<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 27, 1999
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
CORNERSTONE PROPERTIES INC.
(Exact Name of Registrant as Specified in its Charter)
<TABLE>
<S> <C>
NEVADA 74-2170858
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
</TABLE>
TOWER 56, 126 EAST 56TH STREET
NEW YORK, NEW YORK 10022
(212) 605-7100
(Address, including zip code, and telephone number, including
area code, of Registrant's principal executive offices)
JOHN S. MOODY
CHIEF EXECUTIVE OFFICER
CORNERSTONE PROPERTIES INC.
TOWER 56, 126 EAST 56TH STREET
NEW YORK, NEW YORK 10022
(212) 605-7100
(Name, address, including zip code, and telephone number,
including area code of agent for service)
------------------------------
COPY TO:
JOHN J. KELLEY III
KING & SPALDING
191 PEACHTREE STREET, N.E.
ATLANTA, GEORGIA 30303-1763
(404) 572-4600
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
From time to time after the effective date of this Registration Statement.
------------------------------
If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. / /
If any securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended (the "Securities Act"), other than securities offered only in
connection with dividend or interest reinvestment plans, check the following
box. /X/
If this 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(c)
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. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
------------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
NUMBER OF PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF CLASS OF SECURITIES TO BE SHARES TO BE OFFERING PRICE AGGREGATE OFFERING AMOUNT OF
REGISTERED REGISTERED(1) PER SHARE(2) PRICE(2) REGISTRATION FEE
<S> <C> <C> <C> <C>
Common Stock, without par value............ 11,594,203 $15.875 $184,057,973 $51,169
</TABLE>
(1) Does not include 34,493,192 shares of Common Stock previously registered on
Registration Statement No. 333-47149 and to 34,364,428 shares of which the
Prospectus relating to this Registration Statement also relates. A
registration fee of $181,250.94 was previously paid in connection with the
registration of such shares.
(2) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(c) under the Securities Act.
------------------------------
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 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE
ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY
DETERMINE.
PURSUANT TO RULE 429 UNDER THE SECURITIES ACT, THE PROSPECTUS RELATING TO
THIS REGISTRATION STATEMENT IS A COMBINED PROSPECTUS RELATING ALSO TO
REGISTRATION STATEMENT NO. 333-47149 PREVIOUSLY FILED BY THE REGISTRANT ON FORM
S-3 AND DECLARED EFFECTIVE ON MARCH 10, 1998.
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<PAGE>
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. THE
SELLING STOCKHOLDERS MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION
STATEMENT RELATING TO THESE SECURITIES HAS BEEN DECLARED EFFECTIVE BY THE
SECURITIES AND EXCHANGE COMMISSION. THIS PROSPECTUS IS NEITHER AN OFFER TO SELL
NOR A SOLICITATION OF AN OFFER TO BUY THESE SECURITIES IN ANY JURISDICTION WHERE
SUCH OFFER OR SALE IS UNLAWFUL.
<PAGE>
SUBJECT TO COMPLETION, DATED APRIL 27, 1999
PROSPECTUS
45,958,631 SHARES
CORNERSTONE PROPERTIES INC.
COMMON STOCK
------------------
Cornerstone Properties Inc., a Nevada corporation, is a self-administered
equity real estate investment trust that manages and conducts its business
through Cornerstone Properties Limited Partnership, a Delaware limited
partnership. The persons listed as our selling stockholders in this Prospectus
are offering and selling up to 45,958,631 shares of our common stock. All net
proceeds from the sale of the shares of common stock offered by this prospectus
will go to the selling stockholders. We will not receive any proceeds from such
sales.
The selling stockholders may offer their shares of common stock through
public or private transactions, in the over-the-counter markets, on any
exchanges on which our common stock is traded at the time of sale, at prevailing
market prices or at privately negotiated prices. The shares may be sold directly
or through agents or broker-dealers acting as principal or agent, or in block
trades or through one or more underwriters on a firm commitment or best efforts
basis. The selling stockholders may engage underwriters, brokers, dealers or
agents, who may receive commissions or discounts from the selling stockholders.
We will pay substantially all of the expenses incident to the registration of
such shares, except for the selling commissions.
The selling stockholders and any underwriters, agents or broker-dealers that
participate with the selling stockholders in the distribution of the common
stock may be deemed to be "underwriters" within the meaning of the Securities
Act of 1933, and any commissions received by them and any profit on the resale
of the common stock may be deemed to be underwriting commissions or discounts
under such Act.
Our common stock is listed on the New York Stock Exchange under the ticker
symbol "CPP." The closing price of our common stock on April 26, 1999, was $16
per share.
------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR HAS
DETERMINED IF THIS PROSPECTUS IS ADEQUATE OR ACCURATE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
The date of this Prospectus is , 1999.
<PAGE>
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and other
information with the Securities and Exchange Commission (the "Commission"). You
may read and copy any document we file at the Commission's public reference room
located at 450 Fifth Street, N.W., Washington, D.C. 20549, or at its Regional
Offices located at 7 World Trade Center, Suite 1300, New York, New York 10048,
and 500 West Madison Street, Suite 1400, Chicago, Illinois 60661, and copies of
such materials can be obtained from the Public Reference Section of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates. You may call the Commission at 1-800-732-0330 for further information on
the operation of such public reference rooms. You also can request copies of
such documents, upon payment of a duplicating fee, by writing to the Commission
at 450 Fifth Street, N.W., Washington, D.C. 20549 or obtain copies of such
documents from the Commission's web site at http://www.sec.gov.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Commission allows us to "incorporate by reference" the information we
file with them, which means that we can disclose important information to you by
referring you to those documents. The information we incorporate by reference is
considered to be part of this Prospectus and information that we file later with
the Commission automatically will update and supersede such information. We
incorporate by reference the documents listed below and any future filings we
make with the Commission under Sections 13(a), 13(c), 14 or 15(d) of the
Securities Exchange Act of 1934, as amended. These documents contain important
business information about our company and its financial condition.
1. Our Annual Report on Form 10-K for the year ended December 31, 1998
(File No. 1-12861).
2. Our Current Report on Form 8-K/A, as filed with the Commission on March
1, 1999.
3. Our Current Report on Form 8-K, as filed with the Commission on March
24, 1999.
4. Our Registration Statement on Form 8-A, which incorporates by reference
a description of our common stock from the final prospectus included in
our Registration Statement on Form S-3 (File No. 333-18303), as filed
with the Commission on March 11, 1997.
You may request a copy of these filings (including exhibits to such filings
that we have specifically incorporated by reference in such filings), at no
cost, by writing or telephoning our executive offices at the following address:
Cornerstone Properties Inc.
Tower 56, 126 East 56th Street
New York, New York 10022
Attention: Secretary
(212) 605-7100
You should rely only on the information provided or incorporated by
reference in this Prospectus or any related supplement. We have not authorized
anyone else to provide you with different information. The selling stockholders
will not make an offer of these shares in any state that prohibits such an
offer. You should not assume that the information in this prospectus or any
supplement is accurate as of any date other than the date on the cover page of
such documents. ALL REFERENCES IN THIS PROSPECTUS TO "COMMON STOCK" REFER TO OUR
COMMON STOCK, WITHOUT PAR VALUE.
2
<PAGE>
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Information contained in or incorporated by reference into this prospectus
and any accompanying prospectus supplement contains "forward-looking statements"
within the meaning of Section 27A of the Securities Act. We intend the
forward-looking statements to be covered by the safe harbor provisions for
forward-looking statements contained in Section 27A of the Securities Act. These
forward-looking statements relate to, without limitation, future economic
performance, our plans and objectives for future operations and projections of
revenue and other financial items, and can be identified by the use of
forward-looking terminology such as "may," "will," "should," "expect,"
"anticipate," "estimate" or "continue" or the negative thereof or other
variations thereon or comparable terminology. The cautionary statements
incorporated by reference from our Annual Report on Form 10-K under the caption
"Risk Factors" and other similar statements contained in this prospectus or any
accompanying prospectus supplement identify important factors with respect to
such forward-looking statements, including certain risks and uncertainties, that
could cause actual results to differ materially from those in such
forward-looking statements.
INFORMATION ABOUT THE COMPANY
We, Cornerstone Properties Inc., a Nevada corporation, are a
self-administered equity real estate investment trust, or "REIT." We own Class A
office properties in prime locations in major suburban markets and prime central
business districts. Cornerstone owns all of its properties and conducts all of
its business through Cornerstone Properties Limited Partnership, a Delaware
limited partnership. Cornerstone, through its subsidiaries, at April 1, 1999,
owned 96 Class A office properties throughout the United States totaling
approximately 21 million square feet.
Our strategy is to own Class A office properties in prime central business
locations and major suburban office markets in U.S. metropolitan areas. Class A
properties are generally considered to be those that have the most favorable
locations and physical features, attract higher rents and experience the highest
tenant retention rates within their markets. Consistent with our strategy of
growth through acquisitions, in December 1998, we acquired 69 Class A office
properties, aggregating approximately 9.6 million square feet, from William
Wilson & Associates and related entities. In that transaction, we also acquired
the development, construction management, property management and leasing and
tenant improvement services businesses of William Wilson & Associates.
We were incorporated under the laws of the State of Nevada in May 1981. Our
executive offices are located at 126 East 56th Street, New York, NY 10022. Our
general information telephone number is (212) 605-7100.
USE OF PROCEEDS
We are registering the shares of common stock offered by this prospectus for
the account of the selling stockholders identified in the section of this
prospectus entitled "Selling Stockholders." All of the net proceeds from the
sale of the common stock will go to the selling stockholders who offer and sell
their shares of such stock. We will not receive any part of the proceeds form
the sale of such shares.
3
<PAGE>
SELLING STOCKHOLDERS
On October 27, 1997, Cornerstone acquired interests in nine Class A office
properties comprising approximately 4.5 million rentable square feet in
Alexandria, Virginia (three Properties), Atlanta (two Properties), Boston (two
Properties), Charlotte and Washington, D.C., as well as an undeveloped parcel of
land in Chicago (collectively the "PGGM Portfolio"). As consideration for the
acquisition of the PGGM Portfolio, Stichting Pensioenfonds Voor de Gezondheid,
Geestelijke en Maatschappelijke Belangen ("PGGM") and its wholly owned
subsidiary, Dutch Institutional Holding Company, Inc. ("DIHC"), together
received approximately $1.06 billion, consisting of 34,185,500 shares of common
stock, approximately $260 million in cash and $250 million in promissory notes.
The Amended and Restated Registration Rights and Voting Agreement among
Cornerstone, DIHC and PGGM provides that as long as PGGM and DIHC and their
affiliates own in the aggregate 5% or more of the issued and outstanding shares
of common stock, Cornerstone will take all action necessary to ensure that two
members of the Company's Board are individuals designated by PGGM. Pursuant to
their rights under this agreement, PGGM has appointed two directors to the
Board. On December 16, 1998, PGGM purchased from Cornerstone an additional
11,594,203 shares of common stock for an aggregate purchase price of $200
million to fund a portion of the cash consideration of the William Wilson &
Associates acquisition. On December 31, 1998, DIHC distributed its shares of
Cornerstone common stock to PGGM in connection with the purchase by WCP
Services, Inc. of all of the outstanding capital stock of DIHC.
On January 5, 1998, Cornerstone purchased the participation rights in the
cash flow and residual value of Tower 56 from Mazal American Partners and others
for 307,692 shares of common stock. As a result, all cash flow and the residual
value of Tower 56 will now inure to Cornerstone.
The following table sets forth certain information with respect to the
selling stockholders as of April 26, 1999, including the number of shares
offered by each selling stockholder, the number of shares beneficially owned by
each selling stockholder before the offering and the percentage of ownership of
the outstanding shares of common stock represented by the holdings of each
selling stockholder before the offering. The selling stockholders may from time
to time offer and sell pursuant to this Prospectus any or all of the shares, and
there can be no assurance that all or any of the shares offered hereby will be
sold. If any are sold, such selling stockholder will receive all of the net
proceeds from the sale of its respective shares offered hereby.
<TABLE>
<CAPTION>
NUMBER OF
SHARES OWNED NUMBER OF
PRIOR TO PERCENTAGE OF SHARES WHICH
NAME OFFERING OUTSTANDING SHARES MAY BE OFFERED HEREBY
- ---------------------------------------------------- --------------- --------------------- ---------------------
<S> <C> <C> <C>
PGGM................................................ 45,779,703 35.7% 45,779,703
Mazal American Partners............................. 178,928 * 178,928
</TABLE>
- ------------------------
* Less than 1%.
4
<PAGE>
PLAN OF DISTRIBUTION
Any of the selling stockholders may from time to time, in one or more
transactions, sell all or a portion of the common stock in such transactions at
prices then prevailing or related to the then current market price or at
negotiated prices. The offering price of the shares from time to time will be
determined by the selling stockholders and, at the time of such determination,
may be higher or lower than the market price of the shares on the NYSE. In
connection with an underwritten offering, underwriters or agents may receive
compensation in the form of discounts, concessions or commissions from a selling
stockholder or from purchasers of shares for whom they may act as agents, and
underwriters may sell shares to or through dealers, and such dealers may receive
compensation in the form of discounts, concessions or commissions from the
underwriters and/or commissions from the purchasers for whom they may act as
agents. Under agreements that may be entered into by Cornerstone, underwriters,
dealers and agents who participate in the distribution of shares may be entitled
to indemnification by Cornerstone against certain liabilities, including
liabilities under the Securities Act, or to contribution with respect to
payments which such underwriters, dealers or agents may be required to make in
respect thereof. The shares may be sold directly or through broker-dealers
acting as principal or agent, or pursuant to a distribution by one of more
underwriters on a firm commitment or best-efforts basis.
The selling stockholders, or their pledgees, donees, transferees or other
successors in interest, may offer and sell their shares of common stock in the
following manner:
- on the New York Stock Exchange, Frankfurt Stock Exchange, Dusseldorf Stock
Exchange or other exchanges on which the common stock is listed at the
time of sale;
- in the over-the-counter market or otherwise at prices and at terms then
prevailing or at prices related to the then current market price;
- in underwritten offerings;
- in privately negotiated transactions;
- in a block trade in which the broker or dealer so engaged will attempt to
sell the shares as agent, but may position and resell a portion of the
block as principal to facilitate the transaction;
- a broker or dealer may purchase as principal and resell such shares for
its own account pursuant to this prospectus;
- an exchange distribution in accordance with the rules of the exchange; or
- ordinary brokerage transactions and transactions in which the broker
solicits purchasers.
The selling stockholders may accept and, together with any agent of the
selling stockholders, reject in whole or in part any proposed purchase of the
shares of common stock offered by this prospectus. Cornerstone will not receive
any proceeds from the offering by the selling stockholders.
To the extent required, we will set forth in a prospectus supplement
accompanying this Prospectus, or, if appropriate, in a post-effective amendment,
the following information: (i) the amount of the shares of common stock to be
sold; (ii) purchase prices; (iii) public offering prices; (iv) the names of any
agents, dealers or underwriters; and (v) any applicable commissions or discounts
with respect to a particular offer.
We have not registered or qualified the shares of common stock offered by
this prospectus under the laws of any country, other than the United States. In
certain states, the selling stockholders may not offer or sell their shares of
common stock unless (i) we have registered or qualified such shares for sale in
such states or (ii) we have complied with an available exemption from
registration or qualification. Also, in certain states, to comply with such
state securities laws, the selling stockholders can offer and sell their shares
of common stock only through registered or licensed brokers or dealers.
We will pay substantially all of the expenses related to the registration of
the shares of common stock offered by this prospectus. The selling stockholders
will pay any sales commissions or other seller's compensation applicable to such
transactions.
5
<PAGE>
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
THE FOLLOWING IS A GENERAL SUMMARY OF THE MATERIAL FEDERAL INCOME TAX
CONSIDERATIONS ASSOCIATED WITH AN INVESTMENT IN THE COMMON STOCK OFFERED HEREBY.
KING & SPALDING, COUNSEL TO CORNERSTONE, HAS REVIEWED THE FOLLOWING DISCUSSION
AND IS OF THE OPINION THAT IT FAIRLY SUMMARIZES THE FEDERAL INCOME TAX
CONSIDERATIONS THAT ARE LIKELY TO BE MATERIAL TO A HOLDER OF COMMON STOCK. THE
FOLLOWING DISCUSSION IS NOT EXHAUSTIVE OF ALL POSSIBLE TAX CONSIDERATIONS AND IS
NOT TAX ADVICE. MOREOVER THIS SUMMARY DOES NOT DEAL WITH ALL TAX ASPECTS THAT
MIGHT BE RELEVANT TO A PARTICULAR PROSPECTIVE STOCKHOLDER IN LIGHT OF HIS
PERSONAL CIRCUMSTANCES, NOR DOES IT DEAL WITH PARTICULAR TYPES OF STOCKHOLDERS
THAT ARE SUBJECT TO SPECIAL TREATMENT UNDER THE INTERNAL REVENUE CODE OF 1986,
AS AMENDED (THE "CODE"), SUCH AS INSURANCE COMPANIES, FINANCIAL INSTITUTIONS AND
BROKER-DEALERS. THE CODE PROVISIONS GOVERNING THE FEDERAL INCOME TAX TREATMENT
OF REITS ARE HIGHLY TECHNICAL AND COMPLEX, AND THIS SUMMARY IS QUALIFIED IN ITS
ENTIRELY BY THE APPLICABLE CODE PROVISIONS, RULES AND TREASURY REGULATIONS
PROMULGATED THEREUNDER, AND ADMINISTRATIVE AND JUDICIAL INTERPRETATIONS THEREOF.
THE FOLLOWING DISCUSSION AND THE OPINION OF KING & SPALDING ARE BASED ON CURRENT
LAW, WHICH COULD BE CHANGED AT ANY TIME, POSSIBLY RETROACTIVELY.
EACH PROSPECTIVE PURCHASER IS URGED TO CONSULT HIS OWN TAX ADVISOR WITH
RESPECT TO SUCH PURCHASER'S SPECIFIC FEDERAL, STATE, LOCAL, FOREIGN AND OTHER
TAX CONSEQUENCES OF THE PURCHASE, HOLDING AND SALE OF COMMON STOCK OF
CORNERSTONE.
FEDERAL INCOME TAXATION OF CORNERSTONE
Cornerstone has made an election to be taxed as a REIT under the Code and
believes that it has met the requirements for qualification and taxation as a
REIT. Cornerstone intends to continue to operate in such a manner as to continue
to so qualify, but no assurance can be given that it has qualified or will
remain qualified as a REIT. Cornerstone has not requested and does not intend to
request a ruling from the Internal Revenue Service (the "IRS") as to its status
as a REIT. However, in the opinion of King & Spalding, counsel to Cornerstone,
Cornerstone's organization and method of operation are such that it met the
requirements for qualification and taxation as a REIT since its taxable year
ended December 31, 1993 (which counsel believes is the earliest taxable year
which is within the normal period for federal tax audit), and Cornerstone's
method of operation should enable it to continue to so qualify in subsequent
taxable years. Investors should be aware, however, that opinions of counsel are
not binding upon the IRS or any court. King & Spalding's opinion as to
Cornerstone's REIT status is based on various assumptions and is conditioned
upon certain representations made by Cornerstone as to factual matters,
including representations regarding the nature of Cornerstone's properties and
the future conduct and method of operation of its business, and it cannot be
relied upon if those assumptions and representations later prove incorrect.
It must be emphasized that Cornerstone's qualification and taxation as a
REIT depends upon its ability to meet, on a continuing basis through actual
annual operating results, distribution levels, and stock ownership, the various
qualification tests imposed under the Code that are discussed below. No
assurance can be given that the actual results of Cornerstone's operations for
any particular taxable year will satisfy such requirements, and King & Spalding
will not review Cornerstone's compliance with such requirements on a continuing
basis. For a discussion of the tax consequences of failing to qualify as a REIT,
see "--Failure to Qualify," below.
If Cornerstone qualifies for taxation as a REIT, it generally will not be
subject to federal corporate income tax on net income that it currently
distributes to stockholders. This treatment substantially eliminates the "double
taxation" (i.e., taxation at both the corporate and shareholder levels) that
generally results from investment in a corporation. Notwithstanding its REIT
election, however, Cornerstone will be subject to federal income tax in the
following circumstances. First, Cornerstone will be taxed at regular corporate
rates on any undistributed taxable income, including undistributed net capital
gains. Second, under certain circumstances, Cornerstone may be subject to the
"alternative
6
<PAGE>
minimum tax" on its undistributed items of tax preference. Third, if Cornerstone
has (i) net income from the sale or other disposition of "foreclosure property"
(which is, in general, property acquired by foreclosure or otherwise on default
of a loan secured by the property) that is held primarily for sale to customers
in the ordinary course of business or (ii) other non-qualifying income from
foreclosure property, it will be subject to tax at the highest corporate rate on
such income. Fourth, if Cornerstone has net income from "prohibited
transactions" (which are, in general, certain sales or other dispositions of
property (other than foreclosure property) held primarily for sale to customers
in the ordinary course of business), such income will be subject to a 100% tax.
Fifth, if Cornerstone should fail to satisfy the 75% gross income test or the
95% gross income test (as discussed below), and has nonetheless maintained its
qualification as a REIT because certain other requirements have been met, it
will be subject to a 100% tax on the product of (a) the gross income
attributable to the greater of the amount by which Cornerstone fails the 75% or
95% test, and (b) a fraction intended to reflect Cornerstone's profitability.
Sixth, if Cornerstone should fail to distribute during each calendar year at
least the sum of (i) 85% of its REIT ordinary income for such year, (ii) 95% of
its REIT capital gain net income for such year (other than retained long-term
capital gain Cornerstone elects to treat as having been distributed to
stockholders), and (iii) any undistributed taxable income from prior years,
Cornerstone would be subject to a non-deductible 4% excise tax on the excess of
such required distribution over the amounts actually distributed. Seventh, if
Cornerstone acquires any asset from a C corporation (i.e., a corporation
generally subject to full corporate level tax) in a transaction in which the
basis of the asset in Cornerstone's hands is determined by reference to the
basis of the asset (or any other asset) in the hands of the C corporation, and
Cornerstone recognizes gain on the disposition of such asset during the 10-year
period (the "Recognition Period") beginning on the date on which such asset was
acquired by Cornerstone, then, to the extent of such asset's "Built-in Gain"
(i.e.., the excess of the fair market value of such property at the time of
acquisition by Cornerstone over the adjusted basis of such asset at such time),
such gain will be subject to tax at the highest regular corporate rate
applicable (as provided in Regulations that have been announced but not yet
promulgated (the "Built-in Gain Rules")).
REQUIREMENTS FOR QUALIFICATION
To qualify as a REIT, Cornerstone must elect to be so treated and must meet
the requirements, discussed below, relating to Cornerstone's organization,
sources of income, nature of assets and distributions of income to stockholders.
ORGANIZATIONAL REQUIREMENTS
The Code defines a REIT as a corporation, trust or association: (i) that is
managed by one or more directors or trustees; (ii) the beneficial ownership of
which is evidenced by transferable shares or by transferable certificates of
beneficial interest; (iii) that would be taxable as a domestic corporation, but
for Sections 856 through 859 of the Code; (iv) that is neither a financial
institution nor an insurance company subject to certain provisions of the Code;
(v) the beneficial ownership of which is held 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 (the "100 Shareholder Rule"); (vi) not more than 50% in
value of the outstanding stock of which is owned, directly or indirectly, by
five or fewer individuals (as defined in the Code to include certain entities)
during the last half of each taxable year (the "5/50 Rule"); (vii) that makes an
election to be a REIT (or has made such election for a previous taxable year)
and satisfies all relevant filing and other administrative requirements
established by the IRS that must be met in order to elect and to maintain REIT
status; (viii) that uses a calendar year for federal income tax purposes; and
(ix) that meets certain other tests, described below, regarding the nature of
its income and assets.
7
<PAGE>
For purposes of the 5/50 Rule, an unemployment compensation benefits plan, a
private foundation or a portion of a trust permanently set aside or used
exclusively for charitable purposes generally is considered an individual. A
trust that is a qualified trust under Section 401(a) of the Code, however,
generally is not considered an individual and the beneficiaries of such trust
are treated as holding shares of a REIT in proportion to their actuarial
interests in such trust for purposes of the 5/50 Rule. For taxable years
beginning on or after January 1, 1998, a REIT will be treated as having
satisfied the 5/50 Rule if it complies with certain Regulations for ascertaining
the ownership of its stock and if it did not know (or after the exercise of
reasonable diligence would not have known) that its stock was sufficiently
closely held to cause it to violate the 5/50 Rule. See "ANNUAL RECORD KEEPING
REQUIREMENTS," below.
In order to protect Cornerstone from a concentration of ownership of its
stock that would cause Cornerstone to fail the 5/50 Rule or the 100 Shareholder
Rule, Cornerstone's Articles of Incorporation provide that no holder is
permitted to own, either actually or constructively under the applicable
attribution rules of the Code, more than 6% (in value) of the aggregate
outstanding shares of all classes of stock of Cornerstone (with certain
exceptions). In addition, no holder is permitted to own, either actually or
constructively under the applicable attribution rules of the Code, any shares of
any class of Cornerstone's stock if such ownership would cause more than 50% in
value of Cornerstone's outstanding stock to be owned by five or fewer
individuals or would result in Cornerstone's stock being beneficially owned by
fewer than 100 persons (determined without reference to any rule of
attribution).
OPERATING ENTITIES
Cornerstone has owned and operated a number of properties through wholly
owned corporate subsidiaries. Section 856(i) of the Code provides that a
corporation that is a "qualified REIT subsidiary" shall not be treated as a
separate corporation, and all assets, liabilities and items of income, deduction
and credit of a "qualified REIT subsidiary" shall be treated as assets,
liabilities and items of income, deduction and credit of the REIT. A "qualified
REIT subsidiary" is a corporation, all of the capital stock of which is owned by
the REIT. Thus, in applying the requirements described herein, Cornerstone's
"qualified REIT subsidiaries" are ignored, and all assets, liabilities and items
of income, deduction and credit of such subsidiaries are treated as assets,
liabilities and items of income, deduction and credit of Cornerstone.
All of Cornerstone's assets are held by, and all of its operations are
conducted through, Cornerstone Properties Limited Partnership (the "Operating
Partnership"). Cornerstone is the sole general partner of the Operating
Partnership, and as of March 31, 1999, Cornerstone directly or indirectly owned
in the aggregate approximately 86.3% of the outstanding common Units in its
capacity both as the sole general partner and as a limited partner, and
Cornerstone owned all of the preferred partnership units. The remaining Units
are held by other limited partners. In the case of a REIT that is a partner in a
partnership, the Regulations provide that the REIT will be deemed to own its
proportionate share of the assets of the partnership (based on the REIT's
capital interest in the partnership) and will be deemed to be entitled to the
gross income of the partnership attributable to such share. In addition, the
character of the assets and gross income of the partnership will retain the same
character in the hands of the REIT for purposes of Section 856 of the Code,
including satisfying the gross income and asset tests (as discussed below).
Thus, Cornerstone's proportionate share of the assets, liabilities and items of
income of the Operating Partnership, and any other partnerships Cornerstone may
hold an interest in directly or indirectly through the Operating Partnership,
shall be treated as assets, liabilities and items of Cornerstone for purposes of
applying the requirements described herein.
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INCOME TESTS
To maintain its qualification as a REIT, Cornerstone must satisfy certain
annual gross income requirements. First, at least 75% of Cornerstone's gross
income (excluding gross income from prohibited transactions) for each taxable
year must consist of defined types of income derived directly or indirectly from
investments relating to real property or mortgages on real property (including
"rents from real property" and, in certain circumstances, interest) or certain
types of temporary investment income. Second, at least 95% of Cornerstone's
gross income (excluding gross income from prohibited transactions) for each
taxable year must be derived from such real property or temporary investments,
dividends, interest and gain from the sale or disposition of stock or
securities, or from any combination of the foregoing. Third, for Cornerstone's
taxable years beginning prior to January 1, 1998, not more than 30% of
Cornerstone's gross income (including gross income from prohibited transactions)
for each taxable year may be gain from the sale or other disposition of (i)
stock or securities held for less than one year, (ii) dealer property that is
not foreclosure property and (iii) certain real property held for less than four
years (apart from involuntary conversions and sales of foreclosure property).
Rents received or deemed received by Cornerstone will qualify as "rents from
real property" in satisfying the gross income requirements described above only
if several conditions are met. First, the amount of rent generally must not be
based in whole or in part on the income or profits of any person. However, an
amount received or accrued generally will not be excluded from the term "rents
from real property" solely by reason of being based on a fixed percentage or
percentages of receipts or sales. Second, amounts received from a tenant will
not qualify as "rents from real property" if Cornerstone, or an owner of 10% or
more of Cornerstone, directly or constructively is deemed to own 10% or more of
the ownership interests in the tenant (a "Related Party Tenant"). Third, if rent
attributable to personal property, leased in connection with a lease of real
property, is greater than 15% of the total rent received under the lease, then
the portion of rent attributable to such personal property will not qualify as
"rents from real property." Finally, for rents received to qualify as "rents
from real property," Cornerstone 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 Cornerstone derives no income. The "independent contractor" requirement,
however, does not apply to the extent that the services provided by Cornerstone
are "usually or customarily rendered in connection with the rental of space for
occupancy only," which are services of a type that a tax-exempt organization can
provide to its tenants without causing its rental income to be unrelated
business taxable income ("UBTI"). In addition, beginning with Cornerstone's 1998
taxable year, the "independent contractor" requirement no longer applies to
noncustomary services provided by Cornerstone where the annual value of such
services does not exceed 1% of the gross income derived from the property with
respect to which the services are provided (the "1% DE MINIMIS exception"). For
this purpose, such services may not be valued at less than 150% of Cornerstone's
direct cost of providing the services.
Cornerstone has not, and does not anticipate that it will in the future, (i)
charge rent 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 or percentages of
receipts or sales consistent with the rule described above), (ii) derive rent
attributable to personal property leased in connection with real property that
exceeds 15% of the total rents, (iii) derive rent attributable to a Related
Party Tenant, or (iv) provide any noncustomary services to tenants other than
through qualifying independent contractors, except as permitted by the 1% DE
MINIMIS exception or to the extent that the amount of resulting nonqualifying
income would not cause Cornerstone to fail to satisfy the 95% and 75% gross
income tests.
The Operating Partnership acquired a hotel in California in December 1998,
and the gross income from the operation of the hotel constitutes nonqualifying
income for purposes of the 95% and 75% gross income tests. Cornerstone currently
intends to continue to derive income from the operation of the hotel (rather
than lease it to a third-party lessee) to the extent the gross income therefrom
will not
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cause Cornerstone to fail the 95% or 75% gross income test. Cornerstone may
determine, however, to lease the hotel to a third-party lessee in order to
derive qualifying "rents from real property" from the hotel. Alternatively,
Cornerstone may decide to contribute the hotel to a corporate subsidiary of the
Operating Partnership, subject to the limits imposed by the 5% asset test and
the 10% voting securities test (which tests are described below). The net income
from the hotel derived by the corporate subsidiary would be subject to
corporate-level tax (to the extent not sheltered by deductions or losses), but
the gross income from the hotel would no longer be taken into account in
determining whether Cornerstone meets the 95% or 75% gross income test (although
any dividends received by the Operating Partnership from the corporate
subsidiary would be qualifying income under the 95% gross income test, but not
under the 75% gross income test).
If Cornerstone fails to satisfy one or both of the 75% or 95% gross income
tests for any taxable year, it may nevertheless qualify as a REIT for such year
if it is entitled to relief under certain provisions of the Code. These relief
provisions generally will be available if Cornerstone's failure to meet such
tests was due to reasonable cause and not due to willful neglect, Cornerstone
attaches a schedule of the sources of its income to its return and any incorrect
information on the schedules was not due to fraud with intent to evade tax. It
is not possible, however, to state whether in all circumstances Cornerstone
would be entitled to the benefit of these relief provisions. Even if these
relief provisions were to apply, a tax would be imposed with respect to the
excess net income.
ASSET TESTS
At the close of each quarter of its taxable year, Cornerstone must satisfy
two tests relating to the nature of its assets. First, at least 75% of the value
of Cornerstone's total assets must be represented by cash or cash items
(including certain receivables), government securities, "real estate assets" or,
in cases where Cornerstone raises new capital through stock or long-term (at
least five years) debt offerings, temporary investments in stock or debt
instruments during the one-year period following Cornerstone's receipt of such
capital (the "75% asset test"). The term "real estate asset" includes interests
in real property, interests in mortgages on real property to the extent the
mortgage balance does not exceed the value of the associated real property, and
shares of other REITs. For purposes of the 75% asset test, the term "interest in
real property" includes an interest in land and improvements thereon, such as
buildings or other inherently permanent structures (including items that are
structural components of such buildings or structures), a leasehold in real
property and an option to acquire real property (or a leasehold in real
property). Second, of the investments not included in the 75% asset class, the
value of any one issuer's debt and equity securities owned by Cornerstone (other
than Cornerstone's interest in the Operating Partnership, any other entity
classified as a partnership for federal income tax purposes, or the stock of a
qualified REIT subsidiary) may not exceed 5% of the value of Cornerstone's total
assets (the "5% asset test"), and Cornerstone may not own more than 10% of any
one issuer's outstanding voting securities (except for Cornerstone's ownership
interest in the Operating Partnership, any other entity that is classified as a
partnership for federal income tax purposes, or the stock of a qualified REIT
subsidiary) (the "10% voting securities test").
The Operating Partnership owns 100% of the nonvoting stock and 1% of the
voting stock of WCP Services, Inc. ("WCP Services"), representing 95% of the
equity value of the stock of WCP Services. WCP Services was formed in December
of 1998 to engage in certain management and construction activities with respect
to properties owned by unrelated third parties and to perform certain services
with respect to tenant build-out work at Cornerstone's properties. Cornerstone's
indirect interest in the securities of WCP Services will not violate the 10%
voting securities test because the Operating Partnership owns less than 10% of
the voting stock of WCP Services. Further, Cornerstone believes that its
ownership of an indirect interest in the securities of WCP Services will not
violate the 5% asset test because the value of Cornerstone's interest in WCP
Services is substantially less than 5% of the value of Cornerstone's total
assets. No independent appraisals have been or will be obtained of the
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value of the stock of WCP Services. Although Cornerstone plans to take steps to
ensure that it satisfies the 5% asset test for any quarter in which it acquires
securities of WCP Services or other property, there can be no assurance that
such steps always will be successful or will not require a reduction in the
Operating Partnership's overall interest in WCP Services.
The Clinton Administration's budget proposal announced on February 1, 1999
includes a proposal to amend the 10% voting securities test by prohibiting a
REIT from owning more than 10% of the vote OR VALUE of any issuer (a
"non-qualified REIT subsidiary") other than a qualified REIT subsidiary or
another REIT. As proposed, the measure would take effect after the date of
enactment. The proposal would provide an exception to the new 10% vote-or-value
test, and also to the 5% asset test under current law, for "taxable REIT
subsidiaries." One kind of taxable REIT subsidiary, to be called a "qualified
business subsidiary," would be allowed to undertake non-tenant related
activities that would generate nonqualifying income for a REIT, such as
third-party management and development. Another kind of taxable REIT subsidiary,
to be called a "qualified independent contractor subsidiary," would be allowed
to perform noncustomary and other currently prohibited services with respect to
REIT tenants as well as activities that could be performed by a qualified
business subsidiary.
A number of constraints would be imposed on a taxable REIT subsidiary to
ensure that the REIT could not, through a taxable REIT subsidiary, engage in
substantial non-real estate activities and also to ensure that the taxable REIT
subsidiary pays a corporate-level tax on its earnings. First, the value of all
taxable REIT subsidiaries owned by a REIT could not represent more than 15% of
the value of the REIT's total assets, and within that 15-percent limitation, no
more than 5% of the total value of a REIT's assets could consist of qualified
independent contractor subsidiaries. Second, a taxable REIT subsidiary would not
be entitled to deduct any interest incurred or debt funded directly or
indirectly by the REIT. Third, a 100% excise tax would be imposed on certain
"excess payments" to ensure arm's length (i) pricing for services provided to
REIT tenants and (ii) allocation of shared expenses between the REIT and the
taxable REIT subsidiary. Fourth, there would be limitations placed upon
intercompany rentals between the REIT and a taxable REIT subsidiary. Certain
additional limitations also could apply.
Cornerstone believes that, if the proposal were to be enacted, WCP Services
would qualify as a taxable REIT subsidiary. Accordingly, Cornerstone does not
believe that the proposal jeopardizes its ability to qualify as a REIT.
Nevertheless, the constraints imposed on taxable REIT subsidiaries that are
described above potentially could limit WCP Services' ability to deduct interest
and certain other expenses.
If Cornerstone should fail to satisfy the asset tests at the end of a
calendar quarter, such a failure would not cause it to lose its REIT status if
(i) it satisfied all of the asset tests at the close of the preceding calendar
quarter and (ii) the discrepancy between the value of Cornerstone's assets and
the asset test requirements arose from changes in the market values of its
assets and was not wholly or partly caused by an acquisition of nonqualifying
assets. If the condition described in clause (ii) of the preceding sentence were
not satisfied, Cornerstone still could avoid disqualification by eliminating any
discrepancy within 30 days after the close of the calendar quarter in which it
arose. Cornerstone has maintained, and intends in the future to maintain,
adequate records of the value of its assets to ensure compliance with the asset
tests and to take such other actions as may be required to comply with those
tests.
ANNUAL DISTRIBUTION REQUIREMENTS
In order to be taxed as a REIT, Cornerstone is required to distribute
dividends (other than capital gain dividends) to its stockholders in an amount
at least equal to (i) the sum of (A) 95% of Cornerstone's "REIT taxable income"
(computed without regard to the dividends paid deduction and its net capital
gain) and (B) 95% of the net income (after tax), if any, from foreclosure
property, minus
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(ii) 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 Cornerstone timely files its tax return for such year and if
paid on or before the first regular dividend payment after such declaration. To
the extent that Cornerstone does not distribute all of its net capital gain or
distributes at least 95%, but less than 100%, of its "REIT taxable income," as
adjusted, it will be subject to tax on the undistributed amount at regular
capital gains and ordinary corporate tax rates. Furthermore, if Cornerstone
should fail to distribute during each calendar year at least the sum of (i) 85%
of its REIT ordinary income for such year, (ii) 95% of its REIT capital gain net
income for such year (other than long-term capital gain Cornerstone elects to
retain and treat as having been distributed to stockholders), and (iii) any
undistributed taxable income from prior periods, Cornerstone will be subject to
a 4% nondeductible excise tax on the excess of such required distribution over
the amounts actually distributed. In addition, during its Recognition Period, if
Cornerstone disposes of any assets subject to the Built-in Gain Rules,
Cornerstone will be required, pursuant to guidance issued by the IRS, to
distribute at least 95% of the Built-in Gain (after tax), if any, recognized on
the disposition of the asset.
It is expected that Cornerstone's REIT taxable income will be less than its
cash flow due to the allowance of depreciation and other non-cash deductions in
computing REIT taxable income. Accordingly, Cornerstone anticipates that it
generally will have sufficient cash or liquid assets to enable it to satisfy the
95% distribution requirement. In this regard, the partnership agreement of the
Operating Partnership authorizes Cornerstone, as general partner, to take such
steps as may be necessary to cause the Operating Partnership to make
distributions in an amount sufficient to permit Cornerstone to meet these
distribution requirements. It is possible, however, that Cornerstone, from time
to time, may not have sufficient cash or other liquid assets to meet the 95%
distribution requirement or to distribute such greater amount as may be
necessary to avoid income and excise taxation, as a result of timing differences
between (i) the actual receipt of income and actual payment of deductible
expenses and (ii) the inclusion of such income and deduction of such expenses in
arriving at Cornerstone's taxable income, or as a result of nondeductible
expenses such as principal amortization or repayments, or capital expenditures
in excess of noncash deductions. In the event that such timing differences
occur, Cornerstone may find it necessary to borrow funds (or to cause the
Operating Partnership to borrow funds) or to issue equity securities (there
being no assurance that it will be able to do so) or, if possible, to pay
taxable stock dividends in order to meet the REIT distribution requirements.
Under certain circumstances, Cornerstone 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, which may be included in Cornerstone's deduction
for dividends paid for the earlier year. Although Cornerstone may be able to
avoid being taxed on amounts distributed as deficiency dividends, it will be
required to pay interest to the IRS based upon the amount of any deduction taken
for deficiency dividends.
ANNUAL RECORD KEEPING REQUIREMENTS
Cornerstone is required to maintain certain records and request on an annual
basis certain information from its stockholders designed to disclose the actual
ownership of its outstanding shares. Cornerstone has complied with these
requirements in the past and intends to continue to comply with these
requirements. Failure to comply with the recordkeeping requirements in taxable
years beginning prior to January 1, 1998 could lead to disqualification as a
REIT. Beginning with Cornerstone's 1998 taxable year, however, the recordkeeping
rules have been modified such that for any year in which Cornerstone may fail to
comply with the rules, an intermediate penalty will apply instead of REIT
disqualification. The penalty is $25,000 ($50,000 for intentional violations)
for any year in which a REIT does not comply with the rules.
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FAILURE TO QUALIFY
If Cornerstone fails to qualify for taxation as a REIT in any taxable year
and the relief provisions do not apply, Cornerstone 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
Cornerstone fails to qualify will not be deductible by Cornerstone, nor will
they be required to be made. In such event, to the extent of current and
accumulated earnings and profits, all distributions to stockholders will be
taxable as ordinary income, and, subject to certain limitations in the Code,
corporate stockholders may be eligible for the dividends received deduction.
Unless entitled to relief under specific statutory provisions, Cornerstone also
will be disqualified from taxation as a REIT for the four taxable years
following the year during which Cornerstone ceased to qualify as a REIT. It is
not possible to state whether in all circumstances Cornerstone would be entitled
to such statutory relief.
TAXATION OF U.S. STOCKHOLDERS
As used herein, the term "U.S. Stockholder" means a holder of Cornerstone
common stock that for U.S. federal income tax purposes is (i) a citizen or
resident of the United States, (ii) a corporation, partnership or other entity
created or organized in or under the laws of the United States or of any
political subdivision thereof, (iii) an estate whose income from sources without
the United States is includible in gross income for U.S. federal income tax
purposes regardless of its connection with the conduct of a trade or business
within the United States or (iv) any trust with respect to which (A) a U.S.
court is able to exercise primary supervision over the administration of such
trust and (B) one or more U.S. persons have the authority to control all
substantial decisions of the trust.
As long as Cornerstone qualifies as a REIT, distributions made to
Cornerstone's taxable U.S. Stockholders out of current or accumulated earnings
and profits (and not designated as capital gain dividends) will be taken into
account by such U.S. Stockholders as ordinary income and will not be eligible
for the dividends received deduction generally available to corporations. For
purposes of determining whether distributions are out of earnings and profits,
the earnings and profits of Cornerstone will be allocated first to Cornerstone's
preferred stock (to the extent of distributions made in respect thereof), and
then to the Cornerstone common stock. Distributions that are designated as
capital gain dividends will be taxed as a capital gain (to the extent such
distributions do not exceed Cornerstone's actual net capital gain for the
taxable year) without regard to the period for which the stockholder has held
its shares. The tax rates applicable to such capital gains are discussed below.
However, corporate stockholders may be required to treat up to 20% of certain
capital gain dividends as ordinary income. Distributions in excess of current
and accumulated earnings and profits will not be taxable to a stockholder to the
extent that they do not exceed the adjusted basis of the stockholder's shares,
but rather will reduce the adjusted basis of such shares. To the extent that
distributions in excess of current and accumulated earnings and profits exceed
the adjusted basis of a stockholder's shares, such distributions will be
included in income as capital gains assuming the shares are capital assets in
the hands of the stockholder. The tax rate applicable to such capital gain will
depend on the stockholder's holding period for the shares. In addition, any
distribution declared by Cornerstone in October, November or December of any
year and payable to a stockholder of record on a specified date in any such
month shall be treated as both paid by Cornerstone and received by the
stockholder on December 31 of such year, provided that the distribution is
actually paid by Cornerstone during January of the following calendar year.
Cornerstone may elect to treat all or a part of its undistributed net
capital gain as if it had been distributed to its stockholders (including for
purposes of the 4% excise tax discussed above under "Requirements for
Qualification--ANNUAL DISTRIBUTION REQUIREMENTS," above). If Cornerstone should
make such an election, Cornerstone's stockholders would be required to include
in their income as long-term capital gain their proportionate share of
Cornerstone's undistributed net capital gain, as designated by Cornerstone. Each
such stockholder would be deemed to have paid its proportionate
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share of the income tax imposed on Cornerstone with respect to such
undistributed net capital gain, and this amount would be credited or refunded to
the stockholder. In addition, the tax basis of the stockholder's shares would be
increased by its proportionate share of undistributed net capital gains included
in its income, less its proportionate share of the income tax imposed on
Cornerstone with respect to such gains.
Stockholders may not include in their individual income tax returns any net
operating losses or capital losses of Cornerstone. Instead, such losses would be
carried over by Cornerstone for potential offset against its future income
(subject to certain limitations). Taxable distributions from Cornerstone and
gain from the disposition of Cornerstone common stock will not be treated as
passive activity income and, therefore, stockholders generally will not be able
to apply any "passive activity losses" (such as losses from certain types of
limited partnerships in which the stockholder is a limited partner) against such
income. In addition, taxable distributions from Cornerstone generally will be
treated as investment income for purposes of the investment interest
limitations. Capital gains from the disposition of the shares (or distributions
treated as such) will be treated as investment income only if the stockholder so
elects, in which case such capital gains will be taxed at ordinary income rates.
Cornerstone will notify stockholders after the close of Cornerstone's taxable
year as to the portions of the distributions attributable to that year that
constitute ordinary income, return of capital and capital gain.
In general, any gain or loss realized upon a taxable disposition of
Cornerstone common stock by a stockholder who is not a dealer in securities will
be treated as capital gain or loss. Lower marginal tax rates for individuals may
apply in the case of capital gains, depending on the holding period of the
shares that are sold. However, any loss upon a sale or exchange of shares by a
stockholder who has held such shares for six months or less (after applying
certain holding period rules) will be treated as a long-term capital loss to the
extent of distributions from Cornerstone required to be treated by such
stockholder as long-term capital gain. All or a portion of any loss realized
upon a taxable disposition of shares may be disallowed if other shares are
purchased within 30 days before or after the disposition.
For non-corporate taxpayers, the tax rate differential between capital gain
and ordinary income may be significant. The highest marginal individual income
tax rate applicable to ordinary income is 39.6%. Any capital gain generally will
be taxed to a non-corporate taxpayer at a maximum rate of 20% with respect to
capital assets held for more than one year. The tax rates applicable to ordinary
income apply to gain attributable to the sale or exchange of capital assets held
for one year or less. In the case of capital gain attributable to the sale or
exchange of certain real property held for more than one year, an amount of such
gain equal to the amount of all prior depreciation deductions not otherwise
required to be taxed as ordinary depreciation recapture income will be taxed at
a maximum rate of 25%. With respect to distributions designated by a REIT as
capital gain dividends (including deemed distributions of retained capital
gains), the REIT also may designate (subject to certain limits) whether the
dividend is taxable to non-corporate stockholders as a 20% rate gain
distribution or an unrecaptured depreciation distribution taxed at a 25% rate.
The characterization of income as capital or ordinary may affect the
deductibility of capital losses. Capital losses not offset by capital gains may
be deducted against a non-corporate taxpayer's ordinary income only up to a
maximum annual amount of $3,000. Non-corporate taxpayers may carry forward their
unused capital losses. All net capital gain of a corporate taxpayer is subject
to tax at ordinary corporate rates. A corporate taxpayer can deduct capital
losses only to the extent of capital gains, with unused losses being carried
back three years and forward five years.
TREATMENT OF TAX-EXEMPT STOCKHOLDERS
Tax-exempt organizations, including qualified employee pension and profit
sharing trusts and individual retirement accounts, (collectively, "Exempt
Organizations") generally are exempt from
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federal income taxation. However, they are subject to taxation on their UBTI.
While many investments in real estate generate UBTI, the IRS has issued a
published ruling that dividend distributions by a REIT to an exempt employee
pension trust do not constitute UBTI, provided that the shares of the REIT are
not otherwise used in an unrelated trade or business of the exempt employee
pension trust. Based on that ruling, and subject to the exceptions discussed
below, amounts distributed by Cornerstone to Exempt Organizations generally
should not constitute UBTI. However, if an Exempt Organization finances its
acquisition of Cornerstone common stock with debt, a portion of its income from
Cornerstone will constitute UBTI pursuant to the "debt-financed property" rules.
Furthermore, social clubs, voluntary employee benefit associations, supplemental
unemployment benefit trusts and qualified group legal services plans that are
exempt from taxation under paragraphs (7), (9), (17) and (20), respectively, of
Section 501(c) of the Code are subject to different UBTI rules, which generally
will require them to characterize distributions from Cornerstone as UBTI. In
addition, in certain circumstances, a pension trust that owns more than 10% of
Cornerstone's stock is required to treat a percentage of the dividends from
Cornerstone as UBTI (the "UBTI Percentage"). The UBTI Percentage is the gross
income, less related direct expenses, derived by Cornerstone from an unrelated
trade or business (determined as if Cornerstone were a pension trust) divided by
the gross income, less related direct expenses, of Cornerstone for the year in
which the dividends are paid. The UBTI rule applies to a pension trust holding
more than 10% of Cornerstone's stock only if (i) the UBTI Percentage is at least
5%, (ii) Cornerstone qualifies as a REIT by reason of the modification of the
5/50 Rule that allows the beneficiaries of the pension trust to be treated as
holding shares of Cornerstone in proportion to their actuarial interests in the
pension trust and (iii) either (A) one pension trust owns more than 25% of the
value of Cornerstone's stock or (B) a group of pension trusts individually
holding more than 10% of the value of Cornerstone's stock collectively own more
than 50% of the value of Cornerstone's stock.
SPECIAL TAX CONSIDERATIONS FOR NON-U.S. STOCKHOLDERS
The rules governing U.S. federal income taxation of nonresident alien
individuals, foreign corporations, foreign partnerships and other foreign
stockholders (collectively, "Non-U.S. Stockholders") are complex, and no attempt
will be made herein to provide more than a summary of such rules. PROSPECTIVE
NON-U.S. STOCKHOLDERS SHOULD CONSULT WITH THEIR OWN TAX ADVISORS TO DETERMINE
THE IMPACT OF FEDERAL, STATE AND LOCAL INCOME TAX LAWS WITH REGARD TO AN
INVESTMENT IN THE SHARES, INCLUDING ANY REPORTING REQUIREMENTS.
For purposes of this discussion, the term "Non-U.S. Stockholder" does not
include any foreign stockholder whose investment in Cornerstone common stock is
"effectively connected" with the conduct of a trade or business in the United
States. Such a foreign stockholder, in general, will be subject to United States
federal income tax with respect to its investment in the Cornerstone common
stock in the same manner as a U.S. Stockholder is taxed (subject to applicable
alternative minimum tax and a special alternative minimum tax in the case of
nonresident alien individuals). In addition, a foreign corporation receiving
income that is treated as effectively connected with a U.S. trade or business
also may be subject to an additional 30% "branch profits tax," unless an
applicable tax treaty provides a lower rate or an exemption. Certain
certification requirements must be satisfied in order for effectively connected
income to be exempt from withholding.
Distributions to Non-U.S. Stockholders that are not attributable to gain
from sales or exchanges by Cornerstone of U.S. real property interests and are
not designated by Cornerstone as capital gain dividends (or deemed distributions
of retained capital gains) will be treated as dividends of ordinary income to
the extent that they are made out of current or accumulated earnings and profits
of Cornerstone. Such distributions ordinarily will be subject to a withholding
tax equal to 30% of the gross amount of the distribution unless an applicable
tax treaty reduces or eliminates that tax. Distributions
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in excess of current and accumulated earnings and profits of Cornerstone will
not be taxable to a stockholder to the extent that such distributions do not
exceed the adjusted basis of the stockholder's shares, but rather will reduce
the adjusted basis of such shares. To the extent that distributions in excess of
current and accumulated earnings and profits exceed the adjusted basis of a
Non-U.S. Stockholder's shares, such distributions will give rise to tax
liability if the Non-U.S. Stockholder would otherwise be subject to tax on any
gain from the sale or disposition of its shares, as described below.
For any year in which Cornerstone qualifies as a REIT, distributions that
are attributable to gain from sales or exchanges by Cornerstone of U.S. real
property interests will be taxed to a Non-U.S. Stockholder under the provisions
of the Foreign Investment in Real Property Tax Act of 1980 ("FIRPTA"). Under
FIRPTA, distributions attributable to gain from sales of U.S. real property
interests are taxed to a Non-U.S. Stockholder as if such gain were effectively
connected with a U.S. business. Non-U.S. Stockholders thus would be taxed at the
normal capital gain rates applicable to U.S. Stockholders (subject to applicable
alternative minimum tax and a special alternative minimum tax in the case of
nonresident alien individuals). Distributions subject to FIRPTA also may be
subject to a 30% branch profits tax in the hands of a foreign corporate
stockholder not entitled to treaty relief or exemption.
Unless a reduced rate of withholding applies under an applicable tax treaty,
Cornerstone generally will withhold from distributions to Non-U.S. Stockholders,
and remit to the IRS, 30% of all distributions out of current or accumulated
earnings and profits, subject to the application of FIRPTA withholding rules
discussed below. In addition, Cornerstone is required to withhold 10% of any
distribution in excess of its current and accumulated earnings and profits.
Because Cornerstone generally cannot determine at the time a distribution is
made whether or not it will be in excess of earnings and profits, Cornerstone
intends to withhold 30% of the entire amount of any distribution (other than
distributions subject to the 35% withholding discussed below). Generally,
however, a Non-U.S. Stockholder will be entitled to a refund from the IRS to the
extent an amount is withheld from a distribution that exceeds the amount of U.S.
tax owed by such Non-U.S. Stockholder.
Under FIRPTA, Cornerstone is required to withhold 35% of any distribution
that is designated as a capital gain dividend or which could be designated as a
capital gain dividend. Thus, if Cornerstone designates previously made
distributions as capital gain dividends, subsequent distributions (up to the
amount of such prior distributions) will be treated as capital gain dividends
for purposes of FIRPTA withholding.
Under Regulations that are currently in effect, dividends paid to an address
in a country outside the United States generally are presumed to be paid to a
resident of such country for purposes of determining the applicability of
withholding discussed above and the applicability of a tax treaty rate.
Regulations issued in October 1997, however, provide that a Non-U.S. Stockholder
who wishes to claim the benefit of an applicable treaty rate must satisfy
certain certification and other requirements. Such Regulations generally will be
effective for distributions made after December 31, 1999.
For so long as Cornerstone common stock continues to be regularly traded on
an established securities market, the sale of Cornerstone common stock by any
Non-U.S. Stockholder who is not a Five Percent Non-U.S. Stockholder (as defined
below) generally will not be subject to United States federal income tax (unless
the Non-U.S. Stockholder is a nonresident alien individual who was present in
the United States for more than 182 days during the taxable year of the sale and
certain other conditions apply, in which case such gain will be subject to a 30%
tax on a gross basis). In general, the sale or other taxable disposition of
Cornerstone common stock by a Five Percent Non-U.S. Stockholder (as defined
below) is subject to United States federal income tax unless and until
Cornerstone becomes a "domestically controlled REIT." A "Five Percent Non-U.S.
Stockholder" is a Non-U.S. Stockholder who, at some time during the five-year
period preceding such sale or disposition, beneficially owned (including under
certain attribution rules) more than 5% of the total fair market value of
Cornerstone
16
<PAGE>
common stock (as outstanding from time to time) or owned shares of another class
of stock of Cornerstone that represented value greater than 5% of the
Cornerstone common stock (measured at the time such shares were acquired). A
REIT is a "domestically controlled REIT" if, at all times during the five-year
period preceding the relevant testing date, less than 50% in value of its shares
is held directly or indirectly by Non-U.S. Stockholders (taking into account
those persons required to include Cornerstone's dividends in income for United
States federal income tax purposes). Currently, Cornerstone believes that more
than 50% in value of its shares is held directly or indirectly by Non-U.S.
Stockholders, and Cornerstone will not qualify as a domestically controlled REIT
for at least five years following the date when less than 50% is so held.
Further, in part because the Cornerstone common stock is publicly traded in the
United States and in Germany, no assurance can be given that Cornerstone will
qualify as a domestically controlled REIT at any time in the future.
So long as Cornerstone is not a domestically controlled REIT, a Five Percent
Non-U.S. Stockholder will be taxable in the same manner as a U.S. Stockholder
with respect to gain on the sale of Cornerstone common stock (subject to
applicable alternative minimum tax and a special alternative minimum tax in the
case of nonresident alien individuals).
INFORMATION REPORTING REQUIREMENTS AND BACKUP WITHHOLDING TAX
Cornerstone will report to its U.S. Stockholders and to the IRS the amount
of distributions paid during each calendar year, and the amount of tax withheld,
if any. Under the backup withholding rules, a stockholder may be subject to
backup withholding at the rate of 31% with respect to distributions paid unless
such holder (i) is a corporation or comes within certain other exempt categories
and, when required, demonstrates this fact or (ii) provides a taxpayer
identification number, certifies as to no loss of exemption from backup
withholding and otherwise complies with the applicable requirements of the
backup withholding rules. A stockholder who does not provide Cornerstone with
its correct taxpayer identification number also may be subject to penalties
imposed by the IRS. In addition, Cornerstone may be required to withhold a
portion of capital gain distributions to any stockholders who fail to certify
their non-foreign status to Cornerstone.
U.S. Stockholders should consult their own tax advisors regarding their
qualifications for an exemption from backup withholding and the procedure for
obtaining such an exemption. Backup withholding is not an additional tax.
Rather, the amount of any backup withholding with respect to a payment to a U.S.
Stockholder will be allowed as a credit against the U.S. Stockholder's United
States federal income tax liability and may entitle the U.S. Stockholder to a
refund, provided that the required information is furnished to the IRS.
Backup withholding tax and information reporting generally will not apply to
distributions paid to Non-U.S. Stockholders outside the United States that are
treated as (i) dividends subject to the 30% (or lower treaty rate) withholding
tax discussed above, (ii) capital gain dividends or (iii) distributions
attributable to gain from the sale or exchange by Cornerstone of U.S. real
property interests. As a general matter, backup withholding and information
reporting will not apply to a payment of the proceeds of a sale of Cornerstone
common stock by or through a foreign office of a foreign broker. Information
reporting (but not backup withholding) will apply, however, to a payment of the
proceeds of a sale of Cornerstone common stock by a foreign office of a broker
that (i) is a United States person, (ii) derives 50% or more of its gross income
for certain periods from the conduct of a trade or business in the United
States, or (iii) is a "controlled foreign corporation" for United States tax
purposes, unless the broker has documentary evidence in its records that the
holder is a Non-U.S. Stockholder and certain other conditions are satisfied, or
the stockholder otherwise establishes an exemption. Payment to or through a
United States office of a broker of the proceeds of a sale of Cornerstone common
stock is subject to both backup withholding and information reporting unless the
stockholder certifies under penalties of perjury that the stockholder is a
Non-U.S. Stockholder or
17
<PAGE>
otherwise establishes an exemption. A Non-U.S. Stockholder may obtain a refund
of any amounts withheld under the backup withholding rules by filing the
appropriate claim for a refund with the IRS.
The Treasury Department issued final Regulations in October 1997 concerning
the withholding of tax and information reporting for certain amounts paid to
non-resident alien individuals and foreign corporations. These new withholding
rules alter the current withholding regime, and generally will be effective for
distributions made after December 31, 1999. Investors should consult their tax
advisors concerning the impact, if any, of these new Regulations on an
investment in the common stock.
OTHER TAX CONSIDERATIONS
TAX STATUS OF THE OPERATING PARTNERSHIP
An entity classified as a partnership for federal income tax purposes
generally is not a taxable entity and incurs no federal income tax liability.
Each partner in the partnership is required to take into account in computing
its federal income tax liability its allocable share of income, gains, losses,
deductions and credits of the partnership, regardless of whether cash
distributions are made. Distributions of money by a partnership to a partner are
generally not taxable unless the amount of the distribution is in excess of the
partner's adjusted basis in its partnership interest.
Elective entity classification Regulations under Section 7701 of the Code
became effective on January 1, 1997. Under these Regulations, a domestic entity
that has at least two members and that is organized as a state law partnership
on or after January 1, 1997, automatically will be classified as a partnership
for federal income tax purposes unless the entity elects otherwise. The
Operating Partnership was organized on December 23, 1997 and therefore is
properly classified as a partnership for federal income tax purposes unless it
makes a contrary election.
Notwithstanding the Operating Partnership's classification as a partnership,
the Operating Partnership could be treated as a corporation for federal income
tax purposes if it were a "publicly traded partnership" ("PTP") within the
meaning of Section 7704 of the Code. Under Section 7704 of the Code, a
partnership is classified as a PTP if interests in the partnership are traded on
an established securities market or are readily tradable on a secondary market
or the substantial equivalent thereof. If so classified, the PTP is taxable as a
corporation unless it qualifies for a special "90% qualifying income exception"
under Section 7704(c) of the Code. Under that exception, a PTP is not subject to
corporate-level tax if 90% or more of its gross income consists of dividends,
interest, "rents from real property" (as that term is defined for purposes of
the REIT rules, with certain modifications), gain from the sale or other
disposition of real property, and certain other types of income. An amount will
not qualify as rents from real property if the partnership is deemed to own,
actually or constructively, 10% or more of the ownership interests in a tenant
(a "Related Party Tenant"). For this purpose, any interests in a tenant that are
owned by a partner of the partnership will be treated as constructively owned by
the partnership if the partner owns, actually or constructively, 5% or more of
the value of the outstanding interests in the partnership.
If a PTP fails to meet the 90% qualifying income exception for a taxable
year, and (i) the IRS determines that the failure was inadvertent, (ii) the
partnership takes steps to once again comply with the 90% qualifying income
exception, and (iii) the partnership makes such adjustments or payments
(including with respect to the partners) as may be required by the IRS, then the
partnership will be treated as continuing to satisfy the 90% qualifying income
exception.
The Regulations under Section 7704 (the "PTP Regulations") provide rules for
determining whether a partnership is a PTP and provide certain safe harbors
which, if satisfied, preclude a partnership from being so classified. The
"private placement" safe harbor of such regulations requires, among other
things, that the partnership have no more than 100 partners. Because the
Operating Partnership currently has more than 100 partners, it does not satisfy
the private placement safe harbor
18
<PAGE>
and may not be able to satisfy any other safe harbors of the PTP Regulations.
Consequently, there is a risk that the ability of the holders of Units to
exchange their Units for shares of common stock (after expiration of any
applicable lock-out restrictions) could cause the interests in the Operating
Partnership to be viewed as readily tradable on a secondary market or the
substantial equivalent thereof. In that event, although the Operating
Partnership would be classified as a PTP, Cornerstone believes that the
Operating Partnership would satisfy the 90% qualifying income exception and
therefore be exempt from corporate-level tax. In this regard, the partnership
agreement of the Operating Partnership provides that no partner will be
permitted to hold or acquire Units if such acquisition would result in the
Operating Partnership being unable to satisfy the 90% qualifying income
exception.
Although the Operating Partnership would satisfy the 90% qualifying income
exception and therefore would not be subject to corporate-level tax if
classified as a PTP, under Section 469(k) of the Code, the partners in the
Operating Partnership would nevertheless be required to apply the passive loss
limitations of Section 469 separately to the income and loss from the Operating
Partnership.
If the Operating Partnership were treated as an association taxable as a
corporation, Cornerstone would fail the 75% asset test (in addition to the 5%
asset test and, likely, the 10% voting securities test) and therefore would fail
to qualify as a REIT. See "Failure to Qualify," above.
DEPRECIATION
The Operating Partnership's initial income tax basis in the properties
acquired in exchange for Units generally is the same as the transferor's basis
in such property on the date of the acquisition by the Operating Partnership,
except to the extent that gain is recognized by the transferor in connection
with the transfer. The Operating Partnership's tax depreciation deductions will
be allocated among the partners in accordance with their respective percentage
interests in the Operating Partnership, except as otherwise required pursuant to
Section 704(c) of the Code.
STATE AND LOCAL TAX
Cornerstone and its stockholders may be subject to state and local tax in
states and localities in which it does business or owns property. The tax
treatment of Cornerstone and the stockholders in such jurisdictions may differ
from the federal income tax treatment described above. Consequently, prospective
stockholders should consult their own tax advisors regarding the effect of state
and local tax laws on an investment in Cornerstone.
EXPERTS
The consolidated balance sheets as of December 31, 1998 and 1997 and the
consolidated statements of income, changes in stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1998 of
Cornerstone Properties Inc. and subsidiaries, incorporated by reference in this
Prospectus, have been incorporated herein in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
that firm as experts in accounting and auditing.
19
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY CORNERSTONE OR ANY OTHER PERSON. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF ANY OFFER TO BUY ANY
SECURITIES OTHER THAN THE SECURITIES TO WHICH IT RELATES OR AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY SUCH SECURITIES IN ANY CIRCUMSTANCES IN
WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF CORNERSTONE
SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED OR INCORPORATED BY
REFERENCE HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Where You Find More Information........................................... 2
Incorporation of Certain Documents by Reference........................... 2
Special Note Regarding Forward-Looking Statements......................... 3
Information About the Company............................................. 3
Use of Proceeds........................................................... 3
Selling Stockholders...................................................... 4
Plan of Distribution...................................................... 5
Certain United States Federal Income Tax Considerations................... 6
Experts................................................................... 19
</TABLE>
45,958,631 SHARES
CORNERSTONE PROPERTIES INC.
COMMON STOCK
---------------------
PROSPECTUS
---------------------
, 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the fees and expenses in connection with the
issuance and distribution of the securities being registered hereunder, all of
which are being paid by the Registrant. Except for the SEC registration fee, all
amounts are estimates.
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee............... $ 45,931
Transfer agents' fees............................................. 2,500
Printing and engraving expenses................................... 30,000
Legal fees and expenses........................................... 25,000
Accounting fees and expenses...................................... 5,000
Miscellaneous..................................................... $ 1,569
---------
Total....................................................... $ 110,000
---------
---------
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 78.7502 of Chapter 78 of the Nevada Revised Statutes (the "NRS")
empowers a corporation to indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action or
suit or proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of the corporation) by reason of the
fact that he is or was a director, officer, employee or agent of the corporation
or is or was serving at the request of the corporation as a director, officer,
employee or agent of another corporation or other enterprise, against expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by him in connection with such action, suit or
proceeding if he acted in good faith and in a manner he reasonably believed to
be in or not opposed to the best interests of the corporation, and with respect
to any criminal action or proceeding, had no reasonable cause to believe his
conduct was unlawful. The termination of any action, suit or proceeding by
judgment, order, settlement or conviction or upon a plea of nolo contendere or
its equivalent does not, of itself, create a presumption that the person did not
act in good faith or in a manner which he reasonably believed to be in or not
opposed to the best interests of the corporation or that, with respect to any
criminal action or proceeding, he had reasonable cause to believe his cations
were unlawful.
Section 78.7502 of the NRS empowers a corporation to indemnify any person
who was or is a party or is threatened to be made a party to any threatened,
pending or completed action or suit by or in the right of the corporation to
procure a judgment in its favor by reason of the fact that such person acted in
any of the capacities set forth above against expenses, including attorneys'
fees, actually and reasonably incurred by him in connection with the defense or
settlement of such action or suit if he acted under similar standards to those
described above except that no indemnification may be made in respect of any
claim, issue or matter as to which such person shall have been adjudged to be
liable to the corporation or for amounts paid in settlement to the corporation
unless and only to the extent that the court in which such action or suit was
brought determines that, despite the adjudication of liability, such person is
fairly and reasonably entitled to indemnity for such expenses as the court deems
proper.
Section 78.7502 of the NRS further provides that to the extent a director or
officer of a corporation has been successful in the defense of any action, suit
or proceeding referred to in subsections (1) and (2) or in the defense of any
claim, issue or matter therein, he shall be indemnified against expenses
(including attorneys' fees) actually and reasonably incurred by him in
connection
II-1
<PAGE>
therewith. Section 78.751 of the NRS provides that any indemnification provided
for by Section 78.7502 of the NRS (by court order or otherwise) shall not be
deemed exclusive of any other rights to which the indemnified party may be
entitled and that the scope of indemnification shall continue as to directors,
officers, employees or agents who have ceased to hold such positions, and to
their heirs, executors and administrators. Section 78.752 empowers the
corporation to purchase and maintain insurance on behalf of a director, officer,
employee or agent of the corporation against any liability asserted against him
or incurred by him in any such capacity or arising out of his status as such
whether or not the corporation would have the power to indemnify him against
such liabilities under Section 78.7502.
Article IX of the Bylaws of the Registrant provides for indemnification of
its officers and Directors, substantially identical in scope to that permitted
under Section 78.7502 of the NRS. The Bylaws provide, pursuant to Subsection 2
of Section 78.7502 of the NRS, that the expenses of officers and Directors
incurred in defending any action, suit or proceeding, whether civil, criminal,
administrative or investigative, must be paid by the Registrant as they are
incurred and in advance of the final disposition of the action, suit or
proceeding, upon receipt of any undertaking by or on behalf of the Director or
Officer to repay such amounts unless it shall ultimately be determined that he
is entitled to be indemnified by the Registrant pursuant to Article IX of the
Bylaws.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
- --------------- ----------------------------------------------------------------------------------------------
<C> <C> <S>
4.1 -- Restated Articles of Incorporation of Cornerstone (incorporated by reference from Exhibit 3.1
to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1995)
4.1(a) -- Certificate of Amendment of Restated Articles of Incorporation, dated October 27, 1997
(incorporated by reference from Exhibit 4.2(b) to the Registrant's Registration Statement on
Form S-3, File No. 333-47149, as filed with the Commission on March 2, 1998)
4.1(b) -- Certificate of Amendment of Restated Articles of Incorporation of Cornerstone, dated July 10,
1998 (incorporated by reference from Exhibit 4.2(c) to the Registrant's Registration Statement
on Form S-3, File No. 333-59259, as filed with the Commission on July 16, 1998)
4.2 -- Amended and Restated Bylaws of Cornerstone (incorporated by reference from Exhibit 3.1 to the
Registrant's Current Report on Form 8-K dated December 16, 1998)
4.3 -- Specimen Stock Certificate (incorporated by reference from the Registrant's Registration
Statement on Form S-3, File No. 333-47149, as filed with the Commission on March 2, 1998)
5.1 -- Opinion of Lionel, Sawyer & Collins
8.1 -- Opinion of King & Spalding
23.1 -- Consent of PricewaterhouseCoopers LLP
23.2 -- Consent of Lionel, Sawyer & Collins (included in Exhibit 5.1)
23.3 -- Consent of King & Spalding (included in Exhibit 8.1)
24.1 -- Power of Attorney (included on Page II-5)
</TABLE>
II-2
<PAGE>
ITEM 17. 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 a 20% 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;
PROVIDED, HOWEVER, that paragraphs (a)(1)(i) and (a)(1)(ii) above do not
apply if the registration statement is on Form S-3, Form S-8 or Form F-3, and
the information required to be included in a post-effective amendment by those
paragraphs is contained in the periodic reports filed with or furnished to the
Commission by the registrant pursuant to Section 13 or Section 15(d) of the
Securities Exchange Act of 1934 that are incorporated by reference 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 that:
(1) For the purpose of determining any liability under the Securities
Act of 1933, the information omitted from the form of prospectus filed as
part of this registration statement in reliance upon Rule 430A and contained
in a form of prospectus filed by the registrant pursuant to Rule 424(b) (1)
or (4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post- effective amendment that contains a form of
prospectus shall be deemed to be a new registration
II-3
<PAGE>
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.
(d) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the provisions in Item 15 above, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized in the City of New York, State of New York on April 27, 1999.
<TABLE>
<S> <C> <C>
CORNERSTONE PROPERTIES, INC.
By: /s/ JOHN S. MOODY
-----------------------------------------
John S. Moody
CHIEF EXECUTIVE OFFICER AND PRESIDENT
</TABLE>
POWER OF ATTORNEY
We, the undersigned directors and officers of Cornerstone Properties Inc. do
hereby constitute and appoint John S. Moody and Rodney C. Dimock, and each or
any of them, our true and lawful attorneys-in-fact and agents, to do any and all
acts and things in our names and on our behalf in our capacities as directors
and officers and to execute any and all instruments for us and in our name in
the capacities indicated below, which said attorneys and agents, or any of them,
may deem necessary or advisable to enable said Corporation to comply with the
Securities Act of 1933 and any rules, regulations and requirements of the
Securities and Exchange Commission, in connection with this registration
statement, or any registration statement for this offering that is to be
effective upon filing pursuant to Rule 462(b) under the Securities Act of 1933,
including specifically, but without limitation, power and authority to sign for
us or any of us in our names in the capacities indicated below, any and all
amendments (including post-effective amendments) hereto; and we do hereby ratify
and confirm all that said attorneys and agents, or any of them, shall do or
cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated on this 27th day of April, 1999.
<TABLE>
<CAPTION>
SIGNATURE TITLE
- ------------------------------ --------------------------
<C> <S>
/s/ WILLIAM WILSON III
- ------------------------------ Chairman of the Board and
William Wilson III Director
Chief Executive Officer,
/s/ JOHN S. MOODY President and Director
- ------------------------------ (Principal Executive
John S. Moody Officer)
/s/ RODNEY C. DIMOCK
- ------------------------------ Chief Operating Officer
Rodney C. Dimock and Director
Senior Vice President and
/s/ KEVIN P. MAHONEY Chief Financial Officer
- ------------------------------ (Principal Financial and
Kevin P. Mahoney Accounting Officer)
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE
- ------------------------------ --------------------------
<C> <S>
/s/ CECIL D. CONLEE
- ------------------------------ Director
Cecil D. Conlee
/s/ BLAKE EAGLE
- ------------------------------ Director
Blake Eagle
/s/ DR. KARL-LUDWIG HERMANN
- ------------------------------ Director
Dr. Karl-Ludwig Hermann
/s/ HANS C. MAUTNER
- ------------------------------ Director
Hans C. Mautner
/s/ DR. LUTZ MELLINGER
- ------------------------------ Director
Dr. Lutz Mellinger
/s/ CRAIG R. STAPLETON
- ------------------------------ Director
Craig R. Stapleton
- ------------------------------ Director
Michael J. G. Topham
- ------------------------------ Director
Dick van den Bos
- ------------------------------ Director
Jan van der Vlist
/s/ DONALD G. FISHER
- ------------------------------ Director
Donald G. Fisher
/s/ RANDALL A. HACK
- ------------------------------ Director
Randall A. Hack
</TABLE>
II-6
<PAGE>
Exhibit 5
April 27, 1999
Cornerstone Properties Inc.
Tower 56, 126 East 56th Street
New York, New York 10022
RE: Cornerstone Properties Inc.
Registration Statement on Form S-3
----------------------------------
Dear Sirs:
We have acted as special Nevada counsel for Cornerstone Properties Inc., a
Nevada corporation (the "Company"), in connection with the preparation of a
Registration Statement on Form S-3 ("Registration Statement"), being filed by
the Company with the Securities and Exchange Commission (the "Commission") under
the Securities Act of 1933, as amended (the "Act"), with respect to the
registration by the Company of 11,594,203 shares ("Shares") of the Company's
common stock, no par value per share, which shares were issued pursuant to the
terms of the Stock Purchase Agreement, dated June 22, 1999, by and between the
Company and PGGM, for the account of PGGM and DIHC. Capitalized terms used in
this Opinion Letter and not defined herein shall have the meaning given to them
in the Registration Statement.
We have examined originals or copies of such corporate records and
certificates of public officials as we have deemed necessary or advisable for
the purposes of this Opinion Letter. We have assumed the authenticity of all
documents submitted to us as originals, the genuineness of all signatures, the
legal capacity of natural persons and the conformity to originals of all copies
of all documents submitted to us. We have relied upon the certificates of all
public officials and corporate officers with respect to the accuracy of all
matters contained therein, including without limitation, the certificate of the
Company's Secretary, a copy of which is attached hereto as Exhibit A.
Based upon and subject to the foregoing, and subject to the
qualifications, limitations, restrictions and assumptions set forth below, we
are of the opinion that:
<PAGE>
Cornerstone Properties Inc.
April 27, 1999
Page 2
1. The Company is a corporation duly incorporated, validly existing, and
in good standing under the laws of the State of Nevada.
2. The Company has the authority to issue up to 250,000,000 shares of its
common stock.
3. The Shares have been duly authorized, are validly issued and are fully
paid and nonassessable.
Nothing herein shall be deemed an opinion as to the laws of any other
jurisdiction other than the State of Nevada.
This Opinion Letter is intended solely for the use of the Company in
connection with the Registration Statement. It may not be relied upon by any
other person or for any other purpose, or reproduced or filed publicly by any
person without the written consent of this firm; provided, however, we hereby
consent to the filing of this Opinion Letter as an exhibit to the Registration
Statement and to King & Spalding's reliance on this Opinion Letter in giving its
opinion in connection with such registration and offering. In giving consent, we
do not hereby admit that we are in a category of persons whose consent is
required pursuant to Section 7 of the Act or the rules and regulations of the
Commission promulgated thereunder, and we disclaim liability as an expert under
the securities laws of the United States or any other jurisdiction.
Very truly yours,
/s/ LIONEL SAWYER & COLLINS
<PAGE>
Exhibit A
Secretary's Certificate
<PAGE>
CORNERSTONE PROPERTIES
SECRETARY'S CERTIFICATE
The undersigned, Thomas P. Loftus, Secretary of Cornerstone Properties
Inc., a Nevada corporation (the "Company"), does hereby certify as of the date
hereof as follows:
1. I am the duly elected and presently acting Secretary of the Company and
as such have had access to the corporate records of the Company and am familiar
with the matters therein contained and herein certified.
2. Attached hereto as Exhibit 1 is a copy of the Company's Articles of
Incorporation (the "Articles") as certified by Nevada's Secretary of State on
November 25, 1998. The Articles have not been amended, modified, annulled or
revoked and are in full force and effect.
3. Attached hereto as Exhibit 2 is a copy of the Company's Bylaws dated
December 8, 1995 ("Current Bylaws"). The Current Bylaws, until the Company's
adoption of the Restated Bylaws (defined below), had not been amended, modified,
annulled or revoked and were in full force and effect, until such adoption.
4. Attached hereto as Exhibit 3 are resolutions of the Company's Board of
Directors adopting the Amended and Restated Bylaws, dated December 10, 1998
("Restated Bylaws"), a copy of which Restated Bylaws is attached hereto as
Exhibit 4. Such resolution is the only resolution or action of the Company's
Board of Directors dealing with adoption of the Restated Bylaws and such
resolution has not been amended, modified, annulled or revoked and is in full
force and effect. The Restated Bylaws have not been amended, modified, annulled
or revoked and are in full force and effect.
5. Attached hereto as Exhibit 5 are copies of resolutions of the Company's
Board of Directors authorizing the Company to enter into a Contribution
Agreement and Agreement and Plan of Merger by and among the Company, Cornerstone
Properties Limited Partnership, a Delaware limited partnership, William Wilson &
Associates, a California corporation, and the entities identified on Schedule 1
thereto (the "Contribution Agreement"), a Stock Purchase Agreement ("Stock
Purchase Agreement"), by and between the Company and Stichting Pensioenfonds
Voor De Gezondheid Geestelijke en Maatschappelijke Belangen, an entity formed
according to the laws of The Netherlands ("PGGM"), and various related
transactions, and approving the Amended and Restated Cornerstone Properties Inc.
1998 Long-Term Incentive Plan. All such transactions are collectively referred
to in this Certificate as the "Transactions." Such resolutions are the only
resolutions or actions of the Company's Board of Directors dealing with the
Transactions and such resolutions have not been amended, modified, annulled or
revoked and are in full force and effect.
6. Attached hereto as Exhibit 6 is a copy of a resolution of the Company's
Board of Directors, dated May 20, 1998.
<PAGE>
7. Attached hereto as Exhibit 7 are specimen copies of stock certificates
identical in all material respects to the certificates issued to represent
shares of the Company's stock issued to William Wilson & Associates, PGGM, and
certain employees of the Company pursuant to the Transactions (the "Shares").
Such specimen certificates are true, correct and complete.
8. The Company has received the consideration called for in the
Contribution Agreement and the Stock Purchase Agreement for the Shares and the
Shares have been issued and delivered as provided in those agreements.
9. Immediately prior to the Shares being issued, no more than 101,732,165
shares of the Company's common stock and 3,030,303 shares of the Company's
preferred stock were issued and outstanding or otherwise reserved through
options, warrants and other agreements or contractual arrangements existed which
entitled the holders or parties thereto to receive shares of the Company's
common stock or preferred stock.
In witness whereof, I have hereunto set my hand this 27th day of April,
1999.
/s/ Thomas P. Loftus
--------------------------
Thomas P. Loftus
Secretary
<PAGE>
Exhibit 1
Articles of Incorporation
[deleted but on file with Lionel Sawyer & Collins]
Exhibit 2
Current Bylaws
[deleted but on file with Lionel Sawyer & Collins]
Exhibit 3
Bylaw Resolution
[deleted but on file with Lionel Sawyer & Collins]
Exhibit 4
Restated Bylaws
[deleted but on file with Lionel Sawyer & Collins]
Exhibit 5
Board Transaction Resolutions
[deleted but on file with Lionel Sawyer & Collins]
Exhibit 6
Officer Appointment Resolution
[deleted but on file with Lionel Sawyer & Collins]
Exhibit 7
Specimen Stock Certificates
[deleted but on file with Lionel Sawyer & Collins]
<PAGE>
April 27, 1999
Cornerstone Properties Inc.
126 East 56th Street
New York, New York 10022
Re: Certain Federal Income Tax Matters
----------------------------------
Ladies and Gentlemen:
We have acted as tax counsel to Cornerstone Properties Inc., a Nevada
corporation (the "Company"), in connection with the preparation of that certain
Prospectus, dated April 27, 1999 (the "Prospectus"), relating to the
registration under the Securities Act of 1933, as amended (the "Securities
Act"), of 45,958,631 shares of the Company's common stock. The Prospectus has
been included in that certain Registration Statement on Form S-3 (the
"Registration Statement"), which has been filed with the Securities and Exchange
Commission. In connection therewith, the Company has requested our opinion with
respect to the following matters:
(i) the qualification of the Company as a real estate investment trust
("REIT") under the Internal Revenue Code of 1986, as amended (the
"Code"), commencing with the Company's taxable year ended December
31, 1993;
(ii) the treatment of Cornerstone Properties Limited Partnership (the
"Operating Partnership") as a partnership, and not as a corporation
or an association taxable as a corporation, for federal income tax
purposes; and
(iii) the accuracy of the discussion included in the Prospectus under the
heading "Certain United States Federal Income Tax Considerations."
Unless otherwise indicated, all terms used herein with initial capital
letters shall have the same meaning as in the Prospectus.
<PAGE>
Cornerstone Properties Inc.
April 27, 1999
Page 2
FACTS AND ASSUMPTIONS RELIED UPON
---------------------------------
In rendering the opinion expressed herein, we have examined such documents
as we have deemed appropriate, including (but not limited to) the Prospectus,
the Company's Articles of Incorporation, as amended, the Operating Partnership's
agreement of limited partnership, as amended, and the analyses of qualifying
income prepared by the Company. In our examination of documents, we have
assumed, with your consent, that all documents submitted to us are authentic
originals, or if submitted as photocopies or telecopies, that they faithfully
reproduce the originals thereof, that all such documents have been or will be
duly executed to the extent required, that all representations and statements
set forth in such documents are true and correct, and that all obligations
imposed by any such documents on the parties thereto have been or will be
performed or satisfied in accordance with their terms. We also have obtained
such additional information and representations as we have deemed relevant and
necessary through consultation with officers of the Company, including
representations from the Company in a letter to us of even date herewith.
OPINION
Based upon and subject to the foregoing, we are of the following opinion:
1. Commencing with its taxable year ended December 31, 1993, the
Company was organized and has operated in conformity with the
requirements for qualification and taxation as a REIT under the
Code, and the Company's proposed method of operation will enable it
to continue to meet the requirements for qualification and taxation
as a REIT under the Code.
2. For federal income tax purposes, the Operating Partnership has been
during and since its formation, and continues to be, treated as a
partnership and not as a corporation or an association taxable as a
corporation. If the Operating Partnership were to be classified as a
publicly traded partnership under Section 7704(b) of the Code, its
proposed method of operation and expected sources of gross income
would enable it to satisfy the 90% qualifying income exception under
Section 7704(c) of the Code and thereby avoid being treated as a
corporation for federal income tax purposes.
3. The discussion contained in the Prospectus under the heading
"Certain United States Federal Income Tax Considerations" is
accurate and fairly summarizes the federal income tax considerations
that are material to a holder of the Company's common stock, and, to
the extent such discussion contains statements of law or legal
conclusions, such statements and conclusions are the opinion of King
& Spalding.
<PAGE>
Cornerstone Properties Inc.
April 27, 1999
Page 3
The opinion expressed herein is given as of the date hereof and is based
upon the Code, the U.S. Treasury regulations promulgated thereunder, current
administrative positions of the U.S. Internal Revenue Service, and existing
judicial decisions, any of which could be changed at any time, possibly on a
retroactive basis. Any such changes could adversely affect the opinion rendered
herein and the tax consequences to the Company and its shareholders. In
addition, as noted above, our opinion is based solely on the documents that we
have examined, the additional information that we have obtained, and the
representations that have been made to us, and cannot be relied upon if any of
the facts contained in such documents or in such additional information is, or
later becomes, inaccurate or if any of the representations made to us is, or
later becomes, inaccurate. We are not, however, aware of any facts or
circumstances contrary to or inconsistent with the information, assumptions, and
representations upon which we have relied for purposes of this opinion. We
assume no obligation to advise you after the date hereof of facts or
circumstances that come to our attention, or changes in law that occur, which
could affect our opinion.
We hereby consent to the filing of this opinion as an Exhibit to the
Registration Statement and to the reference to us under the heading "Certain
United States Federal Income Tax Considerations" in the Prospectus. In giving
such consent, we do not thereby admit that we are in the category of persons
whose consent is required under the Securities Act.
Finally, our opinion is limited to the tax matters specifically covered
herein, and we have not been asked to address, nor have we addressed, any other
tax consequences to the Company, the Operating Partnership, or the holders of
the Company's common stock.
Very truly yours,
/s/ King & Spalding
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in this Registration Statement
on Form S-3 of our report dated February 24, 1999, except for Notes 8 and 20 for
which the date is February 26, 1999, on our audits of the consolidated financial
statements of Cornerstone Properties Inc. and subsidiaries (the "Company") as of
December 31, 1998 and 1997 and for each of the three years in the period ended
December 31, 1998, which report is included in the Annual Report on Form 10-K of
the Company for the year ended December 31, 1998. We also consent to the
reference to our firm under the caption "Experts."
/S/ PRICEWATERHOUSECOOPERS LLP
New York, New York
April 27, 1999
