<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 21, 1997
REGISTRATION NO. 333-38463
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-3/A
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
FRANKLIN SELECT REALTY TRUST
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
CALIFORNIA 94-3095938
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
------------------------
777 MARINERS ISLAND BOULEVARD
SAN MATEO, CALIFORNIA 94403-7777
(650) 312-3000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF PRINCIPAL EXECUTIVE OFFICES)
------------------------
DAVID P. GOSS, ESQ.
CHIEF EXECUTIVE OFFICER AND PRESIDENT
777 MARINERS ISLAND BOULEVARD
SAN MATEO, CALIFORNIA 94403-7777
(650) 312-3000
(NAME AND ADDRESS OF AGENT FOR SERVICE)
------------------------
COPIES TO:
DAVID J. ROMANSKI, ESQ.
STEINHART & FALCONER LLP
333 MARKET STREET, SUITE 3200
SAN FRANCISCO, CALIFORNIA 94105
(415) 777-3999
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: From time to
time after the Registration Statement becomes effective, as determined by the
Unitholders.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, check the following
box. [ ]
<PAGE> 2
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, 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 of 1933, 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 of 1933, 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, check the following box. [ ]
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
========================================================================================
Proposed Proposed
Amount Maximum Maximum
Being Offering Price Aggregate Amount of
Title of Shares Registered Per Share(1) Offering Price(1) Registration Fee
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Series A
Common Stock 1,625,000 $6.5625 $10,664,063 $3,232
========================================================================================
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(c) under the Securities Act of 1933, as amended, based
on the average of the high and low reported sales prices on the American Stock
Exchange on October 17, 1997.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
- ii -
<PAGE> 3
PROSPECTUS DATED NOVEMBER __, 1997
1,625,000 Shares
FRANKLIN SELECT REALTY TRUST
SERIES A COMMON STOCK
This Prospectus relates to the possible issuance by Franklin Select
Realty Trust (the "Company") of up to 1,625,000 shares (the "Exchange Shares")
of its Series A common stock (the "Common Stock"), if, and to the extent that,
Northport Associates No. 18, a California limited liability company
("Northport") or any transferee of Northport (each, a "Unitholder," and together
with Northport, the "Unitholders"), exercise their right to exchange Units and
the Company elects to satisfy such exchange right through the issuance of Common
Stock. Northport or its transferees hold up to 1,625,000 units of partnership
interest ("Units") in FSRT, L. P., a Delaware limited partnership (the
"Partnership"), of which the Company is the sole general partner. The Company is
registering for resale by such holders the Exchange Shares that may be issued to
the holders of the Units as required under the terms of a certain registration
rights agreement between the Company and the Unitholders (the "Selling
Shareholders"). The Units exchangeable for Exchange Shares registered hereby
were issued in connection with the acquisition of two industrial R&D buildings
located in Fremont, California in October 1996.
The Common Stock is listed on the American Stock Exchange (the "AMEX")
under the symbol "FSN." The Company will cause the Exchange Shares to be listed
on the AMEX prior to their issuance. To insure that the Company retains its
status as a real estate investment trust ("REIT"), ownership by any person is
limited to 7.0% of the outstanding shares of Common Stock, with certain
exceptions.
SEE "RISK FACTORS" FOR CERTAIN FACTORS RELEVANT TO AN INVESTMENT IN THE
COMMON STOCK.
The Company will receive no proceeds from the sale of any of the shares
in this offering; however, the Company has agreed to bear certain expenses of
registration of the Exchange Shares under Federal and state securities laws.
The registration of the shares of Common Stock to which this Prospectus
relates does not necessarily mean that any of such shares will be issued by the
Company as Exchange Shares or sold by the Selling Shareholders.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR
ENDORSED THE MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY
IS UNLAWFUL.
The Selling Shareholders from time to time may offer for sale and sell
the Exchange Shares held by them directly or through agents or broker-dealers on
terms to be determined at the time of sale. To the extent required, the names of
any agent or broker-dealer and applicable commissions or discounts and any other
required information with respect to any particular offer will be set forth in
the section of this Prospectus entitled "Plan of Distribution" or in an
applicable Prospectus Supplement. Each of the
- 1 -
<PAGE> 4
Selling Shareholders reserves the sole right to accept or reject, in whole or in
part, any proposed purchase of the Exchange Shares to be made directly or
through agents or broker-dealers.
The Selling Shareholders and any agents or broker-dealers that
participate with the Selling Shareholders in the distribution of Exchange Shares
may be deemed to be "underwriters" within the meaning of the Securities Act of
1933, as amended (the "Securities Act"), and any commissions received by them
and any profit on the resale of the Exchange Shares may be deemed to be
underwriting commissions or discounts under the Securities Act.
The date of this Prospectus is November __, 1997.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith files reports, proxy statements and other information with
the Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information may be inspected and copied, at prescribed
rates, at the public reference facilities of the Commission at 450 Fifth Street,
N.W., Washington, DC 20549, Room 1024, and at the Commission's New York Regional
Office at Seven World Trade Center, New York, New York 10048 and at the
Commission's Chicago Regional Office at Citicorp Center, 500 W. Madison Street,
Chicago, Illinois 60661. Copies of such material can also be obtained at
prescribed rates by writing to the public reference section of the Commission at
450 Fifth Street, N.W., Washington, DC 20549. The Common Stock of the Company is
listed on the AMEX, and such material can also be inspected and copied at the
offices of the AMEX, 86 Trinity Place, New York, New York 10006-1881.
The Company files information electronically with the Commission, and
the Commission maintains a Web Site that contains reports, proxy and information
statements and other information regarding registrants (including the Company)
that file electronically with the Commission. The address of the Commission's
Web Site is (http://www.sec.gov).
The Company has filed with the Commission a registration statement on
Form S-3 (the "Registration Statement") under the Securities Act, with respect
to the Common Stock registered hereby. This prospectus ("Prospectus"), which
constitutes a part of the Registration Statement, does not contain all of the
information set forth in the Registration Statement and in the exhibits and
schedules thereto. For further information with respect to the Company and such
Common Stock, reference is hereby made to such Registration Statement, exhibits
and schedules. The Registration Statement may be inspected without charge at, or
copies obtained upon payment of prescribed fees from, the Commission and its
regional offices at the locations listed above. Any statements contained herein
concerning a provision of any document are not necessarily complete, and, in
each instance, reference is made to the copy of such document filed as an
exhibit to the Registration Statement or otherwise filed with the Commission.
Each such statement is qualified in its entirety by such reference.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by the Company with the Commission
pursuant to the Exchange Act are incorporated herein by reference and made a
part hereof:
a. The Company's Annual Report on Form 10-K for the year ended December
31, 1996;
- 2 -
<PAGE> 5
b. The description of the Common Stock of the Company included in the
Company's Registration Statement on Form S-4 (Registration No. 033-64131), dated
November 13, 1995;
c. The Company's definitive proxy statement dated April 17, 1997
relating to the annual meeting of shareholders held on June 5, 1997; and
d. The Company's Quarterly Reports on Form 10-Q for the quarter ended
March 31, 1997, and for the quarter ended June 30, 1997.
All documents filed by the Company with the Commission pursuant to
Sections 13(a) and 13(c) of the Exchange Act and any definitive proxy statements
so filed pursuant to Section 14 of the Exchange Act and any reports filed
pursuant to Section 15(d) of the Exchange Act after the date of this Prospectus
and prior to the termination of the offering of the Common Stock shall be deemed
to be incorporated by reference into this Prospectus and to be a part hereof
from the date of filing of such documents. Any statement contained in a document
incorporated by reference herein shall be deemed to be modified or superseded
for the purposes of this Prospectus to the extent that a statement contained
herein or in any other subsequently filed document which is incorporated by
reference herein modifies or supersedes such earlier statement. Any such
statements modified or superseded shall not be deemed, except as so modified or
superseded, to constitute a part of this Prospectus.
The Company will furnish without charge upon written or oral request to
each person to whom a copy of this Prospectus is delivered, including any
beneficial owner, a copy of any or all of the documents specifically
incorporated herein by reference (not including the exhibits to such documents,
unless such exhibits are specifically incorporated by reference in such
documents). Requests should be made to: David P. Goss, Franklin Select Realty
Trust, 777 Mariners Island Boulevard, San Mateo, CA 94403-7777 or by telephone
at (650) 312-5813.
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
descriptions and the financial information and statements appearing elsewhere in
this Prospectus or incorporated herein by reference. Unless the context
otherwise requires, the term "Company" or "Select" shall mean Franklin Select
Realty Trust, predecessors of Franklin Select Realty Trust and those entities
owned or controlled by Franklin Select Realty Trust, including FSRT, L. P. (the
"Partnership").
The Company
Franklin Select Realty Trust is a California corporation formed on
January 5, 1989 for the purpose of acquiring, managing and holding for
investment income-producing real estate assets. The Company is a real estate
investment trust ("REIT"). At June 30, 1997, the Company's property portfolio
consisted of ownership interests in the following ten properties: (i) three
industrial research and development properties containing approximately 465,000
rentable square feet of space; (ii) three suburban office properties containing
approximately 403,000 rentable square feet of space; and (iii) three
neighborhood shopping centers containing approximately 205,000 rentable square
feet of space; and (iv) approximately 12.5 acres of undeveloped land located in
Rancho Cordova, California. The Company's properties are concentrated in the
greater San Francisco and Los Angeles areas from which the Company derived 45%
and 43% of its 1996 rental revenue, respectively.
The Company's day-to-day operations are managed by Franklin Properties,
Inc. (the "Advisor") under the terms of an advisory agreement which is renewable
annually. The Company does not have any employees. Eight of the Company's
properties are managed by Continental Property Management Co., an affiliate of
the Advisor, and the remaining property is managed by an unaffiliated company,
Cupertino Capital. Both management companies perform the leasing, re-leasing and
management-related
- 3 -
<PAGE> 6
services for their respective properties. The Advisor is a wholly-owned
subsidiary of Franklin Resources, Inc. whose primary business is the $226
billion Franklin Templeton Group of Funds.
The principal executive office of the Company is located at 777 Mariners
Island Boulevard, San Mateo, California 94403-7777. The telephone number is
(650) 312-3000.
The Properties
The following table describes the Company's properties:
<TABLE>
<CAPTION>
Average
Total Rentable Year Occupancy 1996 Rental
Property Name/Location Square Footage Acquired During 1996 Revenue
- ---------------------- -------------- -------- ----------- -------
<S> <C> <C> <C> <C>
Industrial R&D Properties:
The Northport Buildings
Fremont, California 144,624 1991 96% $ 1,627,000
The Lam Research Buildings
Fremont, California 211,680 1996 100% 407,000
The Tanon Building
Fremont, California 108,600 1997 100% ____(1)
Office Properties:
The Shores
Redwood City, California 138,546 1989 100% 3,286,000
The Data General Building
Manhattan Beach, California 118,443 1989 100% 2,657,000
The Fairway Center
Brea, California 146,131 1992 100% 3,286,000
Retail Centers:
Mira Loma Shopping Center
Reno, Nevada 94,361 1988 83% 973,000
Glen Cove Center
Vallejo, California 66,000 1994 97% 901,000
Carmel Mountain Gateway
Plaza
San Diego, California 44,230 1994 77% 789,000
------ --- -------
TOTAL: 1,072,615 95% $13,926,000
========= === ===========
</TABLE>
(1) This property was acquired in April, 1997.
Securities to be Offered
This Prospectus relates to the possible issuance by the Company of up to
1,625,000 Exchange Shares if, and to the extent that, holders of up to 1,625,000
Units exercise their right to exchange such Units and the Company elects to
satisfy such exchange right through the issuance of Common Stock. The Company
will receive no proceeds from the sale of the shares in this offering.
The Units exchangeable for Exchange Shares were issued in connection
with the acquisition of two industrial R&D buildings located in Fremont,
California in October 1996. All such Units were issued in reliance on an
exemption from registration under Section 4(2) of the Securities Act. All of the
- 4 -
<PAGE> 7
Units are subject to a certain agreement (the "Registration Rights Agreement")
pursuant to which the Company is required to register the shares issuable upon
exchange of the Units.
Pursuant to the terms of an Exchange Rights Agreement between the
Company and the Unitholders (the "Exchange Agreement"), after October 31, 1997
each Unit may be tendered by its holder to the Company. At the sole option of
the Company, the Units may be exchanged (i) for an equivalent number of shares
of Common Stock, and the Units so acquired by the Company shall automatically be
deemed to be an equal number of general partnership interests owned by the
Company in the Partnership; or (ii) for cash equal to the market value of the
number of shares of Common Stock the Unitholder would have received in such
exchange. The market value of the Common Stock for this purpose will be equal to
the average of the closing trading price of the Company's Common Stock for the
10 trading days before the day on which the exchange notice was received by the
Company.
The Company anticipates that it generally will elect to issue shares of
Common Stock pursuant to this Prospectus in exchange for Units tendered rather
than paying cash for such Units. As a result, the Company may from time to time
issue up to 1,625,000 Exchange Shares upon the acquisition of Units tendered for
exchange. With each such exchange, the Company's interest in the Partnership
will increase.
The Company is registering the Exchange Shares for sale to provide the
holders thereof with freely tradeable securities, but the registration of such
shares does not necessarily mean that any of such shares will be issued by the
Company or offered or sold by the holders thereof.
RISK FACTORS
"Safe Harbor" statement under the Private Securities Litigation Reform
Act of 1995: This Prospectus, including the information incorporated by
reference herein, contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. Actual results could differ
materially from those projected in the forward-looking statements as a result of
the risk factors set forth below, and prospective investors should carefully
consider such risk factors in conjunction with the other information contained
or incorporated by reference in this Prospectus before making a decision to
acquire Common Stock.
REAL ESTATE INVESTMENT CONSIDERATIONS
General
Investments of the Company are subject to the risks incident to the
ownership and operation of commercial real estate generally. The yields
available from equity investments in real estate depend on the amount of income
generated and expenses incurred. If the Company's properties do not generate
revenues sufficient to meet operating expenses, including debt service and
capital expenditures, the Company's results of operations and ability to make
distributions to its shareholders could be adversely affected.
A commercial property's revenues and value may be adversely affected by
a number of factors, including the national, state and local economic climate;
real estate conditions (such as oversupply of or reduced demand for space and
changes in market rental rates); the perceptions of prospective tenants of the
safety, convenience and attractiveness of the properties; the ability of the
owner to provide adequate management, maintenance and insurance; the ability to
collect all rent from tenants on a timely basis; the expense of periodically
renovating, repairing and reletting spaces; and the increase of operating costs
(including real estate taxes and utilities) that may not be passed through to
tenants. Certain significant
- 5 -
<PAGE> 8
expenditures associated with investments in real estate (such as mortgage
payments, real estate taxes, insurance and maintenance costs) are generally not
reduced when circumstances cause a reduction in rental revenues from the
property. If a property is mortgaged to secure the payment of indebtedness and
if the Company is unable to meet its mortgage payments, a loss could be
sustained as a result of foreclosure on the property or the exercise of other
remedies by the mortgagee. In addition, real estate values and income from
properties are also affected by such factors as compliance with laws, including
tax laws, interest rate levels and the availability of financing.
Dependence on Tenants
The Company's results of operations will depend on its ability to
continue to lease space in its real estate properties on economically favorable
terms. In addition, as substantially all of the Company's income is derived from
rentals of real property, the Company's income and funds available for
distribution would be adversely affected if a significant number of the
Company's lessees were unable to meet their obligations to the Company. In the
event of default by a lessee, the Company may experience delays in enforcing its
rights as lessor and may incur substantial costs in protecting its investment.
Tenant Leases
In connection with any lease renewal or new lease, the Company typically
incurs costs for tenant improvements and leasing commissions which will be
funded from operating cash flow and, if necessary, from cash reserves or the
line of credit. In addition, while the Company has historically been successful
in renewing and releasing space, it will be subject to the risk that leases
expiring in the future may be renewed or released at terms that are less
favorable than current lease terms.
Bankruptcy of Tenants
There have been a number of recent bankruptcies in the retail industry.
The bankruptcy or insolvency of a major tenant may have a material adverse
effect on the properties affected and the income produced by such properties.
The Company's leases generally do not contain restrictions designed to ensure
the credit worthiness of the tenant, although the Company conducts a financial
review of all tenants.
Indebtedness
The Company's present policy is to maintain a debt to total assets ratio
not to exceed 50%. At December 31, 1996, the Company's debt to total assets
ratio was 17%. The Company's organizational documents prohibit the aggregate
amount of the Company's indebtedness to exceed 300% of its net assets, and
prohibit unsecured borrowings which result in asset coverage of less than 300%.
Balloon Payments
The Company's mortgage indebtedness has the following balloon payments:
1999 - $4.0 million; and 2006 - $13.4 million. In addition, the Company's $25
million credit facility (the "Credit Facility"), which has an outstanding
principal balance of approximately $7.6 million at October 8, 1997, matures in
1998. The Company does not anticipate that its cash flow from operations will be
sufficient to make all of the balloon payments of principal when due under its
mortgage indebtedness and its Credit Facility. The Company intends to make such
payments by refinancing or extending the indebtedness or by raising funds
through the sale of equity securities or properties. If the Company is unable to
extend, refinance, or payoff its indebtedness when due, the mortgaged properties
could be foreclosed upon by or otherwise transferred to the mortgagee with a
subsequent loss of income and asset value to the Company.
- 6 -
<PAGE> 9
Variable Interest Rates
As of October 8, 1997, the Company had approximately $4.2 million of
variable rate mortgage indebtedness outstanding, which bears interest at a
floating rate tied to the Union Bank Reference Rate. In addition, the Company
has access to a revolving line of credit in the amount of $25 million which
bears interest at a floating rate tied to either (i) the London Interbank
Offered Rates ("LIBOR"), or (ii) the Bank of America Reference Rate at the
Company's option. Currently, there is an outstanding principal balance of
approximately $7.6 million under the line of credit, and the Company intends to
use the remaining balance to provide short term financing for future
acquisitions. An increase in interest rates will have an adverse effect on the
Company's net income and funds from operations.
Risks of Acquisition Activities
The Company intends to acquire existing office and commercial properties
to the extent that they can be acquired on advantageous terms and meet the
Company's investment criteria. Acquisitions of commercial properties entail
general investment risks associated with any real estate investment, including
the risk that investments will fail to perform as expected or that estimates of
the cost of improvements to bring an acquired property up to standards
established for the intended market position may prove inaccurate.
Risks of Development Activities
The Company also intends to develop office and other commercial
properties, in accordance with its development and underwriting policies. Risks
associated with such development and construction activities include the risk
that the Company may abandon development opportunities after expending resources
to determine feasibility; construction costs of a project may exceed original
estimates; occupancy rates and rents at a newly completed property may not be
sufficient to make the properties profitable; financing may not be available on
favorable terms for development of a property; and construction and lease-up may
not be completed on schedule, resulting in increased debt service expense and
construction costs. Development activities are also subject to risks relating to
the inability to obtain, or delays in obtaining, all necessary zoning, land-use,
building, occupancy, and other required governmental permits and authorizations.
If any of the foregoing occurs, the Company's ability to make expected
distributions to shareholders could be adversely affected. In addition, new
development activities, regardless of whether or not they are ultimately
successful, typically require a substantial portion of management's time and
attention.
The Company anticipates that future development will be financed, in
whole or in part, through equity or debt offerings or under lines of credit or
other forms of secured or unsecured construction financing that will result in
the risk that, upon completion of construction, permanent financing for newly
developed properties may not be available or may be available only on
disadvantageous terms. If a project is unsuccessful, the Company's losses may
exceed its investment in the project.
Illiquidity
Real estate investments are relatively illiquid and therefore tend to
limit the ability of the Company to vary its portfolio promptly in response to
changes in economic or other conditions. In addition, the Internal Revenue Code
("Code") limits the Company's ability to sell properties held for fewer than
four years, which may affect the Company's ability to sell properties without
adversely affecting returns to shareholders.
Operating Risks
The Company's properties are subject to operating risks common to
commercial real estate in general, any and all of which may adversely affect
operating income. The properties are subject to
- 7 -
<PAGE> 10
increases in operating expenses such as security, landscaping, insurance,
repairs and maintenance. While the Company's tenants generally are currently
obligated to pay most of these costs, there can be no assurance that tenants
will agree to pay such costs upon renewal or that new tenants will agree to pay
such costs. If operating expenses increase, the local rental market may limit
the extent to which rents may be increased to meet increased expenses without
decreasing occupancy rates. While the Company implements cost saving incentive
measures at each of its properties, if any of the above occurs, the Company's
ability to make distributions to shareholders could be adversely affected.
Competition
There are numerous commercial properties that compete with the Company
in attracting tenants and numerous companies that compete in selecting
properties for acquisition.
Uninsured Loss
The Company carries comprehensive liability and casualty insurance with
respect to all of its properties, with policy specifications, insured limits and
deductibles customarily carried for similar properties. There are, however,
certain types of losses (such as losses arising from acts of war or relating to
pollution or flood) that are not insured because they are either uninsurable or
not economically insurable. Should an uninsured loss or a loss in excess of
insured limits occur, the Company could lose its capital invested in a property,
as well as the anticipated future revenue from such property and would continue
to be obligated on any obligations related to the property. Any such loss could
adversely affect the business of the Company and its financial condition and
results of operations.
Earthquakes
All of the Company's properties are located in areas that are subject to
earthquake activity. The Company currently carries earthquake insurance coverage
for its properties and intends to continue to carry earthquake coverage to the
extent that it is available at economically reasonable rates. However, the
Company's earthquake insurance coverage may, from time to time, be subject to
substantial deductibles.
Possible Environmental Liabilities
Under various Federal, state and local environmental laws, a current or
previous owner or operator of real estate may be required (typically regardless
of knowledge or responsibility) to investigate and clean up hazardous or toxic
substances or petroleum product releases at such property and may be held liable
to a governmental entity or to third parties for property damage and for
investigation and clean-up costs incurred by such parties in connection with the
contamination, which may be substantial. The presence of such substances (or the
failure to properly remediate the contamination) may adversely affect the
owner's ability to borrow against, sell or rent such property. As part of the
investigation of properties prior to acquisition, the Company typically has
obtained inspection reports concerning the condition of the property, including
specialized environmental inspection reports concerning the presence of
hazardous substances on the property. The Company intends to continue this
practice. None of these inspection reports has revealed any environmental
conditions requiring material expenditures for remediation.
The Company is aware of the existence of certain hazardous substances at
the Data General Building site. The Data General Building is located on property
that was formerly part of a site used for storage of crude oil and various
refined petroleum products. As a result, methane gas is present in the soil and
the groundwater is contaminated throughout the area where the property is
located. According to environmental reports prepared at the time the Data
General Building was acquired, a vapor ventilation system on the property, which
was installed and is maintained and monitored by a
- 8 -
<PAGE> 11
prior owner of the property, Chevron Land Development Company, has mitigated any
material risk associated with the presence of the methane gas. The Company has
not incurred any costs for monitoring and remediating the presence of methane
gas or the groundwater contamination at the Data General Building and does not
anticipate incurring any cost with regard to such activities in the future. The
contamination in the groundwater generally presents a risk only if the
groundwater is used as drinking water, which it is not.
The Company has not received any reports from federal or state agencies
relieving it of future clean-up responsibilities, but federal and state agencies
have investigated these matters and have not, to date, required any clean-up.
The Company has no reason to believe at this time that it will be required to
take remediation steps in the future, particularly given the geographic scope of
the contaminated area. It is therefore difficult to predict what, if any, costs
might be incurred by the Company should the position of the federal or state
agencies change. In any event, if the Company is required to cure the
contamination on the Data General Building site, it would seek full indemnity
from the oil companies which were the source of the contamination.
The Data General Building's transite exterior panels and roof coverings
contain asbestos. Transite is "non-friable," which means that the asbestos
fibers are not released into the air, unless the transite is broken, cut or
otherwise damaged. The Company believes that absent such breakage or damage, the
existence of asbestos in the transite panels means that protective measures may
need to be taken if the transite panels are repaired or if they are damaged by
the elements.
Cost of Compliance with Americans with Disabilities Act and Similar Laws
Under the American with Disabilities Act of 1990 (the "ADA"), all places
of public accommodation are required to meet certain Federal requirements
related to access and use by disabled persons. Although management of the
Company believes that the Company's properties are substantially in compliance
with the present requirements of the ADA, the Company may incur additional costs
of complying with the ADA. A number of additional federal, state and local laws
exist which also may require modifications to the Company's properties, or
restrict certain further renovations thereof, with respect to access thereto by
disabled persons. Additional legislation may impose further burdens or
restrictions on owners with respect to access by disabled persons.
RISKS OF DILUTION
The Company anticipates that a portion of its future acquisitions may be
achieved through the issuance of Common Stock or partnership interests. It is
anticipated that the Company will issue additional limited partnership units of
the Partnership, or of similarly structured partnerships, to make certain
acquisitions. The issuance of additional shares of Common Stock or partnership
units could cause dilution of the voting power of the holders of the Common
Stock or Units, respectively.
POSSIBLE ADVERSE CONSEQUENCES OF LIMITS ON OWNERSHIP OF COMMON STOCK
In order to maintain its qualification as a REIT, not more than 50% in
value of the outstanding stock of the Company may be owned, directly or
indirectly, by five or fewer persons. In order to protect the Company against
the risk of losing its status as a REIT due to a concentration of ownership
among its shareholders, the Company may refuse to transfer shares of its stock.
ADVERSE CONSEQUENCES OF FAILURE TO QUALIFY AS A REIT; OTHER TAX LIABILITIES
The Company intends at all times to operate so as to qualify as a REIT
under the Code. Although management of the Company believes that the Company is
organized and operates in such a manner, no assurance can be given that the
Company will remain qualified as a REIT. Qualification as a REIT involves the
application of highly technical and complex Code provisions for which there are
- 9 -
<PAGE> 12
only limited judicial and administrative interpretations. The determination of
various factual matters and circumstances not entirely within the Company's
control may affect the Company's ability to qualify as a REIT. If the Company
fails to qualify as a REIT, it will be subject to Federal income tax (including
any applicable alternative minimum tax) on its taxable income at regular
corporate rates. In addition, unless entitled to relief under certain statutory
provisions, the Company will be disqualified from treatment as a REIT for the
four taxable years following the year during which qualification is lost. The
additional tax would significantly reduce the cash flow available for
distribution to shareholders.
POSSIBLE ADVERSE IMPACT OF MARKET CONDITIONS ON MARKET PRICE
The market value of the Company's securities could be substantially
affected by general market conditions, including changes in interest rates. An
increase in market interest rates may lead purchasers of the Common Stock to
demand a higher annual yield, which could adversely affect the market price of
the outstanding Common Stock. Moreover, numerous other factors such as
government regulatory action and changes in tax laws could have a significant
impact on the future market price of the Common Stock.
TAX CONSEQUENCES OF EXCHANGE OF UNITS
The exercise by a Unitholder of the right to require the exchange of his
or her Units will be treated for tax purposes as a taxable sale or exchange of
the Units by the Unitholder. The tendering Unitholder will be treated as
realizing proceeds in an amount equal to the sum of the cash (or the value of
the Exchange Shares) received in the exchange plus the amount of the reduction
in any Partnership liabilities allocable to the tendering Unitholder. It is
possible that the amount of gain recognized or even the tax liability resulting
from such gain could exceed the amount of cash or the value of Exchange Shares
received upon such disposition. See "Exchange of Units--Tax Consequences of
Exchange." In addition, the ability of the Unitholder to raise cash through the
sale of his or her Exchange Shares to pay tax liabilities associated with the
exchange of Units may be limited because, as a result of fluctuations in the
stock price, the price the Unitholder receives for such shares may not equal the
value of his or her Units at the time of exchange. See "--Effect on Common Stock
Price of Shares Available for Future Sale Upon Exchange of Units" below.
POTENTIAL CHANGE IN INVESTMENT UPON EXCHANGE OF UNITS
If a Unitholder exercises the right to require the exchange of his or
her Units, such Unitholder may receive, at the sole option of the Company, cash
or Exchange Shares in exchange for the Units. If the Unitholder receives cash,
the Unitholder will no longer have any interest in the Company and will not
benefit from any subsequent increases in share price and will not receive any
future distributions from the Company (unless the Unitholder currently owns or
acquires in the future additional shares of Common Stock or Units). If the
Unitholder receives shares of Common Stock, the Unitholder will become a
shareholder of the Company rather than a holder of Units in the Partnership. See
"Exchange of Units--Comparison of Ownership of Units and Shares of Common
Stock."
EFFECT ON COMMON STOCK PRICE OF SHARES AVAILABLE FOR FUTURE SALE UPON EXCHANGE
OF UNITS
Sales of a substantial number of shares of Common Stock, or the
perception that such sales could occur, could adversely affect prevailing market
prices of the Common Stock. As of the date hereof, approximately 1,625,000 Units
have been issued to various holders, including certain directors of the Company.
Any Exchange Shares issued upon exchange of Units may be sold in the public
markets upon registration or available exemptions from registration. No
prediction can be made about the effect that future sales of Common Stock will
have on the market price of shares.
- 10 -
<PAGE> 13
DESCRIPTION OF CAPITAL STOCK OF THE COMPANY
The summary of the terms of the Common Stock of the Company set forth
below does not purport to be complete and is subject to and qualified in its
entirety by reference to the Articles of Incorporation and the bylaws (the
"Bylaws") of the Company, which are incorporated by reference into this
Prospectus.
General
The Company's authorized capital stock consists of one class of common
stock in two series: 50,000,000 shares of Common Stock and 1,000,000 shares of
Series B Common Stock. The Series B Common Stock has the same rights,
preferences, privileges and restrictions as the Common Stock, except that the
Series B Common Stock does not receive operating dividends and is not subject to
the exchange and transfer provisions set forth below.
Each share of Common Stock and Series B Common Stock entitles the holder
to one vote on all corporate matters submitted to the Series A shareholders and
Series B shareholders, including cumulative voting rights with respect to the
election of the board of directors, in accordance with California law.
Cumulative voting entitles each shareholder of the Company to cast as many votes
as there are directors to be elected multiplied by the number of shares
registered in his or her name. A shareholder may cumulate the votes for
directors by casting all of the votes for one candidate or by distributing the
votes among as many candidates as such shareholder chooses.
Holders of Common Stock have no preemptive, subscription, exchange or
conversion rights. Holders of Series B Common Stock have no preemptive or
subscription rights, but have the right to exchange their shares of Series B
Common Stock on a one-for-one basis into shares of Common Stock if and when the
last reported sale price of the Common Stock on the AMEX equals certain target
prices for 20 consecutive trading days.
Exchange and Prohibition of Transfer of Shares
For the Company to maintain its status as a REIT under the Code, not
more than 50% of its outstanding shares may be owned by five or fewer
individuals during the last half of a taxable year (the "5/50 Provision"), and
the shares must be owned by 100 or more persons during at least 335 days of a
taxable year of twelve months or during a proportionate part of a shorter
taxable year. See "Federal Income Tax Considerations." In order to meet these
requirements, the Company has the power to redeem a sufficient number of shares
of Common Stock in order to maintain or bring the ownership of the Common Stock
into conformity with these requirements, and to prohibit the transfer of the
Common Stock to persons whose acquisition would result in a violation of these
requirements. The price to be paid in the event of the exchange of Common Stock
will be the last sale price on the AMEX on the day before exchange or, as
determined in good faith by the board of directors of the Company. In order to
assure compliance with the 5/50 Provision of the Code, the Company's bylaws
permit the Directors of the Company to impose a lower percentage limit on the
remaining shareholders in the event certain shareholders (including Franklin
Resources, Inc. and its affiliates) acquire in excess of 9.9% of the outstanding
shares of Common Stock during the offering period. The Directors of the Company
have exercised this authority under the bylaws to lower the percentage
limitation such that shareholders may not acquire additional shares if such
shareholder then holds, or would then hold, in excess of 7.0% of the total
outstanding voting shares of the Company. Any shares acquired in excess of the
foregoing limitation will be deemed to be held in trust for the Company, and
will not be entitled to receive distributions or to vote.
The Directors of the Company may impose, or seek judicial or other
imposition of additional restrictions if deemed necessary or advisable,
including but not limited to further reductions in the
- 11 -
<PAGE> 14
foregoing percentage limitation with or without notice, or redemption of shares,
in order to protect the Company's status as a qualified REIT.
Registrar and Transfer Agent
The transfer agent and registrar for the Common Stock is Chemical Mellon
Shareholder Services, L.L.C.
USE OF PROCEEDS
The Company will not receive any of the proceeds from the Common Stock
sold by the Selling Shareholders nor will any such proceeds be available for use
by the Company or otherwise for the Company's benefit.
SELLING SHAREHOLDERS
The Exchange Shares issuable upon exchange of the Units are being
registered by the Company under the terms of the Registration Rights Agreement.
The Company is registering the Exchange Shares for resale by the Selling
Shareholders listed below, each of which is a transferee of Northpoint
Associates No. 18, a California limited liability company, the initial limited
partner of the Partnership. Selling Shareholders Barry C. L. Fernald and Larry
D. Russel have served as directors the Company since November 1996.
The following table provides the names of each Selling Shareholder and
the number of Exchange Shares to be owned upon exchange of Units by each
Selling Shareholder that are being registered hereunder. Since the Selling
Shareholders may sell all, some or none of their Exchange Shares, no estimate
can be made of the aggregate number of Exchange Shares that are to be offered
hereby or that will be owned by each Selling Shareholder upon completion of the
offering to which this Prospectus relates. If, however, each of the Selling
Shareholders were to sell all of the Exchange Shares set forth across from his
name, the Selling Shareholders would no longer own any Common Stock or Units.
The Exchange Shares offered by this Prospectus may be offered from
time to time by the Selling Shareholders named below:
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF TOTAL SHARES
NAME SHARES(1) OUTSTANDING (1)
<S> <C> <C>
Barry C. L. Fernald 406,250 2.9%
Larry D. Russel 406,250 2.9%
G. Gerald Engles 406,250 2.9%
Gary Filizetti 406,250 2.9%
--------- ----
1,625,000 11.6%
========= ====
</TABLE>
(1) Assumes the issuance of all of the Exchange Shares.
EXCHANGE OF UNITS
General
Each Unitholder may, after October 31, 1997 and subject to certain
limitations, require that the Company exchange all or a portion of the Units
held by such holder by delivering a notice to the Company. Upon exchange, a
Unitholder will receive, at the sole option of the Company, either (i) a number
of shares of Common Stock equal to the number of Units exchanged, or (ii) cash
in an amount equal to the market value of the number of shares of Common Stock
the Unitholder would have received pursuant to (i). The market value of the
Common Stock for this purpose will be equal to the average of the closing
trading price of the Company's Common Stock for the 10 trading days before the
day on which the exchange notice was received by the Company.
The Company anticipates that it generally will elect to satisfy any
exchange right exercised by a Unitholder through the issuance of the shares of
Common Stock pursuant to this Prospectus, whereupon the Company will acquire the
Units being exchanged and such Units will automatically be deemed to be an equal
number of general partnership units owned by the Company. Such an acquisition by
the Company will be treated as a sale of the Units to the Company for Federal
income tax purposes. See "- -Tax Consequences of Exchange" below. Upon exchange,
such Unitholder's right to receive distributions with respect to the Units
exchanged will cease. However, the Unitholder will then have rights as a
shareholder of the Company from the time of his or her acquisition of Common
Stock, including the payment of dividends.
A Unitholder must notify the Company of the holder's desire to require
the Company to exchange Units by sending a notice in the form attached as an
exhibit to the Partnership Agreement, a copy of which is available from the
Company. An exchange generally will occur on the 7th calendar day after the
notice is delivered by the Unitholder (or 15th calendar day if the Company
elects to pay the Unitholder cash), except that no exchange can occur if the
delivery of Exchange Shares would cause any violation of the Securities Act, the
Exchange Act, or any applicable state securities law, or cause the Company to be
out of compliance with REIT requirements.
Tax Consequences of Exchange
The following discussion summarizes certain Federal income tax
considerations that may be relevant to a Unitholder who exercises his or her
right to require the exchange of his or her Units.
Tax Treatment of Exchange of Units. If a Unitholder exercises his or her
right to require the exchange of Units, the Partnership Agreement provides that
the exchange will be treated by the
- 12 -
<PAGE> 15
Company, the Partnership and the exchanging Unitholder, for tax purposes, as a
sale of Units. Such sale will be fully taxable to the exchanging Unitholder.
Such Unitholder generally will be treated as realizing for tax purposes an
amount equal to the sum of either the cash or the value of the Common Stock
received plus the amount of any Partnership liabilities allocable to the
exchanged Units at the time of the exchange. The determination of the amount of
gain or loss is discussed more fully below.
If the Company elects not to issue shares of Common Stock in exchange
for a Unitholder's Units, and the Company exchanges such Units for cash to
effect the exchange, the tax consequences would be as described in the previous
paragraph. However, if the Company exchanges less than all of a Unitholder's
Units, the Unitholder would not be permitted to recognize any loss occurring on
the transaction and would recognize taxable gain only to the extent that the
cash, plus the amount of any Partnership liabilities allocable to the exchanged
Units, exceeded the Unitholder's adjusted basis in all of such Unitholder's
Units immediately before the exchange. The methodology used by the Partnership
to allocate its liabilities to its partners will likely result in a varying
amount of such liabilities being allocated to different partners. Under that
methodology, which is based on principals set forth in Treasury Regulations, it
is possible that partners who hold an identical number of Units are allocated
different amounts of liabilities of the Partnership for Federal income tax
purposes.
Tax Treatment of Disposition of Units by Unitholder Generally. If a Unit
is exchanged in a manner that is treated as a sale of the Unit, or a Unitholder
otherwise disposes of a Unit, the determination of gain or loss from the sale or
other disposition will be based on the difference between the amount considered
realized for tax purposes and the tax basis in such Unit. See "--Basis of Units"
below. Upon the sale of a Unit, the "amount realized" will be measured by the
sum of the cash or fair market value of Common Stock received plus the reduction
in the amount of any Partnership liabilities allocable to the Unitholder. To the
extent that the amount of cash or property received plus the reduction in the
allocable share of any Partnership liabilities exceeds the Unitholder's basis in
his or her interest in the Partnership, such Unitholder will recognize gain. It
is possible that the amount of gain recognized or even the tax liability
resulting from such gain could exceed the amount of cash or the value of Common
Stock received upon such disposition.
Except as described below, any gain recognized upon a sale or other
disposition of Units will be treated as gain attributable to the sale or
disposition of a capital asset. To the extent that the amount realized upon the
sale of a Unit attributable to a Unitholder's share of inventory or "unrealized
receivables" of the Partnership (as defined in Section 751 of the Code) exceeds
the basis attributable to those assets, such excess will be treated as ordinary
income. Unrealized receivables include, to the extent not previously included in
Partnership income, any rights to payment for services rendered or to be
rendered. Unrealized receivables also include amounts that would be subject to
recapture as ordinary income if the Partnership had sold its assets at their
fair market value at the time of the transfer of a Unit.
Basis of Units. In general, a Unitholder who was deemed at the time of
the formation of the Partnership (the "Formation Transaction") to have received
his or her Units upon liquidation of a partnership, had an initial tax basis in
the Units ("Initial Basis") equal to his or her basis in the partnership
interest at the time of such liquidation. Similarly, in general, a Unitholder
who at the time of the Formation Transaction contributed a partnership interest
in exchange for his or her Units had an Initial Basis in the Units equal to his
or her basis in the contributed partnership interest. A Unitholder's Initial
Basis in his or her Units generally is increased by (i) such Unitholder's share
of Partnership taxable and tax-exempt income, and (ii) increases in such
partner's share of the liabilities of the Partnership (including any increase in
his or her share of liabilities occurring in connection with the Formation
Transaction). Generally, such partner's basis in his or her Units is decreased
(but not below zero) by (A) his or her share of Partnership distributions, (B)
decreases in his or her share of liabilities of the Partnership (including any
decrease in his or her share of liabilities of the Partnership occurring in
connection with the Formation Transaction), (C) his or her share of losses of
the Partnership and (D)
- 13 -
<PAGE> 16
his or her share of nondeductible expenditures of the Partnership that are not
chargeable to capital account.
Potential Application of the Disguised Sale Regulations to a Exchange of
Units. There is a risk that an exchange of Units issued in the Formation
Transaction may cause the original transfer of property to the Partnership in
exchange for Units in connection with the Formation Transaction to be treated as
a "disguised sale" of property. Section 707 of the Code and the Treasury
Regulations thereunder (the "Disguised Sale Regulations") generally provide
that, unless one of the prescribed exceptions is applicable, a partner's
contribution of property to a partnership and a simultaneous or subsequent
transfer of money or other consideration (including the assumption of or taking
subject to a liability) from the partnership to the partner will be presumed to
be a sale, in whole or in part, of such property by the partner to the
partnership. Further, the Disguised Sale Regulations provide generally that, in
the absence of an applicable exception, if money or other consideration is
transferred by a partnership to a partner within two years of the partner's
contribution of property, the transactions are presumed to be a sale of the
contributed property unless the facts and circumstances clearly establish that
the transfers do not constitute a sale. The Disguised Sale Regulations also
provide that if two years have passed between the transfer of money or other
consideration and the contribution of property, the transactions will be
presumed not to be a sale unless the facts and circumstances clearly establish
that the transfers constitute a sale.
Accordingly, if a Unit is exchanged, the Internal Revenue Service
("IRS") could contend that the Disguised Sale Regulations apply because the
Unitholder will thus receive cash or shares of Common Stock subsequent to his or
her previous contribution of property to the Partnership. In that event, the IRS
could contend that the Formation Transaction was taxable as a disguised sale
under the Disguised Sale Regulations. However, whether the IRS would prevail is
dependent upon all the facts and circumstances of the particular transaction.
Comparison of Ownership of Units and Shares of Common Stock
Generally, the nature of any investment in shares of Common Stock of the
Company is substantially equivalent economically to an investment in Units in
the Partnership. Currently, a holder of a share of Common Stock receives the
same cash distribution that a holder of a Unit receives, except that the
distribution in respect of a Unit shall increase 10% as of the first calendar
quarter eighteen months after the Company's initial contribution of the
properties to the Partnership (approximately second quarter 1998) and 10% each
year thereafter. The Company may modify the Partnership Agreement to eliminate
or reduce such increases after and if the Company exercises its right to
contribute all of its properties to the Partnership. Shareholders and
Unitholders generally share in the risks and rewards of ownership in the
enterprise being conducted by the Company (through the Partnership). However,
there are some differences between ownership of Units and ownership of Common
Stock, some of which may be material to investors.
The information below highlights a number of the significant differences
between the Partnership and the Company relating to, among other things, form of
organization, permitted investments, policies and restrictions, management
structure, compensation and fees, investor rights and Federal income taxation
and compares certain legal rights associated with the ownership of Units and
Common Stock. These comparisons are intended to assist Unitholders in
understanding how their investment will be changed if their Units are exchanged
for Common Stock. This discussion is summary in nature and does not constitute a
complete discussion of these matters. Holders of Units should carefully review
the balance of this Prospectus and the Registration Statement of which this
Prospectus is a part for additional important information about the Company.
Form of Organization and Assets Owned. The Partnership is organized as a
Delaware partnership. Its assets include (i) two R&D industrial buildings
consisting of approximately 211,680 rentable square feet of space located in
Fremont, California contributed by Northport, (ii) one suburban
- 14 -
<PAGE> 17
office property (the "Data General Building") consisting of approximately
118,443 square feet of rentable space located in Manhattan Beach, California
contributed by the Company and (iii) one industrial R&D building consisting of
approximately 108,600 rentable square feet of space located in Fremont,
California acquired by the Partnership in April 1997. The Company is the general
partner of the Partnership, holds a majority interest in the Partnership, and
manages its operations. The Partnership is consolidated in the Company's
financial statements for accounting purposes. Property management for the two
R&D buildings is provided by Cupertino Capital, and for the Data General
Building by Continental Management Co., an affiliate of the Advisor.
The Company is a California corporation. Its properties held outside of
the Partnership consist of (i) two suburban office properties consisting of
approximately 284,677 rentable square feet, (ii) three retail centers consisting
of approximately 204,591 rentable square feet and (iii) approximately 12.5 acres
of undeveloped land located in Rancho Cordova, California. The Company's daily
operations are managed by the Advisor. The properties held outside the
Partnership are managed by Continental Management Co. The Company has elected to
be taxed as a REIT under the Code and intends to maintain its qualification as a
REIT. The Company may decide to contribute all of its remaining properties to
the Partnership at some later date. It is expected that the Company will
continue to serve as the general partner if such properties are contributed to
the Partnership.
Length of Investment. The Partnership has a stated termination date of
December 31, 2096, although it may be terminated earlier under certain
circumstances. The Company has a perpetual term and intends to continue its
operations for an indefinite time period.
Purpose and Permitted Investments. The purpose of the Partnership
includes the conduct of any business that may be lawfully conducted by a limited
partnership formed under Delaware law, except that the Partnership Agreement
requires the business of the Partnership to be conducted in such a manner that
will permit the Company to be classified as a REIT for Federal income tax
purposes unless the Company ceases to qualify as a REIT for reasons other than
the conduct of the business of the Partnership. The Partnership may, subject to
the foregoing limitation, invest or enter into partnerships, joint ventures or
similar arrangements and may own interests in any other entity. Under its
Articles of Incorporation, the Company may engage in any lawful activity
permitted under California law.
Additional Equity. The Company is authorized to cause the Partnership to
issue Units and other partnership interests in one or more classes, or one or
more series of any such classes, with such designations, preferences and
relative rights, powers and duties, including rights, powers and duties senior
to the Units. No person has any preemptive, preferential or similar rights with
respect to additional capital contributions to the Partnership or the issuance
or sale of any interests therein.
The Board of Directors of the Company may issue, in its discretion,
additional equity securities consisting of Common Stock or Series B Common
Stock; provided, however, that the total number of shares issued does not exceed
the authorized number of shares of capital stock set forth in the Company's
Articles of Incorporation.
Borrowing Policies. The Partnership has no restrictions on borrowings,
and the Company as general partner has full power and authority to borrow money
on behalf of the Partnership.
The Company is not restricted under its governing instruments from
incurring borrowings. The Company has adopted a policy that its debt to total
assets ratio will not exceed 50% (the Company's bylaws prohibit the aggregate
amount of the Company's indebtedness to exceed 300% of its net assets, and
unsecured borrowings which result in assets covered of less than 300%), but this
policy may be altered at any time by the Board of Directors. The foregoing
reflects the Company's general policy over time and is not intended to operate
in a manner that inappropriately restricts the Company's ability to raise
additional capital, including additional debt, to implement its planned growth,
to pursue attractive acquisition opportunities that may arise or to otherwise
act in a manner that the Board of
- 15 -
<PAGE> 18
Directors believes to be in the best interests of the Company and its
shareholders. The Board of Directors, with the assistance of management of the
Company, may reevaluate from time to time its debt and other capitalization
policies in light of then current economic conditions, including the relative
costs of debt and equity capital, the market value of its properties, growth and
acquisition opportunities, the market value of its equity securities in relation
to the Company's view of the market value of its properties, and other factors,
and may modify its debt policy. Such modification may include increasing or
decreasing its general ratio of debt to total market capitalization or
substituting another measuring standard.
Other Investment Restrictions. Other than restrictions precluding
investments by the Partnership that would adversely affect the qualification of
the Company as a REIT, there are no restrictions on the Partnership's authority
to enter into certain transactions, including, among others, making investments,
lending Partnership funds, or reinvesting the Partnership's cash flow and net
sale or refinancing proceeds.
The Company's bylaws prohibit investments in (i) commodities or
commodity future contracts; (ii) short sales; and (iii) any security in any
company holding investments, or engaging in activities, prohibited by the
Company's bylaws. In addition to other investment restrictions imposed by the
Directors from time to time, the Company observes the following restrictions on
its investments as set forth in its bylaws: (i) not more than 10% of the
Company's total assets are invested in unimproved real property or mortgage
loans secured by unimproved real property; (ii) the Company may not invest in
real estate contracts of sale, unless they are in recordable form and are
appropriately recorded in the chain of title; (iii) the Company may not invest
in or make mortgage loans unless (a) the Company shall have first obtained an
appraisal as to the value of the underlying real property, (b) the Company shall
have first obtained a mortgagee's or owner's title insurance policy or
commitment therefor as to the priority of the corresponding mortgage or the
condition of title to the underlying real property, and (c) the aggregate amount
of all mortgage loans outstanding on a single parcel of real property, including
the amount of the mortgage loan in which the Company has invested, shall not be
greater than 85% of the value of such real property as determined by the
appraisal, unless substantial justification exists because of the presence of
other mortgage loan underwriting criteria; (iv) the Company may not make or
invest in any mortgage loans that are subordinate to any mortgage or equity
interest of the Advisor, the Directors or any of their affiliates; and (v) the
Company may not invest in indebtedness, including construction loans (herein
called "junior debt") secured by a mortgage on real property which is
subordinate to the lien of other indebtedness (herein called "senior debt")
unless (a) the total amount of such junior debt, plus the outstanding amount of
senior debt, does not exceed 85% of the appraised value of the property on an
as-built basis, and (b) total junior debt investments of the Company will not
exceed 25% of the Company's assets. The Company, however, may make junior debt
investments which do not meet the 85% limitation above; however, the aggregate
of such investments would be limited to 10% of the Company's assets (which would
be included in the 25% limitation).
Management Control. All management powers over the business and affairs
of the Partnership are vested in the general partner of the Partnership, and no
Unitholder of the Partnership has any right to participate in or exercise
control or management power over the business and affairs of the Partnership.
The general partner may not be removed by the limited partners for any reason.
The Board of Directors has exclusive control over the Company's business
and affairs subject only to the restrictions in the Articles of Incorporation,
the bylaws and the Partnership Agreement. A new Board of Directors will be
elected at each annual meeting of the shareholders. The policies adopted by the
Board of Directors may be altered or eliminated without advice of the
shareholders. Accordingly, except for their vote in the elections of Directors,
shareholders have no control over the ordinary business policy of the Company.
Management Liability and Indemnification. The Partnership Agreement
generally provides that the general partner will incur no monetary liability to
the Partnership or any limited partner for losses
- 16 -
<PAGE> 19
sustained or liabilities incurred as a result of errors in judgment or of any
act or omission if the general partner acted in good faith. In addition, the
general partner is not responsible for any misconduct or negligence on the part
of its agents provided the general partner appointed such agents in good faith.
The general partner may consult with legal counsel, accountants, appraisers,
management consultants, investment bankers and other consultants and advisors.
Any action the general partner takes or omits to take in reliance upon the
opinion of such persons, as to matters which the general partner reasonably
believes to be within their professional or expert competence, shall be
conclusively presumed to have been done or omitted in good faith and in
accordance with such opinion. The Partnership Agreement also provides for
indemnification of the general partner, the directors and officers of the
general partner, and such other persons as the general partner may from time to
time designate, against any and all losses, claims, damages, liabilities,
expenses, judgments, fines, settlements and other amounts arising from any and
all claims, demands, actions, suits or proceedings that relate to the operations
of the Partnership in which such person may be involved, or is threatened to be
involved, to the fullest extent permitted under Delaware law.
As permitted by California law, the Articles of Incorporation include a
provision limiting the liability of the Company's directors and officers to the
corporation and its shareholders for money damages, subject to specified
restrictions. The law does not, however, permit the liability of directors and
officers to the corporation or its shareholders to be limited to the extent that
(i) the acts or omissions involve the intentional misconduct or a knowing
violation of law, (ii) the director believed the act or omissions to be contrary
to the best interests of the corporation or its shareholders or the director
acted without good faith, (iii) the director derived an improper personal
benefit, (iv) the acts or omissions show a reckless disregard for the director's
duty to the corporation or its shareholders in circumstances in which the
director was aware (or should have been aware) of a risk of serious injury to
the corporation or its shareholders, or (v) the acts or omissions constituted an
abdication of the director's duty to the corporation and its shareholders. This
charter provision does not limit or eliminate the rights of the Company or any
shareholder to seek non-monetary relief such as an injunction or rescission in
the event of a breach of a director's duty of care. Insofar as indemnification
for liabilities arising under the Securities Act may be permitted to directors,
officers or persons controlling the Company pursuant to the foregoing
provisions, the Company has been informed that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act and is therefore unenforceable.
Anti-takeover Provisions. Except in limited circumstances, the general
partner of the Partnership has exclusive management power over the business and
affairs of the Partnership. The general partner may not be removed by the
limited partners with or without cause. Under the Partnership Agreement the
general partner may, in its sole discretion, prevent a limited partner from
transferring his interest or any rights as a limited partner in certain limited
circumstances. The general partner may refuse to consent to the admission of a
transferee as a limited partner, and this may deter, delay or hamper attempts by
persons to acquire an interest in the Partnership.
The Articles of Incorporation and bylaws of the Company contain a number
of provisions that may have the effect of delaying or discouraging an
unsolicited proposal for the acquisition of the Company or the removal of
incumbent management. See "Description of Capital Stock of the Company--Exchange
and Prohibition of Transfer of Shares," and "Risk Factors--Possible Adverse
Consequences of Limits on Ownership of Common Stock."
Voting Rights. Under the Partnership Agreement, the limited partners
generally do not have voting rights relating to the operation and management of
the Partnership. Limited partners do have the right to vote on certain
amendments to the Partnership Agreement. The ownership of Units does not entitle
the holder thereof to vote on any matter to be voted upon by the shareholders of
the Company.
Shareholders of the Company have the right to vote on, among other
things, a merger or sale of all or substantially all of the assets of the
Company, amendments to the Articles of Incorporation,
- 17 -
<PAGE> 20
certain amendments to the bylaws and dissolution of the Company. The Company is
managed and controlled by a Board of Directors. The Board of Directors is
elected by the shareholders at annual meetings of the Company. All shares of
Common Stock and Series B Common Stock have one vote, and have cumulative voting
rights with respect to the election of the Board of Directors, in accordance
with California law. Cumulative voting entitles each shareholder of the Company
to cast as many votes as there are directors to be elected multiplied by the
number of shares registered in his or her name. A shareholder may cumulate the
votes for directors by casting all of the votes for one candidate or by
distributing the votes among as many candidates as such shareholder chooses.
Amendment of the Partnership Agreement or the Articles of Incorporation.
Amendments to the Partnership Agreement may be proposed by the general partner
or by limited partners holding 25% or more of the partnership interests.
Approval of such an amendment requires the vote of the general partner and the
holders of a majority of the percentage interests held by all partners. Certain
amendments may be approved solely by the general partner, such as, among other
things, amendments that would add to the obligations of the general partner,
reflect the admission, substitution, termination or withdrawal of partners, set
forth designations, rights, powers, duties and preferences of other holders of
any additional partnership interests, or satisfy any legal requirements. Certain
amendments that affect the fundamental rights of a limited partner must be
approved by each affected limited partner.
The Company's Articles of Incorporation may not be amended without the
affirmative vote of at least a majority of the shares of capital stock
outstanding and entitled to vote thereon voting together as a single class. The
Company's bylaws may be amended by the majority of the shares cast of capital
stock entitled to vote thereupon at a duly constituted meeting of shareholders.
Vote Required to Dissolve the Partnership or the Company. Under Delaware
law, the Partnership may be dissolved, other than in accordance with the terms
of the Partnership Agreement, only upon the unanimous vote of the limited
partners. The Company has agreed not to cause the Partnership to take any action
that will result in a dissolution for a period of ten years after October 31,
1996.
Under California law, the Company may be dissolved by shareholder
approval by the affirmative vote of the holders of a 50% or more of the total
number of shares of stock outstanding and entitled to vote thereon voting as a
single class.
Vote Required to Sell Assets or Merge. Under the Partnership Agreement,
the sale, exchange, transfer or other disposition of all or substantially all of
the Partnership's assets or the merger or consolidation of the Partnership may
be effected by the general partner without the consent of the limited partners.
However, the Company has agreed (i) not to cause the Partnership to sell,
transfer or otherwise dispose of the real property contributed to the
Partnership by the limited partners for five years after the contribution of
such property to the Partnership without the consent of the limited partners and
(ii) not to cause the loans on these properties to be paid down for ten years
after the contribution, if there will be a recognition of Federal tax liability
by the limited partners. These covenants relate to the two industrial R&D
buildings located in Fremont, California.
Compensation, Fees and Distributions. The Partnership Agreement provides
for quarterly distributions of available cash as follows: first, to each limited
partner a cash distribution equal to $.11 per Unit (which is the same amount as
the Company's current per share quarterly dividend distribution), and second,
100% of the remaining available cash to the general partner. The distribution to
the limited partners increases by 10% annually after the first eighteen months
after closing the formation of the Partnership in October 1996. If the
Partnership does not have sufficient cash available to make the quarterly cash
distributions to the limited partners, the general partner must loan and/or
contribute the monies required to fund such obligation. The general partner's
obligation to fund any deficiency in the cash distributions continues until the
general partner transfers all of its assets to the Partnership or the
Partnership Agreement is otherwise terminated.
- 18 -
<PAGE> 21
The general partner does not receive any compensation for its services
as general partner of the Partnership but may receive an annualized fee of 0.5%
of the book value of the real estate assets held by the Partnership as an
advisory fee. In addition, the Partnership reimburses the general partner for
all expenses incurred relating to the ongoing operation of the Company.
The Directors of the Company receive compensation for their services.
The Company has no employees.
Liability of Investors. Under the Partnership Agreement and applicable
Delaware law, the liability of the limited partners for the Partnership's debts
and obligations is generally limited to the amount of their investment in the
Partnership.
Under California law, shareholders are not personally liable for the
debts or obligations of the Company.
Nature of Investment. The Units constitute equity interests entitling
each limited partner to a quarterly cash distribution made to the limited
partners of the Partnership as described under "-- Compensation; Fees and
Distributions" above.
The shares of Common Stock constitute equity interests in the Company.
Each shareholder will be entitled to his pro rata share of any dividends or
distributions paid with respect to the Common Stock. The dividends payable to
the shareholders are not fixed in amount and are only paid if, when and as
declared by the Board of Directors. In order to qualify as a REIT, the Company
must distribute 95% of its taxable income (excluding capital gains), and any
taxable income (including capital gains) not distributed will be subject to
corporate income tax.
Potential Dilution of Rights. The general partner of the Partnership is
authorized, in its sole discretion and without limited partner approval, to
cause the Partnership to issue additional limited partnership interests and
other equity securities for any partnership purpose at any time to the limited
partners or to other persons on terms established by the general partner.
The Board of Directors of the Company may issue, in its discretion,
additional shares of Common Stock or Series B Common Stock. The issuance of
additional shares of either Common Stock or may result in the dilution of the
interests of the shareholders.
Liquidity. The limited partners generally may transfer all or a portion
of their interests in the Partnership to a transferee. No transferee, however,
will be admitted to the Partnership as a substitute limited partner having the
rights of a limited partner without the consent of the Company as the general
partner and provided that certain other conditions are met, including an
agreement to be bound by the terms and conditions of the Partnership Agreement.
Upon the effectiveness of the Registration Statement of which this
Prospectus is a part, the Exchange Shares will be freely transferable as
registered securities under the Securities Act. The Common Stock is listed on
the AMEX and the Company intends to cause the Exchange Shares to be so listed.
The breadth and strength of this market will depend, among other things, upon
the number of shares outstanding, the Company's financial results and prospects,
the general interest in the Company's and other real estate investments and the
Company's dividend yield compared to that of other debt and equity securities.
REGISTRATION RIGHTS
The registration of the Exchange Shares pursuant to the Registration
Statement of which this Prospectus is a part will discharge the Company's
obligations under the terms of an Exchange
- 19 -
<PAGE> 22
Agreement (the "Exchange Agreement") and the Registration Rights Agreement for
the benefit of holders of Units issued in connection with the acquisition of two
R&D industrial buildings in Fremont, California, on October 31, 1996. The
following summary does not purport to be complete and is qualified in its
entirety by reference to the Registration Rights Agreement.
Under the Registration Rights Agreement, the Company is obligated to
file and cause to be declared effective under the Securities Act a "shelf
registration" statement covering the Exchange Shares. The Company is also
required to use its reasonable efforts to keep the shelf registration statement
continuously effective for a period expiring on the earliest of (i) the date on
which the Unitholders no longer hold any Exchange Shares or Units, (ii) the date
on which the Company has caused the Unitholders to receive an opinion of counsel
stating that all Exchange Shares issued or issuable may be immediately sold
pursuant to Rule 144 under the Securities Act, or (iii) the date on which the
aggregate number of Exchange Shares held by, or issuable under the Exchange
Agreement to the Unitholders is equal to or less than 5% of the number of
Exchange Shares issuable under the Exchange Agreement on the date thereof. Any
Exchange Shares that have been issued pursuant to the Registration Statement of
which this Prospectus is a part, or which have been otherwise transferred and
subject to the issuance of new certificates without legal restriction on further
transfer of such shares, will no longer be entitled to the benefits of the
Registration Rights Agreement.
Pursuant to the Registration Rights Agreement, the Company has agreed to
pay all expenses in connection with the registration of the Exchange Shares
(other than underwriting discounts and commissions, fees and disbursements of
counsel representing the Unitholders, and transfer taxes, if any). The Company
has also agreed to indemnify each Unitholder and its officers and directors and
any person, if any, who controls any Unitholder against certain losses, claims,
damages and expenses arising from any untrue statement or alleged untrue
statement or omission or alleged omission, provided that such statement or
omission cannot be traced back to the Unitholder.
FEDERAL INCOME TAX CONSIDERATIONS
The following discussion provides a summary of certain federal income
tax considerations material to the ownership of Common Stock. The following
summary was prepared by the Company's special counsel, Steinhart & Falconer LLP.
This summary is based upon counsel's interpretation of the Code, the Treasury
Regulations promulgated thereunder, published rulings of the Internal Revenue
Service (the "Service"), and court decisions. No assurance can be given that the
conclusions set forth below by special counsel would be sustained by a court, or
that legislative or administrative changes or court decisions may not be
forthcoming which would significantly modify the statements expressed herein.
This discussion does not purport to deal with all aspects of taxation that may
be relevant to each individual shareholder in light of its particular
circumstances, particularly if such shareholder is a tax-exempt organization, a
foreign entity, or a person who is not a citizen or resident of the United
States. Unitholders should not view the following analysis as a substitute for
careful tax planning.
EACH UNITHOLDER IS ENCOURAGED TO CONSULT HIS OR HER OWN PERSONAL TAX
ADVISOR REGARDING THE SPECIFIC TAX CONSEQUENCES OF ANY EXCHANGE OF UNITS
AND SUBSEQUENT OWNERSHIP OF COMMON STOCK.
In the opinion of special counsel, the Company will satisfy the
requirements for qualification as a REIT, and its proposed method of operation
will enable it to meet the continuing requirements for qualification and
taxation as a REIT under the Code. It must be emphasized that this opinion is
based on various assumptions and is conditioned upon certain representations
made by the Company as to factual matters. Such factual assumptions and
representations are set forth below in this discussion. Further, this opinion is
based upon the factual representations of the Company concerning its business
- 20 -
<PAGE> 23
and properties. Moreover, such qualification and taxation as a REIT depends upon
the Company's ability to meet, through actual annual operating results,
distribution levels and diversity of stock ownership, the various qualification
tests imposed under the Code discussed below. These results will not be reviewed
by Steinhart & Falconer LLP and it will express no opinion with respect to them.
Accordingly, no assurance can be given that the actual results of the Company's
operation for any particular taxable year or years will satisfy such
requirements. No ruling has been requested from the Service as to the
qualification of the Company as a REIT.
If the Company qualifies for taxation as a REIT, it generally will not
be subject to federal corporate income taxes on the portion of its net income
that is currently distributed to its shareholders. This treatment substantially
eliminates the "double taxation" (at the corporate and shareholder levels) which
generally results from an investment in a corporation. Nevertheless, the Company
will generally be subject to Federal income tax as follows: First, the Company
will be taxed at regular corporate rates on any undistributed REIT taxable
income, including undistributed net capital gains. Second, under certain
circumstances, the Company may be subject to the "alternative minimum tax" on
its items of tax preference. Third, if the Company has (i) net income from the
sale or other disposition of "foreclosure property" which is held primarily for
sale to customers in the ordinary course of business or (ii) other nonqualifying
income from foreclosure property, it will be subject to tax at the highest
corporate rate on such income. Fourth, if the Company has net income from
prohibited transactions (which are, in general, certain sales or other
dispositions of property held primarily for sale to customers in the ordinary
course of business other than (a) foreclosure property and (b) property that is
involuntary converted in a transaction subject to Section 1033 of the Code),
such income will be subject to a 100% tax. Fifth, if the Company 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 net income attributable to the greater of the amount by which the Company
fails the 75% or 95% test, multiplied by a fraction intended to distinguish the
qualifying net income of the Company from its non-qualifying income, without
requiring an apportionment or allocation of specific deductions or expenses.
Sixth, if the Company 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, and (iii) any undistributed
taxable income from prior periods, the Company would be subject to a 4% excise
tax on the excess of such required distribution over the amounts actually
distributed. Finally, under circumstances where the Company has consented to
certain procedures pursuant to I.R.S. Notice 88-19, if the Company acquires any
asset from a C corporation (i.e., generally a corporation subject to full
corporate-level tax) in a transaction in which the basis of the asset in the
Company's hands is determined by reference to the basis of the asset (or any
other property) in the hands of the C corporation, and the Company recognizes
gain on the disposition of such asset during the ten year period beginning on
the date on which such asset was acquired by the Company, then, to the extent of
the excess of the fair market value of such asset over its tax basis, such gain
will be subject to tax at the highest regular corporate rate pursuant to IRS
regulations that have not yet been promulgated.
Requirements for Qualification
General
The Code defines a REIT as a corporation, trust or association (1) which
is managed by one or more trustees or directors; (2) the beneficial ownership of
which is evidenced by transferable shares or certificates; (3) which (but for
Sections 856 through 859 of the Code) would be taxable as a domestic
corporation; (4) which is neither a financial institution nor an insurance
company subject to certain provisions of the Code; (5) the beneficial ownership
of which is held by 100 or more persons; (6) not more than 50% in value of the
outstanding stock of which is owned, during the last half of each year, directly
or indirectly, by five or fewer individuals; (7) which meets the other tests
described below; and (8) which has made an election to be treated as a REIT.
- 21 -
<PAGE> 24
Since the Company is a corporation organized under the laws of the state
of California and managed by a board of directors, and will be neither a
financial institution nor an insurance company, it should satisfy the first four
requirements described above. Currently, the beneficial ownership of the Company
is held by more than 100 persons, and not more than 50% of the Company's stock
is owned by five or fewer individuals. The Company has made an election to be
treated as a REIT which has not been terminated or revoked. Finally, as
discussed below, special counsel believes the Company should satisfy the
remaining tests to qualify as a REIT.
Income Tests
The Company must satisfy two annual gross income requirements to
maintain its qualification as a REIT. First, at least 75% of the Company's gross
income (excluding gross income from prohibited transactions) for each taxable
year must be derived directly or indirectly from investments relating to real
property (including rents from real property) or mortgages on real property.
Second, at least 95% of the Company's gross income (excluding gross income from
prohibited transactions) for each taxable year must be derived from such real
property investments (including rents from real property), and from dividends,
interest and gain from the sale or disposition of stock or securities or from
any combination of the foregoing. If the Company fails to meet either the 75% or
95% test described above, but nevertheless maintains its qualification as a REIT
(i.e., because the failure was due to reasonable cause and not willful neglect),
a 100% tax will be imposed on the greater of the amount by which it fails either
test.
Rents received by the Company will qualify for the 75% and 95% of income
tests ("rents from real property") only if several conditions are met. First,
the amount of rent 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 gross revenue. Second, the Code
provides that rents received from a person will not qualify as "rents from real
property" in satisfying the gross income tests if the REIT directly or
constructively owns 10% or more of such person (a "Related Party"). 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," the REIT 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 from whom the REIT derives no revenue.
However, the Company may directly perform certain services that generate income
if such income amount would be excluded from unrelated business taxable income
under Code Section 512(b)(3) if received by an organization described in Code
Section 511(a)(2). The Company does not and will not charge rent for any
property that is based in whole or in part on the net income or profits of any
person (except by reason of being based on a percentage of gross revenue, as
described above) and the Company does not and will not rent any property to a
Related Party. Further, the Company will neither manage any property nor will it
derive any revenue or fees from any independent contractor who manages any
property.
"Interest" on mortgages secured by real estate which qualifies for the
75% of income test and "interest" for purposes of the 95% of income test
generally do not include any amount received or accrued (directly or indirectly)
if the determination of such amount depends in whole or in part on the net
income or profits of any person. However, an amount received or accrued
generally will not be excluded from the term "interest" solely by reason of
being based on a fixed percentage or percentages of receipts or sales. The
Company does not anticipate receiving any interest determined in whole or in
part on the net income or profits of any person.
- 22 -
<PAGE> 25
Asset Tests
The Company, at the close of each quarter of its taxable year, must also
satisfy four tests relating to the nature of its assets. First, at least 75% of
the value of the Company's total assets must consist of real estate assets,
cash, certain cash items and government securities. Second, not more than 25% of
the Company's total assets may be represented by securities other than those
under the 75% test. Third, not more than 5% of the value of its total assets may
consist of securities of a single issuer (if such securities are not includible
under the 75% test). Finally, the Company may not own more than 10% of any
single issuer's outstanding voting securities, unless the issuer is a qualified
REIT subsidiary. The Company anticipates satisfying each asset test at the end
of each quarter of its taxable year.
Annual Distribution Requirements
To qualify as a REIT, the Company must generally distribute to its
shareholders an amount equal to the sum of 95% of the Company's "REIT taxable
income" and 95% of the after-tax income from foreclosure property minus certain
excess noncash income. This amount, which is computed without regard to the
dividends paid deduction and the Company's net capital gain, must be paid in the
taxable year to which it relates or in the following taxable year if declared
before the Company timely files its tax return for such year and paid on or
before the date of the first regular dividend distribution after that
declaration. To the extent the Company does not distribute all of its net
capital gain or distributes at least 95%, but less than 100%, of its "REIT
taxable income," it will be subject to tax at regular ordinary and capital gains
corporate tax rates. Furthermore, if the Company 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 income for such year,
and (iii) any undistributed taxable income from prior periods which was not
subject to corporate income tax, the Company would be subject to a 4% excise tax
on the excess of such required distribution over the amounts actually
distributed. The Company intends to make timely distributions sufficient to
satisfy the annual distribution requirement applicable to ordinary income, but
generally intends to reinvest capital gains (net of the taxes required to be
paid thereon).
Failure to Qualify
If the Company fails to qualify for taxation as a REIT in any taxable
year, and certain relief provisions do not apply, the Company will be subject to
tax (including any applicable alternative minimum tax) on its taxable income at
regular corporate rates. Distributions to shareholders in any year in which the
Company fails to qualify will not be deductible by the Company nor will the
Company be required to make any distributions. In such event, to the extent of
current and accumulated earnings and profits, all distributions to shareholders
will be taxable as ordinary income, and, subject to certain limitations of the
Code, corporate distributees may be eligible for the dividends received
deduction. Unless entitled to relief under specific statutory provisions, the
Company also will be disqualified from taxation as a REIT for the four taxable
years following the year during which qualification was lost. It is not possible
to state whether in all circumstances the Company would be entitled to such
statutory relief.
Taxation of Taxable Domestic Shareholders
As long as the Company qualifies as a REIT, distributions made to the
Company's taxable domestic shareholders out of current or accumulated earnings
and profits (and not designated as capital gain dividends) will be treated as
ordinary income. Moreover, corporate shareholders will not be entitled to a
dividends received deduction. Capital gain dividends will be taxed as long-term
capital gains (to the extent they do not exceed the Company's actual net capital
gain for the taxable year) regardless of whether or not the Company shareholder
held the Common Stock for the requisite long-term holding period. Shareholders
who sell their shares at a loss after owning them for six months or less will be
required to treat that loss as a long-term capital loss to the extent of any
prior capital gain
- 23 -
<PAGE> 26
dividends they received with respect to such shares. However, corporate
shareholders may be required to treat up to 20% of certain capital gain
dividends as ordinary income. To the extent the Company's distributions to its
shareholders exceeds current and accumulated earnings and profits, the
distributions are considered a return of capital. Such distributions simply
reduce the adjusted basis of the shareholders' aggregate basis in their Common
Stock and are not taxable to that extent. To the extent that such distributions
cumulatively exceed a shareholder's adjusted basis in Common Stock, such
distributions are taxable as capital gain, assuming the Common Stock is a
capital asset in the Company shareholder's hands. Such gain will be long-term or
short-term capital gain depending on the Company shareholder's holding period
for his or her stock. Shareholders may not include in their individual income
tax returns any net operating losses or capital losses of the Company.
The Company may elect to retain and pay income tax on its net long-term
capital gains received during the taxable year. For taxable years beginning
after December 31, 1997, if the Company so elects for a taxable year, the
Company's shareholders would include in income as long-term capital gains their
proportionate share of such portion of the Company's undistributed long-term
capital gains for the taxable year as the Company may designate. A shareholder
would be deemed to have paid his share of the tax paid by the Company on such
undistributed capital gains, which would be credited or refunded to the
shareholder. The shareholder's basis in his shares of Common Stock would be
increased by the amount of undistributed long-term capital gains (less the
capital gains tax paid by the Company) included in the shareholder's long-term
capital gains.
The Taxpayer Relief Act of 1997 (the "Act") alters the taxation of
capital gain income. Under the Act, individuals who hold certain investments for
more than 18 months may be taxed at a maximum long-term capital gain rate of 20%
on the sale or exchange of those investments. Individuals who hold certain
assets for more than 12 months but less than 18 months may be taxed at a maximum
mid-term capital gain rate of 28% on the sale or exchange of those investments.
The Act also provides a maximum rate of 25% for "unrecaptured section 1250 gain"
for individuals, special rules for "qualified 5-year gain," as well as other
changes to prior law. The Act allows the IRS to prescribe regulations on how the
Act's new capital gain rates will apply to sales of capital assets by "pass-thru
entities," which include REITs such as the Company. To date regulations have not
yet been prescribed, and it remains unclear how the Act's new rates will apply
to capital gain dividends or undistributed capital gains, including for example,
the extent to which, if any, capital gain dividends or undistributed capital
gains from the Company will be taxed to individuals at the new rates for
mid-term capital gains and unrealized section 1250 recapture, rather than the
long-term capital gain rates. Unitholders are urged to consult their own tax
advisors with respect to the new rules contained in the Act.
Taxation of Shareholders on the Disposition of the Common Stock
In general, any gain or loss realized upon a taxable disposition of the
shares of Common Stock by a shareholder who is not a dealer in securities will
be treated as long-term capital gain or loss if the shares of Common Stock have
been held for more than 18 months, (or, in the case of individuals, mid-term
capital gain or loss if the shares have been held for more than 12 months but
not more than 18 months) and otherwise as short-term capital gain or loss.
However, any loss upon a sale or exchange of shares of Common Stock by a
shareholder who has held such stock 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 the Company or undistributed capital gains
required to be treated by such shareholder as long-term capital gain. All or a
portion of any loss realized upon a taxable disposition of shares of Common
Stock may be disallowed if other shares of Common Stock are purchased within 30
days before or after the disposition.
Backup Withholding
The Company will report to its shareholders and the Service the amount
of dividends paid during each calendar year and the amount of tax withheld.
Under the backup withholding rules, a
- 24 -
<PAGE> 27
Company shareholder may be subject to backup withholding at the rate of 31% with
respect to dividends paid unless such shareholder (a) is a corporation or comes
within certain other exempt categories or (b) provides a taxpayer identification
number, certifies as to no loss of exemption from backup withholding, and
otherwise complies with applicable requirements of the backup withholding rules.
A Company shareholder who does not provide the Company with his correct taxpayer
identification number may also be subject to penalties imposed by the Service.
Any amount paid as backup withholding will be creditable against the Company
shareholder's income tax liability. In addition, the Company may be required to
withhold a portion of capital gain distributions to any Company shareholder who
fails to certify his non-foreign status to the Company.
Taxation of Tax-Exempt Shareholders
In Revenue Ruling 66-106, 1966-1 C.B. 151, the Service ruled that
amounts distributed by a REIT to a tax-exempt employees' pension trust did not
constitute "unrelated business taxable income" ("UBTI"). Revenue rulings are
interpretive in nature and subject to revocation or modification by the Service.
However, based upon Revenue Ruling 66-106 and the analysis therein, special
counsel believes that distributions by the Company to a Company shareholder that
is a tax-exempt entity will also not constitute UBTI, provided that the
tax-exempt entity has not financed the acquisition of its shares with
"acquisition indebtedness" within the meaning of the Code and the shares are not
otherwise used in an unrelated trade or business of the tax-exempt entity.
Certain tax-exempt entities are, however, subject to income taxation on their
investment income independently of the UBTI rules. Distributions from the
Company would be taxable income to such taxpayers. In addition, in certain
circumstances, a pension trust that owns more than 10% of the Company's stock is
required to treat a percentage of the dividends from the Company as UBTI.
Unitholders with questions concerning the taxability of dividends they may
receive should consult their own tax advisors.
Taxation of Foreign Shareholders
Dividends paid to foreign shareholders attributable to the Company's
operating income and dispositions of real estate investments will generally be
subject to United States income tax and withholding by the Company at a 30%
rate, subject to reduction or elimination by applicable treaties. Potential
foreign shareholders are strongly urged to consult their own tax advisors
regarding the tax consequences of an investment in the Company, including the
possibility of United States income tax withholding on Company distributions.
State and Local Taxes
The Company and its shareholders may be subject to state or local
taxation in various state and local jurisdictions, including those in which it
or they transact business or reside. The state and local tax treatment of the
Company and its shareholders may not conform to the federal income tax treatment
described above. Thus, Unitholders should consult their own tax advisors
concerning the state and local tax treatment of an investment in the Company.
PLAN OF DISTRIBUTION
This Prospectus relates to the offer and sale from time to time by the
holders of up to 1,625,000 shares of Common Stock that may be issued by the
Company to Unitholders in exchange for their Units. The Company has registered
the Exchange Shares for sale pursuant to certain exchange and registration
rights agreements, but registration of the Exchange Shares does not necessarily
mean that any of the Exchange Shares will be offered for sale or sold by the
Selling Shareholders.
- 25 -
<PAGE> 28
The Company will not receive any of the proceeds from the sale of any
Shares by the Selling Shareholders; however, the Company will receive the Units
held by the Unitholders and thereby increase its ownership interest in the
Partnership upon the issuance of any Exchange Shares.
The distribution of the Exchange Shares may be effected from time to
time in one or more underwritten transactions at a fixed price or prices, which
may be changed, or at market prices prevailing at the time of sale, at prices
related to such prevailing market prices or at negotiated prices. Any such
underwritten offering may be on a "best efforts" or a "firm commitment" basis.
In connection with any such underwritten offering, underwriters or agents may
receive compensation in the form of discounts, concessions or commissions from
the Selling Shareholders or from purchasers of Exchange Shares for whom they may
act as agents. Underwriters may sell Exchange 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 the Company, underwriters,
dealers or agents who participate in the distribution of Exchange Shares may be
entitled to indemnification by the Company 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 Shareholders and any underwriters, dealers or agents that
participate in the distribution of Exchange Shares may be deemed to be
"underwriters" within the meaning of the Securities Act, and any profit on the
sale of Exchange Shares by them and any discounts, commissions or concessions
received by any such underwriters, dealers or agents may be deemed to be
underwriting discounts and commissions under the Securities Act.
At the time a particular offer of Exchange Shares is made, a Prospectus
Supplement, if required, will be distributed that will set forth the name or
names of any underwriters, dealers or agents and any discounts, commissions and
other terms constituting compensation from the Selling Shareholders and any
other required information.
The sale of the Exchange Shares by the Selling Shareholders may also be
effected from time to time by selling the Exchange Shares directly to purchasers
or to or through broker-dealers. In connection with any such sale, any such
broker-dealer may act as agent for the Selling Shareholders or may purchase from
the Selling Shareholders all or a portion of the Exchange Shares as principal,
and any such sale may be made pursuant to any of the methods described below.
Such sales may be made on the AMEX or other exchanges on which the Common Stock
is then traded, in the over-the-counter market, in negotiated transactions or
otherwise at prices and at terms then prevailing or at prices related to the
then-current market prices or at prices otherwise negotiated.
The Exchange Shares may also be sold in one or more of the following
transactions: (i) block transactions (which may involve crosses) in which a
broker-dealer may sell all or a portion of such stock as agent but may position
and resell all or a portion of the block as principal to facilitate the
transaction; (ii) purchases by any such broker-dealer as principal and resale by
such broker-dealer for its own account pursuant to a Prospectus Supplement;
(iii) a special offering, an exchange distribution or a secondary distribution
in accordance with applicable AMEX or other stock exchange rules; (iv) ordinary
brokerage transactions and transactions in which any such broker-dealer solicits
purchasers; (v) sales "at the market" to or through a market maker or into an
existing trading market, on an exchange or otherwise, for such Shares; or (vi)
sales in other ways not involving market makers or established trading markets,
including direct sales to purchasers. In effecting sales, broker-dealers engaged
by the Selling Shareholders may arrange for other broker-dealers to participate.
Broker-dealers will receive commissions or other compensation from the Selling
Shareholders in amounts to be negotiated immediately prior to the sale that will
not exceed those customary in the types of transactions involved. Broker-dealers
may also receive compensation from purchasers of the Exchange Shares which is
not expected to exceed that customary in the types of transactions involved.
- 26 -
<PAGE> 29
In order to comply with the securities laws of certain states, if
applicable, the Exchange Shares may be sold only through registered or licensed
brokers or dealers. In addition, in certain states, the Exchange Shares may not
be sold unless they have been registered or qualified for sale in such state or
an exemption from such registration or qualification requirement is available
and is complied with.
All expenses incident to the offering and sale of the Exchange Shares,
other than commissions, discounts and fees of underwriters, broker-dealers or
agents, shall be paid by the Company. The Company has agreed to indemnify the
Selling Shareholders against certain losses, claims, damages and liabilities,
including liabilities under the Securities Act.
EXPERTS
The financial statements and schedules incorporated by reference in this
Prospectus, to the extent and for the periods indicated in their reports, have
been audited by Coopers & Lybrand L.L.P. independent certified public
accountants, and are included herein in reliance upon the authority of said firm
as experts in giving such reports.
LEGAL MATTERS
Certain matters with respect to the legality of the Common Stock offered
hereby as well as certain legal matters described under "Federal Income Tax
Considerations" will be passed upon for the Company by Steinhart & Falconer LLP,
San Francisco, California.
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFERING COVERED BY THIS PROSPECTUS. IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY OR THE SELLING SHAREHOLDERS. THIS PROSPECTUS DOES NOT CONSTITUTE
AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE COMMON STOCK, IN ANY
JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE ANY SUCH
OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY OFFER OR
SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT
THERE HAS NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS OR IN
THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
- 27 -
<PAGE> 30
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
AVAILABLE INFORMATION.............................................................. 2
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE.................................... 2
RISK FACTORS....................................................................... 5
DESCRIPTION OF CAPITAL STOCK OF THE COMPANY....................................... 11
USE OF PROCEEDS................................................................... 12
SELLING SHAREHOLDERS..............................................................
EXCHANGE OF UNITS................................................................. 12
REGISTRATION RIGHTS............................................................... 19
FEDERAL INCOME TAX CONSIDERATIONS................................................. 20
PLAN OF DISTRIBUTION.............................................................. 25
EXPERTS .......................................................................... 27
</TABLE>
- 28 -
<PAGE> 31
================================================================================
1,625,000 SHARES
FRANKLIN SELECT REALTY TRUST
SERIES A COMMON STOCK
---------------
PROSPECTUS
---------------
___________, 1997
================================================================================
- 29 -
<PAGE> 32
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the estimated expenses in connection with
the offerings contemplated by this Registration Statement:
<TABLE>
<S> <C>
SEC Registration Fee................................................... $ 3,232
Printing and Engraving Costs .......................................... 1,000
Accounting Fees and Expenses .......................................... 9,000
Legal Fees and Expenses................................................ 18,900
Miscellaneous ......................................................... 2,868
-------
Total $35,000
=======
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company's Articles of Incorporation provide that any director or
officer of the Company, whether or not still in office, made a party to any
action, suit or proceeding or against whom a claim or liability is asserted
because he is or was a director or officer of the Company shall be indemnified
and held harmless by the Company against judgments, fines, amounts paid on
account thereof (whether in settlement or otherwise) and reasonable expenses,
including attorneys fees actually and reasonably incurred by him in connection
with the defense of such action, suit or proceeding or in connection with the
appeal therein, whether or not the same proceeds to judgment or is settled or
otherwise brought to a conclusion. Such rights of indemnification and
reimbursement shall be satisfied only out of the assets of the Company. No
person shall be indemnified or reimbursed for any claim, obligation or liability
which shall have been adjudicated, or in case of settlement, which in the
opinion of counsel for the Company would, if adjudicated, have likely been
adjudicated to have arisen out of or been based upon such person's willful
misfeasance, bad faith, gross negligence or reckless disregard of duty or for
his failure to act in good faith in the reasonable belief that his action was in
the best interests of the Company. The Company has entered into individual
indemnification agreements with each director of the Company.
ITEM 16. EXHIBITS
3.1 Articles of Incorporation of Company.(1)
3.2 First Amendment to Articles of Incorporation.(2)
3.2(a) Second Amended and Restated Bylaws of Franklin Select Realty
Trust.(2)
5.1 Opinion of Steinhart and Falconer LLP regarding legality of the
Offered Securities.
8.1 Opinion of Steinhart and Falconer LLP regarding certain tax
considerations.
10.1 Amended and Restated Advisory Agreement.(3)
10.2 Property Management Agreement.(4)
10.3 Agreement of Limited Partnership of FSRT, L.P. between the
Company and Northport Associates No. 18, a California limited
liability company, dated as of October 30, 1996. (5)
- 30 -
<PAGE> 33
10.4 Contribution Agreement, dated as of October 30, 1996, between
FSRT, L.P., the Company, Northport Associates No. 18, a
California limited liability company, and the members of
Northport Associates No. 18. (5)
10.5 Exchange Rights Agreement, dated as of October 30, 1996, among
the Company, FSRT, L.P., and Northport Associates No. 18, a
California limited liability company. (5)
10.6 Registration Rights Agreement, dated as of October 30, 1996,
among the Company and Northport Associates No. 18, a California
limited liability company.(5)
10.7 Secured line of credit loan agreement, dated December 10, 1996,
by and between the Company and Bank of America.(3)
23.1 Consent of Coopers & Lybrand LLP.
23.2 Consent of Steinhart and Falconer LLP.(included in opinions).
24.1 Power of Attorney (included on signature page).
- ----------------------------
(1) Documents were filed in the Company's Form S-11 Registration Statement,
dated March 30, 1989 (Registration No. 033-26562) and are incorporated
herein by reference.
(2) Documents were filed in the Company's Form S-4 Registration Statement,
dated November 13, 1995 (Registration No. 033-64131) and are incorporated
herein by reference.
(3) Documents were filed in the Company's Form 10-K for the year ended December
31, 1996, and are incorporated herein by reference.
(4) Documents were filed in the Company's Form 10-K for the year ended December
31, 1994, and are incorporated herein by reference.
(5) Documents were filed in the Company's Form 8-K, dated October 31, 1996, and
are incorporated herein by reference.
ITEM 17. UNDERTAKINGS
(a) The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are
being made, a post-effective amendment to this
Registration Statement:
(i) To include any prospectus required by Section
10(a)(3) of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events
arising after the effective date of the
Registration Statement (or the most recent
post-effective amendment thereof) which,
individually or in the aggregate, represent a
fundamental change in the information set forth in
the Registration Statement;
(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) do not apply if 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 Sections 13 or 15(d) of the Securities
Exchange Act of 1934 that are incorporated by reference in the Registration
Statement.
- 31 -
<PAGE> 34
(2) That, for the purpose of determining any liability under
the Securities Act of 1933, each such post-effective
amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and
the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which
remain unsold at the termination of the offering.
(b) The Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each
filing of the Registrant's annual report pursuant to Sections
13(a) or 15(d) of the Securities Exchange Act of 1934 (and, where
applicable, each filing of an employee benefit plan's annual
report pursuant to Section 15(d) of the Securities Exchange Act
of 1934) that is incorporated by reference in the Registration
Statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of
such securities at that time shall be deemed to be the initial
bona fide offering thereof.
(c) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers
and controlling persons of the Registrant pursuant to the
provisions described in Item 15 of this Registration Statement or
otherwise, the Registrant has been advised that in the opinion of
the Securities and Exchange Commission such indemnification is
against public policy as expressed in the 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 against the
Registrant by such director, officer or controlling person in
connection with the securities being registered hereby, the
Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in
the Act and will be governed by the final adjudication of such
issue.
(d) The Registrant hereby undertakes that:
(1) For the purpose of determining any liability under the
Securities Act of 1933, the information omitted from the
form of prospectus filed as part of this Registration
Statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Registrant pursuant to
Rule 424(b)(1) or (4), or 497(h) under the Securities Act
shall be deemed to be part of this Registration Statement
as of the time it was declared effective.
(2) For the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that
contains a form of prospectus shall be deemed to be a new
registration 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.
- 32 -
<PAGE> 35
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-3 and has duly caused this Amendment
No. 1 to the Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City and County of San Mateo,
State of California, on the 21st day of November, 1997.
FRANKLIN SELECT REALTY TRUST
By: /s/ David P. Goss
- ---------------------------
David P. Goss
Chief Executive Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT NO.
1 TO THE REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ David P. Goss Chief Executive Office, November 21, 1997
- ----------------------------- President (Principal
David P. Goss Executive Officer) and Director
/s/ Mark A. TenBoer Vice President-Finance November 21, 1997
- ----------------------------- and Chief Financial Officer
Mark A. TenBoer (Principal Financial and
Accounting Officer)
Barry C. L. Fernald* Director November 21, 1997
- -----------------------------
Barry C. L. Fernald
</TABLE>
- 33 -
<PAGE> 36
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
Lloyd D. Hanford, Jr.* Director November 21, 1997
- -----------------------------
Lloyd D. Hanford, Jr.
Egon H. Kraus* Director November 21, 1997
- -----------------------------
Egon H. Kraus
E. Samuel Wheeler* Director November 21, 1997
- -----------------------------
E. Samuel Wheeler
</TABLE>
*By /s/ David P. Goss
-------------------------
David P. Goss
Attorney-in Fact
- 34 -
<PAGE> 1
EXHIBIT 5.1
October 21, 1997
Board of Directors
Franklin Select Realty Trust
777 Mariners Island Boulevard
San Mateo, CA 94403-7777
Re: Franklin Select Realty Trust
Registration Statement on Form S-3
----------------------------------
Gentlemen:
You (the "Company") have requested our opinion with respect to certain
matters described below relating to up to 1,625,000 shares of the Company's
Series A common stock (the "Common Shares"), which may be issued to certain
holders of limited partnership units (the "Units") in FSRT, L.P., a Delaware
limited partnership for which the Company is sole general partner, in exchange
for such Units and pursuant to a Registration Statement on Form S-3 (the
"Registration Statement").
In connection with our opinion, we have participated in the preparation
of the Registration Statement that the Company proposes to file with the
Securities and Exchange Commission, including the Exhibits thereto; the
Prospectus in the form thereof included in the Registration Statement; Articles
of Incorporation, as amended, and the Second Amended and Restated Bylaws of the
Company; certified copies of resolutions of the board of directors of the
Company authorizing the issuance of the Common Shares and the filing of, and the
transactions described in, the Registration Statement; and such other records,
documents, instruments and certificates of public officials and of the Company
as we have deemed necessary for the purpose of rendering the opinions herein set
forth. In making such examination, we have assumed the genuineness of all
signatures and the authenticity of all items submitted to us as originals and
the conformity with originals of all items submitted to us as copies.
Based upon and subject to the foregoing, and subject to the
qualifications set forth herein, we are of the opinion that:
The Common Shares to be issued pursuant to the Registration Statement
are duly authorized and when issued will be validly issued, fully paid and
nonassessable.
<PAGE> 2
Board of Directors
Franklin Select Realty Trust
October 21, 1997
Page 2
We are members of the State Bar of California and, accordingly, we do
not purport to be qualified to, nor do we, express any opinion herein concerning
any law other than the laws of the State of California and the federal
government of the United States.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the use of our name under the captions "Federal
Income Tax Considerations" and "Legal Matters" in the Registration Statement
and in the Prospectus included therein.
Very truly yours,
STEINHART & FALCONER LLP
<PAGE> 1
EXHIBIT 8.1
October 21, 1997
Franklin Select Realty Trust
777 Mariners Island Blvd.
San Mateo, CA 94403-7777
RE: Form S-3 Registration of up to 1,625,000 Shares
of Franklin Select Realty Trust Series A Common Stock
-----------------------------------------------------
Gentlemen:
We are acting as counsel to Franklin Select Realty Trust, a California
corporation (the "Company") in connection with the proposed registration of up
to 1,625,000 shares of Company Series A Common Stock pursuant to that certain
limited partnership agreement dated October 30, 1996 executed by and between the
Company and Northport Associates No. 18, a California limited liability company.
Hereafter, the partnership formed pursuant to such limited partnership agreement
shall be referred to as the "Operating Partnership". In this connection, we have
participated in the preparation of the Form S-3, including the Prospectus
therein, to be distributed to Unitholders of the Operating Partnership in
connection with the proposed registration.
We have reviewed the following documents for purposes of this opinion:
(1) The Form S-3/Prospectus;
(2) The 1996 Annual Report of the Company filed with the SEC;
(3) The Forms 10-K for the fiscal years ended December 31, 1995 filed by
the Company, Franklin Real Estate Income Fund ("FREIF") and Franklin Advantage
Real Estate Income Fund ("Advantage"), respectively with the SEC;
(4) The Forms 10-Q for the quarter ended March 31, 1996 filed by FREIF
and Advantage with the SEC;
(5) The Forms 10-Q for the quarters ended March 31, 1996, June 30, 1996,
September 30, 1996, March 31, 1997, and June 30, 1997, respectively, filed by
the Company with the SEC;
<PAGE> 2
Franklin Select Realty Trust
October 21, 1997
Page 2
(6) The Form 10-K for the fiscal year ended December 31, 1996 filed by
the Company with the SEC;
(7) The 1995 (full-year) and 1996 (short-year) federal income tax
returns filed by FREIF and Advantage, respectively, with the Internal Revenue
Service;
(8) The 1995 and 1996 federal income tax returns filed by the Company
with the Internal Revenue Service; and
(9) The executed Certificate of the Chief Financial Officer of the
Company and former Chief Financial Officer of Advantage and FREIF dated October
20, 1997.
The documents listed in items (1) through (8) are hereinafter referred
to as the "Reports," and the Certificate listed in item (9) is referred to as
the "Certificate."
We have relied on the correctness and accuracy of all facts set forth in
the Certificate and all the Reports.
Based on this review, and in reliance on the Reports and Certificate, we
are of the opinion that, for the calendar years 1995 and 1996, the Trust met the
requirements of the Internal Revenue Code of 1986, as amended, for qualification
as a real estate investment trust, that the Trust currently meets such
requirements, and that the Trust's contemplated method of operation as described
in the Prospectus will enable the Company to comply with such requirements in
the future.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the use of our name under the captions "Federal
Income Tax Considerations" and "Legal Matters" in the Registration Statement and
in the Prospectus included therein.
Very truly yours,
STEINHART & FALCONER LLP
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statement of
Franklin Select Realty Trust on Form S-3 (File No. 333-38463) of our report
dated February 7, 1997, on our audits of the consolidated financial statements
and financial statement schedule of Franklin Select Realty Trust as of December
31, 1996 and 1995, and for each of the three years in the period ended December
31 1996, which report is included in the Company's Annual Report on Form 10-K.
We also consent to the reference to our firm under the caption "Experts."
COOPERS & LYBRAND L.L.P.
San Francisco, California
November 5, 1997
