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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 12, 1999
REGISTRATION NO. 333-59259
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 1
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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CORNERSTONE PROPERTIES INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C>
NEVADA 74-2170858
(State or other jurisdiction of incorporation or (I.R.S. Employer Identification Number)
organization)
</TABLE>
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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)
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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 for the Registrant)
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<TABLE>
<CAPTION>
COPIES TO:
<S> <C>
F. H. MOORE, JR., ESQ. JOHN J. KELLEY III, ESQ.
SHEARMAN & STERLING KING & SPALDING
599 LEXINGTON AVENUE 191 PEACHTREE STREET
NEW YORK, NEW YORK 10022 ATLANTA, GEORGIA 30303
</TABLE>
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: From time
to time after this Registration Statement becomes effective.
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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 of the 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. / /
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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 THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON
SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY
DETERMINE.
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THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. THE
SELLING STOCKHOLDER 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 12, 1999
PROSPECTUS
3,428,571 SHARES
CORNERSTONE PROPERTIES INC.
COMMON STOCK
Cornerstone Properties Inc. is a self-administered equity real estate
investment trust. The selling stockholder listed in this prospectus is offering
and selling up to 3,428,571 shares of our common stock.
The selling stockholder may sell all or a portion of its shares of common
stock, from time to time, through public or private transactions, in the
over-the-counter markets, on any exchange on which our common stock is traded,
at prevailing market prices or at privately negotiated prices. The selling
stockholder may sell its shares of common stock 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
stockholder may engage underwriters, brokers, dealers or agent, who may receive
commissions or discounts from the selling stockholder.
If required, the specific terms of any particular offering by the selling
stockholder will be set forth in an accompanying prospectus supplement,
including the number of shares to be sold, the public offering price, the names
of any underwriter, broker, dealer or agent and any applicable discounts or
commissions.
The selling stockholder and any underwriters, agents or broker-dealers that
participate with the selling stockholder in the distribution of the common stock
may be deemed to be "underwriters" within the meaning of the Securities Act of
1933. 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 the
Securities Act.
The selling stockholder will receive all of the net proceeds from the sale
of shares of common stock offered by this prospectus. We will not receive any
proceeds from such sales. We will pay substantially all of the expenses incident
to the registration of the shares of common stock. The selling stockholder will
be responsible for any underwriter discounts or selling commissions.
Our common stock is listed on the New York Stock Exchange under the ticker
symbol "CPP." Our common stock is also listed on the Frankfurt and Dusseldorf
Stock Exchanges.
SEE "RISK FACTORS" BEGINNING ON PAGE 3 TO READ ABOUT CERTAIN RISK FACTORS
YOU SHOULD CONSIDER BEFORE BUYING SHARES OF OUR COMMON STOCK.
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NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
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The date of this prospectus is April 12, 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.
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 prospectus supplement. We have not
authorized anyone else to provide you with different information. The selling
stockholder 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 prospectus 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.
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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. You can identify forward-looking statements
by the use of forward-looking words such as "may," "will," "should," "expect,"
"anticipate," "estimate" or "continue" or similar words. The cautionary
statements set forth in this prospectus and 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., 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 ("WW&A"). In that transaction, we also
acquired the development, construction management, property management and
leasing and tenant improvement services businesses of WW&A.
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.
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RISK FACTORS
Prior to making an investment decision with respect to the shares of common
stock offered by this prospectus, you should consider the following matters set
forth below, together with the other information included and incorporated by
reference in this prospectus.
THERE CAN BE NO ASSURANCE THAT WE WILL EFFECTIVELY MANAGE THE WW&A ACQUISITION
AND EXPANSION INTO NEW MARKETS
We have been growing rapidly through acquisitions. We expect that we will
continue to grow through selective, strategic acquisitions. Growth through
acquisitions entails numerous risks, including:
- difficulties in assimilating the operations, personnel, properties and the
financial, computer, payroll and other systems of the acquired businesses;
- diversion of resources from our existing business, including potential
distraction of our management team;
- entering geographic and business markets in which we have little or no
prior experience;
- unanticipated liabilities or contingencies of acquired businesses;
- the potential loss of key employees of the acquired businesses; and
- dilution to existing stockholders if we use our common stock, or other
securities convertible into our common stock, to acquire businesses.
In December 1998, we acquired 69 Class A office properties, aggregating
approximately 9.6 million square feet, from WW&A. The WW&A acquisition more than
doubled the size of our operations. These acquired properties are located
primarily in the San Francisco Bay Area and Southern California in which we
previously had little prior experience. The WW&A acquisition also requires us to
integrate the executive management, other employees, operations and information
systems of WW&A into our organization. We have not completed the integration of
the WW&A business. As a result, the risks discussed above still apply to the
WW&A acquisition.
We cannot assure you that we will be able to integrate successfully any
business that we might acquire in the future or that we will be able to complete
the integration of WW&A's business successfully. Our failure to do so could have
a material adverse effect on our business, financial condition, results of
operations and the market price of our common stock.
OUR PERFORMANCE AND SHARE VALUE ARE SUBJECT TO RISKS ASSOCIATED WITH THE REAL
ESTATE INDUSTRY
GENERAL. If our assets do not generate income sufficient to pay our
expenses, service our debt and maintain our properties, we may not be able to
make expected distributions to our stockholders. Several factors may adversely
affect the economic performance and value of our properties. These factors
include:
- changes in the national, regional and local economic climate;
- changes in local conditions such as an oversupply of office properties or
a reduction in demand for office properties;
- the attractiveness of our properties to tenants;
- competition from other available office properties; and
- changes in market rental rates and the need to periodically repair,
renovate and relet space.
Our performance also depends on our ability to collect rent from tenants and
to pay for adequate maintenance, insurance and other operating costs (including
real estate taxes), which could increase over
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time. Also, the expenses of owning and operating a property are not necessarily
reduced when circumstances such as market factors and competition cause a
reduction in income from the property. If a property is mortgaged and we are
unable to meet the mortgage payments, the lender could foreclose on the mortgage
and take the property. In addition, interest rate levels, the availability of
financing, changes in laws and governmental regulations (including those
governing usage, zoning and taxes) and financial distress or bankruptcies of
tenants may have a material adverse effect on our business, financial condition,
results of operations and the market price of our common stock.
WE MAY BE UNABLE TO RENEW LEASES OR RELET SPACE AS LEASES EXPIRE. When our
tenants decide not to renew their leases upon their expiration, we may not be
able to relet the space. Even if the tenants do renew or we can relet the space,
the terms of renewal or reletting, including the cost of required renovations,
may be less favorable than current lease terms. Through the end of 2003, leases
will expire on a total of 54.3% of the "Full Service Straight-Line Rent" (the
average of all actual rent required to be paid through the term of the leases
relating to the properties calculated in accordance with GAAP, plus recoveries).
If we are unable to promptly renew the leases or relet this space, or if the
rental rates upon such renewal or reletting are significantly lower than
expected rates, then our results of operations and financial condition will be
adversely affected. Consequently, our cash flow, our ability to make
distributions to stockholders and the market price of our common stock would be
adversely affected.
NEW ACQUISITIONS MAY FAIL TO PERFORM AS EXPECTED. We intend to continue to
actively acquire office properties. Newly acquired properties may fail to
perform as expected. If newly acquired properties fail to deliver expected
returns, our business, financial condition, results of operations and the market
price of our common stock would be adversely affected.
COMPETITION FOR ACQUISITIONS MAY RESULT IN INCREASED PRICES FOR
PROPERTIES. Other major real estate investors with significant capital will
compete with us for attractive investment opportunities. These competitors
include other publicly traded REIT's, private REIT's, investment banking firms
and private institutional investment funds. This competition has increased
prices for office properties in recent years. As prices increase, the spread
between the rate of return on investments and our cost of capital is reduced.
Accordingly, the increase in prices for acquisitions will make it more difficult
for us to make suitable property acquisitions on favorable terms.
BECAUSE OUR PROPERTIES ARE ILLIQUID AND SUBJECT TO RESTRICTIONS ON SALE, WE
MAY NOT BE ABLE TO SELL PROPERTIES AT THE MOST FAVORABLE TIMES. Real estate
investments, especially office property investments of relatively large size,
generally cannot be sold quickly. We may not be able to vary our portfolio
promptly in response to economic or other conditions. This inability to respond
promptly to changes in the performance of our investments could adversely affect
our financial condition and ability to service debt and make distributions to
our stockholders. Further, Cornerstone has entered into several agreements
pursuant to which Cornerstone has subjected a number of its properties,
including all of the WW&A projects, to restrictions that may adversely impact
Cornerstone's ability to sell or otherwise dispose of such properties if such
disposal would result in certain adverse tax consequences for the former owners
of such properties. Under the terms of its partnership agreement, our operating
partnership is also subject to a number of similar sale and merger restrictions
and debt maintenance obligations in connection with certain of its properties.
These restrictions may prevent us from selling properties on favorable terms and
thereby could have a material adverse effect on our business, financial
condition, results of operations and the market price of our common stock.
OUR ASSETS ARE CONCENTRATED IN THE SAN FRANCISCO BAY AREA. 45 of
Cornerstone's 96 office properties are located in the metropolitan San Francisco
area. This concentration of assets makes us particularly vulnerable to adverse
changes in the San Francisco economy. A deterioration of economic conditions in
this market would have a material adverse effect on our business, financial
condition, results of operations and the market price of our common stock.
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OUR ASSETS ARE CONCENTRATED IN EARTHQUAKE-PRONE AREAS. 66 of our office
properties are located in California, an area of particular earthquake risk. A
major earthquake in California may cause substantial damage or destruction to
our properties. We carry earthquake insurance on all of our properties located
in California. Our earthquake policies, however, are subject to coverage
limitations. In light of the California earthquake risk, California building
codes since the early 1970s have established construction standards for all new
buildings. The current and strictest construction standards were adopted in
1987. Of the 66 office properties located in California as of April 1, 1999, 25
have been built since January 1, 1988, and we believe they were constructed in
full compliance with the applicable standards existing at the time of
construction. It is possible that material losses in excess of insurance
proceeds will occur in the future as a result of earthquakes, which would have a
material adverse effect on our business, financial condition, results of
operations and the market price of our common stock.
WE ARE DEPENDENT ON EXTERNAL SOURCES OF CAPITAL
To qualify as a REIT, we must distribute to stockholders each year at least
95% of our "REIT taxable income" (excluding any net capital gain). Because of
these distribution requirements, it is not likely that we will be able to fund
all future capital needs from our operations. We therefore will have to rely on
third-party sources of capital, which may or may not be available on favorable
terms or at all. Our access to third-party sources of capital depends on a
number of things, including the market's perception of our growth potential and
our current and potential future earnings. Any failure to obtain additional
capital when needed on acceptable terms, or at all, could have a material
adverse effect on our business, financial condition, results of operations and
the market price of our common stock. Moreover, additional equity offerings may
result in substantial dilution of stockholders' interests, and additional debt
financing may substantially increase our leverage.
RISKS ASSOCIATED WITH OUR INDEBTEDNESS
WE HAVE SUBSTANTIAL LEVERAGE AND DEBT SERVICE OBLIGATIONS. We have a
substantial amount of debt in relation to our equity. Our relatively high
leverage could negatively affect our company in a number of ways, including:
- We may be unable to obtain additional financing in the future for working
capital, capital expenditures, acquisitions, development and other
corporate purposes.
- A significant portion or our cash flow from operations will be dedicated
to paying debt service, thereby reducing funds that are available for
other corporate purposes and for distributions to our stockholders.
- The level of our debt could limit our flexibility in responding to
downturns in the economy or our business.
- The level of our debt could place us at a disadvantage compared to our
competitors that have less debt.
Any of the foregoing could have a material adverse effect on our business,
financial condition, results of operations and the market price of our common
stock.
REFINANCING RISKS. We have significant amounts of debt maturing under
outstanding mortgage loans beginning in the year 2000. Our cash flow from
operations will not be sufficient in all years to repay all of our debt at its
scheduled maturity. We may not be able to refinance our existing debt and, if we
can, the terms of such refinancing might not be as favorable as the terms of our
existing debt. In the event we are unable to refinance such mortgage
indebtedness on acceptable terms, we might be forced to sell properties at
unfavorable terms, which might result in a loss of income and asset value and
might adversely affect our cash flow available for distribution to our
stockholders. In addition, if we are unable to meet mortgage
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payments as they become due, the mortgages securing such properties could be
foreclosed upon, resulting in a loss of income and asset value.
TERMS OF OUR INDEBTEDNESS RESTRICT OUR CORPORATE ACTIVITIES. The mortgages
on our properties and our revolving credit facility contain negative covenants
which, among other things, limit our ability to incur additional indebtedness,
create further liens on our assets, enter into new leases or materially modify
existing leases and apply the proceeds from the sale of assets. We cannot assure
you that these restrictive covenants will not adversely affect our ability to
finance our future operations or capital needs or to engage in other business
activities that may be in the best interests of our stockholders. As a result,
the restrictive covenants in the agreements which govern our debt could have a
material adverse effect on our business, financial condition, results of
operations and the market price of our common stock.
RISING INTEREST RATES COULD ADVERSELY AFFECT CASH FLOW. Advances under the
Revolving Credit Facility bear interest at a variable rate depending upon
Cornerstone's leverage ratio based upon LIBOR. We had, as of April 1, 1999,
interest rate hedging agreements for approximately $250.0 million of our
floating rate debt to limit our exposure to rising interest rates. Although
hedging agreements enable us to convert floating rate liabilities to fixed rate
liabilities, they expose us to the risk that the counterparties to such hedge
agreements may not perform, which could increase our exposure to rising interest
rates. We may borrow additional money, or refinance existing debt, with variable
interest rates in the future and enter into other transactions to limit our
exposure to rising interest rates as appropriate. Increases in interest rates,
or the loss of the benefits of hedging agreements, would increase our interest
expense, which would adversely affect cash flow and our ability to make expected
distributions to stockholders.
PGGM AND WILLIAM WILSON III EXERCISE SIGNIFICANT CONTROL OF CORPORATE GOVERNANCE
MATTERS
Stichting Pensionfonds Voor de Gezonheid Geestelijke en Maatschappelijke
Belangen ("PGGM"), Dutch pension fund, owns approximately 35.7% of the
outstanding shares of our common stock as of April 1, 1999. As a result, PGGM
exercises significant influence over the outcome of any matters submitted to a
vote of stockholders. PGGM also has the right to designate two individuals for
nomination to Cornerstone's board of directors. Cornerstone's bylaws provide
that William Wilson III shall serve as Chairman of the Board for a term of at
least three years from the date of the WW&A acquisition, December 16, 1998.
During such term, Mr. Wilson will have the right to designate himself and two
other individuals to serve as directors of Cornerstone. These provisions give
Mr. Wilson significant influence over the management of Cornerstone. In
exercising their control, PGGM and Mr. Wilson may have interests that differ
from those of other stockholders with respect to prospective acquisitions,
dispositions of assets, development opportunities, compensation policy, setting
the appropriate degree of leverage for Cornerstone or other matters. PGGM and
Mr. Wilson, if they act in concert, may delay or prevent a change in control of
Cornerstone or other transaction that could provide the stockholders with a
premium over the then-prevailing market price of their shares of common stock or
which might otherwise be in the best interest of our stockholders.
WE HAVE A SHARE OWNERSHIP LIMIT FOR REIT TAX PURPOSES
To remain qualified as a REIT, federal tax laws require that not more than
50% in value of our outstanding shares of common stock may be owned, directly or
indirectly, by five or fewer individuals (as defined in the federal income tax
laws applicable to REITs) at any time during the last half of any year. We refer
to this requirement as the "Five or Fewer Requirement". Our articles of
incorporation contain restrictions on share ownership that are designed to
prevent violation of this Five or Fewer Requirement. Our articles of
incorporation exempt certain stockholders from the Five or Fewer Requirement and
permit the board of directors to waive or modify the Five or Fewer Requirement
with respect to a stockholder where such exemption or waiver would not
jeopardize our REIT status. The Five or Fewer Requirement could delay or prevent
a change in control and, therefore, could adversely affect our stockholders'
ability to realize a premium over the then-prevailing market price for the
common stock.
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THIRD-PARTY SERVICES BUSINESS RISKS; LACK OF CONTROL OF WCP SERVICES, INC.
THIRD-PARTY SERVICES CONTRACTS MAY BE TERMINATED. In addition to owning of
our properties, we provide fee-based management, leasing, construction and
development services for third parties. Many of these services are provided
under contracts that can be terminated by either party upon short or no notice.
Any such contract would likely be terminated in connection with a sale of the
property, over which we have no control. When they expire, these contracts might
not be renewed or might be renewed on less favorable terms. Also, the rental
revenues on which certain management fees are based could decline as a result of
general real estate market conditions or specific market factors. This would
result in decreased management fee income for Cornerstone.
WE DO NOT CONTROL OUR MANAGEMENT AND SERVICES BUSINESS. To ensure our
qualification as a REIT, our third-party services business is conducted by WCP
Services, Inc. Although we own 95% of the economic interest in WCP Services,
Inc., its voting stock is owned by William Wilson III and John S. Moody. We
therefore do not control the timing or amount of distributions or the management
and operation of WCP Services, Inc. As a result, decisions relating to the
declaration and payment of distributions and the business policies and
operations of WCP Services, Inc. could be adverse to our interests or could lead
to adverse financial results.
ENVIRONMENTAL PROBLEMS ARE POSSIBLE AND CAN BE COSTLY
Federal, state and local laws and regulations relating to the protection of
the environment may require a current or previous owner or operator of real
estate to investigate and clean up hazardous or toxic substances released on a
property. The owner or operator may have to pay a governmental entity or third
parties for property damage and for investigation and clean-up costs incurred in
connection with the contamination. Such laws typically impose clean-up
responsibility and liability without regard to whether the owner or operator
knew of or caused the presence of the contaminants. Even if more than one person
may have been responsible for the contamination, each person covered by the
environmental laws may be held responsible for all of the clean-up costs
incurred. In addition, third parties may sue the owner or operator of a site for
damages and costs resulting from environmental contamination emanating from that
site. The costs of any such investigation, clean-up or liability for damages
could be substantial. Additionally, the presence of hazardous or toxic
substances, or the failure to properly remediate such substances, may adversely
affect an owner's ability to borrow using such real estate as collateral.
We are not aware of any environmental liabilities at the properties that we
believe would have a material adverse effect on our business, assets, financial
condition or results of operations. We believe that our properties are in
compliance in all material respects with applicable environmental laws.
Unidentified environmental liabilities on our current properties or the
properties we acquire in the future could arise, however, and could have an
adverse effect on our business, financial condition, results of operations and
the market price of our common stock.
THE MARKET VALUE OF OUR COMMON STOCK CAN BE ADVERSELY AFFECTED BY A NUMBER OF
FACTORS
CHANGES IN MARKET CONDITIONS COULD ADVERSELY AFFECT THE MARKET PRICE OF OUR
COMMON STOCK. As with other publicly traded shares, the value of our common
stock depends on various market conditions, which may change from time to time.
Among the market conditions that may affect the value of our common stock are
the following: the extent of institutional investor interest in Cornerstone; the
reputation of REIT's and office REIT's generally and the attractiveness of their
equity securities in comparison to other equity securities (including securities
issued by other real estate companies); our financial condition and performance;
and general financial market conditions.
OUR EARNINGS AND CASH DISTRIBUTIONS WILL AFFECT THE MARKET PRICE OF OUR
COMMON STOCK. We believe that the market value of a REIT's common stock is
based at least in part upon the market's perception of the REIT's growth
potential and its current and potential future cash distributions, as well as
upon the real
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estate market value of the underlying assets. For that reason, our common stock
may trade at prices that are higher or lower than the net asset value per share.
Our failure to meet the market's expectations with regard to future earnings and
cash distributions would likely adversely affect the market price of our common
stock.
MARKET INTEREST RATES MAY HAVE AN EFFECT ON THE VALUE OF OUR COMMON
STOCK. One of the factors that investors consider important in deciding whether
to buy or sell shares of a REIT is the distribution rate on such shares (as a
percentage of the price of such shares) relative to market interest rates. If
market interest rates go up, prospective purchasers of REIT shares may expect a
higher distribution rate. Higher interest rates would not, however, result in
more funds for us to distribute and, in fact, would likely increase our
borrowing costs and potentially decrease funds available for distribution. Thus,
higher market interest rates could cause the market price of our common stock to
go down.
OUR SUCCESS AS A REIT IS DEPENDENT ON COMPLIANCE WITH FEDERAL INCOME TAX
REQUIREMENTS
FAILURE TO QUALIFY AS A REIT WOULD HAVE SERIOUS ADVERSE CONSEQUENCES TO OUR
STOCKHOLDERS. We have made an election to be taxed as a REIT and believe that
we meet the requirements for qualification and taxation as a REIT. We plan to
continue to meet the requirements for taxation as a REIT. Many of these
requirements, however, are highly technical and complex. The determination that
Cornerstone is a REIT requires an analysis of various factual matters and
circumstances that may not be totally within our control. For example, to
qualify as a REIT we must meet certain tests regarding the sources of our gross
income and the nature of our assets. Cornerstone is also required to distribute
to stockholders at least 95% of its REIT taxable income (excluding capital
gains). The fact that we hold our assets through our operating partnership and
its subsidiaries further complicates the application of the REIT requirements.
Even a technical or inadvertent mistake could jeopardize our REIT status.
Furthermore, Congress and the Internal Revenue Service ("IRS") might make
changes to the tax laws and regulations, and the courts might issue new rulings
that make it more difficult, or impossible, for Cornerstone to remain qualified
as a REIT.
If Cornerstone fails to qualify as a REIT, we would be subject to federal
income tax at regular corporate rates. Also, unless the IRS granted Cornerstone
relief under certain statutory provisions, we would remain disqualified as a
REIT for four years following the year Cornerstone first failed to qualify. If
Cornerstone failed to qualify as a REIT, we would have to pay significant income
taxes and would therefore have less money available for investments or for
distributions to stockholders. This would likely have a significant adverse
effect on the value of our common stock. In addition, Cornerstone would no
longer be required to make any distributions to stockholders.
EFFECT OF REIT DISTRIBUTION REQUIREMENTS. To qualify as a REIT, we are
required each year to distribute to our stockholders at least 95% of our "REIT
taxable income" (excluding net capital gains). In addition, we are subject to a
nondeductible 4% excise tax on the amount, if any, by which certain
distributions we pay with respect to any calendar year are less than the sum of
85% of our ordinary income and 95% of our capital gain net income for the
calendar year, plus any amount of such income not distributed in prior years.
Although we anticipate that cash flow from operations will be sufficient to
enable us to pay our operating expenses and meet the distribution requirements
discussed above, we cannot assure you that this will be the case. In addition,
there could be differences in timing between the accrual of income and the
deduction of expenses in arriving at our taxable income. Under certain
circumstances, it may be necessary for us to incur borrowings or otherwise
obtain funds to satisfy the distribution requirements associated with
maintaining our qualification as a REIT. We cannot assure you that we will be
able to borrow funds or otherwise obtain funds if and when necessary to satisfy
such requirements.
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GOVERNMENTAL REGULATIONS MAY IMPOSE SIGNIFICANT COSTS ON OUR BUSINESS
The properties are, and properties that we may acquire in the future will
be, subject to various other federal, state and local regulatory requirements
such as local building codes and other similar regulations. Failure to comply
with these requirements could result in the imposition of fines by governmental
authorities or awards of damages to private litigants. We believe that our
properties are currently in substantial compliance with all applicable
regulatory requirements. Although we do not contemplate any material
expenditures at this time in order to comply with any such laws or regulations,
we cannot assure you that these requirements will not be changed or that new
requirements will not be imposed that would require us to make significant
unanticipated expenditures, which could have an adverse effect on our business
and our ability to make distributions to stockholders. Similarly, changes in
laws increasing the potential liability for environmental conditions existing at
the properties may result in significant unanticipated expenditures, which could
adversely affect our business and our ability to make distributions to
stockholders.
WE FACE YEAR 2000 RISKS
The year 2000 issue is the result of computer programs having been written
using two digits rather than four to define the applicable year. The programming
defect could result in date-sensitive software recognizing a date using "00" as
the year 1900 rather than the year 2000. This error could result in a system
failure or miscalculations causing disruption of operations, including, among
other things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities. We are in the process of
completing our assessment of our systems and the systems of third parties with
whom we do business. If our systems or the systems of other companies on whose
services we depend or with whom our systems interface are not year 2000 ready
when they need to be, our business could be materially and adversely affected.
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USE OF PROCEEDS
We are registering the shares of common stock offered by this prospectus for
the account of the selling stockholder identified in the section of this
prospectus entitled "Selling Stockholder." The selling stockholder will receive
all of the net proceeds from the sale of the common stock. We will not receive
any of the proceeds from the sale of such shares.
SELLING STOCKHOLDER
The Prudential Insurance Company of America, on behalf of and for the
benefit of the Prudential Property Investment Separate Account II, the selling
stockholder, is a New Jersey corporation having its principal place of business
in Newark, New Jersey. On April 28, 1998, Cornerstone originally issued the
3,428,571 shares of common stock offered hereby to the selling stockholder as
part of the consideration paid to the selling stockholder for its interest in a
Class A office property located at One Memorial Drive, Cambridge, Massachusetts
acquired by one of Cornerstone's subsidiaries on that date. Within the past
three years, none of the selling stockholder, its directors, officers or
employees had any position, office or other material relationship with our
company or any of our predecessors or affiliates.
The following table sets forth certain information with respect to the
selling stockholder as of April 12, 1999, including the number of shares offered
by the selling stockholder, the number of shares beneficially owned by the
selling stockholder before the offering and the percentage of ownership of the
outstanding shares of common stock represented by the shares held by the selling
stockholder before the offering. The selling stockholder may from time to time
offer and sell pursuant to this prospectus any or all of the shares. There can
be no assurance that all or any of the shares offered hereby will be sold. If
any shares are sold, the selling stockholder will receive all of the net
proceeds from the sale of its shares offered hereby.
<TABLE>
<CAPTION>
NUMBER OF
SHARES OWNED NUMBER OF
PRIOR TO PERCENTAGE OF SHARES WHICH
OFFERING OUTSTANDING SHARES MAY BE OFFERED HEREBY
--------------- ----------------------- ---------------------
<S> <C> <C> <C>
The Prudential Insurance Company of America, on 3,428,571
behalf of and for the benefit of the Prudential
Property Investment Separate Account II............ 2.7% 3,428,571
</TABLE>
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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, 1992 (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,
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under certain circumstances, Cornerstone may be subject to the "alternative
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.
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,
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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.
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,
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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, the annual value of which 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 of 1998
and has operated the hotel since the acquisition. The gross income from the
hotel constitutes nonqualifying income for purposes of the 95% and 75% gross
income tests. Cornerstone currently intends to have the Operating Partnership
continue to operate the hotel (rather than lease it to a third-party lessee) to
the extent the gross income therefrom will not 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
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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 value of
the stock of the WCP Services, however. 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
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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 (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
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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.
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.
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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 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
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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 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
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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 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
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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 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).
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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 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.
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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 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.
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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.
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PLAN OF DISTRIBUTION
The selling stockholder may sell the shares directly or through
broker-dealers acting as principal or agent, or pursuant to a distribution by
one or more underwriters on a firm commitment or best-efforts basis. The selling
stockholder may sell from time to time, in one or more transactions, 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 selling
stockholder will determine the offering price of the shares from time to time
and, at the time of such determination, such offering price may be higher or
lower than the market price of the common stock on the NYSE. In connection with
an underwritten offering, underwriters or agents may receive compensation in the
form of discounts, concessions or commissions from the selling stockholder or
from purchasers of shares for whom they may act as agents. 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 selling stockholder, or its pledgee, donee, transferee or other
successor in interest, may offer and sell its shares of common stock from time
to time 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 stockholder may accept and, together with any agent of the
selling stockholder, 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 stockholder.
To the extent required in connection with a particular offering, Cornerstone
will set forth in a prospectus supplement accompanying this prospectus, or, if
appropriate, in a post-effective amendment, the terms of the offering, including
among other things, the number of shares of common stock to be sold, the
purchase price, public offering price, the names of any agents, dealers or
underwriters and any applicable commissions or discounts.
Cornerstone has 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 stockholder may not offer or sell its
shares of common stock unless (i) Cornerstone has registered or qualified such
shares for sale in such states or (ii) Cornerstone has complied with an
available exemption from registration or qualification. Also, in certain states,
to comply with such state securities laws, the selling stockholder can offer and
sell its shares of common stock only through registered or licensed brokers or
dealers.
25
<PAGE>
Under applicable rules and regulations under the Exchange Act, any person
engaged in the distribution of the common stock offered may be restricted from
engaging in market making activities with respect to the common stock. In
addition, and without limiting the foregoing, the selling stockholder will be
subject to applicable provisions of the Exchange Act and the rules and
regulations thereunder, which may limit the timing of purchases and sales of the
shares by the selling stockholder.
If the selling stockholder offers the shares to or through underwriters, the
rules of the Commission permit the underwriters to engage in certain
transactions that stabilize the price of the common stock. Such transactions
consist of bids or purchases for the purpose of pegging, fixing or maintaining
the price of the common stock.
If the selling stockholder offers the shares to or through underwriters and
the underwriters create a short position in the common stock in connection with
the offering, i.e., if they sell more shares than are being offered by the
selling shareholder, the underwriters may reduce that short position by
purchasing common stock in the open market.
If the selling stockholder offers shares to or through underwriters, the
underwriters may impose a penalty bid on certain underwriters and selling group
members. This means that, if the underwriters purchase shares of common stock in
the open market to reduce the underwriters' short position or to stabilize the
price of the common stock, they may reclaim the amount of the selling concession
from the underwriters and selling group members who sold those shares as part of
the offering.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases. The imposition of a penalty bid
might also have an effect on the price of a security to the extent that it were
to discourage resales of the security. If the selling stockholder offers shares
to or through underwriters, none of the selling stockholder, Cornerstone or any
of the underwriters makes any representation or prediction as to the direction
or magnitude of any effect that the transactions described above may have on the
price of the common stock. In addition, none of the selling stockholder,
Cornerstone or any of the underwriters makes any representation that the
underwriters will engage in such transactions, or that such transactions, once
commenced, will not be discontinued without notice.
Under agreements into which Cornerstone may enter, underwriters, dealers and
agents who participate in the distribution of Securities may be entitled to
indemnification by Cornerstone against certain liabilities, including
liabilities under the Securities Act. 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.
There can be no assurance that the selling stockholder will sell any or all
of the Shares offered hereunder.
Cornerstone will pay all the expenses incident to the registration of the
shares offered hereby, including, without limitation, Commission filing fees and
expenses of compliance with state securities or "blue sky" laws, PROVIDED,
HOWEVER, that the selling stockholder will pay any underwriting discounts,
commissions, and transfer taxes.
Cornerstone has agreed to indemnify the selling stockholder against certain
liabilities, including liabilities under the Securities Act.
26
<PAGE>
LEGAL MATTERS
The validity of the shares of common stock offered hereby will be passed
upon for Cornerstone by Lionel Sawyer & Collins, Las Vegas, Nevada. Certain tax
matters will be passed upon for Cornerstone by King & Spalding, Atlanta,
Georgia.
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.
27
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED OR INCORPORATED BY REFERENCE IN THIS PROSPECTUS
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION 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 A SOLICITATION OF AN OFFER TO
BUY ANY OF THE SECURITIES BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR
SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR
SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANY PERSON TO WHOM IT IS UNLAWFUL
TO MAKE SUCH OFFER OR SOLICITATION IN SUCH JURISDICTION. NEITHER THE DELIVERY OF
THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES,
CREATE ANY IMPLICATION THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO THE DATE HEREOF OR THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF
CORNERSTONE SINCE SUCH DATE OR, IN THE CASE OF INFORMATION INCORPORATED HEREIN
BY REFERENCE, THE DATE OF FILING WITH THE COMMISSION.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Where You Can Find More Information....................................... 1
Incorporation of Certain Documents
by Reference............................................................ 1
Special Note Regarding Forward-Looking Statements......................... 2
Information About the Company............................................. 2
Risk Factors.............................................................. 3
Use of Proceeds........................................................... 10
Selling Stockholder....................................................... 10
Certain United States Federal
Income Tax Considerations............................................... 11
Plan of Distribution...................................................... 25
Legal Matters............................................................. 27
Experts................................................................... 27
</TABLE>
3,428,571 SHARES
CORNERSTONE
PROPERTIES INC.
COMMON STOCK
---------------------
PROSPECTUS
---------------------
APRIL 12, 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table is an itemized listing of expenses to be incurred by
Cornerstone in connection with the issuance and distribution of the shares of
common stock being registered hereby, other than underwriting discounts and
commissions. All amounts shown are estimates, except the Registration Fee and
the NYSE Listing Fee:
<TABLE>
<S> <C>
Registration Fee.................................................. $ 18,079
NYSE Listing Fee.................................................. 12,000
Printing and Engraving Expenses................................... 30,000
Accounting Fees and Expenses...................................... 5,000
Legal Fees and Expenses (other than Blue Sky)..................... 50,000
Transfer Agent and Registrar Fees................................. 0
Miscellaneous..................................................... 0
Total............................................................. $ 115,079
---------
---------
</TABLE>
ITEM 15. INDEMNIFICATION OF OFFICERS AND DIRECTORS
Subsection 1 of 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, 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 actions were unlawful.
Subsection 2 of 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
II-1
<PAGE>
attorneys' fees) actually and reasonably incurred by him in connection
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 Cornerstone's Bylaws 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 Cornerstone 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
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ----------- --------------------------------------------------------------------------------
<C> <S>
+4.1 Specimen of Common Stock Certificate.
++4.2(a) Restated Articles of Incorporation of Cornerstone.
+4.2(b) Certificate of Amendment of Restated Articles of Incorporation of Cornerstone,
dated October 27, 1997.
*4.2(c) Certificate of Amendment of Restated Articles of Incorporation of Cornerstone,
dated July 10, 1998.
+++4.3 Restated and Amended Bylaws of Cornerstone.
*5.1 Opinion of Lionel Sawyer & Collins.
8.1 Opinion of King & Spalding as to certain tax matters.
*23.1 Consent of Lionel Sawyer & Collins (contained in the opinion filed as Exhibit
5.1).
23.2 Consent of King & Spalding (contained in the opinion filed as Exhibit 8.1).
23.3 Consent of PricewaterhouseCoopers LLP.
*24.1 Power of Attorney.
</TABLE>
- ------------------------
+ Incorporated by reference from Cornerstone's Registration Statement on Form
S-3, as filed with the Commission on March 2, 1998 (File No. 333-47149).
++ Incorporated by reference from Cornerstone's Annual Report on Form 10-K for
the year ended December 31, 1995.
+++ Incorporated by reference from Cornerstone's Current Report on Form 8-K
dated December 16, 1998, as filed with the Commission on December 31, 1998.
* Previously filed.
II-2
<PAGE>
ITEM 17. UNDERTAKINGS
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;
(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; and
(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) of this section
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 periodic reports filed with or
furnished to the Commission by the Registrant pursuant to Section 13 or
Section 15(d) of the Exchange Act that are incorporated by reference in the
Registration Statement;
(2) that, for the purpose of determining any liability under the
Securities Act, 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; and
(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.
The undersigned Registrant hereby further undertakes that, for purposes of
determining any liability under the Securities Act, each filing of the
Registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Exchange Act (and, where applicable, each filing of an employee benefit plan's
annual report pursuant to Section 15(d) of the Exchange Act) 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.
The undersigned Registrant hereby further undertakes to deliver or cause to
be delivered with the Prospectus, to each person to whom the Prospectus is sent
or given, the latest annual report to security holders that is incorporated by
reference in the Prospectus and furnished pursuant to and meeting the
requirements of Rule 14a-3 or Rule 14c-3 under the Exchange Act; and, where
interim financial information required to be presented by Article 3 of
Regulation S-X are not set forth in the Prospectus, to deliver, or cause to be
delivered to each person to whom the Prospectus is sent or given, the latest
quarterly report that is specifically incorporated by reference in the
Prospectus to provide such interim financial information.
II-3
<PAGE>
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the 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, as amended, 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 New York, New York, on this 12th day of April, 1999.
CORNERSTONE PROPERTIES INC.
BY: /S/ JOHN S. MOODY
-----------------------------------------
John S. Moody
Name:
CHIEF EXECUTIVE OFFICER AND
PRESIDENT
Title:
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
SIGNATURE TITLE DATE
- ------------------------------ --------------------------- -------------------
/s/ WILLIAM WILSON III
- ------------------------------ April 12, 1999
William Wilson III Chairman of the Board of
Directors
/s/ RODNEY C. DIMOCK
- ------------------------------ April 12, 1999
Rodney C. Dimock Chief Operating Officer and
Director
/s/ JOHN S. MOODY
- ------------------------------ April 12, 1999
John S. Moody Chief Executive Officer,
President and Director
/s/ KEVIN P. MAHONEY
- ------------------------------ April 12, 1999
Kevin P. Mahoney Senior Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
*
- ------------------------------ April 12, 1999
Cecil D. Conlee Director
*
- ------------------------------ April 12, 1999
Blake Eagle Director
*
- ------------------------------ April 12, 1999
Dr. Karl-Ludwig Hermann Director
*
- ------------------------------ April 12, 1999
Hans C. Mautner Director
*
- ------------------------------ April 12, 1999
Dr. Lutz Mellinger Director
II-5
<PAGE>
SIGNATURE TITLE DATE
- ------------------------------ --------------------------- -------------------
*
- ------------------------------ April 12, 1999
Craig R. Stapleton Director
*
- ------------------------------ April 12, 1999
Michael J.G. Topham Director
- ------------------------------ April 12, 1999
Dick van den Bos Director
- ------------------------------ April 12, 1999
Jan van der Vlist Director
- ------------------------------ April 12, 1999
Donald G. Fisher Director
- ------------------------------ April 12, 1999
Randall A. Hack Director
<TABLE>
<S> <C>
*By: /s/ JOHN S. MOODY
---------------------------------------
John S. Moody
ATTORNEY-IN-FACT
</TABLE>
II-6
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- ---------------------------------------------------------------------------------------------
<C> <S> <C>
+4.1 Specimen of Common Stock Certificate.
++4.2(a) Restated Articles of Incorporation of Cornerstone.
+4.2(b) Certificate of Amendment of Restated Articles of Incorporation of Cornerstone, dated October
27, 1997.
*4.2(c) Certificate of Amendment of Restated Articles of Incorporation of Cornerstone, dated July 10,
1998.
+++4.3 Restated and Amended Bylaws of Cornerstone.
*5.1 Opinion of Lionel Sawyer & Collins.
8.1 Opinion of King & Spalding as to certain tax matters.
*23.1 Consent of Lionel Sawyer & Collins (contained in the opinion filed as Exhibit 5.1).
23.2 Consent of King & Spalding (contained in the opinion filed as Exhibit 8.1).
23.3 Consent of PricewaterhouseCoopers LLP.
*24.1 Power of Attorney.
</TABLE>
- ------------------------
+ Incorporated by reference from Cornerstone's Registration Statement on Form
S-3, as filed with the Commission on March 2, 1998 (File No. 333-47149).
++ Incorporated by reference from Cornerstone's Annual Report on Form 10-K for
the year ended December 31, 1995.
+++ Incorporated by reference from Cornerstone's Current Report on Form 8-K
dated December 16, 1998, as filed with the Commission on December 31, 1998.
* Previously filed.
<PAGE>
Exhibit 8.1
[LETTERHEAD OF KING & SPALDING]
April 12, 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 special tax counsel to Cornerstone Properties Inc., a
Nevada corporation (the "Company"), in connection with the preparation of that
certain Prospectus, dated April 9, 1999 (the "Prospectus"), relating to the
registration under the Securities Act of 1933, as amended (the "Securities
Act"), of 3,428,571 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, 1992;
(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 9, 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, 1992, 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
<PAGE>
Cornerstone Properties Inc.
April 9, 1999
Page 3
legal conclusions, such statements and conclusions are the opinion
of King & Spalding.
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 headings "Certain
United States Federal Income Tax Considerations" and "Legal Matters" 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 23.3
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 7, 1999
