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EXHIBIT 2
UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF CALIFORNIA
JACK OLIVE, JONATHAN NOBLE, M.D., JOHN
P. PEDJOE AND ALLSOP, INC. PROFIT
SHARING PLAN & TRUST, on behalf of
themselves and all others similarly
situated and derivatively on behalf of
NATIONAL INCOME REALTY TRUST, a
California business trust, CONTINENTAL
MORTGAGE AND EQUITY TRUST, a
California business trust,
TRANSCONTINENTAL REALTY INVESTORS, a
California business trust, and INCOME
OPPORTUNITY REALTY TRUST, a California
business trust,
Plaintiffs,
vs.
GENE E. PHILLIPS; WILLIAM S.
FRIEDMAN; RICHARD N. LAPP;
MICHAEL E. SMITH; WILLIE K.
DAVIS; RAYMOND V. J. SCHRAG;
RANDALL K. GONZALEZ; JAMES W. HAMMOND,
JR.; NATIONAL REALTY ADVISORS, INC., a
Texas corporation; NATIONAL REALTY,
L.P.,
-- caption continues --
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Case No. C 89 4331 MHP
DECLARATION OF WILLIAM A. ACKMAN
Date: August 8, 2000
Time: 2:00 p.m.
Place: Courtroom of the
Hon.
Marilyn Hall Patel
a Delaware limited partnership;
AMERICAN REALTY TRUST, INC., a Georgia
corporation; NATIONAL OPERATING L.P.,
a Delaware limited partnership;
Defendants,
-and-
NATIONAL INCOME REALTY TRUST, a
California business trust; CONTINENTAL
MORTGAGE AND EQUITY TRUST, a
California business trust;
TRANSCONTINENTAL REALTY INVESTORS, a
California business trust; and INCOME
OPPORTUNITY REALTY TRUST, a California
business trust;
Nominal Defendants.
_____________________________________
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I, William A. Ackman, do hereby declare as follows:
1. I am one of the principals of Gotham Partners, L.P., Gotham
Partners III, L.P. and Gotham International Advisors, L.L.C., (collectively,
"Gotham"). I submit this declaration in support of the recommendation of
Settlement Counsel in the above-captioned matter that the advisory contract of
Basic Capital Management, Inc. ("BCM") with Transcontinental Realty Investors,
Inc. ("TRI") and Income Opportunity Realty Investors, Inc. ("IORI"), and the
contracts of BCM's affiliates with such entities, be terminated immediately.
The facts herein stated are true and correct of my own personal knowledge, and
if called to testify to such facts I could and would do so competently.
2. In June, 2000, following the substantial declines in the price
of the securities of TRI (and IORI) following the announcement that Gene E.
Phillips and A. Cal Rossi had been indicted, Gotham acquired a total of
approximately 1,835,000 shares of TRI (for which it paid about $10.5 million).
Based upon such acquisitions, it is my understanding that Gotham presently owns
approximately 21 percent of the issued and outstanding shares of TRI.
3. I have reviewed the materials heretofore filed by the parties
in response to the Court's Order to Show Cause, including, among other things,
the Declaration of Edward G. Zampa. In my opinion, the loans by TRI of $12
million to BCM and American Realty Trust, Inc. described in such materials are
improper, not in the best interests of TRI and highly detrimental to TRI's
unaffiliated shareholders, including Gotham. First, the loan is severely
undersecured. Typically, margin loans are secured by collateral with a trading
value of not less than twice the principal amount of the loan. Here, based
upon Mr. Zampa's Declaration, the $12 million of loans are secured only by
stock with a public market value of about $3.6 million. The stock pledged as
security is itself highly volatile; BCM and ART have publicly stated that
they may not be able to meet their existing loans; and Mr. Phillips, the
principal or control person of the borrowers, is a defendant under a serious
criminal indictment - all of which calls into question the borrowers'
creditworthiness.
4. More fundamentally, I see no reasonable business purpose
behind TRI's making loans to BCM and ART at all. A temporary decline in TRI's
share price in response to Mr. Phillips' criminal indictment had no affect on
TRI's underlying business. Mr. Zampa's explanation for the board's action is
that it was concerned about TRI's trading price, stating: "it was in the
interest of all shareholders of [TRI] to have the stock reflect the true value
of the company." Zampa Decl. Par. 21. If that were the board's true
objective, the logical course would have been for TRI itself to repurchase
shares that became available at discounted prices. The opportunity for TRI to
repurchase its own and IORI shares at a discount to true value was an enormous
corporate opportunity. If TRI had repurchased its own and IORI shares, it
would have simultaneously stabilized the price of TRI and IORI and served the
interests of all shareholders. Instead, the board has squandered this
corporate opportunity and risked $12 million of corporate funds to assist BCM
and ART in maintaining control over TRI and IORI.
5. We purchased shares of TRI because we believe that its share
price at the time of purchase and at today's trading price of $12 substantially
understates the true value of the company. We believe the stock trades at a
discount because the companies are controlled by BCM, which charges excessive
fees to TRI for managing its assets and business and because of Mr. Phillips'
reputation. If the board believes that it is "in the interest of all
shareholders to have the stock reflect the true value of the company," it
should replace BCM with an outstanding third party real estate manager on
competitively bid terms.
6. In my opinion, there would be no deleterious effects on the
operations of TRI or IORI if the Court were to order the termination of the
advisory contract of BCM with TRI and IORI and the related brokerage and
property management contracts of BCM's affiliates with TRI and IORI. In fact,
as I have stated above, we believe that such a change would have a positive
effect on TRI and IORI. I am aware of several reputable and qualified real
estate organizations that could immediately take over the functions that BCM
and its affiliates have been performing for TRI and IORI, and which could do so
without any disruption of their operations or other adverse impact upon them.
I declare under penalty of perjury under the laws of the State of
New York that the foregoing is true and correct, and that this Declaration was
executed in New York, New York this 2nd day of August, 2000.
________________________________
William A. Ackman
