line adjustment for stepped lease (254,000) (254,000)
rentals
Changes in asset and liabilities
Receivables (196,042) (196,042)
Accounts payable and accrued expenses 93,553 93,553
Due to affiliates 105,208 105,208
Other assets (293,245) (293,245)
--------------- ------------ -----------------
---------------
Net cash provided by operating activities 2,959,813 2,959,813
--------------- ------------ --------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES
Improvements to real estate (53,284) (53,284)
--------------- ------------ --------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES
Distribution to partners (2,993,697) 797,370 (c) (2,196,327)
--------------- ------------ --------------- -----------------
Increase in cash and cash equivalents (87,168) 797,370 710,202
Cash and cash equivalents, beginning of period 1,000 6,520,698 6,521,698
---------------
=============== ============ =================
Cash and cash equivalents, end of period $1,000 $6,433,530 $797,370 $7,231,900
=============== ============ =============== =================
</TABLE>
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SHELBOURNE PROPERTIES III, INC.
COMPUTATION OF PRO FORMA EARNINGS PER SHARE
For the year ended
December 31, 1999
-----------------------
Average number of pro forma common and common 1,173,998
equivalent shares outstanding during the period
Pro forma net income $1,895,156
Pro forma basic and diluted income per share $1.61
====
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SHELBOURNE PROPERTIES III, INC.
NOTES TO PRO FORMA FINANCIAL STATEMENTS FOR THE YEAR ENDED
DECEMBER 31, 1999 AND THE SIX MONTHS ENDED JUNE 30, 2000
(a) These adjustments eliminate the Partnership Equity.
(b) These adjustments capitalize Shelbourne.
(c) This adjustment reflects the distribution of 95% of taxable income in
order to qualify as a real estate investment trust.
(d) While the settlement fixed the asset management fee for 1999 at
$719,411, the fee in future years will be based on 1.25% of the gross
assets of Shelbourne. The fee for 1999 would have been $669,680 if it
had been calculated based on 1.25% of gross assets using the 1998
property appraisals and $733,660 using the June 30, 2000 property
appraisals.
(e) This adjustment reflects the asset management fee that would have been
paid for the six months ended June 30, 2000 if the fee was based on the
June 30, 2000 property appraisals.
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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, 1,173,998 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 (discussed below), shares of
common stock that you receive in the conversion will be freely transferable.
RESTRICTIONS ON TRANSFERS
For Shelbourne to continue to qualify as a real estate investment trust
under the Internal Revenue Code, it must adhere to the following ownership
limits:
(a) not more than 50% in value of the outstanding equity securities of
all classes may be owned, directly or indirectly, by five or fewer individuals,
as defined in the Internal Revenue Code to include certain entities, during the
last half of a taxable year; and
(b) the equity securities must be beneficially owned by 100 or more
persons during at least 335 days of a taxable year of 12 months or during a
proportionate part of a shorter taxable year.
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 of the common stock, of 10% or more of the
vote or ownership interests in a tenant of any of Shelbourne's properties taking
into account the constructive ownership rules of Section 318 of the Internal
Revenue Code as modified by Section 856(d)(5) of the Internal Revenue Code,
shall be null and void, and the intended transferee will acquire no rights to
the shares of capital stock.
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 $74.43 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
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(c) the surrender for transfer of any certificates for common stock
will also constitute the transfer of the purchase rights associated with the
common stock represented by such certificate.
The purchase rights are not exercisable until the distribution date and
will expire in 2010, unless previously redeemed or exchanged by Shelbourne as
described below.
As soon as practicable after the distribution date, rights certificates
will be mailed to holders of record of common stock as of the close of business
on the distribution date and, thereafter, the separate rights certificates alone
will represent the purchase rights. Except as otherwise determined by the Board
of Directors, only shares of common stock issued prior to the distribution date
will be issued with purchase rights.
In the event that a 15% stock acquisition date occurs, proper provision
will be made so that each holder of a purchase right other than an acquiring
person or its associates or affiliates, whose purchase rights shall become null
and void, will thereafter have the right to receive upon exercise that number of
units of Series A preferred stock of Shelbourne having a market value of two
times the exercise price of the purchase right. For purposes of this discussion,
we will refer to this right as the "subscription right." In the event that, at
any time following the 15% stock acquisition date any one of the following
occurs, each holder of a purchase right shall thereafter have the right to
receive, upon exercise, common stock of the acquiring entity having a market
value equal to two times the exercise price of the purchase right. For purposes
of this discussion, we will refer to this right as the "merger right."
(a) Shelbourne consolidates with, or merges with and into, any other
person, and Shelbourne is not the continuing or surviving corporation;
(b) any person consolidates with Shelbourne, or merges with and into
Shelbourne and Shelbourne is the continuing or surviving corporation of such
merger and, in connection with such merger, all or part of the shares of common
stock are changed into or exchanged for stock or other securities of any other
person or cash or any other property; or
(c) 50% or more of Shelbourne's assets or earning power is sold,
mortgaged or otherwise transferred.
The holder of a purchase right will continue to have the merger right
whether or not such holder has exercised the subscription right. Purchase rights
that are or were beneficially owned by an acquiring person may under some
circumstances specified in the shareholder rights agreement become null and
void.
At any time after the 15% stock acquisition date the Board of Directors
may, at its option, exchange all or any part of the then outstanding and
exercisable purchase rights for shares of common stock or units of Series A
preferred stock at an exchange ratio of one share of common stock or one unit of
series A preferred stock per purchase right. Notwithstanding the foregoing, the
Board of Directors 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
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indebtedness or assets excluding regular quarterly cash dividends, or of
subscription rights or warrants other than those referred to above.
With some exceptions, no adjustment in the exercise price will be
required until cumulative adjustments amount to at least 1% of the exercise
price, determined on a per purchase right basis. Shelbourne is not obligated to
issue fractional units. If Shelbourne elects not to issue fractional units, in
lieu thereof an adjustment in cash will be made based on the fair market value
of the series A preferred stock on the last trading date prior to the date of
exercise. Any of the provisions of the shareholder rights agreement may be
amended by the Board of Directors at any time prior to the distribution date.
The purchase rights may be redeemed in whole, but not in part, at a
price of $0.01 per purchase right by the Board of Directors only until the
earlier of (1) the close of business on the tenth calendar day after the 15%
stock acquisition date, or (2) the expiration date of the shareholder rights
agreement. Such redemption amount shall be payable in cash, common stock or
other consideration deemed appropriate by the Board of Directors. Immediately
upon the action of the Board of Directors ordering redemption of the purchase
rights, the purchase rights will terminate and thereafter the only right of the
holders of purchase rights will be to receive the redemption price.
The shareholder rights agreement may be amended by the Board of
Directors in its sole discretion until the distribution date. After the
distribution date, the Board of Directors may, subject to some limitations set
forth in the shareholder rights agreement, amend the shareholder rights
agreement only to cure any ambiguity, defect or inconsistency, to shorten or
lengthen any time period, or to make changes that do not adversely affect the
interests of purchase rights holders, excluding the interests of an acquiring
person or its associates or affiliates.
Until a purchase right is exercised, the holder will have no rights as
a stockholder of Shelbourne, beyond those as an existing stockholder, including
the right to vote or to receive dividends. While the distribution of the
purchase rights will not be taxable to stockholders or to Shelbourne,
stockholders may, depending upon the circumstances, recognize taxable income in
the event that the purchase rights become exercisable for units, other
securities of Shelbourne, other consideration or for common stock of an
acquiring entity.
A copy of the shareholder rights agreement has been filed with the
Commission and is incorporated as an exhibit hereto by reference to the
Registration Statement to which this consent solicitation is a part. A copy of
the shareholder rights agreement is also available from Shelbourne upon written
request. The foregoing description of the purchase rights does not purport to be
complete and is qualified in its entirety by reference to the purchase rights
Agreement, which is incorporated herein by reference.
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
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bids and to encourage persons seeking to acquire control of Shelbourne to
negotiate first with the Board of Directors. Shelbourne believes that the
benefits of these provisions outweigh the potential disadvantages of
discouraging such proposals because, among other things, negotiation of such
proposals might result in an improvement of their terms. The description set
forth below is intended as a summary only and is qualified in its entirety by
reference to the certificate of incorporation and the bylaws, which have been
filed with the Commission and are incorporated as exhibits hereto by reference
to the Registration Statement to which this is a part. See "DESCRIPTION OF
CAPITAL STOCK -- RESTRICTIONS ON TRANSFERS."
AMENDMENT OF CERTIFICATE AND BYLAWS
Except as described in the following two sentences, Shelbourne's
certificate of incorporation may be amended only by the affirmative vote of the
holders of two-thirds of all of the votes entitled to be cast on the matter.
However, if a majority of the directors then in office approve such amendment,
the holders of only a majority of the all the votes entitled to be cast on the
matter are needed to approve the amendment. In addition, amendments dealing with
various articles of the certificate of incorporation such as articles relating
to stockholder action; the powers, election of, removal of and classification of
directors; limitation of liability; and amendment of the By-laws or the
certificate of incorporation, shall require the affirmative vote of not less
than two-thirds of the outstanding votes entitled to be cast on the matter.
Unless otherwise required by law, the Board of Directors may amend Shelbourne's
bylaws by the affirmative vote of a majority of the directors then in office.
The bylaws may also be amended by the stockholders, at an annual meeting or at a
special meeting called for such purpose, by the affirmative vote of at least
two-thirds of the votes entitled to be cast on the matter; provided, that if the
Board of Directors recommends that stockholders approve such amendment at such
meeting, such amendment shall require the affirmative vote of only a majority of
the shares present at such meeting and entitled to vote.
DISSOLUTION OF SHELBOURNE
Delaware law permits the dissolution of Shelbourne by (1) the
affirmative vote of a majority of the entire Board of Directors declaring such
dissolution to be advisable and directing that the proposed dissolution be
submitted for consideration at an annual or special meeting of stockholders, and
(2) upon proper notice, stockholder approval by the affirmative vote of a
majority of the votes entitled to be cast on the matter.
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
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the purpose, by a majority of the remaining Directors. Pursuant to the terms of
the certificate of incorporation, the Directors are divided into three classes.
One class will hold office initially for a term expiring at the annual meeting
of stockholders to be held in 2001, another class will hold office initially for
a term expiring at the annual meeting of stockholders to be held in 2002 and the
third class will hold office initially for a term expiring in 2003. As the term
of each class expires, Directors in that class will be elected for a term of
three years and until their successors are duly elected and qualified. The use
of a classified board may render more difficult a change in control of
Shelbourne or removal of incumbent management. Shelbourne believes, however,
that classification of the Board of Directors will help to assure the continuity
and stability of its business strategies and policies.
LIMITATION OF LIABILITY AND INDEMNIFICATION
Shelbourne's certificate of incorporation generally limits the
liability of Shelbourne's Directors to Shelbourne to the fullest extent
permitted from time to time by Delaware law. The Delaware General Corporation
Law permits, but does not require, a corporation to indemnify its directors,
officers, employees or agents and expressly provides that the indemnification
provided for under the Delaware General Corporation Law shall not be deemed
exclusive of any indemnification right under any bylaw, vote of stockholders or
disinterested directors, or otherwise. The Delaware General Corporation Law
permits indemnification against expenses and some other liabilities arising out
of legal actions brought or threatened against such persons for their conduct on
behalf of a corporation, provided that each such person acted in good faith and
in a manner that he reasonably believed was in or not opposed to such
corporation's best interests and in the case of a criminal proceeding, had no
reasonable cause to believe his or her conduct was unlawful. The Delaware
General Corporation Law does not allow indemnification of directors in the case
of an action by or in the right of a corporation, including stockholder
derivative suits, unless the directors successfully defend the action or
indemnification is ordered by the court.
The bylaws provide that Directors and officers of Shelbourne shall be,
and, in the discretion of the Board of Directors, non-officer employees may be,
indemnified by Shelbourne to the fullest extent authorized by Delaware law, as
it now exists or may in the future be amended, against all expenses and
liabilities, including legal fees, actually and reasonably incurred in
connection with service for or on behalf of Shelbourne. The bylaws also provide
that the right of directors and officers to indemnification shall be a contract
right and shall not be exclusive of any other right now possessed or hereafter
acquired 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
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stockholder" for a period of three years from the date that such person became
an interested stockholder unless:
o the transaction resulting in a person becoming an interested
stockholder, or the business combination, was approved by the board of directors
of the corporation before the consummation of such transaction;
o the interested stockholder owned 85% or more of the outstanding
voting stock of the corporation, excluding shares owned by persons who are both
officers and directors of the corporation, and shares held by certain employee
stock ownership plans, immediately after the transaction in which it became an
interested stockholder; or
o on or after the date the person becomes an interested stockholder,
the business combination is approved by the corporation's board of directors and
by the holders of at least 66 2/3% of the corporation's outstanding voting stock
at an annual or special meeting, excluding shares owned by the interested
stockholder.
Under Section 203, an "interested stockholder" is defined, with some
exceptions, as any person who, together with affiliates and associates, owns or
within the prior three years did own, 15% or more of the corporation's
outstanding voting stock.
INDEMNIFICATION AGREEMENTS
Shelbourne has entered into indemnification agreements with each of its
directors and executive officers. The indemnification agreements require, among
other things, that Shelbourne indemnify its directors and executive officers to
the fullest extent permitted by law and advance to the directors and executive
officers all related expenses, including legal fees, subject to reimbursement if
it is subsequently determined that indemnification is not permitted. Under these
agreements, Shelbourne must also indemnify and advance all expenses incurred by
directors and executive officers seeking to enforce their rights under the
indemnification agreements and may cover directors and executive officers under
Shelbourne's directors' and officers' liability insurance. Although the form of
indemnification 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
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and practices of the Internal Revenue Service, and judicial decisions, all of
which are subject to change either prospectively or retroactively. Rosenman &
Colin has rendered an opinion to the effect that the discussion set forth under
this heading, to the extent that it contains descriptions of applicable Federal
income tax law, is correct in all material respects as of the date hereof. No
assurance can be given that future legislation, Treasury Regulations,
administrative interpretations or judicial decisions will not significantly
change the current law or adversely affect existing interpretations of current
law, including the conclusions reached by Rosenman & Colin. No rulings will be
sought in connection with any aspect of the Federal income tax consequences
described below.
YOU ARE ADVISED TO CONSULT WITH YOUR OWN TAX ADVISOR REGARDING THE
SPECIFIC FEDERAL, STATE, LOCAL AND (IF APPLICABLE) FOREIGN TAX CONSEQUENCES TO
YOU OF THE CONVERSION AND THE OWNERSHIP AND DISPOSITION OF SHARES OF COMMON
STOCK IN LIGHT OF YOUR SPECIFIC TAX AND INVESTMENT SITUATION.
THE CONVERSION
The proposed conversion has been structured in a manner intended to
result in no recognition of taxable income by you. Rosenman & Colin has rendered
an opinion to the effect that, under current Federal income tax law, (1) the
conversion will qualify as an exchange governed by Section 351 of the Code in
which your partnership will be treated as transferring all of its assets to
Shelbourne in exchange for common stock and the assumption by Shelbourne of your
partnership's liabilities, followed by your partnership's distribution of the
common stock to the unitholders in complete liquidation of your partnership, and
(2) accordingly, no gain or loss will be recognized for Federal income tax
purposes by your partnership, the unitholders or Shelbourne as a result of the
conversion. A legal opinion is not binding on the Service or the courts.
Although the Service has issued a private letter ruling confirming these tax
consequences in the case of a transaction substantially similar to the proposed
conversion, the letter ruling was not issued to your partnership and analyzed a
transaction that was not identical to the proposed conversion. Accordingly,
there can be no assurance that the Service will agree with the conclusions
reached by Rosenman & Colin in its opinion.
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.
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Under Federal income tax law, if certain detailed conditions (discussed
below) imposed by the Code and the related Treasury Regulations are satisfied,
an entity that invests principally in real estate and that would otherwise be
subject to tax as a corporation may elect to be treated as a real estate
investment trust for U.S. Federal income tax purposes. These conditions relate,
in part, to the nature of the entity's assets and income.
Shelbourne intends to elect to be treated for tax purposes as, and to
operate so as to qualify as, a real estate investment trust under Sections 856
through 860 of the Code, commencing with its taxable year ending on December 31,
2000. No assurance can be given that Shelbourne will operate in a manner so as
to qualify, or remain qualified, as a real estate investment trust.
Rosenman & Colin has rendered an opinion to the effect that, commencing
with Shelbourne's tax year ending on December 31, 2000, Shelbourne will be
organized in conformity with the requirements for qualification as a real estate
investment trust, and Shelbourne's proposed method of operation will enable it
to meet the requirements for qualification and taxation as a real estate
investment trust, provided that (1) the conversion and the procedural steps
described below are completed in a timely fashion and (2) Shelbourne and the
operating partnership operate in accordance with the customary representations
and assumptions for transactions of this nature, including representations with
respect to organization, business, properties and operations. The opinion is
based upon certain facts, representations and assumptions as of its date,
including assumptions and factual representations as to your partnership's
organization, business, properties and operation prior to the conversion, and is
not binding on the Service or the courts. Qualification and taxation as a real
estate investment trust will depend upon whether Shelbourne will be able to meet
on an ongoing basis, through its actual annual operating results, its asset
base, distribution levels and diversity of share ownership, various
qualification tests, the results of which will not be reviewed by Rosenman &
Colin. No assurance can be given that the actual results of Shelbourne's
operations for any particular taxable year will satisfy such requirements. See
"-- FAILURE OF SHELBOURNE TO QUALIFY AS A REAL ESTATE INVESTMENT TRUST."
If Shelbourne qualifies for taxation as a real estate investment trust,
it generally will not be subject to Federal corporate income taxes on its net
income that is currently distributed to stockholders. This treatment
substantially eliminates the "double taxation" that generally results from
investment in a regular corporation. However, Shelbourne will be subject to
Federal income tax in the following circumstances:
(1) Shelbourne will be subject to tax at regular corporate rates on any
undistributed real estate investment trust taxable income, including
undistributed net capital gains;
(2) Under certain circumstances, Shelbourne may be subject to the
"alternative minimum tax" on its items of tax preference, if any;
(3) If Shelbourne has (a) net income from the sale or other disposition
of "foreclosure property" which is held primarily for sale to customers in the
ordinary course of business or (b) other nonqualifying income from foreclosure
property, Shelbourne will be subject to tax at the highest corporate rate on
such income;
(4) If Shelbourne has net income from the sale or other disposition of
property, other than foreclosure property, held primarily for sale to customers
in the ordinary course of business (a "prohibited transaction"), such income
will be subject to a 100% tax;
(5) For taxable years after 2000, if Shelbourne receives non-arm's
length income directly from or as a result of any services provided by a
"taxable REIT subsidiary", as defined below, such income will be subject to a
100% tax;
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(6) If Shelbourne fails to satisfy the 75% gross income test or the 95%
gross income test as discussed below but nonetheless has maintained its
qualification as a real estate investment trust because other requirements have
been met, Shelbourne will be subject to a 100% tax on an amount equal to (1) the
gross income attributable to the greater of the amount by which Shelbourne fails
the 75% or 95% test multiplied by (2) a fraction intended to reflect
Shelbourne's profitability;
(7) If Shelbourne fails to distribute during each calendar year at
least the sum of (1) 85% of its ordinary income for such year, (2) 95% of its
capital gains for such year, less any capital gains that it elects to retain and
pay tax on, and (3) any undistributed taxable income from prior periods, less
any capital gains that it elected to retain and pay tax on, Shelbourne will be
subject to a 4% excise tax on the excess of such required distribution over the
sum of the amounts actually distributed plus the amounts on which Shelbourne was
taxed for such calendar year;
(8) If Shelbourne acquires any asset from a corporation that is subject
to full corporate-level taxation in a transaction in which the basis of the
asset in the hands of Shelbourne is determined by reference to the basis of the
asset in the hands of such corporation, and Shelbourne recognizes gain on the
disposition of such asset during the ten-year period beginning on the date on
which such asset was acquired by Shelbourne, then, to the extent of the excess
of (a) the fair market value of such asset over (b) Shelbourne's adjusted basis
in the asset, determined when Shelbourne acquired the asset, such gain will be
subject to tax at the highest regular corporate income tax rate then applicable.
REQUIREMENTS FOR QUALIFICATION
To qualify as a real estate investment trust, Shelbourne must elect to
be treated as such on its Federal income tax return for its taxable year ending
December 31, 2000, and must meet the requirements discussed below relating to
Shelbourne's organization, sources of income, nature of assets, and
distributions of income.
ORGANIZATIONAL REQUIREMENTS
The outstanding stock of Shelbourne must be held by at least 100
persons and not more than 50% of the value of such stock may be owned, directly
or indirectly, by five or fewer individuals (as specially defined) at any time
during the last half of the taxable year. For these purposes, some entities are
treated as individuals. These stock ownership requirements must be satisfied in
Shelbourne's second taxable year and in each subsequent taxable year. Following
the conversion, Shelbourne expects to have outstanding stock with sufficient
diversity of ownership to enable it to satisfy these requirements. In addition,
the certificate of incorporation provides for certain restrictions regarding the
transfer of Shelbourne's capital stock in order to assist Shelbourne in meeting
the stock ownership requirements, although these restrictions cannot insure that
Shelbourne will always satisfy these stock ownership requirements. See
"DESCRIPTION OF CAPITAL STOCK -- RESTRICTIONS ON TRANSFER."
To monitor Shelbourne's compliance with the stock ownership
requirements, Shelbourne will be required to maintain records regarding the
actual ownership of its stock. To do so, Shelbourne must send a letter to its
stockholders requesting that they disclose to Shelbourne the identity of the
actual owners of the stock, i.e., the persons required to include Shelbourne's
dividends in their income. A list of those persons failing or refusing to comply
with this demand must be maintained as part of Shelbourne's records. A
stockholder who fails or refuses to comply with the demand must submit a
statement with its Federal income tax return disclosing the actual ownership of
the stock and certain other information.
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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 III GP, Inc., 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 in voting power or number of shares of such tenant
which we refer to as a Related Party Tenant. Recently enacted legislation, which
applies to rents received or accrued beginning after December 31, 2000, provides
an exception to this rule for rents received under some circumstances from a
taxable REIT subsidiary, which is any corporation having a real estate
investment trust as a shareholder that makes and maintains a valid election to
be treated as a taxable REIT subsidiary under the Code;
(3) Any rent attributable to personal property leased in connection
with a lease of real property must not exceed 15% of the total rent received for
the year under the lease;
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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. Beginning after 2000, services also may be provided to
tenants through a taxable REIT subsidiary subject to applicable limitations. A
real estate investment trust also may provide basic services to tenants without
having to engage independent contractors if the services in question are of a
limited type that a tax-exempt organization can provide to its tenants without
causing its rental income to be treated as taxable under the Code, i.e.,
services that are "usually or customarily rendered" in connection with the
rental of space for occupancy only and that are not considered rendered for the
convenience of the occupant of the property. However, receipts for services,
whether or not rendered by an independent contractor or, for taxable years after
2000, a taxable REIT subsidiary, that are not customarily provided to tenants in
properties of a similar class and in the same geographic market as the relevant
property is located will not qualify as "rents from real property."
Shelbourne anticipates that all or substantially all of the operating
partnership's rental income will qualify as "rents from real property" for
purposes of the 75% and the 95% gross income tests. The operating partnership
does not intend to charge rent for any property that is based in whole or in
part on the income or profits of any person except by reason of being based on a
fixed percentage of receipts or sales, as described above, and does not intend
to derive rents from any persons who, immediately after the conversion, would be
Related Party Tenants as to Shelbourne. The operating partnership does not
intend to derive rent from personal property leased in connection with real
property that exceeds 15% of the total rents under the lease. The operating
partnership intends to provide only services of a type that are customarily
provided to tenants in properties of a similar class in the geographic market in
which the property is located, and all such services will be provided through
independent contractors, except that the operating partnership or the advisor
may provide basic maintenance services of a type that could be provided by a
tax-exempt landlord to its tenants and, after 2000, may also engage taxable REIT
subsidiaries to provide permitted services to tenants.
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.
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If Shelbourne fails to satisfy one or both of the 75% or 95% gross
income tests for any taxable year, it nevertheless may qualify as a real estate
investment trust for such year if it is entitled to relief under certain
provisions of the Code. These relief provisions will generally be available if:
(1) Shelbourne's failure to meet such tests was due to reasonable cause
and not due to willful neglect;
(2) Shelbourne attaches a schedule of the sources of its income to its
Federal income tax return; and
(3) Any incorrect information on the schedule was not due to fraud with
intent to evade tax. It is not possible, however, to state whether Shelbourne
would be entitled to the benefit of these relief provisions in all
circumstances. Also, as discussed above under "TAXATION OF SHELBOURNE AS A REAL
ESTATE INVESTMENT TRUST -- GENERAL," even if these relief provisions apply, a
tax would be imposed with respect to the excess gross income.
ASSET TESTS
Shelbourne, at the close of each quarter of its taxable year, also must
satisfy the following three tests relating to the nature of its assets:
(1) At least 75% of the value of Shelbourne's total assets must be
represented by real estate assets, which for these purposes will include (a) its
allocable share of real estate assets held by partnerships in which Shelbourne
owns an interest including its allocable share of the real estate assets held by
the operating partnership, (b) shares in other real estate investment trusts,
and (c) stock or debt instruments held for not more than one year purchased with
the proceeds of a stock offering or long-term (at least five years) debt
offering of Shelbourne, cash, cash items and government securities;
(2) Not more than 25% of Shelbourne's total assets may be represented
by securities other than those in the 75% asset class; and
(3) Of the investments included in the 25% asset class, the value of
any one issuer's securities owned by Shelbourne directly or through the
operating partnership may not exceed 5% of the value of Shelbourne's total
assets and Shelbourne may not own more than 10% of the outstanding voting
securities of any one issuer other than another real estate investment trust or
a qualified REIT subsidiary or a partnership or other flow-through entity, and,
after 2000, may not own more than 10% of the voting power or value of the
outstanding equity or convertible debt securities of any one issuer other than
another real estate investment trust or a qualified REIT subsidiary or a
partnership or other flow-through entity. However, after 2000, Shelbourne also
will be permitted to own more than 10% of the securities of taxable REIT
subsidiaries provided that the total value of these securities does not exceed
20% of the total value of all of Shelbourne's assets.
Shelbourne anticipates that, as of the closing of the conversion,
substantially more than 75% of the fair market value of the assets indirectly
owned by Shelbourne through the operating partnership will consist of
non-residential rental real estate owned in fee. Shelbourne also expects that,
at all times, substantially more than 75% of the assets indirectly owned by
Shelbourne through the operating partnership will consist of fee ownership of
real property. The operating partnership currently intends to structure its
acquisition of any direct or indirect ownership interests in any entity taxable
as a corporation for Federal income tax purposes in a manner that Shelbourne
determines will be consistent with Shelbourne's satisfying the asset tests both
at the time of the acquisition and for the quarter in which the acquisition
occurs. Accordingly,
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Shelbourne believes that it will be able to meet the asset tests described above
at the time of the conversion and on a going forward basis.
If Shelbourne should fail to satisfy the asset tests at the end of a
quarter, such failure would not cause it to lose its real estate investment
trust status if:
(1) it satisfied all of the asset tests at the close of the preceding
quarter; and
(2) the failure arose solely from changes in the market values of
Shelbourne's assets.
If the condition described in clause (2) of the preceding sentence were not
satisfied, Shelbourne could still avoid disqualification by curing the failure
within 30 days after the close of the quarter in which it arose.
ANNUAL DISTRIBUTION REQUIREMENTS
In order to qualify as a real estate investment trust, Shelbourne will
be required to make ordinary income distributions to its stockholders in an
amount at least equal to (1) the sum of (a) 95% - 90% for taxable years after
2000 - of Shelbourne's "real estate investment trust taxable income," defined as
taxable income computed without regard to the dividends paid deduction and
excluding net capital gain, and (b) 95% of its after-tax net income, if any,
from foreclosure property, minus (2) the sum of certain items of noncash income.
Such distributions must be paid in the taxable year to which they relate, or in
the following taxable year if declared before Shelbourne timely files its tax
return for such year and paid on or before the first regular dividend payment
date after such declaration. Shelbourne intends to make timely distributions
sufficient to satisfy this requirement.
To the extent that Shelbourne does not distribute all of its net
capital gain or distributes at least 95% (90% after 2000), but less than 100%,
of its "real estate investment trust taxable income," as adjusted, it will be
subject to tax thereon at regular corporate tax rates. In addition, if
Shelbourne fails to distribute during each calendar year at least the sum of:
(1) 85% of its ordinary income for such year;
(2) 95% of its capital gain net income for such year less any capital
gains that Shelbourne elects to retain and pay tax on; and
(3) any undistributed taxable income from prior periods, less any
capital gains from such periods that Shelbourne elected to retain and pay tax
on,
Shelbourne will be subject to a 4% excise tax on the excess of the required
distribution over the sum of the amounts actually distributed plus any amounts
on which Shelbourne was taxed for such calendar year.
It is possible that Shelbourne may report taxable income in excess of
cash flow due to timing or other differences between the operating partnership's
inclusion of income and its actual receipt of the related cash, or due to the
operating partnership's payment of non-deductible items, such as principal
amortization or capital expenditures, in excess of non-cash deductions, such as
deductions for depreciation and accrued but unpaid interest. In that event, if
Shelbourne does not have sufficient cash or liquid assets to satisfy the
distribution requirements above, Shelbourne or the operating partnership may
find it necessary to arrange for short-term, or possibly long-term, borrowings,
issue equity or sell assets.
Under certain circumstances, Shelbourne may be able to rectify a
failure to meet the distribution requirement for a year by paying "deficiency
dividends" to stockholders in a later year that may be included
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in Shelbourne's deduction for dividends paid for the earlier year. Thus,
Shelbourne may be able to avoid being taxed on amounts distributed as deficiency
dividends. However, Shelbourne will be required to pay interest based upon the
amount of any deduction taken for deficiency dividends.
FAILURE OF SHELBOURNE TO QUALIFY AS A REAL ESTATE INVESTMENT TRUST
If Shelbourne fails to qualify for taxation as a real estate investment
trust in any taxable year, and if certain relief provisions do not apply,
Shelbourne will be subject to tax, including any applicable alternative minimum
tax, on its taxable income at regular corporate rates. Distributions to
stockholders in any year in which Shelbourne fails to qualify as a real estate
investment trust will not be deductible by Shelbourne in computing its taxable
income. As a result, the cash available for distribution by Shelbourne to its
stockholders would be significantly reduced. In addition, if Shelbourne fails to
qualify as a real estate investment trust, all distributions to stockholders
will be subject to tax as ordinary income, to the extent of Shelbourne's current
and accumulated earnings and profits. In that event, subject to applicable
limitations, distributions paid to a corporate distributee may qualify for the
dividends received deduction. Unless entitled to relief under specific statutory
provisions, Shelbourne also would be disqualified from being treated as a real
estate investment trust for the four taxable years following the year during
which such qualification was lost. It is not possible to state whether in all
circumstances Shelbourne would be entitled to such statutory relief.
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.
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Shelbourne will notify each stockholder after the close of Shelbourne's
taxable year as to the portions of the distributions attributable to that year
which constitute ordinary income, capital gain or a return of capital, and, as
to capital gain distributions, if any, the portion that is taxable for
non-corporate stockholders as a 25% gain distribution and the portion that is
taxable as a 20% gain distribution.
PASSIVE ACTIVITY LOSSES AND THE INVESTMENT INTEREST LIMITATION
Distributions made by Shelbourne and gain, if any, from the sale or
exchange of a stockholder's common stock will not be treated as passive activity
income. As a result, taxable stockholders generally will not be able to apply
any "passive activity losses," including any unused passive activity losses from
your partnership, against such income or gain, except that unused passive
activity losses from your partnership generally will be deductible, subject to
any other applicable limitations, in the year a stockholder sells all his common
stock. Dividends from Shelbourne that do not constitute a capital gain dividend
or a return of capital generally will be treated as investment income for
purposes of the investment interest limitation. However, unless a taxable
stockholder elects to pay tax on such gain at ordinary income rates, net capital
gain from the sale or other disposition of shares of common stock and capital
gain dividends from Shelbourne will not be considered investment income for
purposes of the investment interest limitation. See also "COMPARISON OF YOUR
PARTNERSHIP AND SHELBOURNE -- TAXATION OF TAXABLE LIMITED PARTNERS".
SALE OF COMMON STOCK
Upon any sale or other disposition of common stock, a taxable
stockholder will recognize gain or loss for Federal income tax purposes in an
amount equal to the difference between (1) the amount of cash and the fair
market value of any property received on such sale or other disposition and (2)
such taxable stockholder's adjusted basis in such common stock for tax purposes.
Such gain or loss will be capital gain or loss if such taxable stockholder held
such common stock as a capital asset and, if the taxable stockholder is an
individual, estate or trust, such gain will be taxable at a maximum marginal
Federal income tax rate of 20% if such common stock has been held for more than
one year. In general, any loss recognized by a taxable stockholder upon the sale
or other disposition of common stock that has been held for six months or less
under applicable holding period rules will be treated as a long-term capital
loss to the extent of any distributions received by the taxable stockholder from
Shelbourne that were treated as long-term capital gains.
BACKUP WITHHOLDING
Shelbourne will report to its taxable stockholders and the Service the
amount of dividends paid during each calendar year and the amount of tax
withheld, if any. A taxable stockholder may be subject to backup withholding at
a rate of 31% with respect to dividends unless such taxable stockholder (a) is a
corporation or comes within certain other exempt categories and, when required,
demonstrates this fact, or (b) provides a taxpayer identification number,
certifies as to no loss of exemption from backup withholding, and otherwise
complies with applicable requirements. A taxable stockholder that does not
provide Shelbourne with his correct taxpayer identification number also may be
subject to penalties imposed by the Service. Any amount paid as backup
withholding will be creditable against the taxable stockholder's Federal income
tax liability. Additional withholding issues may arise for non-U.S.
stockholders. See "-- TAXATION OF NON-U.S. STOCKHOLDERS - BACKUP WITHHOLDING TAX
AND INFORMATION REPORTING."
TAXATION OF TAX-EXEMPT STOCKHOLDERS
Based upon a published ruling by the Service, distributions by
Shelbourne to a tax-exempt stockholder will not constitute unrelated business
taxable income, provided that the tax-exempt stockholder
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does not hold its common stock as "debt-financed property" within the meaning of
the Code and such common stock is not otherwise used in an unrelated trade or
business of the tax-exempt stockholder. Subject to the same proviso, income from
the sale of common stock will not constitute unrelated business taxable income
to a tax-exempt stockholder. However, social clubs, voluntary employee benefit
associations, supplemental unemployment benefit trusts and qualified group legal
services plans that are exempt from taxation under Sections 501(c)(7), (9), (17)
and (20), respectively, of the Internal Revenue Code are subject to different
rules that generally will require them to treat their income from Shelbourne as
unrelated business taxable income unless they satisfy applicable set aside and
reserve requirements as to which they should consult their own tax advisors. In
addition, a portion of the dividends paid by Shelbourne may be treated as
unrelated business taxable income to certain U.S. private pension trusts if
Shelbourne is treated as a "pension-held real estate investment trust." Based on
stock ownership restrictions imposed by Shelbourne (see "THE CONVERSION --
CONDITIONS TO THE CONVERSION" and "DESCRIPTION OF CAPITAL STOCK -- RESTRICTIONS
ON OWNERSHIP AND TRANSFER"), Shelbourne does not anticipate that it will be a
"pension-held real estate investment trust." In any event, if Shelbourne were to
become a pension-held real estate investment trust, these rules generally would
apply only to certain U.S. pension trusts that hold more than 10% of
Shelbourne's stock.
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
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alternative minimum tax in the case of nonresident alien individuals. If it is a
corporation, a Non-U.S. Holder also may be subject to a 30% branch profits tax.
Shelbourne will be required to withhold 35% of any capital gain distribution.
That amount will be creditable against the Non-U.S. Holder's Federal income tax
liability.
SALE OF COMMON STOCK
Gain recognized by a Non-U.S. Holder upon the sale or exchange of
common stock generally will not be subject to United States taxation so long as
Shelbourne is a "domestically-controlled real estate investment trust," i.e., a
real estate investment trust in which, at all times during a specified testing
period, less than 50% in value of its stock is held directly and indirectly by
Non-U.S. Holders. Shelbourne currently anticipates that it will be a
"domestically-controlled real estate investment trust," but, because common
stock will be publicly traded, cannot assure this result. If Shelbourne ceases
to be a "domestically-controlled real estate investment trust," gain arising
from the disposition of common stock will not be subject to tax if the Non-U.S.
Holder owned 5% or less of Shelbourne's outstanding stock throughout the
five-year period ending on the date of disposition. Otherwise, the Non-U.S.
Holder would be subject to regular U.S. income tax with respect to such gain in
the same manner as a taxable U.S. stockholder, subject to any applicable
alternative minimum tax, a special alternative minimum tax in the case of
nonresident alien individuals and the possible application of the 30% branch
profits tax in the case of a foreign corporation, and the purchaser of common
stock would be required to withhold and remit to the Service, an amount equal to
10% of the purchase price.
Notwithstanding the foregoing, a Non-U.S. Holder will be subject to tax
on gain from the sale or exchange of common stock not otherwise subject to
FIRPTA if the Non-U.S. Holder is a nonresident alien individual who is present
in the United States for 183 days or more during the taxable year. In such case,
the nonresident alien individual will be subject to a 30% United States
withholding tax on the amount of such individual's gain.
BACKUP WITHHOLDING TAX AND INFORMATION REPORTING
Shelbourne must report annually to the Service and to each Non-U.S.
Holder the amount of dividends paid to, and the tax withheld with respect to,
such stockholder, regardless of whether any tax was actually withheld. That
information may also be made available to the tax authorities of the country in
which a Non-U.S. Holder resides.
Backup withholding tax otherwise imposed at the rate of 31% generally
will not apply to dividends paid on common stock to a Non-U.S. Holder at an
address outside the United States.
The payment of the proceeds from the disposition of common stock to or
through a U.S. office of a broker will be subject to information reporting and
backup withholding unless the owner, under penalties of perjury, certifies,
among other things, its status as a Non-U.S. Holder, or otherwise establishes an
exemption. The payment of the proceeds from the disposition of common stock to
or though a non-U.S. office of a non-U.S. broker generally will not be subject
to backup withholding and information reporting.
The backup withholding tax is not an additional tax and may be credited
against a Non-U.S. Holder's Federal income tax liability or refunded to the
extent excess amounts are withheld, provided that the Non-U.S. Holder files an
appropriate claim for refund with the Service.
The Service has issued final Treasury Regulations regarding the backup
withholding rules as applied to Non-U.S. Holders. These final Treasury
Regulations alter the current system of backup withholding compliance and will
be effective for payments made after December 31, 2000. You should consult your
tax
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advisor regarding the application of the final Treasury Regulations and their
potential effect on your ownership of common stock.
TAX STATUS OF THE OPERATING PARTNERSHIP
Substantially all of Shelbourne's investments will be held through the
operating partnership. Your partnership and Shelbourne each believe that
following the conversion, the operating partnership will be classified as either
(1) a disregarded entity if 100% of its membership interests are held by
Shelbourne directly or indirectly through one or more wholly-owned flow-through
entities, i.e., a limited liability company or a qualified real estate
investment trust subsidiary, or (2) a partnership if, in addition to Shelbourne,
at least one other person who or which is not a disregarded entity of
Shelbourne, owns an interest in the operating partnership. In this regard,
neither the operating partnership nor the limited liability company through
which Shelbourne owns an interest in the operating partnership will elect to be
classified as an association taxable as a corporation. Accordingly, Shelbourne
will include in its 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.
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IMPORTANCE OF OBTAINING PROFESSIONAL TAX ASSISTANCE
The discussion under this heading is intended only as a summary of
Federal income tax consequences of the conversion and owning and disposing of
common stock, and is not a substitute for careful tax planning with a tax
professional. Such tax consequences may vary depending on your individual
circumstances. Accordingly, you are urged to consult with your tax advisor about
the Federal, state, local and foreign tax consequences of the conversion and
owning and disposing of common stock.
AVAILABLE INFORMATION
We have filed with the Securities and Exchange Commission, which we
refer to as the SEC, a Registration Statement on Form S-4 under the Securities
Act of 1933, as amended. This consent 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
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floor, Cambridge, MA 02142. You should make telephone requests for copies to us
at (617) 234-2000. In order to ensure timely delivery of the documents, we
should receive such requests by _______ __, 2000.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
Your partnership's Annual Report on Form 10-K for the fiscal year ended
December 31, 1999, Quarterly Report on Form 10-Q for the period ended March 31,
2000 and the Quarterly Report on Form 10-Q for the period ended June 30, 2000,
each of which has been filed by your partnership with the SEC pursuant to the
Exchange Act, are incorporated herein by reference. Your partnership's SEC file
number is 000-16855.
All documents filed by your partnership pursuant to Section 13(a),
13(c), 14 or 15(d) of the Exchange Act subsequent to the date of this consent
solicitation statement shall be deemed to be incorporated by reference herein
and to be a part hereof from the date of filing of such documents. Any statement
contained in a document incorporated or deemed to be incorporated by reference
herein shall be deemed to be modified or superseded for purposes of this consent
solicitation statement to the extent that a statement contained herein or in any
other subsequently filed document that also is or is deemed to be incorporated
by reference herein modifies or supersedes such statement. Any such statement so
modified or superseded shall not be deemed, except as so modified or superseded,
to constitute a part of this consent solicitation statement.
FORWARD-LOOKING STATEMENTS
This consent solicitation statement contains forward-looking statements
about the financial condition, results of operations and business of the
operating partnership and Shelbourne. All statements, other than statements of
historical facts included in this prospectus, that address activities, events or
developments that we believe, intend or anticipate will or may occur in the
future are forward-looking statements.
Forward-looking statements are inherently subject to risks and
uncertainties, many of which cannot be predicted with accuracy and some of which
might not even be anticipated. Actual results may differ materially from those
expressed or implied by the forward-looking statements for various reasons,
including those discussed under the "RISK FACTORS" section of this consent
solicitation statement. You are cautioned not to place undue reliance on such
forward-looking statements, which speak only as of the date of this consent
solicitation statement.
EXPERTS
The financial statements of your partnership as of December 31, 1999
and 1998, and for each of the three years in the period ended December 31, 1999,
incorporated in this prospectus by reference from your partnership's Annual
Report on Form 10-K for the year ended December 31, 1999, have been audited by
Deloitte & Touche LLP, independent auditors, as stated in their report, which is
incorporated herein by reference, and have been so incorporated in reliance upon
the report of such firm given upon their authority as experts in accounting and
auditing.
The balance sheet of Shelbourne as of June 30, 2000 included in this
prospectus has been audited by Deloitte & Touche LLP, independent auditors, as
stated in their report appearing herein and elsewhere in the registration
statement, and is included in reliance upon the reports of such firm given upon
their authority as experts in accounting and auditing.
The property appraisals referred to in this consent solicitation and
filed as exhibits to the Registration Statement to which this consent
solicitation is a part have been prepared by Cushman & Wakefield and are
included in reliance upon the authority of said firm as experts in giving such
reports.
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The valuation analysis report referred to in this consent solicitation
and filed as an exhibit to the Registration Statement to which this consent
solicitation is a part has been prepared by Insignia/ESG and is included in
reliance upon the authority of said firm as experts in giving such reports.
LEGAL MATTERS
The validity of the issuance of the shares of common stock offered
pursuant to this consent solicitation statement and certain tax matters related
to the Partnership and Shelbourne as described under "FEDERAL INCOME TAX
CONSEQUENCES" will be passed upon by Rosenman & Colin LLP, New York, New York.
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INDEPENDENT AUDITORS' REPORT
To the Shareholders of Shelbourne Properties III, Inc.
We have audited the accompanying consolidated balance sheet of
Shelbourne Properties III, Inc. and subsidiaries (the "Company") as of
June 30, 2000. This financial statement is the responsibility of the
Company's management. Our responsibility is to express an opinion on
this financial statement based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that
we plan and perform the audit to obtain reasonable assurance about
whether the balance sheet is free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts
and disclosures in the balance sheet. An audit also includes assessing
the accounting principles used and significant estimates made by
management, as well as evaluating the overall balance sheet
presentation. We believe that our audit of the balance sheet provides a
reasonable basis for our opinion.
In our opinion, such consolidated balance sheet presents fairly, in all
material respects, the financial position of the Company at June 30,
2000 in conformity with accounting principles generally accepted in the
United States of America.
DELOITTE & TOUCHE LLP
September 15, 2000
Boston, Massachusetts
F-1
<PAGE>
SHELBOURNE PROPERTIES III, INC.
CONSOLIDATED BALANCE SHEET
JUNE 30, 2000
ASSETS
Cash $1,000
======
LIABILITIES AND STOCKHOLDER'S EQUITY
Common Stock, $.01 par value
100 shares authorized, 100 issued and outstanding $ 1
Additional paid in capital 999
-----
$1,000
======
NOTES:
1. ORGANIZATION
Shelbourne Properties III, Inc., a Delaware corporation was
formed on February 8, 2000 for the purpose of exchanging
common stock of the Company for the units of limited
partnership interest of High Equity Partners L.P. - Series 88
(the "Exchange"). The Company has two wholly-owned
subsidiaries, Shelbourne Properties III GP, Inc. and
Shelbourne Properties I L.P. and all intercompany balances
have been eliminated in consolidation.
2. SUMMARY OF ACCOUNTING POLICIES
Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States
of America requires management to make estimates and
assumptions that affect the reported amounts of assets and
liabilities at the reporting date. Actual amounts could differ
from those estimates.
Income Taxes
The Company intends to qualify and operate as a real estate
investment trust ("REIT") under the provisions of the Internal
Revenue Code. Under these provisions, the Company is required
to distribute at least 95% (90% for taxable years after 2000)
of its REIT taxable income to its shareholders to maintain the
REIT qualification and not be subject to Federal income taxes
for the portion of taxable income distributed. The Company
must also satisfy certain tests concerning the nature of its
assets and income distributed and meet certain record keeping
requirements.
F-2
<PAGE>
APPENDIX A
CONSENT FORM
<PAGE>
APPENDIX A
Part A
CONSENT FORM
HIGH EQUITY PARTNERS L.P. - SERIES 88
c/o American Stock Transfer & Trust Company
40 Wall Street
New York, New York 10005
Attn: Cynthia Trotman
Dear Limited Partner:
Enclosed is a consent solicitation statement describing the proposed
tax-free conversion of your partnership into a real estate investment trust that
will be listed on the American Stock Exchange-listed real estate investment
trust. Your general partners are proposing the conversion as the final step of a
court-approved class action settlement. Your general partners believe that the
conversion is fair and recommend that you vote "YES" in favor of the conversion.
Your vote is important. Please complete the bottom portion of this consent form
and then return it using the enclosed pre-addressed postage paid envelope or by
facsimile to (718) 236-2641. If you have any questions, please call (888)
448-5554.
Please detach here
--------------------------------------------------------------------------------
HIGH EQUITY PARTNERS L.P. - SERIES 88
CONSENT SOLICITED BY RESOURCES HIGH EQUITY, INC.
CONSENT EXPIRATION DATE: ________ ___, 2000
The undersigned, a holder of units (the "Units") of limited partnership interest
in High Equity Partners L.P. - Series 88 (the "Partnership"), hereby
acknowledges receipt of the consent solicitation statement, dated _________ ___,
2000, and votes with respect to the conversion of the Partnership described
therein, including the merger of the Partnership with and into SHELBOURNE
PROPERTIES III L.P. pursuant to the Merger Agreement as set forth in Appendix B
thereto, as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
YES NO ABSTAIN
(Approve conversion) (Do not approve conversion) (Same as voting NO)
[ ] [ ] [ ]
</TABLE>
__________________________________ Dated: _______,2000
Signature
__________________________________
Signature (if held jointly)
__________________________________
Title
Please mark here for change of address [ ]
IMPORTANT: Please sign exactly as name appears hereon. When
Units are held by joint tenants, both should sign. When
signing as an attorney, as executor, administrator, trustee
or guardian, please give full title as such. If a
corporation, please sign in corporate name by President or
other authorized officer. If a partnership, please sign in
partnership name. If this card is returned signed but no
vote is indicated, you will be deemed to have voted "YES" in
favor of the conversion.
<PAGE>
Part B
This form appoints each of Michael L. Ashner and Peter Braverman as
your attorneys-in-fact for the purpose of executing all other documents and
instruments advisable or necessary to complete the conversion. This power of
attorney is intended solely to ease the administrative burden of completing the
conversion without requiring your signatures on multiple documents.
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned hereby constitutes and
appoints each of Michael L. Ashner and Peter Braverman his true and lawful
attorney-in-fact and agent, with full power of substitution and resubstitution,
for him and in his name, place and stead, in any and all capacities, with full
power to act alone, to execute any and all documents in connection with the
conversion of High Equity Partners L.P. - Series 88 into Shelbourne Properties
III, 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.
<TABLE>
<CAPTION>
Signatures Title Date
<S> <C> <C>
Limited Partner,
_________________________________ High Equity Partners L.P. - Series 88 _______________
Name:
</TABLE>
<PAGE>
APPENDIX B
AGREEMENT
AND
PLAN OF MERGER
<PAGE>
APPENDIX B
AGREEMENT AND PLAN OF MERGER
Merging
High Equity Partners L.P.- Series 88
into
Shelbourne Properties III L.P.
AGREEMENT AND PLAN OF MERGER, dated as of _______ ___, 2000 (the
"Agreement"), among Shelbourne Properties III, Inc., a Delaware corporation (the
"Company"), Shelbourne Properties III L.P., a Delaware limited partnership
("Shelbourne L.P.") and High Equity Partners L.P.- Series 88, 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 three (3) 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. and Presidio AGP Corp., each Delaware corporations
(collectively, the "HEP General Partners"), with an aggregate 5% partnership
interest and there are 371,766 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 III GP, Inc., a Delaware
corporation, the sole shareholder 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:
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<PAGE>
ARTICLE 1
THE MERGER
SECTION 1.01 MERGER OF HEP INTO SHELBOURNE L.P. At the Effective Time
(as defined in Section 1.05 hereof), HEP shall merge with and into Shelbourne
L.P. (the "Merger"), and the separate existence of HEP shall cease. Shelbourne
L.P. shall be the surviving entity in the Merger (hereinafter, the surviving
entity is referred to as the "Operating Partnership") and its existence with all
its rights, privileges, powers and franchises, shall continue unaffected and
unimpaired by the Merger.
SECTION 1.02 EFFECT OF THE MERGER. The Merger shall have the effects
provided for in the Delaware Revised Uniform Limited Partnership Act ("DRULPA").
SECTION 1.03 GENERAL PARTNER. Shelbourne GP shall be the sole general
partner of the Operating Partnership with a 1% partnership interest therein.
SECTION 1.04 GOVERNING INSTRUMENT OF THE OPERATING PARTNERSHIP. The
Agreement of Limited Partnership of Shelbourne L.P. in effect immediately prior
to the Effective Time, shall be the Agreement of Limited Partnership of the
Operating Partnership.
SECTION 1.05 EFFECTIVE TIME. Promptly after the date hereof, a
certificate of merger evidencing the Merger shall be filed with the Secretary of
State of the State of Delaware pursuant to DRULPA (the "Certificate of Merger").
The Merger shall become effective upon the time and date of the filing of the
Certificate of Merger, except that, in the event that the Certificate of Merger
specifies in accordance with DRULPA a date and time subsequent to the date of
such filing on or at which the Merger is to become effective, the Merger shall
be effective on and at such subsequent time (such time and date when the Merger
shall become effective is herein referred to as the "Effective Time").
ARTICLE 2
EFFECT ON SECURITIES
SECTION 2.01 HEP GENERAL PARTNER INTERESTS. The general partner
interests in HEP held by the General Partners immediately prior to the Effective
Time shall, by virtue of the Merger and without any further action by the HEP
General Partners, be converted into 58,701 shares of Common Stock.
SECTION 2.02 UNITS. Each Unit that is outstanding immediately prior to
the Effective Time shall, by virtue of the Merger and without any further action
by the holder thereof, be converted into three (3) shares of Common Stock.
SECTION 2.03 SHELBOURNE L.P. GENERAL PARTNER INTERESTS. The general
partner interest in Shelbourne L.P. held by Shelbourne GP immediately prior to
the Effective Time shall continue as an equal general partner interest in the
Operating Partnership immediately following the Merger, and Shelbourne GP will
thereupon continue as the general partner of the Operating Partnership.
SECTION 2.04 PARTNERSHIP INTEREST IN SHELBOURNE L.P. HELD BY THE
COMPANY. The partnership interest in Shelbourne L.P. held by the Company
immediately prior to the Effective Time shall continue as an equal limited
partner interest in the Operating Partnership
B-2
<PAGE>
immediately following the Merger, and the Company will thereupon continue as
the limited partner of the Operating Partnership.
SECTION 2.05 COMMON STOCK. Each share of Common Stock outstanding
immediately prior to the Effective Time shall, by virtue of the Merger and
without any further action by the holder thereof, be cancelled and retired
without consideration.
ARTICLE 3
MISCELLANEOUS
SECTION 3.01 TERMINATION AND AMENDMENT. At any time prior to the filing
of the Certificate of Merger pursuant to Section 1.05 hereof, this Agreement may
be terminated by the mutual agreement of the Company and the General Partners.
This Agreement shall not be amended except by an instrument in writing signed on
behalf of each of the parties hereto.
SECTION 3.02 COUNTERPARTS. This Agreement may be executed in one or
more counterparts, all of which shall be considered one and the same agreement,
and shall become effective when one or more counterparts have been signed by
each of the parties and delivered to each of the parties.
SECTION 3.03 GENERAL PARTNER ACTIONS. Following the Effective Time,
Shelbourne GP, as a general partner of the Operating Partnership, shall be
authorized, at such time as it deems appropriate in its full discretion, to
execute, acknowledge, verify deliver, file and record, for and in the name of
the Operating Partnership, and, to the extent necessary, the general and limited
partners of HEP prior to giving effect to the Merger, any and all documents and
instruments, and shall do and perform any and all acts required by applicable
law or which Shelbourne GP deems necessary or advisable in order to effectuate
the Merger.
B-3
<PAGE>
IN WITNESS WHEREOF, the parties to this Agreement have caused this
Agreement to be duly executed as of the date first above written.
SHELBOURNE PROPERTIES III, INC.
By: _________________________
Title:
HIGH EQUITY PARTNERS L.P.-SERIES 88
By: RESOURCES HIGH EQUITY, INC.
managing general partner
By: _______________________
Title:
SHELBOURNE PROPERTIES III L.P.
By: SHELBOURNE PROPERTIES III GP, INC.
general partner
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:
<TABLE>
<CAPTION>
EXHIBIT # DESCRIPTION
<S> <C>
2.1 Form of Merger Agreement (included as Appendix B to the Consent
Solicitation Statement/Prospectus included as Part I of this
Registration Statement).
3.1* Form of Amended and Restated Certificate of Incorporation of
Shelbourne
3.2* Form of Amended and Restated Bylaws of Shelbourne
4.1* Form of Shareholders Rights Agreement
4.2* Certificate of Designations, Preferences and Rights of Series A
Junior Participating Cumulative Preferred Stock
4.3* Form of Temporary Stock Certificate
5.1 Opinion of Rosenman & Colin LLP regarding legality of the shares of
the Common Stock issued
8.1 Opinion of Rosenman & Colin LLP regarding tax matters
10.1* Form of Agreement of Limited Partnership of the Operating Partnership
10.2* Form of Indemnification Agreement between Shelbourne and each of its
directors and executive officers
10.3* Form of Advisory Agreement
10.4 p Appraisal prepared by Cushman & Wakefield of Livonia Plaza
10.5 p Appraisal prepared by Cushman & Wakefield of 568 Broadway Office
Building
10.6 p Appraisal prepared by Cushman & Wakefield of Sunrise Marketplace
10.7 p Appraisals prepared by Cushman & Wakefield of SuperValu Stores
10.8 p Appraisals prepared by Cushman & Wakefield of TMR Warehouses
10.9 p Appraisal prepared by Cushman & Wakefield of Melrose Crossing II
10.10 Valuation Analysis Report, dated August 31, 2000, prepared by
Insignia/ESG, Inc. for High Equity Partners L.P. - Series 88
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
II-2
<PAGE>
Part I of this Registration Statement).
99.2* Final Judgment and Order of Dismissal With Prejudice of Superior
Court of the State of California.
99.3 Stipulation of Settlement of Consolidated Class and Derivative Action
99.4 Continuing Hardship Exemption
</TABLE>
* Previously filed
p Filed in paper pursuant to a continuing hardship exemption
(b) Financial Statement Schedules
The financial statement schedules are incorporated by reference to the
High Equity Partners L.P. - Series 88 Annual Report on Form 10-K for the fiscal
year ended December 31, 1999.
II-3
<PAGE>
ITEM 22. UNDERTAKINGS
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales
are being made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by
Section 10(a) (3) of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events
arising after the effective date of the registration statement
(or the most recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental
change in the information set forth in the registration
statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar
value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form
of prospectus filed with the Commission pursuant to Rule
424(b) if, in the aggregate, the changes in volume and price
represent no more than 20 percent change in the maximum
aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration
statement.
(iii) To include any material information with
respect to the plan of distribution not previously disclosed
in the registration statement or any material change to such
information in the registration statement;"
(2) That, for the purpose of determining any liability
under the Securities Act of 1933, each such post-effective amendment
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a
post-effective amendment any of the securities being registered which
remain unsold at the termination of the offering.
(b) The undersigned registrant hereby undertakes that, for
purposes of determining any liability under the Securities Act of 1933,
each filing of the registrant's annual report pursuant to Section 13(a) or
15(d) of the Securities Exchange Act of 1934 (and, where applicable, each
filing of an employee benefit plan's annual report pursuant to Section
15(d) of the Securities Exchange Act of 1934) that is incorporated by
reference in the registration statement shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
(c) The undersigned registrant hereby undertakes to deliver or
cause to be delivered with the prospectus, to each person to whom the
prospectus is sent or given, the latest annual report, to security holders
that is incorporated by reference in the prospectus and furnished pursuant
to and meeting the requirements of Rule 14a-3 or Rule 14c-3 under the
Securities Exchange Act of 1934; and, where interim financial information
required to be presented by Article 3 of Regulation S-X is not set forth in
the prospectus, to deliver, or cause to be delivered to each person to whom
the prospectus is sent or given, the latest quarterly report that is
specifically incorporated by reference in the prospectus to provide such
interim financial information.
(d) Insofar as indemnification for liabilities arising under
the Securities Act of 1933 may be permitted to directors, officers or
persons controlling the registrant pursuant to the foregoing provisions, or
otherwise, the registrant has been informed that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than
the payment by the registrant of expenses
II-4
<PAGE>
incurred or paid by a director, officer or controlling person of the
registrant in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with
the securities being registered, the registrant will, unless in the opinion
of its counsel the matter has been settled by controlling precedent, submit
to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
(e) (1) The undersigned registrant hereby undertakes as
follows: that prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this registration
statement, by any person or party who is deemed to be an underwriter within
the meaning of Rule 145(c), the issuer undertakes that such reoffering
prospectus will contain the information called for by the applicable
registration form with respect to reofferings by persons who may be deemed
underwriters, in addition to the information called for by the other items
of the applicable form.
(2) The registrant undertakes that every prospectus: (i) that
is filed pursuant to paragraph (1) immediately proceeding, or (ii) that
purports to meet the requirements of Section 10(a) (3) of the Act and
is used in connection with an offering of securities subject to Rule
415, will be filed as a part of an amendment to the registration
statement and will not be used until such amendment is effective, and
that, for purposes of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a
new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof."
(f) The undersigned registrant hereby undertakes to respond to
requests for information that is incorporated by reference into the
prospectus pursuant to Item 4, 10(b), 11, or 13 of this form, within one
business day of receipt of such request, and to send the incorporated
documents by first class mail or other equally prompt means. This includes
information contained in documents filed subsequent to the effective date
of the registration statement through the date of responding to the
request.
(g) The undersigned registrant hereby undertakes to supply by
means of a post-effective amendment all information concerning a
transaction, and the company being acquired involved therein, that was not
the subject of and included in the registration statement when it became
effective.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has
duly caused this Amendment No. 3 to the Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of New
York, New York on September 15, 2000.
Shelbourne Properties III, Inc.
By: /s/ Michael L. Ashner
-------------------------------------------
Michael L. Ashner
President and Chairman of the Board
-----------------
Pursuant to the requirements of the Securities Act of 1933, this
Amendment No. 3 to Registration Statement on Form S-4 of Shelbourne Properties
III, Inc. has been signed by the following persons in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
<S> <C> <C>
/s/ Michael L. Ashner
Michael L. Ashner President September 15, 2000
/s/ Peter Braverman *
Peter Braverman Vice President and Director September 15, 2000
/s/ David T. Hamamoto *
David T. Hamamoto Director September 15, 2000
/s/ David G. King , Jr.*
David G. King, Jr. Vice President and Director September 15, 2000
/s/ Robert Martin *
Robert Martin Director September 15, 2000
/s/ W. Edward Scheetz *
W. Edward Scheetz Director September 15, 2000
/s/ Carolyn Tiffany *
Carolyn Tiffany Vice President and Treasurer September 15, 2000
</TABLE>
-------------
* BY MICHAEL L. ASHNER, ATTORNEY-IN-FACT
II-6
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT # DESCRIPTION
<S> <C>
2.1 Form of Merger Agreement (included as Appendix B to the Consent
Solicitation Statement/Prospectus included as Part I of this
Registration Statement).
3.1* Form of Amended and Restated Certificate of Incorporation of
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
4.3* Form of Temporary Stock Certificate
5.1 Opinion of Rosenman & Colin LLP regarding legality of the shares of
8.1 Opinion of Rosenman & Colin LLP regarding tax matters
10.1* Form of Agreement of Limited Partnership of the Operating Partnership
10.2* Form of Indemnification Agreement between Shelbourne and each of its
10.3* Form of Advisory Agreement
10.4 P Appraisal prepared by Cushman & Wakefield of Livonia Plaza
10.5 P Appraisal prepared by Cushman & Wakefield of 568 Broadway Office
10.6 P Appraisal prepared by Cushman & Wakefield of Sunrise Marketplace
10.7 P Appraisals prepared by Cushman & Wakefield of SuperValu Stores
10.8 P Appraisals prepared by Cushman & Wakefield of TMR Warehouses
10.9 P Appraisal prepared by Cushman & Wakefield of Melrose Crossing II
10.10 Valuation Analysis Report, dated August 31, 2000, prepared by
23.1 Consent of Rosenman & Colin LLP
23.2 Consent of Deloitte & Touche LLP
<PAGE>
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
99.2* Final Judgment and Order of Dismissal With Prejudice of Superior
99.3 Stipulation of Settlement of Consolidated Class and Derivative Action
99.4 Continuing Hardship Exemption
</TABLE>
* Previously filed
P Filed in paper pursuant to a continuing hardship exemption
