As filed with the Securities and Exchange Commission on December 15, 1997
Registration No. 333-1304
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
POST-EFFECTIVE AMENDMENT NO. 4
TO
FORM S-11
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
WEST COAST REALTY INVESTORS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN GOVERNING INSTRUMENTS)
5933 West Century Boulevard - Ninth Floor
Los Angeles, California 90045
Philip N. Gainsborough
5933 West Century Boulevard - Ninth Floor
Los Angeles, California 90045
(NAME AND ADDRESS OF AGRENT FOR SERVICES)
<PAGE>
WEST COAST REALTY INVESTORS, INC.
Cross Reference Sheet Pursuant to Item 1(a)
(By reference to Regulation S-K Item 501 (b))
Item Number and Caption Location in Prospectus
1. Forepart of Registration Cover Page
Statement and Outside
Front Cover Page of
Prospectus
2. Inside Front and Outside Cover Page; Back Cover
Back Cover Pages of
Prospectus
3. Summary Information, Risk Prospectus Summary;
Factors and Ratio of The Company; Risk Factors
Earnings to Fixed Charges
4. Determination of Offering Price Plan of Distribution
5. Dilution Not Applicable
6. Selling Security Holders Management's Discussion
of Financial Condition
7. Plan of Distribution Cover Page; Description
of Common Stock; Plan of
Distribution
8. Use of Proceeds Compensation of Advisor
and Affiliates; Estimated
Use of Proceeds; Investment
Objectives and Policies
9. Selected Financial Data Selected Financial Data
10. Management's Discussion and Management's Discussion and
Analysis of Financial Analysis of Financial
Condition and Results of Condition and Results of
Operations Operations
<PAGE>
11. General Information as Cover Page; The Company;
to Registrant Management; Summary of
Organization Documents
12. Policy with Respect Investment Objectives and
to Certain Activities Policies; Summary of
Organization Documents;
Description of Common Stock
13. Investment Policies Investment Objectives and
of Registrant Policies; Summary of
Organization Documents
14. Description of Real Estate Real Property Investments
15. Operating Data Selected Financial Data
16. Tax Treatment of Registrant Prospectus Summary;
and its Security Holders Tax Consequences
17. Market Price of Not Applicable
and Dividends on the
Registrant's Common
Equity and Related
Stockholder Matters
18. Description of Registrant's Cover Page; Description
Securities of Common Stock
19. Legal Proceedings Not Applicable
20. Security Ownership of Description of Common Stock
Certain Beneficial Owners
21. Directors and Executive Management
Officers
<PAGE>
22. Executive Compensation Compensation of Advisor and
Affiliates; Management
23. Certain Relationships and Compensation of Advisor
Related Transactions and Affiliates;
Conflicts of Interest;
Management
24. Selection, Management and Investment Objectives and
Custody of Registrant's and Policies; Conflicts
Investments of Interest; Management
Services Provided
by the Advisor; Summary of
Organization Documents
25. Policies with Respect to Conflicts of Interest;
Certain Transactions Investment Objectives and
Policies; Summary of
Organization Documents
26. Limitations of Liability Risk Factors; Summary of
Organization Documents
27. Financial Statements Financial Statements
and Information
28. Interests of Named Experts Legal Matters; Experts
29. Disclosure of Commission Summary of Organization
Position on Indemnification Documents
for Securities Act Liabilities
<PAGE>
The supplement ("Supplement") to the Prospectus ("Prospectus") updates the
Prospectus of West Coast Realty Investors, Inc. (the "Company") dated May 1,
1997. This Supplement is part of and must accompany the Prospectus. The date
of this supplement is December 15, 1997.
This Supplement amends and supersedes the corresponding sections of the
Prospectus, and Supplements 1, 2, 3, 4, 5 and 6 to such prospectus; however,
subject to the qualification above, the Prospectus continues to control the
terms of the offering, and all provisions thereof not supplemented or amended
hereby remain pertinent to the offering and are incorporated herein by
reference. Accordingly, current subscribers and prospective investors should
read both the Prospectus and this Supplement No. 7 very carefully. All
capitalized items used in this Supplement have the same meaning ascribed to
them in the Prospectus unless otherwise indicated herein.
<PAGE>
PROSPECTUS
LOGO
WEST COAST REALTY INVESTORS, INC.
$10.00 PER SHARE
MINIMUM INVESTMENT: 100 SHARES ($1,000)
- --------------------------------------------------------------------------------
WEST COAST REALTY INVESTORS, INC. (the "Company") is a Delaware
corporation which qualifies, and since January 1, 1991 is doing business as,
a "Real Estate Investment Trust" for federal income tax purposes. The Company
is advised by West Coast Realty Advisors, Inc. (the "Advisor"), an Affiliate
of Associated Financial Group, Inc. ("AFG"). The Advisor oversees the
investments of the Company, subject to the direction of the Company's Board
of Directors. A majority of the members of the Board of Directors are
independent (i.e., they are not affiliated with the Advisor or AFG) (the
"Independent Directors"). See "Management."
The Company intends to use the net proceeds of this Offering to acquire,
improve, operate, hold for investment, sell and reinvest sales proceeds in
equity interests in income-producing residential, industrial, retail or
commercial real Properties located primarily in California and the west coast
of the United States. Properties will be acquired for cash or on a moderately
leveraged basis with aggregate mortgage indebtedness not to exceed 50% of the
Purchase Price (which is defined generally as the cost to acquire the
Company's Properties) of the Properties; however, an individual Property may
be acquired with mortgage indebtedness not to exceed 80% of its Purchase
Price. If the maximum proceeds of $15,000,000 are raised, approximately
75.39% of the proceeds will be invested in Properties and the remaining
24.61% will be used to pay expenses of the Offering and fees to the Advisor.
See "Estimated Use of Proceeds." As of the date of this Prospectus, the
Company has acquired and owns nine Properties, two of which have been
acquired using proceeds from this offering. See "Real Property Investments."
As of March 18, 1997, the Company has sold 345,528 Shares ($3,454,131).
The minimum subscription of 25,000 Shares was received and accepted by the
Company on July 9, 1996.
The Company has had three prior offerings of its Shares and its Affiliates
have offered and sold prior programs. The amount of securities sold by the
Company in its three prior offerings and by the Affiliates in the prior
programs was less than the maximum amount of securities offered for sale and,
therefore, were insufficient to achieve the Company's investment objectives.
If the Company does not sell the maximum number of Shares offered by this
Prospectus, the Company will acquire fewer Properties, resulting in a lack
of diversification in the number of Properties the Company may own. See
"Prior Performance" and "Risk Factors -- Uncertainty of Company
Capitalization; Diversification; Possibility of Number of Properties; Delay
in Investments".
Investment in the Shares is subject to certain risks, including:
- The lack of identified investments to be acquired with the proceeds of
the offering. However, the Company has acquired and owns nine
Properties.
- The payment of substantial fees to the Advisor and its Affiliates.
- The lack of participation by Shareholders in the direct management and
control of the Company.
- Various conflicts of interest.
- The Company's ability to diversify its investments.
- No active market for the Shares has developed and there is limited
liquidity to transfer the Shares.
- Certain real estate investment risks such as changes in occupancy rates,
revenues, lease payment defaults, competition, economic conditions,
zoning and tax increases; and
- Taxation of the Company as a corporation if it fails to qualify as a
REIT
SEE "COMPENSATION OF ADVISOR AND AFFILIATES," "RISK FACTORS," "CONFLICTS OF
INTEREST" AND "MANAGEMENT."
(Cover page continued on next printed page)
- -----------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE. THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA DOES NOT
RECOMMEND OR ENDORSE THE PURCHASE OF THESE SECURITIES.
THESE ARE SPECULATIVE SECURITIES.
============================================================================
<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO
SHARES OFFERED TO THE PUBLIC PUBLIC COMMISSIONS(1) COMPANY(2)
- ----------------------------------------------------------------------- ------------ --------------- ------------
<S> <C> <C> <C>
Per Share $10.00 $.70 $9.30
Total Maximum (1,500,000) $15,000,000 $1,050,000 $13,950,000
</TABLE>
- ----------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES OFFERED TO SHAREHOLDERS THROUGH DIVIDEND REINVESTMENT PLAN, AND INITIAL SELLING PROCEEDS TO
CROSSING ARRANGEMENT PRICE COMMISSIONS COMPANY(3)
- ----------------------------------------------------------------------- ------------ --------------- ------------
<S> <C> <C> <C>
Per Share $10.00 $0 $10.00
Total $1,000,000 $0 $1,000,000
</TABLE>
============================================================================
(Footnotes continued on next printed page)
The date of this Prospectus is May 1, 1997
<PAGE>
(Footnotes continued from cover)
(1) The Company will pay the Selling Agent and Selected Dealers sales
commissions of up to 7% of the offering price per Share and may pay to the
Selling Agent an additional 1% of the offering price per Share for wholesaling
compensation. The Selling Agent will also receive up to $.05 per Share from
the Company for bona fide due diligence expenses. See "Plan of Distribution."
(2) Before deducting Offering and Organizational expenses which include
legal and accounting fees, due diligence, printing expenses, Monitoring Fee,
filing fees, a nonaccountable expense allowance, and other expenses and fees
relating to the registration, marketing and distribution of all Shares
pursuant to this offering. The Advisor has agreed to pay any Offering and
Organizational expenses which exceed the greater of 4% of the gross proceeds
of the offering or $500,000.
(3) Prior to deducting expenses of the Dividend Reinvestment Plan of
$50,000 to be paid by the Company.
(Cover page continued from cover)
The Company's objectives are to (i) invest in Properties which will
preserve and protect capital, (ii) provide Shareholders with cash Dividends,
a portion of which will not constitute taxable income (which due to
depreciation will constitute a return of capital which will reduce an
investor's basis in the Shares and thereby increase the gain or reduce the
loss that will be incurred on the disposition of the Shares or upon
dissolution or liquidation of the Company), (iii) provide capital gains
through potential appreciation of Properties, and (iv) provide a Crossing
Arrangement and limited liquidity through transferable shares of stock. No
assurance can be given that these objectives will be attained.
The offering of shares of Common Stock (the "Shares") will continue until
the earlier of May 1, 1998, the sale of 1,500,000 Shares or termination of the
offering by the Company's Board of Directors (which may be at any time). The
Company will pay sales commissions of up to 70 cents per Share from the gross
proceeds of this offering. No sales commissions will be paid to the Selling
Agent or Selected Dealers when qualified pension plans, profit sharing plans,
Keogh plans or individual retirement plans purchase a minimum of $500,000 of
Shares. Such entities will pay $9.30 per Share and the net proceeds to the
Company will remain the same. See "Plan of Distribution."
Proceeds received from subscribers will be placed in an interest bearing
escrow account with City National Bank, Los Angeles, California, Subscribers
have no right to withdraw their investment during the escrow period. See "Plan
of Distribution." The proceeds from sales of the Shares will remain in the
escrow account and transferred to the Company from time to time.
The Shares are freely transferable subject only to restrictions on
certain transfers which would disqualify the Company as a real estate
investment trust. However, there is no present market for the Shares except
for the Crossing Arrangement. In view of the imposition of suitability
standards by state "blue sky" administrators and certain listing standards,
there is no assurance that the Shares will be listed on the NASDAQ System or
that an active market for the Shares will develop. The Company has provided
for a Crossing Arrangement which will match buy and sell orders for the
Shares. The Company has also provided for a Dividend Reinvestment Plan which
would allow purchasers of the shares to have any Dividends paid on the Shares
automatically invested in the purchase of Shares of the Company.
See "Glossary" for the definitions of certain capitalized terms.
The Shares are being offered on a best-efforts minimum-maximum basis,
(which means there is no firm commitment to buy any Shares but best efforts
will be made to sell Shares) (the minimum amount of Shares 25,000 ($250,000)
have been sold) and the maximum amount of Shares that can be sold is 1,500,000
($15,000,000)). The Shares will be sold through Associated Securities Corp.
(the "Selling Agent"), also an Affiliate of AFG, and other broker-dealers
("Selected Dealers") selected by the Selling Agent. The Company has agreed to
indemnify the Selling Agent and any Selected Dealers against certain civil
liabilities, including certain liabilities under the Securities Act of 1933,
as amended. The Company will pay the Selling Agent and Selected Dealers a
sales commission of up to 7% of the $10.00 per Share offering price. The
Selling Agent and Selected Dealers may also receive 5 cents per Share for
bona fide due diligence expenses. Shares may be purchased without payment of
any sales commissions at $9.30 per Share by current or retired employees,
officers and directors of the Company, the Advisor, the Selling Agent and
Selected Dealers and their registered representatives and any of their
Affiliates (and the families of any of the foregoing) and trust employee
benefit plans established exclusively for the benefit of such Persons. See
"Plan of Distribution."
THE USE OF FORECASTS IN THIS OFFERING IS PROHIBITED. ANY REPRESENTATIONS
TO THE CONTRARY AND ANY PREDICTIONS, WRITTEN OR ORAL, AS TO THE AMOUNT OR
CERTAINTY OF ANY PRESENT OR FUTURE CASH BENEFIT OR TAX CONSEQUENCE WHICH MAY
FLOW FROM AN INVESTMENT IN THIS PROGRAM IS NOT PERMITTED.
UNTIL NINETY (90) DAYS AFTER THE DATE OF THIS PROSPECTUS ALL DEALERS EFFECTING
TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT PARTICIPATING IN
THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN
ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS.
<PAGE>
TABLE OF CONTENTS
PAGE
----
<TABLE>
<S> <C>
PROSPECTUS SUMMARY............................................................... 1
The Company.................................................................. 1
Risk Factors................................................................. 1
Status of Offering................................................................... 1
Management: Compensation to Advisor and Affiliate.................................... 1
Shares............................................................................... 2
Investment Objectives and Policies................................................... 2
Income Tax Considerations............................................................ 2
Dividends............................................................................ 3
Dividend Reinvestment Plan........................................................... 3
Tax-Deferred Dividends............................................................... 3
Additional Considerations for Tax-Exempt Investors................................... 3
Conflicts of Interest................................................................ 3
THE COMPANY............................................................................ 4
RISK FACTORS........................................................................... 5
Continuous Operations of the Company; Shareholder Liquidation of Investment.......... 5
Substantial Payment of Fees to the Advisor and Affiliates............................ 5
Real Estate Investment Risks......................................................... 5
Leveraging of Investments............................................................ 6
Unspecified Investments.............................................................. 7
Uncertainty of Company Capitalization; Diversification; Possible Limited Numbers of
Properties; Delay in Investments.................................................. 7
Prior Experience in Raising Funds.................................................... 7
Uninsured Losses..................................................................... 8
Risks Related to Hazardous Wastes.................................................... 8
Joint Venture Investments............................................................ 8
Competition for Investments.......................................................... 8
Tax Risks............................................................................ 8
Additional Tax Risk.................................................................. 10
Reliance on Management and Conflicts of Interest..................................... 10
Limited Transferability; No Active Market For Shares May Develop..................... 10
Transferability of Shares; Application of Penny Stock Rules.......................... 10
Limited Liability, Indemnification and Possible Inadequacy of Shareholder Remedies... 11
Potential Dilution................................................................... 11
ESTIMATED USE OF PROCEEDS.............................................................. 11
COMPENSATION OF ADVISOR AND AFFILIATES................................................. 13
Selling Commissions.................................................................. 13
Acquisition Fees and Acquisition Expenses............................................ 13
Disposition Services................................................................. 13
Advisory Fee......................................................................... 13
Property Management Fee.............................................................. 14
Financing Services................................................................... 14
Subordinated Incentive Fee........................................................... 14
Reimbursements....................................................................... 14
CAPITALIZATION......................................................................... 18
SELECTED FINANCIAL DATA................................................................ 18
</TABLE>
i
<PAGE>
PAGE
----
<TABLE>
<S> <C>
CONFLICTS OF INTEREST.................................................................. 19
Competition by the Company with Affiliated Parties for Purchase and Sale of Real
Property.......................................................................... 19
Transactions with the Advisor or an Affiliate........................................ 19
Selling Agent........................................................................ 19
Property Management Fee.............................................................. 20
Lack of Separate Representation...................................................... 20
INVESTMENT OBJECTIVES AND POLICIES..................................................... 20
Principal Investment Objectives...................................................... 20
Use of Initial Capital............................................................... 21
Acquisition Policies................................................................. 22
Borrowing Policies -- Leveraging..................................................... 22
Reserves for Operating Expenses...................................................... 22
Management of Properties............................................................. 23
Dividends............................................................................ 23
Sale, Financing or Refinancing of Properties......................................... 24
General Restrictions................................................................. 25
REAL PROPERTY INVESTMENTS.............................................................. 25
Blockbuster Video Building........................................................... 25
Fresno Property...................................................................... 26
OPTO-22 Property..................................................................... 28
North Palm Street Property........................................................... 30
Riverside Marketplace Property....................................................... 31
Safeguard Business Systems Property.................................................. 33
Technology Drive Property............................................................ 34
Java City Property................................................................... 36
Tycom Property....................................................................... 39
MANAGEMENT'S DISCUSSION OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS............... 41
Results of Operations -- 1996 vs. 1995............................................... 41
Results of Operations -- 1995 vs. 1994............................................... 42
Liquidity and Capital Resources...................................................... 44
New Accounting Pronouncements........................................................ 45
MANAGEMENT............................................................................. 46
Directors and Officers of the Company................................................ 46
Board of Directors................................................................... 47
Advisor.............................................................................. 48
Property Manager..................................................................... 48
PRIOR PERFORMANCE...................................................................... 49
SERVICES PROVIDED BY THE ADVISOR AND PROPERTY MANAGER.................................. 50
Advisory Services.................................................................... 50
Property Management Services......................................................... 51
Other Services....................................................................... 51
TAX CONSEQUENCES....................................................................... 52
Opinion of Counsel................................................................... 53
Requirements for Qualification as a REIT............................................. 53
Termination or Revocation of REIT Status............................................. 57
Taxation of the Company.............................................................. 58
Taxation of Taxable U.S. Shareholders................................................ 58
Taxation of Tax-Exempt Shareholders.................................................. 60
</TABLE>
ii
<PAGE>
PAGE
----
<TABLE>
<S> <C>
Taxation of Non-U.S. Stockholders.................................................... 60
Statement of Stock Ownership......................................................... 61
Tax Law Changes...................................................................... 62
State and Local Taxes................................................................ 62
ERISA CONSIDERATIONS................................................................... 62
DESCRIPTION OF COMMON STOCK............................................................ 63
General.............................................................................. 63
Redemption and Prohibition of Transfer of Shares..................................... 63
SUMMARY OF ORGANIZATION DOCUMENTS...................................................... 64
Directors............................................................................ 64
Limited Liability and Indemnification of Directors, Officers, Employees and Other
Agents............................................................................ 64
Transactions with Affiliates......................................................... 65
Shareholder Limited Liability........................................................ 65
Reports to Shareholders and Rights of Examination.................................... 65
Restrictions on Investments.......................................................... 66
Other Restrictions................................................................... 66
Amendments........................................................................... 67
Meetings of Shareholders and Voting.................................................. 67
WHO SHOULD INVEST...................................................................... 67
Suitability Standards................................................................ 67
How to Subscribe..................................................................... 68
PLAN OF DISTRIBUTION................................................................... 68
Escrow Arrangements.................................................................. 69
Offering Period...................................................................... 69
Method of Subscription............................................................... 69
Transferability; Crossing Arrangement................................................ 70
Dividend Reinvestment Plan........................................................... 70
SALES MATERIAL......................................................................... 72
LEGAL MATTERS.......................................................................... 72
EXPERTS................................................................................ 72
FURTHER INFORMATION.................................................................... 72
GLOSSARY............................................................................... 72
INDEX TO FINANCIAL STATEMENTS.......................................................... 78
SUBSCRIPTION AGREEMENT................................................................. S-1
PRIOR PERFORMANCE TABLES............................................................... T-1
</TABLE>
No dealer, salesman or any other person has been authorized to give any
information or to make any representations other than those contained in this
Prospectus or in supplements to this Prospectus, or in literature issued by
the Company, Advisor or the Principal Distributor (which shall not be deemed
to be a part of this Prospectus), in connection with the offer contained
herein, and if given or made, that information or representation must not be
relied upon. The statements in this Prospectus or in any supplement are made
as of the date of the Prospectus or supplement, unless another time is
specified. Neither the delivery of this Prospectus or any supplement nor any
sale of Shares shall, under any circumstances, create an implication that
there has been no change in the facts since the date of the Prospectus or
supplement. However, if any material changes occur during the period when a
Prospectus is required to be delivered, this Prospectus or any supplement
will be amended or supplemented accordingly.
iii
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the detailed
information appearing elsewhere in this Prospectus. See "Glossary" for
definitions of certain capitalized terms used in this Summary and throughout
this Prospectus.
THE COMPANY. West Coast Realty Investors, Inc. (the "Company") is a Delaware
corporation which has an unlimited life and will, therefore, continue in
business and operate for an indefinite period of time. A majority (3 of 5) of
the Company's Directors are independent of and unaffiliated with the Advisor
or AFG. Since January 1, 1991, the Company qualifies, and is doing business,
as a "Real Estate Investment Trust" under the Internal Revenue Code of 1986,
as amended (the "Code"). See "The Company," "Risk Factors," and "Tax
Consequences." The Company's principal office is located at 5933 W. Century
Boulevard, Ninth Floor, Los Angeles, California 90045, telephone:
(310) 337-9700.
The Company is making the Offering of its Shares to increase its size and
the amount of the Company's investment in Properties, thereby potentially
increasing the amount of Properties it will be able to acquire and
diversifying the risk of an investment in the Company and spreading operating
expenses over a greater number of assets.
RISK FACTORS. An investment in the Shares is subject to certain risks,
including:
- The lack of identified investments to be acquired with the proceeds of
the offering.
- The payment of substantial fees to the Advisor and its Affiliates.
- The lack of participation by Shareholders in the direct management and
control of the Company.
- Various conflicts of interest.
- The Company's ability to diversify its investments.
- No active market for the Shares has developed and there is limited
liquidity to transfer the Shares.
- Certain real estate investment risks such as changes in occupancy
rates, revenues, lease payment defaults, competition, economic
conditions, zoning and tax increases; and
- Taxation of the Company as a corporation if it fails to qualify as a
REIT.
STATUS OF OFFERING. As of March 18, 1997, the Company has sold 345,528 Shares
($3,454,131). Of the net proceeds from such sale (approximately $3,075,000),
approximately $2,800,000 was used for the acquisition of the Java City and
Tycom Properties, (See "Real Property Investments -- Java City Property --
Tycom Property"), $104,000 was used for Working Capital Reserves and the
balance, approximately $171,000, is reserved for the acquisition of
additional Properties.
MANAGEMENT: COMPENSATION TO ADVISOR AND AFFILIATE. West Coast Realty
Advisors, Inc. (the "Advisor"), will act as the Company's Advisor. The
Advisor's principal office is located at 5933 W. Century Boulevard, Ninth
Floor, Los Angeles, California 90045, telephone: (310) 337-9700.
(a) Management of the Company. Pursuant to the terms of an agreement
(the "Advisory Agreement"), the Advisor will provide investment and financial
advice, and conduct the day-to-day operations of the Company. The Advisor is
an Affiliate of AFG. While the Advisor has a limited operating history,
certain of its directors, officers and employees have substantial real estate
investment experience.
(b) Compensation of Advisor and Affiliates. The Advisor and Affiliates
will receive the following substantial fees and compensation, relating to this
offering: Sales commissions of 7% and wholesaling compensation of 1% of the
amount of Shares sold, Acquisition Fees and Acquisition Expenses equal to 6%
of the Purchase Price of Properties acquired; a subordinated disposition fee
of 3% for selling the Company's Properties; a Property Management Fee equal
to 5% of gross revenues for residential properties and 6% of gross revenues
for retail, industrial and commercial properties (which will be reduced to
3% if the Advisor or an Affiliate does not provide any leasing or releasing
services); an Advisory Fee up to 1% of Invested Assets subordinated to an
annualized 7% noncumulative, noncompounded, quarterly dividend on the
Shareholders' Adjusted Price per Share; reasonable and competitive fees for
financing services as determined by the Independent Directors, a Subordinated
Incentive Fee equal to 15% of cash from Property sales or refinancing after
the Shareholders have received a
1
<PAGE>
100% return of their Adjusted Price per Share plus an 8% cumulative
noncompounded return thereon; and reimbursement of Offering and Organizational
Expenses, in an amount not to exceed the greater of 40 cents per Share or
$500,000 to the extent that such nonaccountable expenses do not exceed 3% of
the gross offering proceeds. See "Services Provided by the Advisor and
Property Manager", "Management", "Prior Performance" and "Compensation of
Advisor and Affiliates."
SHARES. The Company is hereby offering shares of its Common Stock (the
"Shares") at a purchase price of $10.00 per Share. As discussed in "Dividends"
below, all Shares will be entitled to equal Dividends per Share when Dividends
are paid. Each Share will have equal voting power. See "Description of Common
Stock." AFG, the Advisor and their Affiliates may also purchase Shares
pursuant to this offering. See "Plan of Distribution -- Escrow Agreements."
INVESTMENT OBJECTIVES AND POLICIES. (a) Principal Investment Objectives. The
Company intends to acquire, improve, operate, hold for investment, sell and
reinvest such sales proceeds in equity interests in income-producing
residential, industrial, retail or commercial Properties. The Company intends
to acquire Properties located primarily in California and the west coast of
the United States; (b) Borrowing Policies -- Leveraging. Generally,
Properties will initially be acquired on an all-cash basis or with moderate
mortgage indebtedness. The aggregate amount of mortgage indebtedness the
Company will incur will not exceed 50% of the Purchase Price of Properties
(which is defined generally as the cost to acquire all the Company's
Properties) or, if a Property is financed or refinanced, 50% of the
Property's Appraised Value (defined generally as its fair market value as
determined by an Appraiser) at the time of such financing or refinancing.
However, the maximum amount of mortgage indebtedness which may be incurred
for the purchase of a specific Property may not exceed 80% of the Purchase
Price of that specific Property. During the course of this offering the
Advisor may, from time to time, make certain cash advances to the Company in
connection with the acquisition of Properties. These advances will be subject
to approval by a majority of the Independent Directors and will be on terms
no less favorable to the Company than those available from third parties.
All advances will be unsecured and will be repaid solely out of the proceeds
of this offering or in Shares at a $9.30 per Share price, to the extent that
the proceeds of this offering are insufficient to repay the advances. The
Company may subsequently sell or finance any or all of the Properties for
the purpose of acquiring additional Property investments.
The Company's principal investment objectives, in the order of priority,
are to invest in Properties which: (i) preserve and protect the Company's
capital, (ii) provide Shareholders with cash Dividends a portion of which will
not constitute taxable income (which due to depreciation will constitute a
return of capital which will reduce an investor's basis in the Shares and
thereby increase the gain or reduce the loss that will be incurred on the
disposition of the Shares or upon dissolution or liquidation of the Company),
(iii) provide capital gains through potential appreciation of the Properties,
and (iv) provide market liquidity through transferable shares of stock. NO
ASSURANCE CAN BE GIVEN THAT THESE OBJECTIVES WILL BE ATTAINED.
The Company has acquired nine Properties. See "Real Property Investments"
and "Investment Objectives and Policies." Specific acquisitions of other
Properties will be described in supplements to this Prospectus. The Company is
unable to predict when Properties may be purchased or the particular income
characteristics of any Property; therefore, no estimate can be given as to the
amount of any Shareholder Dividends. See "Real Property Investments" and "Risk
Factors."
INCOME TAX CONSIDERATIONS. The Company qualifies, and since January 1, 1991
is doing business, as a real estate investment trust (a "REIT") under Sections
856-860 of the Internal Revenue Code of 1986, as amended, (the "Code").
However, continued qualification as a REIT depends upon future operations of
the Company, and no assurance can be given that the Company will be able to
maintain its status as a REIT. Qualification as a REIT involves the
application of highly technical and complex Code provisions of which there
are only a limited number of judicial or administrative interpretations, and
the determination of various factual matters and circumstances not entirely
within the Company's control may impact its ability to qualify as a REIT. In
addition, no assurance can be given that legislation, new regulations,
administrative interpretations or court decisions will not significantly
change the tax laws with respect to the qualification as a REIT or the
federal income tax
2
<PAGE>
consequences of such qualification. The Company, however, is not aware of any
proposal to amend the tax laws that would significantly and adversely affect
the Company's ability to operate as a REIT.
If the Company fails to qualify as a REIT, the Company will be subject to
federal income tax (including any applicable alternative minimum tax) on its
taxable income at regular corporate rates. In addition, distributions to
stockholders would not be deductible by the Company. This treatment would
reduce the net earnings of the Company available for investment or
distribution to stockholders because of the additional tax liability of the
Company for the year or years involved. In addition, unless entitled to
relief under certain statutory provisions, the Company would also be
disqualified from treatment as a REIT for the four taxable years following
the year during which qualification was lost. In addition, the Company would
no longer be required by the Code to make any distributions. See "Risk
Factors" and "Tax Consequences."
DIVIDENDS. The Directors will establish a Dividend rate based on the cash
flow, operations and financial condition of the Company. The Company has
declared Dividends on a monthly basis, and has paid Dividends on a quarterly
basis. See "Investment Objectives and Policies -- Dividends." As a result of
the payment of dividends, the Company had no accumulated earnings for any
fiscal year prior to the 1991 fiscal year, the first year the Company elected
to be taxed as a REIT.
DIVIDEND REINVESTMENT PLAN. The Company has established a Dividend
Reinvestment Plan (the "Plan") for its Shareholders which gives Shareholders
the option to use any Dividend payments to purchase additional Shares. Shares
acquired under the Plan during this offering will be purchased from the Shares
offered hereby at the $10.00 per Share offering price. After the completion
of this offering and if the Shares are quoted on the NASDAQ System, the Plan
will acquire existing Shares through the Crossing Agent at a maximum price of
$10.00 per Share, if a sufficient number of Shares are available at such
price. Thereafter, Shares will be acquired in the over-the-counter public
trading market at negotiated commissions or markups. See "Description of
Common Stock -- Dividend Reinvestment Plan."
TAX-DEFERRED DIVIDENDS. Due to depreciation, the Company's cash flow and
distributions is expected to exceed Taxable Income in the early years of its
ownership of Properties. Consequently, it is expected that a portion of
initial cash flow Dividends to Shareholders will constitute a tax-deferred
return of capital. The availability of cash for Dividends will depend on the
operations of the Company. See "Tax Consequences."
ADDITIONAL CONSIDERATIONS FOR TAX-EXEMPT INVESTORS. It is presently
anticipated that Dividends paid to qualified retirement plans, Individual
Retirement Accounts and tax-exempt investors will generally not constitute
"unrelated business taxable income." However, such investors could be subject
to tax on Dividends or upon sale of their Shares if their Shares are deemed
to be directly or indirectly financed in whole or in part by indebtedness.
See "Tax Consequences -- Taxation of Tax-Exempt Shareholders." The Company
intends to conduct its operations in a manner that will not result in the
Company's assets being considered "plan assets" under the Employee Retirement
Income Security Act of 1974 ("ERISA"); however, fiduciaries of ERISA Plans
and Individual Retirement Accounts, in consultation with their advisors,
should carefully consider the impact of ERISA, the Code and the regulations
thereunder on an investment in Shares. See "ERISA Considerations."
CONFLICTS OF INTEREST. An investment in Shares may subject the Advisor and
its Affiliates to certain conflicts of interest.
- The Company may be in competition with the Advisor and its Affiliates
for investment opportunities.
- Any transactions between the Advisor and its Affiliates and the Company
must be approved by a majority of the Independent Directors, since such
transactions will not be considered at arms length.
- The Selling Agent is an Affiliate of the Advisor and may experience
conflicts in performing its due diligence, although the Selling Agent
believes it has performed the due diligence required.
- West Coast Realty Management, Inc., an Affiliate of the Advisor, is the
property manager for the Company's Properties and will receive a fee
for such services.
- The attorneys, accountants and other experts who perform services for
the Company also perform services for the Advisor and its Affiliates
and will continue to do so in the future.
See "Conflicts of Interest."
3
<PAGE>
THE COMPANY
West Coast Realty Investors, Inc. (the "Company") has been established to
provide investors (both taxable and tax-exempt) with a professionally managed,
diversified portfolio of income-producing equity real estate investments which
present the potential for current cash flow and for capital appreciation. The
Company intends to operate indefinitely. The number of Properties and the
extent of portfolio diversification will depend upon the amount of net
proceeds available to the Company from the sale of the Shares. See "Real
Property Investments," "Management's Discussion of Financial Condition and
Results of Operations," "Risk Factors -- Possible Limited Number of
Properties." Some of the Company's equity investments may be owned by joint
venture partnerships between the Company and other parties which may be
Affiliates of AFG or the Advisor. See "Investment Objectives and Policies."
The Company has had three prior offerings at $10.00 per Share; the first
offering of 1,500,000 Shares commenced on April 20, 1990 and was completed on
November 18, 1991; the second offering of 1,500,000 Shares commenced on
May 14, 1992 and was completed on May 14, 1994. The third offering of
2,000,000 Shares commenced on June 3, 1994 and was completed on April 30,
1996. As a result of the first offering, 268,791 Shares were sold for
$2,672,586 of gross proceeds which were used to acquire one property. As a
result of the second offering, 368,524 Shares were sold for $3,681,147 of
gross proceeds which were used to acquire three Properties. As a result of
the third offering 812,699 Shares were sold for $8,120,748 and the gross
proceeds which were used to acquire the fifth, sixth, and seventh properties
and a portion of the eighth Property. The Company elected to be taxed as a
REIT commencing January 1, 1991. See "Real Property Investments," "Prior
Performance" and "Management's Discussion of Financial Condition and Results
of Operations".
The current offering commenced on May 7, 1996. Through March 18, 1997
345,528 shares were sold for $3,454,131. A portion of the gross proceeds were
applied toward the purchase of the Java City and Tycom Properties.
The Company presently intends to hold each Property for a minimum of four
years and a maximum of ten years. Investments in Properties will occur during
this offering and after the completion of this offering. The net proceeds from
the sale, financing or refinancing of Properties ("Cash From Sales or
Refinancing") may be reinvested in additional Properties on a continuous
basis. Cash From Sales or Refinancings (less appropriate reserves) may be
distributed to Shareholders. No specific date is set forth in the
Organization Documents for the Company's termination and the Company
anticipates continuous operations into the foreseeable future. However, the
Organization Documents permit a majority of the Shareholders to liquidate
the Company at any time.
The Company currently owns nine Properties. While the Advisor is
presently reviewing possible investment opportunities, it does not have
any specific plans for the acquisition (by the Company) of any other
specific Property. See "Real Property Investments" and "Risk Factors."
The Company qualifies, and, since January 1, 1991, is doing business, as
a REIT under Sections 856-860 of the Code. The election by the Company to be
taxed as a REIT was in its 1991 Federal Income Tax return. As of
December 31, 1996, the Company had no accumulated earnings and profits
attributable to taxable years prior to 1996. As a REIT, the Company will not
be subject to federal income tax on that portion of its taxable income which
is distributed annually to Shareholders if certain conditions are met. See
"Tax Consequences" and "Summary of Organization Documents."
The Company expects to benefit from the experience and capabilities of
its officers and Directors, and the officers and directors of the Advisor and
its Affiliates, by drawing on their experience, advice and services in the
areas of real estate investment, commercial and industrial real estate
brokerage, real estate securities and syndication, real estate development
and banking and finance, and public accountancy, as well as upon their
goodwill and their relationships with builders, developers, lenders,
insurers and investors. See "Management."
Day-to-day property management services for the Company's Properties may
be provided by outside property managers, including West Coast Realty
Management Inc. ("WCRM"), an Affiliate of the Advisor,
4
<PAGE>
subject to review by the Advisor and the Directors. Depending on the location
of the Company's real property investments, unaffiliated independent property
management companies may also render day-to-day property management services.
While the Shares will be freely transferable, there is no present market
for the Shares and none is expected to develop during the period of this
offering in view of the suitability standards imposed on investors by certain
state "blue sky" administrators. There is no assurance that an active public
trading market will eventually develop. The Company intends to use a Crossing
Arrangement as an accommodation to and for the benefit of investors who wish
to sell their Shares prior to quotation on the NASDAQ System. See "Description
of Common Stock."
The Company is a corporation organized under the laws of the State of
Delaware on October 26, 1989. Its principal offices are located at 5933 West
Century Boulevard, Ninth Floor, Los Angeles, California 90045, telephone:
(310) 337-9200.
RISK FACTORS
The purchase of Shares involves a high degree of risk. In addition to
general investment risks and those factors set forth elsewhere in this
Prospectus, prospective purchasers should carefully consider the following
factors before making a decision to purchase Shares:
CONTINUOUS OPERATIONS OF THE COMPANY; SHAREHOLDER LIQUIDATION OF
INVESTMENT. The Company's plan of business allows the Company to reinvest, in
lieu of distributing to Shareholders, the proceeds from the sale, financing
and refinancing of Properties in additional Properties. The Shareholders,
therefore, would be able to liquidate their investment only through the sale
of their Shares into the market. Such a market does not currently exist. The
market value of the Shares may never equal or exceed the Appraised Value of
the Properties held by the Company or the net proceeds which may have been
available for distribution to Shareholders upon a current sale of the
Company's Properties.
SUBSTANTIAL PAYMENT OF FEES TO THE ADVISOR AND AFFILIATES. The Advisor is
entitled to receive certain transactional fees or commissions based upon the
acquisition, management and disposition of Properties of the Company or the
financing or refinancing of indebtedness relating to such Properties.
Approximately 74.8% of the minimum offering proceeds (75.39% of the maximum
offering proceeds) will be invested in Properties with the remaining 25.2% of
the minimum offering proceeds (24.61% of the maximum offering proceeds) being
paid to the Advisor and its Affiliates for fees and expenses of the offering.
The ongoing compensation paid to the Advisor in the form of an Advisory Fee
will continue indefinitely. See "Compensation of Advisor and Affiliate."
REAL ESTATE INVESTMENT RISKS. The Company will be subject to the risks
generally associated with the ownership of real property, including the
possibility that operating expenses and fixed costs may exceed property
revenues; adverse changes in economic conditions; changes in the real estate
investment climate; adverse changes in local market conditions due to changes
in general or local economic conditions and neighborhood characteristics;
changes in interest rates and in the availability, costs and terms of mortgage
financing; the need for unanticipated maintenance and renovations,
particularly in older structures; changes in real estate tax property rates
and other operating expenses; adverse changes in governmental rules and
fiscal policies; natural disasters, including earthquakes, floods or
tornadoes (which may result in uninsured losses); the financial condition of
the tenants of Properties; and other factors which are beyond the control of
the Company.
The Company's real estate investments in rental properties will be
subject to the risk of the Company's ability to attract or retain tenants
and a potential decline in rental income. To the extent that the Company
acquires Properties with fixed rental payments, the Company may be prevented
from varying its investment portfolio promptly in response to changing
economic conditions during the term of such investments. Furthermore, real
estate investments tend to be long-term, and under the REIT provisions of the
Code, might be subject to minimum holding periods to avoid adverse tax
consequences; consequently, the Company will have only minimal ability to
vary its Property portfolio in response to changing economic, financial and
5
<PAGE>
investment conditions. To the extent that the Company's rental or interest
income is based on a percentage of the gross receipts of retail tenants, its
cash flow is dependent on the retail success achieved by such tenants.
While one of the Company's objectives is to generate cash flow, there can
be no guarantee that the Properties will generate sufficient revenue to cover
operating expenses and meet any required payments on any debt obligations of
the Company. The opportunities for sale, and the profitability of any sale, of
any particular Property by the Company will be subject to the risk of adverse
changes in real estate market conditions, which may vary depending upon the
size, location and type of each Property.
In the event of a dissolution or termination of the Company, the proceeds
realized from the liquidation of Properties, if any, will be distributed to
the Shareholders, but only after the satisfaction of claims of creditors
including any fees which are then payable to the Advisor. Accordingly, the
ability of Shareholders to receive all or any portion of their investment
under these circumstances will depend on the amount of funds realized and
claims to be satisfied from those funds.
If the Company finds it necessary or desirable to provide secondary
financing to purchasers upon the sale of Properties, a liquidation of the
Company may be delayed beyond the time of disposition of its Properties until
any such financing is paid or otherwise liquidated. See "Investment Objectives
and Policies -- Sale or Refinancing of Properties."
LEVERAGING OF INVESTMENTS. The Company anticipates acquiring Properties for
cash or by incurring long-term secured borrowings on investment Properties.
This practice is often referred to as leveraging. The maximum level of
leveraging to be incurred by the Company will be limited to 80% of the
Purchase Price of any individual Property and 50% of the Purchase Price of
all Properties on a combined basis. If a Property is financed or refinanced,
the maximum amount of leveraging to be incurred by the Company will be
limited to 50% of the Appraised Value of the Property at the time of such
financing or refinancing. Leveraging may involve the use of first mortgages,
junior mortgages and/or wrap-around mortgages. The effects of leveraging are
on the one hand, to increase the funds available for investment (which in
turn permits the acquisition of Properties with a higher purchase price
and/or greater diversification by allowing investment in more Properties) and
thereby to increase the aggregate amount of tax-advantaged depreciation
available to the Company; and on the other hand, to increase the risk of loss
if the Company is unable to generate sufficient funds to repay the debt
incurred. The Company may borrow through loans with fixed interest rates or
with variable interest rates which fluctuate with the market rate of
interest. Financing involving renegotiable, floating or adjustable interest
rates involves greater risks than financing where the interest rate is fixed,
since such rates could rise substantially. The higher the rate of interest on
the financing, the more difficult it will be for the Company to meet its debt
service obligations and the greater the chance of a default. If the Company
defaults on secured indebtedness, the lender may foreclose and the Company
could lose its investment in the Property. To the extent possible, mortgage
debt will be non-recourse, meaning the Company will not be liable for any
deficiency between the proceeds of foreclosure and the amount of the debt.
The Company may also use the proceeds from financing its Properties to
acquire new Properties which may themselves be leveraged. See "Investment
Objectives and Policies -- Borrowing Policies -- Leveraging." Money market
fluctuations may significantly decrease the availability and increase the
cost of real estate loans, which could result in the Company being unable to
incur the optimum level of indebtedness or paying higher costs, or both,
which, in turn, could result in less income to the Shareholders. Money market
conditions may also adversely affect the ability of the Company to sell
Properties, when a sale is determined to be in the best interest of the
Company, and may affect the terms of any such sale. If the Company acquires
Properties with "due on sale" clauses, or finances Properties containing such
clauses in their mortgages, the Company's ability to sell such Properties may
be adversely affected. The Company and the Advisor are unable to predict the
effect, if any, which the money market or the federal government's fiscal,
monetary and statutory policies will have on the ability of the Company to
meet its objectives.
The Company may, under certain conditions, obtain permanent first
mortgage financing which requires a "balloon payment" at maturity. In
general, it is intended that the due date of a "balloon payment" will fall
outside the projected holding period of the Property. "Balloon" mortgages
involve greater risks than mortgages where the principal amount is payable
over the term of the loan even though periodic payments
6
<PAGE>
may be lower since the ability of the Company to repay at maturity the
outstanding principal amount of the "balloon" loan may depend upon the
Company's ability either to sell the related Property or to obtain adequate
refinancing which will in turn depend upon economic conditions in general
and the value of the underlying Property in particular. There is no assurance
that the Company will be able either to sell the related Property or to
refinance "balloon payment" mortgages at maturity. Further, a significant
decline in the value of the underlying Property could result in a loss of the
Property through foreclosure. See "Investment Objectives and Policies --
Principal Investment Objectives."
Recourse for any mortgage indebtedness to be incurred by the Company is
expected to be limited to the particular Property to which the indebtedness
relates. The Federal Bankruptcy Code permits, under certain limited
circumstances, a secured creditor holding non-recourse debt to be treated as
a creditor with a recourse claim. Thus, it is possible that if the Company
were involved in a reorganization proceeding, a holder of a non-recourse loan
to the Company could obtain a Court-approved evaluation of the Property
which secured the loan, and then be treated as the holder of an unsecured
claim against the assets of the Company for any excess of the amount of the
debt over the value of the Property. While the Company intends to obtain
borrowings on a non-recourse basis, the Company might sustain a loss on its
investment as a result of foreclosure by the mortgagee of a Property if
mortgage payments are not paid when due. Also such foreclosure might also
have adverse tax consequences for the Company and the Shareholders. See "Tax
Consequences."
UNSPECIFIED INVESTMENTS. The Company currently owns seven Properties. The
Company has not identified any specific Properties in which the proceeds of
this offering are to be invested.
Therefore, a prospective investor has no information as to the
identification or location of Properties, or other relevant economic and
financial data affecting Properties to be purchased by the Company with the
proceeds of this Offering, which information, if available, would be of
assistance in evaluating an investment in the Company.
The investment of the net proceeds of this offering may occur over an
extended period. During such time, the Company faces the risks of changes in
interest rates and adverse changes in the real estate market. These risks may
adversely affect the amount of funds available for Dividends and investments,
and the price at which Shareholders may sell their Shares. In addition,
substantial delays in investment in Properties could result in the Company's
disqualification as a REIT. See "Tax Consequences -- Requirements for
Qualification as a REIT."
UNCERTAINTY OF COMPANY CAPITALIZATION; DIVERSIFICATION; POSSIBLE LIMITED
NUMBERS OF PROPERTIES; DELAY IN INVESTMENTS. The Company will invest the
proceeds of this offering in a limited number of Properties, depending upon
the amount of proceeds generated by the number of Shares sold. The Company
will acquire Properties for all cash or with moderate leverage. See "Risk
Factors -- Leveraging of Investments." There is no limitation as to the amount
or percentage of the Company's assets which may be invested in any one
developed Property or group of Properties, any specific investment or the
number of purchases which may be made from any person or group of persons.
The Company intends to make real estate investments in Properties in various
locations primarily in California and the west coast of the United States,
in an attempt to achieve diversification and to minimize the effect of changes
in local economic conditions and certain other risks. The extent of
diversification will depend upon the amount of net proceeds available to the
Company from the sale of the Shares. The Company may, however, be subject to
any generalized downturn in the real estate market. The potential
profitability of the Company could also be affected by the amount of capital
at its disposal for investment in Properties.
PRIOR EXPERIENCE IN RAISING FUNDS. There is a risk that the Company will not
sell the entire 1,500,000 Shares being offered and that a significant period
of time will pass between the time funds are received for investment by the
Company and an investment in Property is made. The Company in its initial
offering offered 1,500,000 Shares ($15,000,000) and sold 268,791 Shares
($2,672,586) in a twenty month period. The minimum amount of 100,000 Shares
($1,000,000) in the initial offering, were sold in four months. Ninety
percent of the proceeds from the initial offering were committed for
investment in March, 1993 (60% of the investments were made in February,
1991). The Company's second offering of 1,500,000 Shares ($15,000,000) sold
368,524 Shares ($3,681,147) in a period of 24 months. The minimum amount of
25,000
7
<PAGE>
Shares ($250,000) in the second offering were sold in six months. One Hundred
percent of the proceeds from the second offering were committed for investment
by November, 1994. The Company's third offering of 2,000,000 Shares
($20,000,000) sold 812,699 Shares ($8,120,748) in a period of twenty-four
months. The minimum of 25,000 Shares ($250,000) in that offering were sold in
seven weeks. One hundred percent of the offering proceeds were committed for
investment in properties in twenty-six months. As of March 18, 1997, the
Company has sold 345,528 Shares ($3,454,131) in this offering, and
approximately $2,800,000 of such amount was used to acquire the Java City
Property and the Tycom Property. See "Real Property Investments -- Java City
Property and -- Tycom Property." The minimum of 25,000 Shares ($250,000) in
this offering were sold in ten weeks. In addition, in prior programs
sponsored by an Affiliate of the Company, the full amount of the securities
offered were not sold and it took a significant period of time to invest the
funds received. See "Prior Performance."
UNINSURED LOSSES. The Company will arrange for its Properties to be covered
by comprehensive insurance, including liability for personal injury or
property damage occasioned by its activities, fire and extended coverage,
which is customarily obtained for similar properties. However, there are
certain types of losses (generally of a catastrophic nature such as
earthquakes, floods and tornadoes) which are either uninsurable or not
insurable at economically reasonable costs. Should such a disaster cause the
destruction of a Property, the Company could lose both its invested capital
and anticipated profits in the Property, as well as be obligated to pay any
recourse financing with respect to the Property.
RISKS RELATED TO HAZARDOUS WASTES. Federal law imposes liability on a
landowner for the presence on the premises of improperly disposed hazardous
substances. This liability is without regard to fault for or knowledge of the
presence of such substances and may be imposed jointly and severally upon all
succeeding landowners from the date of the first improper disposal (although
prior to acquisition of a Property the Company will perform due diligence to
ascertain if any hazardous waste exist). If it is ever determined that
hazardous substances are present on a Property, the Company could be required
to pay all costs of any necessary cleanup work, although under certain
circumstances claims against other responsible parties could be made by the
Company.
JOINT VENTURE INVESTMENTS. The Company may make investments in Properties
through joint venture partnerships or joint participations between the Company
(or a partnership between the Company and another entity) and other parties,
including Affiliates or clients of the Advisor and sellers of real properties
or Affiliates thereof. The investment by the Company through joint ventures or
joint participations, instead of investing directly in the Properties may
under certain circumstances involve risks not otherwise present including, for
example, risks associated with the possibility that the Company's co-venturer
in an investment might become bankrupt, that such co-venturer may at any time
have economic or business interests or goals which are inconsistent with the
business interests or goals of the Company, or that such co-venturers may be
in a position to take action contrary to the instructions or the requests of
the Company or contrary to the Company's investment policies or objectives.
In connection with joint ventures, a Property seller may, as a joint venturer,
have the right to take certain actions with respect to the Property owned
through the joint venture without the Company's concurrence, including under
some circumstances the right to determine whether and when the Property will
be sold. Among other things, actions by any such co-venturer might have the
result of subjecting Property owned through the joint venture to liabilities
in excess of those contemplated by the terms of the Company. See "Conflicts
of Interest -- Transactions with the Advisor or an Affiliate," and "Summary
of Organization Documents -- Transactions with Affiliates."
COMPETITION FOR INVESTMENTS. There may be intense competition for Properties
of the type and in the areas in which the Company intends to invest. The
Company will compete for the acquisition of Properties with many other
entities, including Affiliates of the Advisor engaged in real estate
investment activities, some of which have greater assets than the Company.
TAX RISKS. The Company intends to conduct its operations in a manner which
will enable it to qualify for taxation as a REIT under the Code. Although
management of the Company believes that the Company has been so organized and
has been and will operate in such a manner, no assurance can be given that the
Company will be able to operate in a manner as to qualify or remain so
qualified. Qualification as a REIT
8
<PAGE>
involves the application of highly technical and complex Code provisions of
which there are only a limited number of judicial or administrative
interpretations, and the determination of various factual matters and
circumstances not entirely within the Company's control may impact its ability
to qualify as a REIT. In addition, no assurance can be given that legislation,
new regulations, administrative interpretations or court decisions will not
significantly change the tax laws with respect to the qualification as a REIT
or the federal income tax consequences of such qualification. The Company,
however, is not aware of any proposal to amend the tax laws that would
significantly and adversely affect the Company's ability to operate as a REIT.
If the Company fails to qualify as a REIT, the Company will be subject to
federal income tax (including any applicable alternative minimum tax) on its
taxable income at regular corporate rates. In addition, distributions to
stockholders would not be deductible by the Company. This treatment would
reduce the net earnings of the Company available for investment or
distribution to stockholders because of the additional tax liability of the
Company for the year or years involved. In addition, unless entitled to
relief under certain statutory provisions, the Company would also be
disqualified from treatment as a REIT for the four taxable years following
the year during which qualification was lost. In addition, the Company would
no longer be required by the Code to make any distributions. See "Tax
Consequences." The payment of tax by the Company resulting from
disqualification as a REIT would reduce the funds available for distribution
to Shareholders, or could result in the Company having to borrow additional
funds or liquidate certain of its investments in order to pay the corporate
tax.
In order to qualify for the favorable federal income tax treatment
afforded to qualifying REITs, the Company must annually satisfy various
requirements (quarterly for certain requirements), including distributing to
its Shareholders substantially all of its otherwise taxable ordinary income.
Following termination of the offering, the Company intends to make Dividend
distributions to Shareholders at least quarterly. See "Investment Objectives
and Policies -- Dividends." Depending on the circumstances existing in a
given year, the Company might be required to borrow funds or to liquidate
its investments in order to satisfy its distribution requirement. See "Tax
Consequences -- Requirements for Qualification as a REIT" and "Taxation of the
Company." In addition, because the Company will be obligated to pay operating
expenses on a current basis, including certain compensation to the Advisor,
the Company might be required to borrow or liquidate investments in order to
pay its fixed expenses. Since the Company elected to be taxed as a REIT
after its first year of existence, it had a taxable year in which it was not
a REIT. The Company elected to be taxed as a REIT commencing January 1, 1991.
The Company had no accumulated earnings and profits prior to January 1, 1991.
The REIT provisions of the Code place restrictions on the Company's
investments which do not apply to other types of real estate entities. These
provisions also place restrictions on the Company's operations which will not
apply to operators of buildings with which the Company may be competing for
tenants.
The Company has received a ruling from the Internal Revenue Service that,
based on the facts contained in the request for a ruling ("Ruling Request"),
WCRM will qualify as an independent contractor under Section 856(d)(2) and
856(d)(3) of the Code if it renders services to the Company. If WCRM had not
qualified as an independent contractor, it may have been deemed to be an
Affiliate of the Company and if the Company contracted with WCRM for property
management services, the Company might have lost its eligibility to elect REIT
tax treatment. The Company has represented that the material facts contained
in the Ruling Request are currently still factually accurate. Gipson Hoffman
& Pancione, a Professional Corporation, counsel to the Company, has opined
that based upon information and undertakings supplied by the Company as
described in the "Tax Consequences" section, as well as the Company's
representations contained elsewhere in this Prospectus concerning the
organization and proposed operations of the Company, and subject to the
limitations on such opinion discussed in the "Tax Consequences" section, the
Company is eligible to elect REIT tax treatment.
Certain income, excise and penalty taxes can be imposed even if the
Company maintains its status as a REIT. For example, if the Company
reinvests, rather than distributes, net capital gains, the Company will be
subject to income tax (up to 35%) and a 4% excise tax on such gains. See "Tax
Consequences -- Taxation of the Company."
9
<PAGE>
ADDITIONAL TAX RISK. There is a risk that the Company might be taxed as a
corporation for its 1991, 1992 and 1993 taxable years in that the Company
inadvertently failed to send to its shareholders a demand letter regarding
actual ownership of the Company's shares as required by Treasury Regulation
sec.sec. 1.857-8(d) and (e) for such years. A literal reading of the Code and
Regulations would indicate that failure to satisfy such requirement would
result in the Company being taxed as a regular corporation for its 1991, 1992
and 1993 taxable years. However, the Company's failure to satisfy this formal
requirement was inadvertent and the Company believes that it can clearly
establish that it has satisfied all of the substantive requirements which
must be satisfied to qualify for taxation as a REIT for its 1991, 1992
and 1993 taxable years, including the actual ownership of the Company's
shares. It is the Company's understanding that the Internal Revenue Service
has, at least in one situation, not disqualified a corporation from taxation
as a REIT simply because it failed to send its shareholders the written
demand letter required by Treasury Regulation sec.sec. 1.857-8(d) and (e).
Although there is no assurance that this will occur, as a matter of
administrative action, it is possible that the Internal Revenue Service
would permit the Company to be taxable as a REIT for its 1991, 1992 and 1993
taxable years. The Company, in the future, will satisfy all of the record
keeping requirements imposed by sec.sec. 856 through 859 of the Code.
If the Company were taxed as a regular corporation for its 1991, 1992 and
1993 taxable years, the payment of such taxes, including penalties and
interest, would be approximately $140,000, which could be material to the
Company's results of operations.
RELIANCE ON MANAGEMENT AND CONFLICTS OF INTEREST. All decisions with respect
to the management of the Company will be made by the Advisor, subject to the
direction and review of the Directors of the Company. In addition, neither the
Advisor nor any of its officers and directors nor their Affiliates will have
any obligation to give to the Company a prior right to acquire or invest in
any investment opportunities that may be available to them. See "Conflicts of
Interest -- Competition by the Company with Affiliated Parties for Purchase
and Sale of Real Property" and "Services Provided by the Advisor and Property
Manager." Shareholders have no right or power to take part in the direct
management of the Company. Accordingly, investors should not purchase Shares
unless they are willing to entrust all aspects of the management of the
Company to the Directors and the Advisor. See "Management." The Advisor may
also experience certain conflicts of interest in connection with the
management of the Company. See "Conflicts of Interest."
The Advisor and the Directors will have fiduciary duties and obligations
which will require them to manage the affairs of the Company and resolve any
conflicts of interest by exercising the utmost good faith and integrity. This
is a rapidly developing and changing area of the law, therefore, potential
investors or Shareholders who have questions concerning the duties of the
Directors and the Advisor should consult with their own counsel.
LIMITED TRANSFERABILITY; NO ACTIVE MARKET FOR SHARES MAY DEVELOP. Except
under certain circumstances, see "Description of Common Stock -- Redemption
and Prohibition of Transfer of Shares", there are no restrictions on transfer
of the Shares. However, a market is unlikely to develop during this offering
and there can be no assurance that a market will ever develop for the
Shares. Therefore, Shareholders may not be able to liquidate their investment
in the Company in the event of an emergency. In addition, Shares may not be
readily accepted as collateral for a loan. The Company intends to use a
Crossing Arrangement to match buy and sell orders for Shares as an
accommodation to and for the benefit of Shareholders who wish to sell their
Shares. The Company may apply to have the Shares quoted on the NASDAQ System;
however, no assurance can be given that any broker-dealer will act as a
market maker for the Shares, that the Shares will be accepted for quotation
or that, if quoted, an active public trading market for the Shares will
thereafter develop. See "Description of Common Stock."
TRANSFERABILITY OF SHARES; APPLICATION OF PENNY STOCK RULES. There is a risk
that a market for the Company's Shares may not develop if the Company's Shares
are subject to the "Penny Stock" rules promulgated by the Securities and
Exchange Commission. A Penny Stock is defined generally as one which sells for
less than $5.00 per share. If the Company's Shares sell for less than $5.00
per share, the development of a market in the Shares may be inhibited because
of the requirement that broker-dealers provide customers
10
<PAGE>
with a risk disclosure document prior to effecting any transactions in the
Shares, which requirement may prevent broker-dealers from making a market in
the Shares.
LIMITED LIABILITY, INDEMNIFICATION AND POSSIBLE INADEQUACY OF SHAREHOLDER
REMEDIES. The Company's Certificate of Incorporation and Bylaws provide that
the Directors' liability to the Company for monetary damages will be
eliminated to the fullest extent permitted under Delaware law. In addition,
the Company is obligated under its Certificate of Incorporation and Bylaws
to indemnify its Directors, officers, employees and other agents against
certain liabilities incurred in connection with their service in such
capacities. Each of these measures could reduce the legal remedies available
to the Company and Shareholders against such individuals. See "Summary of
Organization Documents -- Limited Liability and Indemnification of Directors,
Officers, Employees and Other Agents" and "Management."
POTENTIAL DILUTION. The Directors are authorized to borrow or raise capital
without Shareholder approval through the issuance of additional Shares, notes,
debentures, or other obligations of the Company that may be convertible into
Shares or that are accompanied by warrants or rights to purchase Shares. The
net proceeds of any such offering would be applied to the acquisitions of
additional Properties, the enhancement of existing Properties, or the
establishment of Working Capital Reserves. The issuance of additional Shares,
the conversion of any such obligations, or the exercise of any such warrants
or rights, could dilute existing Shareholders' equity.
ESTIMATED USE OF PROCEEDS
The Company intends to invest the net proceeds of this offering primarily
in income-producing real estate. See "Investment Objectives and Policies."
Approximately 75.39% of the of the proceeds will be available for
investment in real properties. The remainder of the offering proceeds will
used to pay sales commissions of 7% and wholesaling compensation of 1% (some
of which may be paid to Affiliates of the Advisor if they sell the Shares)
and 3.3% of the proceeds (not to exceed $500,000) will be used to pay
Offering and Organizational Expenses including a nonaccountable expense
allowance which may not exceed 3% of the gross offering proceeds (some of
which may be reimbursed to the Advisor for the payment of the Offering and
Organizational Expenses). Three percent of the proceeds will be maintained
as Working Capital Reserves.
Of the balance of the net proceeds, approximately 10.28% (approximately
$1,542,000 if 1,500,000 Shares are sold) will be paid to the Advisor by
Company as Acquisition Fees and Acquisition Expenses. Acquisition Fees are
normally paid by the seller of a Property rather than the buyer. However,
the price of a Property will generally be adjusted in order to take this
obligation of the seller into consideration, so that in effect, the Company,
as purchaser, will bear all or a portion of the Acquisition Fees in the
Purchase Price of the Property. The Company also expects to pay commissions
in connection with the Sale or Disposition of the Properties which will
reduce the net proceeds to the Company of any such sales.
11
<PAGE> 20
The following tables sets forth information concerning the estimated
initial use of proceeds of this offering of Shares, assuming compensation
levels as described in "Compensation of the Advisor and Affiliates." The
table does not give effect to the use of proceeds which may be received by
the Company from any sale, financing or refinancing of its Properties.
<TABLE>
<CAPTION>
ESTIMATED AMOUNT
ASSUMING
1,500,000 SHARES SOLD
--------------------------
PERCENTAGE
OF GROSS
AMOUNT PROCEEDS
----------- ----------
<S> <C> <C>
Gross Offering Proceeds......................................... $15,000,000 100.0%
Less Public Offering Expenses: Commissions(1)................... 1,200,000 8.0%
Offering and Organizational Expenses(2)......................... 500,000 3.33%
----------- -----
Total Amount Available for Investment in Properties and
Operations.................................................... 13,300,000 88.67%
----------- -----
Net Amount Available for Net Acquisition Fees and Acquisition
Expenses:(3).................................................. 1,542,000 10.28%
Reserves:....................................................... 450,000 3.0%
----------- -----
Amount Available for Investment in Properties and Operations.... $11,308,000 75.39%
----------- -----
</TABLE>
- ---------------
(1) The Selling Agent will receive from the Company up to 8% of the $10.00 per
Share offering price for each Share sold from the proceeds of such sale
for sales commissions and wholesaling compensation, exclusive of the
Monitoring Fee and an additional .5% per Share for bona fide due
diligence expenses. The Company will be solely responsible for paying
commissions to participating Selected Dealers. See "Plan of Distribution."
(2) These amounts represent reimbursements payable to the Advisor for
offering, organization and wholesaling services. See "Plan of
Distribution." The reimbursements are limited to 40 cents per Share for
each Share sold pursuant to this offering and may include a
nonaccountable expense allowance which may not exceed 3% of the gross
offering proceeds. All such expenses in excess of this limit will be
borne by the Advisor.
(3) Assumes Properties are acquired with the maximum 50% leverage. If
Properties were acquired without leverage, the maximum Acquisition Fee
and Acquisition Expenses payable would be $771,000 (5.14%) if the maximum
proceeds were raised. Acquisition Fees are generally defined as all the
fees and commissions paid by any person to any person in connection with
the purchase of any real estate by the Company, whether designated as a
real estate commission, selection fee, nonrecurring management fee,
nonrecurring start up fee, construction fee, or any fee of a similar
nature, but excludes any fees paid for the financing or refinancing of
the property. Acquisition Expenses are generally defined as those fees and
expenses including legal fees, travel and communication expenses,
appraisal costs, nonrefundable options, title fees and other similar
expenses related to the selection and acquisition of Properties.
12
<PAGE> 21
COMPENSATION OF ADVISOR AND AFFILIATES
The Advisor and its Affiliates will receive the following items of
compensation from the Company. Except as described below, and unless otherwise
authorized by a majority of the Independent Directors, no compensation or
reimbursement is to be paid to the Advisor and its Affiliates and such
compensation or reimbursements may not be recovered by reclassifying them
under a different category. These amounts were not determined by arm's-length
negotiations.
SELLING COMMISSIONS. Associated Securities Corp. (the "Selling Agent"), an
Affiliate of the Advisor, will receive a maximum of 80 cents per Share from
the Company for sales commission, and wholesaling compensation, excluding the
Monitoring Fee and 5 cents per Share from the Company for bona fide due
diligence expenses. If all of the Shares are sold by the Selling Agent, the
Selling Agent would receive a maximum of $1,200,000. However, to the extent
that the Company pays a portion of the sales commissions, wholesaling
compensation and Monitoring Fees, or due diligence expenses to Selected
Dealers who are not affiliated with the Advisor, the compensation paid to the
Selling Agent will be reduced.
ACQUISITION FEES AND ACQUISITION EXPENSES. The Advisor and/or an Affiliate
will receive Acquisition Fees (which are defined generally to mean the fees
and commissions paid by any person to any person in connection with the
investigation, selection or purchase of real estate by the Company) and
Acquisition Expenses (which are defined generally to mean those expenses
incurred in the acquisition of properties by the Company, such as legal fees,
travel fees, title insurance, etc.) in an amount which shall not exceed a
maximum of 6% of the Purchase Price of the Property being acquired. If the
maximum amount of Shares are sold, the Acquisition Fees and Acquisition
Expenses to be received by the Advisor, shall approximate a maximum of
$1,542,000 ($771,000 if the Properties were purchased without leverage). The
total amount of Acquisition Fees and Acquisition Expenses which may be paid
by one person to another person shall not exceed 6% of the Purchase Price of
the Properties, no matter how paid. Acquisition Fees paid to the Advisor will
be reduced by all real estate brokerage fees paid by either the Seller or the
Company to any person in connection with the transaction.
In no event will the amount of Acquisition Fees paid exceed the lesser of
the percentages set forth above or the competitive compensation which would be
paid to a real estate professional rendering similar services.
If the Company sells a Property and the proceeds from such sale are
reinvested in the acquisition of another Property, no Acquisition Fees or
Acquisition Expenses will be paid to the Advisor or an Affiliate upon the
acquisition by the Company of the new Property.
DISPOSITION SERVICES. The Company will pay a real estate commission to the
Advisor and/or an Affiliate for selling the Company's Properties. The maximum
real estate commission to be paid will be equal to the lesser of 3% of the
gross sales price of a Property or the normal and competitive rate charged by
unaffiliated parties rendering similar services. The amount of compensation
the Advisor will earn upon disposition of the Company's properties cannot be
estimated at this time, since the gross sales price of the Properties cannot
be determined at this time.
If, on the disposition of a Property, a real estate commission is paid to
an unaffiliated third party in addition to the Advisor and/or an Affiliate,
the maximum total real estate commission paid to the Advisor shall equal the
lesser of one-half of the brokerage commission paid, or 3% of the gross sales
price of the Property. However, the total real estate commission paid by the
Company shall not exceed the lesser of the reasonable and competitive
commission for such Property or an amount equal to 6% of the gross sales
price of the Property.
ADVISORY FEE. The Advisor will receive quarterly, an annualized fee equal to
one percent of the amount of Invested Assets. (Invested Assets are defined
generally as the book value of the real estate owned by the Company). The
Advisory Fee will not be paid unless Shareholders have received a
noncumulative, noncompounded Dividend for such quarter equal to an 7% per
annum return on Shareholders Adjusted Price Per Share (which is defined
generally as the price paid for the Shares less the Dividends paid or deemed
paid from the sale, financing or refinancing of Properties) prior to
adjustment as a result of the Dividend paid. If the maximum amount of Shares
are sold the Advisory Fee would increase approximately $226,160 (113,080 per
13
<PAGE> 22
annum if the Properties were purchased without leverage); (i) assuming maximum
leverage of 50% when the Properties are acquired and (ii) is the amount which
would be paid during the first year the amount available for investment is
fully invested. At its option, the Advisor may elect to waive collection of
all or a portion of the Advisory Fee.
PROPERTY MANAGEMENT FEE. For residential properties the maximum Property
Management Fee payable to West Coast Realty Management Inc., an Affiliate of
the Advisor, will be 5% of the gross revenues. For retail, industrial and
commercial properties, the maximum Property Management Fee will be equal to 6%
of the gross revenues, if the Advisor or an Affiliate performs all or part of
the leasing and releasing of the Properties. However, if the Advisor or its
Affiliate does not perform any of the leasing and releasing services for
retail, industrial and commercial Properties, the maximum amount of the
Property Management Fee will not exceed 3% of the gross revenues. In no
event, however, shall the Property Management Fee exceed the normal
competitive rate for those services in the localities where the Properties
are located. The amount of Property Management Fee compensation cannot be
estimated at this time since the amount of gross revenues cannot be
determined.
FINANCING SERVICES. The Advisor will receive compensation for services
rendered in securing additional or replacement financing on the Company's
Properties and in obtaining unsecured financing. The compensation paid to the
Advisor and/or an Affiliate will be determined by the Independent Directors
based on terms and at rates which are reasonable, fair and competitive with
like activities and services from unaffiliated parties. The amount of
compensation cannot be estimated at this time since the amount of financing
or replacement financing which the Company will require cannot be determined
at this time.
SUBORDINATED INCENTIVE FEE. The Advisor will receive a Subordinated Incentive
Fee on the sale, financing or refinancing of the Company's Properties. The
amount of the Subordinated Incentive Fee to be paid will be determined after
the sale, financing or refinancing of a specific Property has been made and
will equal a maximum of 15% of the amount of Cash From Sales and Refinancing
(which is generally defined as the net cash remaining from the sale of a
Property after payment of the expenses related to such sale and any debt
applicable to the Property) remaining after the Company has received proceeds
from the sale or refinancing of such specific Property in an amount equal to
either Offering Proceeds (which is defined generally as the amount of funds
used from the sale of Shares to purchase the Property) or Reinvestment
Proceeds (which is generally defined as the amount of net cash received from
the sale of a Property which is reinvested in another Property) (such
proceeds are deemed to be a Distribution of Cash Available From Sales or
Refinancing to Shareholders) and Shareholders have received an amount which,
when added to all prior Distributions paid to Shareholders equals 100% of
their Adjusted Price Per Share plus a cumulative noncompounded return on
their Adjusted Price Per Share equal to 8% per annum. The amount of the
Subordinated Incentive Fee cannot be estimated at this time since the amount
of Cash From Sales or Refinancings cannot be determined.
REIMBURSEMENTS. The Selling Agent and Affiliates of the Advisor will receive
reimbursement for Offering and Organizational Expenses (which are defined
generally to mean the costs expended in organizing the Company for the
registration and sale of the Shares and distributing the Shares to the public)
in an amount not to exceed a maximum amount of 40 cents per Share, not to
exceed $500,000 and may be nonaccountable to the extent that such
nonaccountable expenses do not exceed 3% of the gross offering proceeds.
14
<PAGE> 23
The following table summarizes the nature, estimated amounts and
recipients of compensation to be paid to the Advisor and its Affiliates.
<TABLE>
<CAPTION>
ESTIMATED AMOUNT ASSUMING
TYPE OF COMPENSATION AND MINIMUM/MAXIMUM NUMBER OF
ENTITY RECEIVING COMPENSATION METHOD OF COMPENSATION SHARES IS SOLD(1)
- ------------------------------ ------------------------------ ------------------------------
<S> <C> <C>
OFFERING AND ORGANIZATION STAGE
Selling Commissions (payable 70 cents per Share will be $241,870 for the minimum
to the Selling Agent) paid by the Company to the amount of Shares sold and
Selling Agent; however, a $1,200,000 if the maximum
portion may be paid to amount of Shares are sold,
Selected Dealers. excluding the Monitoring
Fee.(2)
Offering and Organization Ex- Total reimbursement not to ex- $138,211 for the minimum
pense reimbursement (payable ceed 40 cents per Share of amount of Shares sold and up
to the Selling Agent) each Share sold pursuant to to $500,000 if the maximum
this offering. amount of Shares are sold.(3)
Non-recurring Acquisition Fees The total Acquisition Fees and $359,230 for the minimum
(payable to the Advisor and/or Acquisition Expenses paid by amount of Shares sold and ap-
an Affiliate and all other the Company shall not exceed proximately $1,542,000 if the
parties, both Affiliates and 6% of the Purchase Price of maximum amount of Shares are
non-Affiliates) involved in the Property. sold.(4)(5)
the acquisition of Properties.
OPERATING STAGE(6)
Property Management Fee for For residential Properties the Not determinable at this time.
Property Management Services maximum Property Management
(payable to West Coast Realty Fee shall be 5% of the gross
Management, Inc. an Affiliate revenues. For industrial,
of the Advisor) commercial, and retail
Properties, the maximum
Property Management Fee will
be 6% of the gross revenues
where the Advisor or an
Affiliate performs all or part
of the leasing, and re-leasing
of Properties. However, if the
Advisor or its Affiliate does
not perform any portion of the
leasing and re-leasing
services for retail,
industrial and commercial
Properties, the amount of
Property Management Fee will
not exceed 3% of the gross
revenues. In no event shall
the Property Management Fee
exceed the normal competitive
rate for those services in the
localities where the
Properties are located.
Advisory Fee for Advising the Annualized fee equal to 1% of Increased per annum by
Company and Managing its Invested Assets. Such fee will approximately $52,200 if the
investments (payable to the be subordinated on a minimum amount of Shares are
Advisor) noncumulative, noncompounded sold and approximately
basis to a quarterly Dividend $228,000 if the maximum amount
payment to Shareholders equal of Shares are sold.(7)(9)
to an annualized 7% per annum
return on Shareholders
Adjusted Price Per Share. This
fee is payable quarterly.
Financing services for As determined by the Not determinable at this time.
obtaining financing (payable Independent Directors, not to
to the Advisor and/or an exceed fair and competitive
Affiliate) rates paid to unaffiliated
parties rendering similar ser-
vices.
</TABLE>
15
<PAGE> 24
<TABLE>
<CAPTION>
ESTIMATED AMOUNT ASSUMING
TYPE OF COMPENSATION AND MINIMUM/MAXIMUM NUMBER OF
ENTITY RECEIVING COMPENSATION METHOD OF COMPENSATION SHARES IS SOLD(1)
- ------------------------------ ------------------------------ ------------------------------
<S> <C> <C>
LIQUIDATING STAGE
Real Estate Commissions for If the Advisor or an Affiliate Not determinable at this
Selling Properties (payable to is the only party to receive a time.(8)(9)
the Advisor and/or an brokerage commission upon the
Affiliate) Property or an sale of a Property, the
amount equal to 6% of the Company will pay a commission
gross sale price. equal to the lesser of (i) 3%
of the gross sale price of a
Property or (ii) a percentage
of the sale price equal to
one-half the normal and
competitive rate charged by
unaffiliated parties ren-
dering similar services,
subject to certain
restrictions specified in the
Company's Organization Docu-
ments. Any real estate
commission which is paid to
any unaffiliated parties shall
equal the lesser of (i)
one-half of the brokerage
commission paid or (ii) 3% of
the gross sale price of the
Property; provided that the
total brokerage commissions
paid by the Company shall not
exceed the lesser of the
reasonable, customary and
competitive commission for
such Property or an amount
equal to 6% of the gross sale
price.
Subordinated Incentive Fee on After the sale, financing or Not determinable at this
Sale, Financing or Refinancing refinancing of a specific time.(9)
(payable to the Advisor and/or Property an amount equal to
an Affiliate) 15% of the amount of Cash From
Sales or Refinancing remaining
after the Company has received
proceeds from the sale or
refinancing of such specific
Property in an amount equal to
either Offering Proceeds or
Reinvestment Proceeds (such
proceeds are deemed a
Distribution of Cash Available
From Sales or Refinancing to
Shareholders) and Shareholders
have received an amount which,
when added to all
Distributions made to
Shareholders, equals 100% of
their Adjusted Price per Share
plus a cumulative (noncom-
pounded) return on their
Adjusted Price per Share
(calculated from time to time)
equal to 8% per annum.
</TABLE>
- ---------------
(1) The estimated amounts assume that a minimum of 345,528 shares (as of March
18, 1997) and a maximum of 1,500,000 Shares are sold.
(2) This assumes the Selling Agent sells all of the Shares. The amount paid to
the Selling Agent will be reduced if Shares are sold by Selected Dealers.
It cannot be determined what percentage of the Shares will be sold by the
Selling Agent and what percentage of the Shares will be sold by Selected
Dealers. The Selling Agent
16
<PAGE> 25
will also receive 5 cents per Share from the Company for bona fide due
diligence expenses. See "Plan of Distribution."
(3) The Advisor will receive reimbursement for actual and necessary
Organization and Offering Expenses which consist of expenses relating to
the Company's organization and formation, for all legal, accounting, due
diligence, printing expenses and for all other expenses relating to the
registration, marketing and distribution of this offering other than
retail sales commissions. This reimbursement is limited to 40 cents per
Share for each Share sold up to a maximum of $500,000 and may include a
nonaccountable expense allowance which may not exceed 3% of the gross
offering proceeds. All such expenses in excess of this limit will be borne
by the Advisor. See "Plan of Distribution."
(4) If the Company finances, refinances, joint ventures or sells a Property,
it may reinvest the proceeds in other Properties. See "Investment
Objectives and Policies." Whenever the proceeds from the sale, financing,
or refinancing of a Property are reinvested in another Property, no
Acquisition Fee will be paid to the Advisor or an Affiliate for the
Property which was subsequently purchased.
(5) The amount of Acquisition Fees and Acquisition Expenses (which assumes
Properties are acquired with a maximum 50% leverage; such amounts would be
approximately $179,615 and $771,000 if the Properties were acquired
without leverage) will be paid by the Company, or the seller of the
Property, to the Advisor and/or an Affiliate. See "Investment Objectives
and Policies -- Acquisition Policies" for limitations applicable to the
payment of these fees. To the extent these fees are paid by sellers of
Properties,the amount of Acquisition Fees paid by the Company will be
reduced, but it is anticipated that in such situations the Purchase
Price, and therefore, the cash payment for the purchase of Properties,
will be increased.
(6) The Company will pay all expenses of its operations except for the
following expenses which shall be borne by the Advisor: (i) employment
expenses of the Chairman, President, Executive and Senior Vice Presidents
and directors of the Advisor, (ii) office expenses of the Advisor, and
(iii) miscellaneous administrative and other expenses of the Advisor not
relating to the performance of its functions as set forth in the Advisory
Agreement.
(7) The amounts reflected assume maximum leverage of 50% when Properties are
acquired and are for the first year the amount available for investment is
fully invested (such amounts would be approximately $26,100 and $113,080
if Properties were purchased without leverage). See "Estimated Use of
Proceeds."
(8) If the Advisor, Affiliates and non-Affiliates participate in a sale, the
general limitation requirements set forth in the Company's Organization
Documents will apply to the Advisor and all Affiliates involved in the
transaction.
(9) Any amounts which are payable to the Advisor but which are deferred (e.g.,
insufficient cash for distribution resulting from a sale of a Property)
will be paid when sufficient funds become available.
17
<PAGE> 26
CAPITALIZATION
The following table sets forth the capitalization of the Company at
December 31, 1996.
<TABLE>
<S> <C>
MORTGAGE DEBT................................................. $10,078,793
SHAREHOLDERS' EQUITY (1,550,607 Shares Outstanding)........... 12,904,891
-----------
Total Capitalization.......................................... $22,983,684
===========
</TABLE>
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------
1996 1995 1994 1993 1992
----------- ----------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Operating Revenues........................... $ 2,474,627 $ 1,813,126 $ 903,167 $ 362,566 $ 158,306
Income from continuing operations............ 705,636 649,605 247,068 158,490 40,287
Income from continuing operations per
share...................................... 0.49 0.58 0.35 0.38 0.15
Long-Term Debt............................... 10,078,793 9,539,180 5,161,355 2,405,526 -0-
Total Assets................................. 23,571,838 21,392,898 13,228,888 7,509,947 2,786,423
Cash Dividends per common share.............. $0.779 $0.720 $0.762 $0.539 $0.275
</TABLE>
18
<PAGE> 27
CONFLICTS OF INTEREST
The Company is subject to various conflicts of interest arising out of
its relationship with the Advisor and Affiliates of the Advisor. None of the
agreements and arrangements, including those relating to compensation, between
the Company and the Advisor and its Affiliates are the result of arm's-length
negotiations. However, the Independent Directors will review annually the
reasonableness of the compensation being paid to the Advisor. In addition, the
Advisory Agreement may be terminated by the Directors, Independent Directors
or Shareholders on 60 days' notice to the Advisor. See "Services Provided by
the Advisor and Property Manager." If the Advisory Agreement is terminated,
the Directors shall select a successor Advisor which shall be approved by the
Shareholders at the next annual meeting of Shareholders.
The Advisor is an Affiliate of AFG. It is anticipated that, in the
future, the Advisor may serve as general partner, advisor or sponsor of other
public and private programs and engage in business activities which will be
competitive with the Company. Accordingly, conflicts may arise between
operating and managing the real estate investments of the Company, and any
such future real estate programs. In addition, AFG and its Affiliates may in
the future engage in additional business activities which will be competitive
with the Company.
The Advisor and its Affiliates are subject to various conflicts of
interest in the operation of the Company. These conflicts include the
following:
COMPETITION BY THE COMPANY WITH AFFILIATED PARTIES FOR PURCHASE AND SALE OF
REAL PROPERTY. The Advisor and its Affiliates may engage for their own
account, or for the account of others, and other public or private real
estate investment trusts or limited partnerships, in other business ventures
involving real estate or otherwise, and neither the Company nor any
Shareholder shall be entitled to any interest in any such venture. The
Company's Organization Documents expressly provide that neither the Advisor
nor any Affiliate of the Advisor will be obligated to present to the Company
any particular investment opportunity which comes to its attention even if
the opportunity is of a character which might be suitable for investment by
the Company. Additionally, the Advisor intends to form other public and
private real estate investment trusts or limited partnerships in the future,
some of which may have the same investment objectives as the Company.
However, the Advisor will not make investments for its own account of the
character suitable for investment by the Company while the Company has
sufficient funds available to make the investment.
When two entities have funds available for investment at the same time,
the Advisor or its Affiliates will review the investment portfolio of each
entity and will make the decision as to which entity will acquire the
property on the basis of such factors, among others, as the suitability of
investing in the property in light of their respective investment objectives,
a review of the investment portfolio of the entities, their respective cash
flow requirements, the effect of the acquisition on diversification of the
portfolio, the size of the investment compared to the capitalization of the
entity, the policy of each entity with respect to leverage, the amount of
funds available and the length of time such funds have been available for
investment. If funds should be available to two or more entities to purchase
a given property or properties and the other factors are deemed equally
applicable to each entity, then the Advisor and its Affiliates will acquire
the properties for the entities on the basis of rotation with the order of
priority determined by the dates of formation of each entity, and will so
report to each entity not selected to acquire the property. There are no
current or prior programs which have funds available for investment in
properties.
TRANSACTIONS WITH THE ADVISOR OR AN AFFILIATE. Transactions with the Advisor
and its Affiliates and the Directors are governed by the Bylaws. The Bylaws
require that the Independent Directors must approve or ratify all transactions
with the Advisor or its Affiliates, or any transaction with any Director,
officer, employee or agent of the Company, except with respect to certain
transactions which, by their terms, are governed by the Bylaws. Transactions
with Affiliates may be considered not to be made at arms-length. The material
terms and circumstances of any transactions so approved will be included in
the Company's annual report. The Company will not acquire Properties from the
Advisor or any of its Affiliates, except as described in "Summary of
Organization Documents -- Transactions with Affiliates."
SELLING AGENT. Associated Securities Corp., a wholly owned subsidiary of AFG,
is the Selling Agent of the Shares. As an Affiliate of AFG and the Advisor,
the Selling Agent may experience conflicts in performing its
19
<PAGE> 28
obligations to exercise due diligence with respect to the statements made in
this Prospectus. The Selling Agent believes, however, that it has exercised
the degree of diligence required of it in connection with this offering.
PROPERTY MANAGEMENT FEE. West Coast Realty Management Inc., an Affiliate of
AFG and the Advisor, will receive a monthly fee not to exceed 5% of the gross
revenues from residential Properties and 3% or 6% of the gross revenues from
the retail, industrial and commercial Properties which it manages and leases.
Currently, three of the properties are subject to a 6% rate and six are
subject to a 3% rate. For further information on the Property Management Fee
see "Investment Objectives and Policies -- Management of Properties" and
"Compensation of Advisor and Affiliates".
LACK OF SEPARATE REPRESENTATION. The attorneys, accountants and other experts
who perform services for the Company also perform services for AFG, the
Advisor and certain Affiliates of the Advisor. It is anticipated that this
dual representation will continue in the future. However, should a dispute
arise between the Company and the Advisor or an Affiliate, or should it
become necessary to negotiate and prepare any material contracts and
agreements between the Company and the Advisor or an Affiliate other than
those existing on the effective date of this Prospectus, the Independent
Directors may cause the Company to retain separate counsel for those matters.
Any future contracts and agreements between the Company and the Advisor or
its Affiliates will provide that they may be terminated at the option of the
Company upon 60 days' notice without penalty to the Company.
INVESTMENT OBJECTIVES AND POLICIES
PRINCIPAL INVESTMENT OBJECTIVES. The Company primarily intends to acquire,
improve, operate and hold for investment income-producing real estate
projects, which may include residential buildings, office buildings, shopping
centers, research and development facilities, industrial parks, warehouses,
or mini-warehouses and other similar types of income-producing property. The
Company will operate on a continuous basis for an indefinite term. The
Company's principal investment objectives cannot be changed without a
majority vote of the Shareholders. The Company will not develop speculative
properties; it will acquire only properties which have been developed and are
producing income. The Company's policy will be to acquire Properties for cash
or with a moderate amount of mortgage indebtedness; however, the Company may
leverage its investments as described below in "Borrowing Policies --
Leveraging." The Company intends to concentrate on equity investments. The
Company does not presently intend to offer Shares as consideration in
exchange for Properties but may do so with the approval of a majority of the
Independent Directors. During the course of this offering the Advisor may,
from time to time, make certain cash advances to the Company in connection
with the acquisition of Properties. These advances will be subject to
approval by a majority of the Independent Directors and will be on terms no
less favorable to the Company than those available from third parties. All
advances will be unsecured and will be repaid out of the proceeds of this
offering or in Shares at a $9.30 per Share price, to the extent that such
offering proceeds are insufficient to repay all advances at the completion of
this offering.
The Company's principal investment objectives in order of priority are to
invest the net proceeds of this offering in Properties which will: (i)
preserve and protect the Company's capital, (ii) provide cash Dividends a
portion of which will not constitute taxable income (which due to
depreciation will constitute a return of capital which will reduce an
investor's basis in the Shares and thereby will result in an increase in gain
or a reduction in loss to the Shareholders on any disposition of the Shares
including a disposition upon dissolution or liquidation of the Company),
(iii) provide capital gains through potential appreciation of Properties, and
(iv) provide market liquidity through transferable shares of stock. NO
ASSURANCE CAN BE GIVEN THAT THESE OBJECTIVES WILL BE ATTAINED.
Except as described below in "Use of Initial Capital" and "Borrowing
Policies -- Leveraging," the Company does not have a policy, and there is no
limitation, as to the amount or percentage of its assets which may be invested
in any one Property or group of Properties, any specific investment or the
number of purchases which may be made from any person or group of persons. To
the extent feasible, investments will be made in various locations primarily
in California and the west coast of the United States in an attempt to achieve
diversification and to minimize the effect of changes in local economic
conditions and certain other
20
<PAGE> 29
risks. See "Risk Factors." However, the extent of diversification depends upon
the amount of net proceeds available to the Company from the sale of the
Shares, and if less than the maximum net proceeds of this offering is
obtained, the number of Properties acquired and the Company's ability to
diversify will be reduced. The Company may, in the future, repurchase Shares
on the open market or in negotiated transactions if the Directors believe that
the Company's Share price makes that an attractive investment. Such
repurchases, if any are made, would only be made in compliance with
conditions imposed by the Federal Securities Exchange Act of 1934.
USE OF INITIAL CAPITAL. The Company intends to use the net proceeds of this
offering, which will be not less than a minimum of $3,454,131 as of March 18,
1997 and a maximum of $13,300,000 for the purchase of Properties, for the
payment of Acquisition Fees and for the establishment of appropriate reserves.
See "Estimated Use of Proceeds".
There can be no assurance as to when the proceeds from the offering may
be fully invested. The Advisor is presently evaluating real property for
purchase. It is intended that the time required to invest the net proceeds
of this offering will not cause the Company to be deemed an "investment
company" for purposes of the Investment Company Act of 1940, as amended. If
the Company holds sufficient uninvested funds, it may invest in short-term
investments (including, without limitation, bank or savings and loan
instruments, bankers' acceptances, repurchase agreements, GNMA and FNMA
mortgage pass-through certificates, commercial paper, short-term time
deposits and money market funds managed by subsidiaries of AFG or its
Affiliates and having assets in excess of $100,000,000) until the funds are
required for the acquisition of Properties. Any interest earned will be
deemed to be earned from operations of the Company. The Company does not
intend to make investments in securities for the purpose of exercising
control of the issuer of such securities.
Before completion of this offering, when the Directors believe that a
reasonable probability exists that a Property will be acquired by the Company,
this Prospectus will be supplemented to disclose the pending acquisition of
the Property. This event will normally occur on the signing of a legally
binding purchase agreement, but it may occur before or after signing,
depending on the particular circumstances surrounding each potential
acquisition. A supplement to this Prospectus will set forth data available
with respect to the acquisition, which will include the proposed terms of
purchase, a description of the Property to be acquired and other information.
Additional data will be made available after a pending acquisition is
completed by means of an additional supplement to this Prospectus if the
information can be distributed before termination of this offering.
PROPOSED ACQUISITIONS WILL BE DISCLOSED WHEN THERE IS, IN THE COMPANY'S
JUDGMENT, A "REASONABLE PROBABILITY" THAT THE PROPERTY WILL BE ACQUIRED.
THEREFORE, INFORMATION CONCERNING A PROPOSED ACQUISITION CANNOT BE RELIED UPON
AS A COMPLETE ASSURANCE THAT THE COMPANY WILL ULTIMATELY CONSUMMATE THE
PROPOSED ACQUISITION OR THAT THE IDENTIFIED PROPERTY WILL ULTIMATELY BE
ACQUIRED UPON THE DISCLOSED TERMS AND CONDITIONS. THERE MAY BE A DELAY
BETWEEN THE NEGOTIATION AND THE COMPLETION OF A PROPERTY ACQUISITION.
To attain its stated objectives and pay cash Dividends to Shareholders,
it will be necessary for the Company to acquire Properties which will
generate cash in excess of the cash required to meet the gross operating
expense of the Company. To do this, the Company intends where possible to
invest the majority of the net proceeds of this offering in Properties with
operating histories including established rent and expense schedules. In the
event that there is an agreement with the seller of a Property assuring a
minimum level of rental income, it is likely that the seller would increase
the purchase price for that Property to reflect the agreement. Upon the
expiration of any such agreement, there would be no assurance that the
Company will be able to obtain or maintain the levels of operating income or
expense which are necessary to produce the return it was previously
experiencing. Payments made to the Company pursuant to such an agreement may
be treated as income for federal income tax purposes.
21
<PAGE> 30
ACQUISITION POLICIES. The Company will obtain an Appraisal of the fair market
value of any equity interest in real estate to be acquired by the Company. The
Appraisal will be made by an Independent Expert who is a member of a
nationally recognized society of appraisers. Each Appraisal will be
maintained in the records of the Company for at least five years following
the acquisition of the appraised Property and during that period will be
available for inspection by any Shareholder. The Company will not purchase
any Property if the cost of the Property (including Acquisition Fees and
Acquisition Expenses) exceeds the appraised value of the Property. It should
be recognized that appraised values are opinions and, as such, may not
represent the true worth or realizable value of the property being appraised.
It is the present policy of the Company that all investments in real
property will be made only with the prior approval of the Directors. The
Advisor and its Affiliates are prohibited from leasing or selling any
Property to the Company except with the approval of the Independent
Directors, and the Advisor and its Affiliates may not have any pecuniary
interest, other than their interest in the Company, in any Property sold or
leased to the Company. However, the Advisor or any of its Affiliates (i) may
be joint venture partners with the Company with respect to certain Property
ownership, and (ii) may purchase Property in its own name, assume loans and
temporarily hold title for the purpose of facilitating the acquisition of a
Property, or for any other purpose related to the business of the Company.
Prior to the acquisition of any Property or any interest in a Property,
the Company will be provided with evidence satisfactory to the Directors or
the Advisor, that the Company will acquire marketable title to the Property.
This evidence may include a policy of title insurance, an opinion of counsel
or such other evidence as is customary in the locality where the Property is
situated. BORROWING POLICIES -- LEVERAGING. The Company will initially
acquire Properties for cash or by borrowing from banks, other institutional
lenders and private lenders. Aggregate borrowings incurred by the Company in
connection with the financing of all Properties will not exceed 50% of the
Purchase Price of the Properties on a combined basis and the amount borrowed
with respect to any individual Property will not exceed 80% of its Purchase
Price. If a Property is financed or refinanced, the aggregate amount of
borrowings the Company will incur will not exceed 50% of the Appraised Value
of the Property at the time of such financing or refinancing. The Company may
use the proceeds from any refinancing, and the proceeds from any Property
disposition, to acquire additional Properties, the acquisition of which may
also be leveraged. The Company may also issue notes, debentures and other
debt securities and mortgage a portion of its Properties in connection with
these borrowings or acquisitions. In addition, the Company may establish a
line of credit with a bank or other lender.
Where possible, the Company will issue only nonrecourse promissory notes
in connection with the financing of Properties so that the Company would not
be generally liable on the borrowing and the lender's rights upon default
would be limited to the Property which secures the obligation. There is no
assurance as to whether, or the extent to which, the Company may enter into
such nonrecourse arrangements. The Company and the Advisor will use their
best efforts to arrange fixed interest rate permanent financing on the most
favorable terms available to the Company; however, some financing may involve
renegotiable, floating or adjustable interest rates, interest accruals or
balloon payments. See "Risk Factors -- Leveraging of Investments."
RESERVES FOR OPERATING EXPENSES. It is anticipated that approximately 3% of
the gross proceeds of the offering will initially be designated as Working
Capital Reserves to meet operating costs and expenses of the Company and its
Properties, capital expenditures and initial cash expense upon completion of
the Company's investment program. In connection with Properties requiring
large initial maintenance expenditures or Properties which are in the process
of being leased pursuant to discussions with prospective tenants, larger
reserves may be retained by the Company. To the extent that Working Capital
Reserves and any income of the Company are insufficient to defray these costs
and other obligations and liabilities, it may be necessary to attempt to
finance or refinance the Properties or, if financing or refinancing is not
available on acceptable terms, to liquidate the Company's investment in
certain of its Properties, which could result in sales on unfavorable terms
as well as jeopardize the tax status of the Company as a REIT. However,
during the holding period of a Property, the Company may increase Working
Capital Reserves to meet anticipated costs and
22
<PAGE> 31
expenses and other economic contingencies. If in any fiscal quarter the
Directors should determine that Working Capital Reserves of the Company exceed
the amount it deems sufficient for the Company's operations, the reserves may
be reduced and the amount of the reduction added to the funds available for
acquisition of Properties or distributed to Shareholders, as determined by
the Board of Directors. See "Investment Objectives and Policies -- Dividends."
MANAGEMENT OF PROPERTIES. It is anticipated that each Property will be
managed by West Coast Realty Management, Inc., an Affiliate of the Advisor,
which will be responsible for the management of the Property and collection
of its rental income. Based upon the accuracy of the facts contained in the
Ruling Request, the Internal Revenue Service has issued a ruling that West
Coast Realty Management, Inc. will qualify as an "independent contractor" as
defined in the REIT provisions of the Code. If West Coast Realty Management,
Inc. had not qualified as an independent contractor, it may have been deemed
to be an Affiliate of the Company, and if the Company contracted with West
Coast Realty Management, Inc. for property management services, the Company
might have lost its eligibility to elect REIT tax treatment. The Company will
use its best efforts to ensure that the material facts contained in the Ruling
Request remain accurate. See "Management." The difference between revenues
and the expenses related to the operation of the Property, including the cost
of maintenance, repairs and improvements, administration, payroll, utilities,
insurance premiums, taxes and assessments, bookkeeping and commissions, debt
service and the Property Management Fee will be retained by the Company. In
no event will the Property Management Fee exceed the rates prevailing for
comparable services in the localities where the Properties are located.
See "Compensation of Advisor and Affiliates." If West Coast Realty
Management, Inc., retains independent management companies to perform a
portion or all of the services in connection with the management of the
Properties, it will be responsible for and pay any fees charged by these
persons without additional cost to the Company. The Property Management Fee
does not include, and West Coast Realty Management, Inc. will not be
responsible to pay, any fees or expenses paid to on-site property managers.
DIVIDENDS. The Company will declare Dividends on a monthly basis, payable to
Shareholders of record on the first of the month, and will pay those Dividends
quarterly. The Company will declare and pay Dividends in such amounts as the
Directors determine, based upon the cash flow of the Properties, the
operations of the Company and its financial condition. However, the Company's
policy will be to pay Dividends to Shareholders aggregating annually at least
95% of its Taxable Income (which term is different from Cash Available For
Distribution or Cash From Sales or Refinancings). Commencing January 1, 1993,
the Advisor and WCRM agreed to waive their administrative services
reimbursement and a portion of the Property Management Fee, until
November, 1994. The effect of the foregoing was to increase Dividends
approximately $.10 to $.15 per Share per year. Beginning July 1, 1996, the
Advisor agreed to waive a portion of its Advisory Fees for an indefinite
period. The effect of the foregoing was to increase Dividends approximately
$.02 to $.03 per Share for the period from July 1, 1996 to December 31, 1996.
The Company will seek to comply with provisions of the federal income
tax laws applicable to REITs, and, assuming compliance, income distributed as
Dividends will not be taxable to the Company under federal income tax laws.
Dividends paid by the Company will always be at the discretion of the
Directors, and will depend on the earnings and cash flow of the Company, its
financial condition and other relevant factors. Certain Dividends, or
portions thereof, may not constitute taxable income to the shareholder. See
"Tax Consequences."
Dividends may be restricted under provisions of the Delaware Corporations
Code. Generally, payment of Dividends is permitted only if the Company has
sufficient retained earnings or it meets certain assets and liabilities tests.
If Dividends are paid in violation of these provisions, creditors of the
Company, if any, who are not paid by the Company may be able to recover the
amount of the Dividends, with interest, from Shareholders who had knowledge of
the facts indicating the impropriety of the Dividends.
Dividends totaling $1,128,597, $804,595, $522,614, $221,010, $74,632 and
$50,284 in 1996, 1995, 1994, 1993, 1992 and 1991, respectively, were declared
for Shareholders of record, who owned Shares on the first day of each month,
and paid in the quarter following the record date. Of such amounts,
approximately
23
<PAGE> 32
37%, 24%, 37%, 6%, 46% and 42% in 1996, 1995, 1994, 1993, 1992 and 1991,
respectively, constituted a return of capital. The 1994, 1995 and 1996
dividend distributions are summarized below.
<TABLE>
<CAPTION>
RECORD DATE PER OUTSTANDING TOTAL
DATE PAID SHARE SHARES DIVIDEND
- -------- -------- -------- ----------- --------
<S> <C> <C> <C> <C>
01/01/94 04/29/94 $ 0.058 562,888 $32,648
02/01/94 04/29/94 0.060 568,404 34,104
03/01/94 04/29/94 0.062 590,966 36,640
04/01/94 08/11/94 0.063 610,195 38,442
05/01/94 08/11/94 0.064 620,421 39,707
06/01/94 08/11/94 0.065 637,315 41,426
07/01/94 10/31/94 0.065 637,315 41,426
08/01/94 10/31/94 0.065 688,203 44,733
09/01/94 10/31/94 0.065 747,876 48,612
10/01/94 01/15/95 0.065 811,034 52,717
11/01/94 01/15/95 0.065 844,800 54,913
12/01/94 01/15/95 0.065 880,700 57,246
01/01/95 04/17/95 0.060 911,986 54,719
02/01/95 04/17/95 0.060 945,136 56,708
03/01/95 04/17/95 0.060 1,009,084 60,545
04/01/95 07/14/95 0.060 1,069,217 64,153
05/01/95 07/14/95 0.060 1,109,374 66,562
06/01/95 07/14/95 0.060 1,109,874 66,592
07/01/95 10/16/95 0.060 1,116,891 67,013
08/01/95 10/16/95 0.060 1,151,911 69,115
09/01/95 10/16/95 0.060 1,204,517 72,271
10/01/95 01/15/96 0.060 1,225,398 73,524
11/01/95 01/15/96 0.060 1,261,859 75,712
12/01/95 01/15/96 0.060 1,294,683 77,681
01/01/96 04/15/96 0.060 1,325,404 79,524
02/01/96 04/15/96 0.060 1,371,794 82,308
03/01/96 04/15/96 0.060 1,401,663 84,100
04/01/96 07/15/96 0.0666 1,413,736 94,155
05/01/96 07/15/96 0.0666 1,445,236 96,253
06/01/96 07/15/96 0.0666 1,448,836 96,492
07/01/96 10/15/96 0.0666 1,448,836 96,492
08/01/96 10/15/96 0.0666 1,448,836 96,492
09/01/96 10/15/96 0.0666 1,498,246 99,784
10/01/96 01/15/97 0.0666 1,498,246 99,783
11/01/96 01/15/97 0.0666 1,500,651 99,943
12/01/96 01/15/97 0.0666 1,550,607 103,270
</TABLE>
The amount of distributions necessary to maintain taxable status as a REIT
for the years ended December 31, 1996, 1995, 1994, 1993, 1992, and 1991 was
$670,354, $617,125, $251,456, $171,223, $38,273, and $27,202.
SALE, FINANCING OR REFINANCING OF PROPERTIES. The Company anticipates holding
Properties for a minimum of four years and a maximum of ten years from the date
of each Property's acquisition. The Company is prohibited from selling any
Property to the Advisor or its Affiliates.
The Company's policy will be to purchase Properties, generally on a
moderately leveraged basis. The Company may sell or finance Properties and
reinvest the proceeds in additional Properties which may themselves be
leveraged. Should the Company sell or refinance Properties, the Company may
distribute all or part of the proceeds to the Shareholders. Properties may be
financed at any time depending upon the availability of suitable financing,
satisfactory terms and other factors. The Company also may use funds from the
sale or financing of a Property to finance improvements or additions to any
Property and may use the net proceeds of any financing to purchase the land
underlying any Property which is held subject to a ground lease.
The determination of whether a particular Property should be sold,
financed, or otherwise disposed of will be made after a consideration of
relevant factors, including performance of the Property and market conditions,
with a view toward achieving the principal investment objectives of the Company.
The Advisor and any Affiliates may not have any pecuniary interest, other than
their interest in the Company and pursuant to the other arrangements described
in this Prospectus, in any Property sold or leased by the Company
24
<PAGE> 33
without the approval of a majority of the Directors, including a majority of the
Independent Directors, not otherwise interested in the transaction.
In connection with the sale of a Property, the Company may provide seller
financing as to a portion of the sales price. The terms of payment to the
Company will be affected by the then prevailing economic conditions. Therefore,
the distribution to Shareholders of the proceeds of a sale, if any, may be
delayed until the notes or other property are paid at maturity, sold, refinanced
or otherwise disposed of. In certain cases a significant portion of the
remaining balance of the sales price may be a balloon payment due at a specified
maturity date.
GENERAL RESTRICTIONS. The Bylaws contain certain restrictions on the Company's
investments and activities, including limitations on transactions with
Affiliates, which are more fully described in "Summary of Organization
Documents --"Restrictions on Investments" and "Other Restrictions."
REAL PROPERTY INVESTMENTS
BLOCKBUSTER VIDEO BUILDING.
On February 26, 1991, utilizing the proceeds received from the prior sale
of its Shares, the Company acquired the Blockbuster Video building and
underlying fee ownership in the land (the "Building") located at 6491 Edinger
Avenue in Huntington Beach, California. Huntington Beach is a thriving,
beachside community located in the northwest section of Orange County. The
Building is located on the northwest corner of Edinger Avenue and Edwards
Street -- two busy thoroughfares located in the heart of the city. The Building
is located approximately three miles away from the San Diego Freeway (Highway
405), two miles away from two major shopping malls (Westminster Mall and
Huntington Center), and one mile away from Golden West Community College.
Description. The Building is occupied by a single tenant, a Blockbuster
Video store. Blockbuster Videos, Inc., ("Blockbuster") the tenant, is a large,
Texas-based corporation that operates a national network of video rental stores.
Blockbuster is a subsidiary of the Viacomm Corporation (a component of the
Standard & Poor's 500 Index). The Blockbuster chain has built a reputation of
offering convenient video rental service featuring easy rental and return
privileges, and has established a good reputation in the communities it is
located in by refusing to rent or sell pornographic videos, or those videos
rated "X" or "NC-17" by the Motion Picture Association of America.
Base building construction was completed in January 1991. The primary
contractor was the Newport Construction Company. The total size of the lot is
18,030 square feet. The Building was constructed using a wood frame, on a
concrete slab, with a flat roof. The floors are concrete with carpet and tile
coverings. The building contains a total of 5,200 rentable square feet. Site
improvements include professional landscaping, parking lot lighting, trash
enclosures, asphalt and concrete paving, striping and buffers, and twenty-six
parking spaces located in a parking lot with street access to both Edinger
Avenue and Edwards Street. The landscaping covers approximately 2,591 square
feet or 14% of the total lot area.
The lease with Blockbuster is for ten years, and is a "triple-net" lease
with the tenant responsible for the Building's operating costs including, but
not limited to, taxes, insurance, and common area maintenance. In addition, the
builder has provided warranties on several of the site improvements. The lease
calls for rental payments of $11,180 per month for years one through five
(1991-1995), and $13,416 per month for years six through ten (1996-2000). This
is equivalent to $2.15 and $2.58 per square foot, respectively. Rental income is
recognized on a straight line basis to the extent that rental income is deemed
collectible. In addition, the tenant has the option to renew the lease for
$16,099 per month ($3.10 per square foot) for years eleven to fifteen
(2001-2005), and another option to renew the lease for $19,319 per month ($3.72
per square foot) for years sixteen to twenty (2006-2010). Rental payments began
when Blockbuster occupied the Building on February 19, 1991.
25
<PAGE> 34
Total Purchase Price paid for the Building was $1,676,210. The total
acquisition cost included $1,575,000 payable to the seller, $10,000 in estimated
legal, appraisal, and closing costs, and $90,140 as an Acquisition Fee payable
to the Advisor and Descolin, Incorporated ("Descolin"). Descolin is an affiliate
of the Advisor. The Building was acquired from Edinger & Edwards, a California
General Partnership.
The funds used to acquire the Building were received from the prior sales
of the Company's Shares. Payment of the Acquisition Fee to the Advisor was
deferred until March 11, 1991, the date on which sufficient net proceeds from
the sale of the Company's Shares was sufficient to pay such fee. All other costs
and expenses, including the payment to the seller of the building, were paid on
February 26, 1991 from net proceeds from the sale of the Company's shares.
The Building was initially acquired entirely for cash, with no debt
financing involved. However, on February 8, 1994, the Company financed the
Building by incurring nonrecourse mortgage debt secured by the Building from
Standard Insurance Company in the amount of $600,000. The initial interest rate
is 8.25% per annum and at the end of the fifth year of the loan, the interest
rate will be adjusted to 350 basis points over the five-year Treasury Bond
yield. The monthly payment is currently $4,934. The loan is amortized over 25
years and matures in 10 years.
Competitive Conditions. The Building is located in the heart of Huntington
Beach, a thriving Orange County city which is adjacent to other well-known
communities such as Fountain Valley, Westminster, and Costa Mesa. Although there
are several other video stores in the area of smaller or equal size, there are
no other Blockbuster video stores within two miles of this location.
Although the building currently has a single tenant, it is readily
convertible to another use for a new, retail tenant in the event of vacancy.
Property Operations. The Advisor has determined that the Building is
adequately insured. Although the tenant is obligated by its lease to pay
property taxes, the property taxes in 1996 were approximately $18,000.
General. The material facts considered in purchasing the Building were the
desirability of its location, comparable rents in the area, the high credit
quality of the single tenant, the long-term lease that the sole tenant has
committed to, and the competitive return on investment provided by the net
income from the Building.
The computation of depreciation is based on the cost of the Blockbuster
Video Property including Acquisition Fees and Acquisition Expenses. The
allocation of the cost of the Blockbuster Video Property to the various asset
categories is estimated, based on allocations noted in the property tax
assessments. Depreciation is computed on a straight-line basis over the
component useful life of the assets.
FRESNO PROPERTY
On May 14, 1993, the Company acquired the property described below (the
"Fresno Property"). The cash to acquire the Fresno Property was received from
the sale of the Company's Shares in prior offerings.
Description. The Fresno Property was a newly developed retail building
(the "Fresno Building") with construction completed in April, 1993. The Fresno
Building is located at 1614 North Blackstone, Fresno, California. The Fresno
Building is located close to the center of Fresno, California on the northeast
corner of Blackstone and McKinley. Fresno is located in Central California. The
Fresno Building is located on a lot size of 23,855 square feet, with a building
size of 8,915 square feet. The exterior of the Fresno Building consists of
stucco and glass construction.
The Fresno Building is 100% occupied by two tenants -- Wherehouse
Entertainment, Inc. ("The Wherehouse"-- a music and video retailer), and RTO,
Inc. (which stands for "Rent To Own" -- a home furnishing and appliance rental
company) (collectively "Tenants").
The Wherehouse entered into a ten year lease which commenced April 1, 1993
and was to continue through March 31, 2003. The Wherehouse occupies
approximately 6,000 square feet of the Fresno Building.
26
<PAGE> 35
Prior to the modification of The Wherehouse lease, as described below, monthly
rental payments were to be as follows:
<TABLE>
<S> <C>
April, 1993 to March, 1998: $7,680 per month
(1.28/sq. ft./month)
April, 1998 to March, 2003: 8,820 per month
(1.41/sq. ft./month)
</TABLE>
As possible additional rent, The Wherehouse was scheduled to pay the
Company 3% of gross sales after applying a formula that involves recapture of
rent and expenses that The Wherehouse would pay as a triple net lease tenant.
There were no amounts due on this additional rent through December 1996.
On August 2, 1995, The Wherehouse filed for protection under Chapter 11 of
the U.S. Bankruptcy Code. The Wherehouse continued to pay its rent under the
terms of the original lease through January 1997. In November 1996, the Company
and The Wherehouse agreed to the terms of a new lease, subject to the approval
of the Bankruptcy Court. Under the terms of the First Amendment to Lease (the
"Amendment") dated November 30, 1996, commencing February 1, 1997, The
Wherehouse's lease was converted from a "net" lease to a "gross" lease. At a
minimum, the Company will be paid rent of $54,000 per year ($4,500 per month)
until January 31, 1998 unless the Wherehouse exercises its one time option to
terminate the lease on March 31, 1998. If the lease is not terminated, the
Company will be paid $82,800 per year ($6,900 per month) thereafter to January
31, 2003. The Amendment also provides that commencing January 20, 1997, the
gross rent will be adjusted to an amount equal to 6.5% of gross sales from the
previous eleven months, but such rent shall never be less than the rent paid
during the said period. On April 20, 1998 and each three months thereafter, the
gross rent will be adjusted to an amount equal to 8.2% of gross sales from the
previous calendar quarter, but the rent shall never be less than the rent paid
during said quarter. At this time, the Company does not feel that the gross rent
calculation will exceed the minimum rental amount payable in 1997. The
Wherehouse will also pay for any percentage increase in property taxes over and
above the amount assessed for calendar year 1996, on its pro rata share of
occupied space of the property. The terms and conditions pertaining to options
to renew the lease remain unmodified and are described below.
As a result of the Amendment, the monthly rent payments (based on minimum
rental amounts) was decreased from $1.28 per square foot to $.75 per square foot
(or $4,500 per month) effective February 1, 1997. In addition, the Company
expects to absorb an additional $18,000 in operating expenses that were
previously allocated to The Wherehouse. The total decrease in income as a result
of the Amendment is therefore estimated to be $38,160 per year until February 1,
1998 when the total decrease will be reduced to $28,800 per year. Based on
approximately 1.6 million shares of the Company outstanding, the Amendment would
decrease distributable income by approximately $.02 per share per year, and thus
is not material to the operating results of the Company.
In addition, the Wherehouse has an option to extend its lease for three
five-year periods at the end of the initial lease, or extended term, as follows:
<TABLE>
<S> <C>
February, 2003 to March, 2008: $10,140 per month
April, 2008 to March, 2013: 11,700 per month
April, 2013 to March, 2018: 13,500 per month
</TABLE>
The Bankruptcy Court gave approval to The Wherehouse's plan of
reorganization as well as the modified lease as of February 1, 1997.
RTO entered into a five year lease and occupies approximately 2,915 square
feet of the Fresno Building, with monthly rental payments as follows:
<TABLE>
<S> <C>
April, 1993 to March, 1993: Free Rent
June, 1994 to March, 1997: $3,498 per month
(1.20/sq. ft./month)
April, 1997 to March, 1998: $3,664 per month
(1.25/sq. ft./month)
</TABLE>
27
<PAGE> 36
During the term of the initial lease -- during the Company's
ownership -- rent payments will average $1.21 per square foot per month.
In addition, RTO has an option to extend the lease for two three year
periods at the end of the initial, or extended lease term as follows:
<TABLE>
<S> <C>
April, 1998 to March, 2001: $3,790 per month
April, 2001 to March, 2004: $3,935 per month
</TABLE>
The RTO lease is "triple-net," with the Tenant responsible for paying all
operating expenses including utilities, maintenance, and a pro rata portion of
real estate taxes.
The Fresno Building was acquired from an unrelated third party. In
determining the propriety of the investment in the Building, the Advisor
reviewed (1991-1992) sales information on seven similar retail buildings located
in the vicinity. Based on sales price of $1,330,000, the Fresno Building's
acquisition price was $149.18 per square foot. In contrast, the comparative
sales in the area ranged from $82.56 to $272.95 per square foot, with the
average of all seven buildings equal to $154.59 per square foot. Based on the
comparison of the price per square foot of the Fresno Building Property and the
comparative recent sales price per square foot of the seven properties
comparable in quality to the Fresno Building, it is the opinion of the Advisor
that the acquisition price of the Fresno Building was reasonable.
Property Operations. The Fresno Building is managed by West Coast Realty
Management, Inc. ("WCRM") (the "Property Manager"), an affiliate of the Company.
WCRM charges the Company 3% of the gross rents collected as a management fee for
managing the Property, as allowed by the property management agreement. In the
opinion of the Advisor, the Fresno Building is adequately insured. The property
tax in 1996 was approximately $14,000, with the tenants obligated to pay their
pro rata portion of taxes. Beginning in calendar 1997, approximately 67% of the
property taxes were absorbed by the Company as a provision of the new gross
lease with The Wherehouse.
Terms of Purchase. Total consideration for the Fresno Building paid by the
Company was $1,414,893. The total acquisition cost includes $1,330,000 payable
to the Seller, $4,838 in legal, appraisal, and closing costs, and an $80,056
Acquisition Fee paid to Descolin, Incorporated, an affiliate of the Advisor.
Long-term financing was obtained from Standard Insurance Company of Portland,
Oregon. The long-term financing totals $665,000 and matures in ten years. The
payments will be amortized over a twenty-five year life at an initial interest
rate of 8.25% per annum. At the end of the fifth year, the interest rate will
adjust to 3.25% above the five-year Treasury Bond yield (if adjusted as of June
1, 1993, this would result in an interest rate of approximately 8.65% per
annum). Payments are currently $5,244 per month. The closing costs pertaining to
the long-term financing, of $18,000 were paid by the Seller.
The purchase price was arrived at through arms-length negotiations with the
seller. The sources of funds for the purchase were proceeds from sale of the
Company's Shares, and the financing provided by Standard Insurance Company.
General. The computation of depreciation is based on the cost of the
Fresno Property, including Acquisition Fees and Acquisition Expenses. The
allocation of the cost of the Fresno Property to the various asset categories is
estimated, based on allocations noted in the appraisal report. Depreciation is
computed on a straight-line basis over 39 years, the component useful life of
the assets.
OPTO-22 PROPERTY
On September 15, 1993, the Company acquired the property described below
(the "OPTO-22 Property" or "Building"). The funds used to acquire the OPTO-22
Property were obtained from the sale of the Company's Shares and from
seller-provided financing in connection with the acquisition of the OPTO-22
Property.
Description. The OPTO-22 Property is located within the master-planned
Huntington Beach Industrial Park at 15461 Springdale (at the intersection of
Springdale Street and McFadden Avenue), Huntington Beach, California. The
Building was built in 1977, and was occupied by a company named OPTO-22 from
1979
28
<PAGE> 37
through 1992. In August 1992, OPTO-22 subleased the Building to Claremont High
School, a private school, whose sublease runs through April 1997. The Building
was deeded over to the Seller in May 1993 by the John Lusk Corporation via a
Deed in Lieu of Foreclosure.
Situated on approximately 3.34 acres of fee land, the Building is concrete
tilt-up construction. The Building has approximately 25,866 square feet of fully
improved office area, 24 foot height clearance, is fully sprinklered, and has
two overhead truck doors as well as one exterior, two-bay truck loading well. In
addition, the site contains ample parking with approximately 201 spaces, and has
three separate driveway entrances for ingress and egress.
The Huntington Beach Industrial Park is a master-planned development of the
Lusk Company. This industrial park contains over 1.5 million square feet of
space, and benefits from its close proximity to labor markets and desirable
housing as well as access to the San Diego (405) Freeway. Also located within
one mile are the Westminster Mall, Golden West Community College, and a
McDonnell Douglas Corporation facility.
The OPTO-22 Property is currently occupied by Claremont High School, a
private school, under a sublease that commenced in August 1992 and continues
until April 1997. Claremont High School is a non-profit, public benefit,
tax-exempt educational institution that serves students in the 7th through 12th
grade levels, and has been in existence since 1975. Claremont is accredited by
the Western Association of Schools and Colleges, and is also certified by the
University of California system. Since taking occupancy of the Building,
Claremont has spent an estimated $200,000 on improvements and upgrades to the
interior of the building.
The Building was previously occupied by OPTO-22, the primary lessee, which
took occupancy in 1979, and subleased the Building to Claremont High School in
August, 1992. OPTO-22's lease on the Building ends at the same time that
Claremont High School's sublease ends with OPTO-22. The primary lease on the
property currently calls for rent of $19,709.41 per month. Claremont High School
currently pays a sublease rent $3,690.59 per month higher than OPTO-22's rent.
At this time, the Company is negotiating with Claremont High School in an
attempt to retain the school as a tenant. The Company expects to at least retain
the school as a tenant on a month-to-month basis through August 1997. Failure to
re-negotiate an extension of the existing lease could require the Company to
expend $100,000 to $200,000 in capital refurbishing costs (in order to attract a
qualified tenant) and result in a vacancy at the property for two to four
months.
The lease is "triple-net" with the Tenant responsible for all operating
expenses including utilities, maintenance, taxes, and insurance.
The OPTO-22 Building was acquired from Glendale Federal Bank (the
"Seller") -- an unrelated third party. In determining the propriety of the
investment in the Building, the Advisor reviewed 1991 and 1992 sales information
on several similar properties in the vicinity. Based on the sales price of
$2,350,000, the OPTO-22's acquisition price was approximately $38.90 per square
foot. In contrast, the comparative sales in the area ranged from $42 to $65 per
square foot, with the average of all the buildings equal to $45 per square foot.
In addition, the Advisor took note that the monthly rental being paid by OPTO-22
is less than current market rents in the area, especially in comparison to the
sub-lease rent being paid to OPTO-22 by Claremont High School for this property.
Based on (1) comparison of the price per square foot of the OPTO-22 Building,
and the comparative recent sales price per square foot of several properties
comparable in quality to the OPTO-22 Building, and (2) the comparison of current
rental revenue on the building to current market rental rates for the area, it
is the opinion of the Advisor that the acquisition price of the OPTO-22 Building
is reasonable.
Property Operations. The OPTO-22 Building is managed by West Coast Realty
Management, Inc. ("WCRM") (the "Property Manager"), an Affiliate of the Company.
WCRM charges the Company 3% of the gross rents collected as a management fee for
managing the Property, as allowed by the Property Management Agreement. In the
opinion of the Advisor, the OPTO-22 Building is adequately insured. Although the
tenant is obligated by their leases to pay property taxes, the property tax in
1996 was approximately $24,000.
29
<PAGE> 38
Terms of Purchase. Total consideration for the OPTO-22 Building paid by
the Company was approximately $2,500,000. The total acquisition cost included
$2,350,000 paid to the Seller, approximately $7,000 in legal, appraisal, audit,
and closing costs, and a $143,000 Acquisition Fee paid to Descolin,
Incorporated, an affiliate of the Advisor. Financing of $1,750,000 was obtained
from the Seller, with the remainder of the acquisition costs, approximately
$779,000, paid in cash. The $1,750,000 financing was in the form of a ten year
note, that is being amortized over a thirty year period. The note has an
adjustable interest rate that began at approximately 7.0%, and will adjust to
three hundred basis points (3.00%) above the Federal Reserve Board Eleventh
District Cost of Funds Rate every year. Payments on the note are currently
$12,723 per month.
The purchase price was arrived at through arms-length negotiations with the
Seller. The source of funds for the purchase were proceeds from the sales of the
Company's Shares, and Seller-provided financing (the Seller is a large bank and
lender).
General. The computation of depreciation is based on the cost of the
OPTO-22 Property, including Acquisition Fees and Acquisition Expenses. The
allocation of the cost of the OPTO-22 Property to the various asset categories
is estimated, based on allocations in the appraisal report. Depreciation will be
computed on a straight-line basis over the component useful life of the assets.
NORTH PALM STREET PROPERTY
On March 4, 1994, the Company acquired the investment described below (the
"North Palm Street Building"). The funds to acquire the North Palm Street
Building were available as the result of the sale of the Company's Shares in a
prior offering and the proceeds from seller-provided financing in connection
with the acquisition.
Description. The North Palm Street Building is an industrial/research and
development building located at 260 North Palm Street, Brea, California. The
North Palm Street Building was built in 1989 and is located within a
master-planned business park. The North Palm Street Building is currently
occupied by two tenants:
M.L.E. Corporation ("MLE"), which occupies 27,831 square feet of the North
Palm Street Building, is a contract office furniture supplier. In addition to
the warehousing and distribution functions in the North Palm Street Building,
MLE maintains a retail showroom for both contract and walk-in customers. MLE,
which has been in business since 1982, commenced their lease on February 1, 1991
and the lease terminates on May 31, 1999. The lease calls for payments of
$11,143 per month through its term ($.40 per square foot).
Surgical Technologies Incorporated ("Surgical") occupies 14,100 square feet
(including a 1,000 square foot mezzanine office). Surgical provides contract
sterilization, assembly and packaging of medical devices. Surgical is a
subsidiary of Minnesota-based Scanlan International, which has been supplying
stainless steel surgical instruments to the medical profession since 1921. The
term of Surgical's lease is from December 15, 1993 to December 14, 1999 and
requires rent payments of $6,819 per month ($.4836 square foot) from December
15, 1993 to December 14, 1998, and $7,077 per month ($.5019 per square foot)
from December 15, 1998 to December 14, 1999.
The Surgical lease is "triple-net" with the tenant responsible for all
operating expenses including utilities, maintenance, taxes and insurance. The
MLE lease is "semi-net," with the tenant paying their pro-rated share of
expenses, taxes and maintenance over the base year 1990/1991.
The North Palm Street Building is located on Palm Street between Imperial
Highway and Lambert Road in Brea, approximately two miles west of the Orange
Freeway (State Highway 57). This is an established industrial area serving North
Orange County, California. Construction of the North Palm Street Building is
concrete tilt-up with a sandblasted exterior and glass on two levels. Five
thousand (5,000) square feet of the building is improved with an office
environment, including 1,000 square feet on the mezzanine space. A "bonus"
mezzanine of approximately 1,300 square feet is available for a future second
story office, but is not currently included in the rentable area. The North Palm
Street Building features a 24 foot minimum clearance, with a fire sprinkler
system and skylights/smoke vents equaling 2% of the roof area for high pile
storage capacity. The North Palm Street Building has four dock high truck doors
and three grade level doors, as well as parking for eighty-five cars. The North
Palm Street Building was acquired from an unrelated third party. In
30
<PAGE> 39
determining the propriety of the investment in the North Palm Street Building,
the Advisor reviewed recent (1992-1993) sales information on several similar
properties in the vicinity. Based on the sales price of $2,100,000, the North
Palm Street Building's acquisition price is approximately $50 per square foot.
In contrast, the comparative sales in the area ranged from $52 to $65 per square
foot, with the average of all buildings equal to $55 per square foot. In
addition, the long-term lease commitments that the two tenants had for this
property made this a desirable acquisition.
Property Operations. The North Palm Street Building is being managed by
West Coast Realty Management, Inc. ("WCRM") (the "Property Manager"), an
affiliate of the Company. WCRM charges the Company 3% of the gross rents
collected as a management fee for managing the North Palm Street Building, as
allowed by the Property Management Agreement. In the opinion of the Advisor, the
North Palm Street Building is adequately insured. Although the tenants are
obligated by their leases to pay property taxes, the property tax in 1996 was
approximately $24,000.
Terms of Purchase. Total consideration for the North Palm Street Building
paid by the Company was approximately $2,248,000. The total acquisition cost
included $2,100,000 paid to the Seller, $18,000 in legal, appraisal, audit and
closing costs, and a $130,000 Acquisition Fee paid to Descolin, Incorporated, an
affiliate of the Advisor. Financing of $1,000,000 was obtained from the Seller,
with the remaining acquisition costs and acquisition price being paid in cash
(approximately $1,248,000). The source of cash was funds received in connection
with the sale of the Company's shares and $600,000 in long-term refinancing
proceeds received in connection with the Blockbuster Video Building. The
$1,000,000 Seller financing was in the form of a Purchase Money Note, payable
monthly, interest only, at the rate of 8% per annum; $500,000 principal amount
of the note was due March 4, 1995 and $500,000 principal amount of the note was
due March 4, 1996. Payments were $6,666.67 per month. The $1,000,000 Sellers
note was refinanced in February 1995 by a $1,000,000 promissory note from an
insurance company at a fixed rate of 9.5% per annum amortized over 25 years,
with monthly principal and interest payments of $8,737.
The purchase price was arrived at through arms-length negotiations with the
Seller.
General. The computation of depreciation is based on the cost of the North
Palm Street Building, including Acquisition Fees and Acquisition Expenses. The
allocation of the cost of the North Palm Street Building to the various asset
categories is estimated, based on allocations in the appraisal report.
Depreciation is computed on a straight-line basis over the component useful life
of the assets.
RIVERSIDE MARKETPLACE PROPERTY
On November 29, 1994, the Company acquired the property described below
(the "Riverside Marketplace Property"). The sources of funds used to acquire the
Riverside Marketplace Property were from the sale of the Company's Shares in the
current and most recent offering, and from bank-provided financing in connection
with the acquisition.
Description. The Riverside Marketplace Property is a six-plex cinema
located at 4040 Vine Street, Riverside, California. The construction of the
Riverside Marketplace Property was completed on June 24, 1994, and is located in
a newly developed retail area (the Riverside Marketplace) containing
restaurants, including Golden Corral, Applebees, and The Old Spaghetti Factory,
retail shops, and the Riverside Marketplace Property. This area is between the
91 Freeway and the Metrolink train station in Riverside. University Avenue -- a
main thoroughfare of Riverside -- runs through the Riverside Marketplace area.
Downtown Riverside is less than six blocks away. The Riverside Marketplace is
similar in design to University Studio's CityWalk (located in Universal City,
California) and the 3rd Street Promenade (located in Santa Monica, California).
Both developments have been successful in drawing large numbers of local
residents and tourists to the clean and safe entertainment facilities that they
offer.
Lease. The sole tenant of the Company's Riverside Marketplace Property is
Sanborn Theaters, Inc. (the "Tenant"), which does business under the name of
SoCal Cinemas. The Tenant operates seven theaters housing thirty-nine screens in
the Southern California area. The Tenant's lease commenced on June 24, 1994,
which was also the completion date of construction for the Riverside Marketplace
Property and the day it
31
<PAGE> 40
opened for business. The six screen theater has seating for 1,586 and contains
30,493 square feet. There is parking available for 483 cars in an adjacent
parking lot, approximately one-half of which is owned by the Company.
The Tenant's lease is for twenty years, and is scheduled to expire on June
15, 2014. The lease calls for the following minimum rental amounts per month,
with the equivalent monthly rent per square foot set forth in the parentheses:
<TABLE>
<S> <C> <C> <C>
First Five years -- $31,250 $(1.02)
Years 6 through 10 -- $32,813 (1.08)
Years 11 through 15 -- $34,453 (1.13)
Years 16 through 20 -- $36,176 (1.19)
</TABLE>
The lease gives the Tenant the option to renew up to five consecutive terms
of five years each, with the minimum rent amount continuing to increase 5%
during each five year period.
The lease also provides that 10% of the theater's gross sales (including
concessions) would be payable to the Company, if that amount exceeds the monthly
minimum rent, less film rental costs. The lease is triple net, with all taxes,
insurance and maintenance costs to be paid by the Tenant.
Property Operations. The Riverside Marketplace Property is managed by West
Coast Realty Management, Inc. ("WCRM"), an Affiliate of the Company. WCRM
receives a property management fee for managing the Riverside Marketplace
Property equal to 3% of the gross rents collected as provided in the Property
Management Agreement. In the opinion of the Advisor, the Riverside Marketplace
Property is adequately insured. Although the Tenant is obligated to pay property
taxes, the property tax in 1996 was approximately $37,000.
Terms of Purchase. The Riverside Marketplace Property was acquired from an
unrelated third party -- Birtcher Riverside Marketplace Partners, Ltd., a
California Limited Partnership. A movie theater is an unusual real estate
investment in that comparable rental and price per square foot information for
other retail shops and restaurants in the area may not provide a readily
comparable method of evaluating the revenues and cost of this type of property.
However, there are several factors that provided a positive basis for its
acquisition, including:
1. A long-term, triple-net lease, with increased rental potential due to
revenue sharing provisions.
2. Success of similar entertainment venues in Universal City and Santa
Monica.
3. The property acquired is new construction.
4. Credit-worthiness and positive operating history of the Tenant.
5. Absence of significant theater competition in the general area.
Based on the seller's price of $3,425,000, the sales price per square foot
of the Property is $112.32. In the opinion of the Company's Advisor, the price
paid was reasonable.
The total consideration paid by the Company for the Riverside Marketplace
Property was $3,655,500. The total acquisition cost included $3,425,000 paid to
the Seller, $40,500 in legal, appraisal, and closing costs, and a $190,000
Acquisition Fee paid to the Advisor. Financing of $1,200,000 was obtained from
Chino Valley Bank, with the remaining acquisition costs, $2,445,500, paid in
cash. The source of funds for the cash payment was proceeds received from the
sale of the Company's Shares. The $1,200,000 financing is in the form of a first
trust deed and note, amortized over a twenty-eight year, three month period at a
fixed interest rate of 9.25% per annum, with payments of principal and interest
of $9,988 per month. The principal balance is fully due and payable in ten
years. Financing charges of $24,000 for the loan were paid at the close of
escrow. Such amount is not included in the costs described above.
The purchase price was arrived at through arms-length negotiations with the
Seller.
32
<PAGE> 41
General. The computation of depreciation for the Riverside Marketplace
Property is based on the cost of the property including Acquisition Fees and
Acquisition Expenses. The allocation of the cost of the Property to the various
asset categories is estimated, based on allocations in the appraisal report.
Depreciation is computed on a straight-line basis over the component useful life
of the assets.
SAFEGUARD BUSINESS SYSTEMS PROPERTY
On May 22, 1995 the Company acquired the investment described below (the
"Safeguard Business Systems Property" or the "Property"). The funds to acquire
the Safeguard Business Systems Property were available as the result of the sale
of the Company's Shares and the receipt of proceeds from insurance company
financing in connection with the acquisition.
Description. The Safeguard Business Systems Property is a two story office
building located at 14661 Franklin Avenue, Tustin, California. This area is near
the Santa Ana (Interstate 5) Freeway, and also has access to the Newport (55)
and San Diego (405) Freeways in the general vicinity. The retail development of
the Tustin Marketplace, Costco, Super K-Mart, and Tustin Auto Mall have also had
a positive influence in the area.
The sole tenant of the Property is Safeguard Business Systems (the
"Tenant"), which occupies 100% of the Property. The Tenant, which was founded in
1913, develops and manufactures economical, easy-to-use products and services
that collect, record and organize data for small businesses. The Tenant has
built what it believes to be the Country's largest distribution sales force that
specifically targets small business. In 1993, the Tenant had net sales of
approximately $197 million and earnings from continuing operations of
approximately $22 million. Safeguard also reported stockholder equity in 1993 of
approximately $156 million, and long term debt of approximately $19 million.
Safeguard is a privately held firm, and does not release complete audited
financial statements to the public.
The Property is a two story building that contains 40,000 rentable square
feet, and was built to suit for Safeguard Business Systems in 1986. Solar gray
glass accents the sandblast finish and exposed concrete walls. Granite tile
pavers and patterned concrete, coupled with an open two story lobby, provide an
entrance to the building. The interior finish is paint or textured wall
coverings, placed over drywall. A security card system is used at the front and
rear of the property. There is parking available for 149 cars. The building is
landscaped, has kitchen facilities, and men's and women's locker and shower
improvements for the benefit of the employees.
The Tenant's lease commenced October 1, 1994, and is scheduled to terminate
eleven years from that date (September 30, 2005). The rent for the current lease
year is $520,000/year (or $43,333/month), with the rent scheduled to increase 3%
per year, on the lease anniversary date. The lease is absolute triple net,
including the potential cost of repair and replacement of the roof and
structure. The Tenant has the option to renew the lease for one ten year period
at the end of the lease period, at the fair market rent in effect at that time.
The lease payments currently scheduled under the terms of the existing lease,
using October 1, 1994 as a starting point (commencement date for current lease),
are as follows:
<TABLE>
<S> <C>
10/1/94 - 9/30/95: $520,000
10/1/95 - 9/30/96: 535,600
10/1/96 - 9/30/97: 551,668
10/1/97 - 9/30/98: 568,218
10/1/98 - 9/30/99: 585,265
10/1/99 - 9/30/00: 602,822
10/1/00 - 9/30/01: 620,907
10/1/01 - 9/30/02: 639,534
10/1/02 - 9/30/03: 658,720
10/1/03 - 9/30/04: 678,482
10/1/04 - 9/30/05: 698,832
</TABLE>
33
<PAGE> 42
Of course, the Company's ownership of the property, and participation in
lease income, did not begin until date of acquisition. The average straightline
rent earned during the Company's projected ownership period (the remaining life
of the lease) was calculated to be $50,914/month ($6,313,382 scheduled rent
divided by one hundred twenty-four months (rounded)).
The Property was acquired from an unrelated third party -- BRS-Tustin
Safeguard Associates, A California Limited Partnership. Several methods of
economic analysis were used to determine the propriety of the purchase price,
and economic feasibility of the property, prior to acquisition. A review of
rental rates for similar size and style buildings in the nearby communities of
Costa Mesa, Irvine, and Newport Beach revealed rental rates ranging from
$1.73/sq. ft to $1.90/sq. ft. The current monthly rental rate on this building
is $1.09/sq. ft., meaning that the Property could possibly rent at a higher rate
than currently in place if exposed to the open market. Comparable market listing
and sales activity was also reviewed by the Advisor. These revealed the sales
price per square foot for similar buildings in the area to range between $88.00
and $121.00 per square foot. The $115.00 per square foot that the Company is
paying for this building is comparable to these numbers. Other positive factors
considered in acquiring the Property included:
1. A long-term, triple-net lease, with the potential for lease extension.
2. The property acquired is relatively new construction.
3. Credit-worthiness and positive operating history of the tenant.
In the opinion of the Advisor, the total sales price of $4,600,000 that the
Company paid for this property is reasonable.
Property Operations. The Safeguard Business Systems Property is managed by
West Coast Realty Management, Inc. ("WCRM"), an affiliate of the Company. WCRM
will charge the Company 3% of the gross rents collected as a management fee for
managing the Property, as allowed by the Property Management Agreement. In the
opinion of the Advisor, the Safeguard Business Systems Property is adequately
insured. Although the tenants are obligated to pay property taxes, the property
tax in 1996 was approximately $49,000.
Terms of Purchase. Total consideration paid by the Company for the
Safeguard Business Systems Property was $4,862,000. The total acquisition cost
included $4,600,000 paid to the Seller, $13,000 in legal, appraisal, and closing
costs, and a $249,000 Acquisition Fee paid to the Advisor. Financing of
$2,300,000 was obtained from Business Men's Assurance Company (an insurance
company), with the remaining acquisition costs and acquisition price being paid
in cash ($2,576,000). The source of cash was funds received in connection with
the sale of the Company's Shares. The $2,300,000 financing was in the form of a
first trust deed and note, amortized over a fifteen year period at the fixed
rate of 9.625% and fully due and payable in ten years. The loan amount
represents an assumption of an existing loan from the seller of the property.
There were no financing costs or points charged in connection with the
financing. Payments on the debt are $24,191 per month.
The purchase price was arrived at through arms-length negotiations with the
Seller.
General. The computation of depreciation for the Safeguard Business
Systems Property is based on the cost of the property, including Acquisition
Fees and Acquisition Expenses. The allocation of the cost of the Property to the
various asset categories was estimated, based on allocations in the appraisal
report. Depreciation is computed on a straight-line basis over the component
useful life of the assets.
TECHNOLOGY DRIVE PROPERTY
On October 31, 1995, the Company acquired the investment described below
(the "Technology Drive Property" or the "Property"). The funds to acquire the
Technology Drive Property were available as the result of the sale of the
Company's Shares in the current offering, and the receipt of proceeds from bank
financing assumed in connection with the acquisition.
34
<PAGE> 43
Description. The Technology Drive Property is a single story light
industrial/research & development building located at 4415 Technology Drive,
Fremont, California. This area is near the Interstate 680 and 880 Freeways (it
is one block east of Interstate 880), and is accessible via the Auto Mall
Parkway off-ramps from both freeways. The Property is located in an established
neighborhood of research and development and industrial projects.
The primary tenant of the Property is CMS Welding & Machining (the
"Tenant"). The tenant, which was founded in 1983, is a manufacturer of welded
vacuum chambers, used in the processing of semiconductors. This privately-held
company had over $7 million in revenues in 1994, and has been profitable for the
last two years. The Tenant has subleased approximately 20,000 square feet of the
space to Macotron Systems, Inc. (the "Sub-tenant"). This sub-lease commenced on
March 1, 1995, and expires March 1, 1998. The $11,000 rent per month that the
Sub-tenant pays is collected entirely by the Company, and the Tenant's rent
obligation is credited for the amount collected from the Sub-tenant. Macotron
Systems also has in excess of $7 million in annual revenues. Both leases are
guaranteed by the principals of each company.
The Property is a one story building that contains 58,727 divisible
rentable square feet located on 3.47 acres. Of the 58,727 square feet, 12,000 is
high quality office space. The manufacturing and assembly area is fully air
conditioned with 14,800 square feet of dropped ceiling. High quality concrete
and tilt-up construction was used to build the Property. Smoked glass is used
extensively to provide a modern appearance to the building. The building is
fully sprinklered for fire prevention purposes. The Property has two dock high
and two grade level doors. There is parking available for 213 cars. Each tenant
has a separate entrance area with two different reception areas.
The Tenant's lease commenced November 2, 1993, and is scheduled to
terminate on February 28, 2005. The current minimum monthly rent schedule (as of
the beginning of 1995) is as follows:
<TABLE>
<S> <C>
1/1/95 - 2/28/95: $ 16,200
3/1/95 - 3/31/95: 19,538
4/1/95 - 7/31/96: 30,976
8/1/96 - 8/31/96: 31,786
9/1/96 - 1/31/99: 32,596
2/1/99 - 2/28/99: 34,633
3/1/99 - 1/31/00: 36,670
2/1/00 - 2/28/00: 37,220
3/1/00 - 1/31/01: 37,770
2/1/01 - 2/28/01: 38,337
3/1/01 - 1/31/02: 38,903
2/1/02 - 2/28/02: 39,487
3/1/02 - 1/31/03: 40,070
2/1/03 - 2/28/03: 40,671
3/1/03 - 1/31/04: 41,272
2/1/04 - 2/28/04: 41,891
3/1/04 - 2/28/05: 42,510
</TABLE>
In addition to the above, the seller of the property paid the Company an
additional $15,390, after the close of escrow, as a rent supplement covering the
period from October 31, 1995 to August 15, 1996. This amount was treated as a
reduction in the cost of the property.
There are certain provisions in the lease with the primary tenant that call
for a minimum 3% rental increase and a maximum 7% rental increase based on the
Consumer Price Index for the San Francisco/Oakland area, based on the average
annual increase for the following three periods: 1/95-1/99; 1/99-1/2001; and
1/2001-1/2003. The total scheduled rent, beginning with the Company's ownership
date (October 31, 1995) is $4,140,528. This works out to an average of $36,969
per month through February 28, 2005 (112 months).
35
<PAGE> 44
The Property was acquired from unrelated third parties -- 26 Technology
Partnership, A California Limited Partnership and Jack Langston, an individual
(collectively known as "the Seller"). Several methods of economic analysis were
used to determine the propriety of the purchase price, and economic feasibility
of the property, prior to acquisition. A review of rental rates for similar size
and style buildings in Fremont (including the immediate business park) revealed
rental rates ranging from $.55 to $.72 per square foot for net leases, and
leases as high as $.80 per square foot for a gross lease. The current monthly
rental rate on this building is $.53, meaning that the Property could possibly
rent at a higher rate than currently in place if exposed to the open market.
Recent occupancy levels in the area have ranged from 90% to 95% due to
significant growth in the technology sector of the nation's economy. Comparable
market listing and sales activity was also reviewed by the Advisor. These
revealed the price per square foot for similar buildings in the area to range
between $43.47 and $88.97 per square foot. Several of the buildings that sold at
the lower range were older and of lower quality, and lacked amenities that are
present in this Property including air conditioning and fire sprinklers. The
$60.45 per square foot that the Company paid for this building is comparable to
these numbers (this number does not include acquisition costs and expenses).
Other positive factors considered in acquiring the Property included:
1. A long-term, triple-net lease, with the potential for lease
extension.
2. The property acquired is relatively new construction.
3. Credit-worthiness and positive operating history of the tenant.
In the opinion of the Advisor, the purchase price of $3,550,000 that the
Company paid the Seller for this property was reasonable.
Property Operations. The Technology Drive Property is managed by West
Coast Realty Management, Inc. ("WCRM"), an affiliate of the Company. WCRM will
charge the Company 3% of the gross rents collected as a management fee for
managing the Property, as allowed by the Property Management Agreement. In the
opinion of the Advisor, the Technology Drive Property is adequately insured.
Although the tenant is obligated to pay property taxes, the property tax in 1996
was approximately $36,000.
Terms of Purchase. Total consideration paid by the Company for the
Technology Drive Property was $3,748,000. The total acquisition cost included
$3,550,000 paid to the Seller, $17,000 in legal, appraisal, and closing costs,
and a $196,000 Acquisition Fee paid to the Advisor. Financing of $2,192,897 with
Manufacturer's Bank of Los Angeles was assumed from the Seller, with the
remaining acquisition costs and acquisition price being paid in cash
($1,570,103). The source of cash was funds received in connection with the sale
of the Company's Shares. The $2,192,897 financing was in the form of a first
trust deed and note, fully amortized over a twenty year period at the fixed rate
of 8.24%. The loan amount represents an assumption of an existing loan from the
seller of the property; the original balance of the loan was $2,200,000 and was
funded on July 1, 1995. There were no financing costs or points charged in
connection with the financing or assumption. Payments on the debt are $18,880
per month.
The purchase price was arrived at through arms-length negotiations with the
Seller.
General. The computation of depreciation for the Technology Drive Property
is based on the cost of the property, including Acquisition Fees and Acquisition
Expenses. The allocation of the cost of the Property to the various asset
categories was estimated, based on allocations in the appraisal report.
Depreciation is computed on a straight-line basis over the component useful life
of the assets.
JAVA CITY PROPERTY
On August 2, 1996, the Company acquired the investment described below (the
"Java City Property" or the "Property"). The funds to acquire the Java City
Property were available as the result of the sale of the Company's Shares in the
previous offering, and the receipt of proceeds from bank financing assumed in
connection with the acquisition.
Description. The Java City Property consists of two single story light
industrial buildings located in the Northgate Industrial Park in Sacramento,
California. The addresses of the two properties are 717 and 721
36
<PAGE> 45
West Del Paso Road. The building sites are in the northern part of Sacramento,
with access to Interstate 80, Interstate 5, and other major freeways.
The buildings are located on a site of approximately 62,173 square feet.
Total building square footage for both buildings is approximately 20,000 square
feet. The subject lot is zoned M-1 industrial by the City of Sacramento. This
zoning allows for a variety of uses, including the existing use. 721 West Del
Paso Road consists of 8,964 total square feet and 717 West Del Paso Road
consists of 11,035 total square feet. Per the provisions of the current lease,
721 West Del Paso consists of 4,347 rentable square feet of warehouse space and
4,293 rentable square feet of office space. Per the provisions of the current
lease, 717 West Del Paso consists of 5,398 rentable square feet of warehouse
space and 5,802 of rentable square feet of office space. The properties were
originally constructed in 1988. The Company believes that there are no deferred
maintenance items that need to be corrected or addressed. The buildings are
constructed using concrete footings (foundation and slab), wood frame wall
designs, and flat/tar gravel roofs. The building has sprinklers for fire
prevention and safety. There is adequate parking in the general business park
area for cars that utilize the Property.
The primary tenant of the Property is Cucina Holdings, Inc. The company
owns and operates forty-one Java City Bakery Cafes and five La Petite
Boulangerie cafes. The Company is popularly known as "Java City". Java City
outlets are located in various areas of California and Arizona, and are
generally in high-visibility, high-traffic locations. These outlets sell high
quality, specialty coffees in a pleasant retail environment setting. In
addition, these outlets sell a selection of sandwiches and baked goods that
complement the sale of coffee. Java City also operates a wholesale operation
that serves approximately seven hundred customer accounts located primarily in
Northern California. The Company's wholesale customers include supermarkets,
gourmet shops, convenience stores, restaurants, universities, airports, and
offices, some of which resell the coffee in whole bean form for home
consumption, while others brew and sell coffee beverages. Approximately 86% of
the Company's sales are from its retail cafe operations and 14% from its
wholesale operations. The tenant was effectively formed in 1993 when Cucina
Holdings, a corporation formed by current management and InterWest Partners (a
Menlo Park Based venture capital firm), purchased the assets of La Petite
Boulangerie from a private investor group in June 1993, and then purchased Java
City in September 1993. Cucina Holdings and Java City are privately held, and
not publicly traded companies.
Java City leases 100% of the rentable square feet in the two buildings
located on the Property. Each building has a separate lease, and both leases are
triple net leases. Both leases expire on August 1, 2003 and there are no options
for extension or purchase of the Property. Java City operates its administrative
offices, coffee bean processing, warehousing facilities, and a Java City retail
outlet out of these two buildings.
The lease payments due on 717 West Del Paso are noted below (rounded to the
nearest dollar):
<TABLE>
<S> <C>
August 1, 1996 to July 31, 1997 $10,004/month
August 1, 1997 to July 31, 1998 10,405/month
August 1, 1998 to July 31, 1999 10,821/month
August 1, 1999 to July 31, 2000 11,254/month
August 1, 2000 to July 31, 2001 11,704/month
August 1, 2001 to July 31, 2002 12,172/month
August 1, 2002 to July 31, 2003 12,659/month
</TABLE>
The least payments due on 721 West Del Paso are noted below (rounded to the
nearest dollar):
<TABLE>
<S> <C>
August 1, 1996 to July 31, 1997 $5,671/month
August 1, 1997 to July 31, 1998 5,898/month
August 1, 1998 to July 31, 1999 6,134/month
August 1, 1999 to July 31, 2000 6,379/month
August 1, 2000 to July 31, 2001 6,635/month
August 1, 2001 to July 31, 2002 6,900/month
August 1, 2002 to July 31, 2003 7,176/month
</TABLE>
37
<PAGE> 46
There are no provisions for consumer price increase adjustments in either
lease. The overall initial rent per square foot is approximately $.76, and this
increases 4% on each lease anniversary date.
The Property was acquired from unrelated third parties -- Thomas Weborg and
Sandra Singer -- husband and wife (90% ownership), and David and Karen
Ewing -- husband and wife (10% ownership) (collectively known as the "Sellers").
Mr. Weborg is President and Chief Executive Officer of Cucina Holdings,
Inc. -- the tenant of the Property. Several methods of economic analysis were
used to determine the propriety of the purchase price, and economic feasibility
of the Property, prior to acquisition. A review of rental rates for similar size
and style buildings and uses in the same general area revealed rates ranging
from $.41 to $.81 per square foot for triple net leases. The current monthly
rent on these buildings is $.76 per square foot, meaning that the Property
currently rents near the highest rate available in this market. However,
considering the good condition of the Property, the quality of the tenant, and
the long-term lease in place, this property at this price is considered to be
desirable. Comparable market listing and sales activity were also reviewed by
the Advisor. These revealed that the price per square foot for similar buildings
in the area range from $40.00 to $97.50. Several of the buildings that were sold
in the lower range were older and of lower quality, and lacked amenities that
are present in the Property, including fire prevention sprinklers. The $86.25
per square foot that the Company is paying for the Property is considered
reasonable given the recent positive movements of price in the market, the
favorable seven year term, and the credit quality of the tenant (this number
does not include acquisition costs and expenses).
In the opinion of the Advisor, the purchase price of $1,725,000 that the
Company is paying the Sellers for this Property is reasonable.
Property Operations. The Java City Property is managed by West Coast Realty
Management Inc. ("WCRM"), an affiliate of the Company. WCRM charges the Company
3% of the gross rents collected as a management fee for managing the Property,
as allowed by the Property Management Agreement. In the opinion of the Advisor,
the Java City Property is adequately insured. Although the tenant is obligated
to pay property taxes, property tax in the first year is estimated to be $18,000
(approximately 1% of the sale price).
Terms of Purchase. Total consideration paid by the Company for the Java
City property was $1,828,500. The total acquisition cost included $1,725,000
paid to the Sellers, $25,323 in legal, appraisal, and closing costs, and $78,177
in Acquisition Fees paid to the Advisor.
There is financing on each building of the Property that is being assumed
by the Company. The financing on the 717 West Del Paso Road building is as
follows:
<TABLE>
<S> <C>
Lender: Business & Professional Bank, Sacramento, CA
Original Loan Amount: $350,000 Payment: $3,413.36/month
Interest Rate: 10% fixed rate Amortization: 25 years
Due Date: November, 2001 Assumption Fee: $3,814
Projected Balance of Debt at time of Purchase: $338,977
Other: Nonrecourse loan; no prepayment penalty
</TABLE>
The financing on the 721 West Del Paso Road building is as follows:
<TABLE>
<S> <C>
Lender: Heller First Capital Corp., Chicago, IL
Original Loan Amount: $405,000 Payment: $3,126/month
Interest Rate: 8% fixed rate Amortization: 25 years
Due Date: June, 2018 Assumption Fee: None
Projected Balance of Debt at time of Purchase: $385,488
Other: Nonrecourse; no prepayment penalty
</TABLE>
Thus, in summary, the total amount of financing/assumption fees that the
Company is paying in connection with the assumption of the above two loans is
$3,814. The balance of the debt at time of purchase was $724,465 with the
remaining cost of acquisition -- including financing fees -- being paid in cash
38
<PAGE> 47
($1,107,849). The source of cash was funds received in connection with the sale
of the Company's shares through April 30, 1996.
The purchase price was arrived at through arms-length negotiations with the
Sellers.
General. The computation of depreciation for the Java City Property is
based on the cost of the Property, including Acquisition Fees and Acquisition
Expenses. The allocation of the cost of the Property to various asset categories
is estimated, based on allocations in the appraisal report. Depreciation is
computed on a straight-line basis over the component useful life of the assets.
TYCOM PROPERTY
On January 17, 1997, the Company acquired the investment described below
(the "Tycom Property" or the "Property"). The funds to acquire the Tycom
Property were available as the result of the sale of the Company's Shares in the
current and previous offerings, and the receipt of proceeds from first trust
deed mortgage financing provided by a bank in connection with the acquisition.
Description. The Tycom Property consists of a two story building, with
underground parking, located at 17862 Fitch Street, Irvine, California. The
Building site is in the southern part of Irvine, with access to Interstate 405
(San Diego Freeway) and State Highway 55 (Costa Mesa Freeway) and is within two
miles of John Wayne Airport (the major commercial airport for Orange County).
The building is located on a site of approximately 92,783 square feet.
Total building square footage is approximately 63,225 square feet (both floors),
while the property has 164 striped parking spaces. These spaces are located both
below the building in a subterranean parking level, and on the side of the
building. The building was constructed using concrete footings foundation, and a
combination of concrete tilt-up and wood frame construction walls, with a flat
tar and gravel roof. The subject lot has been zoned "industrial" by the City of
Irvine. The zoning is designed to preserve city land appropriate for industrial
uses and to attract and preserve desirable manufacturing and
research/development areas. The building is approximately twelve years old.
There are substantial new tenant improvements that are substantially complete at
this time that will enhance the building for office usage. These improvements
include improved air conditioning, Americans with Disabilities Act compliance, a
complete fire sprinkler system, new electrical, new restrooms, and new carpet.
After completion of the improvements, the building will be allocated to
approximately 50% office, 30% research and development, and 20% manufacturing
and storage.
The sole tenant of the Property is Tycom Corporation ("Tycom" or "the
Tenant"). Tycom, a privately held company, is a manufacturer of drill bits and
assorted items used by the semi-conductor and dental industries, and has been in
business for approximately ten years. The Tenant initially purchased this
building and is investing $1.4 million in improvements and renovation. Tycom
sold the building to Brutten/Reynolds/Shidler Investment Corp. ("the Seller") on
December 19, 1996, for an unknown value. The Tenant began occupying the building
December 19, 1996, at which time the provisions of the lease became effective.
The term of the lease is eleven years, and is intended to be a "triple-net"
lease with the Tenant paying for virtually all taxes, insurance, utilities, and
other operating costs of the Property. The base rent is $37,302.75 per month.
Although the rent is fixed, there are provisions for annual rent increases over
the life of the lease based on increases in the consumer price index. The Tenant
has an option to extend the lease for an additional five years.
The Property is being acquired from an unrelated third
party -- Brutten/Reynolds/Shidler Investment Corp. Several methods of economic
analysis were used to determine the propriety of the purchase price, and
economic feasibility of the property, prior to acquisition. A review of rental
rates for similar size buildings and uses in the same general area revealed
rates ranging from $.57 to $.72 per square foot -- all on a triple net basis.
The current monthly rate is set at $.59 per square foot, meaning that the
Property is renting near the lowest rate available in this market for similar
types of buildings. In addition, this Property is occupied by a quality tenant
with a long-term lease in place. Given the fact that vacancy rates in the
surrounding area range from 3% to 5%, the potential for higher rental rates per
square foot is possible given the fact that the
39
<PAGE> 48
Property's current rental rate of $.59/square foot is considered to be on the
low side. Comparable market listing and sales activity were also reviewed by the
Advisor. These revealed the price per square foot for similar buildings in the
area to range from $67 to $77 per square foot. The $73 per square foot that the
Company is paying for the Property is reasonable, considering the approximately
$1,400,000 in tenant improvements that the Tenant has invested into the
Property, the eleven year lease term, and the credit quality of the tenant. (The
$73/square foot figure does not include acquisition fees and expenses, which
will increase the cost per square foot to $77).
In the opinion of the Advisor, the $4,625,000 that the Advisor is paying
for the Property is reasonable.
Property Operations. The Tycom Property is being managed by West Coast
Realty Management, Inc. ("WCRM"), an affiliate of the Company. WCRM will charge
the Company 3% of the gross rents collected as a management fee for managing the
Property, as allowed by the Property Management Agreement. In the opinion of the
Advisor, the Tycom Property is adequately insured. Although the tenant is
obligated to pay property taxes, property tax in the first year is estimated to
be $47,000 (approximately 1% of the sales price).
Terms of Purchase. Total consideration paid by the Company for the Tycom
Property was $4,902,500. The total acquisition cost included $4,625,000 paid to
the Seller, $10,825 in legal, appraisal, and closing costs, and a $266,675
Acquisition Fee payable to the Advisor. In addition, $37,303 was received from
the Seller for the Tenant's security deposit.
Financing was utilized in connection with the acquisition of the Tycom
Property. A short-term promissory note was provided by First National Bank of
San Diego with the following terms:
Original Loan Amount: $2,300,000
Interest Rate: Fixed at 9.25% Term of Loan: One year
Amortization: Interest Only Payments
Monthly Payment: $17,729
Due Date: February 1, 1998
Balance at One year Due Date: $2,300,000
Other: Nonrecourse; no pre-payment penalty; no finance costs or "points".
The Company plans on replacing this financing prior to the due date with a
first trust deed mortgage from a bank with the following expected terms:
Original Loan Amount: $2,300,000
Interest Rate: Fixed at 140 basis points over the five year Treasury Rate (rate
would be approximately 7.65% currently).
Term of Loan: Five year term, with option to extend the loan for an additional
three years using same interest formula, at no additional cost to the Company.
Amortization: Twenty-five years
Monthly Payment: $17,222
Balance at first three year Due Date (estimated): $2,113,653
Other: Nonrecourse; fully assumable for 1% fee; pre-payment penalty in fifth
year only; all financing costs paid by the Seller.
Thus, in summary, the purchase was funded through $2,300,000 in new
financing and $2,565,197 in cash raised from the sale of shares in the current
and previous offerings (this includes assumption of the tenant's security
deposit).
The purchase price was arrived at through arms-length negotiations with the
Seller.
General. The computation of depreciation for the Tycom Property is based on
the cost of the property, including Acquisition Fees and Acquisition Expenses.
The Allocation of the cost of the Property to various asset categories is
estimated, based on allocations in the appraisal report. Depreciation is
computed on a straight-line basis over the component useful life of the assets.
Pro forma financial information is prepared based on information contained in
the signed lease for the property, and assuming that the Seller-provided
financing will be in place for one full year (even though the Company intends on
replacing it prior to the due date with financing having more favorable terms).
40
<PAGE> 49
MANAGEMENT'S DISCUSSION OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company had three prior offerings of its Shares. As of March 18, 1997,
the Company has raised $17,928,612 in capital.
The Company was organized for the purpose of investing in, improving,
holding, and managing equity interests in a diversified number of residential
and commercial properties located in California and the West Coast, while
qualifying as a Real Estate Investment Trust ("REIT"). Properties will be
acquired for cash or on a moderately leveraged basis, with aggregate
indebtedness not to exceed 50% of the Purchase Price of Properties on a combined
basis. The Company intends to hold each property for approximately four to ten
years. See "Investment Objectives and Policies".
The ownership and operation of any income-producing real estate is subject
to those risks inherent in all real estate investment, including national and
local economic conditions, the supply and demand for similar types of
properties, competitive marketing conditions, zoning changes, possible casualty
losses, and increases in real estate taxes, assessments, and operating expenses,
as well as others. See "Risk Factors".
The Company has engaged West Coast Realty Advisors, Inc. to act as the
Company's Advisor. Pursuant to the terms of the Advisory Agreement, the Advisor
provides investment and financial advice and conducts the day-to-day operations
of the Company. The Company, itself, has no employees. See "Management."
RESULTS OF OPERATIONS -- 1996 VS. 1995
Operations for the year ended December 31, 1996 represented a full year of
rental operations for all properties except Java City which was owned for only
five months.
The net income for the year ended December 31, 1996 ($705,636) was higher
than the year ended December 31, 1995 ($649,605) due to the raising of
additional funds and investment of such funds in additional income producing
properties. The Company did not have any adverse events that significantly
impacted net income during the year ended December 31, 1996, and all properties
that have been purchased by the Company have operated at levels equal to current
expectations. All tenants were current on their lease obligations.
Rental revenue increased $685,354 (41%) due to a full year's ownership of
the Technology Drive and Safeguard Building properties (as compared to partial
year ownership in 1995), and partial year ownership for the Java City property.
Interest income decreased $23,853 (25%) due to a new escrow release procedure on
the current offering where new investor funds come into the Company quarterly
rather than daily, thus lowering the amount of excess cash available for
investment.
Operating expenses increased $133,179 (78%) as a reflection of the
additional properties owned during the year. Interest expense increased $260,947
(42%) as a reflection of the additional debt incurred in connection with
property acquisition and refinancing activities. Despite the amount of debt, the
Company remains below the maximum 50% debt maximum allowed by the Company's
by-laws (debt was 48% of property cost (as defined in the by-laws) at December
31, 1996). General and administrative costs increased $106,587 (91%) due to
higher accounting, taxes, and general insurance expense costs related to the
Company's increased size. General and administrative costs increased as a
percentage of revenue going from 6.5% in 1995 to 9.0% in 1996. Much of this
increase was due to $74,361 that the Advisor was paid in 1996 due to the revised
provisions of the Advisor agreement. No advisor fees were earned in 1995.
Depreciation and amortization expense increased $104,757 (41%) as the result of
the ownership of additional properties during 1996 as compared to 1995.
The average number of shares outstanding during 1996 was 1,447,366 vs.
1,117,494 in 1995. Partly because of the greater number of shares outstanding,
the net income per share decreased from $.58 in 1995 to $.49 in 1996. If this
figure is analyzed using flow of funds -- that is net income plus depreciation
expense -- then the amount in 1996 was $.75 per share vs. $.80 in 1995.
41
<PAGE> 50
The decrease in the per share figures is largely due to the imposition of
the Advisory Fee in 1996 ($74,361) which effectively decreased net income and
flow of funds per share by $.05 per share. However, it should be noted that
although the full Advisory fee is recognized on the Statement of Income, the
Advisor agreed to waive collection of $44,061 (59%) of these fees in 1996, and
may elect to waive collection of all or a portion of the fees in the future. The
Advisor's waiver of these fees has been treated as an infusion of equity into
the Company, rather than as a reduction in expenses.
In addition to the added Advisory Fee Expense, the Company had a fairly
large drop in interest income. This was due to relatively lower interest rates
in place for most of 1996 as compared to 1995, and a slower level of new fund
raising from the sale of shares in 1996 as compared to 1995. $3,633,687 was
raised in net proceeds in 1995, while only $2,048,954 was raised in 1996. Thus,
the Company had less funds on hand awaiting investment in 1996 than in 1995.
During the year ended December 31, 1996, the Company declared dividends
totaling $1,128,597, compared to dividends of $804,595 declared for the year
ended December 31, 1995. Cash basis income for the year ended December 31, 1996
was $1,066,537. This was derived by adding depreciation and amortization expense
to net income. Thus, cash distributions this year were greater ($40,898) than
cash basis net income. In contrast, distributions in 1995 were less ($101,154)
than cash basis income. In either event, the Company continues to qualify as a
REIT.
Cash resources increased $567,172 during 1996 compared to a $954,193
increase in 1995. This was the result of normal amounts of investing, financing,
and operating activities that were expected to take place during the year. Cash
provided by operating activities increased by $819,783 with the largest
contributor being $1,066,537 in cash basis income. In contrast, 1995 saw
$2,373,143 in cash being provided by operating activities due to $905,749 in
cash basis income and $1,240,190 being received from the sale of government
securities (such securities were purchased in 1993 primarily). $1,128,597 was
declared as dividends during 1996; this is noted as a large use of cash under
financing activities. This continues the Company's trend of paying virtually all
the cash basis income out to investors in the form of quarterly dividends. Over
the last three years, cash basis income has totaled $2,337,592, while dividend
declarations have totaled $2,311,572 (98% of cash basis income). Financing
activities provided an additional $1,575,889 in cash resources to the Company
via the sale of additional shares in the Company ($2,048,954 in net proceeds),
and $724,465 in financing obtained in connection with the acquisition or
refinancing of properties, less dividends paid of $1,128,597. In contrast,
1995's cash provided by financing activities was $7,228,140 due to $3,633,687 in
proceeds from the sale of additional shares, and a $4,469,647 gross increase in
notes payable, net of dividends paid of $745,172. The sole use of cash in
investing activities in 1996 was $1,828,500 expended for the acquisition of one
property during the year. $755,000 of the funds necessary for obtaining this
property was obtained from debt financing. In contrast, $8,647,090 were used to
purchase additional rental properties in 1995 with $4,469,647 in debt financing
used to facilitate the purchases.
In summary then, the operating performance of the Company continued to
improve as additional funds were raised, additional property was acquired, and
all properties were operated profitably.
RESULTS OF OPERATIONS -- 1995 VS. 1994
Operations for the year ended December 31, 1995 represented a full year of
rental operations for the Blockbuster Video Building, Fresno Village Shopping
Center, OPTO-22 Building, Riverside Marketplace, and Brea properties, and
partial years of operations for the Technology Drive and Safeguard Building
properties.
The net income for the year ended December 31, 1995 ($649,605) was higher
than the year ended December 31, 1994 ($247,068) due to the raising of
additional funds and investment of such funds in additional income producing
properties. The Company did not have any adverse events that significantly
impacted net income during the year ended December 31, 1995, and all properties
that have been purchased by the Company have operated at levels equal to
expectations. All tenants were current on their lease obligations.
42
<PAGE> 51
Rental revenue increased $889,562 (111%) due to a full year's ownership of
the Riverside Marketplace and Brea properties (as compared to partial year
ownership in 1994), and partial year ownership for the Technology Drive and
Safeguard Business Systems properties. Interest income increased $20,397 (20%)
due to a greater amount of cash held during the year awaiting investment and
greater amounts of profits held each quarter awaiting distribution to investors
on the normal distribution timeline.
Operating expenses increased $73,042 (76%) as a reflection of the
additional properties owned during the year. Interest expense increased $317,907
(105%) as a reflection of the additional debt incurred in connection with
property acquisition and refinancing activities. Despite the amount of debt, the
Company remains below the maximum 50% debt maximum allowed by the Company's
by-laws (debt was 49% of property cost (as defined in the by-laws) at December
31, 1995). General and administrative costs increased $46,777 (66%) due to
higher accounting, taxes, and general insurance expense costs related to the
Company's increased size. General and administrative costs decreased as a
percentage of revenue from 7.8% in 1994 to 6.5% in 1995. Depreciation and
amortization expense increased $137,906 (117%) as the result of the ownership of
additional properties during 1995 as compared to 1994. 1994's results were hurt
by the recognition of $68,210 loss on government securities investments during
that year. No loss was recorded in 1995. Net income of $649,605 for 1995 was
$402,537 (163%) higher than 1994.
The average number of shares outstanding during 1995 was 1,117,494 vs.
706,684 in 1994. Despite the greater number of shares outstanding, the net
income per share increased from $.35 in 1994 to $.58 in 1995. If this figure is
analyzed using flow of funds -- that is net income plus depreciation expense and
loss on government securities investments -- then the amount in 1995 was $.80
per share vs. $.61 in 1994. The improvement in results is attributable to a
larger percentage of the Company's assets being invested in income-producing
real estate in 1995 than in 1994, as opposed to investments in relatively lower
yielding money market investments. Although the balance of cash and cash
equivalents was higher at the end of 1995 ($1,450,022) than at the end of 1994
($495,829), the average level of cash on hand during 1995 was lower. In
addition, the rate of increase in total revenues (111%) was much higher than the
rate of increase in general and administrative expenses (66%). General and
administrative expenses represented a smaller percentage of total revenues in
1995 than in 1994 (6.5% in 1995 vs. 7.8% in 1994).
During the year ended December 31, 1995, the Company declared dividends
totaling $804,095, compared to dividends of $522,614 declared for the year ended
December 31, 1994. Cash basis income for the year ended December 31, 1995 was
$905,749. This was derived by adding depreciation and amortization expense to
net income. Thus, cash distributions this year were less ($101,154) than cash
basis net income. In contrast, distributions in 1994 were greater ($89,098) than
cash basis income. In either event, the Company continues to qualify as a REIT.
Cash resources increased $954,193 during 1995 compared to a $284,966 in
1994. This was the result of normal amounts of investing, financing, and
operating activities that were expected to take place during the year. Cash
provided by operating activities increased to $2,373,143 with the largest
contributors being $905,749 in cash basis income and $1,240,190 in proceeds from
the sale of government securities. In contrast, 1994 saw $791,190 in cash being
provided by operating activities due to only $433,516 in cash basis income and
$372,104 being received from the sale of government securities (such securities
were purchased in 1993 primarily). $804,595 (88.8%) of the cash basis income
($905,749) was declared as dividends during the year; this is noted as a large
use of cash under financing activities. This continues the Company's trend of
paying virtually all the cash basis income out to investors in the form of
quarterly dividends. Financing activities provided an additional $7,228,140 in
cash resources to the Company via the sale of additional shares in the Company
($3,633,687 in net proceeds), and $4,469,647 in financing obtained in connection
with the acquisition or refinancing of properties, less cash dividends paid of
$745,172. In contrast, 1994's cash provided by financing activities was
$5,360,233 due to $3,088,804 in proceeds from the sale of additional shares, and
a $2,800,000 gross increase in notes payable, net of dividends paid of $437,803.
The sole use of cash in investing activities in 1995 was $8,647,090 expended for
the acquisition of additional properties during the year. As mentioned above,
$4,469,647 of the funds necessary for obtaining these new properties was
obtained from debt financing. In contrast, only $5,866,457 in funds were used to
43
<PAGE> 52
purchase additional rental properties in 1994. (Note: cash dividends paid were
less than dividends declared due to some dividends being reinvested in
additional shares of the Company).
In summary then, the operating performance of the Company continued to
improve as additional funds were raised, additional property was acquired, and
all properties were operated profitably.
LIQUIDITY AND CAPITAL RESOURCES.
During the year ended December 31, 1996, the Company declared dividends
totaling $1,128,596. Dividends are determined by management based on cash flows
and the liquidity position of the Company. It is the intention of management to
declare dividends, subject to the maintenance of reasonable reserves.
During the year ended December 31, 1996, the Company raised an additional
$2,048,954 in net proceeds as the result of the sale of shares from its third
and fourth public offering. In 1995, the Company raised a net $3,633,687 from a
combination of its second and third public offerings. The Company has used the
net proceeds from these offerings to purchase additional income-producing
properties and to add to the cash reserve balances of the Company as is prudent
given the amount of property now under ownership.
Management uses cash as its primary measure of the Company's liquidity. The
amount of cash that represents adequate liquidity for a "REIT", is dependent on
several factors. Among them are:
1. The relative risk of the Company's operations;
2. The condition of the Company's Properties;
3. The stage in the Company's operating cycle (e.g., money-raising,
acquisition, operating or disposition phase); and
4. The distributions to Shareholders.
The Company is adequately liquid and management believes it has the ability
to generate sufficient cash to meet both short-term and long-term liquidity
needs, based upon the above four points.
The first point refers to the risk of the Company's investments. At
December 31, 1996, the Company's excess funds were invested in a short-term
money market fund.
In February 1991, the Company purchased the Blockbuster Property without
the use of debt, and this property is occupied by an established Standard &
Poor's 500 Company. In May 1993, with the use of moderate leverage, the Company
purchased the Fresno Property, a two tenant retail center that is occupied by
two nationally known retailers. In September 1993, with the use of moderate
leverage, the Company purchased the OPTO-22 Property, a single tenant building
that is leased to an established electronics firm, and sub-leased by an
educational institution that has made significant capital improvements to the
property. In March 1994, with the use of moderate leverage, the Company acquired
the North Palm Street Property, which is occupied by two tenants who have leases
that do not expire until 1999. In November, 1994, with the use of moderate
leverage, the Company acquired the Riverside Marketplace Property, which is
leased by one tenant whose lease expires in 2014. In May 1995, with the use of
moderate leverage, the Company acquired the Safeguard Building Property, which
is leased by one tenant whose lease expires in 2005. In October 1995, with the
use of moderate leverage, the Company acquired the Technology Drive Property,
which is leased by one tenant, whose lease expires in 2005. In August 1996, with
the use of moderate leverage, the Company acquired the Java City Property, which
is leased by one tenant whose lease expires in 2003. In January 1997, with the
use of moderate leverage, the Company acquired the Tycom Property, which is
occupied by one tenant whose lease expires in 2008.
44
<PAGE> 53
The aggregate fees paid to affiliates in connection with these acquisitions
were as follows:
<TABLE>
<S> <C>
Blockbuster.............................................................. 90,141
Fresno................................................................... 80,056
OPTO-22.................................................................. 135,818
North Palm Street........................................................ 127,404
Riverside Marketplace.................................................... 192,602
Safeguard Building....................................................... 259,100
Technology Drive......................................................... 195,612
Java City................................................................ 78,177
Tycom.................................................................... 257,500
---------
1,416,410
=========
</TABLE>
Fees paid to the Advisor and the Property Manager in recent years are as
follows:
<TABLE>
<CAPTION>
ADVISOR WCRM TOTAL
-------- ------- --------
<S> <C> <C> <C>
1996................................................ $173,041 $84,749 $257,790
1995................................................ 607,224 46,947 654,171
1994................................................ 495,880 16,455 512,335
</TABLE>
As to the second point regarding liquidity and use of capital resources,
all properties acquired are relatively new properties and do not have
significant deferred maintenance costs associated with their ownership. In
addition, all seven properties are occupied by "triple-lease" tenants, thus
removing much of the Company's risk pertaining to maintenance and operating
costs.
As to point three, the Company was liquid at December 31, 1996, as it is in
the money raising stage. During the year ended December 31, 1996, the Company's
cash reserves increased by $567,172, primarily due to the sale of the Company's
shares. In addition to the Company's existing reserves, the Company's operations
generated approximately $1,066,000 in cash flow (net income plus depreciation
and amortization expense) during the year ended December 31, 1996, providing an
additional source of liquidity to the Company. At its discretion, the Company
could choose to withhold a portion of this source of cash by not making or
reducing dividend payments to investors, in order to build up cash reserves.
As to point four, the amount of dividends paid to Shareholders was made at
a level consistent with the amount of net income available after application of
expenses. The Company's Advisor does not intend to distribute amounts which will
exceed the level of cash generated from operations available. Commencing January
1, 1993 until November 1994, the Advisor and WCRM, the Property Manager, waived
overhead cost allocations, and Property Management Fees. The effect of the
foregoing was to increase dividends $.10 to $.15 per Share per year. The Advisor
expects to increase the amount of dividends as additional funds are raised,
revenues are increased, and overhead expenses are spread over a larger base of
investor's funds. Beginning July 1, 1996 and continuing indefinitely, the
Advisor waived collection of a portion of the Advisor fees. The effect of the
foregoing was to increase Dividends approximately $.02 to $.03 per Share for the
period from July 1, 1996 to December 31, 1996.
Inflation and changing prices have not had a material effect on the
Company's operations. Operations in the future may be affected as the Company
acquires additional Properties.
The Company currently has no external sources of liquidity (other than
funds that potentially could be received from the sale of additional Shares).
The Company currently has no material capital commitments.
NEW ACCOUNTING PRONOUNCEMENT.
Statement of Financial Accounting Standard No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishment of Liabilities"
(SFAS No. 125) issued by the Financial Accounting Standards Board (FASB) is
effective for transfers and servicing of financial assets and extinguishments of
liabilities occurring after December 31, 1996, and is to be applied
prospectively. Earlier or retroactive application is not permitted. The new
standard provides accounting and reporting standards for transfers and servicing
of financial assets and extinguishments of liabilities. The Company does not
expect adoption to have a material effect on its financial position or results
of operations.
45
<PAGE> 54
MANAGEMENT
DIRECTORS AND OFFICERS OF THE COMPANY. While the Company has a limited
operating history, some of the Directors and officers of the Company have
substantial real estate investment experience. The Directors and officers are
elected annually by the Shareholders and Board of Directors respectively. The
Directors and Officers of the Company are:
<TABLE>
<S> <C>
Philip N. Gainsborough................... Director and Chairman of the Board
W. Thomas Maudlin, Jr. .................. Director and President
Neal E. Nakagiri......................... Secretary
Michael G. Clark......................... Vice President and Treasurer
James W. Coulter......................... Director (1)
George Young............................. Director (1)
Steve Bridges............................ Director (1)
</TABLE>
- ---------------
(1) Independent Director
PHILIP N. GAINSBOROUGH (Born 1938) has, since 1983, been Chairman of the
Board of Directors, President and Director of Associated Financial Group, Inc.
He has been active in the securities and financial services business since 1961.
He has been, and he currently serves as, Chairman of the Board of Directors,
President and Director of Associated Securities Corp. since its organization in
1982. Mr. Gainsborough is also currently the Chairman of the Board of Directors
and Director of West Coast Realty Advisors, Inc., and West Coast Realty
Management, Inc. Mr. Gainsborough is also Chairman of the Board of Directors of
Associated Planners Partnership Services, Inc., Associated Planners Investment
Advisory, Inc. and Associated Planners Insurance Services, Inc. Mr. Gainsborough
is a graduate of the University of Southern California.
W. THOMAS MAUDLIN, JR. (Born 1936) is a Director and President of West
Coast Realty Advisors, Inc., and a Director of West Coast Realty Management,
Inc. He has been active in the real estate area for the past 33 years, serving
as co-developer of high rise office buildings and shopping centers. Mr. Maudlin
has structured transactions for syndicators in apartment housing, including sale
leasebacks, all-inclusive trust deeds, buying and restructuring transactions to
suit a particular buyer, and as a buyer acting as a principal. From 1980 to
present, Mr. Maudlin has been involved in the development of real property in
numerous parts of Southern California. Mr. Maudlin is a graduate of the
University of Southern California.
NEAL E. NAKAGIRI (born 1954) serves as Executive Vice President, General
Counsel, Chief Operating Officer and Secretary of Associated Financial Group,
Inc. He is Vice President for two subsidiaries, Associated Securities Corp. and
Associated Planners Investment Advisory, Inc. He joined the "Associated" group
of companies in March, 1985. He was Vice President of Compliance with Morgan,
Olmstead, Kennedy & Gardner from 1984 to 1985. He was First Vice President and
Director of Compliance with Jefferies & Co., Inc. from 1981 to 1984. He was Vice
President and Director of Compliance at W & D Securities, Inc. from 1980 to
1983. He was an Investigator with the National Association of Securities
Dealers, Inc. from 1976 to 1980. He has a B.A. degree in Economics from UCLA
(1976) and a J.D. from Loyola Law School of Los Angeles (1991). He is a member
of the California Bar and the Compliance and Legal Division of the Securities
Industry Association.
MICHAEL G. CLARK (Born 1956) has served as Vice President/Treasurer of AFG
since January 1988, and served as Controller of AFG from March 1986 to December
1987. Mr. Clark is currently Treasurer of Associated Planners Investment
Advisory, Inc., Treasurer of Associated Planners Insurance Services, Inc.,
Treasurer of Associated Planners Partnership Services, Inc., Treasurer of West
Coast Realty Advisors, Inc., and Treasurer of Associated Securities Corp.. Prior
to joining AFG, Mr. Clark served as Controller for Quest Resources, a Los
Angeles based syndicator and operator of alternative energy projects from
October 1984 to March 1986 and as Assistant Controller for Valley Cable T.V.
from March 1982 through September 1984. In addition, Mr. Clark served as an
auditor for Arthur Young & Co. in Los Angeles from July 1978 to March 1982. Mr.
Clark is a graduate of the University of California, Santa Barbara and has a
Masters of Science degree from the California State University at Northridge.
46
<PAGE> 55
GEORGE YOUNG (Born 1937). Since 1972 has been president of his own company,
now named Internet Link Corporation. The firm specializes in integrating
Internet and Intranet communications into the productive life of enterprises.
They host and develop sites on the World Wide Web; integrate e-mail and
interactive data retrieval applications; and provide content management and
consulting services. Internet Link Corporation is affiliated with Netscape
Communications, Pacific Bell Internet Services and InterNex Information
Services. Mr. Young is a graduate of the University of Southern California.
STEVE BRIDGES (Born 1951) has served as Executive Vice President of Pacific
Building Industries, a general building contractor, from January 1995 to the
present. From July 1986 to January 1995, Mr. Bridges served as Executive Vice
President of Pathfinder Mortgage, a mortgage brokerage firm, and was responsible
for loan production and financing of construction loans. From July 1984 to July
1986 Mr. Bridges was the President of The Muller Company, a real estate
development company, and was responsible for the management of the Company,
developing, financing and joint venture relationships, the development of
800,000 square feet of industrial and commercial real estate and partnership
management. Mr. Bridges is a graduate of the University of Southern California.
JAMES W. COULTER (Born 1938) has since 1988 been a principal in Coulter &
Company, a firm which provides brokerage services and invests in real property
with an emphasis in retail, industrial and office properties. From 1981 to 1988
Mr. Coulter was a Vice President of the investment division of Bishop-Hawk,
Inc., a firm which specializes in commercial real estate. He started the
investment division in Sacramento. Prior to 1981, Mr. Coulter was involved in
real estate investments, property management and development, and served as an
officer of real estate investment trusts. Mr. Coulter is a graduate of and has a
Masters of Business Administration degree from the University of Southern
California.
Gainsborough, Maudlin, Clark, Coulter, Young, and Bridges have served in
their positions with the Company since inception. Nakagiri was named Secretary
of the Company in June 1996, replacing Mr. William T. Haas, who retired from the
Company.
BOARD OF DIRECTORS. The Directors are charged with the ultimate responsibility
for the affairs of the Company, and particularly with monitoring the
relationship between the Company and the Advisor. The Independent Directors will
make an annual determination that the Advisor's compensation is reasonable and
that total fees and expenses of the Company are reasonable, and a quarterly
determination that the Company's borrowings are appropriate.
The Directors are accountable to the Company as fiduciaries and
consequently must exercise good faith and integrity in handling Company affairs.
However, Directors will have no different or greater level of fiduciary duty and
responsibility than do directors of any other Delaware business corporation. In
addition, an Independent Director will not be subject to any greater liability
than a Director who is not independent, notwithstanding the additional
responsibilities of Independent Directors. Directors and officers of the Company
are also entitled to certain indemnity rights under the Company's Organization
Documents. See "Summary of Organization Documents -- Limited Liability and
Indemnification of Directors, Officers, Employees and Other Agents."
The Directors will each spend such time on the affairs of the Company as
their duties may require, and will meet quarterly or more frequently, as
required. Financial statements and various other financial reports of the
Company will be provided to the Directors quarterly to aid them in the discharge
of their duties. It is contemplated that the Directors will not devote a
substantial portion of their time to the discharge of their duties as Directors.
The Directors have the authority to approve or disapprove all investments
recommended to the Company by the Advisor. Prior to an investment being
consummated, all investments recommended to the Company must be approved either
by a majority of the Directors present at a meeting or by written consent of all
of the Directors. If approval is not obtained the investment will not be made.
Certain transactions with the Advisor and its Affiliates require the additional
approval of a majority of the Directors then in office who are not parties to
the transaction or affiliates of any person (other than the Company) who is a
party to the transaction.
Except for payments to Independent Directors, the Company has not paid any
remuneration to its officers and Directors. The Company pays each Independent
Director $500 dollars for each meeting of the Directors attended in person ($100
dollars if attended by telephonic means) and reimburses all Directors for
47
<PAGE> 56
their travel expense and other out-of-pocket disbursements incurred in
connection with attending any such meeting and for carrying on the business of
the Company. The aggregate remuneration paid (exclusive of reimbursement for
expenses) to the Independent Directors for the year ended December 31, 1996 was
$6,600. Directors and officers of the Company who are affiliated with the
Advisor have not received and will not receive compensation from the Company for
their services as Directors and officers of the Company. Such persons will,
however, be remunerated indirectly by reason of their relationship with the
Advisor and its affiliated companies and will be reimbursed by the Company for
their expenses in attending meetings of the Directors and for carrying on the
business of the Company.
ADVISOR. West Coast Realty Advisors, Inc. was organized in 1983 and is an
Affiliate of AFG. In order to obtain the services of persons having substantial
real estate and financial experience, there are no restrictions on the business
activities of the Advisor or any of its officers, directors or employees, and
the Advisor and such persons are free (with certain exceptions) to engage in
other business activities related to real estate investments. See "Conflicts of
Interest."
The Advisor will advise the Company and oversee its investments and
operations, subject to the direction of the Company's Directors. The Advisor's
office is located at 5933 W. Century Boulevard, Ninth Floor, Los Angeles,
California 90045 and its telephone number is (310) 670-0800.
The principal executive officers, directors and key employees of the
Advisor are as follows:
<TABLE>
<CAPTION>
NAME POSITION
----------------------------------------- -----------------------------------------
<S> <C>
Philip N. Gainsborough................... Director and Chairman of the Board
W. Thomas Maudlin, Jr.................... Director and President
Neal E. Nakagiri......................... Secretary
Michael G. Clark......................... Director and Treasurer
</TABLE>
For a description of the occupations and affiliations of Messrs.
Gainsborough, Maudlin, Nakagiri and Clark, see "Directors and Officers of the
Company" above.
PROPERTY MANAGER. West Coast Realty Management, Inc. will act as the property
manager for any Properties acquired by the Company. The principal executive
officers, directors and key employees of the Property Manager are:
Philip N. Gainsborough, Director and Chairman of the Board
W. Thomas Maudlin, Jr., Director (1)
James E. Prock, Director and President
Murli Sujanani, Secretary
David Vazquez, Treasurer
- ---------------
(1) AFG owns 75% and Mr. Maudlin owns 25% of the capital stock of West Coast
Realty Management, Inc.
The Company has received a ruling from the Internal Revenue Service as to
the independent contractor status of West Coast Realty Management, Inc. ("WCRM")
under the REIT provisions of the Code and has therefore contracted with WCRM for
the provision of property management services. (See "Tax
Consequences -- Requirements for Qualification as a REIT".)
For a description of the occupations and affiliations of Messrs.
Gainsborough, Maudlin and Haas see "Directors and Officers of the Company"
above.
JAMES E. PROCK (Born 1935) has over 30 years of experience in the real
estate and construction industries and has been President of West Coast Realty
Management, Inc. since December, 1991. From 1981 to December, 1991, Mr. Prock
was President of Keystate Properties, Inc., a real estate consulting and
brokerage firm which provided acquisition, development and disposition
management services to owners of improved and unimproved properties. Mr. Prock
has Bachelor of Civil Engineering and Master of Business Administration degrees
from the University of Southern California.
MURLI SUJANANI (Born 1950) has served as Senior Vice President/Investment
Research for AFG since 1994, and has been employed by AFG since December, 1990.
From April 1990 to November 1990, Mr. Sujanani served as Vice President/Mortgage
Securities for GMAC-Residential Funding Corporation. From June, 1983 to March,
1990, Mr. Sujanani worked for Dain Bosworth, Inc. in the corporate finance
department
48
<PAGE> 57
as a Vice President where he was responsible for partnership origination and due
diligence work. Mr. Sujanani is a graduate of St. John's University in
Minnesota.
DAVID VAZQUEZ (Born 1962) has served as Assistant Controller of AFG since
April 1995. Prior to joining AFG, Mr. Vazquez served as an auditor for BDO
Seidman LLP in Los Angeles from January 1994 through April 1995, and as an
accounting supervisor for Biggs & Co., a Los Angeles CPA firm from February 1991
through January 1994. In addition, Mr. Vazquez served as a staff accountant for
P. Leiner N.P., a manufacturer and distributor of nutritional products, from
June 1990 through February 1991. Mr. Vazquez has a Bachelor of Business
Administration degree from the California State University, Los Angeles.
PRIOR PERFORMANCE
THE INFORMATION PRESENTED IN THIS SECTION REPRESENTS THE HISTORICAL
EXPERIENCE OF REAL ESTATE PROGRAMS MANAGED BY AFFILIATES OF THE ADVISOR.
INVESTORS IN THE COMPANY SHOULD NOT ASSUME THAT THEY WILL EXPERIENCE RETURNS, IF
ANY, COMPARABLE TO THOSE EXPERIENCED BY INVESTORS IN SUCH PRIOR PROGRAMS.
AFFILIATES OF THE ADVISOR HAVE FORMED THREE LIMITED PARTNERSHIPS DESCRIBED
BELOW. AN AGGREGATE OF $14,644,650 FROM 1,326 INVESTORS WAS RAISED IN THE PRIOR
PROGRAMS. THOSE PARTNERSHIPS HAVE ACQUIRED EIGHT PROPERTIES, 100 PERCENT OF
WHICH WERE EXISTING PROPERTIES, FOR AN AGGREGATE PURCHASE PRICE OF $14,944,404.
FOR THE INVESTMENT EXPERIENCE OF THE COMPANY SEE "REAL PROPERTY
INVESTMENTS" AND "MANAGEMENT'S DISCUSSION OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS".
Associated Planners Realty Fund was formed in 1986, offered an aggregate of
$7,500,000 in Units of Limited Partnership Interests and as of December 31, 1987
had sold an aggregate of $7,499,000 of its Limited Partnership Interests to 704
investors. The proceeds from the offering have been invested in five existing
properties with a total purchase price of $6,670,857. The properties were
purchased for all cash. Three of the properties are office buildings located in
Southern California which were acquired for an aggregate acquisition cost of
$3,858,723 (approximately 58% of the funds expended for investment); a shopping
center in Central California for $1,208,990 (approximately 18% of the funds
expended for investment); and a mini-warehouse in the State of Washington for
$1,603,144 (approximately 24% of the funds expended for investment).
On May 15, 1995, the mini-warehouse located in the State of Washington was
sold to Shurgard Storage Centers, Inc. Associated Planners Realty Fund netted
$1,522,182 as a result of the sale of the property. Proceeds from the sale were
distributed to the partners in accordance with the terms of the Partnership
Agreement in July 1995.
Associated Planners Realty Income Fund was formed in 1987, offered
$12,000,000 of Limited Partnership Interests and as of September 5, 1989, the
date it terminated its offering, had sold a total of $5,096,000 of its Limited
Partnership Interests to 436 investors. It has acquired one existing property, a
shopping center located in Southern California for $1,851,147 cash (which
represents approximately 36% of the amount of funds raised from investors) and,
through a joint venture with its Affiliate Associated Planners Realty Growth
Fund, a 90% interest in an industrial building located in Southern California
for $2,816,000 cash (which represents approximately 55% of funds raised from
investors). None of the properties have been sold.
Associated Planners Realty Growth Fund was formed in 1987, offered
$10,000,000 of Limited Partnership Interests and as of September 5, 1989, the
date it terminated its offering, had sold a total of $2,059,650 of its Limited
Partnership Interests to 186 Investors. It acquired one property, an office
building located in Santa Ana, California for approximately $3,293,400 (which
represented a cash investment of approximately 72% of the amount raised from
Investors), with approximately 46% of the purchase price paid in cash and the
balance through a first mortgage loan. Also, through a joint venture with its
Affiliate, Associated Planners Realty Income Fund, the Partnership purchased a
10% interest in an industrial building
49
<PAGE> 58
located in Southern California for $313,000 cash (which represented
approximately 15% of funds raised from investors).
Although the office building located in Santa Ana, California had been 70%
to 80% occupied in recent years, it had not generated positive cash flow for
Associated Planners Realty Growth Fund due to the drop in rental rates in the
area. The General Partner pursued alternative solutions to improve the cash flow
of the Santa Ana Property and the Partnership. On July 31, 1995, the holder of
the first deed of trust on the property agreed to provide relief by deferring
collection of debt payments due on the loan from September 1995 to January 1996
and adding such debt service payments to the principal balance of the loan and
adjusting the debt service payments commencing February 1, 1996. On March 4,
1996 the Partnership requested that the Lender re-structure the loan on the
ParkCenter Office Building. On April 4, 1996, the Partnership received a reply
from the Lender denying the request to modify the loan and also notified the
Partnership that an event of default had occurred under the deed of trust
securing the loan due to the Partnership's nonpayment of the March 1, 1996 loan
payment. On August 16, 1996, the Partnership and the Lender executed a
deed-in-lieu-of-=foreclosure, in connection with the Park Center Office
Building. On November 1, 1996, the Partnership's 10% interest in the San Marcos
Property was sold to Associated Planners Realty Income Fund (an affiliate) for a
gross purchase price of $188,000. The sales price of the transaction was
established by an independent appraisal of the property. Associated Planners
Realty Growth Fund was dissolved on December 4, 1996 after the final
distribution of $132,564 in proceeds to the limited partners.
The total amount of Units of Limited Partnership Interests ("Units")
offered in Associated Planners Realty Income Fund and Associated Planners Realty
Growth Fund did not generate full sale of such Units and the cash received by
those Prior Programs decreased compared to the amount of Units sold and cash
received by Associated Planners Realty Fund.
The investment objectives of Associated Planners Realty Fund ("Fund I"),
Associated Planners Realty Income Fund ("Income Fund"), Associated Planners
Realty Growth Fund ("Growth Fund") and the Company are the same except that Fund
I and Income Fund acquired their properties for cash without leverage, whereas
Growth Fund acquired, and the Company anticipates acquiring its properties, by
incurring mortgage debt, up to an aggregate of 50% of the Purchase Price of
Properties.
The Advisor will provide to each person to whom this Prospectus is
delivered, upon request and without charge, a copy of the most recent annual
report filed with the Securities and Exchange Commission within the last
twenty-four months by any of the Prior Programs. Requests for such information
should be addressed to West Coast Realty Advisors, Inc., 5933 W. Century
Boulevard, Ninth Floor, Los Angeles, California 90045. Upon request, exhibits to
the annual report will also be provided upon payment of a reasonable fee.
SERVICES PROVIDED BY THE ADVISOR
AND PROPERTY MANAGER
Many of the services to be performed by the Advisor and its Affiliates in
selecting Properties for acquisition by the Company, managing Properties and
communicating with investors are summarized below. This summary is provided to
illustrate the various functions which the Advisor and its Affiliates will
perform for the Company and is not intended to include all of the services which
may be performed by the Advisor and its Affiliates or other services provided by
third parties to the Company.
ADVISORY SERVICES
The Advisory Agreement was renewed until June 30, 1997, by a majority vote
of the Shareholders, and will thereafter be renewable annually with the approval
of a majority of the Shareholders. The Advisory Agreement is not assignable
without the consent of the parties, except for assignments by the Advisor to a
corporation or other person which controls, is controlled by or is under common
control with the Advisor, or by either the Advisor or the Company to a successor
of the business of either of the parties. The Advisory Agreement may be
terminated by the Advisor on 120 days' written notice, or by the Directors, the
Independent Directors or the Shareholders on 60 days' written notice. If for any
reason the Advisory
50
<PAGE> 59
Agreement is terminated, the Directors, subject to Shareholders ratification,
will appoint a new Advisor and the Company has agreed to change its name to one
which does not include "Associated Planners", "West Coast Realty" or any similar
words.
Under the terms of the Advisory Agreement, the Advisor undertakes to use
its best efforts to present an investment program consistent with the investment
policies and objectives of the Company and to obtain investments suitable to
such investment program. In performance of this undertaking, but at all times
subject to the continuing and exclusive authority of the Directors over the
management of the Company, the Advisor will: (i) obtain or furnish and supervise
the performance of such ministerial functions in connection with the
administration of the day-to-day operations of the Company as may be agreed upon
by the Advisor and the Directors; (ii) serve as the Company's investment and
financial advisor and provide research, economic and statistical data with
respect to the making, holding, administration and disposition of the Company's
investments; (iii) investigate, select and oversee outside property managers and
other independent third parties (e.g., consultants, developers, brokers,
appraisers, etc.); (iv) subject to Board approval, make investments consistent
with the policies and provisions of the Company; (v) advise in connection with
negotiations by the Company with investment banking firms, securities brokers or
dealers and other institutions or investors for public or private sales of
securities of the Company, or obtain loans for the Company; and (vi) provide, at
the Company's expense, office space, office furnishings, personnel and other
overhead items necessary and incidental to the Company's business and
operations.
PROPERTY MANAGEMENT SERVICES
The providing of property management services in connection with the
management of the Company's real property investments will, subject to the
supervision of the Advisor and the Directors, be performed by "independent
property managers" (within the meaning of the Code), including WCRM, an
Affiliate of the Advisor, as required by the REIT provisions of the Code. The
Company has received a ruling from the Internal Revenue Service as to the
independent contractor status of WCRM. See "Tax Consequences -- Requirements for
Qualification as a REIT". All or a portion of those services may be contracted
or subcontracted to other unaffiliated independent property management
companies. A separate property management agreement will be entered into with
respect to each real property investment. A copy of the form of the agreement is
filed as an exhibit to the Registration Statement filed with the Securities and
Exchange Commission, of which this Prospectus is a part. The fees payable for
property management services shall in no event be greater than rates charged for
similar services in the area of each real property investment. See "Compensation
of Advisor and Affiliates" and "Conflicts of Interest."
OTHER SERVICES
The Advisor will provide real estate brokerage services in the acquisition,
refinancing or sale of Properties by the Company. The Advisor may utilize the
services of its Affiliates acting for the Company or independent brokers acting
for sellers of Properties to the Company. The Advisor will receive Acquisition
Fees for these Property acquisition services. The Advisor will also receive a
real estate commission for services rendered in connection with the refinancing
or sale of Properties. See "Compensation of Advisor and Affiliates."
The Advisory Agreement provides for an Advisory Fee for regular advisory
services rendered by the Advisor, and a Subordinated Incentive Fee in any fiscal
year that a Property of the Company is sold, financed or refinanced. See
"Compensation of Advisor and Affiliates" for a description of these fees.
Pursuant to the Advisory Agreement, the Advisor is to pay employment
expenses of its senior executives (Chairman, President, Executive and Senior
Vice Presidents and directors), office expenses and other miscellaneous
administrative expenses not relating to the Advisor's performance of its
functions under the Advisory Agreement. The Company will be required to pay its
allocable share of all other expenses at their cost to the Advisor.
Within 60 days after the end of each calendar year, the Advisor will refund
to the Company the amount, if any, by which the Operating Expenses of the
Company during such calendar year exceeded the greater of (a) 2% of the Average
Invested Assets (which is generally defined to mean the book value of the
Company's
51
<PAGE> 60
real estate interests less noncash items) or (b) 25% of Net Income (which is
generally defined as the net profits of the Company) (excluding the gain from
the sale of the Properties for which the Advisor received a Subordinated
Incentive Fee).
Neither the Advisor nor any of its officers and directors nor their
Affiliates will have any obligation to give to the Company a prior right to
acquire or invest in any investment opportunities which may be available to
them. The Advisor will not make investments for its own account of the character
suitable for investment by the Company while the Company has sufficient funds
available to make the investment. The Advisor and its officers and directors
intend, to the extent consistent with the provisions of statutes, regulations
and case law governing their activities, to provide the Company with access to
review investment opportunities generated by them, which are consistent with the
Company's investment policies.
The foregoing is only a summary of the Advisory Agreement. Reference is
made to the Advisory Agreement itself, filed as an exhibit to the Registration
Statement of which this Prospectus is a part, for a complete statement of its
provisions.
TAX CONSEQUENCES
The following summary of the material federal income tax considerations of
the Offering is based on current law, is for general information only and is not
tax advice. The summary is based upon the Internal Revenue Code of 1986, as
currently amended (the "Code"), judicial decisions, administrative regulations
(the "Regulations"), and published rulings and procedures of the Treasury
Department, all of which are subject to change prospectively or retroactively.
This summary is not, and is not intended to be, a complete analysis of all
applicable provisions of the Code, the Regulations and administrative and
judicial interpretations thereof. The summary does not purport to deal with all
aspects of taxation that may be relevant to particular stockholders in light of
their personal investments or tax circumstances, or to certain types of
stockholders (including insurance companies, tax-exempt organizations, financial
institutions or broker-dealers, foreign corporations and persons who are not
citizens or residents of the United States) subject to special treatment under
the federal income tax laws. The effects of certain Code provisions on
individual investors will vary from one case to another, depending upon the
facts. In addition, there is uncertainty concerning certain of the tax aspects
of an investment in the Company, and there can be no assurance that some of the
positions taken by the Company might not be challenged by the Internal Revenue
Service (the "IRS").
The Company might also be subject to state and local taxes in jurisdictions
in which the Company might be deemed to be doing business or in which it owns
property or other interests. See "State and Local Taxes" below.
For the foregoing reasons, this summary is not intended as a substitute for
careful tax planning. Prospective Shareholders and fiduciaries and others
investing on behalf of prospective Shareholders are urged to consult their own
tax advisors with respect to the federal and state tax consequences which could
arise from the purchase of Shares in their individual situations.
The Code provides special tax treatment for an organization that qualifies
and elects to be taxed as a real estate investment trust (a "REIT"). In brief,
if certain detailed requirements imposed by the REIT provisions of the Code
(Sections 856-860) are met, entities that invest primarily in real estate assets
(i.e., real estate, mortgages or REITs) and that otherwise would be taxed as
corporations are, with certain limited exceptions, not taxed at the corporate
level on their income that is currently distributed to their shareholders. This
treatment substantially eliminates the "double taxation" (at the corporate and
shareholder levels) that typically results from the use of corporate investment
vehicles.
The Company has elected to be treated as a REIT. The first taxable year the
Company was taxable as a REIT was its taxable year ending December 31, 1991.
Except for its inadvertent failure to comply with Treasury Regulation Section
31.857-8(d) and (e) for 1991, 1992 and 1993 (See Additional Tax Risks), the
Company believes that it has been organized and has operated in such a manner as
to qualify for taxation as a REIT under Sections 856-860 of the Code for its
taxable year ending through December 31, 1995 and the Company intends to
continue to operate in such a manner in the future. No assurance can be given,
however,
52
<PAGE> 61
that the Company will operate in a manner so as to qualify or remain qualified
as a REIT. See "Requirements for Qualification as a REIT" below. Based on the
accuracy of the facts contained in the Ruling Request, the Company received a
ruling from the Internal Revenue Service that WCRM will qualify as an
independent contractor under Section 856(d)(2) and 856(d)(3) of the Code if it
renders property management services to the Company. The Company has represented
that it will utilize the services of WCRM only for so long as the material facts
contained in the Ruling Request remain accurate.
If the Company does not qualify as a REIT for any taxable year, it will be
subject to federal income tax as if it were a corporation, and the Shareholders
will be taxed as shareholders of a corporation. Consequently, the Company would
be subject to potentially significant tax liabilities which would reduce the
amount of Cash Available For Distribution to the Shareholders and the
Shareholders would also be taxed on Distributions from the Company.
OPINION OF COUNSEL
The Company has obtained an opinion of Gipson Hoffman & Pancione, a
Professional Corporation, counsel to the Company ("Counsel"), that based on
factual representations and various assumptions made by the Company and
calculations prepared by BDO Seidman, LLP is the opinion of Counsel that subject
to the possible disqualification of its REIT's status as a result of its
inadvertent failure to comply with Treasury Regulation Section 1.857-8(d) and
(e) for its 1991, 1992 and 1993 taxable years, the Company was organized in
conformity with the requirements for qualification and taxation as a REIT
commencing with the Company's taxable year ending December 31, 1991, and its
method of operations has, and its proposed method of operation will, enable it
to continue to qualify to be taxed as a REIT. It must be emphasized that this
qualification depends upon the Company's ability to meet the various
requirements imposed under the Code, including, but not limited to, the various
income, asset, distribution, share ownership and other tests discussed below,
the results of which will not be reviewed by Counsel. Accordingly, no assurance
can be given that the actual results of the Company's operation for any one
taxable year will satisfy such requirements. See "Failure to Qualify," below.
The opinion of Counsel, which is summarized in this Prospectus and which is
filed as an exhibit to the Company's Registration Statement of which this
Prospectus forms a part, represents such firm's judgment that it is more likely
than not that the applicable issues should be resolved in the manner indicated
if litigated by the IRS. Nevertheless, that opinion represents the views of
Counsel only, is not binding upon the IRS or the courts, and should not be taken
as an assurance that such tax consequences in fact will result. Because the
opinion is based upon facts and factual assumptions described more fully in this
section, including assumptions as to future facts concerning the actual
operations of the Company, it may be adversely affected by alterations in such
facts and by differences between actual and assumed facts. No factual
investigations have been made by Counsel. Therefore, for purposes of its
opinion, Counsel has relied upon representations made by the Directors on behalf
of the Company and by certain financial information compiled by BDO Seidman,
LLP.
The opinion of Counsel is also based upon existing law and currently
applicable Regulations, current published administrative positions of the IRS
contained in Revenue Rulings and Revenue Procedures, and judicial decisions,
which are subject to change either prospectively or retroactively. Furthermore,
the law as to many tax matters material to an investment in the Company is
uncertain. Although reasonable arguments can be made for the positions which the
Company proposes to take as to tax matters as described in this Prospectus, the
federal income tax consequences of a proposed investment in the Company cannot
be predicted with certainty, and there can be no assurance of how the law will
develop or, if litigated, how the courts will decide various issues.
REQUIREMENTS FOR QUALIFICATION AS A REIT
To qualify as a REIT for federal income tax purposes, the Company has made
a valid election to be so treated and must satisfy the requirements set forth
below. In order to qualify as a REIT, the Company may not have any accumulated
earnings and profits attributable to periods prior to its REIT status, i.e.,
prior to
53
<PAGE> 62
January 1, 1991. The Company has represented that it has no accumulated earnings
and profits for any period commencing prior to January'1, 1991. Once made, an
election continues in effect until voluntarily revoked or automatically
terminated by the Company's failure to qualify as a REIT for a taxable year.
1. SHARE OWNERSHIP. The Shares (i) must be transferable and (ii) must be
held by 100 or more persons during at least 335/365th of the Company's taxable
year. No more than 50% of the outstanding Shares may be owned in the aggregate,
directly or indirectly, by five or fewer individuals (as defined in the Code to
include certain entities) at any time during the last half of the Company's
taxable year. Although, the Advisor was required to purchase Shares and AFG, the
Advisor and their Affiliates (they currently own approximately 8% of the
outstanding shares) may purchase Shares, they intend to limit their investment
in Shares to the extent necessary to enable the Company to satisfy the REIT
ownership requirements and in no event will they own in the aggregate more than
35% of the outstanding Shares.
The Omnibus Budget Reconciliation Act of 1993 was enacted in August, 1993.
This act provides that qualified pension trusts generally would no longer be
treated as a single "individual" for purposes of applying the ownership test
that currently prohibits five or fewer individuals (applying certain attribution
of ownership rules) from owning more than 50% of the value of a REITs'
outstanding shares. The ownership interests instead would be treated as held by
the beneficiaries of the qualified trust, in proportion to their actuarial
interests in the trust. The act also provides that if the REIT would fail the
five or fewer test but for this new exception, and if the REIT is "predominantly
held" by qualified trusts (one such trust owns more than 25% by value, or more
than 50% by value is held by such trusts that each own more than 10%), those
qualified trusts that own more than 10% may be required to report a portion of
the dividends they receive from the REIT as UBTI.
2. NATURE OF ASSETS. On the last day of each calendar quarter, at least
75% of the value of the total assets of the Company must consist of real estate
assets (including interests in real property, interests in loans secured by
mortgages on real property or by interests in real property, shares in other
REITs, regular or residual interests in real estate mortgage investment conduits
("REMICs"), and certain options, but not mineral, oil or gas royalty interests),
cash, cash items (including receivables) and government securities
(collectively, "real estate assets"). During the one-year period beginning on
the date the Company receives new capital from the sale of Shares (other than
from sales resulting from the dividend reinvestment plan), stock or debt
instruments purchased with such capital are treated as "real estate assets" for
the purposes of the 75% asset test. Thereafter, not more than 25% of the value
of the Company's assets may consist of securities (other than government
securities). There are no investment restrictions on the remainder of the
Company's assets, except that the securities of any one nongovernmental issuer
may not represent more than 5% of the value of the Company's total assets or 10%
of the outstanding voting securities of any one issuer.
A REIT is permitted to hold assets in a "qualified REIT subsidiary" which
is a corporation that has been 100% owned by the REIT at all times during its
existence. The REIT treats all of the qualified REIT subsidiary's assets,
liabilities, and items of income, deduction and credit as its own for federal
income tax purposes, although the subsidiary will be a separate entity for state
law purposes. If the fund invests in a partnership, it will be deemed to own a
proportionate share of the partnership's assets.
After initially meeting the asset tests at the close of any quarter, the
Company will not lose its status as a REIT for failure to satisfy the asset
tests at the end of a later quarter solely by reason of changes in asset values.
If the failure to satisfy the asset tests results from an acquisition of
securities or other property during a quarter, the failure can be cured by
disposition of sufficient nonqualifying assets within 30 days after the close of
that quarter. The Company intends to maintain adequate records of the value of
its assets to ensure compliance with the asset tests, and to take such other
action, within 30 days after the close of any quarter, as may be required to
cure any noncompliance.
3. SOURCES OF INCOME. For each taxable year, the Company must meet the
following three income-based tests:
(a) 75% Test. At least 75% of the Company's gross income (excluding income
from prohibited transactions) for each taxable year must be derived from the
following: (i) rents from real property; (ii) interest
54
<PAGE> 63
accruing on obligations secured by mortgages on real property or interests in
real property; (iii) gain from the sale or other disposition of real property,
interests in real property and mortgages on real property (excluding gain from
the sale of "dealer property"); (iv) dividends or other distributions on, and
gain from the sale or other disposition of transferable shares of other
qualified REITs; (v) abatements and refunds of taxes on real property; (vi)
income and gain from the sale or other disposition of foreclosure property;
(vii) gain from the sale or other disposition of a real estate asset which is
not a prohibited transaction; (viii) amounts (other than amounts based in whole
or in part, on the income or profits of any person) received or accrued as
consideration for entering into agreements (A) to make loans secured by
mortgages on real property or on interests in real property, or (B) to purchase
or lease real property, interests in real property or mortgages on real
property; (ix) income from a regular or residual interests in REMICs to the
extent of the proportion in which assets of the REMICs consist of interests in
real property; and (x) income from the temporary investment of new capital in
stock or debt instruments during the one-year period beginning on the date the
Company receives the new capital.
For purposes of the 75% income test and the 95% income test described
below, "rents from real property" do not include (a) amounts determined in whole
or in part by the income or profits derived by any person from a Property; (b)
amounts from any person (e.g., partnership or corporation) in which the Company
directly or indirectly owns 10% or more of the beneficial interests; (c) amounts
received or accrued with respect to a Property if the Company furnishes or
renders noncustomary services to the tenants of such Property, other than
through an independent contractor from whom the Company does not derive or
receive any income; and (d) amounts attributable to personal property leased in
connection with a lease of real property, if more than 15% of the total rent
from the real and personal property is attributable to the personal property.
The Company, has received a ruling from the Internal Revenue Service, as to the
independent contractor status of one of its Affiliates, WCRM under the REIT
provisions of the Code and therefore has contracted with WCRM for the provision
of property management services. The rents generally will not be considered to
be based on income or profits of a tenant if they are based on a fixed
percentage of receipts or sales, or if they are based on the net income or
profits of the tenant and the tenant derives substantially all of its income
with respect to such Property from the leasing or subleasing of substantially
all of such Property and such tenant receives from subtenants only amounts which
would be treated as rents from real property if received directly by a REIT. The
Company may provide services to its tenants and the income will qualify as rents
from real property if the services are (a) customarily furnished or rendered to
tenants in connection with the rental of real property of a similar class in the
geographic market in which the Property is located and (b) of a type that a
tax-exempt organization can provide to its tenants without causing its rental
income to be unrelated business taxable income under the Code.
(b) 95% Test. At least 95% of the Company's gross income (excluding income
from prohibited transactions) for each taxable year must be derived from the
same items which qualify under the 75% income test, or from dividends, interest
or gains from the sale or other disposition of stock or other securities which
are not "dealer property" or from any combination of the foregoing.
Fees for performing services to the Company's tenants (other than for
services which are both (a) customarily furnished or rendered to tenants in real
properties of a similar class in the geographic market in which the property is
located and (b) of a type that a tax-exempt organization can provide its tenants
without causing its rental income to be unrelated business taxable income under
the Code) do not qualify under either the 75% or the 95% income test.
If the Company fails to meet either the 75% or the 95% income test during a
taxable year, it may still qualify as a REIT in such year if (i) it reports the
source and nature of each item of its gross income in its federal income tax
return for such year; (ii) the inclusion of any incorrect information in its
return is not due to fraud with intent to evade tax; and (iii) the failure to
meet such tests is due to reasonable cause and not to willful neglect. However,
in such event the Company will be subject to an excise tax equal to 100% of the
greater of the amount by which it fails either the 75% or the 95% income test
for such year.
(i) Prohibited Transactions. In determining whether the Company complies
with the 75% and 95% income tests, gross income does not include gross income
from "prohibited transactions." The term
55
<PAGE> 64
"prohibited transactions" generally means a sale or other disposition of real
property or interests in mortgages on real property held by the REIT primarily
for sale to customers in the ordinary course of its business ("Dealer
Property"), other than foreclosure property, unless all of the following
requirements are met:
(1) The property was held for at least four years and, except for
foreclosure property, must have been held for at least four years for the
production of rental income;
(2) Either (a) the REIT made no more than seven sales of property during
the year in question (other than foreclosure property) or (b) the aggregate
adjusted tax bases of property (other than foreclosure property) sold during the
taxable year does not exceed 10% of the aggregate tax bases of all of the assets
of the REIT as of the beginning of the taxable year and substantially all of the
marketing and development expenditures with respect to the property were made
through an independent contractor; and
(3) The cost of any improvements made by the REIT to the property or any
partner thereof during the four years prior to the sale did not aggregate in
excess of 30% of the property's net sales price.
Any gross income derived from a prohibited transaction is taken into
account in applying the 30% test described below (and the net income from any
such transaction is subject to a 100% tax). The Company intends to hold its
Properties for investment and rental with a view to long-term appreciation, to
engage in the business of owning, acquiring, managing, renovating and expanding
for rental the Properties, and to make such occasional sales of the Properties
as are consistent with the Company's investment objectives. Based on the above,
the Company believes that all of its real property will be held for rental, and
not for sale to customers, in the ordinary course of its trade or business.
However, whether property is held as Dealer Property depends on the facts and
circumstances in effect from time to time, including those relating to a
particular property. As a result, complete assurance cannot be given that the
Company can avoid being deemed to own property that the IRS later characterizes
as property held "primarily for sale to customers in the ordinary course of its
trade or business."
(ii) Foreclosure Property. "Foreclosure property," referred to above, is
real property and any personal property incident thereto, which is acquired by
the Company as the result of a bid in foreclosure, or by agreement or legal
process, following a default (or where a default as imminent) on a lease of the
property or on an indebtedness secured by that property and which the Company
elects to so treat. If the Company acquires foreclosure property, such property
will normally cease to be foreclosure property no later than two years after the
date of acquisition by the Company. However, if the Company establishes to the
satisfaction of the IRS that an extension of the two-year period is necessary
for the orderly liquidation of the Company's interest in such a foreclosure
property, the IRS may grant one or more extensions of the two-year period. Such
extensions may not extend the two-year period beyond a date which is six years
after the date on which the Company acquired such foreclosure property. If the
Company is not able to dispose of such foreclosure property within such two-year
period, as extended, then, because rents from such foreclosure properties may
not be treated as "rents from real property," the Company may not satisfy either
or both of the 75% or 95% income tests, depending on how great a portion of the
Company's gross income is represented by rental income not meeting the passive
income requirements of the Code for qualification as a REIT.
(c) 30% Test. Less than 30% of the Company's gross income may be derived
from the sale or other disposition of the following: (i) stock or securities
held by the Company for less than one year; (ii) property in a transaction which
is a prohibited transaction; and (iii) real property, including interests in
real property, and mortgages on real property held for less than four years
(other than foreclosure property and property compulsorily or involuntarily
converted through destruction, condemnation or similar event). The Company does
not intend to acquire Properties with a view to deriving short-term profits.
Nevertheless, any gains realized from the sale of a Property held less than four
years by the Company (except as provided above) must be included in the 30%
income test.
4. DISTRIBUTIONS TO SHAREHOLDERS. Each year, the Company must distribute
to its Shareholders an amount equal to (a) 95% of (i) its "REIT taxable income"
(as defined below) determined without regard to the deduction for dividends paid
and by excluding any net capital gain, and (ii) the excess of net income from
foreclosure property over the tax on such income, minus (b) any "excess noncash
income" (as defined
56
<PAGE> 65
below). The Company intends to make distributions to the Shareholders on a
quarterly basis sufficient to meet this 95% distribution requirement. If the
Company does not otherwise have sufficient cash to meet the 95% distribution
requirement, it might be required to borrow funds or sell its Properties in
order to make distributions.
"REIT taxable income" is the taxable income of a REIT, computed as if it
were an ordinary corporation, adjusted by certain items, including without
limitation, an exclusion equal to the amount of net income from foreclosure
property, a deduction for the 100% tax on the greater of the amount by which the
REIT fails the 75% or the 95% income test, and an exclusion for an amount equal
to any net income derived from prohibited transactions. "Excess noncash income"
means the excess of certain amounts that a REIT is required to recognize as
income in advance of receiving cash (such as income recognized under Code
Section 467 relating to rental agreements involving deferred or increasing rents
to the extent the REIT would not otherwise recognize such income under its
regular method of accounting) over five percent of the REIT taxable income
before deduction for dividends paid and excluding any net capital gain. If the
REIT enters into a long-term lease of a Property pursuant to which it receives
deferred rents or increasing rents it might recognize income under Code Section
467 during the term of the lease or upon disposition of the Property subject to
such lease.
Such distributions must be paid in the taxable year to which they relate,
or in the following taxable year (a) if declared by the Company in October,
November or December in the taxable year in question to stockholders of record
in such month and paid by the Company during January of the following taxable
year or (b) if the Company duly elects and if declared before the Company timely
files its tax return for such year and if paid on or before the first regular
dividend payment after such declaration.
The IRS has ruled that if a REIT's dividend reinvestment plan allows
shareholders of the REIT to elect to have cash distributions reinvested
automatically in newly issued shares of the REIT at a purchase price equal to at
least 95% of fair market value on the distribution date, or in shares purchased
in the open market, then such cash distributions qualify under the 95%
distribution test. The terms of the Company's Dividend Reinvestment Plan comply
with such rulings. See "Plan of Distribution -- Dividend Reinvestment Plan."
Shareholders should be aware that the amount of Dividends reinvested pursuant to
the Dividend Reinvestment Plan will be taxable income to them, regardless of the
fact that such dividends have been reinvested with the Company or have been used
to acquire shares through the Crossing Agent or on the open market (i.e., the
tax is not deferred until the Shares received from participation in the Dividend
Reinvestment Plan are sold or disposed of).
TERMINATION OR REVOCATION OF REIT STATUS
For any taxable year that the Company fails to qualify as a REIT, it would
be taxed as a corporation. Consequently, because it would not be entitled to the
deduction for dividends paid to its Shareholders in computing its taxable
income, assets of the Company and Dividends to Shareholders would be reduced to
the extent necessary to pay any resulting tax liability of the Company.
Distributions from the Company at such time would be taxable to Shareholders as
dividends to the extent of the current and accumulated earnings and profits of
the Company with any excess being treated as a reduction of tax basis in the
REIT stock and after such tax basis is exhausted as gain from the sale of stock.
If the Company's election to be treated as a REIT is terminated
automatically, the Company will not be eligible to elect REIT status until the
fifth taxable year which begins after the year for which the Company's election
was terminated, unless (i) the Company did not willfully fail to file a timely
return with respect to the termination taxable year, (ii) the inclusion of any
incorrect information in such return was not due to fraud with intent to evade
tax, and (iii) the Company establishes that failure to meet the requirements was
due to reasonable cause and not to willful neglect. While the Company has no
intention of voluntarily revoking its REIT election, if it does so, it will be
prohibited from electing REIT status for the year to which such revocation
relates and for the next four taxable years.
57
<PAGE> 66
TAXATION OF THE COMPANY
For any taxable year in which the Company qualifies as a REIT, it generally
will not be subject to federal income tax on that portion of its ordinary income
or capital gain which is timely distributed to Shareholders (except certain
income with respect to foreclosure property, which is taxed at the highest
corporate rate -- currently 35%). Even if the Company is treated as a REIT, it
is subject to the tax on any REIT taxable income and net capital gain not
distributed to Shareholders. The Company will be subject to tax on any net
capital gain arising from the sale of its Properties not distributed to the
Shareholders. If the Company reinvests the net capital gain from the sale of a
Property on which it recognized a net capital gain, it will be taxed on that
gain, or, in the alternative, it could distribute all or part of the net capital
gain as a capital gain dividend to the Shareholders and in that event, the
distributed capital gain would be taxable to the Shareholders and not to the
Company. Since at present the maximum rate for individuals on long-term capital
gain is twenty-eight percent (28%), which is lower than the current corporate
federal income tax rate of thirty-five percent (35%), it is anticipated that the
Company will make a capital gains distribution equal to the amount of the
capital gain so that only the lower capital gains tax rates will be incurred.
The Company may choose, however, to not distribute part or all of a capital gain
recognized by the Company and in that event the Company would pay tax on the
capital gain at the corporate tax rate, and reinvest the proceeds remaining in
additional Properties.
In addition, regardless of distributions to Shareholders, (i) if the
Company fails either or both the 75% and 95% income tests, but still maintains
its qualification as a REIT, it will be subject to a 100% tax on the greater of
the amount by which it failed the 75% test or the 95% test, multiplied by a
fraction, the numerator of which would be the Company's taxable income for the
year (with certain adjustments) and the denominator of which would be the
Company's gross income (with certain adjustments); and (ii) the Company will be
subject to a 100% tax on any net income derived from a prohibited transaction.
The Company will also be subject to the minimum tax on items of tax
preference allocable to it. Code Section 59(d) authorizes the Treasury
Department to issue Regulations allocating items of tax preference between a
REIT and its shareholders. Such Regulations have not yet been issued.
The Company will be subject to a 4% excise tax under Code Section 4981 on
the amount, if any, by which the sum of (i) 85% of its REIT ordinary income for
such year, (ii) 95% of any net capital gain for such year, and (iii) any
undistributed taxable income from prior periods exceeds the amount actually
distributed by the Company to its Shareholders during the calendar year (or
declared as a dividend during the calendar year, if distributed during the
following January) as dividends. If necessary, the Company will make its fourth
quarterly distribution prior to February 1 of the following year and will
declare such dividend before the end of the fourth quarter in order to avoid
imposition of the excise tax. If the Company reinvests net capital gains in
additional Properties it is likely to be subject to the excise tax. Imposition
of the excise tax on the Company would reduce both the amount of money available
for reinvestment by the Company and the amount of cash available for
distribution to Shareholders.
The Company has adopted a calendar taxable year for federal income tax
purposes; accordingly, the Company's taxable year will end each December 31. The
Company has elected the accrual method of accounting.
As a result of an inadvertent failure to satisfy certain technical
requirements of Treasury Regulation Section 1.857-8(b) for its 1991, 1992 and
1993 taxable years, it is possible that the Company would be treated as a
regulation corporation (and not as a REIT) for such taxable years.
TAXATION OF TAXABLE U.S. SHAREHOLDERS
1. IN GENERAL. As long as the Company qualifies as a REIT, distributions
made to its taxable U.S. Stockholders (as defined herein) out of current or
accumulated earnings and profits (and not designated as capital gain dividends)
will result in ordinary income. For this purpose, the term "U.S. Stockholder"
means a holder of Common Stock that (for United States federal income tax
purposes) (i) is a citizen or resident of the United States, (ii) is a
corporation, partnership or other entity created or organized in or under the
laws of the United States or of any political subdivision thereof, or (iii) is
an estate or trust, the income of which is subject
58
<PAGE> 67
to United States federal income taxation regardless of its source. For any
taxable year for which the Company qualifies for taxation as a REIT, amounts
distributed to taxable U.S. Stockholders will be taxed as described herein.
Corporate stockholders will not be entitled to the dividends received deduction.
Distributions that are designated as 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) without regard to the period for which
the stockholder has held its stock. However, corporate stockholders may be
required to treat up to 20% of certain capital gain dividends as ordinary
income. Distributions in excess of current and accumulated earnings and profits
will not be taxable to the extent that they do not exceed the adjusted tax basis
of the stockholder's shares of Common Stock, but rather, will reduce a
stockholder's adjusted tax basis in such shares. To the extent that such
distributions exceed the adjusted tax basis of a stockholder's shares of Common
Stock, they will be included in income as long-term capital gain (or short-term
capital gain if the shares of Common Stock have been held for one year or less)
assuming the shares are a capital asset in the hands of the stockholder.
Currently, the maximum tax rate for individuals on net long-term capital gain is
28%.
Capital gain realized by the Company on the sale of its assets generally
will equal the difference between the sale price and the Company's adjusted tax
basis in the asset sold, and will be recognized by the Company's stockholders to
the extent the Company maintains its qualifications as a REIT and such capital
gain is distributed to the Company's stockholders as a capital gain dividend.
The initial tax basis of such assets will be subsequently reduced by annual
depreciation deductions. Depreciation deductions reduce taxable income and thus
may effectively increase the portion of dividends which would represent a
non-taxable return of capital.
Any dividend declared by the Company in October, November or December of
any year payable to a stockholder of record on a specified date in any such
month will be treated as both paid by the Company and received by the
stockholder on December 31 of such year, provided that the dividend is actually
paid by the Company during January of the following year.
Stockholders may not include any net operating losses or capital losses of
the Company in their individual income tax returns. A stockholder will realize
capital gain or loss on the disposition of any of his Common Stock equal to the
difference between (a) the sales price for such Common Stock and (b) his
adjusted tax basis in such Common Stock. In general, any gain or loss realized
upon the sale or exchange of Common Stock by a stockholder who has held such
Common Stock for more than one year (after applying certain holding period
rules) will be treated as a long-term capital gain or long-term capital loss,
respectively. In general, any gain or loss realized upon the sale or exchange of
Common Stock by a stockholder who has held such Common Stock for one year or
less (after applying certain holding period rules) will be treated as short-term
gain or loss, respectively. However, losses incurred on the sale or exchange of
Common Stock held for less than six months will be deemed long-term capital loss
to the extent of any capital gain dividends received by the selling stockholder
with respect to such Common Stock.
2. PORTFOLIO INCOME. Dividends paid to Shareholders will constitute
portfolio income for purposes of Code Section 469 and not passive activity
income. Accordingly, such income will not be subject to reduction by losses from
passive activities (e.g., an interest in a business held as a limited partner or
any interest in a rental activity) of Shareholders who are subject to the
passive activity loss rules.
3. TAXATION OF REINVESTED DIVIDENDS. Those Shareholders who avail
themselves of the Dividend Reinvestment Plan during the offering period will
realize taxable income or gain in an amount equal to the fair market value of
the Shares acquired from the REIT through the Dividend Reinvestment Plan. Those
Shareholders who avail themselves of the Dividend Reinvestment Plan after the
offering period will realize taxable income or gain equal to the gross amount of
Dividends distributed on their behalf to the Agent, as agent for the
participants in such plan. Such distributions will retain the character of the
Company's income and gain which is distributed. Shares received pursuant to the
Dividend Reinvestment Plan will have a holding period which begins on the day
after purchase by the Agent. The tax basis of the Shares acquired through the
Dividend Reinvestment Plan will generally be the gross amount of income realized
by the Shareholder from the distribution.
59
<PAGE> 68
4. BACK-UP WITHHOLDING. The Company will report to its stockholders and to
the IRS the amount of dividends paid during such calendar year, and the amount
of tax withheld, if any. Under the backup withholding rules, a stockholder may
be subject to backup withholding at the rate of 31% with respect to dividends
paid unless such holder (a) is a corporation or another form of exempt entity
and, when required, demonstrates this fact, or (b) provides a taxpayer
identification number, certifies to no loss of exemption from backup
withholding, and otherwise complies with applicable requirements of the backup
withholding rules. A stockholder that does not provide the Company with a
correct taxpayer identification number may also be subject to penalties imposed
by the IRS. Any amount paid as backup withholding will be creditable against the
stockholder's income tax liability. In addition, the Company may be required to
withhold a portion of capital gain distributions to any stockholders who fail to
certify their non-foreign status to the Company. See "Taxation of Non-U.S.
Stockholders."
Additional issues may arise pertaining to information reporting and backup
withholding with respect to Non-U.S. Stockholders, and Non-U.S. Stockholders
should consult their tax advisors with respect to any such information reporting
and backup withholding requirements.
5. DIVIDEND INFORMATION. The Company will notify each Shareholder after
the end of each year as to the portion of Dividends paid that constitutes
ordinary income, return of capital, capital gain and items of tax preferences.
TAXATION OF TAX-EXEMPT SHAREHOLDERS
In Revenue Ruling 66-106, 1966-a C.B. 151, the IRS 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 IRS.
Based upon Revenue Ruling 66-106, distributions to tax-exempt stockholders
generally should not constitute UBTI where (a) the stockholder has not financed
the acquisition of its Common Stock with "acquisition indebtedness" within the
meaning of the Code, and (b) the Common Stock is not used by the stockholder in
an unrelated trade or business. However, legislation was recently enacted which
provides that amounts distributed by a REIT to a tax-exempt employees' pension
trust which owns more than 10% of the REIT's share will be treated as UBTI in
certain circumstances.
TAXATION OF NON-U.S. STOCKHOLDERS
The rules governing United States federal income taxation of nonresident
alien individuals, foreign corporations, foreign partnership and other foreign
stockholders (collectively, "Non-U.S. Stockholders") are complex, and no attempt
will be made herein to provide more than a summary of such rules. Prospective
Non-U.S. Stockholders should consult with their own tax advisors to determine
the impact of federal, state and local income tax laws with regard to an
investment in shares, including any reporting requirements.
In general, Non-U.S. Stockholders will be subject to regular United States
income tax with respect to their investment in the Company if such investment is
"effectively connected" with the Non-U.S. Stockholder's conduct of a trade or
business in the United States. A corporate Non-U.S. Stockholder that receives
income that is (or is treated as) effectively connected with a U.S. trade or
business may also be subject to the branch profits tax under Section 884 of the
Code, which is payable in addition to regular United States corporate income
tax. The balance of this discussion will apply to Non-U.S. Stockholders whose
investment in the Company is not so effectively connected.
Distributions that are not attributable to gain from sales or exchanges of
United States real property interests and not designated as capital gain
dividends will be treated as dividends of ordinary income to the extent that
they are made out of current or accumulated earnings and profits of the Company.
Such distributions ordinarily will be subject to a withholding tax equal to 30%
of the gross amount of the distribution, subject to reduction or elimination
under an applicable tax treaty. The Company expects to withhold United States
income tax at the rate of 30% on the gross amount of any such dividends made to
a Non-U.S. Stockholder unless (i) a lower treaty rate applies and the
stockholder files an IRS Form 1001 or (ii) the Non-U.S. Stockholder files a
properly completed IRS Form 4224 with the Company claiming that the
60
<PAGE> 69
distribution is "effectively connected" income. Distributions which exceed
current and accumulated earnings and profits of the Company will not be taxable
to the extent that they do not exceed the adjusted tax basis of the
stockholder's Common Stock, but rather will reduce the adjusted tax basis of
such Common Stock. To the extent that such dividends exceed the adjusted tax
basis of a Non-U.S. Stockholder's Common Stock, they will give rise to tax
liability if the Non-U.S. Stockholder would otherwise be subject to tax on gain
from the sale or disposition of his Common Stock in the Company, as described
below. Because it cannot be determined at the time a distribution is made
whether or not such distribution will be in excess of current and accumulated
earnings and profits, the distributions generally will be subject to withholding
at the same rate as if distributed from earnings. However, amounts thus withheld
are refundable to a stockholder if it is subsequently determined that such
distribution was, in fact, in excess of current and accumulated earnings and
profits of the Company. A Non-U.S. Stockholder will be solely responsible, at
his or her expense, to file a U.S. tax return claiming a refund of over-withheld
tax.
For any year in which the Company qualifies as a REIT, distributions that
are attributable to gain from sales or exchanges by the Company of a United
States real property interest will be taxed to a Non-U.S. Stockholder under the
provisions of the foreign Investment in Real Property Tax Act of 1980
("FIRPTA"). Under FIRPTA, these distributions are taxed as if such gain were
"effectively connected" with a United States business. Non-U.S. Stockholders
would thus be taxed at the normal capital gain rates applicable to U.S.
Stockholders (subject to the applicable alternative minimum tax and a special
alternative minimum tax for nonresident alien individuals). Also, distributions
subject to FIRPTA may be subject to a 30% branch profits tax in the hands of a
foreign corporate stockholder not entitled to treaty exemption. The Company is
required by applicable Treasury Regulations to withhold 35% of any distribution
that could be designated by the Company as a capital gains dividend regardless
of the amount actually designated as a capital gain dividend. This amount is
creditable against the Non-U.S. Stockholder's FIRPTA tax liability. A refund may
be available if the amount exceeds the Non-U.S. Stockholder's federal tax
liability.
Gain recognized by a Non-U.S. Stockholder upon a sale of Common Stock
generally will not be taxed under FIRPTA if the Company is a "domestically
controlled REIT," defined generally as a REIT in which at all times during a
specified testing period less than 50% of the value of the Common Stock was held
directly or indirectly by foreign persons. If the Company were not a
domestically controlled REIT, sales of shares generally would not be taxed under
FIRPTA so long as (i) the Company's stock is regularly traded on an established
securities market (as defined in applicable Treasury Regulations) and (ii) the
Non-U.S. Stockholder owns less than 5% of the Company's Common Stock. It is
currently anticipated that the Company will be a "domestically controlled REIT,"
and therefore the sale of Common Stock will not be subject to taxation under
FIRPTA. However, gain not subject to FIRPTA will be taxable to a Non-U.S.
Stockholder if (i) the investment in the Common Stock is effectively connected
with the Non-U.S. Stockholder's United States trade or business, in which case
the Non-U.S. Stockholder will be subject to the same treatment as U.S.
stockholders with respect to such gain, or (ii) the Non-U.S. Stockholder is a
nonresident alien individual who was present in the United States for 183 days
or more during the taxable year and (a) such gain is attributable to an office
or fixed place of business in the United States or (b) such nonresident alien
individual has a "tax home" in the United States, and such gain is not
attributable to an office or fixed place of business located outside the United
States, in which case the nonresident alien individual will be subject to a 30%
tax on the individual's capital gains. If the gain on the sale of Common Stock
were to be subject to taxation under FIRPTA, the Non-U.S. Stockholder would be
subject to the same treatment as U.S. Stockholders with respect to such gain
(subject to the applicable alternative minimum tax and a special alternative
minimum tax in the case of nonresident alien individuals).
STATEMENT OF STOCK OWNERSHIP
The Company is required to demand annual written statements of actual stock
ownership of the Shares from the recordholders of one-half percent, one percent
or five percent of its stock depending on whether the Company has 200 or fewer
record Shareholders, 201 to 2000 record Shareholders, or more than 2000 record
Shareholders, respectively. The Company must also maintain, within the Internal
Revenue District in which it is required to file its federal income tax return,
permanent records showing the information it has received as
61
<PAGE> 70
to the actual ownership of such Shares and a list of those persons failing or
refusing to comply with such demand.
TAX LAW CHANGES
The anticipated income tax treatment described in this Prospectus may be
changed, perhaps retroactively, by legislative, administrative or judicial
action at any time.
STATE AND LOCAL TAXES
The tax treatment of the Company and its Shareholders in states having
taxing jurisdiction over them may differ from the federal income tax treatment.
It is possible that some jurisdictions will impose a tax liability on the
Company if it operates in such states, thereby reducing the economic return to
Shareholders. Accordingly, no discussion of state taxation of the Company, the
Shares, or the Shareholders is provided herein, nor is any representation made
as to the tax status of the Company, the Shares or the Shareholders in such
states. Each Shareholder should consult his own tax advisor as to that status of
the Shares under the respective state tax laws applicable to him.
ERISA CONSIDERATIONS
In considering an investment in the Company of a portion of the assets of a
qualified pension, profit sharing, stock bonus, or other employee benefit plan
trust subject to ERISA, a fiduciary, taking into account the facts and
circumstances of each trust, should also consider, among other matters, (i) what
assets will be deemed to constitute "plan assets" for purposes of ERISA and the
Code, particularly under the plan asset regulation (described below), and (ii)
whether the investment satisfies the standards of fiduciary conduct prescribed
by ERISA including, among other matters, the requirements that the plan's
investments be appropriately diversified, and be prudent, considering the nature
of an investment in, and the compensation structure of, the Company; the fact
that the Company has a limited history of operations; and the fact that, except
for investments from a prior offering of Shares as described in "Real Property
Investments", the specific Properties which are to be invested in have not been
identified as of the date of this Prospectus. The prudence of a particular
investment must be determined by the fiduciary (usually the trustee or
investment manager) with respect to each employee benefit plan who is
responsible for controlling, managing and investing plan assets which are to be
invested in this investment, taking into account all of the facts and
circumstances of the investment.
Section 406 of ERISA and Section 4975 of the Code prohibits certain
transactions, involving assets of an employee benefit plan subject to ERISA or
described in Section 4975 of the Code (which excludes governmental plans and
church plans) ("Benefit Plan"), between the Benefit Plan and any party in
interest or qualified person with respect to the Benefit Plan. Neither ERISA nor
the Code defines the term "plan assets." However, the Department of Labor has
issued a final regulation (29 C.F.R. Section 2510.3-101) defining the term "plan
assets" (the "plan assets regulation") for purposes of Subtitle A, and Parts 1
and 4 of Subtitle B, of Title I of ERISA and Section 4975 of the Code. The plan
asset regulation provides that assets of a Benefit Plan will not include the
assets of an equity in which the Benefit Plan invests if the entity (or the
interests therein) satisfies at least one of the sets of criteria contained in
the plan asset regulation.
Under the plan asset regulation, the assets of a Benefit Plan will not
include underlying assets of entities in which the Benefit Plan invests if the
interests in the equity the Benefit Plan acquires are "publicly offered
securities." A publicly-offered security is a security that is (1) part of a
class of securities that is widely held, (2) freely transferable, and (3) sold
as part of a public offering registered under the Securities Act of 1933 and
part of a class of securities registered under the Securities Exchange Act of
1934 within 120 days (or such later time as may be allowed by the Securities and
Exchange Commission) after the end of the fiscal year of the issuer during which
the offering of such securities to the public occurred. A class of securities is
widely held if it is owned by 100 or more persons who are independent of the
issuer and of one another. Whether a security is freely transferable is a
factual question to be determined on the basis of all relevant facts and
circumstances. The preamble to the plan asset regulation suggests that one
factor to be considered in determining whether a
62
<PAGE> 71
security is freely transferable is whether the investor has a reasonable
opportunity to liquidate its investment. The plan asset regulation provides that
where the minimum investment in a public offering of securities is $10,000 or
less, the presence of certain restrictions enumerated in the plan asset
regulation (the "permissible restrictions") designed to permit entities to
comply with applicable federal or state laws and to meet reasonable
administrative needs ordinarily will not affect a determination that such
securities are freely transferable.
As of March 18, 1997, there are 1,675,442 Shares of the Company
outstanding, held by 850 Shareholders. These Shares were sold pursuant to a
Registration Statement under the Securities Act of 1933. The purchase price per
Share pursuant to this offering is $10.00. The minimum offering is 25,000 Shares
($250,000), and the minimum purchase for an investor is 100 Shares ($1,000).
Although they have no present intention to do so, the Advisor and its Affiliates
may purchase Shares pursuant to this offering. It is assumed, therefore, that
the Shares are part of a class of securities that is widely-held.
The Shares will generally be transferable. However, the Company has the
power to redeem or prohibit the transfer of the Shares to the extent necessary
to prevent the Company from failing to satisfy the requirements of qualification
as a REIT under the Code, which requirements tend to enhance, not limit, the
dissemination of REIT stock. See "Tax Consequences." One of the permissible
restrictions under the plan asset regulation that will not ordinarily affect a
finding that securities are freely transferable is any restriction on, or
prohibition against, any transfer or assignment of a security which would result
in a termination or reclassification of the entity for federal or state tax
purposes. The restriction of transferability of the Shares to prevent the
Company's loss of status as a REIT for federal tax purposes falls within this
exception. Except as may be imposed by state "blue sky" administrators, there
are no other restrictions on the transferability of the Shares. The Company
intends to use a Crossing Arrangement to match buy and sell orders for Shares.
The foregoing discussion is merely a summary of issues a Benefit Plan
fiduciary should evaluate when considering an investment in the Shares. Benefit
Plan fiduciaries are urged to consult their legal advisors before investing
Benefit Plan assets in the Shares.
DESCRIPTION OF COMMON STOCK
GENERAL. As of March 18, 1997, there are 1,675,442 Shares outstanding held by
850 Shareholders. The Certificate of Incorporation authorizes the Company to
issue one class of Common Stock. The Shares being issued in this offering all
have the same rights, preferences, privileges and restrictions as the issued and
outstanding Shares. The Shares are entitled to one vote per Share. The Advisor
owns 22,505 Shares representing approximately 1.6% of the voting power of the
Company if the maximum amount of Shares is sold. AFG, the Advisor and their
Affiliates may also purchase Shares pursuant to this offering, although they
have undertaken not to acquire more than 35% of the total outstanding voting
shares at any time, in accordance with certain REIT qualification provisions of
the Code. The Shares will be fully paid and non-assessable by the Company and
may be represented by a share certificate or, at the option of the holder, may
be held in "uncertificated" form. There are currently 5,000,000 Shares
authorized by the Company Organization Documents. The Company is not precluded
from issuing additional Shares after the issuance of the Shares in this
offering. The Company does not intend to issue any equity securities which would
be senior in right and preference to the Shares, and has no authority to do so
without the affirmative vote of a majority of its outstanding voting stock. The
public offering price of the Shares was determined arbitrarily by the Directors
of the Company.
REDEMPTION AND PROHIBITION OF TRANSFER OF SHARES. For the Company to qualify 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, 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 "Tax Consequences." In order to meet these requirements, the
Company has the power to redeem a sufficient number of Shares in order to
maintain or bring the ownership of the Shares into conformity with these
requirements, and to prohibit the transfer of Shares to persons whose
acquisitions would result in a violation of these requirements. The price to be
paid in the event of the redemption of Shares will be the fair market value as
reflected in the latest
63
<PAGE> 72
quotations, if any, or, if no quotations are available, as determined in good
faith by the Directors. The effect of these requirements is to generally limit
direct and indirect ownership of the shares by each of the five largest
Shareholders to no more than 9.9% of the outstanding shares per holder.
SUMMARY OF ORGANIZATION DOCUMENTS
The following is a brief summary of certain provisions of the Organization
Documents (which are the Company's Certificate of Incorporation and Bylaws) not
described elsewhere in this Prospectus. The summary is, however, qualified in
its entirety by the detailed information set forth in the Organization Documents
and the Advisory Agreement, each of which is filed as an exhibit to the
Registration Statement.
DIRECTORS. The Company's Bylaws provide that the number of Directors may be
fixed from time to time by the Directors of the Company, with a minimum of three
and a maximum of five, a majority of whom must be Independent Directors. There
are currently 5 Directors, including 3 Independent Directors. Any Director may
resign at any time and may be removed with or without cause by the holders of a
majority of the Shares, or for cause by a majority of the remaining Directors.
The Directors may in their discretion issue Shares for the consideration
and on the terms as they may deem advisable. The Directors may issue debt
obligations with conversion privileges whereby the holders of the debt
obligations may acquire Shares. The Directors also may issue warrants, options
and rights to buy Shares as a part of a ratable issue to Shareholders, as part
of a public offering, or as part of a financial arrangement with parties other
than the Advisor or directors, officers or employees of the Company or the
Advisor, subject to certain limitations on the total amount of such warrants or
options and on their exercise prices.
LIMITED LIABILITY AND INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES AND
OTHER AGENTS. Under its Certificate of Incorporation and Bylaws and pursuant to
indemnification agreements, the Company will limit the liability of and
indemnify its Directors, officers, employees and other agents against all
liabilities incurred in connection with their serving in those capacities.
Therefore, Shareholders have a limited right of action against such persons, as
permitted by Delaware law.
Consistent with the duties and obligations of, and limitations on, the
Directors and under Delaware law, the Directors are accountable to the Company
and the Shareholders as fiduciaries and are required to perform their duties in
good faith in a manner which each Director believes to be in or not opposed to
the best interests of the Company and the Shareholders and with such care,
including reasonable inquiry, as an ordinarily prudent person in a like position
would use under similar circumstances. However, the Organizational Documents and
the Advisory Agreement provide that the officers, employees, agents, Directors,
the Advisor and their Affiliates will be indemnified against certain liabilities
incurred in connection with serving in such capacities limiting the personal
liability of Directors of the Company to the Company or its Shareholders for
monetary damages for breach of fiduciary duty if such persons were acting in
good faith and in the best interests of the Company and were performing services
or acting on behalf of the Company. Such persons will not be indemnified for
conduct which is found to be negligent, or misconduct, except for Independent
Directors who will not be indemnified for conduct which is found to be grossly
negligent or willful misconduct.
No indemnification will be provided to any agent on account of conduct
which is found to be negligent, or misconduct. In addition, no indemnification
will be provided if a court determines that such indemnification is not lawful.
Notwithstanding anything to the contrary above, the Directors, Advisors or
Affiliates and any persons acting as a broker-dealer shall not be indemnified by
the Company for any losses, liabilities or expenses arising from or out of an
alleged violation of federal or state securities laws by such party unless one
or more of the following conditions are met (i) There has been a successful
adjudication on the merits of each count involving alleged securities law
violations as to the particular indemnitee, (ii) Such claims have been dismissed
with prejudice on the merits by a court of competent jurisdiction as to the
particular indemnitee, (iii) A court of competent jurisdiction approves a
settlement of the claims against a particular indemnitee and finds that
indemnification of the settlement and the related costs should be made, and the
court considering
64
<PAGE> 73
the request for indemnification has been advised of the position of the
Securities and Exchange Commission and of the published position of any state
securities regulatory authority in which securities of the Company were offered
or sold as to indemnification for violations of securities laws. Any
indemnification is recoverable only out of the Company's assets and not from
Shareholders.
The Bylaw provision and the indemnification agreements are not intended to
deny or otherwise limit third party or derivative suits against the Company or
its agents, but to the extent an agent is entitled to indemnification, the
financial burden of a third party suit would be borne by the Company, and the
Company would not benefit from derivative recoveries against such person.
The Directors have obtained insurance payable by the Company in reasonable
amounts against losses arising from tort claims or other claims which may be
made against a Director, officer, employee, agent or Shareholder of the Company.
TRANSACTIONS WITH AFFILIATES. The Company's Bylaws impose certain other
restrictions upon dealings between the Company and the Advisor, any Director or
Affiliates thereof. In particular, the Company may not:
(i) purchase real property from the Advisor, any Director or Affiliates
thereof, unless a majority of the Directors (including a majority of the
Independent Directors) not otherwise interested in such transaction determines
that such transaction is fair and reasonable to the Company and such transaction
is at a price to the Company no greater than the cost of the asset to the
Advisor, a Director or an Affiliate thereof, as the case may be, or if the price
to the Company is in excess of such cost, that substantial justification exists
and such excess is not unreasonable. In no event shall the cost of such asset to
the Company exceed its current Appraised Value;
(ii) make loans to the Advisor, any Director or Affiliates thereof;
(iii) borrow money from the Advisor, any Director or Affiliates thereof
unless a majority of the Directors (including a majority of the Independent
Directors) not otherwise interested in such transaction determines that such
transaction is fair, competitive and commercially reasonable and no less
favorable to the Company than would have been obtained between unaffiliated
lenders and borrowers under the same or similar circumstances;
(iv) invest in joint ventures with the Advisor, any Director or Affiliates
thereof, unless a majority of the Directors (including a majority of the
Independent Directors) not otherwise interested in such transaction determines
that the transaction is fair and reasonable to the Company and is on
substantially the same terms and conditions as would have been obtained with
unaffiliated joint venturers; and
(v) enter into any other transaction with the Advisor, any Director or
Affiliates thereof, unless a majority of the Directors (including a majority of
the Independent Directors) not otherwise interested in such transaction
determines that the transaction is fair and reasonable to the Company and is on
terms and conditions no less favorable than would have been obtained from
unaffiliated third parties and that payments to the Directors of the Company or
to the Advisor, or its Affiliates, for services rendered in a capacity other
than as Directors or as Advisor are not in excess of their current compensation
for comparable services and are not greater than charges for comparable services
from competent unaffiliated third parties.
No Properties of the Company may be sold to the Advisor, AFG, any Director
or any Affiliate of any of the foregoing.
SHAREHOLDER LIMITED LIABILITY. Under Delaware general corporate law, a
Shareholder's liability for claims made against the Company will be limited to
the extent of the Shareholder's investment. However, a Shareholder may have an
obligation to return Dividends under certain limited circumstances. See
"Investment Policies and Objectives -- Dividends."
REPORTS TO SHAREHOLDERS AND RIGHTS OF EXAMINATION. Within 120 days following
the close of each fiscal year, and at least 30 days before the date of the
Company's annual meeting of Shareholders, an annual report of the affairs of the
Company will be provided to the Shareholders, containing a balance sheet, income
statement, statement of changes in Shareholders' equity, and a statement of cash
flows prepared on an accrual
65
<PAGE> 74
basis in accordance with generally accepted accounting principles with a
reconciliation with respect to information furnished to Shareholders for tax
purposes and audited by an independent certified public accountant. The Company
must also report annually on fees, commissions and other compensation paid to or
earned by the Advisor, the Directors or their Affiliates during the year and
must fully disclose all material terms, factors and circumstances surrounding
any and all transactions involving the Company and the Directors, the Advisor or
their Affiliates during the year, with the Independent Directors examining and
commenting in the report as to the fairness of any such transactions. The
Company's Annual Report will contain such disclosures. The Company will also
provide Shareholders quarterly financial statements in the form specified by
Form 10-Q promulgated by the Securities and Exchange Commission within 60 days
after the close of each of the Company's first three fiscal quarters. The
Company will provide a proxy statement in connection with the annual meeting.
Shareholders of the Company have the right under Delaware law to inspect the
Shareholder list and other books and records of the Company for a proper
purpose.
RESTRICTIONS ON INVESTMENTS. The 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 consistent with the Company's objective to qualify as a REIT, the
Company will observe the following restrictions on its investments as set forth
in its Bylaws:
(i) Not more than 10% of the Company's total assets will be invested in
unimproved real property or indebtedness secured by a deed of trust or mortgage
loans on unimproved real property.
(ii) The Company may not invest in real estate contracts of sale.
(iii) The Company may not invest in the equity securities of any
non-governmental issuer, including other real estate investment trusts or
limited partnerships, for a period in excess of 18 months although it may
repurchase and retire its own shares. Investments otherwise permitted hereunder
in entities affiliated with the Advisor, any Director or Affiliates thereof are
subject to the restrictions on joint venture investment. See "Transactions with
Affiliates" above.
(iv) The Company has no present intention of investing in any type of debt;
however, if the Company invests in debt, it 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; (b) the senior debt is held by a person other than any Director,
the Advisor, or one of their Affiliates; and (c) the 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; provided, however, that the aggregate of such investment would
be limited to 10% of the Company's assets (which would be included in the 25%
limitation).
These investment restrictions cannot be changed except by an amendment to
the Bylaws approved by the holders of a majority of the outstanding Shares.
OTHER RESTRICTIONS. The Company's Bylaws contain other restrictions on its
activities, including restrictions regarding the aggregate amount of
indebtedness the Company may incur, restrictions upon the type of securities the
Company may issue, and restrictions against engaging in certain activities.
With respect to the incurrence of indebtedness, the Bylaws provide that the
Company may not incur secured indebtedness such that the Company's aggregate
secured borrowings exceed 50 % of the aggregate Purchase Price of the Company's
Properties (the amount of any single Property's secured indebtedness may not
exceed 80% of the purchase price of that specific Property) or, if a Property is
financed or refinanced, 50% of the appraised value of such Property when
financed or refinanced; and, the Bylaws further provide that the Company may not
incur, in addition to the secured borrowings described above, unsecured
borrowings in excess of 20% of the Invested Assets of the Company, in the
absence of a showing that a higher level of borrowing is appropriate and an
approval by the Independent Directors of borrowing in excess of that limit. In
66
<PAGE> 75
no event, however, may the Company incur total indebtedness in excess of 300% of
Invested Assets. The aggregate borrowings of the Company, secured and unsecured,
shall in all respects be reasonable in relation to the net assets of the
Company, and the level of such aggregate borrowings shall be reviewed by the
Directors at least quarterly. The 20% limitation of unsecured borrowings allows
the Company the flexibility of borrowing additional funds on an unsecured basis
for any emergencies or contingencies which may occur and for which the Working
Capital Reserve is not sufficient.
The Bylaws also prohibit the issuance by the Company of (i) equity
securities redeemable at the option of holder, (ii) securities on a
deferred-payment basis, or (iii) warrants or options exercisable for securities,
except in compliance with certain provisions of the Bylaws.
Additionally, the Bylaws prohibit the Company from engaging in the trading
(as compared with investment activities), underwriting or agency distribution of
securities issued by others, from issuing debt securities in the absence of
adequate cash flow to cover debt service and from holding property primarily for
sale to customers in the ordinary course of the trade or business.
These restrictions cannot be changed except by an amendment to the Bylaws
approved by the Shareholders holding a majority of the outstanding Shares.
AMENDMENTS. The Organization Documents may be amended by the affirmative vote
of the holders of a majority of the outstanding Shares. In addition, a majority
of the Directors may, without the approval or consent of the Shareholders, adopt
any amendment to the Bylaws which they in good faith determine to be necessary
to conform the Bylaws to the requirements of the REIT provisions of the Code,
the requirements imposed by the securities administrator of any state in which
the Shares are being offered and any other applicable laws or regulations.
MEETINGS OF SHAREHOLDERS AND VOTING. The annual meeting of the Shareholders
will be held on the first Tuesday of June in each year, and special meetings may
be called by the Chairman, the President, the Board of Directors, or by one or
more Shareholders holding not less than ten percent (10%) of the voting power of
the Company. At any meeting of Shareholders, each Shareholder is entitled to one
vote for each Share. In addition to the matters discussed under "Amendments"
above, the Shareholders are entitled to decide the following matters by a
majority vote of the Shares at a meeting at which a quorum is present, or by the
written consent of a majority of the outstanding Shares without a meeting: (i)
the election or removal of Directors; (ii) increase or decrease the number of
Directors (between three and five); (iii) termination of the Advisory Agreement
upon 60 days' notice; (iv) ratification of any transaction between the Company
and any Affiliate of the Company; and (v) any amendment to the Certificate of
Incorporation. The Directors or the Independent Directors may also make certain
of these decisions without Shareholder approval.
WHO SHOULD INVEST
SUITABILITY STANDARDS
The Shares will only be sold to an investor who represents in writing that
the investor has either (i) a net worth (exclusive of home, home furnishings and
automobiles) of at least $30,000 and estimates that the investor will have gross
income during the current year of at least $30,000; or (ii) a net worth of
$75,000 (determined with the same exclusions); or (iii) that the investor is
purchasing in a fiduciary capacity for a person or entity meeting such
conditions. In the case of sales to fiduciary accounts, such conditions must be
met by the fiduciary, by the fiduciary account, or by the donor who directly or
indirectly supplies the funds for the purchase of the Units. If sales are made
to fiduciary accounts in the State of California, the suitability requirements
must be met by each beneficiary of the fiduciary account; provided however, if
the only beneficiaries of the fiduciary account are the donor's ancestors,
descendants or spouse, the suitability standards may be met by the donor to the
fiduciary account. If the fiduciary is the donor of the funds for investment,
the suitability requirements may be met by the fiduciary.
The minimum number of Shares which an investor may initially purchase is
100 ($1,000).
67
<PAGE> 76
The Selling Agreement between the Company and the Selling Agent requires
the Selling Agent and Selected Dealers to diligently make inquiries as required
by law of all prospective purchasers of Shares in order to ascertain whether
such purchase is suitable for such person, and to promptly transmit to the
Company a fully completed and duly executed Subscription Agreement and funds
concurrently therewith.
Certain states in which it is contemplated the Company will apply to have
the Shares qualified or registered for sale may establish suitability standards
and minimum purchase requirements different from those set by the Company. In
the event that such suitability and minimum purchase standards are higher than
those set by the Company, such facts are set forth below or will be set forth in
a sticker or supplement to the Prospectus. Unless otherwise so indicated, those
states in which the Company is authorized to sell its securities have minimum
investment requirements and investor suitability standards which come within the
standards established by the Company.
Shares will be sold to investors in the state of Arizona, who represent in
writing that the investor has either (i) a net worth (exclusive of home, home
furnishings and automobiles) of $45,000 and estimates that the investor will
have gross income during the current year of at least $45,000; or (ii) a net
worth of $150,000 (determined with the same exclusions); or (iii) that the
investor is purchasing in a fiduciary capacity for a person or entity meeting
such conditions. In the case of sales to fiduciary accounts, such conditions
must be met by the fiduciary, by the fiduciary account, or by the donor who
directly or indirectly supplies the funds for the purchase of the Units.
HOW TO SUBSCRIBE
An investor who meets the qualifications set forth above may subscribe to
acquire Shares by executing a Subscription Agreement. By subscribing for Shares,
each investor will be deemed to have made all of the representations contained
in the Subscription Agreement and will be bound by all of the terms of the
Subscription Agreement.
The Company shall finally accept or reject subscriptions within 30 days
after the Company has received subscriptions (but the admission of an investor
to the Company shall be subject to acceptance of subscriptions for the minimum
number of Shares).
PLAN OF DISTRIBUTION
A maximum of 1,500,000 Shares are offered through Associated Securities
Corp., (a member of the National Association of Securities Dealers, Inc.
("NASD")), a wholly owned subsidiary of AFG, as Selling Agent of the Shares
pursuant to a Selling Agreement. The Company is offering the Shares through the
Selling Agent and other Selected Dealers who are members of the NASD. The Shares
are being sold on a best efforts, minimum-maximum basis which means that the
Selling Agent and other Selected Dealers are not obligated to purchase any
Shares but are only required to use their best efforts to sell Shares to
investors as of March 18, 1997, the Company has sold 345,528 Shares in this
offering.
The Selling Agent and Selected Dealers will be paid a sales commission 7%
by the Company of the $10.00 per Share offering price on all Shares sold by the
Selling Agent or Selected Dealers. The Selling Agent will also receive 1% of the
$10.00 per Share offering price for wholesaling compensation and .5% of the
$10.00 per Share offering price from the Company for bona fide due diligence
expenses. Shares may be purchased without payment of any sales commissions by
current or retired employees, officers and directors of the Company, the
Advisor, the Selling Agent and Selected Dealers and their registered
representatives and any of their Affiliates (and the families of any of the
foregoing) and trust or employee benefit plans established exclusively for the
benefit of such Persons.
Notwithstanding the foregoing, no sales commission will be paid to the
Selling Agent or Selected Dealers when qualified pension plans, profit sharing
plans, Keogh plans, or individual retirement accounts purchase a minimum of
$500,000 of Shares. Such investors will purchase Shares at $9.30 per Share and
the net proceeds to the Company will not be affected. Subscriptions for Shares
will not be aggregated or combined unless the Shares will be owned by, or for
the benefit of, a single Person's pension plan, profit sharing plan, Keogh plan
68
<PAGE> 77
and/or individual retirement account. In addition, if a registered investment
advisor is receiving a fee for receiving investment advice regarding an
investment in the Company's Shares, the Company will not pay a sales commission
to the registered investment adviser for the sale of such Shares.
In addition to the sales commission, the Company will pay to the Selling
Agent and Selected Dealers an annual monitoring fee (the "Monitoring Fee") with
respect to all Shares sold to clients of the Selling Agent or Selected Dealers
on each April 15 commencing on April 15, 1997 in an amount equal to .15% of the
gross proceeds of all such Shares. Such fee may be payable up to a maximum of
eleven years. No portion of the Monitoring Fee for any year shall accrue in, or
be payable for, such year in which the Company is liquidated or the Shares
become publicly traded. Notwithstanding the foregoing, the Company shall not pay
the portion of the Monitoring Fee for any year which, if paid, would cause the
total underwriting compensation paid to the Selling Agent and Selected Dealers
in connection with the offering, including sales commissions, wholesaling
compensation and all Monitoring Fees, to be equal to or to exceed 10% of the
gross proceeds.
The Advisor will receive reimbursement for organization and offering
services performed by them in connection with this offering which consist of
expenses relating to the Company's organization and formation, for all legal,
accounting, due diligence, printing expenses and for all other expenses relating
to the registration, marketing and distribution of this offering, other than
retail sales commissions. This reimbursement expense allowance is limited to 40
cents per Share for each Share sold up to an aggregate of $500,000 and may be
nonaccountable to the extent that such nonaccountable expenses do not exceed 3%
of the gross offering proceeds. All such expenses in excess of this limit will
be borne by the Advisor.
The total payments made by the Company or any of its Affiliates to the
Advisor, Selling Agent and the Selected Dealers in connection with this
offering, including all Offering and Organization Expenses, will not exceed
14.5% of the gross proceeds obtained from the sale of Shares.
The Selling Agreement, which may be terminated by the Company on 60 days'
notice without penalty, contains cross-indemnity clauses with respect to certain
liabilities between the Company and the Selling Agent, including liabilities
under the Securities Act of 1933. The indemnities of the Company inure to the
benefit of all Selected Dealers participating in the offering. Selected Dealers
participating in this offering may be deemed to be "underwriters" as that term
is defined in the Securities Act of 1933.
ESCROW ARRANGEMENTS. Funds received by the Company from prospective investors
will be placed in an interest bearing escrow account at City National Bank as
escrow agent during the offering and the Company will issue Shares periodically
(but not less often than quarterly) as agreed between the Company and the
Selling Agent. Accrued interest will be paid by the Company to those Subscribers
whose funds are paid into the escrow account within 30 days after funds are
withdrawn from such escrow account and computed from the date each investor's
subscription payment is collected in the escrow account.
AFG, the Advisor or any Affiliate may purchase as many Shares as they wish
(provided that their collective holdings do not exceed 35% of the Shares), but
presently have no intention to purchase any Shares. Shares purchased by AFG, the
Advisor or any Affiliate shall be only for investment and without present
intention to resell, and shall only be purchased on the same terms and
conditions on which the Shares are offered to the public, except that no sales
commissions shall be payable upon any such purchase of Shares. Any Shares
purchased by AFG, the Advisor or any Affiliate may be included in satisfying the
minimum offering requirement.
Investors will be issued Shares not later than the last calendar day of the
month following the month in which funds are released from the escrow account to
the Company.
OFFERING PERIOD. If the Company does not terminate this offering earlier, the
offering of Shares will continue until the earlier of 24 months from the initial
date of this Prospectus or 1,500,000 Shares are sold.
METHOD OF SUBSCRIPTION. To purchase Shares, an investor must complete and
execute an application to purchase Shares as set forth in the Subscription
Agreement included with this Prospectus. Shares will only be sold to an investor
who makes a minimum purchase of 100 Shares ($1,000). Additional Shares may only
be purchased in 10-Share ($100) increments, except that smaller increments will
be made available for Dividend
69
<PAGE> 78
Reinvestment Plans, IRA and Keogh plan rollovers. Any purchase of Shares must be
accompanied by tender of the full sum of $10.00 per Share for each Share
purchased. Once the subscription is submitted to the Company, the investor will
not have a right to revoke the subscription. Subscriptions will be accepted or
rejected by the Company within 30 days after the receipt by the escrow agent of
the purchase price. If the subscription is rejected for any reason, the
investor's subscription will be promptly returned without interest.
TRANSFERABILITY; CROSSING ARRANGEMENT. Except under certain circumstances as
set forth in "Redemption and Prohibition of Transfer of Shares" above, there are
no restrictions on transfer of the Shares; however, a market is unlikely to
develop during this offering and there can be no assurance that a market will
therefore develop for the Shares. However, the Company intends to use a Crossing
Arrangement pursuant to which Associated Securities Corp. (the "Crossing
Agent"), an Affiliate of AFG, will match buy and sell orders for Shares at
negotiated commissions or markups. The Crossing Arrangement is expected to
continue for a period of approximately two years but may continue longer.
Upon receipt of a sell order from a current Shareholder, the Crossing Agent
will arrange for the sale of the Shares to one or more persons who have placed
orders to purchase Shares either through the Crossing Arrangement or through the
Dividend Reinvestment Plan. Neither the Company nor the Crossing Agent can
guarantee that sales of Shares will be effected through this Crossing
Arrangement. The Crossing Agent will not solicit sell orders from any existing
Shareholder.
Shareholders who wish to sell their Shares through this Crossing
Arrangement should contact the Company directly, at the following address or
telephone number:
5933 W. Century Boulevard, Ninth Floor
Los Angeles, California 90045
(310) 337-9700
There is no requirement that Shareholders utilize the services of the
Crossing Agent in the sale of their Shares. Other broker-dealers may offer
similar services to selling Shareholders, and there can be no assurance that the
price per Share received from the Crossing Agent will be the best possible
price. The Company may, from time to time, change the terms of the crossing
arrangement in such fashion as it believes appropriate.
The Company may apply for quotation of the Shares on the NASDAQ System, but
there can be no assurance that it will apply, that the application will be
approved or that an active public trading market for the Shares will thereafter
develop. See "Risk Factors -- Limited Transferability."
West Coast Realty Advisors, Inc. is the transfer agent and registrar for
the Shares. The actual issuance of a stock certificate evidencing the Shares is
optional under the transfer agent's system. IRA and Keogh Account investors will
not be issued share certificates. Shareholders who do not elect to receive a
stock certificate will own Shares in "uncertificated" form, and will be treated
in the same manner as Shareholders who elect to receive a stock certificate.
Owning Shares in an "uncertificated" form will (a) eliminate the physical
handling and safekeeping responsibilities inherent in owning transferable stock
certificates, and (b) eliminate the need to return a duly executed stock
certificate to the transfer agent to effect a transfer. Transfers can be
effected simply by mailing a duly executed stock power to the transfer agent.
DIVIDEND REINVESTMENT PLAN. The fund has established a Dividend Reinvestment
Plan (the "Plan") which is designed to enable Shareholders to have Dividends
automatically invested in Shares of the Company. In order to participate in the
Plan, investors must designate in the Subscription Agreement received with this
Prospectus the manner in which they would like their Dividends reinvested.
Shareholders may elect to participate in the Plan at any time. If a Shareholder
does not indicate a Dividend reinvestment option, Dividends will be paid to such
Shareholder in cash.
Associated Securities Corp. will act as the Plan's agent (the "Agent") for
participating Shareholders. During this offering, the Agent will purchase Shares
for participating Shareholders from the Selling Agent at a
70
<PAGE> 79
price of $10.00 per Share. Of the Shares being offered by this Prospectus, one
hundred thousand shares have been reserved for the Crossing Arrangement and the
Plan.
From the completion of this offering until the Shares are quoted on the
NASDAQ System, the Agent will receive any cash Dividends payable to the
participating Shareholders and use these amounts to purchase Shares for
participants through the Crossing Agent who will match the Shares owned by
Shareholders who wish to sell, with purchases to be made by the Plan. The Plan
will not pay in excess of $9.30 per Share to the Crossing Agent. If an
insufficient number of Shares are presented for sale to the Plan at an
acceptable price, the purchases for the participants will be made either pro
rata or by lot and the remaining amount of cash Dividends not used to purchase
Shares will be returned to the appropriate Shareholders.
If listed on the NASDAQ System, the Agent will purchase Shares for
participants in the over-the-counter trading market at negotiated commissions or
markups, to the extent Shares are available. Purchases will generally be made
within 30 days after the funds are received by the Agent, and pending
investment, funds temporarily will be held in non-interest bearing accounts for
administrative convenience. If Shares are not reasonably available in the market
during such period, the Agent will return a participating Shareholder's pro rata
portion of the remaining funds. If a participant's Dividend is not large enough
to buy a full Share, such participant will be credited with a fractional Share
computed to six decimal places. The Agent will add the Shares purchased to each
participant's capital account as Shares in "uncertificated" form, unless the
participant requests certificates for full Shares in writing. The purchased
Share(s) will then participate in the Plan to the extent of any future
Dividends. Participants will have the right to vote all Shares held in their
Plan accounts, whether in certificates or uncertificated form.
Following each reinvestment under the Plan, each participant will be sent a
confirmation showing the amount of Dividends reinvested, the service and any
brokerage charges deducted, the number and price of Shares purchased, and the
balance of Shares held by the Agent in the participant's account under the Plan.
In addition, each participant will be provided annually with tax information
regarding the reinvestment of Dividends pursuant to the Plan, including
information with respect to income earned on Shares under the Plan for each
calendar year which will be shown on a Form 1099-DIV United States Information
Return.
The Plan and the reinvestment of Dividends in additional Shares thereunder
has been structured to enable the Company to qualify as a REIT under the
applicable provisions of the Code. Therefore, any Dividends to which a
participating Shareholder is entitled will be taxable to the Shareholder
substantially to the same extent as if the Dividends had been received in cash
rather than reinvested in the Company. See "Tax Consequences -- Requirements for
Qualification as a REIT -- Distributions to Shareholders."
Participation in the Plan will start with the next Dividend payable after
receipt of a participant's authorization. Copies of the Company's most current
Prospectus, during the period in which this offering is still in progress, will
be available to any Shareholder on written request to the Company at its
principal office.
A Shareholder's participation in the Plan will continue until terminated by
the Shareholder, the Company or the Agent. A Shareholder may terminate
participation in the Plan at any time by delivering written notice before the
record date for the next Dividend to the Agent at: 5933 W. Century Boulevard,
Ninth Floor, Los Angeles, California 90045. Within 30 days after notice of
termination, the Agent will send a confirmation to the participant evidencing
the whole and fractional Shares in such Shareholder's account. Any future
Dividends will then be paid directly to the Shareholder. The Company may
terminate the Plan for any reason by sending written notice to each
participating Shareholder at the address shown on the Agent's records.
The foregoing summary is qualified in its entirety by reference to the
Plan, a copy of which has been filed as an exhibit to the Registration
Statement. Experience under the Plan may indicate changes are desirable.
Accordingly, the Company reserves the right to amend any aspect of the Plan
effective with respect to any Dividend paid subsequent to notice of the change
sent to participants in the Plan at least 30 days prior to any Dividend record
date. The Company also reserves the right to change the Agent for any reason at
any time with like notice.
71
<PAGE> 80
SALES MATERIAL
The Company may utilize certain sales material in connection with this
offering. In certain jurisdictions, sales material may not be available. This
material may include other material relating to the offering, property brochures
and articles and publications concerning real estate and REITs.
Other than a sales brochure which will accompany the Prospectus, the
Company has not authorized the use of sales material. This offering is made only
by means of this Prospectus. Although the information contained in sales
material does not conflict with any of the information contained in this
Prospectus, the sales material does not purport to be complete, and should not
be considered as part of this Prospectus or as incorporated in this Prospectus
by reference, or as forming the basis of this offering.
LEGAL MATTERS
The legality of the securities offered hereby will be passed upon for the
Company by Gipson Hoffman & Pancione, a Professional Corporation, Los Angeles,
California. Gipson Hoffman & Pancione has also rendered an opinion with respect
to certain federal income tax matters as referred to under "Tax Consequences."
EXPERTS
The financial statements and schedules of the Company included in this
Prospectus and in the Registration Statement have been audited by BDO Seidman,
LLP, and Hunicutt Okamoto & Associates, independent certified public
accountants, to the extent and for the periods set forth in their reports
appearing elsewhere herein and in the Registration Statement, and are included
in reliance upon such reports given upon the authority of said firms as experts
in auditing and accounting.
FURTHER INFORMATION
This Prospectus does not contain all the information set forth in the
Registration Statement and the exhibits relating thereto which the Company has
filed with the Securities and Exchange Commission, 450 Fifth Street, N.W.,
Washington, D.C. 20549, under the Securities Act of 1933, and to which reference
is hereby made. Copies of the exhibits are on file at the offices of the
Securities and Exchange Commission in Washington, D.C. and may be obtained, upon
payment of the fee prescribed by the Commission, or may be examined without
charge at the offices of the Commission.
GLOSSARY
"ACQUISITION EXPENSES" means all expenses, including but not limited to
legal fees and expenses, travel and communication expenses, costs of appraisals,
nonrefundable option payments on property not acquired, accounting fees and
expenses, title insurance, and miscellaneous expenses related to the selection
and acquisition of properties, whether or not acquired.
"ACQUISITION FEES" means all fees and commissions paid by any person to any
person in connection with the investigation, selection, purchase or improvement
of real estate by the Company, whether designated as a real estate commission,
selection fee, non-recurring management fee, non-recurring start-up fee,
construction fee, or any fee of a similar nature, however designated, but not to
include any fees or expenses paid to any party upon financing or refinancing
where the proceeds of such financing or refinancing are not reinvested in real
estate.
"ADJUSTED PRICE PER SHARE" means, with respect to the Shares, $10.00 per
share less all Dividends or other distributions paid out of Cash From Sales or
Refinancings of Properties; and adjusted for any stock split, Dividends in
Shares or combinations or reclassifications resulting in an increase or decrease
in the number of Shares outstanding.
72
<PAGE> 81
"ADVISOR" means any Person whom the Company employs or appoints or with
whom the Company contracts under the provisions of Article VII hereof and who is
responsible for directing or performing the day-to-day business affairs of the
Company, including a person to which an Advisor subcontracts substantially all
said functions.
"ADVISORY AGREEMENT" means an agreement between the Company and its Advisor
that provides for the payment of any regular advisory or incentive compensation,
other than an agreement that provides for compensation based only on the
acquisition, disposition or refinancing of Company properties.
"ADVISORY FEE" means the fee paid to the Advisor for day-to-day advice and
services in managing and carrying on the business and operations of the Company
pursuant to the Advisory Agreement with the Company, as described in
"Compensation of Advisor and Affiliates."
"AFFILIATES" means an Affiliate of another Person includes any of the
following (a) any Person directly or indirectly controlling, controlled by or
under common control with such other Person, (b) any person directly or
indirectly owning, controlling or holding with power to vote 10% or more of the
outstanding voting securities of such other Person, (c) any executive officer,
director, trustee or general partner of such other Person, (d) any legal entity
for which such Person acts as an officer, director, trustee or partner, and (e)
any Person 10% or more of whose outstanding voting securities are directly or
indirectly owned, controlled or held with power to vote by such other Person.
"AFG" means Associated Financial Group, Inc., the sponsor of the Company.
"ANNUAL REPORT" means the Annual Report distributed to shareholders which
shall contain financial statements prepared in accordance with generally
accepted accounting principles which are audited and reported upon by
independent certified public accountants.
"APPRAISAL" means the value of, as of the date of the Appraisal of real
property in its existing state or in a state to be created, as determined by an
Independent Expert. The Directors may in good faith rely on a previous Appraisal
made on behalf of other Persons, provided, (a) it meets these standards and was
made in connection with an investment in which the Company acquires an entire or
participating interest, or (b) it was prepared not earlier than two years prior
to the acquisition by the Company of its interest in the real property. In
appraising Properties, appraisers may take into consideration each of the
specific terms and conditions of a purchase, including any leaseback or other
guarantee arrangement. An Appraisal may not necessarily represent the cash value
of the Property but may consider the value of the income stream from the
Property plus discounted value of the fee interest, and other terms of the
purchase.
"AVERAGE INVESTED ASSETS" means the average of the aggregate book value,
for any period, of the assets of the Company invested, directly or indirectly,
in equity interests in and loans secured by real estate, before reserves for
depreciation or bad debts or other similar non-cash reserves. Average Invested
Assets is computed by taking the average of such values at the end of each month
during such period.
"BYLAWS" means these Bylaws and all amendments, restatements, or
modifications thereof. References in these Bylaws to "herein," "hereof," and
"hereunder" shall be deemed to refer to these Bylaws and shall not be limited to
the particular text, article, or section in which such words appear.
"CASH AVAILABLE FOR DISTRIBUTION" means for any period cash from operations
(consisting of net income from operations plus depreciation and amortization
expenses) for such period.
"CASH FROM SALES OR REFINANCINGS" means net cash realized by the Company
from the Sale or Disposition of any Property after retirement of applicable
secured debt and the payment of all expenses related to the transaction. Cash
from Sales or Refinancings shall not include amounts withheld for Working
Capital Reserves.
"CERTIFICATE OF INCORPORATION" means the articles of incorporation for the
Company, as they may be amended from time to time, as filed with the Delaware
Secretary of State.
"CODE" means the Internal Revenue Code of 1986, as amended.
73
<PAGE> 82
"COMPANY" means West Coast Realty Investors, Inc.
"COMPETITIVE COMMISSION" means the real estate or brokerage commission paid
for the purchase or sale of a Property which is reasonable, customary and
competitive in light of the size, type and location of the Property.
"CONSTRUCTION FEE" means a fee or other remuneration for acting as general
contractor and/or construction manager to construct improvements, supervise and
coordinate projects or to provide major repairs or rehabilitation on a Company's
Property.
"CROSSING ARRANGEMENT" means the matching of buy orders and sell orders of
the Company's Shares at negotiated commissions or markups.
"DEVELOPMENT FEE" means a fee for the packaging of the Company's Property,
including negotiating and approving plans, and undertaking to assist in
obtaining zoning and necessary variances and necessary financing for the
specific Property, either initially or at a later date.
"DIRECTORS" means as of any particular time, the members of the board of
directors of the Company holding office at such time.
"DISTRIBUTION" means any dividend or other distribution of cash distributed
to anyone, including Shareholders, arising from their interests in the Company.
"DIVIDEND" means any Distribution made to Shareholders arising from their
interests in the Company.
"INDEPENDENT DIRECTORS" means Directors of the Company who are not
associated and have not been associated within the last two years, directly or
indirectly, with the Advisor or Sponsor of the Company, (a) a Director shall be
deemed to be associated with the Sponsor or Advisor if he or she: (i) owns an
interest in the Sponsor, Advisor, or any of their Affiliates; or (ii) is
employed by the Sponsor, Advisor or any of their Affiliates; or (iii) is an
officer or director of the Sponsor, Advisor, or any of their Affiliates; or (iv)
performs services, other than as a Director, for the Company; or (v) is a
Director for more than three REITS organized by the Sponsor or advised the
Advisor; or (vi) has any material business or professional relationship with the
Sponsor, Advisor, or any of their Affiliates; (b) for purposes of determining
whether or not the business or professional relationship is material, the gross
revenue derived by the prospective Independent Director from the Sponsor and
Advisor and Affiliates shall be deemed material per se if it exceeds 5% of the
prospective Independent Directors (i) annual gross revenue, derived from all
sources, during either of the last two years; or (ii) net worth, on a fair
market value basis, (c) an indirect relationship shall include circumstances in
which a Director's spouse, parents, children, siblings, mothers- or
fathers-in-law, sons- or daughters-in-law, or brothers- or sisters-in-law is or
has been associated with the Sponsor, Advisor, any of their Affiliates, or the
Company.
"INDEPENDENT EXPERT" means a Person with no material current or prior
business or personal relationship with the Advisor or Directors who is engaged
to a substantial extent in the business of rendering opinions regarding the
value of assets of the type held by the Company.
"INVESTED ASSETS" means for any fiscal quarter, the total assets (other
than intangibles) of the Company valued at cost before deducting depreciation or
other noncash reserves, less liabilities. Invested assets is computed by taking
the average of such values at the end of each month during such quarter.
"MONITORING FEE" means the annual fee paid by the Company to the Selling
Agent with respect to Shares sold to clients of the Selling Agent or Selected
Dealer in an amount equal to .15% of the gross proceeds from the sale of such
Shares, payable beginning on April 15, 1997 and on or before April 15 of each
succeeding year.
"NET INCOME" means for any period, the total revenues applicable to such
period, less expenses applicable to such period, other than additions to
reserves for depreciation or bad debts or other similar non-cash reserves. If
the Company's Advisor receives an incentive fee as provided in Section 8.3(l)
hereof, Net Income, for purposes of calculating Operating Expenses, shall
exclude the gain from the sale or disposition of the Company's assets.
74
<PAGE> 83
"OFFERING PROCEEDS" means the total amount of proceeds received by the
Company pursuant to the sale of its Shares in any public offering of the
Company's Shares.
"OPERATING EXPENSES" means the aggregate annual expenses of every character
paid or incurred by the Company as determined in accordance with generally
accepted accounting principles, as determined by independent accountants
selected by the Directors, including regular and incentive compensation payable
to the Advisor, excluding, however, the following: (a) the expenses of raising
capital such as Organization and Offering Expenses, legal, audit, underwriting,
brokerage, listing, registration and other fees, printing and such other
expenses, and tax incurred in connection with the issuance, distribution,
transfer, registration, and stock exchange listing of the Company's securities;
(b) interest (i. e., the cost of money borrowed by the Company; (c) taxes on
income, taxes and assessments on real property and all other taxes applicable to
the Company; (d) subordinated incentive fees based upon the excess of the sales
prices of Properties over their purchase prices as provided for in Section
8.3(l) of the bylaws; (e) Acquisition Fees, Acquisition Expenses, real estate
commissions on resale of Property, and other expenses connected with the
acquiring, financing, refinancing, disposing of, maintaining, managing and
owning real estate equity interests, mortgage loans, or other property
(including the costs of foreclosure, insurance premiums, legal services,
maintenance, repair and improvement of property); and (f) non-cash expenditures
(including depreciation, amortization and bad debt reserve).
"ORGANIZATION AND OFFERING EXPENSES" means all the actual and necessary
expenses incurred by and to be paid from the assets of the Company in connection
with and in preparing the Company's securities for registration and subsequently
offering and distributing them to the public, including, but not limited to,
total underwriting and brokerage discount, the Monitoring Fee and commissions
(including fees of the underwriters' attorneys), expenses for printing,
engraving, mailing, salaries, registrars, trustees, escrow holders,
depositaries, experts, expenses of qualification of the sale of the securities
under Federal and State laws, including taxes and fees, accountants' and
attorneys' fees.
"ORGANIZATION DOCUMENTS" means the Certificate of Incorporation and the
Bylaws of the Company.
"ORIGINAL INVESTED CAPITAL" means the total cash investment (either as a
down payment, mortgage reduction payment or capital expense) in a Property.
"PERSON" means any natural person, partnership, corporation, association,
trust, limited liability company or other legal entity.
"PROPERTY" or "PROPERTIES" means all properties or any interest in an
property acquired directly or indirectly by the Company, including any direct or
indirect investment in any interest in land, leasehold interests, and buildings,
structures, improvements, fixtures, equipment and furnishings in connection with
land, leasehold interests and rights or interests in land, whether equity or
debt, or any entity, partnership or venture whose principal purpose is to make
any such investment or investments. Reference to a "Property" shall be to any
one of them.
"PROPERTY MANAGEMENT FEE" means the fee payable to West Coast Realty
Management, Inc., an Affiliate of the Advisor, or other entities for property
management services pursuant to a property management agreement.
"PROSPECTUS" means this Prospectus and any Supplements hereto.
"PURCHASE PRICE" means the amount actually paid or allocated to the
purchase, development, construction or improvement of a Property exclusive of
Acquisition Fees and Acquisition Expenses.
"REAL ESTATE COMMISSION" means the real estate brokerage commission payable
to the Advisor, Descolin Incorporated, or an Affiliate, upon sale of a Property
pursuant to the Advisory Agreement as described in "Compensation of Advisor and
Affiliates."
"REAL ESTATE INVESTMENT TRUST" or "REIT" means a real estate investment
trust, as defined in Part II, Subchapter M of Chapter 1 (Sections 856-860) of
the Code.
"REINVESTMENT PROCEEDS" means the amount of proceeds from the sale,
financing or refinancing of a Property used to acquire an additional Property.
75
<PAGE> 84
"ROLLUP" means a transaction involving the acquisition, merger, conversion
or consolidation either directly or indirectly of the Company and the issuance
of securities of a Rollup Entity. Such term does not include (a) a transaction
involving securities of the Company that have been listed for at least twelve
months on a national securities exchange or traded through the National
Association of Securities Dealers Automated Quotation National Market System or
(b) a transaction involving the conversion to corporate, trust or association
form of only the Company if, as a consequence of the transaction, there will be
no significant adverse change in any of the following (i) the Shareholders'
voting rights, (ii) the term of existence of the Company, (iii) compensation to
the Sponsor or Advisor, or (iv) the Company's investment objectives.
"ROLLUP ENTITY" means a partnership, REIT, corporation, trust or other
entity that will be created or would survive after the successful completion of
a proposed Rollup transaction.
"RULING REQUEST" means the request made by the Company to the Internal
Revenue Service that West Coast Realty Management, Inc. is an independent
contractor.
"SALE OR DISPOSITION" means any: (i) disposition of a Company asset not in
the ordinary course of its business, including without limitation, sales,
exchanges or other dispositions of real or personal property; (ii)
condemnations; (iii) recovery of damage awards and insurance proceeds (other
than business or rental interruption insurance proceeds); or (iv) any borrowings
or mortgage financings or refinancings (other than any financing upon the
initial acquisition of Properties). The disposition of a Property by transfer
back to the seller or an Affiliate thereof, whether in the form of a rescission,
exchange or resale or pursuant to an option or an arrangement entered into at or
prior to the time of taking title to the Property, shall not, if the proceeds
from such transfer back are reinvested in other Property, constitute a Sale or
Disposition and shall not result in Cash From Sales or Refinancings.
"SELECTED DEALERS" means members of the National Association of Securities
Dealers, Inc., participating in the offering. See "Plan of Distribution."
"SELLING AGENT" means Associated Securities Corp.
"SHAREHOLDERS" means the beneficial holders of the Company's Shares.
"SHARES" means shares of common stock of the Company.
"SPONSOR" means any person directly or indirectly instrumental in
organizing the Company, wholly or in part, or who will manage or participate in
the management of the Company and its Affiliates.
"SPONSOR" does not include any unaffiliated person whose only relationship
with the Company is that of an independent property manager receiving
compensation from the Company as such, and unaffiliated third parties such as
attorneys, tax preparers, accountants and underwriters whose only compensation
from the Company is for the professional services rendered in connection with
the offering of the Company's securities or the operations of the Company. A
person may also be a Sponsor of the Company by (a) taking the initiative
directly or indirectly in founding or organizing the business or enterprise of
the Company, either alone or in conjunction with one or more other persons, (b)
receiving a material participation in the Company in connection with the
founding or organization of the business of the Company in consideration of
services or property or both services and property, (c) having a substantial
number of relationships and contacts with the Company, (d) possessing
significant rights to control the Company's properties, (e) receiving fees for
providing services to the Company which are paid on a basis that is not
customary in the industry, or (f) providing goods or services to the Company on
a basis which was not negotiated at arms' length with the Company.
"SUBORDINATED INCENTIVE FEE" means the fee payable to the Advisor pursuant
to the Advisory Agreement upon the sale, financing or refinancing of a Property,
as described in "Compensation of Advisor and Affiliates."
"TAXABLE INCOME" means the real estate investment trust taxable income of
the Company for federal income tax purposes, determined without regard to the
deduction for dividends paid and by excluding any net capital gain.
76
<PAGE> 85
"UNIMPROVED REAL PROPERTY" means the real property which has the following
three characteristics: (a) An equity interest in real property which was not
acquired for the purpose of producing rental or other operating income; (b) Has
no development or construction in process on such land; and (c) No development
or construction on such land is planned in good faith to commence on such land
within one year.
"WCRM" means West Coast Realty Management, Inc.
"WORKING CAPITAL RESERVES" means cash reserves of the Company as needed for
normal operations, repairs, maintenance, and other contingencies.
77
<PAGE> 86
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
West Coast Realty Investors
Audited Financial Statements
Report of Independent Certified Public Accountants...................................... F-1
Balance Sheets as of December 31, 1996 and 1995......................................... F-2
Statements of Income for the years ended December 31, 1996, December 31, 1995
and December 31, 1994................................................................ F-3
Statements of Stockholders' Equity for the years ended December 31, 1996, December 31,
1995 and December 31, 1994............................................................ F-4
Statements of Cash Flows for the years ended December 31, 1996, December 31, 1995 and
December 31, 1994..................................................................... F-5
Summary of Accounting Policies.......................................................... F-6
Notes to Financial Statements........................................................... F-8
Schedule III -- Real Estate and Accumulated Depreciation................................ F-15
Schedule IV -- Mortgage Loans on Real Estate............................................ F-17
Java City Property
Report on Independent Certified Public Accountants........................................ F-19
Summary of Historical Information Relating to Operating Revenues and Specified Expenses... F-20
Notes to Summary of Historical Information Relating to Operating Revenues and Specified
Expenses................................................................................ F-21
Estimated Twelve Month Pro Forma Statement of Taxable Operating Income (unaudited)........ F-22
Estimated Twelve Month Pro Forma Statement of Cash Available from Operations
(unaudited)............................................................................. F-22
Notes to Pro Forma Statements............................................................. F-23
Tycom Property
Report of Independent Certified Public Accountants........................................ F-24
Summary of Historical Information Relating to Operating Revenues and Specified Expenses... F-25
Notes to Summary of Historical Information Relating to Operating Revenues and Specified
Expenses................................................................................ F-26
Estimated Twelve Month Pro Forma Statement of Taxable Operating Income (unaudited)........ F-27
Estimated Twelve Month Pro Forma Statement of Cash Available From Operations
(unaudited)............................................................................. F-27
Notes to Pro Forma Statements............................................................. F-28
West Coast Realty Investors, Inc.
Pro Forma Balance Sheet as of December 31, 1996 (unaudited)............................... F-29
Notes to Pro Forma Balance Sheet as of December 31, 1996 (unaudited)...................... F-30
Pro Forma Statement of income for the year ended December 31, 1996 (unaudited)............ F-31
Notes to Pro Forma Income Statement for year ended December 31, 1996 (unaudited).......... F-32
</TABLE>
78
<PAGE> 87
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
West Coast Realty Investors, Inc.
Los Angeles, California
We have audited the accompanying balance sheets of West Coast Realty
Investors, Inc., as of December 31, 1996 and 1995 and the related statements of
income, stockholders' equity, and cash flows for each of the years ended
December 31, 1996, 1995 and 1994. We have also audited the schedules listed in
the accompanying index. These financial statements and schedules are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and schedules are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements and
schedules. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of West Coast Realty Investors,
Inc. at December 31, 1996 and 1995, and the results of its operations and its
cash flows for each of the years ended December 31, 1996, 1995 and 1994 in
conformity with generally accepted accounting principles.
Also in our opinion, the schedules present fairly, in all material
respects, the information set forth there.
BDO SEIDMAN, LLP
Los Angeles, California
February 28, 1997
F-1
<PAGE> 88
WEST COAST REALTY INVESTORS, INC.
BALANCE SHEETS
------------------------
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1996 1995
----------- -----------
<S> <C> <C>
ASSETS
Rental properties, net of accumulated depreciation (Notes 2 and
3)............................................................ $21,118,203 $19,650,165
Cash and cash equivalents....................................... 2,017,194 1,450,022
Accounts receivable............................................. 247,948 132,148
Loan origination fees, net of accumulated amortization of
$21,161 and $19,087........................................... 102,622 119,969
Other assets.................................................... 85,871 40,594
----------- -----------
Total assets.................................................... $23,571,838 $21,392,898
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Accounts payable.............................................. $ 13,922 $ 25,419
Due to related party (Note 4)................................. 46,285 167,314
Dividends payable (Note 7).................................... 302,760 226,649
Security deposits and prepaid rents........................... 124,734 109,068
Other liabilities............................................. 100,453 90,431
Notes payable (Note 5)........................................ 10,078,793 9,539,180
----------- -----------
Total liabilities............................................... 10,666,947 10,158,061
----------- -----------
Commitments
Stockholders' equity
Common Stock, $.01 par -- shares authorized, 5,000,000; shares
issued, 1,550,607 and 1,322,404............................ 15,506 13,224
Additional paid-in capital.................................... 13,861,763 11,771,030
Distributions in excess of earnings........................... (972,378) (549,417)
----------- -----------
Total stockholders' equity...................................... 12,904,891 11,234,837
----------- -----------
Total liabilities and stockholders' equity...................... $23,571,838 $21,392,898
=========== ===========
</TABLE>
See accompanying summary of accounting policies and notes to financial
statements.
F-2
<PAGE> 89
WEST COAST REALTY INVESTORS, INC.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------
1996 1995 1994
---------- ---------- --------
<S> <C> <C> <C>
REVENUES:
Rental (Notes 2 and 3).............................. $2,377,530 $1,692,176 $802,614
Interest............................................ 97,097 120,950 100,553
---------- -------- --------
2,474,627 1,813,126 903,167
---------- -------- --------
COSTS AND EXPENSES
Operating........................................... 302,858 169,679 96,637
Interest............................................ 880,978 620,031 302,124
General and administrative.......................... 224,254 117,667 70,890
Depreciation and amortization....................... 360,901 256,144 118,238
Loss on government securities....................... -- -- 68,210
---------- -------- --------
1,768,991 1,163,521 656,099
---------- -------- --------
Net income............................................ $ 705,636 $ 649,605 $247,068
========== ======== ========
Net income per share (Note 7)......................... $ .49 $ .58 $ .35
========== ======== ========
</TABLE>
See accompanying summary of accounting policies and notes to financial
statements.
F-3
<PAGE> 90
WEST COAST REALTY INVESTORS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
DISTRIBUTIONS
COMMON STOCK ADDITIONAL IN EXCESS
--------------------- PAID-IN OF
SHARES AMOUNT CAPITAL EARNINGS
--------- ------- ----------- -----------
<S> <C> <C> <C> <C>
BALANCE, December 31, 1993............... 562,885 $ 5,629 $ 5,038,512 $ (118,881)
Issuance of stock for cash, net of
costs and sales commissions of
$399,416............................ 349,101 3,491 3,085,313 --
Net income for the year................ -- -- -- 247,068
Equity contribution by Affiliates
through expense reimbursements (Note
4b)................................. -- -- 17,622 --
Dividends declared ($.762 per share)
(Note 7)............................ -- -- -- (522,614)
--------- ------- ----------- ---------
BALANCE, December 31, 1994............... 911,986 9,120 8,141,447 (394,427)
Issuance of stock for cash, net of
costs and sales commissions of
$423,603............................ 410,418 4,104 3,629,583 --
Net income for the year................ -- -- -- 649,605
Dividends declared ($.72 per share)
(Note 7)............................ -- -- -- (804,595)
--------- ------- ----------- ---------
BALANCE, December 31, 1995............... 1,322,404 13,224 11,771,030 (549,417)
Issuance of stock for cash, net of
costs and sales commissions of
$246,599............................ 228,203 2,282 2,046,672 --
Equity contributions by affiliates
through expense reimbursements (Note
4b)................................. -- -- 44,061
Net income for the year................ -- -- -- 705,636
Dividends declared ($.779 per share
(Note 7))........................... -- -- -- (1,128,597)
--------- ------- ----------- ---------
BALANCE, December 31, 1996............... 1,550,607 $15,506 $13,861,763 $ (972,378)
========= ======= =========== =========
</TABLE>
See accompanying summary of accounting policies and notes to financial
statements.
F-4
<PAGE> 91
WEST COAST REALTY INVESTORS, INC.
STATEMENTS OF CASH FLOWS
------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income........................................ $ 705,636 $ 649,605 $ 247,068
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization.................. 360,901 256,144 118,238
Interest expense on amortization of loan
origination fees............................. 21,161 11,454 6,335
Increase (decrease) from changes in:
Government securities........................ -- 1,240,190 440,314
Accounts receivable.......................... (115,800) (62,784) (19,001)
Other assets................................. (45,277) 30,469 (49,185)
Accounts payable............................. (11,497) 10,731 14,688
Due to related party......................... (121,029) 130,378 (16,412)
Other liabilities............................ 10,022 35,133 36,900
Security deposits and prepaid rent........... 15,666 71,823 12,245
------------ ------------ ------------
Net cash provided by operating activities........... 819,783 2,373,143 791,190
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to rental properties.................... (1,828,500) (8,647,090) (5,866,457)
------------ ------------ ------------
Net cash used in investing activities............... (1,828,500) (8,647,090) (5,866,457)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock, net....... 2,048,954 3,633,687 3,088,804
Equity contribution by Affiliates through expense
reimbursements................................. 44,061 -- 17,622
Dividends declared and paid....................... (1,052,925) (745,172) (437,803)
Increase in notes payable......................... 755,000 4,469,647 2,800,000
Payments on note payable.......................... (215,387) (91,822) (44,171)
Increase in loan origination fees................. (3,814) (38,200) (64,219)
------------ ------------ ------------
Net cash provided by financing activities........... 1,575,889 7,228,140 5,360,233
------------ ------------ ------------
Net increase in cash and cash equivalents........... 567,172 954,193 284,966
CASH AND CASH EQUIVALENTS, beginning of year........ 1,450,022 495,829 210,863
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, end of year.............. $ 2,017,194 $ 1,450,022 $ 495,829
============ ============ ============
</TABLE>
See accompanying summary of accounting policies and notes to financial
statements.
F-5
<PAGE> 92
WEST COAST REALTY INVESTORS, INC.
SUMMARY OF ACCOUNTING POLICIES
BUSINESS
West Coast Realty Investors, Inc., (the "Company") is a corporation formed
on October 26, 1989 under the laws of the State of Delaware. The Company exists
as a Real Estate Investment Trust ("REIT") under Sections 856 to 860 of the
Internal Revenue Code. The Company has complied with all requirements imposed on
REIT's for the 1996, 1995 and 1994 tax years; however, qualification as a REIT
for future years is dependent upon future operations of the Company. The Company
was organized to acquire interests in income-producing residential, industrial,
retail or commercial properties located primarily in California and the west
coast of the United States. The Company intends to acquire property for cash on
a moderately leveraged basis with aggregate mortgage indebtedness not to exceed
fifty percent of the purchase price of all properties on a combined basis, or
eighty percent individually and intends to own and operate such properties for
investment over an anticipated holding period of five to ten years.
RENTAL PROPERTIES AND DEPRECIATION
Assets are stated at lower of cost or net realizable value. Depreciation is
computed using the straight-line method over their estimated useful lives of
31.5 to 39 years for financial income tax reporting purposes.
In the event that facts and circumstances indicate that the cost of an
asset may be impaired, an evaluation of recoverability would be performed. If an
evaluation is required, the estimated future undiscounted cash flows associated
with the asset would be compared to the carrying amount to determine if a
write-down to market value is required.
INVESTMENTS
The difference between historical cost and market value are reported as
unrealized gains or losses in the statements of income.
LOAN ORIGINATION FEES
Loan origination fees are capitalized and amortized over the life of the
loan.
RENTAL INCOME
Rental income is recognized on a straight line basis to the extent that
rental income is deemed collectable. Where there is uncertainty of collecting
higher scheduled rental amounts, due to the tendency of tenants to renegotiate
their leases for lower amounts, rental income is recognized as the amounts are
collected.
CASH AND CASH EQUIVALENTS
The Company considers cash in the bank, liquid money market funds, and all
highly liquid certificates of deposits, with original maturities of three months
or less, to be cash and cash equivalents.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the
F-6
<PAGE> 93
WEST COAST REALTY INVESTORS, INC.
SUMMARY OF ACCOUNTING POLICIES -- (CONTINUED)
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
RECLASSIFICATIONS
For comparative purposes, certain prior year amounts have been reclassified
to conform to the current year presentation.
NEW ACCOUNTING PRONOUNCEMENT
Statement of Financial Accounting Standard No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities"
(SFAS No. 125) issued by the Financial Accounting Standards Board (FASB) is
effective for transfers and servicing of financial assets and extinguishments of
liabilities occurring after December 31, 1996, and is to be applied
prospectively. Earlier or retroactive application is not permitted. The new
standard provides accounting and reporting standards for transfers and servicing
of financial assets and extinguishments of liabilities. The Company does not
expect adoption to have a material effect on its financial position or results
of operations.
F-7
<PAGE> 94
WEST COAST REALTY INVESTORS, INC.
NOTES TO FINANCIAL STATEMENTS
1. GENERAL
On October 30, 1989, West Coast Realty Advisors, Inc. (the "Advisor")
purchased 1,000 shares of the Company's common stock for $10,000. On August 30,
1990, the Company reached its minimum initial offering funding level of
$1,000,000. As of December 31, 1996, the Company has raised $15,479,714 in
capital.
Sales commissions and wholesaling fees, representing 7% of the gross
proceeds from the sale of common shares, were paid to Associated Securities
Corp. ("ASC"), a member of the National Association of Securities Dealers, Inc.
("NASD") and an affiliate of the Advisor.
Dividends are accrued approximately based upon the previous quarter's
income from operations before depreciation and amortization.
2. RENTAL PROPERTIES
The Company owns the following income-producing properties:
<TABLE>
<CAPTION>
ACQUISITION
LOCATION (PROPERTY NAME) DATE PURCHASED COST
------------------------------------------ ------------------- -----------
<S> <C> <C>
Huntington Beach, California (Blockbuster) February 26, 1991 $ 1,676,210
Fresno, California May 14, 1993 1,414,893
Huntington Beach, California (OPTO-22) September 15, 1993 2,500,001
Brea, California March 4, 1994 2,248,343
Riverside, California November 29, 1994 3,655,500
Tustin, California (Safeguard) May 22, 1995 4,862,094
Fremont, California (Technology Drive) October 31, 1995 3,747,611
Sacramento, California (Java City) August 2, 1996 1,828,500
</TABLE>
The major categories of property are:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1996 1995
----------- -----------
<S> <C> <C>
Land............................................ $ 7,401,126 $ 6,586,920
Buildings and improvements...................... 14,532,025 13,517,732
----------- -----------
21,933,151 20,104,652
Less accumulated depreciation................... 814,948 454,487
----------- -----------
Net rental properties........................... $21,118,203 $19,650,165
=========== ===========
</TABLE>
A significant portion of the Company's rental revenue was earned from
tenants whose individual rents represented more than 10% of total rental
revenue. Specifically:
Five tenants accounted for 23%, 19%, 18%, 12% and 10% in 1996;
Four tenants accounted for 24%, 20%, 15% and 10% in 1995;
Four tenants accounted for 29%, 18%, 17% and 14% in 1994.
The following unaudited pro forma information are presented to illustrate
the effect of the three properties acquired during 1996 and 1995, as discussed
above and the property acquired in 1997, as discussed in note 10, as if the
acquisitions occurred on January 1 of each year presented.
F-8
<PAGE> 95
WEST COAST REALTY INVESTORS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
2. RENTAL PROPERTIES -- (CONTINUED)
<TABLE>
<CAPTION>
PRO FORMAS FOR THE YEARS
ENDED DECEMBER 31,
--------------------------
1996 1995
---------- -----------
<S> <C> <C>
Revenues:
Rental......................................................... $2,948,961 $ 2,851,554
Interest....................................................... 7,097 950
---------- ----------
2,956,058 2,852,504
---------- ----------
Costs and Expenses:
Operating...................................................... 320,171 214,359
Interest....................................................... 1,130,255 1,032,764
General and administrative..................................... 224,254 117,667
Depreciation and amortization.................................. 551,399 553,696
---------- ----------
2,226,079 1,918,486
---------- ----------
Net income....................................................... $ 729,979 $ 934,018
========== ==========
Net income per share............................................. $ .45 $ .54
========== ==========
</TABLE>
3. FUTURE MINIMUM RENTAL INCOME
As of December 31, 1996, future minimum rental income under the existing
leases that have remaining noncancelable terms in excess of one year are as
follows:
<TABLE>
<CAPTION>
AMOUNT
-------------
<S> <C>
1997.................................................. $2,123,959
1998.................................................. 2,037,591
1999.................................................. 1,976,664
2000.................................................. 1,864,724
2001.................................................. 1,771,212
Thereafter............................................ 15,255,711
-----------
Total....................................... $25,029,861
===========
</TABLE>
Future minimum rental income does not include lease renewals or new leases
that may result after a noncancelable-lease expires.
4. RELATED PARTY TRANSACTIONS
The Advisor has an agreement with the Company to provide advice on
investments and to administer the day-to-day operations of the Company. At
December 31, 1996, the Advisor owned 22,556 shares of the Company. Property
management services for the Company's properties are provided by West Coast
Realty Management, Inc. ("WCRM"), an affiliate of the Advisor.
Certain officers and directors of the Company are also officers and
directors of the Advisor and its affiliates.
F-9
<PAGE> 96
WEST COAST REALTY INVESTORS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
4. RELATED PARTY TRANSACTIONS -- (CONTINUED)
The following related party transactions are included in the statement of
income:
(a) In accordance with the advisory agreement, syndication fees earned
by the Advisor totaled $82,864, $150,429 and $173,874 in 1996, 1995, and
1994.
(b) Overhead expenses reimbursed to the Advisor totaled $12,000,
$12,000 and $2,000 in 1996, 1995 and 1994. In 1994, the Advisor waived
$10,000 of these costs which are included in additional paid-in capital.
(c) Sales commissions paid in accordance with the selling agreement to
ASC totaled $163,735, $301,706 and $172,098 for 1996, 1995 and 1994.
(d) Acquisition fees related to the purchase of real estate totaled
$78,177, $444,795 and $320,006 in 1996, 1995 and 1994 (Note 2). These fees
were split, in accordance with the advisory agreement, between the Advisor
and an affiliate.
(e) Property management fees earned by WCRM totaled $84,749, $46,947
and $24,077 in 1996, 1995, and 1994. In 1994, WCRM waived $7,622 in
property management fees.
(f) Advisory fees earned by WCRA totaled $74,361 in 1996. WCRA waived
collection of $44,061 of these fees, which are included in additional
paid-in capital.
The Corporation had related party accounts payables as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
------- --------
<S> <C> <C>
Associated Financial Group, Inc................................ $ -- $ 40,143
Associated Securities Corp..................................... 396 --
West Coast Realty Advisors..................................... 21,050 111,802
West Coast Realty Management................................... 24,839 15,369
-------- -------
$46,285 $167,314
======== =======
</TABLE>
5. NOTES PAYABLE
Notes payable are made up of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1996 1995
----------- ----------
<S> <C> <C>
8.25% promissory note secured by a Deed of Trust on the
Fresno Property, monthly principal and interest
payments are $5,244, due August 1, 2003................ $ 628,471 $ 639,182
Variable rate promissory note secured by a Deed of Trust
on the OPTO-22 property, interest rate adjustments are
monthly and are based on the 11th District cost of
funds plus 3% (7.835% at December 31, 1996), and may
never go below 6.5% or above 11.0%, monthly principal
and interest payments vary depending upon interest
rates and are currently $12,723, due October 1, 2003... 1,708,362 1,721,993
8.25% promissory note secured by a Deed of Trust on the
Blockbuster property, interest rate adjusts to the
5-year Treasury rate plus 350 basis points on February
1, 1999, monthly principal and interest payments are
$4,934, due February 1, 2004........................... 569,132 579,923
</TABLE>
F-10
<PAGE> 97
WEST COAST REALTY INVESTORS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
1996 1995
---------- ----------
<S> <C> <C>
</TABLE>
5. NOTES PAYABLE -- (CONTINUED)
<TABLE>
<S> <C> <C>
9.25% promissory note secured by a Deed of Trust on the
Riverside property, monthly principal and interest
payments are $9,988, due November 8, 2004.............. 1,177,053 1,185,778
Variable rate promissory note secured by a Deed of Trust
on the Brea property, interest rate is 9.5% until March
1, 2000 (and each succeeding March 1st) when the
interest rate adjusts to the Moody's corporate bond
index daily rate plus 0.125% monthly principal and
interest payments vary depending upon interest rates
and are currently $8,737, due March 1, 2020............ 981,338 992,379
9.625% promissory note secured by a Deed of Trust on the
Safeguard property, monthly principal and interest
payments are $24,191, due February 1, 2005............. 2,155,575 2,234,231
8.24% promissory note secured by a Deed of Trust on the
Fremont property, interest rate equaled the Treasury
rate plus 1.65% at loan closing, monthly principal and
interest payments are currently $18,898, due August 1,
2015................................................... 2,140,311 2,185,694
10% promissory note secured by a Deed of Trust on the
Java City property, monthly principal and interest
payments are $3,413, due November 1, 2001.............. 336,273 --
8% promissory note secured by a Deed of Trust on the Java
City property, monthly principal and interest payments
are $3,126, due June 1, 2018........................... 382,278 --
---------- ----------
$10,078,793 $9,539,180
========== ==========
</TABLE>
The above carrying amounts with the exception of the note on the Fresno
property are reasonable estimates of fair values of notes payable based on
current lending rates in the industry for mortgage loans with similar terms and
maturities. The fair value of the Fresno note is approximately $580,000
calculated by discounting the expected future cash outflows on the note to the
present based on a current lending rate of 10%, which is the approximate
industry lending rate on properties of this type in this location.
The aggregate annual future maturities at December 31, 1996 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, AMOUNT
----------------------------------------------------------------------- -----------
<S> <C>
1997................................................................... $ 210,320
1998................................................................... 228,391
1999................................................................... 248,287
2000................................................................... 269,435
2001................................................................... 582,090
Thereafter............................................................. 8,540,270
----------
Total........................................................ $10,078,793
==========
</TABLE>
F-11
<PAGE> 98
WEST COAST REALTY INVESTORS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
6. DIVIDEND REINVESTMENT PLAN
The Company has established a Dividend Reinvestment Plan (the "Plan")
whereby cash dividends will, upon election of the shareholders, be used to
purchase additional shares of the Company. The shareholders' participation in
the Plan may be terminated at any time.
7. NET INCOME AND DIVIDENDS PER SHARE
Net Income Per Share was computed using the weighted average number of
outstanding shares of 1,447,366, 1,117,494, and 706,684 for 1996, 1995 and 1994.
Dividends declared during 1996 were as follows:
<TABLE>
<CAPTION>
AMOUNT
OUTSTANDING PER TOTAL
RECORD DATE SHARES UNIT DIVIDEND
------------------------------------------------ ----------- ------- ----------
<S> <C> <C> <C>
January 1, 1996................................. 1,325,404 $ 0.060 $ 79,524
February 1, 1996................................ 1,371,794 0.060 82,308
March 1, 1996................................... 1,401,663 0.060 84,100
April 1, 1996................................... 1,413,736 0.0666 94,155
May 1, 1996..................................... 1,445,236 0.0666 96,253
June 1, 1996.................................... 1,448,836 0.0666 96,492
July 1, 1996.................................... 1,448,836 0.0666 96,492
August 1, 1996.................................. 1,448,836 0.0666 96,492
September 1, 1996............................... 1,498,246 0.0666 99,784
October 1, 1996................................. 1,498,246 0.0666 99,784
November 1, 1996................................ 1,500,651 0.0666 99,943
December 1, 1996................................ 1,550,607 0.0666 103,270
----------
Total................................. $1,128,597
==========
</TABLE>
Dividends declared during 1995 were as follows:
<TABLE>
<CAPTION>
OUTSTANDING AMOUNT TOTAL
RECORD DATE SHARES PER UNIT DIVIDEND
--------------------------------------------------- ----------- -------- --------
<S> <C> <C> <C>
January 1, 1995.................................... 911,986 $ 0.060 $ 54,719
February 1, 1995................................... 945,136 0.060 56,708
March 1, 1995...................................... 1,009,084 0.060 60,545
April 1, 1995...................................... 1,069,217 0.060 64,153
May 1, 1995........................................ 1,109,374 0.060 66,562
June 1, 1995....................................... 1,109,874 0.060 66,592
July 1, 1995....................................... 1,116,891 0.060 67,013
August 1, 1995..................................... 1,151,911 0.060 69,115
September 1, 1995.................................. 1,204,517 0.060 72,271
October 1, 1995.................................... 1,225,398 0.060 73,524
November 1, 1995................................... 1,261,859 0.060 75,712
December 1, 1995................................... 1,294,683 0.060 77,681
-------
Total.................................... $804,595
=======
</TABLE>
F-12
<PAGE> 99
WEST COAST REALTY INVESTORS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
7. NET INCOME AND DIVIDENDS PER SHARE -- (CONTINUED)
Dividends declared during 1994 were as follows:
<TABLE>
<CAPTION>
OUTSTANDING AMOUNT TOTAL
RECORD DATE SHARES PER UNIT DIVIDEND
--------------------------------------------------- ----------- -------- --------
<S> <C> <C> <C>
January 1, 1994.................................... 562,888 $ 0.058 $ 32,648
February 1, 1994................................... 568,404 0.060 34,104
March 1, 1994...................................... 590,966 0.062 36,640
April 1, 1994...................................... 610,195 0.063 38,442
May 1, 1994........................................ 620,421 0.064 39,707
June 1, 1994....................................... 637,315 0.065 41,426
July 1, 1994....................................... 637,315 0.065 41,426
August 1, 1994..................................... 688,203 0.065 44,733
September 1, 1994.................................. 747,876 0.065 48,612
October 1, 1994.................................... 811,034 0.065 52,717
November 1, 1994................................... 844,800 0.065 54,913
December 1, 1994................................... 880,700 0.065 57,246
--------
Total.................................... $522,614
========
</TABLE>
Dividends are paid in the fiscal quarter following the record date.
The Company has followed the practice of making distributions to
shareholders in amounts approximately equal to its cash basis net income. Since
cash flows are sheltered from tax by depreciation and amortization expense,
distributions to shareholders are in excess of net income. Accordingly, certain
distributions result in a nontaxable return of capital. Distributions per
beneficial share are reportable by shareholders on their individual income tax
returns as shown below:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------
1996 1995 1994
----- ----- -----
<S> <C> <C> <C>
Taxable ordinary income.................................... $.487 $.549 $.469
Nontaxable return of capital............................... .292 .171 .270
----- ----- -----
$.779 $.720 $.739
===== ===== =====
</TABLE>
8. TAXES ON INCOME
For the taxable years 1995 and 1994, the Company elected to be treated as a
REIT on the filings of the 1995 and 1994 tax returns and will elect the same for
1996.
9. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
The Company had a noncash financing activity related to unpaid dividends
declared of $302,996, $226,649, and $164,876 for 1996, 1995 and 1994.
Cash paid for interest during year ended December 31, 1996, 1995 and 1994
was $857,042, $569,746, and $277,288.
F-13
<PAGE> 100
WEST COAST REALTY INVESTORS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
10. SUBSEQUENT EVENTS
(a) From January 2 to January 14, 1997, a total of $1,179,423 in proceeds
from the sale of shares in the Company's current offering was released from an
escrow account to the Company, and 117,987 shares were issued to investors.
(b) On January 17, 1997, the Company acquired an industrial building
located in Irvine, California for $4,902,500. The acquisition was accomplished
with the use of $2,300,000 in debt financing, and the remainder with proceeds
from the Company's current offering.
(c) On January 15, 1997, the Company paid dividends totaling $302,997
($0.0666 per share per monthly record date), payable to shareholders of record
on October 1, November 1, and December 1, 1996, respectively (Note 7).
F-14
<PAGE> 101
WEST COAST REALTY INVESTORS, INC.
SCHEDULE III -- REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1996
Information required by Rule 12-28 is as follows:
<TABLE>
<CAPTION>
GROSS AMOUNT AT WHICH
INITIAL COST COST CARRIED AT CLOSE OF PERIOD
---------------------- CAPITALIZED -----------------------------------
BUILDING SUBSEQUENT TO BUILDING
& ACQUISITION &
IMPROVE- IMPROVE- IMPROVE- TOTAL
DESCRIPTION ENCUMBRANCES LAND MENTS MENTS LAND MENTS COST
- -------------------------- ------------ --------- ---------- ------------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Retail Building,
Huntington Beach, CA.... 569,132 1,005,965 670,245 0 1,005,965 670,245 1,676,210
Retail Building,
Shopping Center,
Fresno, CA.............. 628,471 553,647 861,245 0 553,647 861,245 1,414,893
Industrial Building
Huntington Beach, CA.... 1,708,362 1,132,159 1,367,842 0 1,132,159 1,367,842 2,500,001
Industrial Building
Brea, CA................ 981,338 808,423 1,439,920 0 808,423 1,439,920 2,248,343
Entertainment Center
Riverside, CA........... 1,177,053 768,667 2,886,833 0 768,667 2,886,833 3,655,500
Office Building
Tustin, CA.............. 2,155,575 1,089,796 3,772,298 0 1,089,796 3,772,298 4,862,094
Light Industrial Bldg,
Fremont, CA............. 2,140,311 1,228,262 2,519,349 0 1,228,262 2,519,349 3,747,611
Office and Light
Industrial Bldgs
Sacramento, CA.......... 718,551 814,206 1,014,294 0 814,206 1,014,294 1,828,500
-
--------- --------- --------- --------- --------- ---------
Total............. 10,078,793 7,401,125 14,532,026 0 7,401,125 14,532,026 21,933,152
========= ========= ========= = ========= ========= =========
<CAPTION>
LIFE ON
WHICH
DEPRECIATION
YEAR IS COMPUTED
ACCUMULATED CONSTRUCTION DATE BUILDING/
DESCRIPTION DEPRECIATION COMPLETED ACQUIRED IMPROVEMENTS
- -------------------------- ----------- ------------ -------- ------------
<S> <C> <C> <C> <C>
Retail Building,
Huntington Beach, CA.... 125,015 1991 2/91 31.5
Retail Building,
Shopping Center,
Fresno, CA.............. 80,055 1993 5/93 39.0
Industrial Building
Huntington Beach, CA.... 115,450 1976 9/93 39.0
Industrial Building
Brea, CA................ 104,617 1989 3/94 39.0
Entertainment Center
Riverside, CA........... 154,215 1994 11/94 39.0
Office Building
Tustin, CA.............. 153,146 1986 5/95 39.0
Light Industrial Bldg,
Fremont, CA............. 72,683 1993 10/95 39.0
Office and Light
Industrial Bldgs
Sacramento, CA.......... 9,767 1988 8/96 39.0
-------
Total............. 814,948
=======
</TABLE>
F-15
<PAGE> 102
WEST COAST REALTY INVESTORS, INC.
SCHEDULE III -- REAL ESTATE AND ACCUMULATED DEPRECIATION -- (CONTINUED)
DECEMBER 31, 1996
A reconciliation of the total cost for the years ending December 31, 1994,
1995 and 1996 follows:
<TABLE>
<S> <C>
Balance at December 31, 1993................................... 5,591,104
1994 Additions................................................. 5,866,457
-----------
Balance at December 31, 1994................................... 11,457,561
1995 Additions................................................. 8,647,091
-----------
Balance at December 31, 1995................................... 20,104,652
1996 Additions................................................. 1,828,499
-----------
Balance at December 31, 1996................................... $21,933,151
===========
</TABLE>
A reconciliation of accumulated depreciation for the years ending December
<TABLE>
<S> <C>
31, 1994, 1995 and 1996 follows:
Balance at December 31, 1993...................................... 85,210
1994 Depreciation................................................. 115,372
--------
Balance at December 31, 1994...................................... 200,582
1995 Depreciation................................................. 253,905
--------
Balance at December 31, 1995...................................... 454,487
1996 Depreciation................................................. 360,461
--------
Balance at December 31, 1996...................................... $814,948
========
</TABLE>
F-16
<PAGE> 103
WEST COAST REALTY INVESTORS, INC.
SCHEDULE IV -- MORTGAGE LOANS ON REAL ESTATE
DECEMBER 31, 1996
Information required by Rule 12-29 is as follows:
<TABLE>
<CAPTION>
FINAL PERIODIC DELINQUENT
INTEREST MATURITY PAYMENT PRIOR FACE CARRYING PRINCIPAL/
DESCRIPTION RATE DATE TERMS LIENS AMOUNT AMOUNT INTEREST
- ---------------------------------- -------- --------- ---------------- ----- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Retail Building................... 8.25% 8/1/2003 Equal monthly None $ 665,000 $ 628,471 None
Fresno, CA payments to
First Deed of Trust Maturity
Balloon Payment
due 8/2003
Industrial Building............... Variable 10/1/2003 Variable Monthly None $1,750,000 $1,708,362 None
Huntington Beach, California Payments to
First Deed of Trust Maturity
Balloon Payment
due 10/2003
Retail Building................... Variable 2/1/2004 Variable Monthly None $ 600,000 $ 569,132 None
Huntington Beach, California Payments to
First Deed of Trust Maturity; 25 yr
Amortization
Balloon payment
due 2/2004
Industrial Building............... Variable 3/1/2020 Variable Rate; None $1,000,000 $ 981,338 None
Brea, CA 25 yr
First Deed of Trust amortization
Entertainment Center.............. 9.25% 11/8/2004 Equal Monthly None $1,200,000 $1,177,053 None
Riverside, CA payments
First Deed of Trust amortized over
28 yrs, 3 months
Balloon Payment
due 11/2004
Office Building................... 9.625% 2/2/2005 Fixed Rate; None $2,300,000 $2,155,575 None
Tustin, CA 15 year
First Deed of Trust amortization
Balloon Payment
due 2/2005
Light Industrial Bldg............. Variable 8/1/2015 Variable Monthly None $2,200,000 $2,140,311 None
Fremont, CA Payments 20
First Deed of Trust years
amortization
Office and Light Industrial 10% 11/1/2001 Fixed Rate; None $ 350,000 $ 336,273 None
Bldg............................ 25 year
Sacramento, CA amortization
First Deed of Trust Balloon payment
due 11/2001
Office and Light Industrial 8% 6/1/2018 Fixed Rate; None $ 405,000 $ 382,278 None
Bldg............................ 25 year
Sacramento, CA amortization,
First Deed of Trust Balloon payment
due 6/2018
---------- ----------
10,470,000 10,078,793
========== ==========
</TABLE>
F-17
<PAGE> 104
WEST COAST REALTY INVESTORS, INC.
SCHEDULE IV -- MORTGAGE LOANS ON REAL ESTATE (CONTINUED)
DECEMBER 31, 1996
A reconciliation of mortgage loans payable for the years ending December
31, 1994, 1995, and 1996 follows:
<TABLE>
<S> <C>
Balance at December 31, 1993.................................... 2,405,526
1994 Additions.................................................. 2,800,000
1994 Paydowns................................................... (44,171)
----------
Balance at December 31, 1994.................................... 5,161,355
1995 Additions.................................................. 4,469,647
1995 Paydowns................................................... (91,822)
----------
Balance at December 31, 1995.................................... $9,539,180
1996 Additions.................................................. 755,000
1996 Paydowns................................................... (215,387)
----------
Balance at December 31, 1996.................................... 10,078,793
==========
</TABLE>
F-18
<PAGE> 105
INDEPENDENT AUDITORS' REPORT
Shareholders
West Coast Realty Investors, Inc.
We have audited the accompanying summary of historical information relating
to operating revenues and specified expenses of 717 and 721 West Del Paso Road
(the Property) for the three months ended March 31, 1996 and for the year ended
December 31, 1995. These financial statements are the responsibility of 717 and
721 West Del Paso's management. Our responsibility is to express an opinion on
these financial statements based upon our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the summary of historical information
relating to operating revenues and specified expenses is free of material
misstatement. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the summary of historical information
relating to operating revenues and specified expenses. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall summary relating to operating
revenues and specified expenses presentation. We believe our audits provide a
reasonable basis for our opinion.
The accompanying summary of historical information relating to operating
revenues and specified expenses was prepared for the purpose of complying with
the rules and regulations of the Securities and Exchange Commission and excludes
certain material expenses, described in Note 2, that would not be comparable to
those resulting from the proposed future operations of the Property.
In our opinion, the summary of historical information relating to operating
revenues and specified expenses referred to above presents fairly, in all
material respects, the operating revenues and specified expenses, exclusive of
expenses described in Note 2, of the Property for the three months ended March
31, 1996 and the year ended December 31, 1995 in conformity with generally
accepted accounting principles.
HUNNICUTT OKAMOTO & ASSOCIATES
May 21, 1996
Woodland Hills, California
F-19
<PAGE> 106
717 AND 721 WEST DEL PASO ROAD
SUMMARY OF HISTORICAL INFORMATION RELATING TO
OPERATING REVENUES AND SPECIFIED EXPENSES
FOR THE THREE MONTHS ENDED MARCH 31, 1996
AND YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
THREE
MONTHS
ENDED YEAR ENDED
MARCH 31, DECEMBER 31,
1996 1995
--------- ------------
<S> <C> <C>
Operating Revenues:
Rental income...................................................... $45,219 $176,815
------- --------
Total operating revenue............................................ 45,219 176,815
------- --------
Specified Expenses:
Operating expenses................................................. 2,700 170
Interest expense................................................... 15,985 63,931
------- --------
Total specified expenses........................................... 18,685 64,101
------- --------
Excess of operating revenues over specified expenses................. $26,534 $112,714
======= ========
</TABLE>
See accompanying notes to summary of historical information
F-20
<PAGE> 107
717 AND 721 WEST DEL PASO ROAD
SUMMARY OF HISTORICAL INFORMATION RELATING TO
OPERATING REVENUES AND SPECIFIED EXPENSES
NOTE 1 -- THE PROPERTY
717 and 721 West Del Paso Road (the Property) is comprised of two adjacent
single story light industrial buildings located in the city of Sacramento,
California. The two properties are located in the same industrial park. The 717
West Del Paso Road property has a rental area approximating 11,200 square feet.
The 721 West Del Paso Road property has a rental area approximating 8,640 square
feet. Both properties are currently leased to Java City, a California
corporation. The owners of the Property are also shareholders of the corporate
tenant. Both leases have lease terms expiring in 2003. The lease agreements
provide that specified expenses including insurance, repairs and maintenance and
property taxes of the Property are paid by the lessee. However, the lease of 721
West Del Paso Road provides that the lessor shall keep the foundation, roof and
structural portions of the exterior walls in good order, condition and repair.
During the three months ended March 31, 1996 and the year ended December 31,
1995 the lessor incurred $2,700 and $170, respectively in roof repairs to the
721 West Del Paso Road property. These specified expenses incurred by the
Property are included as operating expenses in the accompanying summary.
Minimum rental income, under the existing leases, is $183,800, $191,200,
$198,800, $206,800, $215,100, $223,700 for the years ended December 31, 1996
through December 31, 2001 and $371,500 for years thereafter.
The Property is expected to be acquired by West Coast Realty Investors,
Inc. in July 1996. The property is expected to be acquired subject to the
assumption of two promissory notes. The first note has an outstanding balance of
approximately $341,800 as of March 31, 1996 and is due in 2001. The note rate is
10%. Interest expense incurred during the three months ended March 31, 1996 and
the year ended December 31, 1995 was $8,654 and $33,640, respectively. The
second note has an outstanding balance of approximately $387,900 as of March 31,
1996 and is due in 2018. The note rate is 8%. Interest expense incurred during
the three months ended March 31, 1996 and during the year ended December 31,
1995 was $7,331 and $30,291, respectively.
NOTE 2 -- BASIS OF PRESENTATION
The summary of historical information relating to operating revenues and
specified expenses of the Property excludes the following items, which are to
comparable to the future operations of the Property under the ownership of West
Coast Realty Investors, Inc.
(a) Depreciation of building, improvements and equipment
(b) Nonrecurring income and expenses
Rental income is recognized when earned and expenses are recognized when
incurred.
F-21
<PAGE> 108
WEST COAST REALTY INVESTORS, INC.
ESTIMATED TWELVE MONTH PRO FORMA STATEMENT
OF TAXABLE OPERATING INCOME (NOTE 1)
BASED ON ACQUISITION OF JAVA CITY PROPERTY
<TABLE>
<CAPTION>
JAVA CITY PROPERTY
HISTORICAL OPERATING AUDITED FINANCIAL RESULTS PRO FORMA ESTIMATED
RESULTS FOR WCRI FOR THE YEAR ENDED ADJUSTMENTS PRO FORMA
DECEMBER 31, 1996 DECEMBER 31, 1995 (NOTE 2) RESULTS
-------------------- -------------------------- ----------- ----------
<S> <C> <C> <C> <C>
REVENUE:
Rental Income.............. $2,377,530 $176,815 $ (53,017)(a) $2,501,328
Interest Income............ 97,097 (36,000)(b) 61,097
---------- -------- --------- ----------
2,474,627 176,815 (89,017) 2,562,425
---------- -------- --------- ----------
COSTS AND EXPENSES:
Operating.................. 302,858 170 3,714(c) 306,742
Interest................... 880,978 63,931 (27,402)(d) 917,507
General and
Administrative.......... 224,254 224,254
Depreciation and
amortization............ 360,901 13,674(e) 374,575
---------- -------- --------- ----------
1,768,991 64,101 (10,014) 1,823,078
---------- -------- --------- ----------
Taxable Operating Income..... $ 705,636 $112,714 $ (79,003) $ 739,347
========== ======== ========= ==========
</TABLE>
WEST COAST REALTY INVESTORS, INC.
STATEMENT OF CASH AVAILABLE FROM OPERATIONS (NOTE 1)
<TABLE>
<S> <C>
Pro Forma Taxable Net Operating Income.......................................... $ 739,347
Add: Depreciation............................................................... 374,575
----------
Pro Forma Cash Available from Operations.............................. $1,113,922
==========
</TABLE>
See accompanying notes to pro forma financial statements
F-22
<PAGE> 109
WEST COAST REALTY INVESTORS, INC.
JAVA CITY PROPERTY
NOTES TO PRO FORMA FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1 -- BASIS OF PRESENTATION
The preceding unaudited pro forma statements are based on information
obtained from the lease and Agreement to Purchase documents pertaining to the
property located at 717 and 721 West Del Paso Road, Sacramento, California (the
"Java City Property" or the "Property").
The pro forma statements use the audited financial statements for the year
ended December 31, 1996 as a base for preparing the estimated pro forma
operations for the Property during its first full year of operations. The
Property's current tenant, Cucina Holdings, Inc. (doing business as Java City),
leases the space in the two separate buildings. The leases on both buildings
expire October 31, 2003. The lease are triple net in nature.
The pro forma results reflect a full year of operations for the Property
assuming that it was acquired on January 1, 1996. They contain certain
adjustments which are expected to be incurred in the Property's first year of
operations.
There can be no assurance that the foregoing results will be obtained.
The Company acquired the property from a party who is also the President of
Cucina Holdings, Inc. The Company is unaware of any material factors which would
cause the reported financial information not to be indicative of future
operating results.
NOTE 2 -- PRO FORMA ADJUSTMENTS
The significant pro forma adjustments are as follows:
(a) To adjust rental income to reflect only a full year of rental income.
$88,450 in rental income from August 2, 1996 (date of acquisition) to December
31, 1996 is already included in the Historical Operating Results for WCRI for
the year ended December 31, 1996. In calculating this amount, the total
remaining minimum monthly rent from January 1, 1995 to October 31, 2003 is
recognized on a straight-line basis in accordance with generally accepted
accounting principles.
(b) To eliminate interest income not earned due to assumed application of
funds toward purchase of Java City Property.
(c) To reflect approximate property management fees of 3% of rental income
in the first year of the lease for the period prior to acquisition (January 1 to
August 1, 1996).
(d) To adjust interest expense to reflect a full year of expense.
(e) To adjust depreciation expense for amount that pertains to the period
January 1 to August 1, 1996.
F-23
<PAGE> 110
INDEPENDENT AUDITORS' REPORT
Shareholders
West Coast Realty Investors, Inc.
We have audited the accompanying summary of historical information relating
to operating revenues and specified expenses of Tycom Property (the Property)
for the period January 12, 1996 to December 17, 1996. These financial statements
are the responsibility of Tycom Property's management. Our responsibility is to
express an opinion on these financial statements based upon our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the summary of historical information
relating to operating revenues and specified expenses is free of material
misstatement. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the summary of historical information
relating to operating revenues and specified expenses. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall summary relating to operating
revenues and specified expenses presentation. We believe our audits provide a
reasonable basis for our opinion.
The accompanying summary of historical information relating to operating
revenues and specified expenses was prepared for the purpose of complying with
the rules and regulations of the Securities and Exchange Commission and excludes
certain material expenses, described in Note 2, that would not be comparable to
those resulting from the proposed future operations of the Property.
In our opinion, the summary of historical information relating to operating
revenues and specified expenses referred to above presents fairly, in all
material respects, the operating revenues and specified expenses, exclusive of
expenses described in Note 2, of the Property for the period January 12, 1996
until December 17, 1996 in conformity with generally accepted accounting
principles.
HUNNICUT OKAMOTO & ASSOCIATES
January 17, 1997
Woodland Hills, California
F-24
<PAGE> 111
TYCOM PROPERTY
SUMMARY OF HISTORICAL INFORMATION RELATING TO
OPERATING REVENUES AND SPECIFIED EXPENSES
FOR THE PERIOD JANUARY 12, 1996 TO DECEMBER 17, 1996
<TABLE>
<S> <C>
Operating Revenues:
Rental income................................................................... $ --
--------
Total operating revenue......................................................... --
--------
Specified Expenses:
Operating expenses.............................................................. 19,800
--------
Total specified expenses........................................................ 19,800
========
Excess of specified expenses over operating revenues............................ $(19,800)
========
</TABLE>
See accompanying notes to summary of historical information.
F-25
<PAGE> 112
TYCOM PROPERTY
NOTES TO SUMMARY OF HISTORICAL INFORMATION RELATING TO
OPERATING REVENUES AND SPECIFIED EXPENSES
NOTE 1 -- THE PROPERTY
The Tycom Property (the Property) is comprised of a two story building with
underground parking located in the city of Irvine, California. The Tycom
Property has a rental area approximating 63,255 square feet.
The sole tenant of the Property is Tycom Corporation. Tycom Corporation
acquired the Property in January 1996. The Property was vacant prior to Tycom
Corporation's acquisition.
Tycom Corporation substantially improved the Property subsequent to
acquisition. Tycom Corporation did not occupy the Property until on or about
December 17, 1996 when Tycom Corporation sold the property to an unrelated third
party (Seller) and entered into a lease agreement to occupy the Property under
an eleven year term. Accordingly, the management of the Property from January
12, 1996 until December 17, 1996, Tycom Corporation, did not incur any operating
revenues or specified expenses of the Property other than utility expenses. The
utility expenses are shown as operating expenses on the accompanying summary of
historical information relating to operating revenues and specified expenses.
The lease agreement entered into between Tycom Corporation and the Seller,
among other things, provides minimum rental income of $298,422, $447,633,
$447,633, $447,633, $447,633, for the years ended December 31, 1997 through
December 31, 2001 and $2,704,450 for years thereafter.
The Property was acquired by West Coast Realty Investors, Inc. in January
1997 from the Seller.
NOTE 2 -- BASIS OF PRESENTATION
The summary of historical information relating to operating revenues and
specified expenses of the Property excludes the following items, which are not
comparable to the future operations of the Property under the ownership of West
Coast Realty Investors, Inc.
(a) Interest expense on mortgages
(b) Depreciation of buildings, improvements and equipment
(c) Nonrecurring income and expenses
Rental income is recognized when earned and expenses are recognized when
incurred.
F-26
<PAGE> 113
WEST COAST REALTY INVESTORS, INC.
ESTIMATED UNAUDITED TWELVE MONTH PRO FORMA STATEMENT
OF TAXABLE OPERATING INCOME (NOTE 1)
BASED ON ACQUISITION OF THE TYCOM PROPERTY
<TABLE>
<CAPTION>
TYCOM PROPERTY -- AUDITED
HISTORICAL OPERATING FINANCIAL RESULTS PRO FORMA ESTIMATED
RESULTS FOR WCRI FOR THE PERIOD JANUARY 12, ADJUSTMENTS PRO FORMA
DECEMBER 31, 1996 1996 TO DECEMBER 17, 1996 (NOTE 2) RESULTS
---------------------- --------------------------- ----------- ----------
<S> <C> <C> <C> <C>
REVENUE:
Rental Income............ $2,377,530 $ 447,633(a) $2,825,163
Interest Income.......... 97,097 (90,000)(b) 7,097
---------- ------- -------- ----------
2,474,627 0 280,725 2,832,260
---------- ------- -------- ----------
COSTS AND EXPENSES:
Operating................ 302,858 19,800 13,429(c) 316,287
(19,800)(f)
Interest................. 880,978 212,748(d) 1,093,726
General and
Administrative........ 224,254 224,254
Depreciation and
amortization.......... 360,901 176,824(e) 537,725
---------- ------- -------- ----------
1,768,991 19,800 383,201 2,171,992
---------- ------- -------- ----------
Taxable Operating Income... $ 705,636 $ (19,800) $ (25,568) $ 660,268
========== ======= ======== ==========
</TABLE>
WEST COAST REALTY INVESTORS, INC.
UNAUDITED STATEMENT OF CASH AVAILABLE FROM OPERATIONS (NOTE 1)
<TABLE>
<S> <C>
Pro Forma Taxable Net Operating Income.......................................... $ 660,268
Add: Depreciation............................................................... 537,725
----------
Pro Forma Cash Available from Operations........................................ $1,197,993
==========
</TABLE>
See accompanying notes to unaudited pro forma financial statements
F-27
<PAGE> 114
WEST COAST REALTY INVESTORS, INC.
TYCOM PROPERTY
NOTES TO PRO FORMA FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1 -- BASIS OF PRESENTATION
The preceding unaudited pro forma statements are based on information
obtained from the lease and Agreement to Purchase documents pertaining to the
property located at 17862 Fitch Street, Irvine, California (the "Tycom Property"
or the "Property").
The pro forma statements use the audited financial statements for the
period from January 12, 1996 to December 17, 1996 as a base for preparing the
estimated pro forma operations for the Property during its first full year of
operations. The Property's current tenant, Tycom Corporation, leases 100% of the
space in the building. The lease on the building expires December, 2007. The
lease is triple net in nature.
The pro forma results reflect a full year of operations for the Property
assuming that it was acquired January 1, 1996. They contain certain adjustments
which are expected to be incurred in the Property's first year of operations.
There can be no assurance that the foregoing results will be obtained.
The Company acquired the property from a third party. The Company is
unaware of any material factors which would cause the reported financial
information not to be indicative of future operating results.
NOTE 2 -- PRO FORMA ADJUSTMENTS
The significant pro forma adjustments are as follows:
(a) To reflect a full year's worth of rental income per provisions of
the lease with the Property's tenant. In calculating the amount, the total
remaining minimum monthly rent from December 1996 to December 2007 is
recognized on a straight-line basis in accordance with generally accepted
accounting principles.
(b) To eliminate interest income not earned due to assumed application
of funds toward purchase of Tycom Property.
(c) To reflect approximate property management fees of 3% of rental
income in the first year of the lease.
(d) To reflect interest expense incurred in connection with debt on
the Tycom property.
(e) The computation of depreciation is based on the cost of the
Property including estimated Acquisition Fees and Expenses, and is for the
initial twelve months subsequent to the purchase. The allocation of the
cost of the property to the various asset categories and lives is based on
the allocations contained in the final appraisal report for the Property.
Depreciation has been computed on a straight-line basis over the component
useful life of the assets.
<TABLE>
<CAPTION>
DEPRECIABLE LIFE COST DEPRECIATION
---------------- ---------- ------------
<S> <C> <C> <C>
Building and Improvements...................... 39 $1,932,500 $ 49,551
Tenant Improvements............................ 11 1,400,000 127,273
Land........................................... -- 1,570,000 --
---------- --------
$4,902,500 $176,824
========== ========
</TABLE>
(f) To eliminate operating expenses incurred in period prior to
ownership since this lease is triple-net in nature.
F-28
<PAGE> 115
WEST COAST REALTY INVESTORS
UNAUDITED PRO FORMA BALANCE SHEET
DECEMBER 31, 1996
<TABLE>
<CAPTION>
HISTORICAL
DECEMBER 31, PRO FORMA PRO FORMA
1996 ADJUSTMENTS BALANCE
------------ ---------- ----------
<S> <C> <C> <C>
ASSETS
RENTAL REAL ESTATE............................. 21,118,203 4,902,500(2) 26,020,703
CASH AND CASH EQUIVALENTS...................... 2,017,194 1,000,000(1) 451,997
(2,565,197)(2)
ACCOUNTS RECEIVABLE............................ 247,948 247,948
OTHER ASSETS................................... 188,493 188,493
---------- ----------
23,571,838 26,909,141
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
DUE TO RELATED PARTY............................. 46,285 46,285
DIVIDENDS PAYABLE.............................. 302,760 302,760
SECURITY DEPOSITS AND PREPAID RENTS............ 124,734 37,303(2) 162,037
OTHER LIABILITIES.............................. 114,375 114,375
NOTES PAYABLE.................................. 10,078,793 2,300,000(2) 12,378,793
---------- ----------
TOTAL LIABILITIES...................... 10,666,947 13,004,250
---------- ----------
COMMITMENTS AND CONTINGENCIES
COMMON STOCK AND ADDITIONAL PAID-IN CAPITAL.... 13,877,269 1,000,000(1) 14,877,269
DISTRIBUTIONS IN EXCESS OF EARNINGS............ (972,378) (972,378)
---------- ----------
TOTAL STOCKHOLDERS' EQUITY............. 12,904,891 13,904,891
---------- ----------
23,571,838 26,909,141
---------- ----------
</TABLE>
F-29
<PAGE> 116
WEST COAST REALTY INVESTORS, INC.
NOTES TO UNAUDITED PRO FORMA BALANCE SHEET
DECEMBER 31, 1996
The pro forma Balance Sheet assumes that the Tycom Property was acquired on
December 31, 1996. This statement reflects certain changes to the balance sheet
that would be reflected if the property was acquired on that date.
NOTE 1 -- ADDITIONAL EQUITY RAISED
The Company would not have had enough funds available to acquire the
property as of December 31, 1996. Therefore, an assumption was made that the
Company had raised an additional $1.0 million in investor proceeds, from the
sale of approximately 112,360 shares. This would be sufficient funds to acquire
the Property and maintain a reserve account of 3% of all funds raised. In
reality, between November 6, 1996 and January 14, 1997 the Company received
approximately $1,475,000 in net proceeds from the sale of shares sold from
August 1 to December 29, 1996.
NOTE 2 -- ACQUISITION OF TYCOM PROPERTY
These adjustments reflect the effect of acquiring the Tycom Property,
including an increase in security deposits, notes payable and rental real
estate, and a net decrease in cash and cash equivalents.
F-30
<PAGE> 117
WEST COAST REALTY INVESTORS, INC.
UNAUDITED PRO FORMA STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1996
INTRODUCTION
The following unaudited pro forma financial statement is presented to
illustrate the acquisition of the Java City and Tycom Properties as described in
this offering, on the results of operations of the Company.
The unaudited pro forma statement of income has been prepared as if all the
aforementioned properties had been acquired and occupied by their respective
tenants on January 1, 1996.
The unaudited pro forma financial statements are not necessarily indicative
of the Company's future operations and should be read in conjunction with the
other financial statements and notes thereto included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL CONDENSED
DECEMBER 31, JAVA CITY TYCOM ADJUSTMENTS DECEMBER 31,
1996 (I) (II) (NOTE 1) 1996
------------ --------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C>
REVENUE:
Rental..................................... $ 2,377,530 $ 176,815 -- $ (53,017)(a) $ 2,948,961
447,633(b)
Interest................................... 97,097 (90,000)(c) 7,097
----------- --------- --------- --------- -----------
2,474,627 176,815 -- 304,616 2,956,058
----------- --------- --------- --------- -----------
EXPENSES:
Operating.................................. 302,858 170 19,800 3,714(d) 320,171
13,429(e)
(19,800)(j)
Interest................................... 880,978 63,931 (27,402)(f) 1,130,255
212,748(g)
Depreciation and amortization.............. 360,901 13,674(h) 551,399
176,824(i)
General and administrative................. 224,254 224,254
----------- --------- --------- --------- -----------
1,768,991 64,101 19,800 373,187 2,226,079
----------- --------- --------- --------- -----------
Net income................................... $ 705,636 $ 112,714 $ (19,800) (68,571) $ 729,979
----------- --------- --------- --------- -----------
Net income per share......................... $ 0.49 Net Income Per Share................ $0.45
=========== ===========
Weighted Average Shares Used For Pro
Weighted Average Shares Used for Historical
Calculation................................ 1,447,366 Forma Calculation (Note 2).......... 1,612,404
=========== ===========
</TABLE>
- ---------------
(I) Year ended December 31, 1995 (audited)
(II) Period January 12, 1996 to December 17, 1996 (audited)
F-31
<PAGE> 118
WEST COAST REALTY INVESTORS, INC.
NOTES TO UNAUDITED PRO FORMA STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1996 (UNAUDITED)
BASIS OF PRESENTATION
The pro forma Statements of Income reflects operations for the Company
assuming that the, Java City, and Tycom properties were acquired on January 1,
1996. This statement contains certain adjustments which are expected to be
incurred in those properties' first year of operations, reflected in the
Statement of Income for the year ended December 31, 1996.
There can be no assurance that the foregoing results will be obtained.
1. PRO FORMA ADJUSTMENTS
The adjustments to the pro forma statement of income are as follows:
a. To adjust rental income for the Java City property to recognize rental
income on a straight-line basis for 1995 using lease rates in effect
from January 1, 1995 to August 1, 2003.
b. To reflect one year of rental income for Tycom Property.
c. To eliminate interest income to reflect funds used for the acquisition
of properties.
d. To reflect additional property management fees for the Java City
Property.
e. To reflect one year of property management fees for the Tycom
Property.
f. To adjust interest expense on Java City Property to reflect a full
year of expense.
g. To reflect interest expense on Tycom Property for first year of
mortgage debt.
h. To reflect depreciation expense on the Java City Property for January 1
to August 1, 1996.
i. To reflect depreciation expense on the Tycom Property for its first
year of ownership.
j. To eliminate operating expenses incurred on the Tycom Property by
prior ownership, since the Company will be operating and leasing the
property on a triple-net basis.
2. PER SHARE AMOUNTS
The pro forma income statement assumes that the Java City, and Tycom
properties were owned as of January 1, 1996. The Company used approximately $3.7
million in cash to acquire these properties. However, as of January 1, 1996, the
Company actually had approximately $1.1 million available for the acquisition of
additional properties. The properties were acquired primarily using funds raised
subsequent to January 1, 1996. Therefore, the weighted average shares
outstanding as of December 31, 1996, was calculated assuming that an additional
$2.9 million in shares (290,000 shares) were outstanding as of January 1, 1996,
and that no additional shares were issued throughout the year. This is assumed
to be the minimum number of shares that would be sold given the offering
expenses and reserves that are allocated against shares sold.
F-32
<PAGE> 119
PRIOR PERFORMANCE TABLE
The Tables below present information on past performance regarding
partnerships for which the Advisor or its Affiliates served as general partner
and which were sponsored by Affiliates of the Advisor or the Advisor. A
potential investor may therefore evaluate the experience of the Advisor and its
Affiliates and their record in meeting the investment objectives of the
partnership. These tables should be carefully reviewed by a potential investor
in considering an investment in the Company. The tables provide information as
of December 31, 1996. The tables are:
Table IV -- Results of Completed Programs
Associated Planners Realty Growth Fund, a partnership in which West Coast
Realty Advisors served as general partner, was dissolved in 1996.
Table V -- Sales or Disposals of Properties
Table V summaries the sales or disposals of properties made by prior
programs affiliated with the Company for the three years ended December 31,
1996. The table presents information concerning the cash and other consideration
received from the sale or disposition of its property, its cost and net
operating cash received. IT SHOULD NOT BE ASSUMED THAT INVESTORS IN THE OFFERING
COVERED BY THIS PROSPECTUS WILL EXPERIENCE RESULTS COMPARABLE TO THOSE
EXPERIENCED IN PRIOR OFFERINGS.
Factors which the Company considered in determining whether the prior
limited partnership had investment objectives similar to those of the Company
were the type and standards of real property investments and benefits of the
prior partnerships. The Company included Associated Planners Realty Fund ("Fund
I") and Associated Planners Realty Growth Fund ("Growth Fund") prior performance
since they had similar investment objectives in that they sought to preserve and
protect invested capital and provide capital appreciation. Fund I acquired
properties for cash, without borrowings, while the Growth Fund acquired property
using moderate leverage.
PERSONS WHO PURCHASE SHARES IN THE COMPANY WILL NOT THEREBY ACQUIRE ANY
OWNERSHIP INTEREST IN THE PARTNERSHIPS TO WHICH THESE TABLES RELATE. THE
INCLUSION OF THESE TABLES IN THE PROSPECTUS DOES NOT IMPLY THAT THE COMPANY WILL
MAKE INVESTMENTS COMPARABLE TO THOSE REFLECTED IN THE TABLES AND RETURNS
COMPARABLE TO THOSE EXPERIENCED BY INVESTORS IN THE PARTNERSHIPS REFERRED TO. IN
ADDITION, NONE OF THE INFORMATION CONTAINED IN THE TABLES HAS BEEN AUDITED BY
INDEPENDENT ACCOUNTANTS. (SEE "PRIOR PERFORMANCE" ON PAGE 49 OF THE PROSPECTUS.)
T-1
<PAGE> 120
TABLE IV
RESULTS OF COMPLETED PROGRAMS
JANUARY 1, 1992 TO DECEMBER 31, 1996
Program Name: Associated Planners Realty Growth Fund
Dollar Amount Raised: $2,059,650
Number of Properties Purchased: One and 10% interest in another property
co-owned with an affiliated company (Associated Planners Realty Income
Fund)
Date of Closing of Offering: September 5, 1989
Date of First Sale of Property: August 16, 1996 (property deeded back to
lender)
Date of Final Sale of Property: November 1, 1996
Tax and Distribution Data Per $1,000 Investment Through December 31, 1996
Federal Income Tax Results:
Ordinary income (loss)
-- from operations: ($483)
-- from recapture: $198
Capital Gain (loss): ($567)
Deferred Gain: None
Capital: None
Ordinary: None
Cash Distributions to Investors
Source (on GAAP basis)
-- Investment income: $7
-- Return of Capital: $141
Source (on cash basis)
-- Sales: $64
-- Refinancing: None
-- Operations: $84
-- Other: None
Receivable on Net Purchase Money Financing: None
T-2
<PAGE> 121
TABLE V.
SALES OR DISPOSALS OF PROPERTIES
JANUARY 1, 1994 TO DECEMBER 31, 1996
(NOT COVERED BY INDEPENDENT AUDITOR'S REPORT)
<TABLE>
<CAPTION>
COST OF
PROPERTIES
INCLUDING
CLOSING
AND
SOFT COSTS
SELLING PRICE, NET OF ----------
CLOSING COSTS AND GAAP ADJUSTMENTS
--------------------------------------------------------------
CASH ADJUSTMENTS
RECEIVED MORTGAGE PURCHASE MONEY RESULTING
NET OF BALANCE MORTGAGE TAKEN FROM ORIGINAL
DATE DATE OF CLOSING AT TIME BACK BY APPLICATION MORTGAGE
PROPERTY ACQUIRED SALE COSTS OF SALE PROGRAM OF GAAP TOTAL FINANCING
- ------------------------------- -------- ------- ---------- --------- -------------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(1)Shurgard Mini-Warehouse..... 5/8/88 5/15/95 $1,510,976 none none none $1,510,976(2) none
Puyallup, Washington
(3)Santa Ana Office Building... 11/17/89 8/16/96 0 1,674,918 none (1,674,918) 0 $1,675,000
Santa Ana, California
(4)San Marcos Building......... 11/17/89 11/1/96 188,000 none none none $ 188,000(5) none
San Marcos, California
<CAPTION>
TOTAL
ACQUISITION EXCESS
COST, (DEFICIENCY)
CAPITAL OF PROPERTY
IMPROVEMENT, OPERATING CASH
CLOSING AND RECEIPTS OVER
PROPERTY SOFT COSTS TOTAL CASH EXPENDITURES
- ------------------------------- ----------- ---------- -----------------
<S> <C<C> <C> <C>
(1)Shurgard Mini-Warehouse..... $1,639,005 $1,639,005 $ 863,373
Puyallup, Washington
(3)Santa Ana Office Building... $1,563,972 $3,238,972 $ 68,600
Santa Ana, California
(4)San Marcos Building......... $ 311,878 $ 311,878 $ 181,447
San Marcos, California
</TABLE>
- ---------------
(1) This property was owned by Associated Planners Realty Fund.
(2) The gain on sale was $116,749. The gain was entirely capital gain. The gain
was not reported on an installment basis.
(3) This property was owned by Associated Planners Realty Growth Fund. It was
transferred back to the mortgage lender in a deed-lieu-of-foreclosure
transaction.
(4) 10% of this property was owned by Associated Planners Realty Growth Fund.
The amounts here reflect that 10% interest. This was sold to Associated
Planners Realty income Fund, on affiliated partnership, prior to dissolution
of the Growth Fund.
(5) The loss on sale was $77,948. The loss was entirely capital loss.
T-3
<PAGE> 122
- --------------------------------------------------------------------------------
WEST COAST REALTY INVESTORS, INC.
SUBSCRIPTION AGREEMENT
TO: WEST COAST REALTY INVESTORS, INC.
The buyer identified below hereby orders shares of West Coast
Realty Investors, Inc. at $ per share for a total purchase price
of $ .
The undersigned:
(1) Warrants that prior to any offer of sale or sale of shares of West Coast
Realty Investors, Inc. (the "Company"), Buyer has received a copy of the
Prospectus of the Company.
(2) Under penalties of perjury, certifies that (i) the Social Security or Tax
I.D. number shown below is correct and (ii) he or she has not been notified
that he or she is subject to backup withholding, (if you have been so
notified, strike out all of (ii) above).
(3) REPRESENTATIONS AND WARRANTIES: By executing this Subscription Agreement
the Subscriber represents and warrants to the Company, the Advisor and
Associated Securities Corp. that:
(a) The Subscriber hereby confirms the Subscriber's understanding that the
Company has full right to accept or reject this Subscription Agreement
promptly after it is received by the Company and provided that, in the
case of rejection, the payment of the Subscriber is promptly returned.
Upon acceptance of this Subscription Agreement by the Company, the
Subscriber will receive a confirmation of acceptance.
(b) If the Subscriber is acting in a representative capacity for a
corporation, partnership or trust or as an agent for any person
or entity, the Subscriber has full power and authority to execute this
Subscription Agreement in that capacity and on behalf of the
corporation, trust, person or entity.
(c) The Subscriber is not entitled to cancel, terminate or revoke this
Subscription Agreement and that this Subscription Agreement shall
survive the Subscriber's death or disability.
(d) The Subscriber meets the suitability standards set forth in the
Prospectus.
REGISTRATION (if a custodial account, also give address of beneficiary below);*
Please Type or Print the Following Information
Registered Name(s)
(As it is to appear on
certificate of ownership)
Street Address (Residence)
City, State, Zip Code
Telephone Number
Name and/or Mailing Address for Distributions or Investor Reports if different
from above
Name
Mailing Address
City, State, Zip Code
MANNER IN WHICH TITLE IS TO BE HELD:
Check One:
<TABLE>
<CAPTION>
<S> <C> <C>
[ ] Individual Ownership [ ] Pension/Profit Sharing Plan* [ ] Custodian Under
[ ] Joint Tenants with Right [ ] Keogh Plan* UTMA (State)*
of Survivorship (both sign) [ ] Trust (taxable)* [ ] UGMA (State)
[ ] Community Property [ ] Trust (non-taxable)* [ ] Sole Proprietorship
[ ] Tenants in common (all sign) [ ] Partnership [ ] Other (Please Explain)
[ ] Individual Retirement Account* [ ] Corporation
</TABLE>
------------------------------------------------------
*Trustee/Custodian must sign as Investor
- --------------------------------------------------------------------------------
S-1
<PAGE> 123
- --------------------------------------------------------------------------------
DIVIDEND DISTRIBUTION METHOD: Subscribers have the option of receiving their
quarterly distributions in cash or, under the terms of the Dividend Reinvestment
Plan, Subscribers may have their dividends automatically reinvested in
additional Shares of the Company. Please elect the method of dividend
distribution you would like by checking the appropriate box below. If no box is
checked, dividends will automatically be paid in cash. Please check one of the
following boxes:
[ ] Paid in cash.
[ ] Reinvested in additional Shares of the Company.
[ ] Other (Please Provide Details)
-----------------------------------------------------------
-----------------------------------------------------------
- ------------------------------------ -----------------------------------
(Date) (Social Security or Tax I.D. Number)
- ------------------------------------ -----------------------------------
(Signature) (Signature)
All shares will be held in safekeeping
on your behalf by the Transfer Agent
unless you specifically request by
an "X" below that a certificate be issued.
Management urges that for the sake of
convenience shares be held in safekeeping
and a certificate not be issued.
-- Issue certificate [ ]
DEALER INFORMATION
- -----------------------------------
Authorized Representative Name and
Number
- ----------------------------------- ------------------------------------
Broker/Dealer Name Street Address (Branch Office)
- ----------------------------------- ------------------------------------
Street Address (Home Office) City and State (Branch Office)
( )
- ----------------------------------- ------------------------------------
City and State (Home Office) Representative Telephone Number
Company Use Only:
ACCEPTED:
WEST COAST REALTY INVESTORS, INC.
By
Authorized Officer
Fund No. $ Date / / Title Code
Abbrev. Name Br. No. Rep. No.
By
CHECKS SHOULD BE MADE PAYABLE TO: "CITY NATIONAL BANK-WEST COAST REALTY
INVESTORS, INC."
MAIL TO: 5933 W. Century Boulevard
Ninth Floor
Los Angeles, California 90045
Rev. 5/97
- -------------------------------------------------------------------------------
S-2
<PAGE> 124
=============================================================
NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS OR IN SUPPLEMENTS TO THIS PROSPECTUS, OR IN LITERATURE ISSUED BY THE
COMPANY, ADVISOR OR THE PRINCIPAL DISTRIBUTOR (WHICH SHALL NOT BE DEEMED TO BE
PART OF THIS PROSPECTUS), IN CONNECTION WITH THE OFFER CONTAINED HEREIN, AND IF
GIVEN OR MADE, THAT INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON. THE
STATEMENTS IN THIS PROSPECTUS OR IN ANY SUPPLEMENT ARE MADE AS OF THE DATE OF
THE PROSPECTUS OR SUPPLEMENT, UNLESS ANOTHER TIME IS SPECIFIED. NEITHER THE
DELIVERY OF THIS PROSPECTUS OR ANY SUPPLEMENT NOR ANY SALE OF SHARES SHALL,
UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN
THE FACTS SINCE THE DATE OF THE PROSPECTUS OR SUPPLEMENT. HOWEVER, IF ANY
MATERIAL CHANGES OCCUR DURING THE PERIOD WHEN A PROSPECTUS IS REQUIRED TO BE
DELIVERED, THIS PROSPECTUS OR ANY SUPPLEMENT WILL BE AMENDED OR SUPPLEMENTED
ACCORDINGLY.
-------------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PROSPECTUS SUMMARY....................................... 1
THE COMPANY.............................................. 4
RISK FACTORS............................................. 5
ESTIMATED USE OF PROCEEDS................................ 11
COMPENSATION OF ADVISOR AND AFFILIATES................... 13
CAPITALIZATION........................................... 18
SELECTED FINANCIAL DATA.................................. 18
CONFLICTS OF INTEREST.................................... 19
INVESTMENT OBJECTIVES AND POLICIES....................... 20
REAL PROPERTY INVESTMENTS................................ 25
MANAGEMENT'S DISCUSSION OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.................................. 41
MANAGEMENT............................................... 45
PRIOR PERFORMANCE........................................ 48
SERVICES PROVIDED BY THE ADVISOR AND PROPERTY MANAGER.... 49
TAX CONSEQUENCES......................................... 51
ERISA CONSIDERATIONS..................................... 61
DESCRIPTION OF COMMON STOCK.............................. 62
SUMMARY OF ORGANIZATION DOCUMENTS........................ 63
WHO SHOULD INVEST........................................ 66
PLAN OF DISTRIBUTION..................................... 67
SALES MATERIAL........................................... 71
LEGAL MATTERS............................................ 71
EXPERTS.................................................. 71
FURTHER INFORMATION...................................... 71
GLOSSARY................................................. 71
INDEX TO FINANCIAL STATEMENTS............................ 77
SUBSCRIPTION AGREEMENT................................... S-1
PRIOR PERFORMANCE TABLES................................. T-1
</TABLE>
=============================================================
=============================================================
25,000 SHARES
LOGO
WEST COAST REALTY INVESTORS, INC.
$10.00 PER SHARE
MINIMUM INVESTMENT: 100 SHARES ($1,000)
-------------------------------------
PROSPECTUS
-------------------------------------
, 1997
=============================================================
<PAGE> 125
Supplement No. 7 to prospectus dated May 1, 1997.
This supplement ("Supplement") to the Prospectus ("Prospectus") updates the
Prospectus of West Coast Realty Investors, Inc. (the "Company") dated May 1,
1997. This Supplement is part of and must accompany the Prospectus. The date
of this supplement is December 15, 1997.
This Supplement amends and supersedes the corresponding sections of the
Prospectus, and Supplements 1, 2, 3, 4, 5 and 6 to such prospectus; however,
subject to the qualification above, the Prospectus continues to control the
terms of the offering, and all provisions thereof not supplemented or amended
hereby remain pertinent to the offering and are incorporated herein by
reference. Accordingly, current subscribers and prospective investors should
read both the Prospectus and this Supplement No. 7 very carefully. All
capitalized items used in this Supplement have the same meaning ascribed to them
in the Prospectus unless otherwise indicated herein.
The following supplements the Cover Page and pages 1, 4, 8 ("Prior Experience
in Raising Funds"), and 68 ("Plan of Distribution") of the Prospectus
As of December 15, 1997, the Company has sold 698,688 Shares ($6,972,874) in
this offering.
The following supplement page 21 of the Prospectus ("Use of Initial Capital").
The Company intends to use the net proceeds of this offering, which will be not
less than a minimum $6,136,000 as of December 15, 1997, and a maximum
$13,300,000 for the purchase of Properties, for the payment of Acquisition Fees,
and for the establishment of appropriate reserves. See "Estimated Use of
Proceeds."
The following supplements page 23("Dividends") and page 45 ("Liquidity and
Capital Resources") of the Prospectus.
The Company waived a portion of its Advisory Fees from January 1, 1997 to
September 30, 1997. The amount waived was $88,742. The effect of this was to
increase Dividends approximately $.03 per Share for the nine months ended
September 30, 1997.
The following supplements the "Dividends" portion of INVESTMENT OBJECTIVES AND
POLICIES section of the Prospectus, beginning on page 23, and continuing to page
24.
Dividends totaling $325,906 were paid on April 15, 1997, for shareholders of
record on January 1, February 1, and March 1, 1997. Dividends totaling
$362,441 were paid on July 15, 1997 for shareholders of record on April 1, May
1, and June 1, 1997. Dividends totaling $383,474 were paid on October 15, 1997
for shareholders of record on July 1, August 1, and September 1, 1997.
<PAGE>
Approximately 37% of these dividends constituted a return of capital. The
dividend payments are summarized below:
Record Date Per Outstanding Total
Date Paid Share Shares Dividend
- ------ -------- ------ ---------------- -------------
01/01/97 4/15/97 $0.0666 1,550,607 $ 103,270
02/01/97 4/15/97 0.0666 1,671,442 111,318
03/01/97 4/15/97 0.0666 1,671,442 111,318
04/01/97 7/15/97 0.0666 1,810,916 120,607
05/01/97 7/15/97 0.0666 1,815,579 120,917
06/01/97 7/15/97 0.0666 1,815,579 120,917
07/01/97 10/15/97 0.0666 1,815,579 120,917
08/01/97 10/15/97 0.0666 1,974,144 131,478
09/01/97 10/15/97 0.0666 1,968,144 131,078
The following supplements or amends the "REAL PROPERTY INVESTMENTS " Section of
the Prospectus, beginning on page 29.
OPTO-22 Property
The existing lease on the OPTO-22 building expired on April 30, 1997. OPTO-22,
the tenant, and Claremont School, the sub-tenant, both vacated the premises on
September 10, 1997. West Coast Realty Investors, Inc. has settled with OPTO-22
for the amounts owed by OPTO-22 to West Coast Realty Investors, Inc. for rent
and for deferred maintenance. OPTO-22 has paid the amounts owed to West Coast
Realty Investors, Inc. in accordance with the terms and conditions of a
Settlement Agreement dated October 31, 1997 and the parties have released one
another from any further claims as provided in said agreement.
The following supplements or amends the "REAL PROPERTY INVESTMENTS " Section of
the Prospectus, beginning on page 31.
North Palm Street Property
On October 31, 1997, the Company ("Seller") sold the North Palm Street Property
to a unrelated buyer. The sale was unsolicited and was partially contingent on
the Seller utilizing the Internal Revenue Service Code Section S1031 to
facilitate a tax free exchange. The total sales price was $2,515,860 in cash.
The Seller must pay off the existing lender of the first deed of trust which as
of October 31, 1997 totaled $971,305. Additionally, the Buyer has agreed to
contribute an additional $15,000 to prepay the mortgage loan.
<PAGE>
The following supplements or amends the "REAL PROPERTY INVESTMENTS " Section of
the Prospectus, beginning on page 40.
Tycom Property
The Company negotiated the refinancing of an existing short term promissory note
on the Tycom Property loan which was scheduled to mature on February 1, 1998.
The terms of the new first deed of trust loan are as follows:
Lender: Union Bank of California, N.A.
Loan Amount: $2,312,500
Interest Rate: Variable Rate - margin is 1.9% over the 3 month LIBOR with right
to convert after the first year. The conversion margin would be 1.9%
over selected Treasury Rate for the selected loan term.
Loan Term: Ten year term
Amortization: Twenty-five years
Monthly Debt Service: $17,469
Other: Recourse is only to West Coast Realty Investors, Inc.; The Company
must maintain a minimum net worth of $5,000,000; loan fees and a majority
of the administrative expenses are being paid by the former owner from whom
the Company purchased the property.
Roseville Property
On November 26, 1997, the Company acquired the investment described
below (the "Roseville Property" or the "Property"). The funds to acquire the
Roseville resulted from the Section S1031 tax free exchange of the Brea property
(as described above), plus additional proceeds resulting from the sale of the
Company's Shares in the current offering. No debt financing was used in
connection with the Roseville acquisition.
Description. The Property is located at the corner of Stanford Ranch Road
and Fairway Drive in Roseville, California. Roseville is a city of 59,700
residents (1997 Sacramento Area Council of Governments estimate) located in the
Sacramento region of Northern California.
The property is located on a lot size of .87 acres (approximately 37,900
square feet). This site is part of a larger shopping center which includes well-
known retailers such as Costco, Toys 'R Us, Shell Gasoline, Ross Dress For Less,
and McDonald's Restaurants. The total lot size is approximately 8.66 acres
(378,000 square feet). There are 61 parking spaces assigned to this site, with
the property also enjoying the use of hundreds of other parking spaces located
within the larger shopping center. The building size totals 5,133 square feet.
<PAGE>
The sole tenant of the Property is Applebee's Restaurant. Applebee's is a
well-known, national franchise of sit-down casual restaurants. This particular
Applebee's is being developed by, and acquired from, Christian Knox (an
individual and unrelated third party), and the restaurant franchise will be
owned and operated by him in a sale-leaseback arrangement. Mr. Knox has seven
Applebees and nine Burger King franchises, as evidence of his experience in this
industry.
The lease on the property commenced upon the concurrent issuance of the
Certificate of Occupancy in September 1997. The lease is a 20 year triple net
lease, including provisions for collection of common area charges that will be
assessed by the shopping center owner. Lease payments are initially $14,333.33
per month ($172,000 per year) with rental increases scheduled every five years
at the rate of 12 /%. The lease payments to the Company, on a calendar year
basis are noted below:
1997 $ 14,333
1998-2001 172,000
2002 179,167
2003-2006 193,500
2007 201,563
2008-2011 217,688
2012 226,758
2013-2016 244,898
2017 (through September 1) 163,266
Mr. Knox has personally guaranteed the lease and has provided documentation
demonstrating a personal net worth in excess of $10 million.
Property Operations. The Roseville Property is managed by West Coast
Realty Management, Inc. ("WCRM"), an affiliate of the Company. WCRM charges the
Company 3% of the gross rents collected as a management fee for managing the
Property, as allowed by the Property Management Agreement. Although the tenant
is obligated to pay property taxes, property tax in the first full year of
operations is estimated to be $20,000 (approximately 1% of the sales price).
Terms of Purchase. Total consideration paid by the Company for the
Roseville property is $2,067,000. This cost includes the $1,950,000 sales price
payable to the Seller/Operator, $12,500 in legal, appraisal, and closing costs,
and a $110,000 Acquisition Fee paid to the Advisor. In addition, $14,333 was
received from the Seller/Operator as a security deposit. The sale was paid for
from approximately $1,500,000 received from the disposition of the Brea property
(as described above), with the balance (approximately $567,000) from the
proceeds resulting from the sale of the Company's shares in the current
offering.
The purchase price was arrived at through arms-length negotiations with the
Seller/Operator.
<PAGE>
General. The computation of depreciation for the Roseville Property is
based on the cost of the property, including Acquisition Fees and Expenses. The
allocation of the cost of the Property to various asset categories is estimated,
based on allocations in the appraisal report. Depreciation will be computed on
a straight-line basis over the component useful life of the assets.
The following supplements or amends the "MANAGEMENT'S DISCUSSION OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS" Section of the Prospectus, beginning on
page 41.
As of December 15, 1997, the Company has raised $14,462,708 in capital from
prior offerings and $6,972,874 from the current offering. An additional
$1,809,286 has been raised in the current offering for sales between September
24, 1997 and December 15, 1997; these funds are expected to be released from
escrow in January, 1998.
Results of Operations - Nine Months Ended September 30, 1997 compared to Nine
Months Ended September 30, 1996
Operations for the nine months ended September 30, 1997 represented a full nine
months of rental operations for all properties except Tycom which was owned for
eight and one-half months.
The net income for the nine months ended September 30, 1997 continued to be
significantly larger than the prior nine months amount due to the raising of
additional funds and investment of such funds in additional income producing
properties. The Company did not have any adverse events that significantly
impacted net income during the nine months ended September 30, 1997, and all
properties that have been purchased by the Company have operated at levels equal
to current expectations.
Rental revenue increased $410,407 (23.2%) due to a full nine months ownership of
the Java City property and eight and one-half months of the Tycom property (as
compared to no ownership of these properties during the nine months ended
September 30, 1996).
Operating expenses increased $27,711 (33%) primarily due to a increase in
property liability insurance, utilities and common area maintenance during the
nine months ended September 30, 1997 as compared to the nine months ended
September 30, 1996. Interest expense increased $163,220 (25.5%) as a reflection
of the additional debt taken on in connection with additional property
acquisition and refinancing activities. Despite the large debt amounts, the
Company is still below the maximum 50% debt maximum that is allowed by the
Company's by-laws (debt was 46% of property cost (as defined in the by-laws) at
September 30, 1997). General and administrative costs increased $106,202 (75%),
much of this increase is due to $133,742 that the Advisor was paid during the
nine months ended September 30, 1997 due to the revised provisions of the
Advisor agreement. In contrast, the Advisor was paid $35,912 during the nine
months ended September 30, 1996 for Advisory fees in accordance to the revised
Advisor Agreement. Depreciation and amortization expense increased $163,219
(26%) as the result of the ownership of additional properties during 1997 as
compared to 1996. Net income of $567,017 for the nine months ended September
30, 1997 was $10,210 (2%) higher than the nine months ended September 30, 1996.
<PAGE>
The average number of shares outstanding during 1997 was 1,764,404 vs. 1,430,333
in 1996. Partly because of the greater number of shares outstanding, the net
income per share decreased from $.39 in 1996 to $.32 in 1997. If this figure is
analyzed using flow of funds - that is net income plus depreciation expense,
plus adding advisory fee expense with was incurred in 1997 and not 1996 - then
the amount in 1997 was $.60 per share vs. $.62 per share in 1996.
During the nine months ended September 30, 1997, the Company declared dividends
totaling $1,071,820, compared to dividends of $825,059 declared for the nine
months ended September 30, 1996. Cash basis income for the nine months ended
September 30, 1997 was $925,901. This was derived by adding depreciation and
amortization expense to net income. Thus, cash distributions during the nine
months ended September 30, 1997 were $145,919 greater than cash basis net
income. In comparison, distributions in the first nine months of 1996 were
$19,985 less than cash basis income of $845,044. In either event, the Company
is expected to qualify as a REIT in 1997, and liquidity of the Company continues
to be strong.
In summary then, the operating performance of the Company continued to improve
as additional funds were raised, additional property was acquired, and all
properties were operated profitably
The following supplements the "Liquidity and Capital Resources" section on Page
45.
Fees paid to the Advisor and the Property Manager for the nine months ended
September 30, 1997 are as follows:
Advisor--$770,691
Property Manager --$83,384
The following supplements or amends the "ERISA CONSIDERATIONS" and "DESCRIPTION
OF COMMON STOCK" sections on pages 62 and 63 of the Prospectus.
As of December 15, 1997, there are 2,147,524 Shares of the Company outstanding,
held by approximately 1,000 Shareholders. In addition, $1,809,286 in gross
proceeds has been raised from the sale of 181,509 shares in the current offering
to seventy investors between September 24 and December 15, 1997; these funds
have been deposited into an escrow account, and shares are expected to be issued
in January 1998.
<PAGE>
The following amends the Index to Financial Statements on p. 78.
West Coast Realty Investors
Unaudited Financial Statements
Balance Sheet as of December 31, 1996 and September 30, 1997..........F-33
Statements of Income for the three and nine months ended September 30,
1997 and 1996.....................................................F-34
Statements of Stockholders' Equity for the nine months ended September 30,
1997 and 1996.....................................................F-35
Statement of Cash Flows for the nine months ended September 30, 1997 and
1996..............................................................F-36
Summary of Accounting Policies........................................F-37
Notes to Financial Statements.........................................F-39
West Coast Realty Investors, Inc.
Pro Forma Statement of Income for the nine months ended September 30,
1997.............................................................F-48
Notes to Pro Forma Financial Statement for the nine months ended
September 30, 1997...............................................F-49
Pro Forma Statement of Income for the nine months ended September 30,
1997.............................................................F-50
Notes to Pro Forma Financial Statement for the nine months ended
September 30, 1997...............................................F-51
Pro Forma Statement of Income for the year ended December 31, 1996...F-52
Notes to Pro Forma Financial Statement for the year ended December 31,
1996.............................................................F-53
Pro Forma Balance Sheet for the nine months ended September 30, 1997.F-54
Notes to Pro Forma Financial Statement for the nine months ended September
30, 1997.........................................................F-55
<PAGE>
<TABLE>
WEST COAST REALTY INVESTORS, INC.
BALANCE SHEETS
September 30, 1997 (Unaudited) and December 31, 1996
<CAPTION>
September December
30, 1997 31, 1996
<S> <C> <C>
Assets
Rental real estate, less accumulated
depreciation (Note 2) $25,676,713 $21,118,203
Cash and cash equivalents 2,882,215 2,017,194
Accounts receivable 404,203 247,948
Loan origination fees, net of accumulated
amortization of $49,872 and $40,248 122,335 102,622
Other assets 44,869 85,871
Total assets $29,130,335 $23,571,838
Liabilities and Stockholders' Equity
Liabilities
Accounts payable $11,322 $13,922
Due to related party (Note 5(e)) 80,557 46,285
Dividends payable (Note 8) 383,236 302,760
Security deposits and prepaid rent 137,392 124,734
Other liabilities 137,484 100,453
Notes payable (Note 6) 12,228,139 10,078,793
Total liabilities 12,978,130 10,666,947
Commitments
Stockholders' equity
Common stock, $.01 par-shares authorized,
5,000,000 shares issued, 1,968,144 and
1,550,607 outstanding in 1997 and 1996 19,681 15,506
Additional paid-in capital 17,609,705 13,861,763
Retained earnings (1,477,181) (972,378)
Total stockholders' equity 16,152,205 12,904,891
Total liabilities and stockholders' equity $29,130,335 $23,571,838
</TABLE>
[FN]
See accompanying notes to financial statements.
F-33
<PAGE>
<TABLE>
WEST COAST REALTY INVESTORS, INC.
STATEMENTS OF INCOME
Three and Nine Months Ended September 30, 1997 and 1996
(Unaudited)
<CAPTION>
Three Three Nine Nine
Months Months Months Months
Ended Ended Ended Ended
September September September September
30, 30, 30, 1997 30, 1996
1997 1996
<S> <C> <C> <C> <C>
Revenues:
Rental $735,057 $618,081 $2,182,869 $1,772,462
Interest 37,605 19,974 70,558 70,564
772,662 638,055 2,253,427 1,843,026
Costs and Expenses:
Operating 43,076 40,405 110,772 83,061
Property taxes 27,722 18,528 83,167 55,927
Property management fees
-related party(Note 5 (d)) 27,581 27,015 83,384 78,213
Interest 282,835 220,188 802,547 639,327
General and administrative 86,767 61,476 247,656 141,454
Depreciationand amortization 119,954 98,764 358,884 288,237
587,935 466,376 1,686,410 1,286,219
Net Income $184,727 $171,679 $567,017 $556,807
Net Income Per Share (Note 8) $.10 $.12 $.32 $.39
</TABLE>
[FN]
See accompanying notes to financial statements.
F-34
<PAGE>
<TABLE>
WEST COAST REALTY INVESTORS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
Nine Months Ended September 30, 1997
(Unaudited)
Common Stock Additional Paid-in
Shares Amount Capital Deficit
<S> <C> <C> <C> <C>
Balance at December 31, 1996 1,550,607 $15,506 $13,861,763 $(972,378)
Issuance of stock, net 417,537 4,175 3,659,200 ---
Equity contribution by Affiliates
through expense reimbursements --- --- 88,742 ---
Net income --- --- --- 567,017
Dividends declared (Note 8) --- --- --- (1,071,820)
Balance at September 30, 1997 1,968,144 $19,681 $17,609,705 $(1,477,181)
</TABLE>
<TABLE>
Nine Months Ended September 30, 1996
(Unaudited)
<CAPTION>
Common Stock Additional Paid-in
Shares Amount Capital Deficit
<S> <C> <C> <C> <C>
Balance at December 31, 1995 1,322,404 $13,224 $11,771,030 $(549,417)
Issuance of stock, net 178,342 1,783 1,584,406 ---
Equity contribution by Affiliates
through expense reimbursements --- --- 20,912 ---
Net income --- --- --- 556,807
Dividends declared (Note 8) --- --- --- (825,059)
Balance at September 30, 1996 1,500,746 $15,007 $13,376,348 $(817,669)
</TABLE>
[FN]
See accompanying notes to financial statements.
F-35
<PAGE>
<TABLE>
WEST COAST REALTY INVESTORS, INC.
STATEMENTS OF CASH FLOWS
Nine Months Ended September 30, 1997 and 1996 (Unaudited)
<CAPTION>
Nine Months Nine Months
Ended Ended
Increase (Decrease) in Cash and Cash September September
Equivalents 30, 1997 30, 1996
<S> <C> <C>
Cash flows from operating activities
Net income $567,017 $556,807
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 349,260 288,237
Interest expense on amortization of
loan origination fees 9,624 ---
Increase (decrease) from changes in:
Accounts receivable (156,255) (109,016)
Other assets 41,002 119
Accounts payable (2,600) (78,462)
Due to related party 34,272 ---
Security deposits and prepaid rent 12,658 (16,443)
Other liabilities 37,031 ---
Net cash provided by operating activities 892,009 641,242
Cash flows from investing activities
Additions to rental real estate (4,907,441) (1,828,500)
Net cash (used in) investing activities (4,907,441) (1,828,500)
Cash flows from financing activities
Proceeds from issuance of common stock,net 3,544,372 1,579,005
Equity contribution by Affiliates through
expense reimbursements 88,742 20,912
Dividends declared and paid (931,344) (773,302)
Proceeds from notes payable 2,312,500 724,465
Payments on notes payable (163,154) (133,910)
Increase in loan origination fees 29,337 ---
Net cash provided by financing activities 4,880,453 1,417,170
Net increase in cash and cash equivalents 865,021 229,912
Cash and cash equivalents,beginning of period 2,017,194 1,450,022
Cash and cash equivalents, end of period $2,882,215 $1,679,934
</TABLE>
[FN]
See accompanying notes to financial statements.
F-36
<PAGE>
WEST COAST REALTY INVESTORS, INC.
SUMMARY OF ACCOUNTING POLICIES
Three and Nine Months Ended September 30, 1997 and 1996 (unaudited)
and December 31, 1996
BASIS OF PRESENTATION
The accompanying balance sheet as of September 30, 1997, the income statements
and statements of cash flow for the nine months periods ended September 30,
1997, and 1996 are unaudited, but in the opinion of management include all
adjustments, consisting only of normal recurring accruals, necessary for a fair
presentation of the financial position and results of operations for the periods
presented. The results of operations for the nine month period ended September
30, 1997, are not necessarily indicative of results to be expected for the year
ended December 31, 1997.
BUSINESS
West Coast Realty Investors, Inc. (the "Company"), is a corporation formed on
October 26, 1989 under the laws of the State of Delaware. The Company exists as
a Real Estate Investment Trust ("REIT") under Sections 856 to 860 of the
Internal Revenue Code. The Company has complied with all requirements imposed
on REIT's for 1996 and 1995 tax years; however, qualification as a REIT for
future years is dependent upon future operations of the Company. The Company
was organized to acquire interests in income-producing residential, industrial,
retail or commercial properties located primarily in California and the west
coast of the United States. The Company intends to acquire property for cash on
a moderately leveraged basis with aggregate mortgage indebtedness not to exceed
fifty percent of the purchase price of all properties on a combined basis, or
eighty percent individually and intends to own and operate such properties for
investment over an anticipated holding period of five to ten years.
RENTAL PROPERTIES AND DEPRECIATION
Assets are stated at lower of cost or net realizable value. Depreciation is
computed using the straight-line method over their estimated useful lives of
31.5 to 39 years for financial and income tax reporting purposes.
In the event that facts and circumstances indicate that the cost of an asset may
be impaired, an evaluation of recoverability would be performed. If an
evaluation is required, the estimated future undiscounted cash flows associated
with the asset would be compared to the carrying amount to determine if a write-
down to market value is required.
LOAN ORIGINATION FEES
Loan origination fees are capitalized and amortized over the life of the loan.
F-37
<PAGE>
WEST COAST REALTY INVESTORS, INC.
SUMMARY OF ACCOUNTING POLICIES
(Continued)
RENTAL INCOME
Rental income is recognized on a straight-line basis to the extent that rental
income is deemed collectable. Where there is uncertainty of collecting higher
scheduled rental amounts, due to the tendency of tenants to renegotiate their
leases for lower amounts, rental income is recognized as the amounts are
collected.
CASH AND CASH EQUIVALENTS
The Company considers cash in the bank, liquid money market funds, and all
highly liquid certificates of deposits, with original maturities of three months
or less, to be cash and cash equivalents.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
RECLASSIFICATIONS
For comparative purposes, certain prior year amounts have been reclassified to
conform to the current year presentation.
NEW ACCOUNTING PRONOUCEMENTS
Statement of Financial Accounting Standards No. 125, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities" (SFAS No.
125) issued by the Financial Accounting Standards Board (FASB) is effective for
transfers and servicing of financial assets and extinguishments of liabilities
occurring after December 31, 1996, and is to be applied prospectively. Earlier
or retroactive application is not permitted. The new standard provides
accounting and reporting standards for transfers and servicing of financial
assets and extinguishments of liabilities. The Company does not expect adoption
to have a material effect on its financial position or results of operations.
F-38
<PAGE>
WEST COAST REALTY INVESTORS, INC.
NOTES TO FINANCIAL STATEMENTS
Three and Nine Months Ended September 30, 1997 and 1996 (Unaudited)
and December 31, 1996
Note 1 - General
On October 30, 1989, West Coast Realty Advisors, Inc. (the "Advisor"), purchased
1,000 shares of the Company's common stock for $10,000. On August 30, 1990, the
Company reached its minimum initial offering funding level of $1,000,000. As of
September 30, 1997 the Company has raised $19,650,602 in capital.
Sales commissions and wholesaling fees, representing 8% of the gross proceeds
from the sale of common shares, were paid to Associated Securities Corp.
("ASC"), a member of the National Association of Securities Dealers, Inc.
("NASD") and an affiliate of the Advisor.
Dividends are declared and accrued based approximately upon the previous
quarter's income from operations before depreciation and amortization.
Note 2 - Rental Properties
The Company owns the following income-producing properties
Original
Location (Property Name) Date Purchased Acquisition
Cost
Huntington Beach, California
(Blockbuster) February 26, 1991 $ 1,676,210
Fresno, California May 14, 1993 1,414,893
Huntington Beach, California
(OPTO-22) September 15, 1993 2,500,001
Brea, California March 4, 1994 2,248,343
Riverside, California November 29, 1994 3,655,500
Tustin, California
(Safeguard) May 22, 1995 4,862,094
Fremont, California
(Technology Drive) October 31, 1995 3,747,611
Sacramento, California
(Java City) August 2, 1996 1,828,500
Irvine, California (Tycom) January 17, 1997 4,907,441
F-39
<PAGE>
WEST COAST REALTY INVESTORS, INC.
NOTES TO FINANCIAL STATEMENTS
Three and Nine Months Ended September 30, 1997 and 1996 (Unaudited)
and December 31, 1996 (Continued)
Note 2 - Rental Properties (continued)
The major categories of property are:
September 30, December 31,
1997 1996
Land $ 8,971,126 $ 7,401,126
Buildings and improvements 17,869,466 14,532,025
26,840,592 21,933,151
Less accumulated depreciation 1,163,879 814,948
Net rental properties $ 25,676,713 $ 21,118,203
A significant portion of the Company's rental revenue was earned from tenants
whose individual rents represented more than 10% of total rental revenue.
Specifically:
Five tenants accounted for 28%, 22%, 20%, 19% and 10% in 1997;
Five tenants accounted for 23%, 19%, 18%, 12% and 10% in 1996;
Four tenants accounted for 24%, 20%, 15% and 10% in 1995;
Note 3 - Other Assets
Other assets consists of the following:
September 30, 1997 December 31, 1996
Deposits and prepaid expenses $44,869 $85,871
Organization costs 14,330 14,330
59,199 100,201
Less accumulated amortization 14,330 14,330
Net other assets $44,869 $85,871
F-40
<PAGE>
WEST COAST REALTY INVESTORS, INC.
NOTES TO FINANCIAL STATEMENTS
Three and Nine Months Ended September 30, 1997 and 1996 (Unaudited)
and December 31, 1996 (Continued)
Note 4 - Future Minimum Rental Income
As of September 30, 1997 and December 31, 1996, future minimum rental income
under the existing leases that have remaining noncancelable terms in excess of
one year are as follows:
September 30, 1997 December 31,1996
1997 ............................... $ 763,725 $2,123,959
1998 ............................... 1,839,402 2,037,591
1999 ............................... 1,845,801 1,976,664
2000 ............................... 1,863,450 1,864,724
2001 ............................... 1,751,311 1,771,212
Thereafter ......................... 15,193,805 15,255,711
Total $23,257,494 $25,029,861
Future minimum rental income does not include lease renewals or new leases that
may result after a noncancelable-lease expires.
Note 5 - Related Party Transactions
The Advisor has an agreement with the Company to provide advice on investments
and to administer the day-to-day operations of the Company. Property management
services for the Company's properties are provided by West Coast Realty
Management, Inc. ("WCRM"), an affiliate of the Advisor.
F-41
<PAGE>
WEST COAST REALTY INVESTORS, INC.
NOTES TO FINANCIAL STATEMENTS
Three and Nine Months Ended September 30, 1997, and 1996 (Unaudited)
and December 31, 1996 (Continued)
During the periods presented, the Company had the following related party
transactions:
(a) In accordance with the advisory agreement, compensation earned by, or
services reimbursed or reimbursable to the advisor, consisted of the
following:
Nine Months For the Year
Ended Ended
September 30, December 31,
1997 1996
Syndication fees $482,307 $82,864
Acquisition fees 270,384 78,177
Overhead expenses 18,000 12,000
$770,691 $173,041
(b) At September 30, 1997 and December 31, 1996, the Advisor owned 22,505
shares of the issued and outstanding shares of the Company.
(c) Sales commissions paid in accordance with the selling agreement to ASC
totaled $310,421 for the nine months ended September 30, 1997 and $119,083 for
the nine months ended September 30, 1996.
(d) Property management fees earned by WCRM totaled $27,581 and $27,015
for the three months ended September 30, 1997 and 1996, respectively. For the
nine months ended September 30, 1997 and 1996, WCRM earned $83,384 and $78,213,
respectively in property management fees.
(e) The Corporation had related party accounts payable as follows:
September 30, December 31,
1997 1996
Associated Securities Corp. $ 4,156 $ 396
West Coast Realty Management 19,249 24,839
West Coast Realty Advisors 57,152 21,050
$80,557 $46,285
(f) A financing fee of $23,125 was paid in August 1997 in connection with
the refinancing of the note payable on the Tycom property (Note 6).
F-42
<PAGE>
WEST COAST REALTY INVESTORS, INC.
NOTES TO FINANCIAL STATEMENTS
Three and Nine Months Ended September 30, 1997, and 1996 (Unaudited)
and December 31, 1996 (Continued)
Note 6 - Notes Payable
Notes payable are made up of the following:
September 30, December 31,
1997 1996
8.25% promissory note secured by a Deed of Trust
on the Fresno Property, monthly principal and interest
payments are $5,244 due August 1, 2003 ............ $ 619,366 $ 628,471
Variable rate promissory note secured by a Deed
of Trust on the OPTO-22 property, interest rate
adjustments are monthly and are based on the 11th
District cost of funds rate plus 3% (7.835% at
September 30, 1997), and may never go below 6.5%
or above 11.0%, monthly principal and interest
payments are $12,723, due October 1, 2003 .......... 1,693,720 1,708,362
8.25% promissory note secured by a Deed of Trust on
the Blockbuster property, interest rate adjusts
to the 5-year Treasury rate plus 350 basis points
on February 1, 1999, monthly principal and interest
payments are $4,934, due February 1, 2004 ........... 559,684 569,132
9.25% promissory note secured by a Deed of Trust
on the Riverside property, monthly principal and
interest payments are $9,988, due November 8, 2004 . 1,169,786 1,177,055
Variable rate promissory note secured by a Deed of Trust
on the Brea property, interest rate is 9.5% until March 1,
2000 (and each succeeding March 1st) when interest rate
adjusts to the Moody's corporate bond index daily rate
plus 0.125%, monthly principal and interest payments
vary depending upon interest rates and are currently
$8,737, due March 1, 2020 .......................... 972,345 981,338
F-43
<PAGE>
WEST COAST REALTY INVESTORS, INC.
NOTES TO FINANCIAL STATEMENTS
Three and Nine Months Ended September 30, 1997, and 1996 (Unaudited)
and December 31, 1996 (Continued)
Note 6 - Notes Payable (cont.)
September 30, December 31,
1997 1996
9.625% promissory note secured by a Deed of Trust
on the Safeguard property, monthly principal and
interest payments are $24,191, due February 1,
2005 ............................................ $2,091,431 $2,155,575
8.24% promissory note secured by a Deed of Trust
on the Fremont property, interest rate equaled the 20-year
Treasury rate plus 1.65% at loan closing, monthly principal
and interest payments are currently $18,898, due
August 1, 2015 ................................... 2,103,427 2,140,311
10% promissory note secured by a Deed of Trust on the
Java City property, monthly principal and interest payments
are $3,413, due November 1, 2001................... 330,971 336,272
8% promissory note secured by a Deed of Trust on the
Java City property, monthly principal and interest payments
are $3,126, due June 1, 2018......................... 377,482 382,277
Variable rate promissory note secured by a Deed of Trust
on the Tycom Property, interest rate is 1.90% over the
3 month LIBOR with right to convert after first year; The
conversion margin would be 1.90% over selected Treasury
Rate for the 10 year loan term, monthly principal and interest
payments vary depending upon interest rates and are
currently $17,469 due July 31, 2007.................. 2,309,927 ---
$12,228,139 $10,078,793
The above carrying amounts, with the exception of the note on the Fresno
property, are reasonable estimates of fair values of notes payable based on
current lending rates in the industry for mortgage loans with similar terms and
maturities. The fair value of the Fresno note is approximately $580,000
calculated by discounting the expected future cash outflows on the note to the
present based on a current lending rate of 10%, which is the approximate
industry lending rate on properties of this type in this location.
F-44
<PAGE>
WEST COAST REALTY INVESTORS, INC.
NOTES TO FINANCIAL STATEMENTS
Three and Nine Months Ended September 30, 1997, and 1996 (Unaudited)
and December 31, 1996 (Continued)
The aggregate annual future maturities at September 30, 1997 and December 31,
1996 are as follows:
Year Ending September 30, 1997 December 31, 1997
1997 $60,032 $210,322
1998 239,183 228,391
1999 259,579 248,287
2000 281,228 269,435
2001 594,384 582,090
Thereafter 10,793,733 8,540,268
Total $12,228,139 $10,078,793
Note 7 - Dividend Reinvestment Plan
The Company has established a Dividend Reinvestment Plan (the "Plan") whereby
cash dividends will, upon election of the shareholders, be used to purchase
additional shares of the Company. The shareholders' participation in the Plan
may be terminated at any time.
Note 8 - Net Income and Dividends Per Share
Net Income Per Share for the nine months ended September 30, 1997 and 1996 was
computed using the weighted average number of outstanding shares of 1,764,404
and 1,430,333, respectively.
Dividends declared during the first nine months 1997 and 1996 were as follows:
Outstanding Amount Total
Record Date Shares Per Unit Dividend
January 1, 1997 1,550,607 $ 0.0666 $103,270
February 1, 1997 1,671,442 0.0666 111,318
March 1, 1997 1,671,442 0.0666 111,318
April 1, 1997 1,810,916 0.0666 120,607
May 1, 1997 1,815,579 0.0666 120,917
June 1, 1997 1,815,579 0.0666 120,917
July 1, 1997 1,815,579 0.0666 120,917
August 1, 1997 1,974,144 0.0666 131,478
September 1, 1997 1,968,144 0.0666 131,078
Total $1,071,820
F-45
<PAGE>
WEST COAST REALTY INVESTORS, INC.
NOTES TO FINANCIAL STATEMENTS
Three and Nine months Ended September 30, 1997, and 1996 (Unaudited)
and December 31, 1996 (Continued)
Note 8 - Net Income and Dividends Per Share (cont.)
Outstanding Amount Total
Record Date Shares Per Unit Dividend
January 1, 1996 1,325,404 0.0600 $79,524
February 1, 1996 1,371,794 0.0600 82,308
March 1, 1996 1,401,664 0.0600 84,100
April 1, 1996 1,413,736 0.0666 94,155
May 1, 1996 1,445,236 0.0666 96,253
June 1, 1996 1,448,836 0.0666 96,492
July 1, 1996 1,448,836 0.0666 96,492
August 1, 1996 1,448,836 0.0666 96,492
September 1, 1996 1,498,246 0.0666 99,783
Total $825,599
Note 9 - New Accounting Pronouncements
Statement of Financial Accounting Standards No. 125, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities" (SFAS No.
125) issued by the Financial Accounting Standards Board (FASB) is effective for
transfers and servicing of financial assets and extinguishments of liabilities
occurring after December 31, 1996, and is to be applied prospectively. Earlier
or retroactive application is not permitted. The new standard provides
accounting and reporting standards for transfers and servicing of financial
assets and extinguishments of liabilities. The Company does not expect adoption
to have a material effect on its financial position or results of operations.
Note 10 - Subsequent Events
(a) In October 1997, the Company paid dividends totaling $383,474 ($0.0666 per
share per period), payable to shareholders of record on July 1, August 1, and
September 1, 1997, respectively (Note 8).
(b) On October 3, and October 10, 1997, a total of $1,775,984 in proceeds from
the sale of shares in the Company's current offering was released from an escrow
account, and 178,105 shares were issued to investors.
F-46
<PAGE>
WEST COAST REALTY INVESTORS, INC.
NOTES TO FINANCIAL STATEMENTS
Three and Nine Months Ended September 30, 1997, and 1996 (Unaudited)
and December 31, 1996 (Continued)
Note 10 - Subsequent Events (cont.)
(c) On October 31, 1997, the Company ("Seller") sold the North Palm Street
Property to a unrelated buyer. The offer to purchase the property was
unsolicited and was partially contingent on the Seller utilizing the Internal
Revenue Service Code Section S1031 to facilitate a tax free exchange. The total
sales price is $2,515,860 in cash. The Seller paid off the existing lender of
the first deed of trust which as of September 30, 1997 totaled $975,309.
Additionally, the Buyer agreed to contribute an additional $15,000 to prepay
the mortgage loan.
(d) In early November 1997, the Company intends on acquiring an investment
known as the Roseville Property. The funds to acquire the Roseville will result
from the Section S1031 tax free exchange of the Brea property (as described
above), plus additional proceeds resulting from the sale of the Company's Shares
in the current offering. No debt financing will be used in connection with the
Roseville acquisition. The Roseville Property has been constructed, and the
Company will be taking ownership of the Property two to three weeks after the
occupancy permit is issued. The property's tenant intends on using the property
as a sit-down, casual restaurant. Roseville is a city located in the Sacramento
region of Northern California.
F-47
<PAGE>
<TABLE>
WEST COAST REALTY INVESTORS, INC.
PRO FORMA STATEMENT OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
INTRODUCTION
The following unaudited pro forma financial statement is presented to
illustrate the acquisition of the Roseville Property and the disposition of the
Brea Property as described in this offering, on the results of operations of the
Company.
The unaudited pro forma statement of income has been prepared as if all the
aforementioned properties had been occupied by their respective tenants or sold
by the Company on January 1, 1997. The unaudited pro forma financial statements
are not necessarily indicative of the Company's future operations and should be
read in conjunction with the other financial statements and notes thereto
included elsewhere in this Prospectus.
<CAPTION>
Disposition Acquisition
HISTORICAL BREA ROSEVILLE PRO FORMA
SEPTEMBER PROPERTY PROPERTY CONDENSED
30, 1997 SEPTEMBER
30, 1997
<S> <C> <C> <C> <C> <C> <C>
REVENUE:
Rental $2,182,869 $(195,033) (a) $129,000 (a) $2,116,836
Gain on sale --- 325,791 (f) 325,791
of property
Interest 70,558 75,000 (b) (62,000) (b) 83,558
2,253,427 205,758 67,000 2,526,185
EXPENSES:
Operating 277,323 (59,093) (c) 9,000 (c) 227,230
Interest 802,547 (69,569) (d) 732,978
Depreciation
and 358,884 (27,695) (e) 25,460 (e) 356,649
amortization
General and
administrative 247,656 --- --- 247,656
1,686,410 (156,357) 34,460 1,564,513
Net income $567,017 $362,115 $32,540 $961,672
Net income per $.32 $.55
share
Weighted Average Shares Used Weighted Average Shares Used for Pro
for Historical Calculation 1,764,404 Forma Calculation 1,764,404
</TABLE>
F-48
<PAGE>
WEST COAST REALTY INVESTORS, INC.
NOTES TO PRO FORMA FINANCIAL STATEMENTS
For the Nine Months Ended September 30, 1997
(Unaudited)
1. BASIS OF PRESENTATION
The pro forma statements of income reflect operations for the Company assuming
that the Roseville Property was acquired, and the Brea Property, was sold on
January 1, 1997. This statement contains certain adjustments which are expected
to be incurred in those properties' first year of operations, with a full nine
month's worth of operations reflected in the Statement of Income for the nine
months ended September 30, 1997.
There can be no assurance that the foregoing results will be obtained.
2. PRO FORMA ADJUSTMENTS
The adjustments to the pro forma statement of income are as follows:
(a) To reflect additional rental income for the Roseville Property, and the
reduction of rental income for the Brea Property so that a full nine
months are recognized.
(b) To eliminate interest income due to funds used for the acquisition of the
Roseville Property and the addition to interest income to reflect funds
provided by the sale of the Brea Property.
(c) To reflect additional property management fees for nine months based on the
first year of the lease on the Roseville Property and the reflection of
operating costs savings from the sale of the Brea Property.
(d) To reflect interest expense savings for the nine months on the Brea
property.
(e) To reflect depreciation expense on the Roseville and Brea Properties from
January 1, to September 30, 1997.
(f) To reflect the gain on the sale of the Brea Property.
F-49
<PAGE>
<TABLE>
WEST COAST REALTY INVESTORS, INC.
PRO FORMA STATEMENT OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
INTRODUCTION
The following unaudited pro forma financial statement is presented to
illustrate the acquisition of the Roseville and Tycom Properties and the
disposition of the Brea Property, as described in this offering, on the results
of operations of the Company.
The unaudited pro forma statement of income has been prepared as if all the
aforementioned properties had been occupied by their respective tenants, and the
Brea property was sold, on January 1, 1997. The unaudited pro forma financial
statements are not necessarily indicative of the Company's future operations and
should be read in conjunction with the other financial statements and notes
thereto included elsewhere in this Prospectus.
<CAPTION>
Disposition Acquisitions
HISTORICAL BREA ROSEVILLE TYCOM PRO FORMA
SEPTEMBER30, PROPERTY PROPERTY PROPERTY CONDENSED
1997 SEPTEMBER
30, 1997
<S> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUE:
Rental $2,182,869 $(195,033) (a) $129,000 (a) $25,754 (a) $2,142,590
Gain on sale --- 325,791 (f) 325,791
of property
Interest 70,558 75,000 (b) (62,000) (b) (7,400) (b) 76,158
2,253,427 205,758 67,000 18,354 2,544,539
EXPENSES:
Operating 277,323 (59,093) (c) 9,000 (c) 773 (c) 228,003
Interest 802,547 (69,569) (d) 12,240 (d) 745,218
Depreciation
and 358,884 (27,695) (e) 25,460 (e) 356,649
amortization
General and
administrative 247,656 --- --- --- 247,656
1,686,410 (156,357) 34,460 13,013 1,577,526
Net income $567,017 $362,115 $32,540 $5,341 $967,013
Net income per $.32 $.55
share
Weighted Average Shares Used Weighted Average Shares Used for Pro
for Historical Calculation 1,764,404 Forma Calculation 1,764,404
</TABLE>
F-50
<PAGE>
WEST COAST REALTY INVESTORS, INC.
NOTES TO PRO FORMA FINANCIAL STATEMENTS
For the Nine Months Ended September 30, 1997
(Unaudited)
1. BASIS OF PRESENTATION
The pro forma statements of income reflect operations for the Company assuming
that the Roseville and Tycom Properties were acquired, and the Brea Property was
sold, on January 1, 1997. This statement contains certain adjustments which are
expected to be incurred in those properties' first year of operations, with a
full nine month's worth of operations reflected in the Statement of Income for
the nine months ended September 30, 1997.
There can be no assurance that the foregoing results will be obtained.
2. PRO FORMA ADJUSTMENTS
The adjustments to the pro forma statement of income are as follows:
(a) To reflect additional rental income for the Roseville and Tycom Properties
from January 1, 1997 to the date of acquisition or September 30, 1997
(whichever is first), and the reduction of rental income due to the assumed
sale of the Brea Property on January 1, 1997.
(b) To eliminate interest income to reflect funds used for the acquisition of
Roseville and Tycom Properties and the addition to interest income to
reflect funds provided by the sale of the Brea Property.
(c) To reflect additional property management fees for nine months based on the
first year of the lease on the Roseville and Tycom Properties and the
reflection of operating costs savings from the sale of the Brea Property.
(d) To reflect interest expense savings for the six months on the Brea property
and to reflect added interest expense for nine months for the Tycom
Property based on the first year of payments under the projected
amortization schedule for the Tycom Property loan.
(e) To reflect depreciation expense on the Roseville and Brea Properties from
January 1, to September 30, 1997.
(f) To reflect the gain on the sale of the Brea Property.
F-51
<PAGE>
<TABLE>
WEST COAST REALTY INVESTORS, INC.
PRO FORMA STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1996
INTRODUCTION
The following unaudited pro forma financial statement is presented to
illustrate the acquisition of the Roseville, Tycom and Java City Properties and
the disposition of the Brea Property as described in this offering, on the
results of operations of the Company.
The unaudited pro forma statement of income has been prepared as if all the
aforementioned properties had been occupied by their respective tenants on
January 1, 1996 or in the case of the Brea Property, disposed of on that date.
The unaudited pro forma financial statements are not necessarily indicative of
the Company's future operations and should be read in conjunction with the other
financial statements and notes thereto included elsewhere in this Prospectus.
<CAPTION>
Disposition 1997 Acquisitions 1996 Acquisition
HISTORICAL BREA ROSEVILLE TYCOM JAVA PRO FORMA
DECEMBER PROPERTY PROPERTY PROPERTY CITY CONDENSED
31, 1996 PROPERTY DECEMBER
31, 1996
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUE:
Rental $2,377,530 $(285,019) (a) $172,000 (a) $459,348 (a) $135,340 (a) $2,859,199
Gain on sale
of property --- 390,400 (f) 390,400
Interest 97,097 89,950 (b) --- --- (30,475) (b) 156,572
2,474,627 195,331 172,000 459,348 104,865 3,406,171
EXPENSES:
Operating 302,858 (80,696) (c) 10,500 (c) 14,040 (c) 17,980 (c) 264,682
Interest 880,978 (93,717) (d) 184,042 (d) 37,900 (d) 1,009,203
Depreciation
and 360,901 (36,924) (e) 33,950 (e) 88,540 (e) 15,160 (e) 461,627
amortization
General and
administrative 224,254 --- --- --- --- 224,254
1,768,991 (211,337) 44,450 286,622 71,040 1,959,766
Net income $705,636 $406,668 $127,550 $172,726 $33,825 $1,446,405
Net income $.49 $. 73
per share
Weighted Average Shares Used Weighted Average Shares Used for Pro
for Historical Calculation 1,447,366 Forma Calculation (Note 3) 1,960,521
</TABLE>
F-52
<PAGE>
WEST COAST REALTY INVESTORS, INC.
NOTES TO PRO FORMA FINANCIAL STATEMENTS
For the Year Ended December 31, 1996 (Unaudited)
1. BASIS OF PRESENTATION
The pro forma statements of income reflect operations for the Company assuming
that the Roseville, Tycom and Java City Properties were acquired and the Brea
Property was sold on January 1, 1996. This statement contains certain
adjustments which are expected to be incurred in those properties' first year of
operations, with a full year of operations reflected in the Statement of Income
for the year ended December 31, 1996.
There can be no assurance that the foregoing results will be obtained.
2. PRO FORMA ADJUSTMENTS
The adjustments to the pro forma statement of income are as follows:
(a) To reflect additional rental income for the Roseville, Tycom and Java City
Properties, and a reduction of rental income for the Brea Property.
(b) To eliminate interest income to reflect funds used for the acquisition of
Java City Property and the addition to interest income to reflect funds
provided by the sale of the Brea Property.
(c) To reflect additional property management fees for year ended December 31,
1996 on the lease of the Roseville, Tycom and Java City Properties and the
reflection of operating costs savings from the sale of the Brea Property.
(d) To reflect interest expense savings for the year ended December 31, 1996 on
the Brea property and to reflect added interest expense for year for the
Roseville, Tycom and Java City Properties based on the first year of
payments under the projected amortization schedules.
(e) To reflect depreciation expense on the Roseville, Tycom, Java City and Brea
Properties for the year ended December 31, 1996.
(f) To reflect the gain on the sale of the Brea Property.
3. PER SHARE AMOUNTS
The pro forma income statement assumes that the Roseville Property, Tycom
Property and the Java City Property were owned and the Brea Property was sold as
of January 1, 1996. The Company used approximately $5.4 million in cash to
acquire these properties, offset by approximately $2.5 million provided by the
sale to the Brea property. However, as of January 1, 1996, the Company had
approximately $2.0 million available for the acquisition of additional
properties. The properties were acquired primarily using funds raised
subsequent to January 1, 1996. Therefore, the weighted average shares
outstanding as of December 31, 1996, was calculated assuming that an additional
$5.7 million in shares (570,000 shares) were outstanding as of January 1, 1996,
and that no additional shares were issued throughout the year. This is assumed
to be the minimum number of shares that would be sold given the offering
expenses and reserves that are allocated against shares sold.
F-53
<PAGE>
<TABLE>
WEST COAST REALTY INVESTORS, INC.
PRO FORMA BALANCE SHEET
SEPTEMBER 30, 1997
<CAPTION>
Historical Pro Forma Pro Forma
September Adjustments Condensed
30, 1997 September
30, 1997
<S> <C> <C> <C> <C>
ASSETS:
Rental Real Estate $25,676,713 2,067,000 (1) $25,627,682
(2,116,031) (2)
Cash & Cash Equivalents 2,882,215 1,472,003 (2) 2,287,218
(2,067,000) (1)
Accounts Receivable 404,203 404,203
Loan Origination fees, net of accumulated
amortization of $49,872 and $40,248 122,335 (29,467) (2) 92,868
Other Assets 44,869 44,869
TOTAL ASSETS $29,130,335 $28,456,840
LIABILITIES AND STOCKHOLDERS EQUITY
Accounts Payable $11,322 $11,322
Due to Related Party 80,557 80,557
Dividends Payable 383,236 383,236
Security Deposits and Prepaid 137,392 (12,245) (2) 125,147
Rents
Other Liabilities 137,484 137,484
Notes Payable 12,228,139 (972,345) (2) 11,255,794
TOTAL LIABILITIES 12,978,130 11,993,540
COMMITMENTS AND CONTENGENCIES
Common Stock and Additional Paid- 17,629,386 17,629,386
in Capital
Distributions in Excess of Earnings (1,477,181) 311,095 (2) (1,166,086)
TOTAL STOCKHOLDERS EQUITY 16,152,205 16,463,300
TOTAL LIABILITIES & STOCKHOLDERS
EQUITY $29,130,335 $28,456,840
</TABLE>
F-54
<PAGE>
West Coast Realty Investors, Inc.
Notes to Pro Forma Balance Sheet
September 30, 1997
The pro forma Balance Sheet assumes that the Roseville Property was acquired
and the Brea Property was sold on September 30, 1997. This statement reflects
certain changes to the balance sheet that would be reflected if the properties
were acquired and sold on that date.
Note 1 - Acquisition of Tycom Property
These adjustments reflect the effect of acquiring the Roseville Property,
including an increase in rental real estate and a net decrease in cash and cash
equivalents. A significant amount of the proceeds for the purchase of the
Roseville Property will be provided by the sale of the Brea Property (see Note
2).
Note 2 - Sale of the Brea Property
These adjustments reflect the effect of the sale of the Brea Property,
including a decrease in rental real estate, security deposits and notes payable,
a net increase in cash and cash equivalents, and a gain on the sale of the
property.
F-55
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 30. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The estimated expenses in connection with the offering are as follows:
<TABLE>
<S> <C>
Securities and Exchange Commission
Registration Fee.................................................................. $ 5,517
NASD Filing Fee................................................................... 2,100
Accounting Fees and Expenses...................................................... 95,000
Blue Sky Fees and Expenses........................................................ 35,000
Legal Fees and Expenses........................................................... 100,000
Investor/Dealer Printed Materials................................................. 100,000
Prospectus Printing............................................................... 100,000
Mailgrams, Western Union, Postage and Miscellaneous............................... 62,383
---------
Total........................................................................... 500,000
=========
</TABLE>
ITEM 31. SALES TO SPECIAL PARTIES.
Not Applicable.
ITEM 32. RECENT SALES OF UNREGISTERED SECURITIES.
On October 30, 1989, 1,000 shares of Registrant's Common Stock were sold
for cash (without commissions) to Registrant's Advisor, West Coast Realty
Advisors, Inc., pursuant to the exemption from registration under Section 4(2)
of the Securities Act of 1933, as amended.
ITEM 33. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Registrant has the power to indemnify its directors, officers,
employees, and certain other persons against liability for certain acts pursuant
to Section 145 of the Delaware Corporations Code. Indemnification of the
directors, officers, employees and agents is provided for in the Certificate of
Incorporation and the Bylaws of the Registrant and is incorporated herein by
reference to Exhibits 3.1, 3.1.1, 3.2, 3.2.1 and 3.2.2 filed herewith.
ITEM 34. TREATMENT OF PROCEEDS FROM STOCK BEING RETURNED.
Not applicable.
ITEM 35. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements:
<TABLE>
<CAPTION>
<S> <C>
West Coast Realty Investors
Audited Financial Statements
Report of Independent Certified Public Accountants
Balance Sheets as of December 31, 1996 and 1995
Statements of Income for the years ended December 31, 1996, December 31, 1995 and
December 31, 1994
Statements of Stockholders' Equity for the years ended December 31, 1996,
December 31, 1995 and December 31, 1994
Statements of Cash Flows for the years ended December 31, 1996, December 31, 1995
and December 31, 1994
</TABLE>
II-1
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Summary of Accounting Policies
Notes to Financial Statements
Schedule III -- Real Estate and Accumulated Depreciation
Schedule IV -- Mortgage Loans on Real Estate
Java City Property
Report on Independent Certified Public Accountants
Summary of Historical Information Relating to Operating Revenues and Specified
Expenses
Notes to Summary of Historical Information Relating to Operating Revenues and
Specified Expenses
Estimated Twelve Month Pro Forma Statement of Taxable Operating Income (unaudited)
Estimated Twelve Month Pro Forma Statement of Cash Available from Operations
(unaudited)
Notes to Pro Forma Statements (unaudited)
Tycom Property
Report of Independent Certified Public Accountants
Summary of Historical Information Relating to Operating Revenues and Specified
Expenses
Notes to Summary of Historical Information Relating to Operating Revenues and
Specified Expenses
Estimated Twelve Month Pro Forma Statement of Taxable Operating Income (unaudited)
Estimated Twelve Month Pro Forma Statement of Cash Available from Operations
(unaudited)
Notes to Pro Forma Statements (unaudited)
West Coast Realty Investors, Inc.
Pro Forma Balance Sheet as of December 31, 1996 (unaudited)
Notes to Pro Forma Balance Sheet as of December 31, 1996 (unaudited)
Pro Forma Statement of Income for the year ended December 31, 1996 (unaudited)
Notes to Pro Forma Statement of Income for year ended December 31, 1996 (unaudited)
</TABLE>
(b) Exhibits:
<TABLE>
<S> <C>
1.1 Amended Form of Selling Agreement.(1)
1.2 Amended Form of Selected Dealer Agreement.(1)
3.1 Certificate of Incorporation (incorporated by reference to the Company's Registration
Statement on Form S-11, File No. 33-32466).(1)
3.1.1 Amendment to Certificate of Incorporation (incorporated by reference to the Company's
Registration Statement on Form S-11, File No. 33-45802).(1)
3.2 Bylaws (incorporated by reference to the Company's Registration Statement on Form
S-11, File No. 33-32466).(1)
3.2.1 Amendment to Bylaws (incorporated by reference to the Company's Registration
Statement on Form S-11, File No. 33-45802).(1)
3.2.2 Amended and Restated Bylaws (incorporated by reference to the Company's Registration
Statement on Form S-11, File No. 33-45802).(1)
3.2.3 Amended and Restated Bylaws.(1)
4 Form of Share Certificate (incorporated by reference to the Company's Registration
Statement on Form S-11, File No. 33-32466).(1)
5 Opinion re: legality (including consent).(1)
8 Opinion re: tax matters (including consent).(1)
10.1 Executed copy of Advisory Agreement (incorporated by reference to the Company's
Registration Statement on Form S-11, File No. 33-32466).(1)
</TABLE>
II-2
<PAGE>
<TABLE>
<S> <C>
10.1.1 Executed Copy of Amendment to Advisory Agreement (incorporated by reference to the
Company's Registration Statement on Form S-11, File No. 33-45802).(1)
10.1.2 Amended and Restated Advisory Agreement (incorporated by reference to the Company's
Registration Statement on Form S-11, File No. 33-45802).(1)
10.1.3 Second Amended and Restated Advisory Agreement (incorporated by reference to the
Company's Registration Statement on Form S-11, File No. 33-75260).(1)
10.1.4 Third Amended and Restated Advisory Agreement (incorporated by reference to the
Company's Registration Statement on Form S-11, File No. 33-75260).(1)
10.2 Executed Copy of Escrow Instructions.(1)
10.3 Form of Dividend Reinvestment Plan (incorporated by reference to the Company's
Registration Statement on Form S-11, File No. 33-3246).(1)
10.4 Form of Property Management Agreement for Property Manager (incorporated by reference
to the Company's Registration Statement on Form S-11, File No. 33-32466).(1)
10.4.1 Amended and Restated Property Management Agreement (incorporated by reference to the
Company's Registration Statement on Form S-11, File No. 33-45802).(1)
10.4.2 Second Amended and Restated Property Management Agreement.(1)
10.5 Form of Sure Pay Agreement for Automatic Reinvestment Plan (incorporated by reference
to the Company's Registration Statement on Form S-11, File No. 33-32466).(1)
10.6 Agreement to Purchase Property (6491 Edinger Avenue, Huntington Beach, California)
incorporated by reference to the Company's Registration Statement on Form S-11, File
No. 33-32466).(1)
10.7 Lease Re: Property (6491 Edinger Avenue, Huntington Beach, California) incorporated
by reference to the Company's Registration Statement on Form S-11, File No.
33-32466).(1)
10.8 Internal Revenue Service Ruling (6491 Edinger Avenue, Huntington Beach, California)
incorporated by reference to the Company's Registration Statement on Form S-11, File
No. 33-32466).(1)
10.9 Agreement of Purchase and Sale and Joint Escrow Instructions By and Between
Shaw-Nelson San Clemente No. 7 ("Seller") and Associated Planners Realty Investors,
Inc. ("Buyer") (incorporated by reference to the Company's Current Report on Form 8-K
dated January 17, 1992).(1)
10.10 Standard Form Lease Between Shaw/Nelson San Clemente No. 7, a California Limited
Partnership and Societe Endo Technic, a California Corporation, dba Endo Technic
Corporation (incorporated by reference to the Company's Current Report on Form 8-K
dated January 17, 1992).(1)
10.11.1 Lease and Assignment thereof regarding the OPTO-22 Property. (Incorporated by
reference to the Company's Registration Statement on Form S-11, File No.
33-45802).(1)
10.12 Agreement of Purchase and Sale and Escrow Instructions between IBG Palm Associates, a
California General Partnership and the Company dated January 6, 1994 re: the North
Palm Street Property. (Incorporated by reference to the Company's Registration
Statement on Form S-11, File No. 33-45802).(1)
10.12.1 Leases and Assignment thereof regarding the North Palm Street Property. (Incorporated
by reference to the Company's Registration Statement on Form S-11, File No.
33-45802).(1)
10.13 Real Estate Purchase Agreement between K & I Associates and West Coast Realty
Investors, Inc. dated March 1, 1993. (Incorporated by reference to Exhibit 10.13 to
Registrant's Current Report on Form 8-K dated May 5, 1994).(1)
10.13.1 Leases re: Fresno Property. (Incorporated by reference to Exhibit 10.13.1 to
Registrant's Current Report on Form 8-K dated May 5, 1994).(1)
10.13.2 First Amendment to lease re The Wherehouse.(1)
10.14 Agreement of Purchase and Sale of Real Property and Escrow Instructions Between
Birtcher Riverside Market Place Properties, Ltd. and West Coast Realty Investors,
Inc. (Incorporated by reference to Exhibit 10.14 to Registrant's Current Report on
Form 8-K dated November 29, 1994).(1)
10.14.1 Riverside Market Place Lease and Assignment thereof (Incorporated by reference to
Exhibit 10.14.1 to Registrant's Current Report on Form 8-K dated November 29,
1994).(1)
10.14.2 Exhibits to Agreement of Purchase and Sale of Real Property and Escrow Instructions
Between Birtcher Riverside Market Place Properties and West Coast Realty Investors,
Inc. (Incorporated by reference to Exhibit 10.14.2 to Registrant's Current Report on
Form 8-K dated November 29, 1994, as amended).(1)
10.14.3 Appraisal for Riverside Market Place Property. (Incorporated by reference to Exhibit
10.14.2 to Registrant's Current Report on Form 8-K dated November 29, 1994, as
amended).(1)
</TABLE>
II-3
<PAGE>
<TABLE>
<S> <C>
10.15 Purchase and Sale Contract between BRS-Tustin Safeguard Associates and West Coast
Realty Investors, Inc. (Incorporated by reference to Exhibit 10.15 to Registrant's
Current Report on Form 8-K dated May 22, 1995).(1)
10.15.1 Standard Industrial Lease -- Net between BRS-Tustin Safeguard Associates and
Safeguard Business Systems, Inc. (Incorporated by reference to Exhibit 10.15.1 to
Registrant's Current Report on Form 8-K dated May 22, 1995).(1)
10.15.2 Loan Assignment and Assumption Agreement between BRS-Tustin Safeguard Associates,
West Coast Realty Investors, Inc. and Businessmen's Assurance Company of America
(Incorporated by reference to Exhibit 10.15.2 to Registrant's Current Report on Form
8-K dated May 22, 1995).(1)
10.15.3 Appraisal of Safeguard Business Systems Property (Incorporated by reference to
Exhibit 10.15.3 to Registrant's Current Report on Form 8-K dated May 22, 1995).(1)
10.16 Purchase and Sale Agreement Dated August 28, 1995 between 26 Technology Partnership,
L.P. (co-owner), Jack M. Langston (President of the General Partner of 26 Technology
Partnership, L.P. and co-owner), and West Coast Realty Investors, Inc. (Incorporated
by reference to Exhibit 1 to Registrant's Current Report on Form 8-K dated September
21, 1995).(1)
10.16.1 Appraisal Report for An Industrial Building 4400-4415 Technology Drive, Fremont,
California. (Incorporated by reference to Exhibit 2 to Registrant's Current Report on
Form 8-K dated September 21, 1995).(1)
10.16.2 Standard Industrial Lease between CMS Welding & Machining and 26 Technology
Partnership, L.P. dated November 2, 1993. (Incorporated by reference to Exhibit 3 to
Registrant's Current Report on Form 8-K dated September 21, 1995).(1)
10.16.3 Promissory note secured by deed of trust dated July 1, 1995, including assignment of
leases, environmental indemnity agreement, and other supporting documents.
(Incorporated by reference to Exhibit 4 to Registrant's Current Report on Form 8-K
dated September 21, 1995).(1)
10.16.4 Environmental Site Assessment for 4415 and 4425 Technology Drive dated February 24,
1995. (Incorporated by reference to Registrant's Current Report on Form 8-K dated
September 21, 1995).(1)
10.17 Agreement of Purchase and Sale and Joint Escrow Instructions for 717 and 721 West Del
Paso Road (with exhibits) (Incorporated by reference to Exhibit 1 to Registrant's
Current Report on Post-effective Amendment No. 1 dated October 1, 1996).(1)
10.17.1 Standard Industrial Lease-Net dated April 10, 1989 (as amended) on 717 West Del Paso
Road.(1)
10.17.2 Guarantee of a portion of the Rent on 717 West Del Paso Road (Incorporated by
reference to Exhibit 2 to Registrant's Current Report on Post-effective Amendment No.
1 dated October 1, 1996).(1)
10.17.3 An Appraisal of An Office/Industrial Facility at 717 and 721 West Del Paso Road,
Sacramento, California, dated June 5, 1996 (Incorporated by reference to Exhibit 3 to
Registrant's Current Report on Post-effective Amendment No. 1 dated October 1,
1996).(1)
10.17.4 Amendment No. 1 to Form S-11 Registraton Statement dated April 16, 1996. (1)
10.18 Purchase and Sale Contract dated November 18, 1996 between West Coast Realty
Investors and Shidler West Investment Corporation (Incorporated by reference to
Exhibit 1 to Registrant's Current Report on Form 8-K dated January 17, 1997).(1)
10.18.1 Appraisal Report for an Office/Industrial Facility at 17862 Fitch Street, Irvine,
California. (Incorporated by reference to Exhibit 2 to Registrant's Current Report on
Form 8-K dated January 17, 1997).(1)
10.18.2 Commercial lease between Tycom Corporation and Shidler West Investment Corporation
dated December 18, 1996. (Incorporated by reference to Exhibit 3 to Registrant's
Current Report on Form 8-K dated January 17, 1997).(1)
10.18.3 Promissory note secured by deed of trust dated January 9, 1997, including Rider to
Promissory Note, secured by deed of trust on property at 17862 Fitch Street, Irvine.
(Incorporated by reference to Exhibit 4 to Registrant's Current Report on Form 8-K
dated January 17, 1997).(1)
10.19 Agreement of Purchase and Sale and Joint Escrow Instructions for Applebee's Restaurant
Facility, 6700 Stanford Ranch Road (with exhibits). (2)
10.19.1 Guarantee of Lease on the Applebee's Restaurant Facility. (2)
10.19.2 Standard Triple-Net Lease dated November 26, 1997 on the Applebee's Restaurant
Facility. (2)
10.19.3 An Appraisal of an Applebee's Restaurant Facility, 6700 Stanford Ranch Road,
Roseville, California, dated August 12, 1997. (2)
24.1 Consent of BDO Seidman, LLP.(2)
24.2 Consent of Gipson Hoffman & Pancione included in Exhibits 5 and 8 hereto.
24.3 Consent of Hunnicutt Okamoto & Associates.(2)
25 Description of Graphic and Image Material.(2)
</TABLE>
- ---------------
(1) Previously filed.
(2) Filed herewith.
II-4
<PAGE>
ITEM 36. UNDERTAKINGS.
A. Subject to the terms and conditions of Section 15(d) of the Securities
Exchange Act of 1934, the undersigned Registrant hereby undertakes to file with
the Securities and Exchange Commission such supplementary and periodic
information, documents and reports as may be prescribed by any rule or
regulation of the Commission heretofore or hereafter duly adopted pursuant to
authority conferred in that section.
B. 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; and
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the Registration Statement
or any material change to such information in the Registration
Statement.
2. 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.
C. The Registrant undertakes to file a sticker supplement pursuant to Rule
424(c) under the Securities Act of 1933 during the distribution period
describing each property not identified in the prospectus at such time as there
arises a reasonable probability that such property will be acquired and to
consolidate all such stickers into a Post-Effective Amendment filed at least
once every three months with the information contained in such Amendment
provided simultaneously to the existing shareholders of the Registrant. Each
sticker supplement will disclose all compensation and fees received by the
Advisor or its Affiliates in connection with any such acquisition. The
Post-Effective Amendment will include audited financial statements meeting the
requirements of Rule 3-14 of Regulation S-X only for properties acquired during
the distribution period.
D. The Registrant also undertakes to file after the end of the distribution
period a current report on Form 8-K, containing the financial statements and any
additional information required by Rule 3-14 of Regulation S-X, to reflect each
commitment (i.e, the signing of a binding purchase agreement) made after the end
of the distribution period involving the use of 10 percent or more (on a
cumulative basis) of the net proceeds of the offering and to provide the
information contained in such report to the Registrant's shareholders at least
once each quarter after the distribution period of the offering has ended.
E. The Registrant hereby undertakes to provide to the principal
underwriter, at the closing specified in the Selling Agent Agreement,
certificates in such denominations and registered in such names as required by
the underwriters to permit prompt delivery to each purchaser.
F. The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of a registration statement in reliance upon Rule 430A and contained in the
form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act of 1933 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
II-5
<PAGE>
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) That all Post-Effective Amendments will comply with the applicable
forms, rules and regulations of the Commission in effect at the time such
Post-Effective Amendments are filed.
G. 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 referred to in Item 33 hereof, 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 said Act and is, therefore, unenforceable. If a claim for
indemnification against such liabilities (other than the payment by Registrant
of expenses incurred or paid by a director, officer or controlling person of the
Registrant in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with the
securities being registered, the Registrant will, unless in the opinion of
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 said Act and will be governed by the
final adjudication of such issue.
H. The undersigned Registrant hereby undertakes that it will provide its
Shareholders the financial statements required by Form 10K and Form 10Q
promulgated under the Securities Exchange Act of 1934.
I. The Registrant undertakes to send to each Shareholder on an annual basis
a detailed statement of any transaction with the Advisor or its Affiliates, and
of fees, commissions, compensation and other benefits paid, or accrued to the
Advisor or its Affiliates for the fiscal year completed, showing the amount paid
or accrued to each recipient and the services performed.
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-11 and has duly caused this
Post-Effective Amendment No. 2 to Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in Los Angeles, California
on March 19, 1997.
WEST COAST REALTY INVESTORS, INC.
a Delaware corporation
By */s/ Philip N. Gainsborough
------------------------------------
Philip N. Gainsborough
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement on Form S-11 of West Coast Realty Investors, Inc. has
been signed by the following persons in the capacities and on the date
indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------------- ------------------------ ---------------
<S> <C> <C>
*/s/ Philip N. Gainsborough Director and March 19, 1997
- ------------------------------------------------- Chief Executive Officer
Philip N. Gainsborough
*/s/ W. Thomas Maudlin, Jr. Director and March 19, 1997
- ------------------------------------------------- President
W. Thomas Maudlin, Jr.
*/s/ Michael G. Clark Vice President, March 19, 1997
- ------------------------------------------------- Treasurer and Chief
Michael G. Clark Financial Officer
*/s/ Steve Bridges Director March 19, 1997
- -------------------------------------------------
Steve Bridges
*/s/ James W. Coulter Director March 19, 1997
- -------------------------------------------------
James W. Coulter
*/s/ George Young Director March 19, 1997
- -------------------------------------------------
George Young
/s/ Michael G. Clark
- -------------------------------------------------
*Michael G. Clark
(As attorney-in-fact
pursuant to Power of
Attorney previously filed)
</TABLE>
II-7
<PAGE>
EXHIBIT INDEX
Exhibit
Number
- -------
<TABLE>
<S> <C>
1.1 Amended Form of Selling Agreement.(1)
1.2 Amended Form of Selected Dealer Agreement.(1)
3.1 Certificate of Incorporation (incorporated by reference to the Company's Registration
Statement on Form S-11, File No. 33-32466).(1)
3.1.1 Amendment to Certificate of Incorporation (incorporated by reference to the Company's
Registration Statement on Form S-11, File No. 33-45802).(1)
3.2 Bylaws (incorporated by reference to the Company's Registration Statement on Form
S-11, File No. 33-32466).(1)
3.2.1 Amendment to Bylaws (incorporated by reference to the Company's Registration
Statement on Form S-11, File No. 33-45802).(1)
3.2.2 Amended and Restated Bylaws (incorporated by reference to the Company's Registration
Statement on Form S-11, File No. 33-45802).(1)
3.2.3 Amended and Restated Bylaws.(1)
4 Form of Share Certificate (incorporated by reference to the Company's Registration
Statement on Form S-11, File No. 33-32466).(1)
5 Opinion re: legality (including consent).(1)
8 Opinion re: tax matters (including consent).(1)
10.1 Executed copy of Advisory Agreement (incorporated by reference to the Company's
Registration Statement on Form S-11, File No. 33-32466).(1)
10.1.1 Executed Copy of Amendment to Advisory Agreement (incorporated by reference to the
Company's Registration Statement on Form S-11, File No. 33-45802).(1)
10.1.2 Amended and Restated Advisory Agreement (incorporated by reference to the Company's
Registration Statement on Form S-11, File No. 33-45802).(1)
10.1.3 Second Amended and Restated Advisory Agreement (incorporated by reference to the
Company's Registration Statement on Form S-11, File No. 33-75260).(1)
10.1.4 Third Amended and Restated Advisory Agreement (incorporated by reference to the
Company's Registration Statement on Form S-11, File No. 33-75260).(1)
10.2 Executed Copy of Escrow Instructions.(1)
10.3 Form of Dividend Reinvestment Plan (incorporated by reference to the Company's
Registration Statement on Form S-11, File No. 33-3246).(1)
10.4 Form of Property Management Agreement for Property Manager (incorporated by reference
to the Company's Registration Statement on Form S-11, File No. 33-32466).(1)
10.4.1 Amended and Restated Property Management Agreement (incorporated by reference to the
Company's Registration Statement on Form S-11, File No. 33-45802).(1)
10.4.2 Second Amended and Restated Property Management Agreement.(1)
10.5 Form of Sure Pay Agreement for Automatic Reinvestment Plan (incorporated by reference
to the Company's Registration Statement on Form S-11, File No. 33-32466).(1)
10.6 Agreement to Purchase Property (6491 Edinger Avenue, Huntington Beach, California)
incorporated by reference to the Company's Registration Statement on Form S-11, File
No. 33-32466).(1)
10.7 Lease Re: Property (6491 Edinger Avenue, Huntington Beach, California) incorporated
by reference to the Company's Registration Statement on Form S-11, File No.
33-32466).(1)
10.8 Internal Revenue Service Ruling (6491 Edinger Avenue, Huntington Beach, California)
incorporated by reference to the Company's Registration Statement on Form S-11, File
No. 33-32466).(1)
10.9 Agreement of Purchase and Sale and Joint Escrow Instructions By and Between
Shaw-Nelson San Clemente No. 7 ("Seller") and Associated Planners Realty Investors,
Inc. ("Buyer") (incorporated by reference to the Company's Current Report on Form 8-K
dated January 17, 1992).(1)
10.10 Standard Form Lease Between Shaw/Nelson San Clemente No. 7, a California Limited
Partnership and Societe Endo Technic, a California Corporation, dba Endo Technic
Corporation (incorporated by reference to the Company's Current Report on Form 8-K
dated January 17, 1992).(1)
10.11.1 Lease and Assignment thereof regarding the OPTO-22 Property. (Incorporated by
reference to the Company's Registration Statement on Form S-11, File No.
33-45802).(1)
10.12 Agreement of Purchase and Sale and Escrow Instructions between IBG Palm Associates, a
California General Partnership and the Company dated January 6, 1994 re: the North
Palm Street Property. (Incorporated by reference to the Company's Registration
Statement on Form S-11, File No. 33-45802).(1)
10.12.1 Leases and Assignment thereof regarding the North Palm Street Property. (Incorporated
by reference to the Company's Registration Statement on Form S-11, File No.
33-45802).(1)
10.13 Real Estate Purchase Agreement between K & I Associates and West Coast Realty
Investors, Inc. dated March 1, 1993. (Incorporated by reference to Exhibit 10.13 to
Registrant's Current Report on Form 8-K dated May 5, 1994).(1)
10.13.1 Leases re: Fresno Property. (Incorporated by reference to Exhibit 10.13.1 to
Registrant's Current Report on Form 8-K dated May 5, 1994).(1)
10.13.2 First Amendment to lease re The Wherehouse.(1)
</TABLE>
<PAGE>
Exhibit
Number
- -------
<TABLE>
<S> <C>
10.14 Agreement of Purchase and Sale of Real Property and Escrow Instructions Between
Birtcher Riverside Market Place Properties, Ltd. and West Coast Realty Investors,
Inc. (Incorporated by reference to Exhibit 10.14 to Registrant's Current Report on
Form 8-K dated November 29, 1994).(1)
10.14.1 Riverside Market Place Lease and Assignment thereof (Incorporated by reference to
Exhibit 10.14.1 to Registrant's Current Report on Form 8-K dated November 29,
1994).(1)
10.14.2 Exhibits to Agreement of Purchase and Sale of Real Property and Escrow Instructions
Between Birtcher Riverside Market Place Properties and West Coast Realty Investors,
Inc. (Incorporated by reference to Exhibit 10.14.2 to Registrant's Current Report on
Form 8-K dated November 29, 1994, as amended).(1)
10.14.3 Appraisal for Riverside Market Place Property. (Incorporated by reference to Exhibit
10.14.2 to Registrant's Current Report on Form 8-K dated November 29, 1994, as
amended).(1)
10.15 Purchase and Sale Contract between BRS-Tustin Safeguard Associates and West Coast
Realty Investors, Inc. (Incorporated by reference to Exhibit 10.15 to Registrant's
Current Report on Form 8-K dated May 22, 1995).(1)
10.15.1 Standard Industrial Lease -- Net between BRS-Tustin Safeguard Associates and
Safeguard Business Systems, Inc. (Incorporated by reference to Exhibit 10.15.1 to
Registrant's Current Report on Form 8-K dated May 22, 1995).(1)
10.15.2 Loan Assignment and Assumption Agreement between BRS-Tustin Safeguard Associates,
West Coast Realty Investors, Inc. and Businessmen's Assurance Company of America
(Incorporated by reference to Exhibit 10.15.2 to Registrant's Current Report on Form
8-K dated May 22, 1995).(1)
10.15.3 Appraisal of Safeguard Business Systems Property (Incorporated by reference to
Exhibit 10.15.3 to Registrant's Current Report on Form 8-K dated May 22, 1995).(1)
10.16 Purchase and Sale Agreement Dated August 28, 1995 between 26 Technology Partnership,
L.P. (co-owner), Jack M. Langston (President of the General Partner of 26 Technology
Partnership, L.P. and co-owner), and West Coast Realty Investors, Inc. (Incorporated
by reference to Exhibit 1 to Registrant's Current Report on Form 8-K dated September
21, 1995).(1)
10.16.1 Appraisal Report for An Industrial Building 4400-4415 Technology Drive, Fremont,
California. (Incorporated by reference to Exhibit 2 to Registrant's Current Report on
Form 8-K dated September 21, 1995).(1)
10.16.2 Standard Industrial Lease between CMS Welding & Machining and 26 Technology
Partnership, L.P. dated November 2, 1993. (Incorporated by reference to Exhibit 3 to
Registrant's Current Report on Form 8-K dated September 21, 1995).(1)
10.16.3 Promissory note secured by deed of trust dated July 1, 1995, including assignment of
leases, environmental indemnity agreement, and other supporting documents.
(Incorporated by reference to Exhibit 4 to Registrant's Current Report on Form 8-K
dated September 21, 1995).(1)
10.16.4 Environmental Site Assessment for 4415 and 4425 Technology Drive dated February 24,
1995. (Incorporated by reference to Registrant's Current Report on Form 8-K dated
September 21, 1995).(1)
10.17 Agreement of Purchase and Sale and Joint Escrow Instructions for 717 and 721 West Del
Paso Road (with exhibits).(1)
10.17.1 Standard Industrial Lease-Net dated April 10, 1989 (as amended) on 717 West Del Paso
Road.(1)
10.17.2 Guarantee of a portion of the Rent on 717 West Del Paso Road.(1)
10.17.3 An Appraisal of An Office/Industrial Facility at 717 and 721 West Del Paso Road,
Sacramento, California, dated June 5, 1996.(1)
10.17.4 Amendment No. 1 to Form S-11 Registration Statement dated April 16, 1996.(1)
10.18 Purchase and Sale Contract dated November 18, 1996 between West Coast Realty
Investors and Shidler West Investment Corporation (Incorporated by reference to
Exhibit 1 to Registrant's Current Report on Form 8-K dated January 17, 1997).(1)
10.18.1 Appraisal Report for an Office/Industrial Facility at 17862 Fitch Street, Irvine,
California. (Incorporated by reference to Exhibit 2 to Registrant's Current Report on
Form 8-K dated January 17, 1997).(1)
10.18.2 Commercial lease between Tycom Corporation and Shidler West Investment Corporation
dated December 18, 1996. (Incorporated by reference to Exhibit 3 to Registrant's
Current Report on Form 8-K dated January 17, 1997).(1)
10.18.3 Promissory note secured by deed of trust dated January 9, 1997, including Rider to
Promissory Note, secured by deed of trust on property at 17862 Fitch Street, Irvine.
(Incorporated by reference to Exhibit 4 to Registrant's Current Report on Form 8-K
dated January 17, 1997).(1)
10.19 Agreement of Purchase and Sale and Joint Escrow Instructions for Applebee's Restaurant
Facility, 6700 Stanford Ranch Road (with exhibits). (2)
10.19.1 Guarantee of Lease on the Applebee's Restaurant Facility. (2)
10.19.2 Standard Triple-Net Lease dated November 26, 1997 on the Applebee's Restaurant
Facility. (2)
10.19.3 An Appraisal of an Applebee's Restaurant Facility, 6700 Stanford Ranch Road
Roseville, California, dated August 12, 1997. (2)
24.1 Consent of BDO Seidman, LLP.(2)
24.2 Consent of Gipson Hoffman & Pancione included in Exhibits 5 and 8 hereto.
24.3 Consent of Hunnicutt Okamoto & Associates.(2)
25 Description of Graphic and Image Material.(2)
</TABLE>
- ---------------
(1) Previously filed.
(2) Filed herewith.
<PAGE>
EXHIBIT 24.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
West Coast Realty Investors, Inc.
Los Angeles, California
We hereby consent to the use in the Prospectus, constituting a part of this
Post-Effective Amendment No. 2 to the Form S-11 Registration Statement, our
report dated February 28, 1997, relating to the financial statements of West
Coast Realty Investors, Inc., which are contained in that Prospectus.
We also consent to the reference to us under the caption "Experts" in the
Prospectus.
/s/ BDO Seidman, LLP
- ------------------------------------------------------
Los Angeles, California
March 18, 1997
<PAGE>
EXHIBIT 24.3
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use of our reports dated May 21, 1996, and January 17,
1997 in the Post-Effective Amendment No. 2 to the Registration Statement
333-1304 on Form S-11 of West Coast Realty Investors, Inc., included herein. We
also consent to the reference to us under the caption "Experts" in the
Prospectus.
/s/ HUNNICUTT OKAMOTO & ASSOCIATES
- ------------------------------------------------------
Woodland Hills, California
March 18, 1997
<PAGE>
EXHIBIT 25
DESCRIPTION OF GRAPHIC AND IMAGE MATERIAL
1. Location: Inside Front Cover Page of the Prospectus (Upper left)
Item: Photograph
Description:
Exterior of building at 14661 Franklin Avenue, Tustin, CA looking
northwest from the southeast. The address is printed just below the
photograph.
2. Location: Inside Front Cover of the Prospectus (Middle)
Item: Photograph
Description:
Exterior of the building at 4040 Vine Street, Riverside, CA looking
east from the west. The address is printed just below the
photograph.
3. Location: Inside Front Cover of the Prospectus (Lower right)
Item: Photograph
Description:
Exterior of building at 260 North Palm Street, Brea, CA looking
northeast from the southwest. The address is printed just below the
photograph.
4. Location: Inside Back Cover Page of the Prospectus (Upper left)
Item: Photograph
Description:
Exterior of the building at 4415 Technology Drive, Fremont, CA
looking west from the east. The address is printed just below the
photograph.
5. Location: Inside Back Cover Page of the Prospectus (Upper right)
Item: Photograph
Description:
Exterior of building at 6491 Edinger, Huntington Beach, CA looking
northwest from the southeast. The address is printed just below the
photograph.
6. Location: Inside Back Cover Page of the Prospectus (Middle)
Item: Photograph
Description:
Exterior of building at 1614 North Blackstone Street, Fresno, CA
looking east from the west. The address is printed just below the
photograph.
7. Location: Inside Back Cover Page of the Prospectus (Bottom)
Item: Photograph
Description:
Exterior of the building at 15461 Springdale Street, Huntington
Beach, CA looking west from the east. The address is printed just
below the photograph.
<PAGE>
NOTICE OF ASSIGNMENT
OF RIGHTS UNDER PURCHASE AND SALE AGREEMENT
WEST COAST REALTY INVESTORS, INC.
ASSIGNOR CHRISTIAN. KNOX
ASSIGNEE: ASSET PRESERVATION, INC
PROPERTY ADDRESS: SEE ATTACHED EXHIBIT "A., ROSEVILLE, CALIFORNIA,
YOU ARE HEREBY NOTIFIED THAT CHRISTIAN J. KNOX, "ASSIGNOR" HAS ASSIGNED
HIS/HER/THEIR/ITS RIGHTS UNDER THE PURCHASE AND SALE AGREEMENT DATED , TO ASSET
PRESERVATION, INC., "ASSIGNEE", AS HIS/HER/THEIR/ITS QUALIFIED INTERMEDIARY FOR
THE PURPOSE OF A 1031 TAX DEFERRED EXCHANGE
ASSIGNOR:
BY:
CHRISTIAN J. KNOX DATED
ASSIGNEE ASSET PRESERVATION, INC.
A CALIFORNIA CORPORATION
PURCHASER ACKNOWLEDGEMENT: WEST COAST REALTY INVESTORS, INC.
WEST COAST REALTY INVESTORS, INC.
BY:
WEST COAST REALTY INVESTORS, INC.
<PAGE>
EXHIBIT A
City of Rosevi11e
Order No. 90014143
Parcel 2, as shown on Parce1 Map of Stanford Crossing recorded on March 28, 1997
in Book 28 of Parcel Maps at page 160, Placer County Records .
EXCEPTING THEREFROM all oil, gas, minerals, hydrocarbon and kindred substance
lying below a depth of 500 feet as reserved in that certain Deed recorded May 5,
1982 in Book 2497, page 696, and that certain Deed recorded July 24, 1972 in
Book 1432 at page 305, Placer County Records.
10
<PAGE>
AGREEMENT OF PURCHASE AND SALE
AND JOINT ESCROW INSTRUCTIONS
By and Between
CHRISTIAN KNOX
('"Seller")
and
WEST COAST REALTY INVESTORS, INC.
("Buyer")
Effective Date: July 8, l997
Project:
Applebee's Restaurant
6700 Stanford Ranch Road
Roseville, California 95678
<PAGE>
AGREEMENT OF PURCHASE AND SALE
AND JOINT ESCROW INSTRUCTIONS
THIS AGREEMENT OF PURCHASE AND SALE AND JOINT ESCROW INSTRUCTIONS ("Agreement")
is made and entered into as of the Effective Date by and between Seller and
Buyer. The terms of this Agreement and the Escrow Holder's instructions are as
follows:
ARTICLE 1
CERTAIN DEFINITIONS AND FUNDAMENTAL PROVISIONS
Set forth below are certain definitions and fundamental provisions for the
purposes of this Agreement.
1.1 "Agreement" means this Agreement of Purchase and Sale and Joint
Escrow Instructions.
1.2 "Building" means the improvements required to be constructed pursuant to the
terms of the Tenant Lease in accordance with the Building Plans.
1.3 "Building Plans" means the plans and specifications for the construction of
the Building to be constructed in accordance with the terms of the Tenant Lease.
1.4 "Buyer's Address" means the following:
West Coast Investors Realty, Inc.
5933 West Century Boulevard, Suite 900
Los Angeles, California 90045-5454
Attn: W. Thomas Maudlin, Jr.
Facsimile No.: (310) 337-9895
Telephone No.: (310) 337-9700
With a copy to:
Allen, Matkins, Leck Gamble & Mallory LLP
515 South Figueroa Street, Seventh Floor
Los Angeles, California 90071-3398
Attn: Michael L. Matkins, Esq.
Facsimile No.: (213) 620-8816
Telephone No.: (213) 622-5555
1.5 "Closing Date" means the date which is not less than ten (10) days nor more
than thirty (30) days after the occurrence of both (a) the Completion of the
Building and (b) the occupancy of the Building by the Tenant pursuant to the
terms of the Tenant Lease. The Closing Date shall be determined by Buyer giving
written notice thereof to Seller upon Buyer's receipt of written notice from
Seller that the Completion of the Building has occurred and that the Tenant is
occupying the Building pursuant to the terms of the Tenant Lease.
<PAGE>
1.6 "Completion of the Building" means the date that the architect who prepared
the Building Plans certifies that the Building has been completed in strict
conformance with the Building Plans and the Tenant has certified in writing that
it accepts the Building as having been constructed and completed in accordance
with the terms of the Tenant Lease.
1.7 "Deposit" means Twenty Five Thousand Dollars ($25,000).
1.8 "Effective Date" means the Effective Date set forth on the facing
page of this Agreement.
1.9 "Escrow Holder" means Commerce Escrow whose address is:
1545 Wilshire Boulevard, Suite 600
Los Angeles, California 90017
Attn: Phil Graf
Facsimile: (213) 484-0417
Telephone: (213) 484-0855
1.10 "Guaranty" means that certain Guaranty of Lease executed by Christian Knox
which Guaranty guarantees payment and performance by the Tenant under the Tenant
Lease.
1.11 "Improvements" means all buildings, fixtures, structures, parking areas,
landscaping and other improvements constructed and located on the Land,
including, but not limited to, the Building, together with all machinery and
mechanical, electrical, HVAC and plumbing systems (other than Personal Property)
used in the operation thereof, but excluding any such items owned by Tenant or
public or private utilities or contractors under contract.
1.12 "Inspection Period" means the period commencing on the Effective Date and
ending at 5:00 p.m. P.S.T. on the thirtieth (30th) day following Buyer's receipt
of the Due Diligence Materials described in Paragraph 5.5.
1.13 "Land" means that certain real property located in the City of Roseville,
County of Placer, State of California, and more particularly described in
Exhibit 1.13 attached hereto and incorporated herein by this reference, together
with all right, title and interest of the Seller in and to all streets, alleys,
easements and rights-of-way in, on, across, in front of, abutting or adjoining
said real property.
1.14 "Project" means, collectively, the Land and Improvements and is commonly
known as set forth on the facing page of this Agreement.
1.15 "Property" means, collectively, all of Seller's right, title and interest
in the Land, the Improvements, the Personal Property, the Tenant Lease, the
Tenant Deposit, the Licenses and Permits, the Plans and Records and the Service
Contracts.
<PAGE>
1.16 "Purchase Price" means One Million Nine Hundred Fifty Thousand
Dollars ($1,950,000).
1.17 "Seller's Address" means the following:
633 East Victor Road, Suite E
Lodi, California 95240
Attn: Christian Knox
Facsimile No.: (209) 367-5401
Telephone No.: (209) 367-7517
1.18 "Survival Period" means the period commencing on the Closing and ending
5:00 p.m. P.S.T. on the second (2nd) anniversary of the Closing.
1.19 "Tenant" means Christian Knox.
1.20 "Tenant Lease" means that certain Tenant Lease entered into or to be
entered into between Seller and Tenant which Tenant Lease shall contain the
following terms which will otherwise be acceptable to Buyer: .
Term: 20 years
Base Rent: $172,000 per annum, payable in equal monthly installments
Rent Increases: 12.5% every 60 months
Other: Triple Net
1.21 "Title Company" means First American Title Company whose
address is:
First American Title Company
11855 Edgewood Road
Auburn, California 95604-5046
Attn:
Facsimile No.: (916) 888-8035
Telephone No.: (916) 885-2464
In addition to those terms defined above, capitalized terms used in this
Agreement shall have the meanings following the use of such terms or, if no
definition is so set forth, such capitalized terms shall have the meanings set
forth in the Glossary of Terms included in this Agreement.
-3 -
<PAGE>
ARTICLE 2
PURCHASE AND SALE
Seller agrees to sell to Buyer, and Buyer agrees to purchase from Seller, the
Property upon the terms and conditions set forth in this Agreement.
ARTICLE 3
PURCHASE PRICE
The Purchase Price for the sale and conveyance of the Property is specified in
Article 1.
ARTICLE 4
PAYMENT OF PURCHASE PRICE
The Purchase Price shall be payable as follows:
4.1 Deposit. Upon the Opening of Escrow, Buyer shall deposit with Escrow Holder
the Deposit specified in Article 1 in cash or Cash Equivalent.
The Deposit shall be invested by Escrow Holder in an interest-bearing money
market account maintained at a federally-insured state or national bank located
in the State in which the Project is situated. All interest earned shall be
reported to the Internal Revenue Service as income of Buyer and such interest
shall increase and become part of the Deposit. Buyer shall promptly execute all
forms reasonably requested by Escrow Holder in connection with depositing the
Deposit in such interest-bearing account.
If this Agreement is terminated by either Seller or Buyer as provided in this
Agreement, Escrow Holder shall deliver the portion of the Deposit then held by
Escrow Holder to the party entitled thereto pursuant to the applicable terms of
this Agreement.
If the purchase and sale transaction contemplated by this Agreement is
consummated in accordance with the terms of this Agreement, the Deposit shall be
applied and credited toward payment of the Purchase Price at Closing.
4.2 Cash Balance. On or before the Closing, Buyer shall deposit into Escrow cash
or Cash Equivalent in the amount of the balance of the Purchase Price. If the
purchase and sale contemplated by this Agreement is consummated in accordance
with the terms of this Agreement, such amount shall be applied toward payment of
the Purchase Price at the Closing.
-4-
<PAGE>
ARTICLE 5
ENTRY, INSPECTIONS AND EXAMINATION
5.1 Inspections. Tests and Studies. Seller shall permit Buyer and its authorized
agents and representatives to enter upon the Project at all reasonable times
prior to line Closing during normal business hours to inspect and conduct
necessary tests and studies of the Project, as determined by Buyer. Buyer shall
notify Seller in writing of its intention or the intention of its agents or
representatives to enter upon the Project at least: forty-eight (48) hours prior
to such intended entry. Buyer shall bear the cost of all such inspections, tests
and studies. In conducting any inspections, tests or studies, Buyer and its
authorized agents and representatives shall (a) comply with all terms of the
Tenant Lease regarding entry rights and obligations of Seller to Tenant, (b) not
disturb the Tenant or interfere with its use of the Project pursuant to the
Tenant Lease, (c) not interfere with the operation, use and maintenance of the
Project, (d) not damage any part of the Project or any personal property owned
or held by Tenant or any third party, (e) not injure or otherwise cause bodily
harm to Seller or any of its respective agents, contractors and employees or
Tenant or other third party, (f`) promptly pay when due the cost of all
inspections, tests or studies, (g) not permit any liens to attach to the Project
by reason of the exercise of their rights under this Paragraph, and (h) fully
restore the Project to the condition in which the same was found before any such
inspections, tests or studies were undertaken.
5.2 Seller's Books and Records. Seller shall permit Buyer and its authorized
agents and representatives to inspect and examine all books, records and files
of Seller relating to the Property ("Seller's Books and Records") at all
reasonable times prior to the Closing during normal business hours. Buyer shall
notify Seller in writing of its intention or the intention of its agents or
representatives to inspect and examine Seller's Books and Records at least
forty-eight (48) hours prior to such intended inspection and examination. Buyer
shall be entitled to communicate directly with the Authorities and Tenant in
connection with the proposed purchase and sale transaction contemplated by this
Agreement. Buyer shall bear the cost of all inspections and examinations of
Seller's Books and Records and of all communications with the Authorities or any
Tenant.
5.3 Buyer's Indemnity. Buyer hereby agrees to indemnify, defend, protect and
hold Seller and its agents, employees and contractors harmless from and against
any and all liens, claims, losses, liabilities, damages, costs, expenses, causes
of action (including reasonable attorneys' fees and court costs) arising out of
(a) Buyer's inspections, tests and studies, and (b) Buyer's examination and
inspection of Seller's Books and Records.
5.4 Review of Due Diligence Materials. Within ten (10) days after the Opening of
Escrow, Seller shall deliver to Buyer for Buyer's review and approval the
documents and materials ("Due Diligence Materials") respecting the Property set
forth below.
5.4.1 Title. A standard preliminary title report and an "extended coverage"
supplemental title report (each as of a date not earlier than thirty (30) days
prior to the Opening of Escrow) issued by the Title Company with respect to the
Project
-5-
<PAGE>
together with an A.L.T.A. survey ("Surveys) of the Project accompanied by a
certificate from a licensed surveyor, together with legible copies of all
documents, whether recorded or unrecorded, referred to in the preliminary title
report, supplemental title report and Survey.
5.4.2 Personal Property Inventory. A detailed list ("Inventory") describing all
of the Personal Property as of a date not earlier than thirty (30) days prior to
the Opening of Escrow.
5.4.3 Tenant Lease. A copy of the Tenant Lease and Guaranty.
5.4.4 Service Contracts. A list ("Service Contract List") and legible copies of
all Service Contracts identifying the names of the parties thereto and the date
of such Service Contracts (including all amendments, modifications and
supplements).
5.4.5 Plans and Reports. A list ("Plans and Reports List") and copies of all
Plans and Reports in Seller's possession or reasonably available to Seller,
including a Level 1 Toxic Waste Report respecting the Project prepared within
one hundred eighty (180) days of the Effective Date.
5.4.6 Licenses and Permits. A list ("License List") and conies of all Licenses
and Permits.
5.4.7 Insurance Policies. A list ("Insurance List") and copies of
all Insurance Policies.
5.4.8 Property Tax Bills. Copies of the bills issued for the three (3) most
recent years for all real property taxes and assessments and personal property
taxes and copies of all notices or documents for any assessments or bonds
relating to the Property.
5.4.9 UCC Searches. Current searches ("WCC Searches") of all Uniform Commercial
Code Statements filed with respect to the Property.
5.4.10 Other Information. All other information and legible copies of any
additional documents in Seller's possession which, in the Seller's good faith
judgment, may materially affect the economic or physical condition of the
Property.
5.5 No Negation of Representations and Warranties. The exercise or undertaking
by Buyer of an inspection, examination, test or study or the review by Buyer of
Seller's Books and Records on the Due Diligence Materials or any other act by
Buyer shall not negate any representation, warranty or covenant of Seller or
modify any of Buyer's rights or Seller's obligations in the event of any breach
by Seller of its representations, warranties or covenants in this Agreement.
-6-
<PAGE>
ARTICLE 6
ESCROW
6.1 Opening of Escrow. Buyer and Seller shall promptly cause the Opening of
Escrow to occur by delivering a fully executed copy of this Agreement to Escrow
Holder. Buyer and Seller hereby authorize their respective attorneys to execute
and deliver to Escrow Holder any additional or supplementary instructions as may
be necessary or convenient to implement the terms of this Agreement and close
the transaction contemplated hereby. Buyer and Seller also agree to execute, if
necessary, Escrow Holder's standard or pre-printed Escrow Instructions but only
to the extent the same are consistent with this Agreement; provided, however,
any such additional, supplementary and/or preprinted standard Escrow
Instructions shall not supersede or conflict with this Agreement and any such
conflict shall be governed by the terms of this Agreement.
6.2 Indemnification and Non-Liability of Escrow Holder.
6.2.1 Indemnification of Escrow Holder. If this Agreement or any matter relating
to this Agreement shall become the subject of any litigation or controversy,
Buyer and Seller agree, jointly and severally, to hold Escrow Holder free and
harmless from any loss or expense, including attorneys' fees, that may be
suffered by it by reason thereof. In the event conflicting demands are made or
notices served upon Escrow Holder with respect to this Agreement, the Buyer and
Seller expressly agree that Escrow Holder shall be entitled to file a suit in
interpleader and obtain an order from the court requiring Buyer and Seller to
interplead and litigate their several claims and rights among themselves. Upon
the filing of the action in interpleader, Escrow Holder shall be fully released
and discharged from any obligations imposed upon it by this Agreement.
6.2.2 Nonliability of Escrow Holder. Escrow Holder shall not be liable for the
sufficiency or correctness as to form, manner, execution or validity of any
instrument deposited with it, nor as to the identity, authority or rights of any
person executing such instrument, nor for failure to comply with any of the
provisions of any agreement, contract or other instrument filed with Escrow
Holder or referred to herein. Escrow Holder's duties hereunder shall be limited
to the safekeeping of such money, instruments or other documents received by it
as Escrow Holder, and for their disposition in accordance with the terms of this
Agreement. Notwithstanding the foregoing, if Escrow Holder is also acting as the
Title Company under the terms of this Agreement, nothing in this Paragraph 6.2.2
shall limit the liability of Escrow Holder under the Title Policy.
6.3 Closing Date. The Closing shall occur through Escrow on the
Closing Date.
6.4 Seller's Deliveries. Seller hereby covenants and agrees to deliver or caused
to be delivered to Escrow Holder at least one (1) day prior to the Closing Date
the following instruments and documents:
-7-
<PAGE>
6.4.1 Grant Deed. A Grant Deed ("Grant Deed"), duly executed and acknowledged in
recordable form by Seller, conveying the Project to Buyer. -The Grant Deed shall
be in the form of, and upon the terms contained in, Exhibit 6.4.1 attached
hereto.
6.4.2 Bill of Sale. Two (~2) counterpart originals of a bill of sale ("Bill of
Sale") duly executed and acknowledged by Seller in favor of Buyer, assigning and
conveying to Buyer all of Seller's right, title and interest in and to the
Personal Property. The Bill of Sale shall be in the form of, and upon the terms
contained in, Exhibit 6.4.2 attached hereto. If any of the Personal Property is
licensed or registered motor vehicles, Seller shall also deliver to Buyer
assignments of title to all such vehicles together with the original
certificates of title thereto.
6.4.3 Assignment of Tenant Lease. Two (2) counterpart originals of an Assignment
of Tenant Lease ("Tenant Lease Assignment") duly executed and acknowledged by
Seller assigning to Buyer all of Seller's right, title and interest in and to
the Tenant Lease. The Tenant Lease Assignment shall be in form, and upon the
terms contained in, Exhibit 6.4.3 attached hereto.
6.4.4 General Assignment. Two) counterpart originals of an assignment ("General
Assignment"), duly executed by Seller, assigning to Buyer all of Seller's right,
title and interest in and to the Licenses and Permits, Plans and Reports and
Service Contracts. The General Assignment shall be in the form of, and upon the
terms contained in, Exhibit 6.4.4 attached hereto.
6.4.5 Non-Foreign Certification. A certification duly executed by Seller under
penalty of perjury in the form of, and upon the terms set forth in, the
Non-Foreign Certificate Transferor's Certification of Non-Foreign Status
attached hereto as Exhibit 6.4.5 ("Non-Foreign Certificate')..
6.4.6 Tenant Notification Letter. A letter to the Tenant ("Tenant Notification
Letter"), duly executed by Seller and dated as of the Close of Escrow, notifying
each Tenant that: (a) the Project has been sold to Buyer; (b) all of Seller's
right, title and interest in and to the Tenant Lease and Tenant Deposit have
been assigned to Buyer; and (c) commencing immediately, all rent and other
payments and any notices under the Tenant Lease are to be paid and sent to
Buyer. The Tenant Notification Letter shall be in the form, and upon the terms
contained in, Exhibit 6.4.6.
6.4.7 Change of Address. Written notices executed by Seller to the taxing
Authorities having jurisdiction over the Project, changing the address for
service of notice and delivery of statements and bills.
6.4.8 Proof of Authority. Such proof of Seller's authority and authorization to
enter into this Agreement and consummate the transactions contemplated hereby,
and such proof of the power and authority of the individual(s) executing and/or
-8-
<PAGE>
delivering any instruments, documents or certificates on behalf of Seller to act
for and bind Seller as may be reasonably required by Title Company and/or Buyer.
6.4.9 Lien Affidavits. Any lien affidavits or mechanic's lien indemnification's
as may be reasonably requested by the Title Company in order to issue the Title
Policy.
6.5 Buyer's Deliveries. Buyer hereby covenants and agrees to deliver or cause to
be delivered to Escrow Holder on or at least one (1) business day prior to the
Closing the following:
6.5.1 Purchase Price. The balance of the Purchase Price, net of all prorations,
closing costs and other funds required to be paid or provided by Buyer under
this Agreement.
6.5.2 Tenant Lease Assignment. Two (2) counterpart originals of the Tenant Lease
Assignment duly executed and acknowledged by Buyer.
6.5.3 General Assignment. Two (2) counterpart originals of the General
Assignment duly executed by Buyer.
6.6 Prorations.
6.6.1 General. All items to be prorated shall be prorated as of 11:59 P.M. on
the day preceding the Closing. For purposes of calculating prorations, Buyer
shall be deemed to be in title to the Property, and therefore entitled to the
income and responsible for the expenses, for the entire day upon which the
Closing occurs. All proration items pertaining to the month in which the Closing
occurs shall be prorated based upon the actual number of days in such month.
6.6.2 Revenues. Revenues shall be prorated as of the Close of Escrow. "Revenues"
includes fixed monthly rentals, additional rentals, percentage rentals,
escalation rentals, retroactive rentals, operating cost pass throughs,
reimbursements, income and other revenues and charges payable by Tenants under
the Tenant Leases.
6.6.3 Tenant Deposit. Buyer shall be credited and Seller shall be debited with
an amount equal to all Tenant Deposit (and any interest accrued thereon for the
benefit of a Tenant) being held by Seller or any other person under the Tenant
Lease. Seller shall retain the Tenant Deposit.
6.6.4 Prepaid Rentals. Rentals received by Seller attributable to periods after
the Close of Escrow and the amount of any other credits due Tenants shall be
credited to Buyer and debited to Seller at the Closing. Seller shall retain all
such prepaid rentals.
6.6.5 Taxes and Assessments. All non-delinquent real estate taxes on the
Property shall be prorated based on the actual current tax bill, but if such tax
-9-
<PAGE>
bill has not yet been received by Seller by the Closing then current year's
taxes shall be deemed to be one hundred two percent (102%) of the amount of the
previous year's tax bill. All delinquent taxes and all assessments, if any, on
the Project shall be paid at the Closing from funds accruing to Seller.
6.6.6 Operating Expenses. All utility service charges for electricity, heat and
air conditioning service, other utilities, elevator maintenance, common area
maintenance, taxes (other than real estate taxes) such as rental taxes, other
expenses incurred in operating the Project that Seller customarily pays, and any
other costs incurred in the ordinary course of business or the management and
operation of the Project shall be prorated on an accrual basis. Seller shall pay
all such expenses that accrue prior to the Closing and shall pay all such
expenses accruing on the Closing and thereafter. To the extent possible, Seller
and Buyer shall obtain billings and meter readings as of the Closing to aid in
such prorations.
6.6.7 Commissions. Seller shall pay in full all leasing commissions with respect
to the Tenant Lease entered into as of or prior to the Closing without
contribution or proration from Buyer.
6.6.8 Capital Expenditures. All capital and other improvements (including labor
and materials) which are performed or contracted for by Seller at or prior to
the Closing will be paid by the Seller, without contribution or proration from
Buyer.
6.6.9 Service Contracts. Amounts payable under Service Contracts shall be
prorated on an accrual basis. Seller shall pay all amounts due thereunder which
accrue prior to the Closing and Buyer shall pay all amounts accruing on the
Closing and thereafter.
6.6.10 Method of Proration. All prorations shall be made in accordance with
customary practice in the County, except as expressly provided herein. Buyer and
Seller agree to cause their accountants to prepare a schedule of tentative
prorations prior to the Closing. Such prorations, if and to the extent known and
agreed upon as of the Closing, shall be paid by Buyer to Seller (if the
prorations result in a net credit to the Seller) or by Seller to Buyer (if the
prorations result in a net credit to the Buyer) by increasing or reducing the
cash to be paid by Buyer at the Closing. Any such prorations not determined or
not agreed upon as of the Closing shall be paid by Buyer to Seller, or by Seller
to Buyer, as the case may be, in cash as soon as practicable following the
Closing. A copy of the schedule of prorations as agreed upon by Buyer and Seller
shall be delivered to Escrow Holder at least three (3) business days prior to
the Closing Date.
6.7 Disbursements and Other Actions by Escrow Holder. Upon the Closing, Escrow
Holder shall promptly undertake all of the following in the manner
hereinbelow indicated:
-10-
<PAGE>
6.7.1 Funds. Disburse all funds deposited with Escrow Holder as
follows:
6.7.1.1 Closing Costs. Pay all closing costs which are to be paid through Escrow
(e.g., recording costs, documentary transfer taxes, Title Policy premium and
escrow fees and costs).
6.7.1.2 To Seller. After deducting therefrom the amounts expended by Escrow
Holder in accordance with Paragraph 6.7.1.1 which are chargeable to the account
of Seller (as provided in Paragraph 6.7.4 below) and deducting therefrom or
adding thereto (as appropriate) the net amount of the prorations pursuant to
Paragraph 6.6 above, disburse the Purchase Price to Seller in accordance with
separate wiring instructions to be delivered to Escrow Holder by Seller.
6.7.1.3 To Buyer. Disburse any remaining funds to Buyer in accordance with
separate instructions to be delivered to Escrow Holder by Buyer.
6.7.2 Recordation. Cause to be recorded in the Official Records the Deed (with
documentary transfer tax, if any, to be shown by a separate unrecorded
affidavit) and any other documents which Seller and Buyer hereto may mutually
direct to be recorded in the Official Records and obtain conformed copies
thereof for distribution to Buyer and Seller.
6.7.3 Delivery of Documents. Escrow Holder shall:
6.7.3.1 Direct the Title Company to issue the Title Policy to Buyer.
6.7.3.2 Combine into two separate fully executed originals and deliver one each
to Buyer and Seller each of the two (2) original counterparts of the Tenant
Lease Assignment and General Assignment executed by Seller and Buyer.
6.7.3.3 Deliver to Buyer the Non-Foreign Certificate and the Bill of Sale
executed by Seller.
6.7.3.4 Deliver the Tenant Notice to Buyer or, if requested by Buyer under
separate written instructions to Escrow Holder, to the applicable Tenant by
certified mail, return receipt requested. All return receipts received by the
Escrow Holder or Buyer shall be delivered to Seller.
6.7.4 Closing Costs. Seller shall pay (a) the premium for the Title Policy, (b)
all City and County documentary transfer taxes assessed on recordation of the
Deed, (c) one-half (1/2) of all escrow fees and costs and (d) all sales and
gross receipts taxes. Buyer shall pay (x) any document recording charges and (y)
one-half (1/2) of all escrow fees and costs. Buyer and Seller shall each pay all
legal and professional fees and
-11-
<PAGE>
fees of other consultants incurred by Buyer and Seller, respectively. AU other
costs and expenses shall be allocated between Buyer and Seller in accordance
with the customary practice in the County.
6.8 Seller's Deliveries to Buyer Upon Closing. Seller shall deliver to Buyer, on
or prior to the Closing, the following:
6.8.1 Project. Possession of the Project.
6.8.2 Tenant Lease. Original of the Tenant Lease or, to the extent an original
Tenant Lease is unavailable, a duplicate original thereof with a certificate
executed by Seller warranting the authenticity of such duplicate original.
6.8.3 Service Contracts. Originals of all Service Contracts or, to the extent an
original Service Contract is unavailable, a duplicate original thereof with a
certificate executed by Seller warranting the authenticity of such duplicate
original.
6.8.4 Licenses and Permits. Originals of all Licenses and Permits or, to the
extent an original of a License or Permit is unavailable, a duplicate original
thereof with a certificate executed by Seller warranting the authenticity of
such duplicate original.
6.8.5 Plans and Records. Originals of the Plans and Records.
6.8.6 Keys. Keys to all entrance doors to the Improvements and keys to all
Personal Property, which keys shall be properly tagged for identification.
6.8.7 Personal Property. Possession of the Personal Property.
ARTICLE 7
CONDITIONS TO CLOSING
7.1 Conditions Precedent to Buyer's Obligations. The Closing and Buyer's
obligations with respect to the transactions contemplated by this Agreement are
subject to the satisfaction, not later than the Closing (unless otherwise
provided), of the following conditions:
7.1.1 Inspections and Studies. As of the expiration of the Inspection Period,
Buyer shall have approved in Buyer's sole and absolute discretion, every aspect
of the Property, including any item examined or inspected by Buyer pursuant to
Article 5.
7.1.2 Representations. Warranties and Covenants of Seller. Seller shall have
duly performed each and every covenant to be performed by Seller under this
Agreement and Seller's representations and warranties set forth in this
Agreement shall be true and correct as of the Closing in all material respects.
-12-
<PAGE>
7.1.3 Title Insurance. As of the Closing, the Title Company shall nave Issued or
shall have committed to issue to Buyer, upon payment of a normal premium, an
A.L.T.A. 1970 Form B Owner's Policy of Title Insurance with any title
endorsements reasonably requested by Buyer showing fee title to the Project
vested in Buyer, subject only to the Permitted Exceptions ("Title Policy"). For
purposes of this Agreement, (a) title endorsements shall be deemed reasonably
requested by Buyer if Buyer shall have requested the issuance of such title
endorsement by the Title Company prior to the expiration of the Inspection
Period and the Title Company shall have agreed in writing to issue such
endorsements as part of the Title Policy, and (b) "Permitted Exceptions" shall
mean all matters shown on the standard preliminary title report, supplemental
title report and Survey delivered by Buyer to Seller which have not been
objected to in writing by Buyer prior to the expiration of the Inspection
Period, or, if so objected to by Buyer, the Title Company has agreed in writing
not to exclude such matters from the Title Policy. The Title Policy shall be
issued with liability in an amount equal to the Purchase Price. Buyer shall have
the right to require the Title Company to obtain coinsurance or facultative
reinsurance (together with agreements in a form and content satisfactory to
Buyer providing Buyer with the right of "direct access" against the reinsurance)
with respect to the Title Policy in such amount and with such title companies as
Buyer determines in Buyer's reasonable discretion.
7.1.4 Tenant Estoppel Certificate. Buyer shall have received an estoppel
certificate ("Tenant Estoppel Certificate") duly executed by the Tenant which
Tenant Estoppel Certificate shall be dated after Completion of the Building and
after occupancy of the Building by the Tenant pursuant to the terms of the
Tenant Lease. The Tenant Estoppel Certificate shall be in the form of and upon
the terms contained in Exhibit 7.1.4 attached hereto, with such modifications or
additions thereto shall be reasonably requested by Buyer prior to the expiration
of the Inspection Period. Seller shall deliver the original executed Tenant
Estoppel Certificate to Buyer no later than three (3) business days prior to the
Closing Date.
7.1.5 Appraisal. As of the expiration of the Inspection Period, Buyer shall have
obtained, at its sole cost and expense, and approved an appraisal of the
Project.
7.1.6 Advisory Committee. As of the expiration of the Inspection Period, the
Advisory Committee of Buyer shall approved the acquisition of the Property
pursuant to the terms of this Agreement.
7.1.7 No Material Changes. At the Closing, there shall have been no material
adverse changes in the physical or financial condition of the Project.
7.1.8 Moratorium. At the Closing, there shall be no reassessment,
reclassification, rezoning or other statute, law, judicial or administrative
decision, proceeding, ordinance or regulation (including amendments and
modifications of any of the foregoing) pending or proposed to be imposed by the
Authorities or any public
-13-
<PAGE>
or private utility having jurisdiction over the Project which would adversely
affect, in Buyer's reasonable judgment, the acquisition, development, use or
sale of the Project.
The conditions set forth in this Paragraph 7.1 are solely for the benefit of
Buyer and may be waived only by Buyer. Buyer shall at all times have the right
to waive any condition. Such waiver or waivers shall be in writing to Seller.
The waiver by Buyer of any condition shall not relieve Seller of any liability
or obligation with respect to any representation, warranty, covenant or
agreement of Seller contained in this Agreement. All approvals given by Buyer
under this Paragraph 7.1 shall be in writing and the failure of Buyer to approve
any matter requiring its approval under this Paragraph 7.1 by the time therefor
shall be deemed disapproval thereof by Buyer. Neither Seller nor Buyer shall act
or fail to act for the purpose of permitting or causing any condition to fail
(except to the extent Buyer, in its own discretion, exercises its right to
disapprove any items or matters pursuant to Paragraphs 7.1.1, 7.1.5 and 7.1.6.)
7.2 Conditions Precedent to Seller's. Obligations. The Closing and Seller's
obligations with respect to the transactions contemplated by this Agreement are
subject to Buyer having performed each and every covenant to be performed by
Buyer under this Agreement and Buyer's representations and warranties set forth
in this Agreement being true and correct as of the Closing in all material
respects.
7.3 Failure of Condition to Closing In the event any of the conditions set forth
in Paragraph 7.1 or Paragraph 7.2 are not timely satisfied or waived, for a
reason other than the default of Buyer or Seller under this Agreement:
7.3.1 Termination. This Agreement, the Escrow and the rights and obligations of
Buyer and Seller shall terminate, except as otherwise provided herein; provided,
however, no such termination shall occur until (a) Buyer has had the opportunity
to waive any condition for Buyer's benefit within two(2)business days after
receipt of written notice from Seller, and (b) Buyer does not elect to waive
such condition; and
7.3.2 Return of Funds. Escrow Holder is hereby instructed to promptly return to
Seller and Buyer all funds (including the Deposit) and documents deposited by
them, respectively, into Escrow which are held by Escrow Holder on the date of
said termination less, in the case of the party otherwise entitled to such
funds, however, the amount of any cancellation charges required to be paid by
such party under Paragraph 7.3.3.
7.3.3 Cancellation Fees and Expenses. In the event this Agreement and the Escrow
terminates because of the nonsatisfaction of any condition for a reason other
than the default of Buyer or Seller under this Agreement, the cancellation
charges required to be paid by and to Escrow Holder and the Title Company shall
be borne one-half (1/2) by Seller and one-half (lt2) by Buyer and all other
charges shall be borne by the party incurring same.
-14-
<PAGE>
ARTICLE 8
SELLER'S REPRESENTATIONS AND WARRANTIES
In addition to any express agreements of Seller contained herein, the following
constitute representations and warranties of Seller to Buyer.
8.1 Seller's Authority.
8.1.1 Power. Seller has the legal power, right and authority to enter into this
Agreement and the instruments referenced herein, and to consummate the
transactions contemplated hereby.
8.1.2 Requisite Action. All requisite action (corporate, trust, partnership or
otherwise) has been taken by Seller in connection with the entering into this
Agreement, the instruments referenced herein, and the consummation of the
transactions contemplated hereby. No consent of any partner, shareholder,
creditor, investor, judicial or administrative body, Authority or other party is
required.
8.1.3 Authority. The individuals executing this Agreement and the instruments
referenced herein on behalf of Seller and the partners, officers or trustees of
Seller, if any, have the legal power, right, and actual authority to bind Seller
to the terms and conditions hereof and thereof
8.1.4 Validity. This Agreement and all documents required hereby to be executed
by Seller are and shall be valid, legally binding obligations of and enforceable
against Seller in accordance with their terms, subject only to applicable
bankruptcy, insolvency, reorganization, moratorium laws or similar laws or
equitable principals affecting or limiting the rights of contracting parties
generally.
8.1.5 No Conflict. Neither the execution and delivery of this Agreement and
documents referenced herein, nor the incurrence of the obligations set forth
herein, nor the consummation of the transactions herein contemplated, nor
compliance with the terms of this Agreement and the documents referenced herein
conflict with or result in the material breach of any terms, conditions or
provisions of, or constitute a default under, any bond, note, or other evidence
of indebtedness or any contract, indenture, mortgage, deed of trust, loan,
partnership agreement, lease or other agreements or instruments to which Seller
is a party or affecting the Project.
8.2 Seller's Warranties.
8.2.1 Legal Actions. There are no pending, threatened or contemplated actions,
suits, arbitrations, claims or proceedings, at law or in equity, affecting the
Property or in which Seller is, or to the best of Seller's knowledge will be, a
party by reason of Seller's ownership of the Property.
-15-
<PAGE>
8.2.3 Bankruptcy. No attachments, execution proceedings, assignments for the
benefit of creditors, insolvency, bankruptcy, reorganization or other
proceedings are pending or threatened against Seller.
8.2.4 Governmental Regulations. To the best of Seller's knowledge, there are no
violations of Governmental Regulations relating to the Property. The
Improvements will be, as of the Closing, permitted conforming structures under
applicable zoning and building laws and ordinances and the present uses thereof
are permitted conforming uses under applicable zoning and building laws and
ordinances. The conveyance of the Property to Buyer will not violate any
Governmental Regulations and will include all rights necessary to permit
continued compliance by the Project with all Governmental Regulations.
8.2.5 Licenses and Permits. All licenses, approvals, permits and certificates
from the Authorities or private parties necessary for the construction,
development, alteration or rehabilitation of the Improvements and for the use
and operation of the Property will be as of the Closing obtained and possessed
by Seller, and the Project will, as of the Closing, have been constructed and
completed in accordance with (a) all such approvals, licenses, permits and
certificates, (b) all Governmental Regulations, (c) accepted standards of good
materials and workmanship, (d) all covenants, conditions, restrictions,
easements and agreements of any kind or nature affecting the Property, and (e)
the plans therefor set forth on the Plans and Reports List, which plans will
have been approved by all Authorities having jurisdiction thereof To the best of
Seller's knowledge, any conditions to any licenses, approvals, permits and
certificates for the construction, development, alteration or rehabilitation of
the Improvements will have been satisfied.
8.2.6 Defects and Deficiencies. There will be as of the Closing, no physical or
mechanical defects or deficiencies in the condition of the Project, including,
but not limited to, the roofs, exterior walls or structural components of the
Improvements and the heating, air conditioning, plumbing, ventilating, elevator,
utility, sprinkler and other mechanical and electrical systems, apparatus and
appliances located in the Project. The Project will be is free from infestation
by termites or other pests, insects or animals. The Personal Property will be in
good operating condition.
8.2.7 Hazardous Materials. There has been no production, disposal or storage at
the Project of any Hazardous Materials or other toxic substance and there is no
proceeding or inquiry by any Authority with respect thereto.
8.3 Tenant Lease and Service Contracts.
8.3.1 Complete Information. All instruments, documents, lists, schedules and
items required to be delivered to Buyer hereunder will fairly present the
information set forth in a manner that is not misleading and will be true,
complete and correct in all respects on the date of delivery and upon the
Closing, as they may be updated, modified or supplemented in accordance with
this Agreement.
-16-
<PAGE>
8.3.2 Tenant Lease. There are no leases, subleases, occupancies or tenancies in
effect pertaining to the Project, except the Tenant Lease and Seller has no
knowledge of any oral agreements with anyone, including the Tenant, with respect
to the occupancy of the Project. The Tenant Lease has been modified, amended or
altered in writing or otherwise, and no concessions, abatements or adjustments
have been granted to Tenant, except as set forth in the Tenant Lease. The Tenant
Lease has been duly authorized and executed by the landlord thereunder, and, to
the best of Seller's knowledge, by the Tenant thereunder. The Tenant Lease is in
full force and effect strictly according to the terms set forth therein. To the
best of Seller's knowledge, there are no uncured defaults under the Tenant Lease
and the Tenant has not asserted, or has any defense to, offsets or claims
against rent payable or obligations under the Tenant Lease. No guarantors of the
Tenant Lease have been released or discharged, voluntarily or involuntarily, or
by operation of law from any obligation related to the Tenant Lease.
8.3.3 Service Contracts. There are no service or maintenance contracts,
warranties, guarantees or bonds (whether oral or written) which affect or will
affect or which are or will be obligations of the Buyer or the Project, other
than those set forth in the Service Contract List. There is no current default
or breach under the terms and provisions of any Service Contract and no Service
Contract has been, will be, amended or modified except as provided in this
Agreement.
8.3.4 Licenses. There are no Licenses which affect or will affect, or which are
or will be obligations of Buyer or the Project, other than those set forth on
the License List. There is no current default or breach under the terms and
provisions of any of the Licenses and the Licenses have not been, and will not
be, amended or modified except as provided in this Agreement.
8.3.5 Plans and Reports. The Plans and Reports to be delivered to Buyer under
the terms of this Agreement are all of such Plans which are within the
possession of, under the control of, or reasonably available to, Seller.
8.3.6 Permitted Exceptions. To the best of Seller's knowledge, there is no
current default or breach under the terms and provisions of any of the Permitted
Exceptions. The Permitted Exceptions have not been, and will not be, amended or
modified except as provided in this Agreement.
8.3.7 Employees. There are no employees of Seller who, by reason of any
Governmental Regulations, contract or agreement with Seller or for any other
reason whatsoever would become employees of Buyer as a result of the purchase of
the Property by Buyer.
8.3.8 General Representation. To the best of Seller's knowledge, no
representation, warranty or statement of Seller in this Agreement or in any
document, certificate or schedule furnished or to be furnished to Buyer pursuant
hereto contains or will contain any untrue statement of a material fact or omits
or will omit to state a material fact necessary to make the statements or facts
contained therein not misleading.
-17-
<PAGE>
Seller's representations and warranties made in this Article 8 shall be
continuing and shall be true and correct as of the Close of Escrow with the same
force and effect as if remade by Seller in a separate certificate at that time.
ARTICLE 9
INTENTIONALLY OMITTED
ARTICLE 10
BUYER'S REPRESENTATIONS AND WARRANTIES
In addition to any express agreements of Buyer contained herein, the following
constitute representations and warranties of Buyer to Seller:
10.1 Power. Buyer has the legal power, right and authority to enter into this
Agreement and the instruments referenced herein, and to consummate the
transactions contemplated hereby.
10.2 Requisite Action. All requisite action (corporate, trust, partnership or
otherwise) has been taken by Buyer in connection with the entering into this
Agreement and the instruments referenced herein, and the consummation of the
transactions contemplated hereby.
10.3 Authority. The individuals executing this Agreement and the instruments
referenced herein on behalf of Buyer have the legal power, right and actual
authority to bind Buyer to the terms and conditions hereof and thereof
10.4 Validity. This Agreement and all documents required hereby to be executed
by Buyer are and shall be valid, legally binding obligations of and enforceable
against Buyer in accordance with their terms.
10.5 No Conflicts. Neither the execution and delivery of this Agreement and
documents referenced herein, nor the incurrence of the obligations set forth
herein, nor the consummation of the transactions herein contemplated, nor
compliance with the terms of this Agreement and the documents referenced herein
conflict with or result in the material breach of any terms, conditions or
provisions of, or constitute a default under, any bond, note, or other evidence
of indebtedness or any contract, indenture, mortgage, deed of trust, loan,
partnership agreement, lease or other agreements or instruments to which Buyer
is a party.
10.6 General Representation. No representation, warranty or statement of Buyer
in this Agreement or in any document, certificate or schedule furnished or to be
finished to Seller pursuant hereto contains or will contain any untrue statement
or a material fact, omits or will omit to state a material fact necessary to
make the statements or facts contained therein not misleading.
-18-
<PAGE>
Buyer's representations and warranties made in this Article 10 shall be
continuing and shall be true and correct as of the Close of Escrow with the same
force and effect as if remade by Buyer in a separate certificate at that time.
ARTICLE 11
COVENANTS OF BUYER AND SELLER
11.1 Operation of the Project Through the Closing.
11.1.1 Construction of Building. Seller hereby agrees to construct or cause the
Building to be constructed and completed, and cause the completion of the
Building to occur not later than August 15, 1997. Such construction shall be in
a good and workmanlike manner, in conformance with all Governmental Regulations
and in strict accordance with the Building Plans.
11.1.2 Operation. Seller hereby agrees, through and including the Closing and at
the Seller's sole cost and expense, to (a) keep all existing insurance policies
affecting the Project in full force and effect and (c) make all regular payments
of interest and principal on the existing financing affecting the Property.
11.1.3 Tenant Lease. Seller hereby agrees that Seller will not hereafter modify,
extend or otherwise change any of the terms, covenants or conditions of the
Tenant Lease, or enter into new leases or any other obligations or agreements
affecting the Project without the prior written consent of Buyer.
11.1.4 Service Contracts. Seller will not extend, renew, modify or replace any
of the Service Contracts without the prior written consent of Buyer.
11.1.5 Payment of Bills. Seller has paid or will pay in full, prior to the
Closing, all bills and invoices for labor, goods, materials and services of any
kind relating to the Property and utility charges, relating to the period prior
to the Closing. Any alterations, installations, decorations and other work
required to be performed under the Tenant Leases will by the Closing be
completed and paid for in full. Any brokerage fee or similar commission which is
or will become due and payable in connection with any Tenant Lease has been or
will be paid by Seller prior to the Closing.
11.1.6 Notice to Buyer. Seller shall promptly notify Buyer of any change in any
condition with respect to the Property or of any event or circumstance which
makes any representation or warranty of Seller under this Agreement untrue or
misleading, or any covenant of Buyer under this Agreement incapable or less
likely of being performed, it being understood that the Seller's obligation to
provide notice to Buyer shall in no way relieve Seller of any liability for a
breach by Seller of any of its representations, warranties or covenants under
this Agreement.
11.2 Broker. Seller represents and warrants to Buyer, and Buyer represents and
warrants to Seller, that no broker or finder has been engaged by it,
respectively, in
-19-
<PAGE>
connection with any of the transactions contemplated by this Agreement, or to
its knowledge is in any way connected with any of such transactions. In the
event of any such claims for additional brokers' or finders' fees or commissions
in connection with the negotiation, execution or consummation of this Agreement,
then Buyer shall indemnify, save harmless and defend Seller from and against
such claims if they shall be based upon any statement or representation or
agreement by Buyer, and Seller shall indemnify, save harmless and defend Buyer
if such claims shall be based upon any statement, representation or agreement
made by Seller.
11.3. Required Actions of Buyer and Seller. Buyer and Seller agrees to execute
all such instruments and documents and to take all actions pursuant to the
provisions of this Agreement in order to consummate the purchase and sale herein
contemplated and shall use their best efforts to accomplish the Closing in
accordance with the provisions of this Agreement.
ARTICLE 12
REMEDIES
12.1 Liquidated Damages: Seller's Remedies. IN THE EVENT THE CLOSING AND THE
CONSUMMATION ( IF THE TRANSACTION HEREIN CONTEMPLATED DO NOT OCCUR AS PROVIDED
IN THIS AGREEMENT BY REASON OF ANY BREACH OF BUYER, BUYER AND SELLER AGREE THAT
IT WOULD BE IMPRACTICAL AND EXTREMELY DIFFICULT TO ESTIMATE THE DAMAGES WHICH
SELLER MAY SUFFER AS A RESULT THEREOF. THEREFORE, BUYER AND SELLER AGREE THAT A
REASONABLE ESTIMATE OF THE TOTAL NET DETRIMENT THAT SELLER WOULD SUFFER IN THE
EVENT THAT BUYER BREACHES THIS AGREEMENT AND FAILS TO COMPLETE THE PURCHASE OF
THE PROPERTY IS AND SHALL BE, AS SELLER'S SOLE AND EXCLUSIVE REMEDY (WHETHER AT
LAW OR IN EQUITY), AND AS THE FULL, AGREED AND LIQUIDATED DAMAGES FOR SUCH
BREACH, AN AMOUNT EQUAL TO THE DEPOSIT. UPON ANY SUCH BREACH BY BUYER, UNLESS
OTHERWISE SPECIFIED, THIS AGREEMENT SHALL BE TERMINATED AND NEITHER PARTY SHALL
HAVE ANY FURTHER RIGHTS OR OBLIGATIONS HEREUNDER, EACH TO THE OTHER, EXCEPT FOR
THE RIGHT OF SELLER TO COLLECT SUCH LIQUIDATED DAMAGES FROM BUYER AND ESCROW
HOLDER AND THE OBLIGATION OF BUYER TO DELIVER TO SELLER THE DELIVERY ITEMS
PURSUANT TO PARAGRAPH 4.1; PROVIDED, HOWEVER, THAT THIS LIQUIDATED DAMAGES
PROVISION SHALL NOT LIMIT SELLER'S RIGHT TO RECEIVE REIMBURSEMENT FOR OR RECOVER
DAMAGES IN CONNECTION WITH BUYER'S INDEMNITY OF SELLER AND/OR BREACH OF BUYER'S
OBLIGATIONS PURSUANT TO PARAGRAPH 5.3 AND/OR RECOVER ATTORNEYS' FEES AND COURT
COSTS PURSUANT TO PARAGRAPH 12.3. THE PARTIES ACKNOWLEDGE THAT THE PAYMENT OF
SUCH LIQUIDATED DAMAGES IS NOT INTENDED AS A FORFEITURE OR PENALTY WITHIN THE
MEANING OF CALIFORNIA CIVIL CODE SECTIONS 3275 OR 3369, BUT IS INTENDED TO
CONSTITUTE LIQUIDATED DAMAGES TO SELLER PURSUANT TO CALIFORNIA CIVIL CODE
SECTIONS 1671, 1676 AND 1677.
-20-
<PAGE>
SELLER'S INITIALS BUYER'S INITIALS
12.2 Buyer's Remedies. In the event Seller fails to perform its obligations
pursuant to this Agreement for any reason, then Buyer may elect either to: (a)
terminate this Agreement by giving Seller timely written notice of such election
prior to or upon the Closing Date, whereupon Buyer shall be entitled to recover
from Escrow Holder the entire portion of the Deposit then held by Escrow Holder
and pursue any other rights or remedies available to Buyer at law anchor (b)
enforce specific performance of this Agreement and pursue any other rights or
remedies available to Buyer in equity.
12.3 Attorneys' Fees. If any action or proceeding is commenced by either party
to enforce its rights or remedies under this Agreement, the prevailing party in
such action or proceeding, including any bankruptcy, insolvency or appellate
proceedings, shall be entitled to recover its reasonable attorneys' fees and
court costs incurred therewith.
ARTICLE 13
CONDEMNATION AND DESTRUCTION
13.1 Eminent Domain or Taking. If, prior to the Closing, any material portion of
the Real Property is taken by eminent domain or otherwise (or is the subject of
a pending, threatened or contemplated taking which has not been consummated),
Seller shall immediately notify Buyer thereof In such event, Buyer shall have
the option, in its sole and absolute discretion, to terminate this Agreement
upon written notice to Seller given not later than ten (10) days after receipt
of Seller's notice. For purposes hereof, "material" shall be deemed to be any
taking where access to the Improvements or available parking area for the
Improvements is reduced or restricted or where any of the rentable square
footage of the Improvements is taken. If Buyer does not exercise this option to
terminate this Agreement, or if there has not been a material taking by eminent
domain or otherwise to give rise to such option, neither party shall have the
right to terminate this Agreement, but the Seller shall assign and turn over,
and the Buyer shall be entitled to receive and keep, all awards for the taking
by eminent domain which accrue to Seller and the Buyer and Seller shall proceed
to the Closing pursuant to the terms of this Agreement, without modification of
the terms of this Agreement and without any reduction in the Purchase Price.
Unless or until this Agreement is terminated, Seller shall take no action with
respect to any eminent domain proceeding without the prior written consent of
Buyer.
13.2 Fire or Casualty. Prior to the Closing, and notwithstanding the pendency of
this Agreement, the entire risk of loss or damage by earthquake, flood,
landslide, fire or other casualty shall be borne and assumed by Seller, except
as otherwise provided in this Paragraph 13.2. If, prior to the Closing, any part
of the Improvements is damaged or destroyed by earthquake, flood, landslide,
fire or other casualty, Seller shall immediately notify Buyer thereof. If such
damage or destruction is "material", Buyer shall have the option to terminate
this Agreement upon written notice to the Seller given not later than ten (10)
days after receipt of Seller's notice. For purposes hereof, "material" shall be
deemed to be any uninsured damage or destruction to the Project or any insured
damage or destruction (a) where the cost of repair or
-21-
<PAGE>
replacement is estimated to be Fifty Thousand Dollars ($50,000.00) or more or
shall take more than ninety (90) days to repair, in Buyer's good faith judgment,
or (b) which allows the Tenant to abate its rent or to terminate the Tenant
Lease; provided, however, in the case of uninsured damage or destruction, Seller
may, at Seller's option, elect to repair such damage and destruction and keep
this Agreement in full force and effect so long as such repair can be and is
completed by Seller prior to the Closing Date. If Buyer does not exercise this
option to terminate this Agreement, or if the casualty is not material, neither
party shall have the right to terminate this Agreement but Seller shall assign
and turn over, and Buyer shall be entitled to receive and keep, all insurance
proceeds payable to it with respect to such destruction (which shall then be
repaired or not at Buyer's option and cost), plus Seller shall pay over to Buyer
on the Closing an amount equal to the deductible amount with respect to the
insurance and Buyer and Seller shall proceed to the Closing pursuant to the
terms of this Agreement without modification of the terms of this Agreement and
without any reduction in the Purchase Price. If Buyer does not elect to
terminate this Agreement by reason of any casualty, Buyer shall have the right
to participate in any adjustment of the insurance claim.
ARTICLE 14
INDEMNIFICATION.
14.1 Claims Against Seller and Indemnification of Buyer. Seller hereby agrees to
indemnify Buyer against, and to hold Buyer harmless from, all losses, damages,
costs and expenses, including without limitation reasonable legal fees and
disbursements, incurred by Buyer relating to the Property which arise or result
from acts, occurrences or matters that took place prior to the Closing, and/or
acts, occurrences or matters the existence or occurrence of which constitute a
violation of one or more representations, warranties or covenants of Seller in
this Agreement, and do not relate to obligations or liabilities expressly
assumed by Buyer hereunder; provided, however, nothing contained herein shall
obligate Seller with respect to, or negate or modify any liability of Buyer for
breach of Buyer's representations, warranties and covenants in this Agreement.
Buyer shall not be entitled to any such indemnification or hold harmless, and
Seller shall have no liability for such indemnification or hold harmless, or any
other liability hereunder, with respect to any representation, warranty,
agreement or covenant made or arising hereunder, and Buyer hereby waives and
releases all claims against Seller hereunder, unless claim with respect to such
liability is made by Buyer to Seller within the Survival Period, such written
notice to Seller to set forth the specific breach or basis of liability
asserted.
14.2 Defense of Claims Against Buyer. With respect to any claim for which Buyer
has requested indemnification under Paragraph 14.1, Seller will be entitled to
assume the defense of any related litigation, arbitration or other proceeding,
provided that Buyer may at its election and expense, participate in such
defense, and provided further that in the event of any difference of opinion or
strategy with respect to the defense of such action or the assertion of
counterclaims to be brought with respect thereto, Seller's counsel will, after
consultation with Buyer's counsel, determine the actual strategy, defense and
counterclaim to be employed. At Seller's reasonable request, Buyer will
cooperate with Seller in the preparation of any defense to any such claim, and
Seller will reimburse Buyer for any reasonable expenses incurred in connection
with such request. If Seller does not elect to assume the defense of any such
matter,
-22-
<PAGE>
Seller shall have the right, at its sole expense, to employ separate counsel
acceptable to Buyer and participate in such defense, provided that in the event
of any difference of opinion or strategy with respect to the defense of such
action or the assertion of counterclaims to be brought with respect thereto,
Buyer's counsel will, after consultation with Seller's counsel, determine the
actual strategy, defense and/or counterclaim to be employed.
14.3 Indemnification of Seller. Buyer hereby agrees to indemnify Seller against,
and to hold Seller harmless from, all losses, damages, costs and expenses,
including without limitation legal fees and disbursements, incurred by Seller
relating to the Property which (a) arise or result from acts, occurrences or
matters that take place after the Closing, provided, however, nothing contained
herein shall obligate Buyer with respect to, or negate or modify any liability
of Seller for a breach of Seller's representations, warranties and covenants in
this Agreement, or (b) arise or result from a breach by Buyer of its agreements,
covenants, representations or warranties of this Agreement, or (c) arise after
Closing with respect to obligations expressly assumed by Buyer.
14.4 Defense of Claims Against Seller. With respect to any claim for which
Seller has requested indemnification under Paragraph 14.3 above, Buyer will be
entitled to assume the defense of any related litigation, arbitration or other
proceeding, provided that Seller may at its election and expense, participate in
such defense, and provided further that in the event of any difference of
opinion or strategy with respect to the defense of such action or the assertion
of counterclaims to be brought with respect thereto, Buyer's counsel will, after
consultation with Seller's counsel, determine the actual strategy, defense and
counterclaim to be employed. At Buyer's reasonable request, Seller will
cooperate with Buyer in the preparation of any defense to any such claim, and
Buyer will reimburse Seller for any reasonable expenses incurred in connection
with such request. If Buyer does not elect to assume the defense of any such
matter, Buyer shall have the right, at its sole expense, to employ separate
counsel acceptable to Seller and participate in such defense, provided that in
the event of any difference of opinion or strategy with respect to the defense
of such action or the assertion of counter- claims to be brought with respect
thereto, Seller's counsel will, after consultation with Buyer's counsel,
determine the actual strategy, defense and/or counterclaim to be employed.
ARTICLE 15
ARBITRATION OF DISPUTES
THE PARTIES HEREBY AGREE TO SUBMIT ALL CONE ROVERSIES,
CLAIMS AND MATTERS OF D1EPERENCE ARISING OUT OF OR RELATING TO THIS AGREEMENT
AND THE TRANSACTIONS CONTEMPLATED HEREBY TO BINDING ARBITRATION IN THE COUNTY IN
WHICH THE PROJECT IS SITUATED, IN ACCORDANCE WITH THE RULES AND PRACTICES OF THE
AMERICAN ARBITRATION ASSOCIATION FROM TIME TO TIME IN EFFECT (THE "RULES"). THIS
SUBMISSION AND AGREEMENT TO ARBITRATE SHALL BE MANDATORY, EXCLUSIVE AND
SPECIFICALLY ENFORCEABLE. ALL REFERENCES IN THIS AGREEMENT TO LITIGATION BETWEEN
BUYER AND SELLER, SHALL BE
-23-
<PAGE>
GOVERNED BY THE PROVISION OF THIS ARTICLE IS. WITHOUT LIMITING THE GENERALITY OF
THE FOREGOING, THE FOLLOWING SHALL BE CONSIDERED CONTROVERSIES FOR THIS PURPOSE:
(A) ALL QUESTIONS RELATING TO THE BREACH OF ANY OBLIGATION, WARRANTY,
REPRESENTATION, COVENANT OR AGREEMENT HEREUNDER OR UNDER ANY EXHIBIT HERETO AND
ALL QUESTIONS RELATING TO THE CONSTRUCTION AND INTERPRETATION THEREOF;
(B) ALL QUESTIONS RELATING TO REPRESENTATIONS,
NEGOTIATIONS AND OTHER PROCEEDINGS LEADING TO THE EXECUTION OF THIS AGREEMENT
AND ALL MODIFICATIONS OF THIS AGREEMENT OF EVERY NATURE AND DESCRIPTION;
(C) FAILURE OF ANY PARTY TO DENY OR REJECT A CLAIM OR DEMAND OF ANOTHER PARTY;
(D) ALL QUESTIONS AS TO WHETHER THE RIGHT TO ARBITRATE ANY QUESTIONS EXISTS OR
AS TO THE EXISTENCE OF ANY AGREEMENT TO ARBITRATE; AND
(E) ALL ISSUES RAISED BY ANY SUBSEQUENT ALLEGED AMENDMENT HERETO, WHETHER
WRITTEN OR ORAL, UNLESS SUCH AMENDMENT EXPRESSLY CANCELS THIS ARBITRATION
PROVISION IN WRITING SIGNED BY ALL AFFECTED PARTIES HERETO.
BUYER AND SELLER MAY AGREE ON A RETIRED JUDGE AS SOLE
ARBITRATOR. IN THE ABSENCE OF SUCH AGREEMENT, THERE SHALL BE THREE (3)
ARBITRATORS, SELECTED IN ACCORDANCE WITH THE RULES: ONE (1) ATTORNEY AND/OR
RETIRED JUDGE, ONE (1) EXPERT IN COMMERCIAL MORTGAGE AND REAL ESTATE
TRANSACTIONS, AND ONE (1) CERT1FED PUBLIC ACCOUNTANT. A DECISION AGREED ON BY
TWO (2) OF THE ARBITRATORS SHALL BE THE DECISION OF THE ARBITRATION PANEL;
PROVIDED, HOWEVER, THAT IN THE CASE OF MONETARY DAMAGES, IF THERE IS NO
AGREEMENT OF TWO ARBITRATORS AS TO THE AMOUNT OF THE AWARD, THEN THE FINAL AWARD
OF THE ARBITRATION PANEL FOR THE PURPOSE OF THIS AGREEMENT SHALL BE THE AMOUNT
LEFT AFTER EXCLUDING THE HIGHEST AND LOWEST AMOUNTS. THE PARTIES AGREE TO ABIDE
BY ALL AWARDS RENDERED IN SUCH PROCEEDINGS. ANY AWARD SHALL INCLUDE COSTS AND
REASONABLE ATTORNEYS' FEES TO THE SUCCESSFUL PARTY. SUCH AWARDS SHALL BE FINAL
AND BINDING ON ALL PARTIES. THERE SHALL BE NO APPEAL THEREFROM OTHER THAN FOR
FRAUD OR MISCONDUCT. ALL AWARDS MAY BE FILED WITH THE CLERK OF ONE OR MORE
COURTS, STATE OR FEDERAL, HAVING JURISDICTION OVER THE PARTY AGAINST WHOM SUCH
AN AWARD IS RENDERED OR ITS PROPERTY AS A BASIS OF JUDGMENT AND OF THE ISSUANCE
OF AN ORDER AUTHORIZING EXECUTION FOR COLLECTION. NOTHING IN THIS
-24-
<PAGE>
AGREEMENT AND/OR THE EXHIBITS HERETO SHALL BE DEEMED TO PREVENT THE ARBITRATION
PANEL FROM EXERCISING AUTHORITY TO PERMIT EXERCISE BY A PARTY OF ITS LEGAL
AND/OR EQUITABLE REMEDIES INCLUDING THE RIGHT OF OFFSET. IT IS UNDERSTOOD BY THE
PARITIES THAT THERE IS NOT INTENDED IN THIS AGREEMENT OR ANY EXHIBIT HERETO THAT
THERE BE A WAIVER OF A PARTY'S RIGHT TO ANY REMEDY WHICH MAY BE ENFORCED THROUGH
ARBITRATION, SPECIFICALLY INCLUDING, WITHOUT LIMITATION, THE RIGHT OF SETOFF AND
INJUNCTIVE RELIEF.
NOTICE: BY INITIALING IN THE SPACE BELOW YOU ARE AGREEING TO HAVE ANY DISPUTE
ARISING OUT OF THE MATTERS INCLUDED IN THE "ARBITRATION OF DISPUTES" PROVISION
DECIDED BY NEUTRAL ARBITRATION AS PROVIDED BY CALIFORNIA LAW AND YOU ARE GIVING
ANY RIGHTS YOU MIGHT POSSESS TO HAVE THE DISPUTE LITIGATED IN A COURT OR JURY
TRIAL. BY INITIALING IN THE SPACE BELOW YOU ARE GIVING UP YOUR JUDICIAL RIGHTS
TO DISCOVERY AND APPEAL, UNLESS THOSE RIGHTS ARE SPECIFICALLY INCLUDED IN THE
"ARBITRATION OF DISPUTES" PROVISION. IF YOU REFUSE TO SUBMIT TO ARBITRATION
AFTER AGREEING TO THIS PROVISION, YOU MAY But COMPELLED TO ARBITRATE UNDER THE
AUTHORITY OF THE CALIFORNIA CODE OF CIVIL PROCEDURE.: YOUR AGREEMENT TO THIS
ARBITRATION PROVISION IS VOLUNTARY. WE HAVE READ AND UNDERSTAND THE FOREGOING
AND AGREE TO SUBMIT DISPUTES ARISING OUT OF THE MATTERS INCLUDED IN THE
"ARBITRATE DISPUTES" PROVISION TO NEUTRAL ARBITRATION.
BUYER'S INITIALS SELLER'S INITIALS
ARTICLE 16
EXCHANGE
Rather than purchase the Project for the consideration herein provided, Buyer
may prefer to exchange for the Project other real property and improvements of
like kind ("Exchange Property") owned by Buyer in accordance with this Article
16 in order to defer recognition of income on the disposition of the Exchange
Property. As an accommodation to Buyer, Seller agrees to cooperate with Buyer to
accomplish such exchange, including the execution of documents therefor,
provided the following terms and conditions are satisfied:
16.1 Notice. At least two (2) days prior to the Closing Date, Buyer shall notify
Seller that Buyer has arranged such an exchange and the terms thereof As soon as
reasonably possible thereafter, Seller and Buyer, and such other parties as may
be necessary to effect the exchange, shall execute any and all documents
satisfactory to the parties and their respective legal counsel which are
necessary to effect the exchange.
-25-
<PAGE>
16.2 Costs. Seller shall in no way be obligated to pay any escrow costs,
brokerage commissions, title charges, survey costs, recording costs or other
charges incurred with respect to the Exchange Property and/or the exchange.
16.3 No Contingency. In no way shall the Closing be contingent or otherwise
subject to the consummation of the exchange for the Exchange Property, and the
Escrow shall timely close in accordance with the terms of this Agreement despite
any failure, for any reason, of the parties to the exchange to effect same.
16.4 No Liability. Seller will not be required to acquire title to the Exchange
Property or incur any personal liability whatsoever in connection with the
exchange transaction contemplated by this Article 16.
16.5 Indemnification. Buyer indemnifies and agrees to hold Seller harmless from
and against any and all causes, claims, demands, liabilities, costs and
expenses, including reasonable attorneys' fees, as a result of or in connection
with the Exchange Property and any such exchange.
ARTICLE 17
MISCELLANEOUS
17.1 Entire Agreement. This Agreement (including all Exhibits attached hereto)
is the final expression of and contains the entire agreement between, the
parties with respect to the subject matter hereof and supersedes all prior
understandings with respect thereto. This Agreement may not be modified,
changed, supplemented or terminated, nor may any obligations hereunder be
waived, except by written instrument signed by the party to be charged or by its
agent duly authorized in writing or as otherwise expressly permitted herein.
Buyer and Seller do not intend to confer any benefit hereunder on any person,
firm or corporation other than the parties hereto.
17.2 Agreement Binding on Parties. This Agreement, and the terms, covenants, and
conditions herein contained, shall inure to the benefit of and be binding upon
the heirs, personal representatives, successors, and assigns of Buyer and
Seller. Buyer may assign its rights under this Agreement only upon the following
conditions: (a) the assignee of Buyer must be an affiliate of Buyer or an entity
which is directly owned or controlled by Buyer; (b) the Deposit must have been
delivered in accordance with Paragraph 4.1; (c) the Inspection Period shall have
expired; (d) Buyer shall remain primarily liable for the performance of Buyer's
obligations under this Agreement and (e) the assignee must expressly assume in
writing all of Buyer's obligations under this Agreement, and Buyer shall deliver
to Seller a copy of the fully executed written assignment and assumption
agreement between Buyer.
17.3 Notice. Any notice, communication, request, reply or advice (collectively,
"Notice") provided for or permitted by this Agreement to be made or accepted by
-26-
<PAGE>
Buyer or Seller must be in writing. Notice may, unless otherwise provided
herein, be given or served (a) by depositing the same in the United States mail,
postage paid, certified, and addressed to the party to be notified, with return
receipt requested, (b) by delivering the same to such party, or an agent of such
party, in person or by commercial courier, (c) by facsimile transmission,
evidenced by confirmed receipt and concurrently followed by a "hard" copy of
same delivered to the party by mail, personal delivery or overnight delivery
pursuant to clauses (a), (b) or (d) hereof, or (d) by depositing the same into
custody of a nationally recognized overnight delivery service such as Federal
Express, Overnight Express, Airborne Express, Emery or Purolator. Notice
deposited in the mail in the manner hereinabove described shall be effective on
the third (3rd) business day after such deposit. Notice given in any other
manner shall be effective only if and when received by the party to be notified
between the hours of 8:00 A.M. and 5:00 P.M. of any business day with delivery
made after such hours to be deemed received the following business day. For the
purposes of Notice, the addresses of Seller, Buyer, Escrow Holder and Title
Company shall, until changed as hereinafter provided, be as set forth in Article
1. Buyer and Seller shall have the right from time to time to change their
respective addresses, and each shall have the right to specify as its address
any other address within the United States of America by at least five (5) days
written Notice to the other party.
17.4 Governing Law. This Agreement shall be construed in accordance with the
laws of the State of California.
17.5 No Recordation. Without the prior written consent of Seller, there shall be
no recordation of either this Agreement or any memorandum hereof, or any
affidavit pertaining hereto and any such recordation of this Agreement or
memorandum hereto, by Buyer without the prior written consent of Seller shall
constitute a default hereunder by Buyer, whereupon this Agreement shall, at the
option of Seller, terminate and be of no further force and effect. Upon such
termination, the Deposit shall be immediately delivered to Seller, whereupon the
parties shall have no further duties or obligations, each to the other except as
provided in Paragraph 5.3.
17.6 Partial Invalidity. If any term or provision of this Agreement or the
application thereof to any person or circumstance shall, to any extent, be
invalid or unenforceable, the remainder of this Agreement, or the application of
such term or provision to persons or circumstances other than those as to which
it is held invalid or unenforceable, shall not be affected thereby, and each
such term and provision of this Agreement shall be valid and be enforced to the
fullest extent permitted by law.
17.7 Waivers. No waiver of any breach of any covenant or provision herein
contained shall be deemed a waiver of any preceding or succeeding breach
thereof, or of any other covenant or provision herein contained. No extension of
time for performance of any obligation or act shall be deemed an extension of
the time for performance of any other obligation or act.
17.8 Survival of Representations. The covenants, agreements, representations and
warranties made herein shall survive the Closing until the expiration of the
Survival Period whereupon such covenants, agreements, representations and
warranties shall be
-27-
<PAGE>
of no further force or effect; provided, however, that any claim for a breach of
any such covenant, agreement, representation or warranty shall continue to
survive after the Survival Period if, prior to the expiration of the Survival
Period, any party claiming such breach delivers to the other party a written
claim of such party specifying in reasonable detail the nature of such breach
and a description of the facts supporting such breach; provided, further, that
notwithstanding anything to the contrary contained herein, the covenants and
agreements set forth in Paragraph 5.3 of this Agreement shall continue to
survive notwithstanding the expiration of the Survival Period.
17.9 Time of Essence. Seller and Buyer hereby acknowledge and agree that time is
strictly of the essence with respect to each and every term, condition,
obligation and provision hereof and that failure to timely perform any of the
terms, conditions, obligations or provisions hereof by either party shall
constitute a material breach of and a non-curable (but waivable) default under
this Agreement by the party so failing to perform.
17.10 Construction. Headings at the beginning of each paragraph and subparagraph
are solely for the convenience of the parties and are not a part of the
Agreement. Whenever required by the context of this Agreement, the singular
shall include the plural and the masculine shall include the feminine and vice
versa. This Agreement shall not be construed as if it had been prepared by one
of the parties, but rather as if both parties had prepared the same. Unless
otherwise indicated, all references to paragraphs and subparagraphs are to this
Agreement. All exhibits referred to in this Agreement and the Glossary of Terms
are attached and incorporated by this reference.
17.11 Business Day. If any date or any period provided in this Agreement shall
end on a Saturday, Sunday or legal holiday, the applicable date or period shall
be extended to the first business day following such Saturday, Sunday or legal
holiday.
17.12 Currency. All dollar amounts are expressed in United States
currency.
17.13 Multiple Counterparts. This Agreement may be executed in multiple
counterparts (each of which is to be deemed original for all purposes).
17.14 Governing Law. The parties hereto acknowledge that this Agreement has been
negotiated and entered into in the State. The parties hereto expressly agree
that this Agreement shall be governed by, interpreted under, and construed and
enforced in accordance with the laws of the State in which the Project is
situated.
-28-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
date and year hereinabove written.
"Buyer" "Seller"
WEST COAST REALTY INVESTORS, CHRISTIAN KNOX
INC., a Delaware corporation /
By:
W. Thomas Maudlin, Jr.
President
-29-
<PAGE>
JOINDER BY ESCROW HOLDER
Commerce Escrow, referred to in this Agreement as the "Escrow Holder, " hereby
acknowledges that it received this Agreement executed by Seller and Buyer on the
day of July, 1997, and accepts the obligations of and instructions for the
Escrow Holder as set forth herein. It further acknowledges that it received the
Deposit on the day of July, 1997. The Escrow Holder hereby agrees to hold and
distribute the Deposit in accordance with the terms and provisions of this
Agreement.
DATE: July , 1997
COMMERCE ESCROW
By:
Name:
Title: Escrow Officer
Address 1545 Wilshire Boulevard, Suite 600
Los Angeles, California 90017
-30-
<PAGE>
GLOSSARY OF TERMS
( ) "Authorities" means any governmental or quasi-governmental body or agency
having jurisdiction over the Project and/or Seller including, without
limitation, the State, the City and the County in which the Project is situated.
( ) "Bill of Sale" is defined in Paragraph 6.4.2.
( ) "Cash Equivalent" means a wire transfer of funds or a certified or bank
cashier's check dragon on a reputable bank licensed to do business in the State
in which the Project is situated.
( ) "Closing" means the date the Deed is recorded in the Official Records.
( ) "Due Diligence Materials" is defined in Paragraph 5.4.
( ) "Escrow" means the above-referenced escrow opened with Escrow Holder for the
consummation of the transaction described in this Agreement.
( ) "General Assignment" is defined in Paragraph 6.4.4.
( ) "Governmental Regulations" means any laws, ordinances, rules, requirements,
resolutions, policy statements and regulations (including, without limitation,
those relating to land use, subdivision, zoning, environmental, toxic or
hazardous waste, occupational health and safety, water, earthquake hazard
reduction, and building and fire codes) of the Authorities bearing on the
construction, alteration, rehabilitation, maintenance, use, operation or sale of
the Project.
"Grant Deed" is defined in Paragraph 6.4.1.
( ) "Hazardous Materials" means any hazardous, toxic or dangerous waste,
substance or material, pollutant or contaminant, which is or becomes regulated
by any local governmental authority, the State of California or the United
States Government. The term "Hazardous Material" includes, without limitation,
any material or substance which is (i) defined as a "hazardous waste,"
"extremely hazardous waste" or "restricted hazardous waste" under Sections
25115,25117 or 25122.7, or listed pursuant to Section 251.40, or the California
Health and Safety Code, Division 20, Chapter 6.5 (Hazardous Waste Control Law),
(ii) defined as a "hazardous substance" under Section 25316 of the California
Health and Safety Code, Division 20, Chapter 6.8 (Carpenter-Presley-Tanner
Hazardous Substance Account Act), (iii) defined as a "hazardous material,"
"hazardous substance," or "hazardous waste" under Section 25501 of the
California Health and Safety Code, Division 20, Chapter 6.95 (Hazardous
Materials Release Plans and Inventory), (iv) defined as a "hazardous substance"
under Section 25281 of the California Health and Safety Code, Division 20,
Chapter 6.7 (Underground Storage of Hazardous Substances), (v) listed under
Article 9 or defined as hazardous or extremely hazardous pursuant to Article 11
of Title 22 of the California Administrative Code, Division 4,
-i-
<PAGE>
Chapter 20, (vi) designated as a "hazardous substance" pursuant to Section 311
of the Federal Water Pollution Control Act (33 U.S.C. 81317), (vii) defined as a
"hazardous waste" pursuant to Section 1004 of the Federal Resource Conservation
and Recovery Act, 42 U.S.C. S 6901 et seq. (42 U.S.C. 8 6903), as amended
("RCRA"), or (viii) defined as a "hazardous substance" pursuant to Section 101
of the Comprehensive Environmental Response, Compensation and Liability Act, 42
U.S.C. S 9601 et seq. (42 U.S.C. 89601), as amended ("CERCLA") or.(ix) any
substance which is toxic, explosive, corrosive, flammable, infectious,
radioactive, carcinogenic, mutagenic or otherwise hazardous, or (x) any
substance which contains gasoline, diesel fuel or other petroleum hydrocarbons,
polychlorinated biphenyls (PCBs), radon gas, urea formaldehyde, asbestos, lead
or electromagnetic waves.
( ) "Insurance List" is defined in Paragraph 5.4.7.
( ) "Insurance Policies" means all hazard, rent loss, liability, workers'
compensation and other insurance policies currently in effect with respect to
the Project and copies of all claims and settlements made within the three most
recent years of $50,000 or more.
( ) "Inventory" is described in Paragraph 5.4.2.
( )"License List" is described in Paragraph 5.4.6.
( ) "Licenses and Permits" means (A) all licenses, permits, certificates of
occupancy, approvals, dedications, subdivision maps and entitlements issued,
approved or granted by Authorities or otherwise in connection with the Project;
(B) all right, title and interest of Seller in and to the use of the name of the
Project set forth in the facing page of this Agreement and any and all other
trade names and logos used by Seller in the operation and identification of the
Project; (C) any and all development rights and other intangible rights, titles,
interests, privileges and appurtenances owned by Seller and in any way related
to or used in connection with the Project and its operation; and (D) all
licenses, consents, easements, rights of way and approvals required from private
parties to make use of utilities and to insure vehicular and pedestrian ingress
and egress to the Project.
( )"Non-Foreign Certificate" is defined in Paragraph 7(a).
( ) "Notice" is described in Paragraph 15.3.
( ) "Official Records" means the Official Records of the County in which the
Project is situated.
( ) "Opening of Escrow" means the date on which a fully executed copy of this
Agreement is delivered to Escrow Holder by Buyer and Seller.
( ) "Permitted Exceptions" is defined in Paragraph 7.1.3.
( ) "Personal Property" means all equipment, appliances, tools, machinery,
supplies, building materials and other personal property of every kind and
character owned by Seller and attached to, appurtenant to, located in or used in
connection with the operation of the
-ii-
<PAGE>
Project including, without limitation, all attachments, appliances, fittings,
gas and oil burners, automatic stokers, lighting fixtures, doors, cabinets,
partitions, mantles, elevators, electric motors, pumps, screens, flag poles,
waste disposal or storage equipment, all sprinklers, plumbing, heating, air
conditioning, electrical, ventilating, lighting, incinerating, vacuum cleaning,
refrigerating and cooling systems, each with its respective furnaces, boilers,
engines, motors, dynamos, radiators, pipe, wiring and other apparatus, vaults,
safes, fire prevention and extinguishing equipment, carpets, floor covering,
kitchen appliances and antenna.
( ) "Plans and Reports" means (A) all preliminary, final and proposed building
plans and specifications (including "as-built" drawings) respecting the
Improvements, and (B) all structural reviews, architectural drawings and
engineering, soils, seismic, geologic and architectural reports, studies and
certificates and other documents pertaining to the Project which are within the
possession of, under the control of, or reasonably available to Seller.
( ) "Plans and Reports List" is defined in Paragraph 5.4.5.
( ) "Property" means, collectively, the Real Property, the Improvements, and all
of Seller's interest in the Personal Property, Plans and Reports, Licenses and
Permits Tenant Leases, Tenant Deposits and Service Contracts.
( )"Revenues" is defined in Paragraph 6.6.2.
( ) "Rules" is defined in Article 15.
( ) "Seller's Books and Records" is defined in Paragraph 5.2.
( ) "Service Contracts" means any and all service agreements, maintenance
contracts, warranties, guarantees, bonds and like contracts and agreements
relating to the Project, together with all supplements, amendments and
modifications thereto, relating to the Property.
( )"Service Contract List" is defined in Paragraph 5.4.4.
( ) "Survey" is defined in Paragraph 5.4.1.
( ) "Tenant Deposit" means all security deposits, prepaid rentals, cleaning fees
and other deposits, plus any interest accrued thereon, paid by Tenant to Seller
or any other person relative to the Project.
( )"Tenant Estoppel Certificate" is defined in Paragraph 7.1.4.
( )"Tenant Lease Assignment" is defined in Paragraph 6.4.3.
( )"Tenant Notification Letter" is defined in Paragraph 6.4.6.
( )"Title Policy" is defined in Paragraph 7.1.3.
( )"UCC Searches" is defined in Paragraph 5.4.9.
-iii-
<PAGE>
LEGAL DESCRIPTION
[To be attached prior to
execution of the Agreement]
EXEIIB1T 1.13
<PAGE>
RECORDING REQUESTED BY AND
WHEN RECORDED MAIL THIS GRANT DEED TO:
Allen, Matkins, Leck Gamble & Mallory LLP
515 South Figueroa Street, Seventh Floor
Los Angeles, California 90071-3398
Attn: Michael L. Matkins, Esq.
SEND ALL TAX STATEMENTS TO:
West Coast Realty Investors, Inc.
5933 West Century Boulevard, Suite 900
Los Angeles, California 90045-5454
Attn: Mr. W. Thomas Maudlin, Jr.
(Above Space For Recorder's Use Only)
GRANT DEED
The undersigned grantor declares:
Documentary Transfer Tax is shown by an unrecorded separate affidavit pursuant
to Section 11932 of the Revenue and Taxation Code.
( ) computed on full value of property conveyed, or
( ) computed on full value, less value of liens and encumbrances remaining at
time of sale.
City of
FOR VALUABLE CONSIDERATION, receipt of which is hereby acknowledged, hereby
GRANTS to WEST COAST REALTY INVESTORS, INC., a Delaware corporation, the
following described real property ("Property") located in the City of
County of , State of
See Exhibit "A" attached hereto and incorporated herein by this reference.
SUBJECT TO:
1. Taxes and assessments.
Exhibit 6.4.1
<PAGE>
2. All other covenants, conditions, restrictions, reservations, rights, rights
of way, easements, encumbrances, liens and title matters whether or not of
record or visible from an inspection of the Property and all matters which an
accurate survey of the Property would disclose.
DATED:
EXHIBIIT 6.4.1
-2-
<PAGE>
LEGAL DESCRIPTION
[To be attached prior to
execution of the Agreement]
EXHIBIT A
TO EXHIBIT 6.4.1
<PAGE>
STATE OF
COUNTY OF
On 199 before me, the undersigned, a Notary Public in and for said
State, personally appeared and ,personally known to me (or
proved to me on the basis of satisfactory evidence) to be persons who executed
the within instrument as the and respectively, of
,the corporation that executed the within Instrument, known to me to be the
persons who executed the within Instrument on behalf of said corporation, and
acknowledged to me that such corporation executed the within instrument pursuant
to its bylaws or a resolution of its board of directors.
WITNESS my hand and official seal.
Notary Public in and for said State
<PAGE>
BILL OF SALE
THIS BILL OF SALE ("Bill of Sale") is made this day of , 19 by
('"Seller"), in favor of WEST COAST REALTY INVESTORS, INC., a Delaware
corporation ("Buyer").
WITNESSETH:
Seller and Buyer entered into that certain Agreement of Purchase and Sale and
Joint Escrow Instructions dated as of 199 ("Agreement") respecting
the sale of certain "Property" (as defined in the Agreement).
Under the Agreement, Seller is obligated to transfer to Buyer any and all of its
right, title and interest in and to all equipment, appliances, tools, machinery,
supplies, building materials and other personal property of every kind and
character owned by Seller and attached to, appurtenant to, located in or used in
connection with the operation of the improvements ("Improvements") commonly
known as and located on the real property described in Exhibit "A"
attached hereto, including, without limitation, all attachments, appliances,
fittings, gas and oil burners, automatic stokers, lighting fixtures, doors,
cabinets, partitions, mantles, elevators, electric motors, pumps, screens, flag
poles, waste disposal or storage equipment, all sprinklers, plumbing, heating,
air conditioning, electrical, ventilating, lighting, incinerating, vacuum
cleaning, refrigerating and cooling systems, each with its respective furnaces,
boilers, engines, motors, dynamos, radiators, pipe, wiring and other apparatus,
vaults, safes, fire prevention and extinguishing equipment, carpets, floor
covering, kitchen appliances and antenna, including those items described on the
Inventory attached hereto (collectively, "Personal Property").
NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency
of which are hereby acknowledged, Seller does hereby absolutely and
unconditionally give, grant, bargain, sell, transfer, set over, assign, convey,
release, confirm and deliver to Buyer all of the Personal Property.
Seller hereby covenants that Seller will, at any time and from time to time upon
written request therefor, execute and deliver to Buyer, Buyer's successors,
nominees or assigns, such documents as Buyer or they may reasonably request in
order to frilly assign and transfer to and vest in Buyer or Buyer's successors,
nominees and assigns, and protect Buyer's or their right, title and interest in
and to all of the Personal Property and rights of Seller intended to be
transferred and assigned hereby, or to enable Buyer, Buyer's successors,
nominees and assigns to realize upon or otherwise enjoy such rights and
property.
Seller hereby represents and warrants to Buyer that: (i) to the best of Seller's
knowledge, the Personal Property has been paid for and is not subject to any
liens, encumbrances or claims of any kind; (ii) all taxes of any nature
whatsoever on the Personal Property have been
EXHIBIT 6.4.2
<PAGE>
paid by Seller; (iii) the consideration paid to Seller herewith is the frill and
complete consideration for the Personal Property; (iv) any sales or other taxes
which may be payable with respect to this transfer shall be the sole
responsibility of Seller; and (v) the transfer of the Personal Property to Buyer
does not require the consent of third parties except as otherwise disclosed in
writing by Seller to Buyer. Such warranties and representations shall survive
the execution and delivery of this Bill of Sale and Buyer's subsequent transfer
of any of the Personal Property.
Seller warrants, and hereby covenants, at Seller's sole cost and expense, to
defend Buyer's title to the Personal Property against all lawful claims and
demands of all persons or entities whomsoever which may now exist or which may
have accrued as of the date of this Bill of Sale. Seller hereby agrees to
indemnify and hold Buyer free and harmless from all liabilities, obligations,
damages, causes of action, judgments, costs and expenses (including reasonable
attorneys' fees) which Buyer may incur or suffer in connection with any breach
by Seller of the preceding warranty and covenant.
This Bill of Sale shall be binding upon and inure to the benefit of the
successors, assigns, personal representatives, heirs and legatees of Buyer and
Seller.
This Bill of Sale shall be governed by, interpreted under, and construed and
enforceable in accordance with, the laws of the State of
IN WITNESS WHEREOF, Seller has executed and delivered this Bill of Sale as of
this day of 1997.
EXHIBIT 6.4.2
-2-
<PAGE>
TENANT LEASE ASSIGNMENT
THIS TENANT LEASE ASSIGNMENT ("Assignment") is made this day of 199 by and
between ,a ("Assignor"), and WEST COAST REALTY INVESTORS,
INC., a Delaware corporation ("Assignee").
WITNESSETH:
Assignor and West Coast Realty Investors, Inc. entered into that certain
Agreement of Purchase and Sale and Joint Escrow Instructions dated as of
,1997("Agreement") respecting the sale of certain "Property" (as defined in the
Agreement).
Under the Agreement, Assignor is obligated to assign to Assignee any and all of
its right, title and interest in and to all leases, licenses, rental agreements
and occupancy agreements, and all amendments and supplements thereto relative to
the real property ("Real Property") described in Exhibit "A" attached hereto,
together with all rents, issues and profits thereunder (collectively, "Tenant
Leases") and all security deposits, prepaid rentals, cleaning fees and other
deposits, plus any interest accrued thereon, paid by tenants of the Property to
Assignor or any other person ("Tenant Deposits"), which Tenant Leases and Tenant
Deposits are set forth on Exhibit "B" attached hereto.
NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency
of which are hereby acknowledged, Assignor hereby assigns, sells, transfers,
sets over and delivers unto Assignee all of Assignor's estate, right, title and
interest in and to the Tenant Leases and Tenant Deposits and Assignee hereby
accepts such assignment.
The representations and warranties made by Assignor to Assignee in the Agreement
with respect to the Tenant Leases and Tenant Deposits are incorporated herein by
this reference.
Such representations and warranties shall survive the execution and delivery of
this Assignment for the period and to the extent provided in the Agreement.
Assignor hereby covenants that Assignor will, at any time and from time to time
upon written request therefor, execute and deliver to Assignee, Assignee's
successors, nominees or assigns, such documents as Assignee or they may
reasonably request in order to frilly assign and transfer to and vest in
Assignee or Assignee's successors, nominees and assigns, and protect Assignee's
or their right, title and interest in and to the Tenant Leases and the Tenant
Deposits and the rights of Assignor intended to be transferred and assigned
hereby, or to enable Assignee, Assignee's successors, nominees and assigns to
realize upon or otherwise enjoy such rights in and to the Tenant Leases and the
Tenant Deposits.
EXHIBIT 6.4.3
<PAGE>
Assignee hereby assumes the performance of all of the terms, covenants and
conditions imposed upon Assignor as landlord under the Tenant Leases accruing or
arising on or after the date of delivery of this Assignment.
Assignee hereby agrees to indemnify and hold harmless Assignor, Assignor's
agents and Assignor's and their successors and assigns from and against any and
all claims, losses, liabilities and expenses, including reasonable attorneys'
fees, suffered or incurred by Assignor by reason of any breach by Assignee from
and after the date hereof of any of Assignee's obligations under the Tenant
Leases or with respect to the Tenant Deposits for the period and to the extent
provided in the Agreement.
Assignor hereby agrees to indemnify and hold harmless Assignee, Assignee's
agents and Assignee's and their successors and assigns from and against any and
all claims, losses, liabilities and expenses, including reasonable attorneys'
fees, suffered or incurred by Assignee by reason of any breach by Assignor prior
to the date hereof, of any of Assignor's obligations under the Tenant Leases or
with respect to the Tenant Deposits for the period and to the extent provided in
the Agreement.
In the event of the bringing of any action or suit by a party hereto against
another party hereunder by reason of any breach of any of the covenants,
conditions, agreements or provisions on the part of the other party arising out
of this Assignment, then in that event the prevailing party shall be entitled to
have and recover of and from the other party all costs and expenses of the
action or suit, including reasonable attorneys' fees.
This Assignment may be executed simultaneously in counterparts, each of which
shall be deemed an original, but all of which, together, shall constitute one
and the same instrument.
This Assignment shall be binding upon and inure to the benefit of the
successors, assignees, personal representatives, heirs and legatees of all
the respective parties hereto.
This Assignment shall be governed by, interpreted under, and construed and
enforceable in accordance with, the laws of the State of
EXHIBIT 6.4.3
-2-
<PAGE>
IN WITNESS WHEREOF, Assignor and Assignee have executed and delivered this
Assignment as of the day and year first written above.
WEST COAST REALTY INVESTORS. INC., a Delaware corporation
By:
Name:
Title:
By:
Name:
Title:
"Assignor"
By:
W. Thomas Maudlin, Jr. President
"Assignee"
EXHIBIT 6.4.3
-3-
<PAGE>
STATE OF
COUNTY OF
On , 1997 before me, the undersigned, a Notary Public in and for
said State, personally appeared ,personally known to me (or proved
to me on the basis of satisfactory evidence) to be the person whose name is
subscribed to the within instrument, and acknowledged to me that
executed the same.
WITNESS my hand and official seal.
Notary Public in and for said State
STATE OF
COUNTY OF
On , 1997 before me, the undersigned, a Notary Public in and for said
State, personally appeared , personally known to me (or proved to me on
the basis of satisfactory evidence) to be the person whose name is subscribed to
the within instrument, and acknowledged to me that executed the
same.
WITNESS my hand and official seal.
Notary Public in and for said State
EXHIBIT 6.4.3
-4-
<PAGE>
GENERAL ASSIGNMENT
THIS GENERAL ASSIGNMENT ("Assignment") is made this day of
, 19 by and between , a ("Assignor"), and WEST COAST REALTY
INVESTORS, INC., a Delaware corporation ("Assignee").
WITNESSETH:
Assignor and West Coast Realty Investors, Inc. entered into that certain
Agreement of Purchase and Sale and Joint Escrow Instructions dated as of
19 ("Agreement") respecting the sale of certain "Property", including the "Real
Property" described in Exhibit "A" and the "Improvements" located thereon (ad as
defined in the Agreement).
Under the Agreement, Assignor is obligated to assign to Assignee any and all of
its right, title and interest in and to:
(a) certain service contracts, agreements, maintenance contracts, warranties,
guarantees, bonds and like contracts and agreements, together with ad
supplements, amendments and modifications thereto, relating to the Property,
("Service Contracts"). A list of the Service Contracts is attached hereto as
Exhibit "B".
(b) all licenses, permits, certificates of occupancy, approvals, dedications,
subdivision maps and entitlements issued, approved or granted by "Authorities"
(as defined in the Agreement) or otherwise in connection with the Property; all
right, title and interest of Seller in and to the use of the name " "
and any other trade names, trademarks, and logos used by Assignor in the
operation and identification of the Improvements and/or the Real Property; any
and all development rights and other intangible rights, titles, interests,
privileges and appurtenances owned by Assignor and in any way related to or used
in connection with the Property and its operation; and all licenses, consents,
easements, rights of way and approvals required from private parties to make use
of utilities and to insure vehicular and pedestrian ingress and egress to the
Real Property and the Improvements ("Licenses and Permits"). A list of the
Licenses and Permits is attached hereto as Exhibit "C".
(c) all financial and other books and records maintained in connection with the
operation of the Property, all preliminary, final and proposed building plans
and specifications (including "as-built" drawings) respecting the Improvements,
and all structural reviews, architectural drawings and engineering, soils,
seismic, geologic and architectural reports, studies and certificates and other
documents pertaining to the Property which are within the possession of, under
the control of or reasonably available to Assignor ("Plans and Reports"). A list
of the Plans is attached hereto as Exhibit "D".
NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency
of which are hereby acknowledged, Assignor hereby assigns, sells, transfers,
sets over
EXHIBIT 6.4.4
<PAGE>
and delivers unto Assignee all of Assignor's estate, right, title and interest
in and to the Service Contracts, Licenses and Permits and Records and Plans and
Reports and Assignee hereby accepts such assignment.
The representations and warranties made by Assignor to Assignee in the Agreement
are incorporated herein by this reference.
Such representations and warranties shall survive the execution and delivery of
this Assignment for the period and to the extent provided in the Agreement.
Assignor hereby covenants that Assignor will, at any time and from time to time,
upon written request therefor, execute and deliver to Assignee, Assignee's
successors, nominees and assigns, any new or confirmatory instruments which
Assignee, Assignee's successors, nominees and assigns may reasonably request in
order to frilly assign and transfer to and vest in Assignee, or Assignee's
successors, nominees and assigns, and to protect Assignee's or Assignee's
successors, nominees and assigns right, title and interest in and to the Service
Contracts, Licenses and Permits, and Plans or to otherwise realize upon or enjoy
such rights in and to the Service Contracts, Licenses and Permits, and Plans.
Assignee hereby assumes the performance of all of the terms, covenants and
conditions imposed upon Assignor under the Service Contracts, Licenses and
Permits, and Plans and Reports accruing or arising on or after the date of this
Agreement.
Assignee hereby agrees to indemnify and hold harmless Assignor, Assignor's
agents and Assignor's and their successors and assigns from and against any and
all claims, losses, liabilities and expenses, including reasonable attorneys'
fees, suffered or incurred by Assignor by reason of any breach by Assignee from
and after the date hereof of any of Assignee's obligations under the Service
Contracts, Licenses and Permits or Plans and Reports for the period and to the
extent provided in the Agreement.
Assignor hereby agrees to indemnify and hold harmless Assignee, Assignee's
agents and Assignee's and their successors and assigns from and against any and
all claims, losses, liabilities and expenses, including reasonable attorneys'
fees, suffered or incurred by Assignee by reason of any breach by Assignor prior
to the date hereof of any of Assignor's obligations under the Service Contracts,
Licenses and Permits or Plans and Reports for the period and to the extent
provided in the Agreement.
In the event of the bringing of any action or suit by a party hereto against
another party hereunder by reason of any breach of any of the covenants,
conditions, agreements or provisions on the part of the other party arising out
of this Assignment, then in that event the prevailing party shall be entitled to
have and recover of and from the other party all costs and expenses of the
action or suit, including reasonable attorneys' fees.
This Assignment shall be binding upon and inure to the benefit of the
successors, assignees, personal representatives, heirs and legatees of all the
respective parties hereto.
EXHIBIT 6.4.4
-2-
<PAGE>
This Assignment shall be governed by, interpreted under, and construed and
enforceable in accordance with, the laws of the State of
IN WITNESS WHEREOF, Assignor and Assignee have executed and delivered this
Assignment as of the day and year first above written.
By:
Name:
Title:
By:
Name:
Title:
"Assignor"
WEST COAST REALTY INVESTORS, INC., a Delaware corporation
W. Thomas Maudlin, Jr. President
"Assignee"
EXlIIB1T 6.4.4
-3-
<PAGE>
NON-FOREIGN CERTIFICATE
TRANSFEROR'S CERTIFICATION OF NON-FOREIGN STATUS
A. Federal Certification.
To inform WEST COAST REALTY INVESTORS,. ("Transferee") that withholding of tax
under Section 1445 of the Internal Revenue Code of 1954, as amended ("Code")
will not be required upon the transfer of certain real property to the
Transferee by the undersigned ("Transferor"). Transferor hereby certifies to
Transferee:
1. Transferor is not a foreign corporation, foreign partnership, foreign trust,
or foreign estate (as those terms are defined in the Code and the Income Tax
Regulations promulgated thereunder).
2. Transferor's U.S. employer identification/social security number is
3. The Transferor's office/personal residence address is
Transferor understands that this Certification may be disclosed to the Internal
Revenue Service by the Transferee and that any false statement contained herein
could be punished by fine, imprisonment, or both.
Transferor understands that the Transferee is relying on this Certification in
determining whether withholding is required upon said transfer.
B. California Certification.
Resident/Non-Resident Affidavit
Sections 18805 and 26131 of the Revenue and Taxation Code provide that a buyer
or real property may be required to withhold 3 1/3% of the sales price of
California real property sold by a non-resident Seller, unless the sales price
of the real property is less than $100,000.00.
Transferor hereby certifies that Transferor is a [partnership as determined in
accordance with Subchapter K of Chapter 1 of Subtitle A of the Internal Revenue
Code] or [California resident and not subject to the above mentioned withholding
and that its California residence address is
Transferor understands that this Certification may be disclosed to the Franchise
Tax Board of California by Transferee and that any false statement contained
herein could be punished by fine, imprisonment, or both.
EXHIBIT 6.4.5
<PAGE>
C. General.
Transferor hereby agrees to indemnify, defend and hold the Transferee harmless
from and against any and all obligations, liabilities, claims, losses, actions,
causes of action, rights, demands, damages, costs and expenses of every kind,
nature or character whatsoever (including, without limitation, actual attorneys'
fees and court costs) incurred by the Transferee as a result of any false or
misleading statement contained herein.
Under penalty of perjury, Transferor declares that Transferor has examined this
Certification and to the best of Transferor's knowledge and belief, it is true,
correct and complete, and Transferor further declares that it has authority to
sign this document on behalf of the Transferor.
Date: , 199
EXHIBIT 6.4.5
-2-
<PAGE>
TENANT NOTIFICATION LETTER
Re: Your lease (the "Lease") of space in the building known as " " located
in , California (the "Building)
Ladies and Gentlemen:
You are hereby notified that , (the "Owner"), as owner of the
Building and the current owner of the landlord's interest under the Lease, has
sold the Building to WEST COAST REALTY INVESTORS, INC. ("Buyer"), and in
connection with such sale the Owner has assigned and transferred its interest in
the Lease and any and all security deposits thereunder or relating thereto to
Buyer, and Buyer has assumed and agreed to perform all of the landlord's
obligations under the Lease (including any obligations set forth in the Lease to
repay or account for any security deposits thereunder) from and after the date
of this Tenant Notification Letter. Accordingly, (a) all of your obligations
under the Lease from and after the date of this Tenant Notification Letter
(including your obligations to pay rent and fulfill your insurance requirements)
shall be performable to and for the benefit of Buyer, its successors and assigns
and (b) all of the obligations of the landlord under the Lease (including any
obligations to repay or account for any security deposits thereunder) from and
after the date of this Tenant Notification Letter shall be the binding
obligations of Buyer and its successors and assigns.
The address of Buyer for all purposes under the Lease (including the payment of
rentals, the recoupment of and security deposits and the giving of any notices
provided for in the Lease) is:
Very truly yours,
By:
Name
Title
EXIIIB1T 6.4.6
<PAGE>
TENANT:
DATE OF LEASE:
AMENDED:
PREMISES:
ESTOPPEL CERTIFICATE
To:
Re:
The undersigned hereby certifies to WEST COAST REALTY INVESTORS INC.
("Buyer") as follows:
1. The undersigned is the "Tenant" under the above referenced lease ("Lease")
covering the above-referenced Premises ("Premises"). A true, correct and
complete copy of the Lease (including all addendums, riders, amendments,
modifications and supplements thereto) is attached as Exhibit "A".
2. The Lease constitutes the entire agreement between landlord under the Lease
("Landlord") and Tenant with respect to the Property and the Lease has not been
modified, changed, altered or amended in any respect except as set forth above.
3. The term of the Lease commenced on , 19 and, including any
presently exercised option or renewal term, will expire on , 19
Tenant has accepted possession of the Premises and is the actual occupant in
possession and has not sublet, assigned or hypothecated Tenant's leasehold
interest. All improvements to be constructed on the Property by Landlord have
been completed and accepted by Tenant and any tenant construction allowances
have been paid in frill.
4. As of the date of this Estoppel Certificate, there exists no breach or
default, nor state of facts which, with notice, the passage of time, or both,
would result in a breach or default on the part of either Tenant or Landlord. To
the best of Tenant's knowledge, no claim, controversy, dispute, quarrel or
disagreement exists between Tenant and Landlord.
5. Tenant is currently obligated to pay annual rental in monthly installments of
$ per month and monthly installments of annual rental have been paid
through , 19 . In addition, the Lease requires rent adjustments based
on increases in the consumer price index. No other rent has been paid in advance
and Tenant has no claim or defense against Land- lord under the Lease and is
asserting no offsets or credits against either the rent or Landlord. Tenant has
no claim against Landlord for any security or other deposits except $
which was paid pursuant to the Lease.
EXHIIB1T 7.1.4
<PAGE>
6. Tenant has no option or preferential right to purchase all or any part of the
Premises (or the real property of which the Premises are a part) nor any right
or interest with respect to the Property other than as Tenant under the Lease.
Tenant has no right to renew or extend the terms of the Lease except
7. Tenant has made no agreement with Landlord or any agent, representative or
employee of Landlord concerning free rent, partial rent, rebate of rental
payments or any other type of rental or other concession except as expressly set
forth in the Lease.
8. There has not been filed by or against Tenant a petition in bankruptcy, .
voluntary or otherwise, any assignment for the benefit of creditors, any
petition seeking reorganization or arrangement under the bankruptcy laws of the
United States, or any state thereof, or any other action brought under said
bankruptcy laws with respect to Tenant.
9. All insurance required of Tenant by the Lease has been provided by Tenant
and all premiums paid.
10. The Property contains square feet of rentable/usable area.
This Certificate is made to Buyer in connection with the prospective purchase by
Buyer, or Buyer's assignee, of the building containing the Premises. This
Certificate may be relied on by Buyer and any other party who acquires an
interest in the Premises in connection with such purchase or any person or
entity which may finance such purchase.
Dated this 11 day of July 1997
EXElIB1T 7.1.4
-2-
<PAGE>
GUARANTY OF LEASE
THIS GUARANTY OF LEASE (this "Guaranty") is made as of November 26, 1997, by
CHRISTIAN J. KNOX, a married man (the "Guarantor"), in favor of WEST COAST
REALTY INVESTORS, INC., a Delaware corporation ("Landlord").
WHEREAS, Landlord and CHRISTIAN J. KNOX & ASSOCIATES, INC., a California
corporation doing business as Applebee's Neighborhood Grill & Bar, desire to
enter into that certain Lease Agreement dated November 26, 1997 (the "Lease")
concerning the premises in the building located at 6700 Stanford Ranch Road,
City of Roseville, State of California;
WHEREAS, Guarantor has a financial interest in the Tenant; and
WHEREAS, Landlord would not execute the Lease if Guarantor did not execute and
deliver to Landlord this Guaranty.
NOW, THEREFORE, for and in consideration of the execution of the foregoing Lease
by Landlord and as a material inducement to Landlord to execute said Lease,
Guarantor hereby absolutely, presently, continually, unconditionally and
irrevocably guaranties the prompt payment by Tenant of all rentals and other
sums payable by Tenant under said Lease and the faithful and prompt performance
by Tenant of each and every one of the terms, conditions and covenants of said
Lease to be kept and performed by Tenant, and further agrees as follows:
1. It is specifically agreed and understood that the terms, covenants and
conditions of the Lease may be altered, affected, modified, amended,
compromised, released or otherwise changed by agreement between Landlord and
Tenant, or by course of conduct and Guarantor does guaranty and promise to
perform all of the obligations of Tenant under the Lease as so altered,
affected, modified, amended, compromised, released or changed and the Lease may
be assigned by or with the consent of Landlord or any assignee of Landlord
without consent or notice to Guarantor and that this Guaranty shall thereupon
and thereafter guaranty the performance of said Lease as so changed, modified,
amended, compromised, released, altered or assigned.
2. This Guaranty shall not be released, modified or affected by failure or delay
on the part of Landlord to perforce any of the rights or remedies of Landlord
under the Lease, whether pursuant to the terms thereof or at law or in equity,
or by any release of any person liable under the terms of the Lease (including,
without limitation, Tenant) or any other guarantor from any liability with
respect to Guarantor's obligations hereunder.
3. Guarantor's liability under this Guaranty shall continue until all rents due
under the Lease have been paid in full in cash and until all other obligations
to Landlord have been satisfied, and shall not be reduced by virtue of any
payment by Tenant of any amount due under the Lease. If all or any portion of
Tenant's obligations under the Lease is paid or performed by Tenant, the
obligations of Guarantor hereunder shall continue and remain in full force and
effect in the event
Page 1
<PAGE>
that all or any part of such payment(s) or performance(s) is avoided or
recovered directly or indirectly from Landlord as a preference, fraudulent
transfer or otherwise.
4. Guarantor warrants and represents to Landlord that Guarantor now has and will
continue to have full and complete access to any and all information concerning
the Lease, the value of the assets owned or to be acquired by Tenant, Tenant's
financial status and its ability to pay and perform the obligations owed to
Landlord under the Lease. Guarantor further warrants and represents that
Guarantor has reviewed and approved copies of the Lease and is fully informed of
the remedies Landlord may pursue, with or without notice to Tenant, in the event
of default under the Lease. So long as any of the Guarantor's obligations
hereunder remains unsatisfied or owing to Landlord, Guarantor shall keep fully
informed as to all aspects of Tenant's financial condition and the performance
of said obligations.
5. Guarantor hereby covenants and agrees with Landlord that if a default shall
at any time occur in the payment of any sums due under the Lease by Tenant or in
the performance of any other obligation of Tenant under the Lease, Guarantor
shall and will forthwith upon demand pay such sums and any arrears thereof, to
Landlord in legal currency of the United States of America for payment of public
and private debts, and take all other actions necessary to cure such default and
perform such obligations of Tenant.
6. The liability of Guarantor under this Guaranty is a guaranty of payment and
performance and not of collectibility, and is not conditioned or contingent upon
the genuineness, validity, regularity or enforceability of the Lease or the
pursuit by Landlord of any remedies which it now has or may hereafter have with
respect thereto, at law, in equity or otherwise.
7. Guarantor hereby waives and agrees not to assert or take advantage of to the
extent permitted by law: (i) all notices to Guarantor, to Tenant, or to any
other person, including, but not limited to, notices of the acceptance of this
Guaranty or the creation, renewal, extension, assignment, modification or
accrual of any of the obligations owed to Landlord under the Lease and, except
to the extent set forth in Paragraph 9 hereof, enforcement of any right or
remedy with respect thereto, and notice of any other matters relating thereto;
(ii) notice of acceptance of this Guaranty; (iii) demand of payment,
presentation and protest; (iv) any right to require Landlord to apply to any
default any security deposit or other security it may hold under the Lease; (v)
any statute of limitations affecting Guarantor's liability hereunder or the
enforcement thereof; (vi) any right or defense that may arise by reason of the
incapability, lack of authority, death or disability of Tenant or any other
person; and (vii) all principles or provisions of law which conflict with the
terms of this Guaranty. Guarantor further agrees that Landlord may enforce this
Guaranty upon the occurrence of a default under the Lease, notwithstanding any
dispute between Landlord and Tenant with respect to the existence of said
default or performance of the obligations under the Lease or any counterclaim,
set-off or other claim which Tenant may allege against Landlord with respect
thereto. Moreover, Guarantor agrees that Guarantor's obligations shall not be
affected by any circumstances which constitute a legal or equitable discharge of
a guarantor or surety.
8. Guarantor agrees that Landlord may enforce this Guaranty without the
necessity of proceeding against Tenant or any other guarantor. Guarantor hereby
waives the right to require
Page 2
<PAGE>
Landlord to proceed against Tenant, to proceed against any other guarantor, to
exercise any right or remedy under the Lease or to pursue any other remedy or to
enforce any other right.
9. (a) Guarantor agrees that nothing contained herein shall prevent Landlord
from suing on the Lease or from exercising any rights available to it thereunder
and that the exercise of any of the aforesaid rights shall not constitute a
legal or equitable discharge of Guarantor. Without limiting the generality of
the foregoing, Guarantor hereby expressly waives any and all benefits under
California Civil Code S 2809, 2810, 2819, 2845, 2847, 2848, 2849 and 2850.
(b) Guarantor agrees that Guarantor shall have no right of subrogation against
Tenant unless and until all amounts due under the Lease have been paid in full
and all other obligations under the Lease have been satisfied. Guarantor further
agrees that, to the extent the waiver of Guarantor's right of subrogation as set
forth herein is found by a court of competent jurisdiction to be void or
voidable for any reason, any rights of subrogation Guarantor may have against
Tenant shall be junior and subordinate to any rights Landlord may have against
Tenant.
(c) To the extent any dispute exists at any time as to any Guarantor's right to
subrogation or otherwise, Guarantor agrees to indemnify, defend and hold
Landlord harmless from and against any loss, damage, claim, demand, cost or any
other liability (including without limitation, reasonable attorneys' fees and
costs) Landlord may suffer as a result of such dispute.
(d) The obligations of Guarantor under this Guaranty shall not be altered,
limited or affected by any case, voluntary or involuntary, involving the
bankruptcy, insolvency, receivership, reorganization, liquidation or arrangement
of Tenant or any defense which Tenant may have by reason of order, decree or
decision of any court or administrative body resulting from any such case.
Landlord shall have the sole right to accept or reject any plan on behalf of
Guarantor proposed in such case and to take any other action which Guarantor
would be entitled to take, including, without limitation, the decision to file
or not file a claim. Guarantor acknowledges and agrees that any payment which
accrues with respect to Tenant's obligations under the Lease (including, without
limitation, the payment of rent) after the commencement of any such proceeding
(or, if any such payment ceases to accrue by operation of law by reason of the
commencement of such proceeding, such payment as would have accrued if said
proceedings had not been commenced) shall be included in Guarantor's obligations
hereunder because it is the intention of the parties that said obligations
should be determined without regard to any rule or law or order which may
relieve Tenant of any of its obligations under the Lease. Guarantor hereby
permits any trustee in bankruptcy, receiver, debtor-in-possession, assignee for
the benefit of creditors or similar person to pay Landlord, or allow the claim
of Landlord in respect of, any such payment accruing after the date on which
such proceeding is commenced. Guarantor hereby assigns to Landlord Guarantor's
right to receive any payments from any trustee in bankruptcy, receiver,
debtor-in-possession, assignee for the benefit of creditors or similar person by
way of dividend, adequate protection payment or otherwise.
Page 3
<PAGE>
10. Any notice, statement, demand, consent, approval or other communication
required or permitted to be given, rendered or made by either party to the
other, pursuant to this Guaranty or pursuant to any applicable law or
requirement of public authority, shall be in writing (whether or not so stated
elsewhere in this Guaranty) and shall be deemed to have been properly given,
rendered or made only if hand-delivered or sent by first-class mail, postage
pre-paid, addressed to the other party at its respective address set forth
below, and shall be deemed to have been given, rendered or made on the day it is
hand-delivered or one day after it is mailed, unless it is mailed outside of Los
Angeles County, California, in which case it shall be deemed to have been given,
rendered or made on the third business day after the day it is mailed. By giving
notice as provided above, either party may designate a different address for
notices, statements, demands, consents, approvals or other communications
intended for it.
To Guarantor: Christian J. Knox
633 East Victor Road, Suite E
Lodi, California, 95240
Facsimile No.: (209) 367-5401
Telephone No.: (209)367-7517
To Landlord: West Coast Realty Investors, Inc.
5933 West Century Boulevard, Suite 900
Los Angeles, California 90045-5454
Facsimile No.: (310) 337-9898
Telephone No.: (310) 337-9700
Attn: W. Thomas Maudlin, Jr.
With a copy to:
Allen, Matkins, Leck, Gamble & Mallory
515 South Figueroa Street, 8th Floor
Los Angeles, California 90071
Attn: Michael L. Matkins, Esq.
11. Guarantor represents and warrants to Landlord as follows:
(a) No consent of any other person, including, without limitation, any creditors
of Guarantor, and no license, permit, approval or authorization of, exemption
by, notice or report to, or registration, filing or declaration with, any
governmental authority is required by Guarantor in connection with this Guaranty
or the execution, delivery, performance, validity or enforceability of this
Guaranty and all obligations required hereunder. This Guaranty has been duly
executed and delivered by Guarantor, and constitutes the legally valid and
binding obligation of Guarantor enforceable against Guarantor in accordance with
its terms.
Page 4
<PAGE>
(b) The execution delivery and performance of this Guaranty will not violate any
provision of any existing law or regulation binding on Guarantor, or any order,
judgment, award or decree of any court, arbitrator or governmental authority
binding on Guarantor, or of any mortgage, indenture, lease, contract or other
agreement, instrument or undertaking to which Guarantor is a party or by which
Guarantor or any of Guarantor's assets may be bound, and will not result in, or
require, the creation or imposition of any lien on any of Guarantor's property,
assets or revenues pursuant to the provisions of any such mortgage, indenture,
lease, contract, or other agreement, instrument or undertaking.
12. The obligations of Tenant under the Lease to execute and deliver estoppel
statements, as therein provided, shall be deemed to also require the Guarantor
hereunder to do and provide the same relative to Guarantor.
13. This Guaranty shall be binding upon Guarantor, Guarantor's heirs,
representatives, administrators, executors, successors and assigns and shall
inure to the benefit of and shall be enforceable by Landlord, its successors,
endorsees and assigns. Any married person executing this Guaranty agrees that
recourse may be had against community assets and against his separate property
for the satisfaction of all obligations herein guaranteed. As used herein, the
singular shall include the plural, and the masculine shall include the feminine
and neuter and vice versa, if the context so requires.
14. The term "Landlord" whenever used herein refers to and means the Landlord
specifically named in the Lease and also any assignee of said Landlord, whether
by outright assignment or by assignment for security, and also any successor to
the interest of said Landlord or of any assignee in the Lease or any part
thereof, whether by assignment or otherwise. So long as the Landlord's interest
in or to the demised premises (as that term is used in the Lease) or the rents,
issues and profits therefrom, or in, to or under the Lease, are subject to any
mortgage or deed of trust or assignment for security, no acquisition by
Guarantor of the Landlord's interest in the demised premises or under the Lease
shall affect the continuing obligations of Guarantor under this Guaranty, which
obligations shall continue in full force and effect for the benefit of the
mortgagee, beneficiary, trustee or assignee under such mortgage, deed of trust
or assignment, or any purchaser at sale by judicial foreclosure or under private
power of sale, and of the successors and assigns of any such mortgagee,
beneficiary, trustee, assignee or purchaser.
15. The term "Tenant" whenever used herein refers to and means the Tenant in the
Lease specifically named and also any assignee or sublessee of said Lease and
also any successor to the interests of said Tenant, assignee or sublessee of
such Lease or any part thereof, whether by assignment, sublease or otherwise.
16. In the event of any dispute or litigation regarding the enforcement or
validity of this Guaranty, Guarantor shall be obligated to pay all charges,
costs and expenses (including, without limitation, reasonable attorneys' fees)
incurred by Landlord, whether or not any action or proceeding is commenced
regarding such dispute and whether or not such litigation is prosecuted to
judgment.
Page 5
<PAGE>
17 This Guaranty shall be governed by and construed in accordance with the laws
of the State of California, and in a case involving diversity of citizenship,
shall be litigated in and subject to the jurisdiction of the Courts of
California.
18. Every provision of this Guaranty is intended to be severable. In the event
any term or provision hereof is declared to be illegal or invalid for any reason
whatsoever by a court of competent jurisdiction, such illegality or invalidity
shall not affect the balance of the terms and provisions hereof, which terms and
provisions shall remain binding and enforceable.
19. This Guaranty may be executed in any number of counterparts each of which
shall be deemed an original and all of which shall constitute one and the same
Guaranty with the same effect as if all parties had signed the same signature
page. Any signature page of this Guaranty may be detached from any counterpart
of this Guaranty and re-attached to any other counterpart of this Guaranty
identical in form hereto but having attached to it one or more additional
signature pages.
20. No failure or delay on the part of Landlord to exercise any power, right or
privilege under this Guaranty shall impair any such power, right or privilege,
or be construed to be a waiver of any default or any acquiescence therein, nor
shall any single or partial exercise of such power, right or privilege preclude
other or further exercise thereof or of any other right, power or privilege.
21. This Guaranty shall constitute the entire agreement between each Guarantor
and the Landlord with respect to the subject matter hereof. No provision of this
Guaranty or right of Landlord hereunder may be waived nor may Guarantor be
released from any obligation hereunder except by a writing duly executed by an
authorized officer, director or trustee of Landlord.
22. The liability of Guarantor and all rights, powers and remedies of Landlord
hereunder and under any other agreement now or at any time hereafter in force
between Landlord and Guarantor relating to the Lease shall be cumulative and not
alternative and such rights, powers and remedies shall be in addition to all
rights, powers and remedies given to Landlord by law.
IN WITNESS WHEREOF, Guarantor has executed this Guard day and year first above
written
CHRISTIAN J. KNOX
Social Security No. ###-##-####
Page 6
<PAGE>
LEASE AGREEMENT
BETWEEN
WEST COAST REALTY INVESTORS, INC.,
a Delaware corporation
and
CHRISTIAN J. KNOX & ASSOCIATES, INC.,
a California corporation
dba Applebee's Neighborhood Grill & Bar
<PAGE>
TABLE OF CONTENTS FOR
LEASE AGREEMENT
ARTICLE AND TITLE
I. ASSIGNMENT AND SUBLETTING --------------------------- 2
II. USE ------------------------------------------------ 4
III. FIXED MINIMUM RENT; ADDITIONAL CHARGES------------- 6
IV. CONDITION - TENANTS WARRANTIES---------------------- 8
V. UTILITIES-------------------------------------------- 9
VI. SIGNS AND ADVERTISING------------------------------ 10
VII. CONSTRUCTION, ALTERATION, DAMAGE AND
DESTRUCTION, AND RESTORATION--------------------------- 10
VIII. MECHANICS' AND MATERIALMEN'S LIEN---------------- 11
IX. MAINTENANCE OF PREMISES---------------------------- 12
X. INSURANCE------------------------------------------- 13
XI. EMINENT DOMAIN ------------------------------------ 16
XII. REAL ESTATE TAXES, SPECIAL ASSESSMENTS
AND USE TAXES------------------------------------------ 16
XIII. NET LEASE EXPENSES------------------------------- 17
XIV. DEFAULT OR DESERTION BY TENANT-------------------- 18
XV. DEFAULT OF LANDLORD-------------------------------- 21
XVI. INSOLVENCY OF TENANT------------------------------ 21
XVII. NO OBSTRUCTION OF VISIBILITY -------------------- 21
XVIII. PROPERTY LEFT ON PREMISES----------------------- 22
XIX. TENANT'S PROPERTY--------------------------------- 22
XX. SURRENDER OF PREMISES------------------------------ 23
XXI. NOTICES------------------------------------------- 23
<PAGE>
ARTICLE AND TITLE
XXII. RENTAL CHECKS ----------------------------- 24
XXIII. WAIVERS ----------------------------------- 25
XXIV. RIGHTS AND REMEDIES-------------------------- 25
XXV. MONTH to MONTH--------------------------------- 25
XXVI. RIGHT OF ENTRY--------------------------------- 25
XXVII. SUBORDINATION TO MORTGAGE LIEN-------------- 25
XXVIII. TENANT'S AND LANDLORD'S REPRESENTATIONS
AND INDEMNITIES-------------------------------------- 26
XXIX. PARTIAL INVALIDITY----------------------------- 30
XXX. GOVERNING LAW----------------------------------- 30
XXXI. CONSTRUCTION OF LEASE-------------------------- 31
XXXII. NO PARTNERSHIP-------------------------------- 31
XXXIII. NO ACCORD AND SATISFACTION------------------- 31
XXXIV. "AS IS"--------------------------------------- 31
XXXV. GUARANTY OF LEASE------------------------------ 32
XXXVI. BROKERS--------------------------------------- 32
XXXVII. MEMORANDUM OF LEASE-------------------------- 32
XXXVIII. ATTORNEYS' FEES----------------------------- 32
XXXIX. OPTION TO EXTEND------------------------------ 33
XXXX. LEASEHOLD FINANCING---------------------------- 33
XXXXI. ESTOPPEL CERTIFICATE-------------------------- 38
XXXXII. FINANCIAL INFORMATION REQUIREMENTS ---------- 39
<PAGE>
EXHIBITS
EXHIBIT A: LEGAL DESCRIPTION
EXHIBIT A-1: SITE PLAN OF THE CENTER
EXHIBIT B: PERMITTED EXCEPTIONS
EXHIBIT C: IMPROVEMENT PLANS
EXHIBIT D: COMMON AREA MAINTENANCE AGREEMENT
EXHIBIT E: MEMORANDUM OF LEASE
<PAGE>
LEASE AGREEMENT
THIS LEASE AGREEMENT ("Lease"), made and entered as of November 26, 1997, by and
between WEST COAST REALTY INVESTORS, INC., a Delaware corporation (hereinafter
referred to as ("Landlord"), and CHRISTIAN J. KNOX & ASSOCIATES, INC., a
California corporation, dba Applebee's Neighborhood Grill & Bar (hereinafter
referred to as ("Tenant").
WITNESSETH:
Landlord, by these presents, does demise, lease and let unto Tenant
approximately 41,537 square feet of land and improvements located at 6700
Stanford Ranch Road, City of Roseville, County of Placer, State of California,
the exact legal description of which is set forth on Exhibit A hereto and
incorporated herein by reference, (hereinafter referred to as the "Demised
Premises"), subject to the "Permitted Exceptions" as defined in Exhibit B
attached hereto and incorporated herein by reference (hereinafter "Permitted
Exceptions"). The Demised Premises and the adjoining land bounded by Five Star
Boulevard to the South and Stanford Ranch Road to the East, as depicted on the
site plan attached hereto as Exhibit A-1 and incorporated herein by reference,
is hereinafter referred to as the "Center".
TO HAVE AND TO HOLD the Demised Premises unto Tenant for a term of twenty (20)
years from and including the commencement date as hereinafter defined. The
commencement date shall be the date which is not less than ten (10) days nor
more than thirty (30) days after the occurrence of both (a) "Completion of the
Building" and (b) occupancy of the "Building" by Tenant, as those terms are
defined in the AGREEMENT OF PURCHASE AND SALE AND JOINT ESCROW INSTRUCTIONS
dated July 8, 1997 between Tenant as "Seller" and Landlord as "Buyer", which
terms as defined therein are incorporated herein by reference. This Lease shall
be effective for all purposes, except the commencement of rent, as of the date
first written above.
IN CONSIDERATION THEREOF, Landlord and Tenant covenant and agree as follows:
Initial by Landlord Initial by Tenant
-1-
<PAGE>
ARTICLE I. ASSIGNMENT AND SUBLETTING.
Tenant shall have no right to assign or sublet the Demised Premises without the
prior written consent of Landlord, which consent may be withheld in Landlord's
sole and reasonable discretion, and if granted may be subject to such conditions
as Landlord in its sole and reasonable discretion may impose, including, without
limitation, the requirement that such assignee or sublessee have a net worth of
not less than the minimum net worth requirement of Tenant's franchiser,
Applebee's International, Inc. On the date of this Lease or Three Million
Dollars ($3,000,000.00), whichever is greater.
Consent by Landlord to any assignment or subletting shall not in any way be
construed to relieve Tenant from obtaining the express consent in writing of
Landlord to any further assignment or subletting, nor shall any such assignment
or subletting relieve Tenant from liability for the payment of rentals or the
performance of any condition or covenant of this Lease.
Notwithstanding the provisions of the foregoing paragraphs, Tenant shall have
the right to assign this Lease or sublease the entire Demised Premises, without
the consent of Landlord, so long as Tenant is in compliance with its obligations
hereunder and has paid all rentals due to the date thereof, (i) to the parent
corporation of Tenant, or (ii) to any wholly-owned subsidiary of Tenant or
Tenant's parent corporation, or (iii) to any corporation succeeding to all of
the assets of Tenant as a result of consolidation or merger, or (iv) to a
corporation to which substantially all of the assets of Tenant are sold, or (v)
to any person or entity controlled by, under common control with or controlling
Tenant, or (vi) to any entity that will operate an Applebee's restaurant on the
Demised Premises pursuant to a license or franchise from Applebee's
International Inc.; provided that Landlord, in Landlord's reasonable discretion,
has approved the business qualifications and financial capability of such
successor. As used in this Paragraph, "control" means the right to exercise by
contract or otherwise more than fifty percent (50%) of the voting interests of
such entity.
Notwithstanding any other provision of this Lease to the contrary, Tenant may
assign this Lease to its franchiser Applebee's International, Inc.(sometimes
referred to as "Franchiser"), whether Tenant is in compliance with or in default
under this Lease, provided that Tenant gives Landlord at least thirty (30) days'
written notice of its intent to assign this Lease to its Franchiser. Franchiser
shall become the Tenant hereunder upon its written acceptance Of said assignment
and shall be responsible and
Initial by Landlord Initial by Tenant
-2-
<PAGE>
obligated hereunder for any obligations and performance only from the date of
said assignment to the end of the term (as the same may be extended hereunder)
and not for any past-due rents or charges, or for any assignment fee or other
expense related to the assignment. In addition, Franchiser may assign this Lease
to a new franchisee, and thereafter said franchisee shall become the tenant
hereunder, so long as said franchisee meets the qualifications of franchisees of
Franchiser generally, including its standard financial qualifications. If in
order to meet said financial qualifications, Franchiser has received the
personal guaranty of the principal shareholders of said franchisee, Landlord
shall approve the assignment to such new franchisee only so long as the same
principal shareholders agree to guarantee the performance of the new franchisee
as to the terms of this Lease. In the event of a default by Tenant under the
terms of this Lease, Landlord shall give Franchiser not less than thirty (30)
days' written notice thereof prior to initiating any action to foreclose upon or
retake possession of said Lease Premises.
No assignment or sublease shall operate to release Tenant from its obligations
hereunder, without the written consent of Landlord.
Tenant shall pay Landlord's costs and expenses, including attorneys' fees
incurred in connection with any request by Tenant to assign or sublet.
In addition to the foregoing, Tenant may assign this Lease, without the consent
of Landlord to any Leasehold Mortgagee, as defined in and subject to the
provisions of Article XXXX, provided that no such assignment shall operate to
create a lien or encumbrance on Landlord's interest and the rents therefrom,
separate from Tenant's leasehold estate. Nothing in this Lease shall be
construed to require Landlord to subordinate or otherwise subject its fee
interest in the Demised Premises, or the rents therefrom, to the lien of any
Leasehold Mortgagee. Tenant shall notify Landlord of any such collateral
assignment.
In addition to the foregoing, Tenant may assign this Lease, without the consent
of Landlord to any Limited Partnership of which Tenant is the General Partner or
to any Limited Liability Company of which the Tenant is the
Operating Manager.
Initial by Landlord Initial by Tenant
-3-
<PAGE>
ARTIICLE II. USE.
Tenant agrees that the Demised Premises shal1 be used as an Applebee's
Neighborhood Grill & Bar Restaurant, open for lunch and dinner and serving food
and wine and beer, or alcoholic beverages including wine and beer, and for no
other use without the prior consent of Landlord, which consent may be given or
withheld in Landlord's sole and absolute discretion. In the event that Tenant's
Franchise Agreement with Franchiser is terminated by Franchiser, thus preventing
the operation of an Applebee's restaurant at the Demised Premises, Tenant shall
continue to operate the Demised Premises as a sit-down, non-fast food restaurant
where food and alcohol are served from a menu which shall be comparable to an
Applebee's restaurant as such restaurants are operated as of the date of this
Lease, subject to Landlord's prior approval thereof, which shall not be
unreasonably withheld or delayed ("Comparable Restaurant") such as, for example,
TGIF Fridays, Chevy's, Chili's, Outback Steakhouse and Claim Jumper. The Demised
Premises shall be used and occupied in a careful and proper manner, and no waste
will be committed or permitted upon or damage done to the Demised Premises.
Tenant agrees that it will not conduct, nor permit to be conducted, on the
Demised Premises any business or commitment or permit any act which is or may be
contrary to or in violation of any law or any ordinance of the city, county and
state in which the Demised Premises are located.
Tenant further agrees at its own expense to comply with all governmental laws,
rules and regulations and all covenants, conditions, restrictions, easements,
development agreements and other encumbrances including the Permitted
Exceptions, now or hereafter affecting the Demised Premises, (collectively,
"Encumbrances") and/or applicable to the use, development or operation of the
Demised Premises, including, without limitation, all Environmental Laws, and
including making all repairs, capital improvements, alterations and structural
changes required by law and/or such Encumbrances and payment of all fees and
assessments, and charges which may be imposed thereby. As used in this Lease,
"Environmental Laws" means any federal, state, or local law, regulation,
guideline, code or ordinance applicable to environmental quality or human
health, or to the use, generation, handling, storage, treatment, transport,
decontamination, clean-up, removal, encapsulation, enclosure, abatement or
disposal of any substance classified as toxic or hazardous or by similar terms,
including, without limitation, petroleum products. Tenant agrees to indemnify,
protect, defend and hold Landlord harmless from any claims arising out of the
violation by Tenant or Tenant's agents,
Initial by Landlord Initial by Tenant
-4-
<PAGE>
employees, contractors or invitees of, any law, rule or regulation, including
any Environmental Law, and/or any such Encumbrances with regard to the Demised
Premises.
Tenant agrees to continuously and uninterruptedly operate one hundred percent
(100%) of the Demised Premises during the "Minimum Hours," as defined below, as
an Applebee's Restaurant (or a Comparable Restaurant, if applicable, as
described above), during the entire term unless prevented from doing so because
of fire, accident or act of God. Tenant shall conduct its business at all times
in a first-class and reputable manner, maintaining at all times a full staff of
employees and a full and complete stock of merchandise and adequate equipment,
fixtures and personal property.
"Minimum Hours" means 11:00 a.m. to midnight Monday through Thursday, 11:00 a.m.
to 2:00 a.m. Friday and Saturday, and 10:00 a.m. to midnight Sunday, or such
comparable alternate hours as may be required by Franchiser.
No auction, liquidation, going-out-of-business, fire or bankruptcy sales may be
conducted in the Demised Premises. Tenant agrees that it will conduct its
business in the Demised Premises under the trade name "Applebee's Neighborhood
Grill & Bar" (or under such other trade name for a Comparable Restaurant as
shall be approved by Landlord, if applicable, as described above) in a lawful
manner and in good faith, and will not do any act tending to injure the
reputation of the Center as reasonably determined by Landlord. Notwithstanding
any provision in this Lease requiring the continuous operation of Tenant's
business by Tenant, Landlord hereby agrees that Tenant may close its business
for the sole purpose or remodeling, repairing and enhancing the Demised Premises
for a sixty (60) day period from time to time during the term of this Lease, and
for any additional time periods that may be required by Franchiser pursuant to
national, regional or California remodeling requirements, subject to the
limitations in Article VII. Tenant shall tender to Landlord written notice of
its intent to close its business at least sixty (60) days prior to the date of
commencement of any such repair, remodeling or enhancement work. During such
period, rent, and all other monetary obligations shall not abate, and Tenant
shall remain obligated to perform all other provisions of this Lease.
Tenant hereby represents and warrants to Landlord that Tenant is the assignee
franchisee under that certain Franchise Agreement, dated August 18, 1997 (the
"Franchise Agreement"), between Apple By The Bay, Inc. and Applebee's
International, Inc., allowing the franchisee or assignee franchisee thereunder
to use the tradenames, styles, methods of operation and so forth, and to provide
the services and distribute the products described therein.
Initial by Landlord Initial by Tenant
-5-
<PAGE>
ARTICLE III. FIXED MINIMUM RENT; ADDITIONAL CHARGES.
3.1 Tenant shall pay to Landlord during the term of this Lease the fixed minimum
annual rental ("Fixed Minimum Rent") as set forth in the following schedule:
Commencement Date through September 30, 2002 $172,000
October 1, 2002 through September 30, 2007 $193,500
October 1, 2007 through September 30, 2012 $217,687
October 1, 2012 through September 30, 2017 $244,898
First Extension Term:
October 1, 2017 through September 30, 2022 $275,511
Second Extension Term:
October 1, 2022 through September 30, 2027 $309,950
Fixed Minimum Rent shall be payable by Tenant in equal consecutive monthly
installments on or before the first day of each month, in advance, at the
address specified for Landlord in Article XXI, or at such other place as
Landlord shall designate, without any prior demand therefore and without any
deduction or set off whatsoever. If the commencement date occurs on a day other
than the first day of a calendar month, or the expiration date occurs on a day
other than the last day of a calendar month, then the rental for such fractional
month will be prorated on the basis of a thirty (30) day month.
3.2 Security Deposit. Tenant shall deposit with Landlord upon execution hereof a
Security Deposit in the sum of $14,333.33 as security for Tenant's faithful
performance of its obligations under this Lease. If Tenant fails to pay the
Fixed Minimum Rent, or otherwise defaults under this Lease, Landlord may use,
apply, or retain all or any portion of said Security Deposit for the payment of
any amount due Landlord or to reimburse or compensate Landlord for any
liability, expense, loss or damage which Landlord may suffer or incur by reason
thereof. If Landlord uses or applies all or any portion of said Security
Deposit, Tenant shall within ten (10) days after written request therefor
deposit moneys with Landlord sufficient to restore said Security Deposit to the
full amount required by this Lease. If the fixed Minimum Rent increases during
the term of this Lease, Tenant shall, upon written request from Landlord,
deposit additional moneys with Landlord so that the total amount of the Security
Deposit shall at all times bear the same proportion to the increased Fixed
Minimum Rent as the initial Security Deposit bore to the initial Fixed Minimum
Rent. Should the Lease be assigned or sub-let, Landlord shall have the right to
increase the Security Deposit to the extent necessary, in
Initial by Landlord Initial by Tenant
-6-
<PAGE>
Landlord's reasonable judgment, to account for any increased risk that the
Landlord may suffer as a result thereof, provided however, this provision for
increasing the security deposit shall not be applicable to Applebee's
International, Inc. if the Lease is assigned to Applebee's International, Inc.
In other words, Franchiser shall not be required to pay a security deposit of
any amount if this Lease is assigned to Franchiser. If a change in control of
Tenant occurs during this Lease and following such change the financial
condition of Tenant is, in Landlord's reasonable judgment, significantly
reduced, Tenant shall deposit such additional moneys with Landlord as shall be
sufficient to cause the Security Deposit to be at a commercially reasonable
level based on said change in financial condition. Landlord shall not be
required to keep the Security Deposit separate from its general accounts. Within
fourteen (14) days after the expiration or termination of this Lease, if
Landlord elects to apply the Security Deposit only to unpaid Rent, and otherwise
within thirty (30) days after the Premises have been vacated pursuant to ARTICLE
XX. SURRENDER OF PREMISES below, Landlord shall return that portion of the
Security Deposit not used or applied by Landlord. No part of the Security
Deposit shall be considered to be held in trust, to bear interest or to be
prepayment for any moneys to be paid by Tenant under this Lease.
3.3 Late Charges. Tenant hereby acknowledges that late payment by Tenant of rent
will cause Landlord to incur costs not contemplated by this Lease, the exact
amount of which will be extremely difficult to ascertain. Such costs include,
but are not limited to, processing and accounting charges, and late charges
which may be imposed upon Landlord by any lender. Accordingly, if any rent shall
not be received by Landlord within ten (10) days after such amount shall be due,
then, without any requirement for notice to Tenant, Tenant shall pay to Landlord
a one-time late charge equal to ten percent (10%) of each such overdue amount.
The parties hereby agree that such amount represents a fair and reasonable
estimate of the costs Landlord will incur by reason of such late payment.
Acceptance of such late charge by Landlord shall in no event constitute a waiver
of Tenant's default or breach with respect to such overdue amount, nor prevent
the exercise of any of the other rights and remedies granted hereunder. In the
event a late charge is payable hereunder, whether or not collected, for three
(3) consecutive installments of Fixed Minimum Rent, then notwithstanding any
provision of this Lease to the contrary, the Fixed Minimum Rent shall at
Landlord's option become due and payable quarterly in advance.
Initial by Landlord Initial by Tenant
-7-
<PAGE>
3.4 Tenant shall pay to Landlord all charges and other amounts required under
this Lease as additional rent (herein called "additional rent"). All such
additional rent will be payable to Landlord at the place where the Fixed Minimum
Rent is payable. Landlord will have the same remedies for a default in the
payment of any additional rent as for a default in the payment of rent.
ARTICLE IV. CONDITION - TENANTS WARRANTIES
4.1 Condition to Tenant's Obligations.
Tenant's obligations hereunder and the effectiveness of this Lease shall be
expressly conditioned upon the approval of the terms of this Lease by Applebee's
International, Inc., on or before December 1, 1997 (the "Contingency Period").
4.2 Tenant's Warranties.
Tenant represents, warrants, and covenants as follows:
A. Tenant shall erect and operate upon the Demised Premises, upon proper
application to, and approvals from, Landlord and the appropriate governmental
authorities, the improvements for the use hereinbefore provided as described in
Article VII, below. Said applications and approvals shall include, but shall not
be limited to: (i) authority to construct an Applebee's restaurant upon the
Demised Premises of the approximate size of five thousand five hundred (5,500)
square feet, (ii) authority to construct, the aforesaid restaurant facility and
any other improvements needed therefor or incident thereto with building or
construction materials, in the design color and shape similarly used for other
prototype freestanding Applebee's restaurants, (iii) authority to affix to the
restaurant building such signage, awnings, exterior decor and television
reception antenna and/or disc as it deems necessary for the operation of the
restaurant, (iv) zoning and subdivision necessary to construct said restaurant
as stated above, including the authority and zoning to construct parking,
install landscaping and obtain the ingress and egress access to adjoining public
thoroughfares, which in the opinion of Tenant is sufficient for its intended
use, (v) authority to conduct Tenant's use in accordance with Tenant's standard
operating procedures, and (vi) authority to place advertising signs in
accordance with Article VI.
Initial by Landlord Initial by Tenant
-8-
<PAGE>
B. Tenant shall, at its expense, obtain prior to opening for business, and
maintain throughout the term of this Lease, a license/permit for the sale of
beer, wine and alcoholic beverages at the restaurant to be located upon the
Demised Premises.
C. Tenant shall, at its expense, cause all utilities, including without
limitation, electric, water, gas and sewer, to be available to the Demised
Premises in a size and capacity to serve the intended use of the Demised
Premises.
D. Tenant shall, in conducting Tenant's use, not violate the terms of any
easement, agreement or any covenants, conditions or restrictions affecting the
Demised Premises.
E. Landlord has made no representation or warranty as to the compliance of the
Demised Premises with the requirements of the Americans with Disabilities Act
("ADA") or any other applicable laws. Tenant shall be responsible for continuing
compliance of the Demised Premises with ADA requirements or any other applicable
laws, including (without limitation) any such compliance arising from the
existence, construction, installation or modifications of additions,
alterations, changes or improvements within the Demised Premises.
ARTICLE V. UTILITIES.
It is understood and agreed that at all times during the term of this Lease and
any extensions thereof, if any, Tenant shall pay all service charges for water,
telephone, electricity and heat, or any other utility charge that may accrue by
reason of the occupancy of the Demised Premises by Tenant, and Tenant shall not
at any time permit any lien or claim to be filed against said Demised Premises
or any part thereof on account of any expenses or charges for said utilities.
The parties agree that Tenant's obligations under this Article V, shall include
the payment of all utility charges that are incurred during the period that
Tenant is constructing or modifying improvements on the Demised Premises.
Initial by Landlord Initial by Tenant
-9-
<PAGE>
ARTICLE VI. SIGNS AND ADVERTISING.
Tenant is hereby granted the privilege of erecting signs in good taste on the
Demised Premises, which conform with the provisions of all sign programs, if
any, applicable to the Center and which otherwise comply with all applicable
federal, state or local laws, rules, regulations or ordinances and CC & R's or
other recorded instruments affecting the Demised Premises. Any and all signage
installed by Tenant on the Demised Premises shall conform to and be consistent
with the existing signage of the Center and must be approved in writing by
Landlord prior to installation. All such signs shall advertise the Tenant's
business, and no revenue producing signs shall be permitted on the Demised
Premises. Tenant shall remove al' signs at the termination of this Lease and
shall repair any damage to the Demised Premises caused by such signs at its sole
cost and expense.
ARTICLE VII. CONSTRUCTION, ALTERATION, DAMAGE AND
DESTRUCTION, AND RESTORATION.
Tenant represents and warrants to Landlord that Tenant has constructed upon the
Demised Premises a standard Applebee's Neighborhood Grill & Bar restaurant
building of approximately 5,500 square feet in accordance with Exhibit C
attached hereto and incorporated herein by reference.
Landlord shall not have the right to make additions, alterations, changes and
improvements in and to any building or other improvements constructed by Tenant
on the Demised Premises without Tenant's prior written consent.
Tenant shall not have the right to make additions, alterations or changes to the
Demised Premises, or improvements in and to any building or other improvements
constructed by Tenant in or on the Demised Premises without Landlord's prior
written consent, unless such additions, alterations, changes and improvements
are non structural, do not affect the use of the Demised Premises required under
Article II of this Lease and are required by Applebee's International, Inc.
All work required or desired to be done by Tenant pursuant to this Article and
Article 4.2 shall be done at its sole cost and expense, including, without
limitation, utility hook-up fees, sewer and water connections and building and
all other permit fees, and in strict compliance with all building laws,
ordinances and regulations applicable thereto. Landlord agrees to cooperate with
Tenant, if necessary, for the purpose of securing such
Initial by Landlord Initial by Tenant
-10-
<PAGE>
building or other permits which may be required from time to time for any such
work, but without expense to Landlord.
Tenant shall have the right, upon notice to Landlord given at least sixty (60)
days in advance, to close the restaurant from time to time for a period of
forty-five (45) to sixty (60) days for purposes of completing a major remodeling
requited by Applebee's International, Inc. in connection with a National,
Regional or California remodeling program.
In the event of any damage or destruction to the Demised Premises during the
term of this Lease by fire or other casualty, Tenant shall have no right to
terminate this Lease and shall continue to pay rent due under this Lease (Tenant
waives its right under California Civil Code Section 1932(2) and 1933(4)) and
will (i) rebuild such improvements in the same or a modified form and size, or
(ii) construct other improvements upon the Demised Premises consistent with the
use of the Demised Premises permitted in this Lease and subject to Landlord's
prior approval. Provided, however, that if for any reason Tenant fails to
rebuild the improvements located on the Demised Premises within one year after
the occurrence of such casualty, Landlord shall have the right, in addition to
its other remedies, to terminate this Lease by notice in writing given to Tenant
within thirty (30) days after the expiration of such one year period. Tenant
shall promptly rebuild the restaurant improvements at Tenant's sole cost and
expense whether or not there are available insurance proceeds.
ARTICLE VIII . MECHANICS' AND MATERIALMEN' S LIEN.
Tenant shall not do or suffer anything to be done whereby the Demised Premises
or any part thereof may be encumbered by any mechanics' or materialmens'
statutory lien and if, whenever and as often as any mechanics' or materialmen's
lien is filed against said Demised Premises, or any part thereof, purporting to
be for or on account of any labor or materials or service furnished in
connection with any work in, on, or about the Demised Premises done by, for, or
under the authority of Tenant or anyone claiming by, through or under Tenant,
Tenant shall promptly procure and record a satisfaction and release of the same.
Prior to commencement of any repair or improvement to the Demised Premises,
Tenant shall provide Landlord such items as payment and performance bonds
binding Tenant's contractor or such other security as Landlord may approve.
Tenant shall have the right to contest any such mechanics' or materialmens' lien
or other lien claim filed against the Demised Premises, or any part thereof, if
Tenant (i) notifies
Initial by Landlord Initial by Tenant
-11-
<PAGE>
Landlord in writing of its intention so to do, (ii) diligently prosecutes any
such contest, (iii) at all times effectively stays or prevents any judicial sale
of the Demised Premises under execution or otherwise, (iv) posts with a court of
competent jurisdiction for the county in which the Demised Premises are located,
any applicable statutory bond , (v) pays or otherwise satisfies any final
judgment adjudicating or enforcing such contested mechanics' materialmen's or
other lien, and (vi) thereafter promptly procures and records a satisfaction and
release thereof. Notwithstanding anything contained herein to the contrary,
Tenant shall not have the right to bind Landlord with respect to any work done
or materials supplied regarding the Demised Premises, and any lien filed or
attempted to be filed shall apply solely against Tenant's right to lease the
Demised Premises.
ARTICLE IX. MAINTENANCE OF PREMISES.
Landlord shall not have any responsibility for the maintenance or repair of the
Demised Premises. Tenant shall, solely at Tenant's own expense, make all
necessary repairs and replacements to the Demised Premises including, without
limitation, all buildings and improvements thereon and all utilities servicing
the Demised Premises (i.e., telephone, water, gas, steam heat, electric, sewers,
storm and sanitary, and other utilities whatsoever). Such repairs and
replacements to the Demised Premises and improvements thereon and utilities
serving the Demised Premises, ordinary as well as extraordinary and structural
as well as non-structural, shall be promptly made and shall be made in full and
strict compliance with this Lease. All repairs and replacements shall be in
quality and class at least equal to the original work. On default of the Tenant
in making such repairs or replacements, or if Tenant is not maintaining the
Premises in a first class manner Landlord may, but shall not be required to,
make such repairs and replacements on, or maintain, Tenant's account and the
expense thereof shall constitute and be collectible as additional rent. The
Demised Premises shall otherwise be maintained in (i) a first-class condition
and (ii) in a manner comparable to the condition in which business at the Center
are being maintained as of the date of this Lease.
Tenant shall, at Tenant's sole cost and expense, promptly comply with all
statutes, ordinances, rules, orders, regulations and requirements of all county,
municipal, state, federal or other applicable governmental authorities now in
force, or which may hereafter be in force, pertaining to the Demised Premises
and its use. Tenant shall, at Tenant's sole cost and expense, also comply with
all rules, orders and regulations of the Board of Fire Underwriters or any
similar body in lieu thereof for the prevention
Initial by Landlord -12- Initial by Tenant
<PAGE>
of fire. Tenant shall be responsible for its pro rata share of all common area
costs for the Center and all other costs and charges imposed upon the Demised
Premises, pursuant to the terms of Article XIII of this Lease.
Notwithstanding the foregoing, if Landlord elects to make repairs and
replacements as provided above in this ARTICLE IX. MAINTENANCE OF PREMISES, or
if Tenant fails to comply with Tenant's obligations set forth in this ARTICLE X.
INSURANCE, ARTICLE XII. REAL ESTATE TAXES, SPECIAL ASSESSMENTS AND USE TAXES, or
ARTICLE XIII. NET LEASE EXPENSES, and Landlord becomes responsible for the
payment of any costs for which Tenant is responsible as a result of Tenant's
failure to perform such obligations, or if OPUS SOUTHWEST CORPORATION ("Opus")
terminates the COMMON AREA MAINTENANCE AGREEMENT ("CAMA") and no one, including
Tenant, performs the duties and obligations otherwise required to be performed
by Opus and Landlord performs and/or pays for the performance of duties and
obligations otherwise required by Opus in order to protect Landlord's interest
in the Demised Premises, then Landlord shall be entitled to recover from Tenant,
as additional rent, all such costs and expenses reasonably incurred by Landlord
together with a sum equal to the ten percent (10%) of the payments made by
Landlord as consideration for management, administrative and bookkeeping
expenses expended by Landlord in connection with such payments made by Landlord.
ARTICLE X. INSURANCE.
Tenant shall, solely at Tenant's expense, obtain and keep in force during the
term of this Lease a policy of commercial general liability insurance insuring
Tenant, Landlord and any mortgagee of Landlord, against any liability arising
out of the ownership, use, occupancy or maintenance of the Demised Premises and
all areas appurtenant thereto. Such insurance shall be in the amount of not less
than Two Million Dollars ($2,000,000) for injury or death of one person in any
one accident or occurrence and in the amount of not less than Five Million
Dollars ($5,000,000) for injury or death of more than one person in any one
accident or occurrence. Such insurance shall further insure Tenant, Landlord and
any mortgagee of Landlord against liability for property damage of at least Two
Hundred Fifty Thousand Dollars ($250,000). The limit of any such insurance shall
not, however, limit the liability of Tenant hereunder. Tenant may provide this
insurance under a blanket policy, provided that said insurance shall have a
protective liability endorsement for Landlord and its mortgagee, if any,
attached thereto and provided that coverage for Tenant's obligations is
available to the same extent and in the same amounts required hereunder. If
Tenant shall fail to procure and maintain
Initial by Landlord Initial by Tenant
-13-
<PAGE>
said insurance, Landlord may, but shall not be required to, procure and maintain
same, but at the expense of Tenant. The insurance required hereunder shall be in
companies rated A:XII or better in "Best's Key Rating Guide." Tenant shall
deliver to Landlord, prior to its right of entry, copies of policies of
liability insurance required herein or certificates evidencing the existence and
amounts of such insurance with loss payable clauses satisfactory to Landlord. No
policy shall be canceled or subject to reduction of coverage. All such policies
shall be written as primary policies not contributing with and not in excess of
coverage which Landlord may carry. Landlord shall have the right to require
Tenant to increase the amount of coverage at five (5) year intervals beginning
with the expiration of the third year of the term, provided that such required
coverage shall not exceed commercially reasonable amounts for similar operations
in the vicinity of the Demised Premises.
During the term of this Lease, Tenant shall, at its own expense, procure a
policy or policies of insurance insuring the Demised Premises against the perils
insured against by the standard fire and extended coverage insurance, including
glass breakage, vandalism and signage coverage, in use in the state in which the
Demised Premises are located in an amount equal to one hundred percent (100%) of
the replacement value of the improvements on the Demised Premises, exclusive of
foundations and excavations, as such value may be or appear from time to time.
Tenant shall, at its own cost and expense, procure a policy of insurance
providing coverage for twelve (12) months rental and business interruption. Said
insurance policies obtained by Tenant shall contain loss payable clauses
providing that all proceeds therefrom shall be paid to Tenant and/or Leasehold
Tenant's Mortgagee. The standard fire and extended coverage insurance policy or
certificate thereof shall be delivered to Landlord together with proof of
payment of premium therefor. During the term of this Lease, Tenant shall deliver
to Landlord renewals of such insurance policies or a certificate thereof with
proof of payment of premium at least thirty (30) days prior to the expiration
date of such policy. Each of said insurance policies obtained by Tenant shall
contain a provision that coverage shall not be canceled without thirty (30) days
prior written notice from the respective insurance company to Landlord. If the
Landlord's Lender requires insurance to be paid by the Lender and impounded,
Tenant agrees to reimburse Landlord for Tenant's obligations on a monthly basis
or other periodic basis as directed by Lender upon notice by Landlord to Tenant
of reasonable proof of payment thereof.
Initial by Landlord -14- Initial by Tenant
<PAGE>
Additionally, if required by any Lender of Landlord as a condition to making a
loan secured by a mortgage or deed of trust encumbering the Demised Premises,
Tenant, at Tenant's sole cost and expense, shall obtain and keep in force during
the term of this Lease a policy of flood and earthquake insurance insuring the
respective interests of Tenant' Landlord and such Lender in the Demised
Premises. Provided, however, Tenant's liability for payment of the premium
corresponding to such earthquake and flood coverage shall be limited to Five
Thousand Dollars ($5,000.00) per coverage year.
Notwithstanding the foregoing with regard to standard fire, earthquake, flood
and extended coverage insurance, Tenant agrees to provide Landlord and any
mortgagee of Landlord, that requires such certificate as a condition to making a
loan to Landlord, with Certificates of Insurance naming Landlord and any
mortgagee of Landlord as Additional Insureds under said insurance policies as
their interests may appear. Further, Tenant agrees to provide a Loss Payable
Endorsement to said insurance policies to any mortgagee of Landlord, that
requires such endorsement as a condition to making a loan to Landlord and/or
increase the amount of said insurance if required by any mortgagee of Landlord,
or otherwise comply with the requirements of any mortgagee of Landlord in
connection with said insurance. Provided, however, all proceeds from fire and
extended coverage insurance shall be paid to Tenant or made available to Tenant
or Tenant's construction contractor through escrow for the purpose of, and shall
be used for, Tenant's reconstruction obligations under this Lease, subject to
approval of said escrow procedure by the insurance company and/or any such
mortgagee.
Tenant hereby waives any right that it may have against Landlord on account of
any loss or damage to the Demised Premises, any improvements thereon, and/or any
of Tenant's trade fixtures, equipment, inventory and personal property located
therein or thereon, to the extent such loss or damage is insurable under the
property damage insurance required to be carried by Tenant under this Lease. In
addition, Tenant agrees to have its insurance companies Issuing property damage
insurance waive any rights of subrogation that such company may have against
Landlord.
Initial by Landlord Initial by Tenant
-15-
<PAGE>
ARTICLE XI. EMINENT DOMAIN.
In the event any part of the Demised Premises shall be taken by any authority
under the power of eminent domain, then the term of this Lease shall cease as to
the part so taken on the day that possession of that part shall be required for
any public purpose, and the rent shall be paid to that day, and from that day
the monthly rental herein reserved shall be reduced in proportion to the amount
of the Demised Premises taken. Provided, however, that in the event less than
the whole of the Demised Premises be so taken and by virtue of such taking the
remaining portion of the Demised Premises, in the reasonable opinion of Tenant,
shall in fact no longer be useful practicably for purposes for which the same
had been used by or under the authority of Tenant, then, upon written notice to
be given within sixty (60) days after such taking, Tenant shall have the option,
to cancel this Lease and declare the same null and void. The damages awarded as
compensation for the diminution in value of the Landlord's interest, and any
"bonus value" of this Lease, shall be awarded to Landlord. All awards made for
Tenant's loss of business and loss to Tenant of its building or other property
or its leasehold interest for the remainder of the term and any remaining
extension term(s), or portion thereof shall belong to Tenant.
ARTICLE XII. REAL ESTATE TAXES, SPECIAL ASSESSMENTS AND USE TAXES.
During the entire term of this Lease, Tenant agrees and covenants to fully pay
and discharge all ad valorem, special assessments and any other taxes and
assessments (including gross rentals and receipts taxes) levied, assessed or
becoming due and payable against or applicable to this Lease, the Demised
Premises or any part thereof and to pay any and all taxes or assessments
applicable to or levied, assessed or payable by reason of Tenant's use or
occupancy of the Demised Premises. During the first and last year of this Lease,
Tenant shall only be obligated to pay the prorated portion of the ad valorem
taxes and special assessments based upon the portion of the tax year during
which the term occurred. If the Landlord's lender requires such taxes and/or
assessments corresponding to the Demised Premises to be paid by such Lender and
impounded, Tenant agrees to reimburse Landlord for Tenant's obligations on a
monthly basis or other periodic basis as directed by Lender upon notice by
Landlord to Tenant of reasonable proof of the payment thereof.
Initial by Landlord -16- Initial by Tenant
<PAGE>
Tenant acknowledges that the Demised Premises are not currently separately
assessed from the remainder of the Center for real estate tax purposes, and
Tenant's obligation to pay for such taxes and assessments attributable and/or
allocable to the Demised Premises shall not be affected by such fact. Tenant
shall, however, at its sole cost and expense, cause the Demised Premises to be
assessed as a separate tax parcel as soon as reasonably possible after the date
hereof. Tenant shall at all times keep the Demised Premises free and clear of
all liens, penalties, fines and interest resulting from any taxes and
assessments assessed against or attributable to the Demised Premises or Tenant's
use thereof, including without limitation, the failure of Tenant to pay any such
taxes and assessments. Tenant shall indemnify, defend, protect and hold Landlord
and the Demised Premises harmless from and against any and all liens, claims,
liabilities, damages, costs and expenses, including court costs and attorneys'
fees, resulting from Tenant's breach of any of the foregoing provisions of this
Article XII, which indemnification shall survive the expiration of early
termination of this Lease.
ARTICLE XIII. NET LEASE EXPENSES
Tenant shall, throughout the term of the Lease, perform all of Christian J.
Knox's obligations and pay its pro-rata share of all common area costs as set
forth in the COMMON AREA MAINTENANCE AGREEMENT dated March 31, 1997, between
Opus and CHRISTIAN J. KNOX, a copy of which is attached hereto as Exhibit D and
incorporated herein by reference.
Tenant acknowledges and agrees that this Lease is a "triple-net" lease and
Tenant shall be responsible, at its sole cost and expense, for paying all costs,
expenses and charges which may be imposed or assessed against the Demised
Premises in connection with the use, operation, maintenance, repair and
occupancy thereof, including, without limitation, all taxes and assessments and
insurance costs as set forth in Articles XI and X hereof, respectively, all
common area costs assessed against the Demised Premises pursuant to the CAMA (as
described above) and all other costs and expenses that may be assessed or
charged under any Encumbrances. In addition, Tenant covenants to perform all
maintenance, construction, indemnification and other obligations(including
making capital improvements), at its sole cost and expense, which are currently
imposed or may in the future be imposed upon or be the responsibility of the
Demised Premises or Landlord under the CAMA and/or the Encumbrances, including,
without limitation, as a result of any failure of Opus or any other owner or
occupant of the Center to perform any of its obligations
Initial by Landlord Initial by Tenant
-17-
<PAGE>
thereunder. In addition, Tenant shall be responsible, at its sole cost and
expense, for ensuring compliance with all covenants, conditions, restrictions
and other Encumbrances affecting the Demised Premises including ensuring the
availability of pedestrian and vehicular ingress and egress to and from the
Demised Premises and parking for the Demised Premises as required or necessary
for Tenant's operation of its restaurant on the Demised Premises.
Tenant shall indemnify, defend, protect and hold Landlord and the Demised
Premises harmless from any against any and all claims, damages, liabilities,
losses, costs and expenses, including, without limitation, court costs and
attorneys' fees, arising or resulting from Tenant's breach of the foregoing
provisions of this Article XIII. Such indemnification shall survive the
expiration or earlier termination of this Lease.
ARTICLE XIV. DEFAULT OR DESERTION BY TENANT.
In the event (i) default be made due to non-payment on the date due of any
rents, or any item of additional rent, or any part thereof which default is not
cured within ten (10) days after written notice thereof; or (ii)Tenant shall
assign this Lease or sublet the Demised Premises, except as hereinabove provided
for; or (iii) default be made in the performance of any of the other terms,
covenants and conditions in this Lease to be kept or performed by Tenant; or
(iv) Tenant shall fail to comply with any of the statutes, ordinances, rules,
orders, regulations and requirements of the federal, state and city governments,
or of any and all their departments and bureaus applicable to the Demised
Premises or as hereafter established, as herein provided and if any default
specified in clause (ii) through (iv) inclusive of this Article shall continue
for a period of thirty (30) days after written notice and demand, unless Tenant,
in good faith, commences the curing of such default within said thirty (30) days
and cannot, with reasonable diligence, cure such default within said period, in
which event Tenant shall have a reasonable time to do so provided, however,
Tenant shall not have any such additional time beyond such 30-day period to cure
any failure by Tenant to perform Tenant's continuous operating covenants in
Article II hereof; or (v) at any time there shall be filed by or against Tenant,
in any court of competent jurisdiction, a petition in bankruptcy or insolvency
or for reorganization or for the appointment of a receiver or trustee of all or
a portion of Tenant's property, or if Tenant makes an assignment for the benefit
of creditors or takes advantage of any insolvency act, and within thirty (30)
days thereof Tenant fails to secure a discharge thereof, then, Tenant shall be
in default under this Lease and in addition to all the rights and remedies
available
Initial by Landlord Initial by Tenant
-18-
<PAGE>
to Landlord at law or in equity, Landlord shall have the following rights and
remedies:
(A) The rights and remedies provided by California Civil Code Section 1951.2,
including, but not limited to terminate Tenant's right to possession of the
Demised Premises and to recover the worth at the time of award of the amount by
which the unpaid rent and all other charges payable by Tenant under this Lease
for the balance of the term after the time of award, exceed the amount of rental
loss for the same period that the Tenant proves could be reasonably avoided, as
computed pursuant to subsection (b) of said Section 1951.2.
(B) The rights and remedies provided by California Civil Code Section 1951.4,
which allows Landlord to continue this lease in effect and to enforce all of its
rights and remedies under this Lease, including the right to recover rent as it
becomes due, for so long as Landlord does not terminate Tenant's right to
possession. Acts of maintenance or preservation, efforts to relet the Demised
Premises or the appointment of a receiver upon Landlord's initiative to protect
its interest under this Lease shall not constitute a termination of Tenant's
right to possession. If Landlord exercises its rights under California Civil
Code Section 1951.4, Landlord may from time to time sublet the Demised Premises
or any part thereof for such term or terms (which may extend beyond the term)
and at such rent and upon such other terms as Landlord in its sole discretion
may deem advisable, with the right to make alterations and repairs to the
Demised Premises. Upon each subletting, Tenant shall be immediately liable for
payment to Landlord of, in addition to rent and all other charges payable by
Tenant hereunder, the cost of such subletting and such alterations and repairs
incurred by Landlord and the amount, if any, by which the rent and all other
charges payable by Tenant hereunder for the period of such subletting (to the
extent such period does not exceed the term) exceed the amount to be paid as
rent and all other charges payable by Tenant for the Demised Premises for such
period pursuant to such subletting. No taking possession of the Demised Premises
by Landlord shall be construed as an election on Landlord's part to terminate
this Lease or Tenant's right to possession unless a written notice of such
intention is given to Tenant. No action taken by Landlord pursuant to this
subsection shall be deemed a waiver of any default by Tenant and, notwith-
standing any such subletting without termination, Landlord may at any time
thereafter elect to terminate this Lease for such previous default.
Initial by Landlord -19- Initial by Tenant
<PAGE>
(C) For purposes of this Article XIV, "worth at the time of award" for purposes
of determining the unpaid rent due pursuant to California Civil Code Section
1951.2(3) shall be computed by discounting such amount at the discount rate of
the Federal Reserve Bank of San Francisco at the time of the award plus one
percent (1%); and rent and all other charges payable by Tenant under this Lease
with respect to each month shall be deemed to be a monthly rental arrived at by
adding (i) one twelfth (1/12th) of the Fixed Minimum Rent, plus (ii) one twelfth
(1/12th) of the other charges payable by Tenant under this Lease paid or payable
by Tenant hereunder during the twelve (12) consecutive month period prior to the
month in which Tenant's default occurs (or one twelfth (1/12) of the annualized
amount of the other charges payable by Tenant under this Lease paid or payable
by Tenant with respect to the period between the commencement date and the last
day of the calendar month prior to the month in which such default occurs, if
such default occurs during the first twelve (12) calendar months of the term).
(D) The right to have a receiver appointed for Tenant upon application by
Landlord to take possession of the Demised Premises and to apply any rental
collected from the Demised Premises and to exercise all other rights and
remedies granted to Landlord pursuant to subsection (B) hereof.
Any mention in this Lease of any particular remedy shall not preclude Landlord
from any other remedy in law or in equity.
Each day of any continuing default or breach of the terms, covenant and
agreements herein shall be a separate and distinct default or breach, and no
waiver of any breach or default of any of said terms, covenants or agreements
shall operate as a waiver of any subsequent breach or default of the same or any
other term, covenant or agreement herein.
Tenant may request from time to time Landlord to provide Tenant with a written
certification by Landlord stating whether (i) Tenant is or is not in default
under the Lease (and if Tenant is in default, the specific reasons therefor),
(ii) the Lease is in full force and effect (and if not, the reasons therefor),
(iii) the Landlord is in full compliance with the terms of the Lease (and if
not, the reasons therefor). Said certificate shall be tendered to Tenant by
Landlord in writing within fifteen (15) days after its receipt of such a request
by Tenant.
Initial by Landlord Initial by Tenant
-20-
<PAGE>
ARTICLE XV. DEFAULT OF LANDLORD.
If Landlord defaults in compliance with any covenant on Landlord's part herein
contained to be performed, Tenant shall give Landlord thirty (30) days notice to
cure the default. If Landlord, as of the expiration date of the notice, has
neither (i) cured the default, nor (ii) if the default cannot be reasonably
remedied as of such date, engaged in good-faith efforts to cure the default or
given Tenant adequate security for the remedy thereof, then Tenant's sole and
exclusive remedy shall be the right to recover damages resulting from such
breach, without any right of offset or abatement or any right to terminate this
Lease.
Landlord may request from time to time Tenant to provide Landlord with a written
certification by Tenant stating whether (i) Landlord is or is not in default
under the Lease (and if Landlord is in default, the specific reasons therefor),
(ii) the Lease is in full force and effect 'and if not, the reasons therefor),
or (iii) the Tenant is in full compliance with the terms of the Lease (and if
not, the reasons therefor). Said certificate shall be tendered to Landlord by
Tenant in writing within fifteen (15) days after its receipt of such a request
by Landlord.
ARTICLE XVI. INSOLVENCY OF TENANT.
It is agreed between the parties hereto that if Tenant shall be declared
insolvent or adjudicated bankrupt by a court of competent jurisdiction, or if
Tenant shall make an assignment for the benefit of creditors or otherwise, or if
Tenant's leasehold estate herein created shall be sold under execution, or if a
Trustee in Bankruptcy or a Receiver shall be appointed for Tenant, whether under
the operation of the federal or of the state statutes, then and in any of said
cases, the Landlord, transferee, received, trustee or any other person or
persons, may terminate this Lease and immediately retake possession of the
Demised Premises.
ARTICLE XVII. NO OBSTRUCTION OF VISIBILITY.
Landlord shall not construct any building or structure or change any parking
areas or landscaping in front of the restaurant constructed by Tenant on the
Demised Premises, which would substantially reduce the visibility of, or access
to such restaurant or reduce the parking stalls available to the customers of
the restaurant on the effect date of this Lease.
Initial by Landlord Initial by Tenant
-21-
<PAGE>
ARTICLE XVIII. PROPERTY LEFT ON PREMISES.
Upon the expiration or termination of this Leash for any reason, or if the
Demised Premises should be vacated at any time or abandoned by Tenant, it is
hereby understood and agreed that the building and fixture improvements to be
constructed upon the Demised Premises shall thereafter become the property of
Landlord without the necessity of further transfer documents to be executed by
either party hereto. However, until such event, said building and improvements
shall remain the property of Tenant. Further, upon the expiration of this Lease,
or if the Demised Premises should be vacated at any time or abandoned by Tenant,
or this Lease should terminate for any cause and at the time of such expiration,
vacation, abandonment or termination Tenant, or Tenant's agents or any other
person, should leave any property of any kind or character in or on the Demised
Premises, the fact of leaving such property on or in the Demised Premises shall
be conclusive evidence of intent by Tenant, Tenant's agents or such other
persons, to abandon such property, and such leaving shall constitute abandonment
of the property. It is understood and agreed by and between the parties hereto
that none of Landlord's servants, agents or employees have or shall have the
actual or apparent authority to waive any portion of this Article, and Tenant
shall have no right to leave any such property on the Demised Premises without
the written consent of Landlord. Provided, however, upon the termination of this
Lease, or the Franchise Agreement, Franchiser shall have thirty (30) days (after
termination of either agreement) to enter the Demised Premises and remove
signage and all items bearing any of Franchiser's marks, without any obligation
to compensate Landlord except for any damages caused by the removal of such
signage or marks but, such right of Franchiser to remove such signage or marks
during the term of this Lease shall not relieve Tenant of its obligation to
continuously operate an Applebee's restaurant or Comparable Restaurant at the
Demised Premises pursuant to Article II hereof.
ARTICLE XIX. TENANT'S PROPERTY.
Tenant shall install, maintain and replace as necessary the trade fixtures and
equipment required to operate the Demised Premises as an Applebee's Neighborhood
Grill & Bar (or Comparable Restaurant, if applicable) as provided in Article II
above, or such other use as may be approved by Landlord in Landlord's sole and
absolute discretion.
Initial by Landlord -22- Initial by Tenant
<PAGE>
It is understood and agreed that trade fixtures or equipment owned by Tenant
which may, from time to time, be placed in or on the Demised Premises by Tenant,
are the property of Tenant, who shall have the right to remove a part of or all
of such property at any time that Tenant is not in default under this Lease, so
long as Tenant immediately replaces such trade fixtures and equipment as may be
necessary in order to continuously operate its restaurant at the Demised
Premises as required pursuant to Article II.
ARTICLE XX. SURRENDER OF PREMISES.
It is understood and agreed that Tenant will, at the termination of this Lease,
or any extension hereof, if any, peacefully quit, surrender and deliver up to
Landlord, its successors or assigns, the Demised Premises, in accordance with
Article XVIII. Tenant agrees to surrender the premises in good repair, properly
maintained, and broom clean.
ARTICLE XXI. NOTICES.
All notices, requests, demands, approvals and consents required or desired to be
given hereunder shall be in writing and may be given by personal delivery or by
certified mail, return receipt requested, postage prepaid, and if given by
Tenant to Landlord shall be addressed to Landlord and if given by Landlord to
Tenant shall be addressed to Tenant at the respective addresses as provided
below or at such other place or places as Landlord or Tenant may from time to
time designate in writing:
If to Landlord: West Coast Realty Investors, Inc.
5933 West Century Boulevard Suite 900
Los Angeles, California 90045-5454
Attention: W. Thomas Maudlin, Jr.
Facsimile No.: (310) 337-9895
Telephone No.: (310) 337-9700
With a copy to:
Allen, Matkins, Leck, Gamble & Mallory LLP
515 South Figueroa Street, 7th Floor
Los Angeles, California 90071-3398
Attention: Michael L. Matkins, Esq.
Facsimile No.: (213) 620-8816
Telephone No.: (213) 622-5555
Initial by Landlord Initial by Tenant
-23-
<PAGE>
If to Tenant: Christian J. Knox & Associates, Inc.
Attn: Christian J. Knox, President
633 East Victor Road
Lodi, CA 95240
Facsimile No.: (209) 367-5401
Telephone No.: (209) 367-7516
With a copy to:
Richard S. Calone, Inc.
Attention: William F. Cook, Esq.
1810 Grand Canal Boulevard Suite 6
Stockton, CA 95207
Facsimile No.: (209) 952-8751
Telephone No.: (209) 952-4545
If to AII: Mr. Robert T. Steinkamp, Esq.
General Counsel
Applebee's International, Inc.
4551 West 107th Street
Overland Park, Kansas 66207
If at the time Landlord gives any notice hereunder to Tenant the leasehold
estate created hereby is encumbered by the lien of any mortgage and Landlord
shall have been furnished with the name and address of the owner and holder of
said mortgage and the note, debt and claim thereby secured, Landlord shall, at
the time said notice is given to Tenant, mail a copy thereof by certified mail,
return receipt requested, postage prepaid, addressed to said owner and holder at
said address or at such other place or places said owner and holder may from
time to time designate in writing to Landlord.
All notices given by certified mail shall be deemed duly given as of the date of
receipt or rejection.
ARTICLE XXII. RENTAL CHECKS.
All checks for rentals due under this Lease shall be made payable to Landlord or
Landlord's designated agent and mailed to its mailing address as previously
provided Tenant, until such time as Landlord advises Tenant in writing as to a
different mailing address.
Initial by Landlord -24- Initial by Tenant
<PAGE>
ARTICLE XXIII. WAIVERS.
No waiver of any condition or covenant of this Lease by either party hereto
shall be deemed to imply or constitute a further waiver by such party of any
other condition or covenant of said Lease.
ARTICLE XXIV. RIGHTS AND REMEDIES.
The rights and remedies hereby created are cumulative, and the use of one remedy
shall not be taken to exclude or waive the right to the use of another.
ARTICLE XXV. MONTH-TO-MONTH.
In the event Tenant remains in possession of the Demised Premises after the
expiration of this Lease , Tenant shall be deemed to be occupying the Demised
Premises as a tenant from month to month at a minimum rent equal to one hundred
fifty percent (150%) of the minimum rent in effect at the expiration of this
Lease, subject to all of the conditions, provisions and obligations of this
Lease insofar as the same are applicable to a month-to-month tenancy, including,
but not limited to Tenant's obligation with respect to the payment of additional
rent.
ARTICLE XXVI. RIGHT OF ENTRY.
Landlord, or Landlord's agent, may enter the Demised Premises at reasonable
hours, upon reasonable notice to Tenant, to examine the same, show the Demised
Premises to a prospective purchaser or mortgagee, and to do anything Landlord is
permitted or required to do under this Lease. Provided, however such right of
entry by Landlord shall not be exercised in a manner that interferes
unreasonably with Tenant's use of the Demised Premises as provided in this
Lease.
ARTICLE XXVII. SUBORDINATION TO MORTGAGE LIEN.
Landlord reserves the right to subject and subordinate this Lease at all times
to the lien of any mortgage or deed of trust placed upon Landlord's interest in
the Demised Premises, whether before or after the date of this Lease. Tenant
shall execute and deliver, upon demand of Landlord, such further instrument
subordinating this Lease to the lien of any such mortgage as Landlord may
reasonably request. Provided, however, that the holder of any such mortgage or
deed of trust shall execute a NON-DISTURBANCE AND ATTORNMENT AGREEMENT, in form
reasonably
Initial by Landlord Initial by Tenant
-25-
<PAGE>
acceptable to Tenant's attorney and Tenant's Leasehold Mortgagee, agreeing to
the validity and continuance of this Lease in the event of foreclosure of the
Landlord's interest in the Demised Premises or in the event of conveyance of
such interest in lieu of foreclosure, so long as Tenant shall not be in default
hereunder. Landlord shall pay all Tenant's expenses, including attorney fees,
incurred in connection with any subordination pursuant to this Article, not to
exceed Five Hundred Dollars ($500.00).
ARTICLE XXVIII. TENANT'S AND LANDLORD'S
REPRESENTATIONS AND INDEMNITIES.
A. Tenant agrees to indemnify and defend Landlord and its officers, agents,
employees, licensees, contractors, invitees, legal representatives, successors
and assigns (each of whom is an "Indemnified Party") against and save Landlord
harmless from and against any and all damages, losses, liabilities, obligations,
penalties, claims, judgments or expenses, of every kind and nature whatsoever,
including without limitation reasonable attorney's fees and costs, incurred in
connection with or arising from: (i) any default by Tenant in the observance of
performance of any of the terms, covenants or conditions of this Lease on
Tenant's part to be performed, or (ii) the use or occupancy of the Demised
Premises by Tenant or any person or entity claiming through or under Tenant, or
(iii) the condition of the Demised Premises or any occurrence on the Demised
Premises except as caused by the negligence, gross negligence or willful
misconduct of Landlord, or (iv) any acts, omissions or negligence of Tenant or
of the contractors, agents, servants. employees, visitors or licensees of
Tenant, in, on or about the Demised Premises, or (v) the construction of any
improvements on the Demised Premises by Tenant, its agents or contractors.
Landlord shall give to Tenant prompt notice of any obligation of Tenant arising
under this Paragraph. Tenant shall have the right and obligation to defend,
settle or otherwise compromise any claim. Any claim for indemnity under this
Article shall be barred if not made by Landlord within one year after the date
Landlord should reasonably have knowledge of the factual basis of such claim.
Tenant's obligations under this paragraph shall survive of the termination of
this Lease.
B. Landlord warrants that Landlord, upon closing, has a valid fee simple
interest in the Demised Premises and covenants that Tenant, upon payment of the
rentals and performance of its covenants hereunder, shall and may peacefully
hold the Demised Premises during the term hereof, including any extensions.
Initial by Landlord Initial by Tenant
-26-
<PAGE>
C. Landlord covenants and agrees to indemnify, defend and hold harmless Tenant
and its officers, agents, employees, licensees, contractors, invitees, legal
representatives, successors and assigns (each of whom. is sometimes referred to
herein as an "Indemnified Party") against and from any and all damages, losses,
liabilities, obligations, penalties, claims, judgments or expenses, of every
kind and nature whatsoever, including, without limitation, reasonable attorneys'
fees and costs, which may be at any time be incurred by or asserted against any
Indemnified Party, arising from (i) any default by Landlord in the observance or
performance of any of the terms, covenants or conditions of this Lease on
Landlord's part to be performed, or (ii) the negligence, gross negligence or
willful misconduct of Landlord or Landlord's officers, partners, agents,
employees, invitees, licensees or contractors on or about the Demised Premises,
but not to the extent covered or required to be covered by Tenant's insurance.
Tenant shall give Landlord prompt notice of any obligations of Landlord arising
under this Paragraph, and Landlord shall have the right and obligation to
defend, settle or otherwise compromise any such claim. Any claim for indemnity
under this Article shall be barred if not made by Tenant within one year after
the date Tenant shall reasonably have knowledge of the factual basis of such
claim. Landlord's obligations under this Paragraph shall survive the termination
of this Lease.
D. (i) Tenant represents, warrants and covenants (A) that it will not use,
generate, transport, handle or store in, on or about the Demised Premises any
Hazardous Materials without the prior written consent of Landlord, which consent
may be given or withheld in Landlord's sole and absolute discretion; provided,
however, that Tenant shall have the right to use and store in the Demised
Premises small amounts of Hazardous Materials, such as normal janitorial
cleaning and maintenance supplies, that are necessary for Tenant to conduct its
business activities on the Demised Premises, provided that Tenant shall comply
with all applicable federal, state and local laws, rules, regulations, policies
and authorities relating to the storage, use, disposal or cleanup of such
Hazardous Materials, including, but not limited to, the obtaining of proper
permits, and in no event shall such Hazardous Materials be used, handled or
stored in any manner which is known or suspected to pose a hazard to the health
and safety of Tenant's employees, visitors, contractors, licensees or invitees
or to the occupants of any adjacent property; and provided further,
Initial by Landlord Initial by Tenant
-27-
<PAGE>
that in no event shall such Hazardous Materials be used, stored or permitted to
accumulate on the Demised Premises in amounts in excess of those required in the
ordinary course of Tenant's business, and (B) that it will not dispose of any
Hazardous Materials in, on or about the Demised Premises under any
circumstances.
(ii) Tenant shall immediately notify Landlord of any inquiry, test,
investigation or enforcement proceeding by or against Tenant, Landlord or the
Demised Premises concerning any Hazardous Materials. Tenant acknowledges that
Landlord, as the owner of the Demised Premises, shall have the right, at its
election, in its own name or as Tenant's agent, to negotiate, defend, approve
and appeal, at Tenant's expense, any action taken or order issued with regard to
any Hazardous Materials by an applicable governmental authority.
(iii) In the event of the presence, release, disposal, use, storage and/or
contamination of or pertaining to Hazardous Materials in, on, under or about the
Demised Premises (including the soil, surface and/or ground water) caused by
Tenant, its agents, employees, contractors or invitees, and/or resulting from
any acts from third parties or migration from other properties during the term
of this Lease, and/or resulting from the existing Hazardous Materials in, on,
under or about the Demised Premises as of the date hereof ("Hazardous Material
Condition") (A) requiring clean-up or remediation under Environmental Laws, or
(B) at levels which are unacceptable to Landlord, in Landlord's reasonable
judgment, then Tenant, at Tenant's sole cost and expense, shall remove,
remediate and/or clean-up such Hazardous Material Condition as required under
such Environmental Laws, and/or reasonably required by Landlord. Tenant further
agrees to indemnify, defend and hold Landlord harmless from and against any and
all claims, liabilities, suits, causes o, actions, costs, expenses and fees,
including attorneys' fees and court costs, arising out of or in connection with
any such Hazardous Material Condition and any remediation, clean-up work,
inquiry or enforcement proceedings in connection therewith. Such indemnity shall
survive the expiration or earlier termination of the Lease.
(iv) Notwithstanding any other right of entry granted to Landlord under this
Lease, and subject to the restrictions set forth in Article XXVI regarding
reasonable notice and unreasonable interference with Tenant's use, Landlord
shall have the right to enter the Demised Premises or to have consultants enter
the Demised Premises throughout the term of this Lease for the purpose of (A)
determining whether the Demised Premises are in conformity with federal, state
and local statutes, regulations,
Initial by Landlord Initial by Tenant
-28-
<PAGE>
ordinances, and policies, including those pertaining to the environmental
condition of the Demised Premises, (B) conducting an environmental audit or
investigation of the Demised Premises for purposes of sale, transfer, conveyance
or financing, (C) determining whether Tenant has complied with this Paragraph
XXVIII.D, and (D) determining the corrective measures, if any, required of
Tenant to ensure the safe use, storage and disposal of Hazardous Materials or to
remove Hazardous Materials. Tenant agrees to provide access and reasonable
assistance foe such inspections. Such inspections may include, but are not
limited to, entering the Demised Premises or adjacent property with drill rigs
or other machinery for the purpose of obtaining laboratory samples. Landlord
shall not be limited in the number of such inspections during the term of this
Lease. To the extent such inspections disclose the presence of Hazardous
Materials used, stored or disposed of by Tenant or its agents, employees,
contractors or invitees, Tenant shall reimburse Landlord for the cost of such
inspections within ten (10) days of receipt of a written statement thereof. If
such consultants determine that the Demised Premises are contaminated with
Hazardous Materials used, stored or disposed of by Tenant or its agents,
employees contractors or invitees, Tenant shall, in a timely manner, at its
expense, remove such Hazardous Materials or otherwise comply with the
recommendations of such consultants to the reasonable satisfaction of any
applicable governmental agencies. The right granted to Landlord herein to
inspect the Demised Premises shall not create a duty on Landlord's party to
inspect the Demised Premises, or liability of landlord for Tenant's use, storage
or disposal of Hazardous Materials, it being understood that Tenant shall be
solely responsible for all liability in connection therewith.
(v) Tenant shall surrender the Demised Premises to Landlord upon the expiration
or earlier termination of this Lease, free of debris, waste and Hazardous
Materials used, stored or disposed of by Tenant or its agents, employees,
contractors or invitees, and in a condition which complies with all governmental
statutes, ordinances, regulations and policies.
(vi) Tenant's obligations under this Paragraph XXVII.D shall survive termination
of this Lease.
Initial by Landlord Initial by Tenant
-29-
<PAGE>
(vii) As used herein, the term "Hazardous Material(s)" shall mean any substance
or material which has been determined by any state, federal or local
governmental authority to be capable of posing a risk of injury to health,
safety or property, including all of those materials and substances designated
as hazardous or toxic by the city in which the Demised Premises are located, the
U. S. Environmental Protection Agency, the Consumer Product Safety Commission,
the Food and Drug Administration, the California Water Resources Control Board,
the Regional Water Quality Control Board, San Francisco Bay Region, the
California Air Resources Board, CAL/OSHA Standards Board, Division of
Occupational Safety and Health, the California Department of Food and
Agriculture, the California Department of Health Services, and any federal
agencies that have overlapping jurisdiction with such California agencies, or
any other governmental agency now or hereafter authorized to regulate materials
and substances in the environment. Without limiting the generality of the
foregoing, the term "Hazardous Material" shall include all of those materials
and substances defined as "hazardous materials" or "hazardous waste" in Sections
66680 through 66685 of Title 22 of the California Administrative Code, Division
4, Chapter 30, as the same shall be amended from time to time, petroleum,
petroleum-related substances and the by-products, fractions, constituents and
sub-constituents of petroleum or petroleum-related substances, asbestos, and any
other materials requiring remediation now or in the future under federal, state
or local statutes, ordinances, regulations or policies.
ARTICLE XXIX. PARTIAL INVALIDITY.
In the event any clause or provision of this Lease shall be invalid or void for
any reason,-other than the obligation to pay rent, such invalid or void clause
or provision shall not affect the whole of this instrument, but the balance of
the provisions hereof shall remain in full force and effect.
ARTICLE XXX. GOVERNING LAW.
This Lease shall inure to and be binding upon the heirs, administrators,
successors and assigns of the parties hereto and shall be construed under and
governed by the laws of the State of California.
Initial by Landlord Initial by Tenant
-30-
<PAGE>
ARTICLE XXXI. CONSTRUCTION OF LEASE.
Words of any gender used in this Lease shall be held to include any other
gender, and words in the singular number shall be held to include the plural,
when the sentence requires. Wherever used herein, the words "Lessor,"
"Landlord," "Lessee," and "Tenant" shall be deemed to include the heirs,
personal representatives, successors, sublessees and assigns of parties, unless
the context excludes such construction. Each term, condition or provision hereof
has been freely negotiated and shall be equally binding upon Landlord and
Tenant, and no such term, condition or provision shall be construed against
either party hereto solely because such term, condition or provision was
initially drafted or prepared by such party.
ARTICLE XXXII. NO PARTNERSHIP.
Nothing contained herein shall be deemed or construed by the parties hereto, nor
by any third party, as creating a relationship between the parties hereto other
than the relationship of Landlord and Tenant.
ARTICLE XXXIII. NO ACCORD AND SATISFACTION.
No acceptance by Landlord of a lesser sum than the Fixed Minimum Rent,
additional rent or any other charge then due shall be deemed to be other than on
account of the earliest installment of such rent or charge due, nor shall any
endorsement or statement on any check or any letter accompanying any check or
payment as rent or other charge be deemed an accord and satisfaction, and
Landlord may accept such check or payment without prejudice to Landlord's right
to recover the balance of such installment or charge or any other monies owing
by Tenant or pursue any other remedy in this Lease provided.
ARTICLE XXXIV. "AS IS"
Tenant is a sophisticated tenant and developer of real property. Tenant
acknowledges and agrees that he is entering into this Lease based solely upon
Tenant's inspection and investigation of the Demised Premises and all documents
and other matters related to the Demised Premises on an "AS IS" basis. Without
limiting the above, Tenant acknowledges that Landlord has not made any
representations or warranties on which Tenant is or will be relying as to any
matters concerning the Demised Premises, including, but not limited to,
development rights, taxes, assessments, bonds, permissible uses, Covenants,
conditions and restrictions, water or
Initial by Landlord -31- Initial by Tenant
<PAGE>
water rights, topography, utilities, zoning, soil, subsoil, the purposes for
which the Demised Premises are to be used, drainage, hazardous or toxic
substances or materials, environmental or building laws, rules or regulations,
title to the Demised Premises or any other representations or warranties.
ARTICLE XXXV. GUARANTY OF LEASE
As a condition to the effectiveness of this Lease, Christian J. Knox shall
execute and deliver to Landlord a Guaranty of Lease in the form attached as
Exhibit "G" hereto and incorporated herein by reference.
ARTICLE XXXVI. BROKERS.
Mach party warrants to the other that neither of them, nor any of their agents
or representatives, have engaged or contracted with any broker with respect to
the transaction contemplated herein, and that no brokers have been involved with
this Lease. Landlord and Tenant each agree to indemnify and hold the other party
harmless from any and all claims or demands for brokerage fees arising out of
its action.
ARTICLE XXXVII. MEMORANDUM OF LEASE.
Landlord and Tenant shall execute and acknowledge a Memorandum of Lease in the
form attached hereto as Exhibit E and Tenant shall have the right to record the
same in the Official Records of Placer County, California, at Tenant's costs,
including any taxes.
ARTICLE XXXVIII. ATTORNEYS' FEES.
If there is any legal action or proceeding to enforce or interpret any provision
of this Lease or to protect or establish any right or remedy of any party, the
unsuccessful party to such action or proceeding, whether such action or
proceeding is settled or prosecuted to final judgment, shall pay to the
prevailing party as finally determined, all costs and expenses, including
attorneys' fees and costs, incurred by such prevailing party in such action or
proceeding, in enforcing such judgment, and in connection with any appeal from
such judgment. Attorneys' fees and costs incurred in enforcing any judgment or
in connection with any appeal shall be recoverable separately from and in
addition to any other amount included in such judgment. This Article is intended
to be severable from the other provisions of this Lease, and the prevailing
Initial by Landlord Initial by Tenant
-32-
<PAGE>
party's rights under this Article shall not merge into any judgment, and any
judgment shall survive until all such fees and costs have been paid.
ARTICLE XXXIX. OPTION TO EXTEND
So long as Tenant is in compliance with the terms hereof, and that Tenant is not
in default at the time such option is exercised or at the commencement of an
extension term, Tenant shall have the right to extend the term of this Lease for
two (2) additional, consecutive five (5) year periods, the first of which shall
commence as of the day after the last day of the primary term hereof, and the
second of which shall commence as of the day after first extension term. Tenant
shall notify intention to exercise each such option no (18) months prior to the
end of primary term and the first extension term, respectively. The terms,
conditions and obligations of Landlord and Tenant under this Lease shall apply
to each extension term, except as said terms relate to the amount of Fixed
Minimum Rent to be paid. Fixed Minimum Rent for each extension term shall be
that provided in the schedule in Article III of this Lease. This option is
personal to Christian J. Knox & Associates, Inc., dba Applebee's Neighborhood
Grill & Bar, any franchisee of Applebee's International, Inc., to whom this
Lease has been assigned in accordance with Article I, or Applebee's
International, Inc., if this Lease has been assigned to Applebee's
International, Inc., in accordance with Article I.
ARTICLE XXXX. LEASEHOLD FINANCING.
40.1 Mortgage by Tenant.
Tenant may, from time to time, hypothecate, mortgage, pledge or alienate
Tenant's leasehold estate and rights hereunder on the terms and conditions of
this Article XXXX. Tenant may not encumber any interest of Landlord in the
Demised Premises. The holder or holders of any such lien, shall be referred to
herein as "Leasehold Mortgagee." A Leasehold Mortgagee or its assigns may
enforce such lien and acquire title to the leasehold estate in any lawful way
and, pending foreclosure of such lien, the Leasehold Mortgagee may take
possession of and operate the Demised Premises, performing all obligations
performable by Tenant, and upon foreclosure of such lien by power of sale,
judicial foreclosure, or upon acquisition of the leasehold estate by deed in
lieu of foreclosure, the Leasehold Mortgagee may, upon notice to Landlord, sell
and assign the leasehold estate hereby created. Notwithstanding anything herein
contained to the contrary, the Leasehold
Initial by Landlord Initial by Tenant
-33-
<PAGE>
Mortgagee or any person or entity acquiring such leasehold estate at the
foreclosure proceeding, shall be liable to perform the obligations imposed on
Tenant by this Lease only during the period such person has ownership of said
leasehold and/or possession of the Demised Premises. When a Leasehold Mortgagee
acquires title to the leasehold estate, the Leasehold Mortgagee shall expressly
assume in writing all the obligations of Tenant under the Lease and continue to
be liable until the leasehold estate is sold or assigned to another who in turn
expressly assumes in writing the obligations of Tenant under the Lease.
40.2 Notice To and Rights of Leasehold Mortgagees.
(A) When giving notice to Tenant with respect to any default hereunder, Landlord
shall also serve a copy of each such notice upon any Leasehold Mortgagee who
shall have given Landlord a written notice specifying its name and address. If
any Leasehold Mortgagee fails to give Landlord written notice specifying its
name and address, then Landlord shall not be under any obligation to serve a
copy of such notice upon such Leasehold Mortgagee. Tenant shall have the
responsibility to keep Landlord notified of any change of address of any
Leasehold Mortgagee. Any notice to be served on the Leasehold Mortgagee shall be
deemed duly served when deposited in the United States mail, first class postage
prepaid, addressed to the Leasehold Mortgagee at the last mailing address for
the Leasehold Mortgagee furnished in writing to Landlord by Tenant or the
Leasehold Mortgagee. In the event Tenant shall default in the performance of any
of the terms, covenants, agreements and conditions of this Lease on Tenant's
part to be performed, any Leasehold Mortgagee shall have the right, within the
grace period available to Tenant for curing such default, to cure or make good
such default or to cause the same to be cured or made good whether the same
consists of the failure to pay rent or the failure to perform any other
obligation and Landlord shall accept such performances on the part of any
Leasehold Mortgagee as though the same had been done or performed by Tenant.
(B) In case of a default by Tenant in the payment of money, Landlord will take
no action to effect a termination of this Lease by reason thereof unless such
default has continued beyond thirty (30) days after Landlord shall have served a
copy of such notice upon Tenant and any Leasehold Mortgagee who has given
Landlord notice as provided in (A) above, it being the intent hereof and the
understanding of the parties that any Leasehold Mortgagee shall be allowed
twenty (20) days in addition to the ten (10) days granted to Tenant to cure any
default of Tenant in the payment of rent or in the making of any other monetary
payment required under the terms of this Lease.
Initial by Landlord Initial by Tenant
-34-
<PAGE>
(C) In the case of any other default by Tenant, Landlord will take no action to
effect a termination of the term of this Lease by reason thereof unless such
default has continued beyond the grace period available to Tenant for curing
said default, and then only after Landlord shall have given to all Leasehold
Mortgagees thirty (30) days after the expiration of Tenant's grace period for
curing such default within which either:
(i) to commence and diligently proceed to cure such default, if such default is
susceptible of being cured by the Leasehold Mortgagee obtaining possession of
the Demised Premises; and
(ii) to commence and diligently proceed to obtain possession of the Demised
Premises (including possession by a receiver, but not by judicial foreclosure)
and to cure such default in the case of a default which is susceptible of being
cured when the Leasehold Mortgagee has obtained possession thereof; or
(iii) to institute non-judicial foreclosure proceedings within thirty (30) days
and thereafter to complete such foreclosure proceedings or otherwise acquire
Tenant's interest under this Lease with reasonable and continuous diligence. A
Leasehold Mortgagee shall not be required to continue such possession or
continue such foreclosure proceedings if the default which prompted the service
of such a notice has been cured. A Leasehold Mortgagee shall have no obligation
to cure any default which is not reasonably susceptible of being cured by the
Leasehold Mortgagee.
(D) In the event that this Lease is terminated by Landlord on account of any
default, Landlord shall give prompt notice thereof to the Leasehold Mortgagee,
provided the Leasehold Mortgagee has notified Landlord in writing of its name
and address. Landlord, within thirty (30) days after receiving from Leasehold
Mortgagee a written request therefore, which shall be given within thirty (30)
days after such termination, will deliver a new lease of the Demised Premises to
the Leasehold Mortgagee or its nominee or to the purchaser, assignee, or
transferee, as the case may be for the remainder of the term of this Lease,
containing the same covenants, agreements, terms, provisions, and limitations as
are contained herein. The Leasehold Mortgagee shall then deliver to Landlord an
executed copy of the new lease and simultaneously pay to Landlord all monetary
defaults existing under this lease up to and including the date of the
commencement of the term of such new lease and all expenses including, without
limitation, reasonable attorneys' fees and disbursements and court costs,
incurred by Landlord in connection with the default by Tenant, the termination
Initial by Landlord Initial by Tenant
-35-
<PAGE>
and preparation of the new lease. Upon receipt of the new lease duly executed by
the Leasehold Mortgagee and the payment of all such monetary defaults and
Landlord's expenses, Landlord shall execute the new lease and return a fully
executed copy to the Leasehold Mortgagee. After execution of the new Lease by
the Leasehold Mortgagee and Landlord, the Leasehold Mortgagee shall commence and
diligently proceed to cure all non-monetary defaults existing under this Lease
which are reasonably susceptible of being cured by the Leasehold Mortgagee,
provided that Landlord shall have the right to exercise its termination rights
under Article XIV unless Leasehold Mortgagee, within ninety (90) days after the
date of the new lease, commences the operation of an Applebee's restaurant or a
Comparable Restaurant, with an operator that possesses sufficient net worth and
restaurant experience that would satisfy conditions as required by a franchiser
such as Applebee's International, Inc.
(E) As long as there is a Leasehold Mortgagee, neither the bankruptcy nor the
insolvency of Tenant shall operate nor permit Landlord to terminate this Lease
as long as all rent specified above and all other charges of whatsoever nature
payable by Tenant continue to be paid in accordance with the term of this Lease.
(F) Provided that Leasehold Mortgagee cures all of Tenant's monetary defaults
under this Lease, the time available to a Leasehold Mortgagee to initiate
non-judicial foreclosure proceedings as aforesaid shall be deemed extended by
the number of days of delay of occasioned by judicial restriction against such
initiation or occasioned by other circumstances beyond the Leasehold Mortgagee's
control.
(G) During the period that a Leasehold Mortgagee shall be in possession of the
Demised Premises (including through a receiver) and/or during the pendency of
any foreclosure proceedings instituted by a Leasehold Mortgagee, the Leasehold
Mortgagee shall pay or cause to be paid the rent specified above and all other
charges of whatsoever nature payable by Tenant hereunder which have been accrued
and are unpaid and which will thereafter accrue during said period. Following
the acquisition of Tenant's leasehold estate by the Leasehold Mortgagee or its
designee, either as a result of foreclosure or acceptance of an assignment in
lieu of foreclosure, the Leasehold Mortgagee or party acquiring title to
Tenant's leasehold estate shall, as promptly as possible, commence the cure of
all non-monetary defaults hereunder to be cured and thereafter diligently
process such cure to completion, except such non-monetary defaults which cannot
in the exercise of reasonable diligence be cured or performed by the Leasehold
Mortgagee or party
Initial by Landlord -36- Initial by Tenant
<PAGE>
execute, deliver and acknowledge any amendment reasonably necessary to affect
any such requirement; provided, however, that any such amendment shall not in
any way affect the term or rental under this Lease, not reduce Tenant's monetary
or non-monetary obligations hereunder.
(K) A Leasehold Mortgagee shall have no obligation to cure any default in the
payment of money which has occurred more than twelve (12) months before the
receipt of notice of such default, in order to preserve its interest under its
mortgage or to exercise any of the rights granted to it under this Lease.
(L) Nothing contained herein is intended to operate as a waiver of any rights or
claims that the Landlord may have against Tenant under this Lease.
40.3 Recordation of Leasehold Mortgage.
On the recording of a leasehold mortgage, Tenant, at its expense shall cause to
be recorded in the Office of the County Recorder of San Joaquin County a written
request separately or within the leasehold mortgage, executed and acknowledged
by Landlord for a copy of all notices of default and all notices of sale under
the leasehold mortgage. In addition, a Leasehold Mortgagee shall notify Landlord
of any default by Tenant under the leasehold mortgage, and Landlord shall have
the right, but not the obligation, to cure such default, within ten (10) days
after receipt by Landlord of such notice.
ARTICLE XXXXI. ESTOPPEL CERTIFICATE.
Tenant, at any time and from time to time upon not less than ten (10) days prior
written notice from Landlord, agrees to execute and deliver to Landlord a
statement (i) certifying that this Lease is unmodified and in full force and
effect and the date to which the rent and other charges have been paid in
advance, if any, (ii) acknowledging that there are not, to Tenant's knowledge,
any uncured defaults on the part of Landlord hereunder, or specifying such
defaults if they are claimed evidencing the status of this Lease, and (iii)
evidencing the status of this Lease as may be required either by a lender making
a loan to be secured in whole or in part by a deed of trust or mortgage
encumbering Landlord's interest in the Demised Premises, or any part thereof, or
by a purchaser or other person acquiring some or all of Landlord's interest in
the Demise Premises. Tenant's failure to deliver an estoppel certificate within
such time shall, without having waiving any other rights or remedies Landlord
may have by reason of such failure, be conclusive upon Tenant that (a) this
Lease is in full
Initial by Landlord Initial by Tenant
-38-
<PAGE>
force and effect without modification except as may be represented by Landlord,
(b) to Tenant's knowledge there are no uncured defaults in Landlord's
performance, and (c) no rent has been paid in advance except as set forth in
this Lease.
ARTICLE XXXXII. FINANCIAL INFORMATION REQUIREMENTS.
Landlord and certain mortgagees of Landlord require periodic review of the
financial condition of Tenants of Landlord. Tenant agrees to furnish Landlord
and certain mortgagees of Landlord with current financial statements of Tenant
upon request.
IN WITNESS WHEREOF, the parties have executed this instrument the day and year
first above written.
"LANDLORD"
WEST COAST REALTY INVESTORS, INC., a Delaware corporation
By:
W. Thomas Maudlin Jr.
President
"TENANT"
Christian J. Knox & Associates
a California corporation
Christian J. Knox, President
Initial by Landlord Initial by Tenant
-39-
<PAGE>
EXHIBIT A
LEGAL DESCRIPTION OF DEMISED PREMISES
Initial by Landlord Initial by Tenant
<PAGE>
All that certain real property located in the City of Roseville, County of
Placer, State of California described as follows:
Parcel 2 as shown on Parcel Map of Stanford Crossing recorded on March 28, 1997
in Book 28 of Parcel Maps at Page 160, Placer County Records.
Initial by Landlord Initial by Tenant
<PAGE>
EXHIBIT A-1
SITE PLAN OF THE CENTER
Initial by Landlord Initial by Tenant
<PAGE>
EXHIBIT B
Permitted Exceptions
TO BE PROVIDED BY LANDLORD
Initial by Landlord Initial by Tenant
<PAGE>
EXHIBIT C
IMPROVEMENT PLANS
TO BE PROVIDED BY LANDLORD
Initial by Landlord Initial by Tenant
<PAGE>
EXHIBIT D
COMMON AREA MAINTENANCE AGREEMENT
Initial by Landlord Initial by Tenant
<PAGE>
RECORDING REQUESTED BY AND
WHEN RECORDED, RETURN TO:
Gregory L. Mast, Esq.
GALLAGHER & KENNEDY, P.A.
2600 North Central Avenue
Phoenix, Arizona 85004
COMMON AREA MAINTENANCE AGREEMENT
THIS COMMON AREA MAINTENANCE AGREEMENT (the "Agreement") is made and entered in
to as of the 26 day of March, 1997, by and among OPUS SOUTHWEST CORPORATION, a
Minnesota corporation (Opus), and CHRISTIAN J. KNOX, a married man dealing with
his sole and separate property ("Knox").
WITNESSETH:
Whereas, Knox has of even date herewith acquired from Opus fee title to chat
certain real property more particularly described on exhibit "A" attached hereto
and incorporated herein (the "Applebees Pad");
Whereas, Onus is the owner o. that certain parcel of property more Particularly
described on Exhibit "B" attached hereto and incorporated herein (the "Opus
Parcel");
Whereas, the Opus Parcel and the Applebees Pad together comprise an integrated
retail center (the "Shopping Center") to be developed and managed by Opus;
WHEREAS, the Applebees Pad and the Opus Parcel are each subject to the terms and
conditions of that certain Construction, Operation and Reciprocal Easement
Agreement by and between Roseville Properties Investment Partners, Ltd., a Texas
limited partnership, and The Price Company, a California corporation, dated as
of May 26, 1995, and recorded June 21, 1995, in Instrument No. 95-0314d5,
Official Records of Sacramento County, California, as amended by that certain
First Amendment to Construction, Operation and Reciprocal Easement Agreement
dated as of April 3, 1996, and recorded April 3, 1996, in Instrument No.
96-018254, Official Records or Sacramento County, California (the "COREA");
1
<PAGE>
Whereas, the COREA contains provisions relating to the maintenance of the
common areas on each parcel of property subject to the terms thereof; and
Whereas, Opus and Knox desire to enter into this Agreement to set forth the
obligations of each party with respect to the maintenance of the common areas
located on the Applebees Pad.
NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency
of which are hereby acknowledged, the parties hereto hereby agree as follows:
1. From and after the date of this Agreement, Opus shall maintain or cause to be
maintained the Common Areas (as defined In Section 1.l(e) of the COREA) of the
Shopping Center in accordance with the terms and provisions of Article 6 of the
COREA.
2. Knox hereby agrees to reimburse Opus for Knox's proportionate share of the
costs expended by Opus in maintaining the Common Areas of the Shopping Center
(the "Maintenance Expenses"), which proportionate share shall be equal to the
total of the Maintenance Expenses multiplied by a fraction, the numerator of
which is the area (in square feet) of the Applebees Pad and the denominator of
which is the sum of (i) the total area (in square feet) of the Opus Parcel and
(ii) the total area (in square feet) of the levees Pad. Knox's share of the
Maintenance Expenses seal' be paid as follows:
(a) Beginning on the date of issuance of a certificate of occupancy (or its
equivalent) for the building to be constructed on the Applebees Pad, Knox
s:r.a31 Day Opus on the first day o, each calendar month an amount estimated by
Opus to be Knox's share of such Maintenance expenses. The foregoing estimated
monthly charge may be adjusted by Opus at the end or any calendar quarter on the
basis of Opus' experience and reasonably anticipated costs. Knox's share of any
extraordinary costs may be added when accrued.
(b) Within thirty (30) days following the end of each calendar quarter or, at
Opus' option, each calendar year, Opus shall furnish Knox a statement covering
the calendar quarter or year just expired, showing the total of such Maintenance
Expenses, the amount of Knox's share of such Maintenance Expenses for such
calendar quarter or year, and the payments made by Knox with respect to such
period as set forth in subsection (a). If Knox's share of such Maintenance
Expenses exceed the actual payments made by Knox for such period, Knox shall pay
to Opus the shortfall within thirty t30) days following receipt of such notice.
If Knox's share of such Maintenance Expenses is less than the sum of payments
actually made by Knox, ODUS shall provide to Knox a credit in the amount of any
excess payment actually made against the payments next thereafter to become due
Opus hereunder. Failure of
2
<PAGE>
Knox to pay any of the charges due hereunder shall constitute a default under
the terms hereof.
(c) For the purpose of this Agreement, the term "maintenance Expenses" means the
total cost and expense incurred in operating and maintaining the Common Areas of
the Opus Parcel and the Applebees Pad in accordance with Article 6 of the COREA.
3. The term of this Agreement shall commence on the date hereof and shall
continue in perpetuity until this Agreement is terminated in accordance with the
provisions of this paragraph 3. This Agreement may be terminated at any time by
Opus upon delivery written notice to Knox, in which event this Agreement shall
terminate on the date sixty (60) days after the date of said notice.
4. This Agreement shall be binding upon the heirs, executors, administrators,
personal representatives, successors and assigns of the parties hereto.
5. If any clause or provision of this Agreement is held to be illegal, invalid
or unenforceable under any law applicable to the terms hereof, then the
remainder of this Agreement shall not be affected thereby.
6. This agreement represents the final agreement between the parties with
respect to the matters set forth herein and may not be contradicted by evidence
of Prior, contemporaneous or subsequent oral agreements of the parties. Any such
prior written or verbal agreements or understandings are deemed merged into this
agreement.
7. This Agreement shall not be amended, except by a writing signed by the
parties.
8. If any party shall default in the performance of any of the terms and
conditions of this Agreement, the non-defaulting party shall be entitled to
recover all costs, charges, and expenses of enforcing this Agreement including
reasonable attorneys' fees, paralegal fees, and costs, which reasonable fees
shall include any such fees incurred in any trial or appellate proceedings.
9. Any notice which any party may be required or may desire to give hereunder
shall be deemed to have been duly given when personally delivered, against
receipt therefor signed by the party to whom the notice is given, or on the next
business day if sent by overnight courier, or on the fourth business day after
mailing by certified or registered mail, postage prepaid, addressed as set forth
below, or to such other address as a party hereto may designate by a notice to
the other Parties. Any notice mailed, sent by facsimile transmission on, or
given to the Escrow Agent shall be deemed given only when received.
3
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement
on the day and year first set forth above.
KNOX:
CHRISTIAN J. KNOX
OPUS SOUTHWEST CORPORATION,
a Minnesota corporation
By:
Thomas W. Roberts
Its: President
STATE OF CALIFORNIA
COUNTY OF SAN JOAQUIN
The foregoing instrument was acknowledged before me this 31 day of
March 1997, by CHRISTIAN J. KNOX on his own behalf.
Notary Public
My Commission Expires:
STATE OF ARIZONA
County of Maricopa ss.
The foregoing instrument was acknowledged before me this day of , 1997, by
Thomas W. Roberts, the President of OPUS SOUTHWEST CORPORATION, a Minnesota
corporation, on-behalf of the corporation.
Notary Public
My Commission Expires:
5
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement on the day and year
first set forth above.
KNOX:
CHRISTIAN J. KNOX
OPUS:
OPUS SOUTHWEST CORPORATION,
a Minnesota corporation
By:
Thomas W. Roberts
Its: President
STATE OF ARIZONA ) ss.
County of Maricopa )
The ongoing instrument was acknowledged before me this day or , 1997, by
CHRISTIAN J. KNOX. on his own behalf.
Notary Public
My Commission: Expires
STATE OF ARIZONA )ss.
County or Maricopa )
The foregoing instrument was acknowledged before me this 27 day of March 1997,
by Thomas W. Roberts, the President of OPUS SOUTHWEST CORPORATION, Minnesota
corporation, on behalf of the corporation.
Notary Public
My Commission expires:
5
<PAGE>
EXHIBIT E
MEMORANDUM OF LEASE
Initial by Landlord Initial by Tenant
<PAGE>
RECORDING REQUESTED BY AND
WHEN RECORDED RETURN TO:
William Cook, Esq.
Richard S. Calone, Inc.
1810 Grand Canal Blvd., Suite 6
Stockton, CA 95207
(Space above this line for Recorder's use)
MEMORANDUM OF LEASE
THIS MEMORANDUM OF LEASE is made as of November 24, 1997, by and between WEST
COAST REALTY INVESTORS, INC., a Delaware corporation ("Landlord") and CHRISTIAN
J. KNOX & ASSOCIATES, INC., a California corporation ("Tenant").
WITNESSETH:
1. Lender, for good and valuable consideration, the receipt and adequacy which
are hereby acknowledged, has leased to Tenant certain real property located in
Roseville, Placer County, California, more particularly described on the
attached Exhibit A, upon and subject to the terms and conditions set forth in
that certain Lease Agreement ("Lease"), between the parties hereto, of even date
herewith.
2. The term of the Lease is twenty (20) years.
Initial by Landlord Initial by Tenant
<PAGE>
3. Tenant has the option to extend the term of the Lease for two (2) five (5)
year extension terms.
4. The purpose of this Memorandum of Lease is to give notice of the rights and
obligations of the parties hereto under the Lease, and all the terms and
conditions of the Lease are incorporated herein by reference as if they were
fully set forth herein.
5. Subject to the terms of the Lease, this Memorandum of Lease shall be binding
upon and inure the benefit of the parties hereto and their respective successors
in interest and assigns.
IN WITNESS WHEREOF, the parties hereto have executed this Memorandum of Lease on
the date first above written.
"LANDLORD"
WEST COAST INVESTORS REALTY, INC.
a Delaware corporation
By: W. Thomas Maudlin Jr.
President
"TENANT"
CHRISTIAN J. KNOX & ASSOCIATES, INC.,
a California corporation
Christian J. Knox
President
Initial by Landlord Initial by Tenant
<PAGE>
STATE OF CALIFORNIA )ss.
COUNTY OF Los Angeles )
On this 24 day of November 1997, before me, the undersigned Notary Public,
personally appeared W. THOMAS MAUDLIN, JR.
X personally known to me
proved to me on the basis of satisfactory evidence
to be the person whose name is subscribed to the within instrument, and
acknowledged that he/she executed the same in his/her authorized capacity, and
that by his/her signature on the instrument the person or the entity upon behalf
of which the person acted, executed the instrument.
WITNESS my hand and official seal.
STATE OF CALIFORNIA )ss.
COUNTY OF San Joaquin)
On this 24 day of November 1997, before me, the undersigned Notary Public,
personally appeared CHRISTIAN J. KNOX
X personally known to me
proved to me on the basis of satisfactory evidence
to be the person whose name is subscribed to the within instrument, and
acknowledged that he/she executed the same in his/her authorized capacity, and
that by his/her signature on the instrument the person or the entity upon behalf
of which the person acted, executed the instrument.
WITNESS my hand and official seal.
Notary's Signature
Initial by Landlord Initial by Tenant
<PAGE>
All that certain real property located in the City of Roseville, County of
Placer, State of California described as follows:
Parcel 2 as shown on Parcel Map of Stanford Crossing recorded on March 28, 1997
in Book 28 of Parcel Maps at Page 160, Placer County Records.
EXHIBIT A
Initial by Landlord Initial by Tenant
<PAGE>
Appraisal
of
A Restaurant Facility
Located at the
6700 Stanford Ranch Road
North West Corner of Highway 65 & Stanford Ranch Road
Roseville, California
As of:
August 5, 1997
Prepared As Of
August 12, 1997
Appraised by
Lawrence F. Sherman Ph.D.,JD, ASA, IFAC
State Certified General Appraiser #AG-006353
L.F. Sherman
4600 Campus Drive, Suite 106
Newport Beach, California 92660
<PAGE>
August 12, 1997
Mr. W. Thomas Maudlin, Jr.
President
West Coast Realty Advisors, Inc.
5933 W. Century Blvd. - 9th Floor
Los Angeles, CA 90045
RE: Appraisal and Evaluation of Real Property:
An Applebee's Restaurant Facility
North West Corner of Highway 65 and Stanford Ranch Road
Roseville, California
Dear Mr. Maudlin:
At your request, we have appraised the real property located at
the North West Corner of Highway 65 & Stanford Ranch Road Roseville.
California.
The purpose of this appraisal is to estimate the market value
of the fee simple interest in the real estate subject to the
definition of value, the assumptions and limiting conditions and the
certification in the attached report for the sale and leaseback of
the subject property. The appraisal is under the assumption that the
building which is under construction be completed in a workman like
manner and that proper occupancy certificates are issued.
The descriptions of the property appraised together with
explanations of the appraisal procedures used are presented in the
report.
<PAGE>
Mr. W. Thomas Maudlin, Jr.
Page Two August 12, 1997
Based on the data and conclusions presented in the attached report,
it is our opinion that the market value of the subject property, as
of August 12, 1997 is:
TWO MILLION NINETY FIVE THOUSAND DOLLARS
$2,095,000
In this appraisal we have given substantial consideration to the
value of land in the subject location as well as the building being
constructed, plus the state of the economy affecting the area for
the type of restaurant being constructed. We have reviewed the
economic environment for business and real estate in the area and
section referred to as Roseville and also considered the Rocklin,
California area. The property is directly across the street from
Rocklin and many of the customers of the restaurant would come from
that geographic area.
Our report is prepared and this letter summarizes the valuation
opinion. It is based on our field work, research, and the collected
appraisal data as of the date of preparation of this report.
A report detailing our analysis and conclusions is attached. Thank
you for using our services. A physical inspection of the subject
property and this report was prepared by Dr. Lawrence F. Sherman ID,
ASA, IFAC.
Respectfully submitted,
L.F. SHERMAN
LAWRENCE F. SHERMAN PhD., JD, ASA, IFAC
President end Senior appraiser
<PAGE>
CERTIFICATION
I certify that, to the best of my knowledge and belief:
1. the statements of fact contained in this report are true
and correct.
2. the reported analyses, opinions, and conclusions are limited
only by the reported assumptions and limiting conditions, and
are my personal, unbiased professional analyses, opinions, and
conclusions.
3. I have no present or prospective interest in the property that is the subject
of this report, and I have no personal interest or bias with respect to the
parties involved.
4. my compensation is not contingent upon the reporting of a predetermined
value or direction in value that favors the cause of the client, the amount
of the value estimate, the attainment of a stipulated result, or the
occurrence of subsequent event resulting from the analyses, opinions, or
conclusions, or the use of this report.
5. my analyses, opinions, and conclusions were developed, and this report
has been prepared, in conformity with the Uniform Standard of Professional
Appraisal Practice.
6. I have made a personal inspection of the property that is the subject of
this report.
7. no one provided significant professional assistance to the person signing
this report.
8. I certify that, to the best of my knowledge and belief, the reported
analysis, opinion, conclusions were developed, and this report has been
prepared, in conformity with the requirements of the Code of Professional
Ethics and the Standards of Professional Practice of the American Society of
Appraisers.
9. I certify that the use of this report is subject to the requirements of
the American Society of Appraisers relating to review by its duly authorized
representatives.
<PAGE>
RESTRICTIONS, ASSUMPTIONS, AND LIMITING CONDITIONS
This appraisal is made with respect to the following assumptions:
Assumptions:
1. No responsibility is assumed for the legal description or for matters
including legal or title considerations. Title to the property is assumed to
be good and marketable unless otherwise stated.
2. The property is appraised free and clear of any or all liens or
encumbrances unless otherwise stated.
3. Responsible ownership and competent property management are assumed.
4. The information furnished by others is believed to be reliable. However, no
warranty is given for its accuracy.
5. All engineering is assumed to be correct. The plot plans and illustrative
material in this report are included only to assist the reader in visualizing
the property.
6. It is assumed that there are no hidden or unapparent conditions of the
property, subsoil, or structures that render it more or less valuable. No
responsibility is assumed for such conditions or for arranging for engineering
studies that may be required to discover them.
7. It is that there is full compliance with all applicable federal, state, and
local environmental regulations and laws unless compliance is stated, defined,
and considered in the appraisal report.
8. It is assumed that all applicable zoning and use regulations and
restrictions have been complied with, unless a nonconformity has been stated,
defined, and considered in the appraisal report.
9. It is assumed that all required licenses, certificates of occupancy,
consents, or other legislative or administrative authority from any local,
state, or national government or private entity or organization have been or
can be obtained or renewed for any use on which the value estimate contained
in this report is based.
10. It is assumed that the utilization of the land and improvements is within
the boundaries or property lines of the property described and that there is
no encroachment or trespass unless noted in the report.
<PAGE>
Limiting Conditions:
This appraisal report has been made with the following general limiting
conditions:
1. The distribution, if any, of the total valuation in this report between
land and improvements applies only under the stated program of utilization.
The separate allocations for land and buildings must not be used in
conjunction with any other appraisal and are invalid if so used.
2. Possession of this report, or a copy thereof, does not carry with it the
right of publication.
3. The appraiser, by reason of this appraisal, is not required to give further
consultation, testimony, or be in attendance in court with reference to the
property in question unless arrangements have been previously made.
4. Neither all nor any part of the contents of this report (especially any
conclusions as to value, the identity of the appraiser, or the firm with which
the appraiser is connected) shall be disseminated to the public through
advertising, public relations, news, sales, or other media without the prior
written consent and approval of the appraiser.
5. The definition of "market value" is defined in the subject report.
6. The definition of "fee simple estate"* is:
Absolute ownership unencumbered by any other interest or estate; subject only
to the four powers of government.
7. The definition of "Highest and Best Use" is:
The reasonably probable and legal use of vacant land or an improved
property, which is physically possible, appropriately supported, financially
feasible, and that results in the highest value. The four criteria the highest
and best use must meet are: legal permissibility, physical possibility,
financial feasibility, and maximum profitability.
* The Dictionary of Real Estate Appraisal, second edition.
<PAGE>
Appraisal
of
A Restaurant Facility
Located at the
6700 Stanford Ranch Road
North West Corner of Highway 65 & Stanford Ranch Road
Roseville, California
As of:
August 5, 1997
Prepared As of
August 12, 1997
Appraisal by
Lawrence F. Sherman Ph.D.,JD, ASA, IFAC
State Certified General Appraiser #AG-006353
L.F. Sherman
4600 Campus Drive, Suite 106
Newport Beach, California 92660
<PAGE>
TABLE OF CONTENTS
INTRODUCTION
Identification of the Property. . . . . 1
Plat Map. . . . . . . . . . . . . . . . 3
Purpose and Function of the Appraisal . 4
Definition of Market Value. . . . . . . 4
Assumptions and Limiting Conditions . . 4
DESCRIPTIVE SECTION. . . . . . . . . 10
Regional Map . . . . . . . . . 10
Regional Analysis . . . . . . . 11
Area Analysis . . . . . . . . . 12
City Analysis . . . . . . . . . 13
Neighborhood Analysis . . . . . 15
Neighborhood Map. . . . . . . . . 15
Site Analysis . . . . . . . . . . 15
Photographs -- Street Scenes 20
Assessment and Tax Data . . . . 20
Zoning Map. . . . . . . . . 20
Photographs -- Improvement. 21
Improvement Analysis. . . . 21
Highest and Best Use. . . . 23
VALUATION SECTION. . . . . 26
Appraisal Procedures 29
Valuation Analysis . . . 26
Cost Approach 29
Land Valuation 29
Improvement Valuation 31
Summation . . . . . . 36
Income Approach 37
Income Analysis. . . . 38
Expense Analysis . . . 41
Capitalization Process 42
Market Approach . . . . . . 45
Summary of Market Value Analysis . . 47
Conclusion of Value . . . . . . . . . . . 54
ADDENDA
EXHIBIT A: Market Data: Selected
EXHIBIT B: Economic Profile
EXHIBIT C: Preliminary Title Report
EXHIBIT D: Lease Summary
EXHIBIT E: Certifications and Qualification of Appraiser
<PAGE>
Summary of Important Data and Conclusions
Location: 6700 Stanford Ranch Road
North West corner of Hwy 65 &
Stanford Ranch Road
Roseville, California
Interest Appraised: Simple Fee Interest
Owner(s): Christian J. Knox
Property Type: A Stand-alone Restaurant Building
Building Area: Measured at 5,130 Square Feet
Land Area: Reported at: 37,918
A.P.N. 017-121-028
Zoning: Commercial
Principal Improvements: Class D Building with wood frame
Construction
Total Square Footage 5,130
Highest & Best Use: Yes
Fair Market Value: $2,095,000
Valuation Date: August 5, 1997
<PAGE>
INTRODUCTION
The property appraised is located at 6700 Stanford Ranch Road, Roseville.
California.
The property is adjacent to the city of Rocklin,
California. A preliminary title report was provided
to review easements and encumbrances of record; this
is reproduced in the Addenda to this report in Exhibit
A.
To aid in identifying the property, the following
page indicates the subject property on a plat map.
1
<PAGE>
PURPOSE OF THE APPRAISAL
The purpose of the appraisal is to estimate the market value of the property
appraised, in fee simple title as of August 5, 1997.
FUNCTION OF THE APPRAISAL
The function of the appraisal is to provide value information for due
diligence and purchase decision of West Coast Realty Advisors, Inc.
DEFINITION OF MARKET VALUE
For the purposes of this report, market value is defined as:
"The most probable price in terms of money which a property will bring in
a competitive and open market under all conditions requisite to a fair
sale, the buyer and seller each acting prudently, knowledgeably, and
assuming the price is not affected by undue stimulus. Implicit in this
definition is the consummation of a sale as of a specified date and the
passing of title from seller to buyer under conditions whereby: (1) buyer
and seller are typically motivated, (2) both parties are well informed or
well advised, and each acting on what each considers to be his own best
interest, (3) a reasonable time is allowed for exposure in the open
market, (4) payment is made in cash or its equivalent, (5) financing, if
any, is on terms generally available in the community at the specified
date and typical for the property type in its locale, (6) the price
represents a normal consideration for the property sold unaffected by
special financing amounts and/or terms, services, fees, costs, or credits
incurred in the transactions. "
HISTORY OF OWNERSHIP
The subject property is in process of construction. The property is expected
to be completed at the end of August and ready for occupancy. It was reported
that the land was recently purchased for approximately $550,000 for the stand
alone restaurant location.
3
<PAGE>
ASSUMPTIONS AND LIMITING CONDITIONS
Title to Real Estate - A copy of the preliminary title report was provided
for the purpose of this appraisal. In accordance with professional appraisal
practice, we assume that:
a) The title to the property is marketable,
b) The property is free and clear of all liens, encumbrances,
easements and restriction except where noted in this report;
c) The property does not exist in violation of any applicable
codes/ordinances, statutes or other government regulations;
d) The property is under responsible ownership and competent
management and is available for its highest and best use.
We have reviewed the preliminary title reports reproduced in the Addenda to
this report.
Sketches and Maps - Sketches and maps in this report are provided to aid the
reader in visualizing the property and are the results of field
investigations made by the appraiser. Dimensions and descriptions are based
on public records and information that was furnished by others. These
dimensions and descriptions are not meant to be used to replace matters of
survey.
Information and Data - Information supplied by others is considered in this
valuation. These information sources are believed to be reliable, and no
further responsibility is assumed for their contribution to the value
estimate. A change in the value estimate may be required upon consideration
of additional or more reliable data that may become available.
4
<PAGE>
Unexpected Conditions - It is assumed that there are no expected or
unexpected conditions of the property that would adversely affect
value.
Distribution of Value - The distribution of total value for land and
improvements is applied only under the state of usage and utilization.
Separate values for land and improvements may not be used in conjunction with
any other appraisal and are invalid if so used.
Legal or Specialized Expertise - No opinion is customarily expressed for
matters requiring legal expertise, or other matters under investigation, or of
knowledge beyond that customarily expressed by real estate appraisers.
Advertising - Neither all nor any part of this appraisal report shall
be conveyed to the public through advertising, public relations, news,
sales or other methods without the written consent and approval of the
appraiser(s).
Court Testimony - Testimony or attendance in court by reason of this appraisal
shall not be required unless arrangements for such services were previously
made.
Effective Date of Value - The date of value, to which the conclusions and
opinions expressed in this report apply, is set forth in the letter of
transmittal. The effective date of value is the date of inspection of the
subject property. The dollar amount of any value opinion reported is based on
the purchasing power of the U.S. dollar as of that date. The
5
<PAGE>
appraiser assumes no responsibility for economic or physical factors occurring
subsequent to the date of value which may affect the opinions reported.
Mineral Rights - The value of mineral rights, if any, was not considered in
this appraisal unless otherwise noted.
Structural Deficiencies - The appraiser found no obvious evidence of
structural deficiencies except as stated; however, no responsibility for
structural soundness or conformity to city or county building and safety
codes can be assumed without an independent structural engineering report.
Property Inspection - The appraiser(s) personally inspected the subject
property as part of the appraisal assignment.
Property Included - No consideration was given in this appraisal to personal
property located on the premises. Only the Real Property was considered as
part of the appraisal assignment. However, the appraiser has considered the
value of tenant improvements in valuation conclusion.
6
<PAGE>
Earthquakes - As earthquakes are not uncommon in the area, no responsibility
is assumed for their possible effect on individual properties unless detailed
geologic reports are made available.
Soil Conditions - No detailed soil studies of the subject were available to
the appraiser. Therefore, statements regarding soil qualities made in this
report are not conclusive but have been considered consistent with the
information available to us.
Mechanical Equipment - It is assumed by the appraiser that all mechanical
equipment is in operative condition. The mechanical equipment is not included
in this appraisal except as to what is considered permanently attached.
Environmental Study - This appraisal is not an environmental study and
reliance should not be placed on this report for matters that are the province
of an environmental study. Such a study has not been provided to the appraiser
for our review.
7
<PAGE>
Hazardous Waste - The appraiser has not learned of any hazardous waste or
toxic material in existence at the subject property, therefore, the indicated
value does not reflect their existence, if any.
8
<PAGE>
DESCRIPTIVE SECTION
AND
REGIONAL DISCUSSION
Regional Map
Regional Area: Sacramento County
<PAGE>
NEIGHBORHOOD DISCUSSION
10
<PAGE>
AERIAL MAP
The five county area, represented by Sacramento, El
Dorado, Placer, Sutter, and Yolo is a diversified base
of economic activity. There is strong growth in service,
technology,
11
<PAGE>
manufacturing, science, and information sectors. The Sacramento area has a
major airport, numerous colleges and universities, transcontinental rail
lines, and a good interstate highway system. Businesses are migrating to the
area to take advantage of the abundant resources, the high quality of life,
and due to the rapid employment and economic growth experienced by the area.
Available from the appraiser is detailed economic and demographic information
from the demographic data for the area that presents a favorable outlook for
the area with the Roseville and Rocklin areas being a highly desirable
residential growth area for upper and upper middle class neighborhoods.
A complete economic profile of Roseville and data from the
Chamber of Commerce is reproduced in the Addenda to this report. Additional
data is available that we examined from the most recent Census Data using a
geographic information system referred to as ARC VIEW.
Roseville is located in Placer County and is considered to be one of the
better places to live outside of Sacramento County because of the low crime
rate and the substantial employment and housing opportunities. The property
location is across the street from the City of Rocklin. A community economic
profile is reproduced in the Addenda -Exhibit B.
12
<PAGE>
NEIGHBORHOOD ANALYSIS
SITE ANALYSIS
The subject site is in close proximity to good freeway access via Interstate
80 and Highway 65. It is surrounded by industrial and commercial buildings of
similar vintage in a desirable retail location along Stanford Ranch road. To
the north is Marysville and Yuba City; to the east is Reno, Nevada; and the
south is Sacramento. There is excellent access to Interstate 80.
However, the subject property will have excellent visibility and access from
Stanford Ranch Road and Fairway Drive. The Center is a "power" center anchored
by Toys-it-Us and Price Club. Surrounding the site is several fast food
restaurants such as McDonalds and across the street is additional shopping
centers. The property will face Stanford Ranch Road with a traffic count of
over 17,000 cars per day. That count is expected to increase as the areas in
the nearby vicinity is built up.
Directly north and east of the site is the City of Rocklin and directly south
is Roseville. The area is a residential development that is in strong demand
and the commercial sites in the area is designed to provide infrastructure to
serve the developing community.
13
<PAGE>
As reported by the City of Rocklin economic planning this is one of the
premiere and fastest growing residential area in the immediate vicinity of
Sacramento. Median income levels after appropriate time adjustments show a
median income of about $70,000 within 1 mile radius of the site.
An examination of rental rates in the immediate area, however, showed a
stability of rental rates and there was limited vacancy in structures the size
of the subject property other than what was normal for the area and to allow
for transition. Vacancy were minimal and all restaurant sites were occupied
and in use.
Discussion with several economic planners and commercial real estate brokers
in the area indicated that leasing demand is relatively good and sales
activity is reasonably strong. Demand is favorable. There was few properties
available for sale in the immediate area.
Topography was level and the site was well landscaped. Discussions with the
owner indicated that the building would have reciprocal parking arrangements
to supplement the 51 parking spaces on the property. The traffic count will
increase significantly after the shopping center area is fully occupied. A
competitive analysis disclosed only several restaurants in the immediate area
that were of the quality of the Applebee's restaurants.
14
<PAGE>
SITE ANALYSIS
Site Improvements The site is covered by building improvements, and
associated asphalt paving, of approximately 37,918 square feet of area for
the parcel which comprising the property. Total building square footage is
5,133 square feet. Reciprocal parking is available in the adjacent center.
The subject property fronts to Stanford Ranch Road with good access to the
Highway 65 and Interstate 80.
Dimensions/ Shape / Area :
The subject lot is rectangularly shaped. The site enjoys frontage on Stanford
Ranch Road which is a lane thoroughfare. The site has 37,918 square feet of
space with good access to the adjacent shopping center, Fairview Drive, and
Stanford Ranch road.
Zoning is commercial - retail, which allows the existing use for retail and
restaurant location.
Flood Zone
The property is reported to not be in a flood zone.
16
<PAGE>
Topography:
The lot and surrounding area is level for the subject and in the immediate
area of the neighboring properties. Topography is level and very slightly
downward from front to back of the lot to allow for drainage. Neighboring
properties are basically level and there was no evidence of settling in the
subject property or area. To the north and east of the subject is rolling
hillside developments that are residentially developed.
Soil & Subsoil Conditions:
The subject soil appears to be adequate, there is no evidence of land and
building settlement in the subject neighborhood. However, no soil report was
made available to the appraiser. The City is not subject to unstable soil
conditions other than Earthquakes as discussed with the Economic Planning
department of the City and from discussion with the Rocklin Planning
Department.
It is assumed for appraisal purposes that there are no adverse soil
conditions which might adversely affect the value of the subject property.
The land use before the building was built was undisclosed, but appears to
have been rolling hillside and a noncommercial use.
It is assumed for appraisal purpose that the previous use posed no form of
toxic danger which could adversely affect the value of the subject property.
The appraiser(s) has not reviewed any environmental study, nor does the
appraiser(s) claim to be an expert in the
17
<PAGE>
field of environmental study. If concern over environmental contamination is
or becomes an issue, a prospective purchaser is urged to consider
environmental studies by professionals trained in that area. Environmental
studies are common for retail locations such as the subject property, prior
to property transfers.
Drainage:
The lot appears to be adequate for drainage. No noticeable area of water
accumulation was found, nor noticed. Drainage from the surrounding areas
appear minimal. The lot is downward sloping slightly to allow adequate
drainage.
Utilities and Services:
The subject property is connected to all public utilities.
Access:
The lot is accessible from Stanford Ranch road and Fairview Drive.
Easements:
There are no adverse noticeable adverse easements affecting the property. The
appraiser has reviewed a preliminary title or title report of the property in
that determination. There is the availability for ingress and egress and also
for public utility easements. A copy of the Preliminary Title report is
reprinted in the Addenda to this report in Addenda - Exhibit C.
18
<PAGE>
Man-Made Improvements:
The subject street is maintained by the City of Roseville. The off-site
improvements include sidewalks, curbs, electrical street lights, sanitary
sewers and storm sewers.
Assessment and Taxes: According to the Placer County Assessor, current
assessed costs are presented current and not payable. Assessments are as
follow:
APN: 017-121-028*
Land $98,243.2 per installment
Improvements $ 0
TAXES:
1st. Installment Paid
2nd Installment Paid
Based on Proposition 13 taxes should increase annually by 2% unless there is a
change of ownership, at which time they will increase to an amount based on
the current tax rates against existing market value.
Zoning:
The subject lot is zoned commercial, City of Roseville. This zoning allows
for a variety of uses including the existing use. Zoning is designed to
preserve city land appropriate for retail uses and to attract and preserve
desirable retail locations. Land use is retail.
Zoning is intended to provide safeguards and appropriate transitions to
surrounding land uses that may be sensitive to commercial activities and to
permit efficient design of
19
<PAGE>
infrastructure and public services to serve these uses. Such infrastructure
serves the neighboring area. The property is in a well structured and planned
retail area that should enhance the subject area.
20
<PAGE>
IMPROVEMENT ANALYSIS
21
<PAGE>
IMPROVEMENT ANALYSIS
Building Improvements: The primary improvements is one stucco construction
with wood frame building. It has approximately 5,133 square feet exclusive of
freezer area.
Age: The subject property is in process of construction and is expected to be
finished by August 31, 1997. It has a chronological age of O years, an
effective age of 65 years, and a remaining economic life of 65 years.
Based on the appraiser's inspection and assessment of the condition of the
improvements, the subject has an estimated effective age of O years and a
remaining useful life in excess of 65 years. It is adequately maintained for
it's intended use. There was no deferred maintenance noted. Workmanship and
quality is very good.
The Construction is summarized as follows:
Construction: Concrete footings, foundation and slab; wood frame
wall design office; flat tar/gravel roof.
Basement: None
Exterior Walls: Stucco wood frame construction
Interior Walls: Painted and finished drywall with baseboard molding.
Windows: 1/4" tinted glass in metal and wood casement.
23
<PAGE>
Roof: Wood, sloping roof with built-in tar/gravel cover.
Plumbing: Adequate bathroom and plumbing facilities present.
Adequate plumbing and normal equipment is evidenced.
Air Conditioning,
Ventilation: There is adequate heating and air conditioning
equipment. Area is clean and air conditioned.
Electric: 110/220 volt electrical service. The entire building
has adequate Amperage service with the ability to expand
as need for restaurant usage.
Lighting: For the restaurant area and lobby area, fluorescent and
incandescent lighting is provided by flush mounted drop
in-ceiling fluorescent fixtures, incandescent lighting,
and commercial 2 bulb, 8 foot fluorescent fixtures.
Sprinkled: The building is sprinkled for fire protection.
Parking: Parking is adequate and within applicable building
codes. There is reciprocal parking in the immediate
vicinity of the area.
Comments: The subject building is in very good/excellent
condition and evidences a desirable quality of
construction.
Deferred Maintenance: There was no deferred maintenance noted.
Other Factors: There is substantial tenant improvements that
enhances the use of the building for retail usage
including a liquor license for the Restaurant.
24
<PAGE>
Highest and Best Use
Highest and Best use is defined as:
"That reasonable and probable use that supports the highest present
value, as defined, as of the effective date of appraisal.
Alternatively, that use, from among reasonable, probable and legal
alternative uses, found to be physically possible, appropriately
supported, financially feasible and which results in highest land value.
The definition immediately above applied specifically to the highest and best
use of land.
It is to be recognized that in cases where a site has existing improvements
on it, the highest and best use may be determined to be different from the
existing use. The existing use will continue, however, unless and
until land value in its highest and best use exceeds the total
value of the property in its existing use."
The above describes the concept of highest and best use where the existing
improvements have a number of years of physical life remaining that does
enhance the total property value.
The overall analysis of the real estate indicates that the improvements are
new and does not suffer depreciation. The trends indicate that land values
are stable and/or increasing in the area for retail locations; the
improvements contribute to the overall property value and razing of these
improvements would not be feasible until the value of the current use
25
<PAGE>
is exceeded by the land. The net return of the building is greater than the
return which could be earned if the site were vacant.
Based on the existing uses and trends in the neighborhood, zoning, and
location, the highest and best use of the land is for commercial -retail
usage.
The existing improvements are developed with this type of use and
therefore, are concluded to represent the highest and best use as improved.
Therefore, the property is at highest & best use as presently zoned and
developed.
Lease Analysis In evaluating the lease for the subject property a
description of the Leasee's business is reproduced in the Addenda to this
report. It should be noted that the tenant is a closely held company that
manages restaurant facilities including properties like the subject property
and that Applebee's is a nationally known restaurant franchise. The subject
company is well financed and a well run company in a niche market of "sit
down" restaurants in a premiere and highly visible location.
Lease Analysis
This valuation and appraisement is based on finalizing a lease with the
following features. If such features are not agreed to in the final lease it
may affect the value of the subject property.
26
<PAGE>
Leasor: West Coast Realty Advisors, Inc.
Leasee: Christian Knox
Tenant: Applebee's Restaurant
Building Square Footage: 5,133 square footage
Lease expiration: 20 year lease
Existing rent:
Base rent: $172,000 per year
Terms: Triple net. Tenant to pay for all costs, including but
not limited to maintenance of the building,
landscaping, parking lot, CAM charges with regards to
the entire shopping center, management fees,
utilities, taxes and assessments and all other costs.
Rent Increases: Base rent shall be adjusted upwards
every 60 months by 12.5%
Lease expiration date: 20 years from expiration
Use: Restaurant Facility
In addition, the buyer is to approve a Level I Toxic Waste Report that is to
be provided by the Seller. The appraiser has not reviewed such a report and if
adverse factors are disclosed this may affect the value of the property. The
appraiser asks to review the final lease once finalized to determine if there
is any impact on the valuation issued.
26
<PAGE>
VALUATION SECTION
<PAGE>
VALUATION SECTION
Appraisal Procedures
The three traditional approaches to value are applied in order to arrive at
a final value conclusion. A synopsis of the procedures employed in each
approach follows.
COST APPROACH
The Cost Approach is based upon the proposition that the informed purchaser
would pay no more than the cost of producing a substitute property with the
same utility as the subject. It is particularly applicable when the property
under appraisement involves new or newer improvements which represent the
highest and best use of the land. Additionally it is applicable to those
types of properties which are unique and contain specialized improvements for
which there is no comparable data in the market.
The Cost Approach includes the following steps:
1. Estimate the market value for the land.
2. Estimate the reproduction cost of the improvements.
3. Deducting appropriate depreciation from the cost new to arrive
at a depreciated improvement value.
4. Adding the land and depreciated improvement value to arrive at a
property value estimate.
INCOME APPROACH
The Income Approach views the property as a revenue producing assets whose
value is derived from satisfying investment criteria. This approach generally
follows the following steps:
29
<PAGE>
1. Recognizing the revenue producing potential of the property.
2. Considering appropriate expenses associated with the revenue
including normal operating costs and real property taxes as
well as vacancy and collection loss factors. Care is
exercised in keeping expenses within acceptable proportions
for the specific investment.
3. Subtracting the expenses from revenues in order to arrive
at a net annual income stream produced by the property.
4. Capitalizing the net operating income at an Overall Rate
which considers the risks inherent in the property as
compared to alternate investments.
THE MARKET APPROACH
This method produces an estimate of value by comparing the subject property to
sales and/or listing of similar properties in the same or competing areas.
This technique is used to indicate the value established by informed buyers
and sellers in the market. At the date of this appraisal, there was not
indicated by an inspection of market sales from use of DAMAR/TRW, COMPS INC.
and assessor data an abundance of comparable sales of this type of property.
These restaurant facilities are build and designed by investors who generally
hold onto the property and lease the properties such as the present building
to restaurant operators. At the date of the appraisal such restaurant holding
companies are generally doing well in the Sacramento area given the uplift in
the economy in California.
Since the property is newly constructed the cost approach is felt to bear
significance in the value determination. The lease rate, available
capitalization rates from similar size properties, and the examination of the
income stream, plus the long term nature of the lease are factors that the
income approach should consider.
30
<PAGE>
VALUATION ANALYSIS
The Cost Approach This approach involves the summation of the depreciation
value of the building and site improvements with the market value of the
land. The market value of land added to the depreciated improvement value
estimate is the value indicated by the cost approach. The land sales used to
derive our estimate of land value is presented on the following pages under
land valuation.
We have made adjustments for location, time of sales, size, corner influence,
traffic count, and potential use to arrive at our estimate of land value. This
value when added to the depreciated improvement value estimates produces the
following value estimate attributable to the cost approach.
Land Valuation The comparison method, or market approach is the most common
way of developing a market value estimate for land. In the comparison method,
sales and listings of vacant land comparable to the subject property are
gathered and analyzed. The sale prices are adjusted for time, location,
physical characteristics, and other relevant variations. The adjusted prices
are reduced to some common unit of comparison, such as price per acre or
price per square foot. The appraiser analyzed this information and derives a
unit value applicable to the subject property. When applied to the
appropriate unit measure, this results in an estimate of the market value of
the vacant land.
31
<PAGE>
Perhaps, the best indication of value is the sales price of the subject
property. It was reported that the sales price was $550,000 as the property
is a premiere corner location in a new 'power" shopping center.
An investigation of land sales in the subject's vicinity disclosed several
that were useful in our analysis. We have used land sales in the immediate
area to formulate the value conclusion as follows:
No. Address Lot Area Zoning Sale Date Sale Price Per Sq. Ft.
1. 5007 Foothill Blvd. 25,700 S.F. Commercial 03/12/97 $391,000 $15.21
Roseville, CA.
2. Riverside Avenue 56,628 S.F. Commercial 12/06/96 $230,000 $4.06
Roseville, Ca.
3. Eureka Road 69,696 S.F. Commercial 10/29/96 $374,000 $5.37
Roseville, CA.
Analysis:
An analysis of land sales in the immediate area did not disclose an abundance
to draw our value conclusion. However, only Comparable #1 was of similar
quality and location that when coupled with the reported sale of the subject
property enable the appraiser to arrive at a valuation opinion for 37,918
square feet of $14.50 or a total value of $550,000 for the subject site. That
amount includes the use of reciprocal parking in the adjacent shopping center
as per the arrangement for additional parking.
32
<PAGE>
Land Sale Discussion:
Summary: The review of vacant land sales was conducted
and consideration was given to other sales which did not contradict the
rational utilized in the report. Estimating the value of the subject site as
though vacant is a primary step in completing the cost approach to value.
Vacant land sales reported were helpful in estimating the value of the subject
site as though vacant as was the reported sale of the subject property. In
addition, the appraiser has considered by the land residual technique the
value of land for several restaurants in the immediate area that have recently
sold. For a restaurant like the subject site a typical land value arrived at
by the residual approach ranges from $450,000 to $750,000 for land value
alone. After such adjustments this was used to confirm the value of the land
based on the utility of such usage.
With adjustments, the land value of the subject is similar to these various
approaches. After making adjustments for location, size, date of sale, retail
access, proximity to the central business district, and probable use, we
conclude that the indicated market value of the subject's land value is
conservatively stated at $14.50 per square foot since the property is
desirable and considering the size of the parcel and the location of the
commercial land in the area for development. Therefore, the total land value
for the land is calculated as:
$14.50 x 37,918 square feet = $549,811
which results in a total rounded value of $550.000 for land value
under the definition of fair market value.
33
<PAGE>
Improvement Valuation
The next step in the Cost Approach is to estimate the Reproduction Cost New
of the improvements. Reproduction Cost New is defined as follows:
"The cost of construction at current prices of an exact duplicate
or replica using the same materials, construction standards,
design, layout, and quality of workmanship, embodying all the
deficiencies, super-adequacies and obsolescence of the subject."
The Reproduction Cost estimate is based upon the current market and
includes all items necessary to reproduce the subject improvements as of
the date of appraisal. In compiling the cost estimate the Marshall
Valuation Cost Manual was employed and reflects not only the cost of
material and labor, but also includes architect's fees, engineering
expenses, contractor's fees, overhead and profit. As an improvement ages,
it typically loses value or depreciates because of deterioration and/or
obsolescence resulting from wear and tear, inadequacy or ova-adequacy.
Accrued Depreciation is defined as follows:
"A loss from the upper limit of value. An effect caused by
deterioration and/or obsolescence. Deterioration is evidenced by
wear and tear, decay, dry rot, cracks, encrustation, or structural
defects. Obsolescence is divisible into two parts, functional and
economic. Functional obsolescence may be due to poor floor plan,
mechanical inadequacy or over-adequacy, functional inadequacy or
over-adequacy due to size, style, age, etc. It is evidenced by
conditions within the property. Economic obsolescence is caused by
changes external to the property such as changes in neighboring
property uses, changes in zoning and legislation, etc. It is also
the actual decline in market value of the improvement to land from
time of purchase to the time of resale."
34
<PAGE>
Depreciation is divided into three classifications; Physical Deterioration,
Functional Obsolescence, and Economic Obsolescence. Physical deterioration
refers to the loss in value due to the wear and tear of the physical
components of the structure. Curable physical deterioration is normally
measured by the cost of those physical aspects of the structure which are in
need of repair. Non-curable Physical Deterioration is estimated by the
"Age-Life Method" wherein the depreciation is based upon the relationship of
the structure's effective age to the total estimated physical life when new.
Functional obsolescence is a loss or reduction in the utility of a structure
resulting from a decreased capacity of the structure or one of its component
parts to perform the function for which it was intended. This type of
depreciation or obsolescence is evidenced by conditions within the property
and is generally caused by deficiencies in architectural style, placement of
the improvements on the site, or the general floor plan.
Functional obsolescence can be curable or non-curable. As an example curable
functional obsolescence could present itself as a lack of loading doors in an
industrial property. All things being equal the cure would be to construct
additional doors to permit the building to be competitive with other
facilities. Non-curable obsolescence could be evidenced by low ceiling
heights in comparison to competing structures.
35
<PAGE>
Economic Obsolescence is the loss in value of a property due to factors
outside the limits of the property itself. An example is a major free-standing
chain store relocating and its effects on neighboring local retailers. In
general, the local merchants are highly dependent on the foot traffic created
by a large chain store. The absence of this store will reduce foot traffic and
retail sales for the local merchants. This can reduce the economic rentals
which a property could command prior to the moving of the chain store. Other
examples include the re-routing of thoroughfares, changing of zoning, etc.
Physical Deterioration - Subject Property Physical Deterioration was based on
analysis of the physical condition of the subject improvements. Consideration
was given to the physical deterioration created by the wear of elements and
use, and the estimated effective age of the improvements with respect to the
total estimated physical life of same (Age/Life Method).
Although the improvement's actual age is 0 years, it was noted that the
property has been adequately maintained. An effective age of 65 years was
determined and a remaining economic life of 65 years was considered to be
appropriate. The physical depreciation calculation is set forth as follows.
36
<PAGE>
The effective age is estimated at 0 years which is divided by the effective
age plus the estimated remaining economic life of 65 years. Therefore,
physical depreciation is calculated as: 0/60 = 0% depreciation.
If, we had considered that the building will depreciate on a curvi-linear
basis, the depreciation would be 0% based on Marshall and Swift Valuation
Guide. Curvi-linear depreciation is thought to better represent the physical
depreciation of the improvements. As a result, the appraiser has used a
depreciation percentage of 0% after consideration of both calculations, the
extent of the tenant improvements, and the present good quality and
condition of the improvements.
Functional Obsolescence - Subject Property
None Evident. The subject is well designed for its present and intended
purpose.
Economic Obsolescence - Subject Property None Evident. The area supports the
value of the property.
Our Cost Approach Summary is presented on the following page.
37
<PAGE>
COST APPROACH SUMMARY
A. Two Story Retail Building, Class D Good Quality,
Good Condition with square feet of 5,133 Q an average
of $120 PSF*, new: $615,960
Less Estimated Depreciation from all causes:
Physical Deterioration @ 0% $0
Functional Obsolescence: None
Economic Obsolescence: None < 0>
Total Depreciated Value of the Main Improvement $615,960
C. Estimated Value of Site Improvements $125,000
D. Total Estimated Value of the Improvements: $740,960
E. Furniture, Fixture, and Equipment, Estimate $540,000
Liquor License
F. Add Estimated Land Value $550,000
Total Value Indicated by the Cost Approach: $1,830,960
Rounded to: $1,830,000
* Estimated from Marshall & Swift, Commercial Section and adjusted for
tenant improvements and necessary liquor license.
** This estimate does not consider the turnkey nature of the site, nor the
locational features such as traffic count, competition, etc. that
would give the site utility.
INCOME APPROACH
The next step in the appraisal process is to develop an estimate of value
for the subject property by applying the income approach. This Approach is
recognized as most applicable to those properties which are considered
"investment oriented real estate". The Net Income generated by the
property is capitalized based on the premise that the value of the subject
property is represented by the present worth of anticipated net income.
38
<PAGE>
Considering the location, regular maintenance and repair, and the size of the
structure, the subject would be desirable rental space if exposed to the open
market.
The appraiser has determined that an economic rental rate for the subject is
best represented by current rate that is being negotiated as per the above
lease terms. As this is a sale and leaseback and the subject lease will be for
a 20 year duration and guaranteed by a high net worth individual The property
is a very desirable facility in a developing area. The lease to be negotiated
is to a quality tenant and has 20 years remaining. The rental income will
adjust upward 12.5% every 5 years. It is likely that the rental income will be
increasing along with the price level for that period. In purchasing the
property the appraisal evaluation must consider the rental income received
from the lease to account for the economic benefits due the prospective
purchaser.
The appraiser has determined that the estimate of market rent is calculated as
follows:
39
<PAGE>
Net Lease Basis
Address Square Foot Net Lease Rate Total Rent
6700 Stanford Ranch Rd. 5,133 S.F. $2.80 NNN $14,333
X 12
Total Market Rental Rate $172,000
Total rental revenue is estimated at $172,000 assuming full occupancy and
considering comparable rental rates in the immediate area. An examination of
the existing lease showed a 12.5% adjustment for every five years which is
typical adjustments for the market, but exposes the purchaser to additional
risk should inflation return.
Other rental rates are generally below the subject property in the
surrounding area. The subject property is a new building in a new developing
shopping center. Thus, we have used existing lease rates for fair rental
value.
Vacancy loss has been estimated at 0% given the vacancy and growing
competitive nature of the rental market, the quality tenant, and the
existing lease. The appraiser has considered the vacancy and collection in
the immediate and neighboring area to establish the vacancy rate of 2%, but
then considered the lease which insures a minimum vacancy as long as the
subject company honors it's existing lease. A vacancy rate of 0 is felt to
be appropriate given the lease and the demand for such space given the
demographics and growth of the area.
40
<PAGE>
Total Market Rental Rate $172,000
Total rental revenue is estimated at $172,000 assuming full occupancy and
considering comparable rental rates in the immediate area. An examination of
the existing lease showed a 12.5% adjustment for every five years which is
typical adjustments for the market, but exposes the purchaser to additional
risk should inflation return.
Other rental rates are generally below the subject property in the
surrounding area. The subject property is a new building in a new developing
shopping center. Thus, we have used existing lease rates for fair rental
value.
Vacancy loss has been estimated at 0% given the vacancy and growing
competitive nature of the rental market, the quality tenant, and the
existing lease. The appraiser has considered the vacancy and collection in
the immediate and neighboring area to establish the vacancy rate of 2%, but
then considered the lease which insures a minimum vacancy as long as the
subject company honors it's existing lease. A vacancy rate of 0 is felt to
be appropriate given the lease and the demand for such space given the
demographics and growth of the area.
A study of the market place indicated that there are similar properties to
the subject, but in general they are less desirable properties that are
vacant and/or for sale.
41
<PAGE>
The benefit for the subject property is that it is located in a desirable
commercial location for a restaurant. Common management expenses would include
collecting rents, servicing the debt, if any, paying operating expenses and
paying taxes when due are paid by the tenant.
A study of operating expenses indicate that expenses are estimated to
approximate 3% of Total Rental Revenue for reserves for replacement.
Management expenses have been estimated at 1% of annual income and is paid by
the tenant.
Reserves cover the replacement of short-lived building components (and
deferred maintenance). In this case, reserves for replacement would include
items covered items such as resurfacing, pavement of parking areas, and
roofing repairs. Such reserves are included in the estimate of operating
expenses as short lived items are paid for out of the revenue stream as
needed.
Since the improvements are the reserves for replacement have been estimated
at 2% of annual income.
Statement of Pro-Forma Net Operating Income
Gross Revenue $172,000
Less: Vacancy and Collection Loss @ 0% < 0>
Effective Gross Annual Income $172,000
Operating Expense, Reserve For Replacements, etc. 2% $< 3,440>
Net Income $168,560
42
<PAGE>
Capitalization Process The capitalization of income has been made on the premise
that value is represented by the present worth of anticipated net income. The
projected income stream is based on an analysis of the quality, as well as the
quantity and duration of the income expectancy. This income stream is
capitalized into an indication of value using a capitalization rate developed
from the market.
Using the technique of direct capitalization, the capitalization rate is
calculated using market data as follows:
43
<PAGE>
We have concluded that a capitalization rate of 8.00% appears appropriate given
the time of sale, and the market sales in the recent past. The majority of sales
are owner occupied and not investment owned and it has not been possible to
derive capitalization rates from them. However, sales in the nearby vicinity
generally shows a dropping capitalization rate as rental income increases and
with an increase in market values.
An analysis of direct sales indicated that most of the industrial sales are of
a similar size and type in the immediate area and was investment owned
properties.
After analyzing these sales and the nature of the market in general it is our
opinion that the capitalization rates is for sales in the 1995- 1997 period is
due to the anticipation of the return being obtained at the end of the
investment holding period (as a reversion or sale). Investment in the subject
property requires that a projection be made of resale price in the future
and/or of rental rates in the future. This is difficult to do, but the
direction of change is rising price per square foot, lower vacancy rates, and
stable market interest rates.
A review of economic activity in the area shows a high growth rate which
should be favorable, barring a major economic recession, due to the
technology emphasis in the immediate area as the employment base.
44
<PAGE>
As a result, we have arrived at a direct capitalization approach to arrive at an
overall capitalization rate of approximately 8.00%. We have selected an overall
rate to reflect the rate appropriate for the risks and returns of this type of
investment. We have added to the capitalization rate to reflect the risk in the
economy due to recession and increasing elicited in the market for industrial
property in the immediate area.
The value conclusion as it applies to the subject is as follows:
Net Income + Overall Rate = Value Indication
$168,560 + .0800 = $2,107,000
Rounded To: $2,107,000
Market Approach The next step in the appraisal process is the development of
the market approach for the subject property. The market approach is an
appraisal technique in which a market value estimate is based on prices paid
in actual market value estimate is based on prices paid in actual market
transactions and on current listings. It is a process of analyzing recently
sold and listed properties similar to the subject. The reliability of this
technique depends on (a) the degree of comparability of the property
appraised with each sale or listing, (b) the length of time since the sale,
(c.) the accuracy of the sale data, and (d) the absence of unusual conditions
affecting the sale.
Once the sales are selected they are compared to the subject property on some
unit of comparison which is generally recognized in the marketplace, such as
square feet of
45
<PAGE>
improvement area, including land value, square feet of improvement area after
land value has been subtracted, annual gross rent multiplier, etc.
A search of the subject's area disclosed several sales that were useful in my
analysis. The property is selling at the top of the market range indicated
partially due to the changing market, the favorable 20 year lease term, and
the credit quality of the tenant. The structure is presently under
construction.
The appraiser has considered sales from 1995 to present, plus has checked
several listings in the determination of the comparables to use in the
analysis. Generally, properties in the immediate area that were available for
sale were of similar/lesser locations and were in good condition of
maintenance.
46
<PAGE>
Summary:
The 5 sales represent similar style restaurant sales which have sold in
neighboring and comparable market areas. Although some adjustments have been
noted in each analysis the properties are similar in use, age and design.
Comparable No. 1 is in process of construction. As no one sale indicates a
market other sales have been considered.
Considering these sales on a price per square foot basis before adjustments, a
range of $250 to $450 per square foot was determined. The appraiser has
considered similar sales throughout the Sacramento area and visited a total of
11 restaurants that recently sold. In addition, the appraiser has visited two
existing Applebee's restaurants to view the finished product.
47
<PAGE>
Adjustments were made for size of lot, size of structure, age, location, date of
sale, and other factors such as accessibility. Also, considered was the state of
the local economy and the potential for the restaurant industry.
Therefore, our valuation opinion is based on the following:
Rentable Area: 5,133 s.f. x $400* = $2,053,200
* The price per square foot is based on extensive tenant that will become
fixtures attached to the subject property.
In the market approach we have weighted each comparable carefully to arrive
at a market value indicated at $2,053,000. This valuation has also
considered the quality of the tenants and the nature of the existing lease
on the premises. In addition there were several sales of neighboring
properties that were less desirable than the subject property based on the
quality of improvements and occupancy. We have considered those sales and
they can be justified on the basis of a slightly less visible location, lack
of quality tenants, and due to one being a lesser quality restaurant. Since
many of the restaurant locations were owner occupied many of the successful
restaurant like the subject were not build to be sold, but were built
especially for the restaurant business. Thus, a premium for those
restaurants.
48
<PAGE>
CONCLUSION OF VALUE
The three approaches have various degrees of applicability depending on the
circumstances. The cost approach is usually relied on when the improvements are
new, or nearly new, and are fully utilized for their designed intent, or when
the improvements represent a special purpose property on which no reliable
income or market data is available.
In this instance the cost approach was considered less reliable than the
other approaches and set an upper limit to value. This is due to the
recovery of the commercial market in the area and difficulty of estimating
land value. The cost approach indication of value was $1,083,000 which was,
however, used in deriving the value conclusion after consideration of the
market and income approach.
The income approach is often used for properties that are typically leased.
The income approach was applied in the traditional manner and the value
indication produced was given substantial weight as this property is
"investment oriented" real estate. The income approach indication of value
is $2,107,000. This is the best approach to value as it reflects the income
producing ability of the property and as the property is new, rented to a
quality tenant, and is a franchised restaurant operation, the appraiser has
given greatest weight to this approach.
49
<PAGE>
The market approach reflects actual prices paid for similar properties. This
approach is generally used when reliable and comparable market data are
available. The indicated value for the unit of comparison is then applied
against the subject property. This approach was given lesser weight than the
income approach in the final value conclusion although timely market data
indicated that a recovery was starting as optimistically reported by several
real estate brokers in the area. The market approach indication of value is
$2,053,000 after substantial adjustment. The market approach is given lesser
weight as there are few sales in the immediate range as the subject which is a
new property built for an experienced user under a sale and leaseback
arrangement.
The appraiser has given the greatest weight to the income approach and then
considered the market approach and the cost approach. In general, market
conditions had changed with few sales in the 1997 time period. As a result, we
have tempered the values arrived at by the market (e.g. direct sales) approach
for the change in market conditions. Since substantial factors such as income
generating ability must be carefully considered in this type of appraisal we
have carefully considered the income approach to value. That approach while
yielding the highest indication of value suggests that an investment in a
restaurant facility must carefully consider the income generating ability of
real property. To supplement this analysis the appraiser has considered the
demographic features of the local market and also the neighborhood from which
the is located.
50
<PAGE>
In conclusion, based upon the foregoing analysis, it is our opinion that the
Fair Market Value of the subject unencumbered, as of August 5, 1997 is
estimated at:
TWO MILLION NINETY FIVE THOUSAND DOLLARS
$2,095,000.
The appraiser has given greatest weight to the income approach and then
consider the market approach and cost approach, but has given slightly less
weight to the cost approach. Carefully considered was the terms of the
existing lease and the tenant's use of the facility. The appraiser has not
reviewed the financial condition, nor financial statements of the tenants, but
was assured that the tenant has the requisite ability to manage the subject
restaurant and the business acumen to make this a successful venture.
51
