<PAGE>
SUBJECT TO COMPLETION -- JUNE 15, 1999
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED JUNE 8, 1999)
- --------------------------------------------------------------------------------
1,250,000 SHARES
[LOGO]
CORPORATE OFFICE PROPERTIES TRUST
% SERIES B CUMULATIVE REDEEMABLE PREFERRED SHARES
(LIQUIDATION PREFERENCE $25.00 PER SHARE)
- -------------------------------------------------------------------------
THE INFORMATION IN THIS PROSPECTUS SUPPLEMENT IS NOT COMPLETE AND MAY BE
CHANGED. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED
AND IS EFFECTIVE. THIS PROSPECTUS SUPPLEMENT IS NOT AN OFFER TO SELL THESE
SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY
STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
<PAGE>
Corporate Office Properties Trust is a fully-integrated and self-managed real
estate investment trust which focuses on the ownership, management, leasing,
acquisition and development of suburban office properties in select Mid-Atlantic
submarkets. As of April 30, 1999, Corporate Office Properties Trust owned 59
suburban office properties totaling 4.7 million rentable square feet which were
97.8% occupied. In addition, Corporate Office Properties Trust's property
management subsidiary, in which it owns the principal economic interest, manages
115 commercial properties totaling 9.0 million rentable square feet for third
parties. Corporate Office Properties Trust is among the largest suburban office
owners in the majority of its submarkets and the largest in the Northern
Baltimore/Washington Corridor.
Corporate Office Properties Trust will pay quarterly cumulative dividends, in
arrears, on the Series B Preferred Shares from the date of original issue on
April 15, July 15, October 15 and January 15 of each year, when and as declared,
beginning on July 15, 1999, at a yearly rate of % of the $25.00 liquidation
preference, or $ per Series B Preferred Share per year.
The Series B Preferred Shares will not be redeemable prior to July 15, 2004,
except in order to preserve Corporate Office Properties Trust's status as a real
estate investment trust. On or after July 15, 2004, Corporate Office Properties
Trust may, at its option, redeem the Series B Preferred Shares, in whole or from
time to time in part, for cash at $25.00 per Series B Preferred Share plus any
accrued and unpaid dividends through the date of redemption. The Series B
Preferred Shares have no stated maturity, are not subject to any sinking fund
and will remain outstanding indefinitely unless redeemed.
It is anticipated that the Series B Preferred Shares will be listed on the New
York Stock Exchange under the symbol "OFC PFD.B." Corporate Office Properties
Trust expects that trading on the New York Stock Exchange will commence within
30 days after initial delivery of the Series B Preferred Shares.
<TABLE>
<CAPTION>
PER SHARE TOTAL
<S> <C> <C>
Public offering price........................................................... $ $
Underwriting discounts and commissions.......................................... $ $
Proceeds, before expenses, to Corporate Office Properties Trust................. $ $
</TABLE>
SEE "RISK FACTORS" ON PAGES 4 TO 10 OF THE ACCOMPANYING PROSPECTUS FOR FACTORS
THAT SHOULD BE CONSIDERED BEFORE INVESTING IN THE SERIES B PREFERRED SHARES OF
CORPORATE OFFICE PROPERTIES TRUST.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
accuracy or adequacy of this prospectus supplement or the accompanying
prospectus. Any representation to the contrary is a criminal offense.
- --------------------------------------------------------------------------------
The underwriters may, under certain circumstances, purchase up to 187,500
additional Series B Preferred Shares from Corporate Office Properties Trust at
the public offering price, less underwriting discounts and commissions. Delivery
and payment for the Series B Preferred Shares will be on June , 1999.
PRUDENTIAL SECURITIES
DEUTSCHE BANC ALEX. BROWN
DONALDSON, LUFKIN & JENRETTE
JANNEY MONTGOMERY SCOTT INC.
TUCKER ANTHONY CLEARY GULL
June , 1999
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PROSPECTUS SUPPLEMENT
<S> <C>
PAGE
---------
Summary.............................. S-1
Capitalization....................... S-10
Financial Ratios..................... S-11
Use of Proceeds...................... S-12
Our Company.......................... S-13
Our Office Portfolio................. S-16
Management........................... S-23
Description of Series B Preferred
Shares............................. S-26
Certain Federal Income Tax Matters... S-35
Underwriting......................... S-37
Experts.............................. S-38
Legal Matters........................ S-38
Where You Can Find More
Information........................ S-39
<CAPTION>
PROSPECTUS
PAGE
---------
<S> <C>
Summary.............................. 3
Risk Factors......................... 4
Use of Proceeds...................... 10
Ratios of Earnings to Combined
Fixed Charges and Preferred Share
Dividends.......................... 10
General Description of the Offered
Securities......................... 10
Description of Shares................ 11
Federal Income Tax Matters........... 20
Plan of Distribution................. 31
Experts.............................. 32
Legal Matters........................ 32
Where You Can Find More
Information........................ 32
</TABLE>
- --------------------------------------------------------------------------------
The terms "COPT," "Company," "we," "our" and "us" refer to Corporate Office
Properties Trust and our subsidiaries, including Corporate Office Properties,
L.P., Corporate Office Management, Inc., Corporate Realty Management, LLC, and
Corporate Development Services, LLC unless the context suggests otherwise. The
term "you" refers to a prospective investor.
- --------------------------------------------------------------------------------
We are providing information to you about our company and the Series B
Preferred Shares in this prospectus supplement and the accompanying prospectus.
This prospectus supplement is more specific than the accompanying prospectus. If
the information in this prospectus supplement differs from the accompanying
prospectus, you should rely on the information in this prospectus supplement.
You should rely only on the information contained in this prospectus supplement
and the accompanying prospectus that follows or that is incorporated by
reference in these documents. We have not authorized anyone to provide you with
different information. We are not making an offer of these securities in any
jurisdiction where the offer or sale is not permitted. You should not assume
that the information contained or incorporated by reference in this prospectus
supplement and the accompanying prospectus is accurate as of any date other than
the date on the front cover of this prospectus supplement.
i
<PAGE>
FORWARD-LOOKING STATEMENTS
This prospectus supplement, the accompanying prospectus and our documents
incorporated by reference herein and therein contain "forward-looking"
statements, within the meaning of Section 27A of the Securities Act and Section
21E of the Exchange Act as defined in the Private Securities Litigation Reform
Act of 1995, that are based on our current expectations, estimates and
projections about future events and financial trends affecting the financial
condition of our business. Statements that are not historical facts, including
statements about our beliefs and expectations, are forward-looking statements.
These forward-looking statements are subject to a number of risks, uncertainties
and assumptions about us which include, but are not limited to: our ability to
borrow on favorable terms; general economic and business conditions, which will,
among other things, affect office property demand and rents, tenant
creditworthiness and financing availability; adverse changes in the real estate
markets including, among other things, competition with other companies; risks
of real estate acquisition and development; governmental actions and
initiatives; environmental requirements; and the other factors described under
the heading "Risk Factors" beginning on page 4 of the prospectus accompanying
this prospectus supplement.
In addition, in this prospectus supplement, the words "believe," "may,"
"will," "estimate," "continue," "anticipate," "intend," "expect" and similar
expressions, as they relate to us, our business or our management, are intended
to identify forward-looking statements. We undertake no obligation to publicly
update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise. In light of these risks and
uncertainties, the forward-looking events and circumstances discussed in this
prospectus supplement and the accompanying prospectus may not occur and actual
results could differ materially from those anticipated or implied in the
forward-looking statements.
ii
<PAGE>
SUMMARY
THIS SUMMARY HIGHLIGHTS INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS
SUPPLEMENT, AND MAY NOT CONTAIN ALL OF THE INFORMATION INVESTORS SHOULD CONSIDER
BEFORE INVESTING IN OUR SERIES B PREFERRED SHARES. YOU SHOULD READ THE ENTIRE
PROSPECTUS SUPPLEMENT AND ACCOMPANYING PROSPECTUS CAREFULLY, ESPECIALLY THE
"RISK FACTORS" SECTION BEGINNING ON PAGE 4 OF THE ACCOMPANYING PROSPECTUS AND
THE DOCUMENTS WE REFER YOU TO IN THE SECTION OF THIS PROSPECTUS SUPPLEMENT
CALLED "WHERE YOU CAN FIND MORE INFORMATION." UNLESS OTHERWISE INDICATED, ALL
INFORMATION IN THIS PROSPECTUS SUPPLEMENT ASSUMES THAT (I) ALL PROPERTY
INFORMATION IS PRESENTED AS OF APRIL 30, 1999, (II) ALL FINANCIAL INFORMATION IS
PRESENTED AS OF MARCH 31, 1999, AND (III) THE UNDERWRITERS' OVER-ALLOTMENT
OPTION TO PURCHASE UP TO 187,500 ADDITIONAL SERIES B PREFERRED SHARES IS NOT
EXERCISED.
CORPORATE OFFICE PROPERTIES TRUST
We are a fully-integrated and self-managed real estate investment trust
("REIT"). Important aspects of our company include:
SUBURBAN OFFICE FOCUS. We focus on the ownership, management, leasing,
acquisition and development of suburban office properties. We believe office
buildings currently offer the strongest fundamentals of any real estate property
type, and suburban office properties offer us very attractive investment
opportunities. The three key factors driving the strong fundamentals of suburban
office properties are (i) increasing rental rates, (ii) low vacancy rates, and
(iii) a limited supply of new office product. Additionally, we believe that many
companies are relocating to, and expanding in, suburban locations because of
lower total costs, proximity to residential housing and better quality of life.
GEOGRAPHIC AND SUBMARKET FOCUS. Our strategy is to operate in select,
demographically strong and growing submarkets, primarily within the Mid-Atlantic
region, where we believe we can achieve the critical mass necessary to maximize
management efficiencies, operating synergies and competitive advantages through
our acquisition, property management and development programs. As a result, we
are among the largest suburban office owners in the majority of our submarkets
and the largest in the Northern Baltimore/Washington Corridor.
The following table sets forth certain information, as of April 30, 1999,
regarding our office portfolio:
<TABLE>
<CAPTION>
% of Total Total Rental
Number Rentable Total Rental Rental Revenue Per
Region of Properties Square Feet Occupancy Revenue(1) Revenue Occupied Sq. Ft.
- ----------------------------------- -------------- ----------- --------- ------------- ---------- ----------------
<S> <C> <C> <C> <C> <C> <C>
(thousands)
Northern Baltimore/Washington
Corridor(2) 39 2,736,612 98.0% $44,381 62.0% $16.55
Blue Bell/Philadelphia 4 960,349 100.0 9,122 12.8 9.50
Greater Harrisburg 3 184,821 100.0 2,755 3.9 14.91
Northern/Central New Jersey 13 866,110 94.1 15,289 21.3 18.75
--- ----------- ------------- -----
TOTAL/AVERAGE 59 4,747,892 97.8% $71,547 100.0% $15.41
--- ----------- ------------- -----
--- ----------- ------------- -----
</TABLE>
- ------------------------------
(1) Total Rental Revenue is the monthly contractual base rent as of April 30,
1999 multiplied by 12 plus the estimated annualized expense reimbursements
under existing office leases.
(2) The Northern Baltimore/Washington Corridor encompasses Anne Arundel and
Howard Counties. In addition, we own three properties outside of this region
in suburban Washington, D.C.
OFFICE PARK FOCUS. Our properties are principally located in established
suburban corporate office parks. We believe the suburban office park environment
generally attracts longer-term tenants, including high-quality corporations
seeking to attract and retain quality work forces, because these parks are
typically situated along major transportation routes with easy access to support
services, amenities and residential communities. Consistent with our submarket
strategy, we are the largest office property owner within many of the suburban
office parks in which we operate.
S-1
<PAGE>
CORPORATE TENANTS. Our office properties are leased to a variety of
corporations in a wide range of industries. Our tenant base includes Federal and
state governmental entities, national and international service sector employers
and high tech firms. To enhance the stability of our cash flow, we typically
structure our leases with terms ranging from three to ten years. Additionally,
we focus on leasing to large, high-quality corporations with significant space
requirements. The following table sets forth credit information, as of April 30,
1999, on certain of our office tenants:
<TABLE>
<CAPTION>
Number Total Rental % of Total Rental Wtd. Avg. Remaining
Credit Rating(1) of Leases Revenue(2) Revenue Lease Term(3)
- --------------------------------------- --------------- ------------- --------------------- -------------------------
<S> <C> <C> <C> <C>
(thousands) (years)
Agencies of the U.S. Government 14 $ 13,855 19.4% 6.0
All Investment-Grade Tenant Leases(4) 62 35,097 49.1 6.8
</TABLE>
- ------------------------------
(1) Based on Standard & Poor's Rating Corporation long-term unsecured debt
rating for each tenant.
(2) Total Rental Revenue is the monthly contractual base rent as of April 30,
1999 multiplied by 12 plus the estimated annualized expense reimbursements
under the existing office leases.
(3) Based on Total Rental Revenue.
(4) Includes agencies of the U.S. Government.
Our largest tenants include, among others, several agencies of the U.S.
Government, Unisys, IBM, AT&T Local Services, Magellan Behavioral Health, Inc.,
Merck & Co., Inc. and Ciena Corporation. Our 20 largest tenants lease a total of
3.2 million rentable square feet and account for approximately two-thirds of our
total rental revenue and rentable square feet. Our office portfolio average
lease size is approximately 16,521 rentable square feet with a weighted average
remaining lease term of 5.4 years. During 1998, our tenant retention rate was
92.8% (based on rentable square footage renewed) and our re-tenanting costs
averaged $1.49 per square foot.
OPERATIONAL INFRASTRUCTURE. We conduct our operations principally through
our operating partnership, Corporate Office Properties, L.P., for which we are
the sole managing general partner. Our operating partnership owns our properties
both directly and through subsidiary partnerships and limited liability
companies. All of our property management operations are conducted through our
unconsolidated property management subsidiary Corporate Realty Management, LLC
("CRM"). See "Our Company--Ownership Structure." In addition to our 59
properties, CRM manages 115 commercial properties totaling 9.0 million rentable
square feet for a number of nationally recognized institutional owners,
including, among others: C.B. Richard Ellis; Lend Lease Real Estate Advisors;
LaSalle Investment Management, Inc.; and T.A. Associates. We believe our
activities through CRM give us significant competitive advantages including
enhanced tenant satisfaction and property performance and lead to potential
tenant expansions, acquisitions and build-to-suit development opportunities.
Additionally, we believe CRM's established infrastructure, which includes ten
regional offices in four states in the Mid-Atlantic region, has the capacity to
support a much larger asset base and will enable us to substantially expand our
portfolio in existing and new submarkets efficiently without significantly
increasing our overhead.
MID-ATLANTIC MANAGEMENT EXPERIENCE. Our nine executive officers have an
average of 21 years of property management, acquisition and development
experience specifically within our markets. We believe our extensive experience,
market knowledge and network of industry contacts within the Mid-Atlantic region
provide us with an important competitive advantage in establishing, maintaining
and enhancing our prominence within our selected submarkets. Additionally, as a
seasoned and prominent owner and operator, we believe we can effectively attract
and retain quality corporate tenants and efficiently accommodate tenant needs on
a cost-effective basis.
CAPITAL MARKETS EXPERIENCE. Our company is led by Jay Shidler, Chairman of
our Board of Trustees. Mr. Shidler has a nationally recognized investment track
record resulting from the successful creation and performance of two other large
public real estate companies, First Industrial Realty Trust, Inc. and TriNet
Corporate Realty Trust, Inc. Including Mr. Shidler, our nine executive officers
have an average of 15 years of public company operating experience.
S-2
<PAGE>
DEBT STRATEGY. Our capitalization policy is aimed at maintaining a flexible
capital structure in order to facilitate consistent growth and performance
through all market conditions. An important element of our policy is our debt
strategy. We primarily utilize property-level mortgage debt as opposed to
corporate unsecured debt. We believe the commercial mortgage debt market is a
more mature and generally a more stable market for real estate companies, which
provides us with greater access to capital on a more consistent basis and,
generally, on more favorable terms. We seek to maintain, on a consolidated
basis, a minimum debt service coverage ratio (ratio of EBITDA (operating income
before mortgage and other interest, income taxes, depreciation and amortization)
to debt service (interest expense plus capitalized interest and scheduled
principal amortization)) of 1.6 to 1.0, which we believe is generally consistent
with the current minimum investment grade requirement for mortgages securing
commercial real estate. We believe this ratio is appropriate for a seasoned
portfolio of suburban office buildings. For the three month period ended March
31, 1999, our debt service coverage ratio was 2.2 to 1.0.
MANAGEMENT OWNERSHIP. As of March 31, 1999, our executive officers and
Trustees owned a total of 29.8% of our equity, on a fully diluted basis, which
we believe is among the highest management ownership positions within the public
REIT industry.
RECENT DEVELOPMENTS
ACQUISITION PROGRAM
Upon the completion of our public offering of Common Shares in April 1998,
which raised $72.7 million in net proceeds, we embarked on implementing our
stated three-part acquisition strategy targeting: (i) entity acquisitions of
significant portfolios along with their management to establish prominent
ownership positions in new submarkets and enhance our management infrastructure;
(ii) portfolio purchases to expand our existing submarket positions as well as
enter selective new submarkets; and (iii) opportunistic acquisitions of
individual properties in our existing submarkets.
COMPLETED ACQUISITIONS. The following table sets forth certain information,
as of April 30, 1999, regarding office properties we acquired since April 1998:
<TABLE>
<CAPTION>
Transaction and Number Rentable Total
Location Type Submarket of Properties Sq. Ft. Cost(1) Date(s) Acquired
- --------------------- ----------- --------------------------- ----------------- --------- ----------- -----------------
<S> <C> <C> <C> <C> <C> <C>
(thousands)
Airport Square Portfolio BWI Airport 12 812,616 $ 72,618 April 1998
LINTHICUM, MD
Fairfield Portfolio Wayne 2 262,417 29,405 May 1998
FAIRFIELD, NJ
Constellation Entity Baltimore/Washington(2) 12 1,197,625 153,256 Sept.-Dec. 1998
BALTIMORE, MD
Centerpoint Portfolio Exit 8A - Cranbury 8 269,224 31,656 October 1998
CRANBURY, NJ
7200 Riverwood Drive Single Howard County Perimeter 1 160,000 20,333 October 1998
COLUMBIA, MD Asset
Gateway 44 Portfolio Howard County Perimeter 3 148,804 17,345 December 1998
COLUMBIA, MD
Airport Square XXI Single BWI Airport 1 67,913 6,751 February 1999
LINTHICUM, MD Asset
Parkway Crossing Portfolio BWI Airport 2 99,026 9,343 April 1999
LINTHICUM, MD
Commons Corporate Portfolio BWI Airport 8 249,426 25,891 April 1999
LINTHICUM, MD
-- --------- -----------
TOTAL 49 3,267,051 $ 366,598
-- --------- -----------
-- --------- -----------
</TABLE>
- ------------------------------
(1) Includes the purchase price and all closing costs.
(2) Our properties are specifically located in the BWI Airport, Howard County
Perimeter, Southern Prince George's County and Laurel submarkets.
S-3
<PAGE>
DEVELOPMENT PROGRAM
We balance our acquisition program through selective development and
expansion of suburban office properties as market conditions and leasing
opportunities support favorable risk-adjusted returns. Our development
activities are principally in response to the needs of existing and prospective
new tenants. We develop sites that are in close proximity to our existing
properties. We currently have options to acquire 121 acres, which can support
approximately 1.9 million rentable square feet of new office development,
principally located in the corporate office parks in which we currently operate.
COMPLETED DEVELOPMENTS. The following table sets forth certain information,
as of April 30, 1999, regarding recently completed development projects:
<TABLE>
<CAPTION>
Rentable
Property and Location Submarket Sq. Ft. Occupancy Total Cost Date Completed
- ------------------------------------ -------------------------- ---------- ------------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
(thousands)
6950 Columbia Gateway Drive Howard County Perimeter 107,778 100.0% $ 17,928 October 1998
COLUMBIA, MD
135 National Business Parkway BWI Airport 86,863 100.0 12,384 December 1998
ANNAPOLIS JUNCTION, MD
---------- -----------
TOTAL 194,641 100.0% $ 30,312
---------- -----------
---------- -----------
</TABLE>
DEVELOPMENTS UNDER CONSTRUCTION. The following table sets forth certain
information, as of April 30, 1999, regarding projects under construction:
<TABLE>
<CAPTION>
Rentable Percentage Scheduled
Property and Location Submarket Sq. Ft. Pre-leased Total Cost Completion
- ------------------------------------ -------------------------- ---------- ------------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
(thousands)
6940 Columbia Gateway Drive Howard County Perimeter 106,000 46.2% $ 13,900 3Q 1999
COLUMBIA, MD
134 National Business Parkway BWI Airport 92,816 74.8 12,300 3Q 1999
ANNAPOLIS JUNCTION, MD
---------- -----------
TOTAL 198,816 59.5% $ 26,200
---------- -----------
---------- -----------
</TABLE>
PROJECTS IN PRE-DEVELOPMENT. As of April 30, 1999, we had six projects in
the pre-development phase totaling approximately 500,000 rentable square feet of
suburban office space and representing approximately $76.7 million in total
development costs. Based on preliminary discussions with a number of prospective
tenants, we expect to commence construction on these projects during the next
six months. The commencement of these projects is generally subject to an
acceptable level of pre-leasing. Accordingly, we can give no assurance that any
or all of these projects will be initiated or completed.
PROPERTY DISPOSITIONS
Consistent with our strategy of focusing on owning and operating suburban
office properties, we sold four retail properties for $33.4 million during the
first quarter of 1999. Three of these properties were part of our predecessor
company's portfolio, and one property was acquired as part of the Constellation
entity transaction. The net proceeds from these sales were used to repay
borrowings outstanding under our secured revolving line of credit.
FINANCING ACTIVITY
In May 1998, we entered into a $100.0 million secured revolving credit
facility with Bankers Trust Company, an affiliate of one of the underwriters in
this offering. We borrow under this facility primarily to fund our property
development activities and acquisitions. Borrowings under the facility bear
interest at LIBOR plus 1.75%. As of March 31, 1999, 22 of our properties secured
this loan and the outstanding balance was $82.0 million. The loan matures in May
2000, and may be extended by us for a one-year period, subject to customary
conditions. In January 1999, we entered into an interest
S-4
<PAGE>
rate swap agreement with Bankers Trust Company which fixed the LIBOR interest
rate on a notional principal amount of $30.0 million at 5.1% per annum through
May 2001.
In October 1998, we obtained an $85.0 million fixed-rate, long-term mortgage
from Teachers Insurance and Annuity Association of America. The loan is secured
by nine of our properties. The loan bears interest at a fixed rate of 6.89%,
requires monthly payments of interest and principal based on a 25 year
amortization schedule, and matures in November 2008. The proceeds from this loan
were used primarily to repay certain debt assumed in our property acquisitions
and a portion of our secured revolving credit facility.
As of April 30, 1999, we financed our $366.6 million of acquisitions by:
- incurring $177.5 million in mortgage indebtedness including assumed
mortgages, on certain of our acquired properties;
- issuing 14,530,793 Common Shares, valued at $152.6 million ($10.50 per
share), including proceeds from our April 1998 public offering;
- issuing 475,157 Common Units, valued at $5.0 million ($10.50 per unit);
- issuing 984,308 5.5% Series A Convertible Preferred Shares, valued at
$24.6 million ($25.00 per share); and
- utilizing $6.9 million of cash reserves.
In connection with our two development projects currently under
construction, during the first quarter of 1999 we entered into two construction
loan facilities totaling $20.7 million. These loans bear interest at a rate of
LIBOR plus 1.6% and LIBOR plus 1.75%. These loans each mature in 2001, and may
be extended, at our option, for one year, subject to customary conditions. As of
March 31, 1999, we had borrowed $7.6 million under these loans.
SUBORDINATION AND CONVERSION OF INITIAL PREFERRED UNITS
In connection with this offering, all of the holders of the Initial
Preferred Units ($52.5 million) in our operating partnership, including Jay
Shidler, the Chairman of our Board of Trustees, and Clay Hamlin, our Chief
Executive Officer, have agreed to effectively subordinate their priority return
distributions to the distributions designated to the Series B Preferred Shares.
Additionally, these holders have agreed to convert their Initial Preferred Units
into Common Units on October 1, 1999, the earliest allowable date for
conversion. See "Description of Series B Preferred Shares--Ranking."
S-5
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Securities Offered........... 1,250,000 Series B Preferred Shares (1,437,500 Series B
Preferred Shares if the underwriters' over-allotment option
is exercised in full)
Dividends.................... Dividends on the Series B Preferred Shares will be
cumulative from the date of original issue and are payable
quarterly, in arrears, on April 15, July 15, October 15 and
January 15 of each year, when and as declared, beginning on
July 15, 1999. We will pay cumulative dividends on the
Series B Preferred Shares in an amount per share equal to
$ per year, equivalent to % of the $25.00
liquidation preference.
Liquidation Preference....... $25.00 per Series B Preferred Share, plus an amount equal to
any accrued and unpaid dividends, whether or not earned or
declared
Optional Redemption.......... The Series B Preferred Shares will not be redeemable prior
to July 15, 2004, except in certain limited circumstances
relating to the ownership limitation necessary to preserve
our qualification as a REIT. On and after July 15, 2004, we
may, at our option, redeem the Series B Preferred Shares, in
whole or from time to time in part, for cash at $25.00 per
Series B Preferred Share, plus accrued and unpaid dividends,
if any, to the redemption date. The redemption price for the
Series B Preferred Shares, other than any portion thereof
consisting of accrued and unpaid dividends, will be payable
solely with the proceeds from the sale of equity securities
by us or our subsidiaries.
Ranking...................... The Series B Preferred Shares will rank senior to our Common
Shares and equal to our 5.5% Series A Convertible Preferred
Shares ($24.6 million liquidation preference) and any other
parity securities that we may issue in the future, in each
case with respect to payment of distributions and amounts
upon liquidation, dissolution or winding-up. All of the
holders of the Initial Preferred Units of our operating
partnership have agreed to subordinate such units to the
Series B Preferred Units, which mirror the economic terms of
the Series B Preferred Shares. See "Description Of Series B
Preferred Shares--Ranking."
Voting Rights................ Holders of the Series B Preferred Shares will generally have
no voting rights. However, if dividends have not been paid
for six or more quarterly periods (whether or not
consecutive), holders of the Series B Preferred Shares and
the holders of all other shares of any class or series
ranking on a parity with the Series B Preferred Shares which
are entitled to similar voting rights (voting together as a
single class) will be entitled to elect two additional
Trustees to our Board of Trustees until all unpaid dividends
have been paid or declared and set apart for payment. In
addition, certain material adverse changes to the terms of
the Series B Preferred Shares cannot be made without the
affirmative vote of the holders of at least two-thirds of
our outstanding Series B Preferred Shares and shares of any
class or series of stock ranking on a parity with the
</TABLE>
S-6
<PAGE>
<TABLE>
<S> <C>
Series B Preferred Shares which are entitled to similar
voting rights (voting together as a single class).
Ownership Limit.............. To maintain our qualification as a REIT for federal income
tax purposes, you may not acquire more than 9.8% of the
number or aggregate value of all of our outstanding common
and preferred shares.
Listing...................... We intend to file an application to list the Series B
Preferred Shares on the NYSE under the symbol "OFC PFD.B."
We expect that trading on the NYSE will commence within 30
days after initial delivery of the Series B Preferred
Shares.
Form......................... The Series B Preferred Shares will be issued and maintained
in book-entry form registered in the name of the nominee of
the Depository Trust Company except under limited
circumstances described herein.
Conversion................... The Series B Preferred Shares are not convertible into, or
exchangeable for, any other of our property or securities.
Use of Proceeds.............. We intend to contribute the net proceeds from this offering
to our operating partnership to repay certain indebtedness
under our secured revolving credit facility and for our
general operating purposes.
</TABLE>
There has been no public market for the Series B Preferred Shares prior to
this offering. As a result, we cannot be sure that the initial public offering
price will be an accurate indication of the price at which this Series B
Preferred Shares will trade in the public market after this offering or that
there will be an active trading market for the Series B Preferred Shares. For
additional information regarding the terms of the Series B Preferred Shares, see
"Description of Series B Preferred Shares."
S-7
<PAGE>
SUMMARY FINANCIAL DATA
The following table contains summary financial data as of and for the year
ended December 31, 1998 (the first calendar year of operations ending after our
reformation as a Maryland real estate investment trust) derived from our audited
financial statements and unaudited information as of and for the three months
ended March 31, 1999 and 1998. Since this information is only a summary, you
should refer to our consolidated financial statements and "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in our
Annual Report on Form 10-K for the year ended December 31, 1998 and our
Quarterly Report on Form 10-Q for the three months ended March 31, 1999,
incorporated by reference in this prospectus supplement, for additional
information.
<TABLE>
<CAPTION>
Three Months Ended March 31,
Year Ended
---------------------------- December 31,
1999 1998 1998
------------- ------------- -------------
<S> <C> <C> <C>
(dollar and share information in thousands,
except per share data)
OPERATING DATA:
Revenues:
Rental income...................................................... $ 16,179 $ 4,919 $ 35,676
Tenant recoveries and other income................................. 2,344 606 4,538
------------- ------------- -------------
Total revenues................................................... 18,523 5,525 40,214
------------- ------------- -------------
Expenses:
Property operating................................................. 5,003 899 9,632
General and administrative......................................... 889 299 1,890
Interest........................................................... 5,193 2,159 12,207
Amortization of deferred financing costs........................... 225 64 423
Depreciation and other amortization................................ 2,792 977 6,285
Reformation costs(1)............................................... -- 637 637
------------- ------------- -------------
Total expenses................................................... 14,102 5,035 31,074
------------- ------------- -------------
Income before equity in income of Service Companies, gain on sales of
rental properties, minority interests and extraordinary item(2).... 4,421 490 9,140
Equity in income of Service Companies................................ 181 -- 139
Gain on sale of rental properties.................................... 986 -- --
Minority interests................................................... (1,349) (989) (4,583)
Extraordinary item--loss on retirement of debt....................... (694) -- --
------------- ------------- -------------
Net income (loss).................................................... 3,545 (499) 4,696
Preferred share dividends............................................ (338) -- (327)
------------- ------------- -------------
Net income (loss) available to Common Shareholders................... $ 3,207 $ (499) $ 4,369
------------- ------------- -------------
------------- ------------- -------------
Basic earnings (loss) per Common Share
Income before extraordinary item................................... $ 0.23 $ (0.22) $ 0.48
Extraordinary item--loss on retirement of debt..................... (0.04) -- --
------------- ------------- -------------
Net income (loss) per Common Share................................. $ 0.19 $ (0.22) $ 0.48
------------- ------------- -------------
------------- ------------- -------------
Diluted earnings (loss) per Common Share
Income before extraordinary item................................... $ 0.19 $ (0.22) $ 0.47
Extraordinary item--loss on retirement of debt..................... (0.02) -- --
------------- ------------- -------------
Net income (loss) per Common Share................................. $ 0.17 $ (0.22) $ 0.47
------------- ------------- -------------
------------- ------------- -------------
Cash dividends declared per Common Share............................. $ 0.18 $ 0.15 $ 0.66
Weighted average Common Shares outstanding--basic.................... 16,802 2,268 9,099
Weighted average Common Shares outstanding--diluted.................. 28,914 2,294 19,237
BALANCE SHEET DATA (AS OF PERIOD END):
Commercial real estate properties, net............................... $ 528,029 $ 187,730 $ 546,887
Total assets......................................................... 550,203 192,656 563,677
Mortgage loans payable............................................... 290,836 114,301 306,824
Total liabilities.................................................... 302,588 117,194 317,700
Minority interests................................................... 78,922 64,611 77,196
Shareholders' equity................................................. 168,693 10,851 168,781
</TABLE>
S-8
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended March 31,
Year Ended
---------------------------- December 31,
1999 1998 1998
------------- ------------- -------------
(dollar and share information in thousands,
except per share data)
<S> <C> <C> <C>
OTHER DATA:
Cash flows provided by (used in):
Operating activities............................................... $ 6,470 $ 956 $ 13,141
Investing activities............................................... (78) (682) (183,928)
Financing activities............................................... (5,126) (1,323) 169,741
Funds from operations(3)............................................. 7,376 2,099 16,154
OFFICE PROPERTY DATA (AS OF PERIOD END):
Number of office properties owned.................................... 49 10 48
Total rentable square feet owned (in thousands)...................... 4,399 1,488 4,338
</TABLE>
- ------------------------------
(1) Reflects a non-recurring expense of $637 associated with our reformation
during the first quarter of 1998. This transaction has been eliminated in
determining funds from operations ("FFO") since it is not expected to have a
continuing impact on us. For information regarding the reformation, see Note
8 to Notes to Consolidated Financial Statements included in our Annual
Report on Form 10-K for the year ended December 31, 1998 incorporated by
reference in this prospectus supplement.
(2) The Service Companies constitute Corporate Office Management, Inc. together
with its subsidiaries, Corporate Realty Management, LLC and Corporate
Development Services, LLC.
(3) We consider FFO to be meaningful to investors as a measure of the financial
performance of an equity REIT when considered with the financial data
presented under generally accepted accounting principles ("GAAP"). Under the
National Association of Real Estate Investment Trusts' ("NAREIT")
definition, FFO means net income (loss) computed in accordance with GAAP,
excluding gains (or losses) from debt restructuring and sales of property,
plus real estate-related depreciation and amortization and after adjustments
for unconsolidated partnerships and joint ventures. Further, if the
conversion of securities into Common Shares is dilutive, we exclude any GAAP
income allocated to these securities in computing FFO. The FFO we present
may not be comparable to the FFO of other REITs since they may interpret the
current NAREIT definition of FFO differently or they may not use the current
NAREIT definition of FFO. FFO is not the same as cash generated from
operating activities or net income determined in accordance with GAAP. FFO
is not necessarily an indication of our cash flow available to fund cash
needs. Additionally, it should not be used as an alternative to net income
when evaluating our financial performance or to cash flow from operating,
investing, and financing, when evaluating our liquidity or ability to make
cash distributions or pay debt service.
S-9
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of March 31, 1999: (i)
on a historical basis; (ii) as adjusted for our acquisitions of the Commons
Corporate portfolio, purchased on April 28, 1999, and the Parkway Crossing
portfolio, purchased on April 16, 1999 (together, the "Acquisitions"); and (iii)
as further adjusted assuming the sale of Series B Preferred Shares and the
application of net proceeds of this offering as described under "Use of
Proceeds" and assuming conversion of the Initial Preferred Units into Common
Units (the "Conversion"). The information set forth in the following table
should be read in conjunction with, and is qualified in its entirety by, the
consolidated financial statements and the notes thereto in our Annual Report on
Form 10-K for the year ended December 31, 1998, and our Quarterly Report on Form
10-Q for the quarter ended March 31, 1999, incorporated by reference herein:
<TABLE>
<CAPTION>
As of March 31, 1999(1)
-------------------------------------------------
<S> <C> <C> <C>
As Further
Adjusted for
the
As Adjusted for Conversion and
the this
Historical Acquisitions(2) Offering(3)
--------------- --------------- ---------------
<CAPTION>
(dollars in thousands)
<S> <C> <C> <C>
Mortgage loans payable............................................. $ 290,836 $ 321,621 $ 291,689
Minority Interests:
Initial Preferred Units.......................................... 52,500 52,500 --
Common Units..................................................... 26,422 29,454 90,913
--------------- --------------- ---------------
Total........................................................ 78,922 81,954 90,913
Shareholders' equity:
5.5% Series A Convertible Preferred Shares ($0.01 par value;
1,025,000 authorized, 984,308 shares issued and outstanding on
a historical, as adjusted and as further adjusted basis)....... 10 10 10
% Series B Cumulative Redeemable Preferred Shares ($0.01 par
value; no shares authorized, issued and outstanding on a
historical and as adjusted basis, 1,437,500 shares authorized
and 1,250,000 shares issued and outstanding on an as further
adjusted basis)(4)............................................. -- -- 13
Common Shares ($0.01 par value; 45,000,000 authorized and
16,801,876 shares issued and outstanding on a historical, as
adjusted and as further adjusted basis)(5)..................... 168 168 168
Additional paid-in capital......................................... 175,532 175,931 196,891
Accumulated deficit................................................ (7,017) (7,017) (7,017)
--------------- --------------- ---------------
Total shareholders' equity................................... 168,693 169,092 190,065
--------------- --------------- ---------------
TOTAL CAPITALIZATION............................................... $ 538,451 $ 572,667 $ 572,667
--------------- --------------- ---------------
--------------- --------------- ---------------
</TABLE>
- ------------------------------
(1) Subsequent to March 31, 1999, we repaid a $988 mortgage upon disposition of
a retail property. In addition, we obtained a $12,500 mortgage loan, which
bears interest at a rate of LIBOR plus 1.75%. Three of our properties secure
this loan, which matures in May 2002. We also obtained a $10,000 mortgage
loan which bears interest at a rate of LIBOR plus 1.75%, which was used to
repay a portion of our secured revolving credit facility. Eight properties
secure this loan, which matures in November 1999.
(2) In connection with the Acquisitions, we issued 326,775 Common Units in our
operating partnership valued at $10.50 per unit. We also assumed $5,097 of
debt and borrowed $25,688 under our secured revolving credit facility to
finance the Acquisitions. Includes the adjustment to minority interest of
$(399) to reflect the change in ownership of our operating partnership.
(3) In connection with this offering, the holders of our Initial Preferred Units
consented to the Conversion on October 1, 1999 of their 2,100,000 Initial
Preferred Units, convertible on the basis of 3.5714 Common Units for each
Initial Preferred Unit, plus any accrued return. The accrued return of $853
at March 31, 1999 was disbursed on April 15, 1999. Includes the adjustment
to minority interest of $8,959 to reflect the change in ownership of our
operating partnership.
(4) Does not include 187,500 Series B Preferred Shares issuable upon the
exercise of the underwriters' over-allotment option.
(5) Does not include (i) 10,756,915 Common Shares that may be issued under
certain circumstances upon conversion or redemption of outstanding Common
Units, including existing Common Units (2,930,200 Common Units) and Common
Units issued in connection with the Acquisitions (326,775 Common Units) and
the Conversion (7,499,940 Common Units), and (ii) 1,008,475 Common Shares
underlying options issued under our option plan and incentive plan
outstanding as of March 31, 1999.
S-10
<PAGE>
FINANCIAL RATIOS
CALCULATION OF RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED SHARE
DIVIDENDS
The following financial ratio measures our ability to repay interest, any
preferred share dividends and Initial Preferred Unit distributions from our
earnings. Earnings were computed by adding fixed charges (excluding preferred
share dividends and capitalized interest) and minority interests of holders of
Common Units in our operating partnership to net income. Fixed charges consist
of interest costs, amortization of debt issuance costs and distributions to
preferred unitholders.
<TABLE>
<CAPTION>
Three Months Ended
March 31, 1999
-----------------------
<S> <C>
Ratio of earnings to combined fixed charges and Preferred Share dividends.................... 1.53x
</TABLE>
In connection with this offering, all holders of the Initial Preferred Units
($52.5 million) in our operating partnership have agreed to convert their
Initial Preferred Units into Common Units on October 1, 1999, the earliest
allowable date for conversion. See "Description of Series B Preferred
Shares--Ranking." The following ratio of earnings to combined fixed charges and
Preferred Share dividends was calculated on a pro forma basis assuming this
conversion had taken place on January 1, 1999:
<TABLE>
<CAPTION>
Three Months Ended
March 31, 1999
-----------------------
<S> <C>
Ratio of earnings to combined fixed charges and Preferred Share dividends as adjusted for
this conversion............................................................................ 1.76x
</TABLE>
CALCULATION OF INTEREST AND DEBT SERVICE COVERAGE RATIOS
The following table presents financial ratios which measure our ability to
repay interest and principal from EBITDA (our earnings before mortgage and other
interest, income taxes, depreciation and amortization):
<TABLE>
<CAPTION>
Three Months Ended
March 31, 1999
-----------------------
<S> <C>
Ratio of EBITDA to interest expense.......................................................... 2.47x
Ratio of EBITDA to interest expense plus capitalized interest................................ 2.41x
Ratio of EBITDA to interest expense plus capitalized interest and scheduled principal
amortization (debt service coverage ratio)................................................. 2.20x
</TABLE>
S-11
<PAGE>
USE OF PROCEEDS
We intend to contribute the net proceeds from the sale of the Series B
Preferred Shares, estimated to be $ million or $ million if the
underwriters' over-allotment option is exercised in full, to our operating
partnership in exchange for a preferred interest in our operating partnership.
The terms of such preferred interest will be substantially equivalent to the
economic terms of the Series B Preferred Shares. Our operating partnership
intends to use a portion of the amount received from us to repay $29.9 million
of indebtedness under our secured revolving credit facility. Bankers Trust
Company, an affiliate of one of the underwriters in this offering, is the lead
and administrative agent under our secured revolving credit facility. This
indebtedness bore interest at a weighted average rate of 6.75% at June 11, 1999,
and matures in May 2000 unless extended, at our option, for a one-year period,
subject to customary conditions. Our operating partnership will use the
remaining net proceeds, if any, for our general operating purposes.
S-12
<PAGE>
OUR COMPANY
HISTORY
Our predecessor company was formed in 1988 as Royale Investments, Inc. to
own and acquire retail properties and subsequently became an externally advised
REIT. In October 1997, Royale Investments, Inc., as part of a series of
transactions, acquired the Mid-Atlantic suburban office operations of The
Shidler Group, a nationally recognized real estate investment company. As a
result of these transactions, we relocated our headquarters from Minneapolis to
Philadelphia and became internally administered. At that time, Jay Shidler
became our Chairman of the Board and Clay Hamlin became our President and Chief
Executive Officer. In January 1998, we changed our name to Corporate Office
Properties Trust, Inc. and in March 1998, we were reformed as a Maryland real
estate investment trust and changed our name to Corporate Office Properties
Trust.
Our reformation as a Maryland real estate investment trust completed the
conversion of The Shidler Group's privately-owned Mid-Atlantic suburban office
operations into a public REIT operating format. This transformation resulted
from our vision and desire to create a growth-oriented real estate company
focused on suburban office properties.
In April 1998, we completed a public offering which generated $72.7 million
of net proceeds from the issuance of 7,500,000 Common Shares. Concurrent with
our 1998 offering, we listed our Common Shares on the NYSE and began trading
under the symbol "OFC."
In September 1998, we acquired the property portfolio and management
operations of Constellation Real Estate Group, Inc. ("Constellation"), the
wholly-owned real estate subsidiary of Baltimore Gas and Electric ("BGE").
Constellation's portfolio consisted principally of 12 suburban office properties
totaling 1.2 million rentable square feet, predominately located in the Northern
Baltimore/Washington corridor. In addition, we acquired our interest in CRM and
formed Corporate Development Services, LLC ("CDS") to expand our property
management business and development activities. The transaction was valued at
$186.8 million, and included the issuance of 7,030,793 Common Shares, valued at
$10.50 per Common Share, and 984,308 5.5% Series A Convertible Preferred Shares,
valued at $25.00 per share, to BGE. As of March 31, 1999, BGE owned a total of
30.5% of our equity on a fully-diluted basis. In addition, we added several key
executive officers, including Randall Griffin as our President and Chief
Operating Officer and Roger Waesche as a Senior Vice President and our Chief
Financial Officer, and two BGE nominees to our Board of Trustees.
Today we are a fully-integrated and self-managed real estate company with
over 120 employees focused on the ownership, management, leasing, acquisition
and development of suburban office properties. Our office portfolio currently
consists of 59 suburban office properties totaling 4.7 million rentable square
feet diversified across three Mid-Atlantic states (Maryland, Pennsylvania, and
New Jersey). As of April 30, 1999, our office portfolio was 97.8% occupied. In
addition, we currently have two office properties totaling approximately 199,000
square feet under construction and have options to acquire an additional 121
acres, contiguous to certain of our properties, which can support approximately
1.9 million rentable square feet of new office development. Our property
management subsidiary also manages 115 commercial properties totaling 9.0
million rentable square feet for third parties.
Our headquarters are located at 401 City Avenue, Suite 615, Bala Cynwyd,
Pennsylvania 19004, and our telephone number is (610) 538-1800.
S-13
<PAGE>
CORPORATE OBJECTIVES AND STRATEGIES
Our primary objectives are to achieve sustainable long-term growth in funds
from operations per share and to maximize long-term shareholder value. We seek
to achieve these objectives by implementing our focused operating and growth
strategies. Key elements of our strategies include:
SUBURBAN OFFICE FOCUS. We focus on the ownership, management, leasing,
acquisition and development of suburban office properties. We believe office
buildings currently offer the strongest fundamentals of any real estate property
type, and suburban office properties offer us very attractive investment
opportunities. The three key factors driving the strong fundamentals of suburban
office properties are (i) increasing rental rates, (ii) low vacancy rates, and
(iii) a limited supply of new office product. Additionally, we believe that many
companies are relocating to, and expanding in, suburban locations because of
lower total costs, proximity to residential housing and better quality of life.
GEOGRAPHIC AND SUBMARKET FOCUS. We focus on operating in select,
demographically strong and growing submarkets, primarily within the Mid-Atlantic
region, where we believe we can achieve the critical mass necessary to maximize
management efficiencies, operating synergies and competitive advantages through
our acquisition, property management and development programs. By focusing
within specific submarkets where our management has extensive experience and
market knowledge, we believe we can achieve submarket prominence that will lead
to better operating results.
OFFICE PARK FOCUS. We focus on owning and operating properties located in
established suburban corporate office parks. We believe the suburban office park
environment generally attracts longer-term tenants, including high-quality
corporations seeking to attract and retain quality work forces, because these
parks are typically situated along major transportation routes with easy access
to support services, amenities and residential communities.
CORPORATE TENANTS. To enhance the stability of our cash flow, we typically
structure our leases with terms ranging from three to ten years. We focus on
leasing to large, high-quality corporations with significant space requirements.
We believe this strategy enables us to establish long-term relationships with
quality tenants and, coupled with our geographic and submarket focus, enhances
our ability to become the low-cost provider and the landlord of choice in our
targeted markets.
THIRD PARTY MANAGEMENT. In addition to operating and leasing our portfolio,
we provide, through CRM, property management and a full-range of fee-based
services to a wide variety of institutional owners. We believe this activity
provides us with an additional source of stable income and gives us significant
competitive advantages. These advantages include enhanced tenant satisfaction
and property performance and lead to potential tenant expansions, acquisitions
and build-to-suit development opportunities. Additionally, we believe CRM's
established infrastructure has the capacity to support a larger asset base and
will enhance our ability to expand our portfolio in existing and new submarkets
without significantly increasing our overhead.
ACQUISITION STRATEGIES. We actively pursue the acquisition of suburban
office properties through our three-part acquisition strategy. This strategy
includes targeting: (i) entity acquisitions of significant portfolios along with
their management to establish prominent ownership positions in new submarkets
and enhance our management infrastructure; (ii) portfolio purchases to enhance
our existing submarket positions as well as enter selective new submarkets; and
(iii) opportunistic acquisitions of individual properties in our existing
submarkets.
PROPERTY DEVELOPMENT STRATEGIES. We balance our acquisition program through
selective development and expansion of suburban office properties as market
conditions and leasing opportunities support favorable risk-adjusted returns. We
pursue development opportunities principally in response to the needs of
existing and prospective new tenants. We develop sites that are in close
S-14
<PAGE>
proximity to our existing properties. We believe developing such sites enhances
our ability to effectively meet tenant needs and efficiently provide critical
tenant services.
INTERNAL GROWTH STRATEGIES. We aggressively manage our portfolio to
maximize the operating performance of each property through: (i) proactive
property management and leasing, (ii) achieving operating efficiencies through
increasing economies of scale, (iii) renewing tenant leases and re-tenanting at
increased rents where market conditions permit, and (iv) expanding our third
party management business.
FINANCING POLICY
We pursue a capitalization strategy aimed at maintaining a flexible capital
structure in order to facilitate consistent growth and performance through all
real estate and economic market conditions. Key components of our policy
include:
DEBT STRATEGY. We primarily utilize property-level mortgage debt as opposed
to corporate unsecured debt. We believe the commercial mortgage debt market is a
more mature and generally a more stable market for real estate companies, which
provides us with greater access to capital on a more consistent basis and,
generally, on more favorable terms. Additionally, we seek to utilize long-term,
fixed-rate debt, which we believe enhances the stability of our cash flow. On a
consolidated basis, we seek to maintain a minimum debt service coverage ratio of
1.6 to 1.0, which we believe is generally consistent with the current minimum
investment grade requirement for mortgages securing commercial real estate. We
believe this ratio is appropriate for a seasoned portfolio of suburban office
buildings.
EQUITY STRATEGY. We seek to maximize the benefits of our operating
partnership organizational structure by emphasizing the issuance of our
operating partnership units as an equity source to finance our property
acquisition program. This strategy provides prospective property sellers the
ability to defer taxable gains by receiving our units in lieu of cash and
reduces the need for us to access the equity and debt markets.
OWNERSHIP STRUCTURE
We conduct our operations principally through our operating partnership,
Corporate Office Properties, L.P., for which we are the sole managing general
partner. Our operating partnership owns our properties both directly and through
subsidiary partnerships and limited liability companies. Additionally, it also
owns a 95.0% economic interest in and, collectively with our Chief Executive
Officer and Chief Operating Officer, 49.5% of the voting stock of Corporate
Office Management, Inc. ("COMI"), which performs asset management, managerial,
financial and legal functions. COMI owns 75.0% of the voting and economic
interest in CRM, which provides property management services, and 100.0% of CDS,
which provides construction and development services.
S-15
<PAGE>
OUR OFFICE PORTFOLIO
PROPERTY SUMMARY DATA
The following table provides certain information, as of April 30, 1999,
relating to each of our office properties:
<TABLE>
<CAPTION>
Total Rental
Total Revenue Per
Year Built/ Rentable Percentage Rental Occupied
Property and Location Submarket Renovated Sq. Ft. Occupied Revenue(1) Sq. Ft.
- --------------------------------- ------------------ ----------- ----------- --------------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
(thousands)
NORTHERN BALTIMORE/WASHINGTON CORRIDOR:(2)
2730 Hercules Road BWI Airport 1990 240,336 100.0% $ 4,575 $ 19.04
ANNAPOLIS JUNCTION, MD
900 Elkridge Landing Road BWI Airport 1982 97,139 100.0 1,645 16.94
LINTHICUM, MD
1199 Winterson Road BWI Airport 1988 96,636 100.0 1,534 15.88
LINTHICUM, MD
133 National Business Parkway(3) BWI Airport 1997 88,666 100.0 1,670 18.84
ANNAPOLIS JUNCTION, MD
141 National Business Parkway BWI Airport 1990 86,964 98.4 1,480 17.30
ANNAPOLIS JUNCTION, MD
135 National Business Parkway BWI Airport 1998 86,863 100.0 1,614 18.59
ANNAPOLIS JUNCTION, MD
7467 Ridge Road BWI Airport 1990 73,773 100.0 1,523 20.64
HANOVER, MD
881 Elkridge Landing Road BWI Airport 1986 73,572 100.0 918 12.48
LINTHICUM, MD
1099 Winterson Road BWI Airport 1988 70,002 87.7 962 15.67
LINTHICUM, MD
131 National Business Parkway BWI Airport 1990 68,906 100.0 1,225 17.78
ANNAPOLIS JUNCTION, MD
1190 Winterson Road BWI Airport 1987 68,567 100.0 1,099 16.03
LINTHICUM, MD
911 Elkridge Landing Road BWI Airport 1985 68,419 73.6 822 16.32
LINTHICUM, MD
849 International Drive BWI Airport 1988 67,913 88.4 1,003 16.71
LINTHICUM, MD
1201 Winterson Road BWI Airport 1985 67,903 100.0 676 9.95
LINTHICUM, MD
7318 Parkway Drive BWI Airport 1984 59,204 100.0 633 10.69
LINTHICUM, MD
930 International Drive BWI Airport 1986 57,140 100.0 623 10.90
HANOVER, MD
900 International Drive BWI Airport 1986 57,140 100.0 623 10.90
HANOVER, MD
921 Elkridge Landing Road BWI Airport 1983 54,057 100.0 862 15.94
LINTHICUM, MD
939 Elkridge Landing Road BWI Airport 1983 51,953 100.0 797 15.34
LINTHICUM, MD
800 International Drive BWI Airport 1988 50,612 100.0 776 15.33
LINTHICUM, MD
1340 Ashton Road BWI Airport 1989 46,400 100.0 587 12.65
HANOVER, MD
7321 Parkway Drive BWI Airport 1984 39,822 100.0 627 15.75
HANOVER, MD
<CAPTION>
Major Tenants
(10% or More
Property and Location Rentable Sq. Ft.)
- --------------------------------- ---------------------------------
<S> <C>
NORTHERN BALTIMORE/WASHINGTON COR
2730 Hercules Road U.S. Department of Defense (100%)
ANNAPOLIS JUNCTION, MD
900 Elkridge Landing Road First Annapolis (51%);
LINTHICUM, MD Booz Allen Hamilton (38%)
1199 Winterson Road U.S. Department of Defense (100%)
LINTHICUM, MD
133 National Business Parkway(3) e.spire Communications (67%);
ANNAPOLIS JUNCTION, MD Applied Signal Technology (33%)
141 National Business Parkway Stanford Telecommunications
ANNAPOLIS JUNCTION, MD (46%); J.G. Van Dyke & Associates
(20%); Harris Data Services Corp
(14%)
135 National Business Parkway Credit Management Solutions (82%)
ANNAPOLIS JUNCTION, MD
7467 Ridge Road Travelers Casualty and Surety
HANOVER, MD (55%);
Pepsi-Cola Bottling (17%)
881 Elkridge Landing Road U.S. Department of Defense (100%)
LINTHICUM, MD
1099 Winterson Road Preferred Health Network (34%);
LINTHICUM, MD McDonald's Corporation (29%)
131 National Business Parkway TASC, Inc. (36%);
ANNAPOLIS JUNCTION, MD e.spire Communications (35%);
U.S. Department of Defense (15%);
Intel Corporation (13%)
1190 Winterson Road Chesapeake Appraisal (58%);
LINTHICUM, MD U.S. Department of Defense (15%);
Motorola, Inc. (14%)
911 Elkridge Landing Road U.S. Department of Defense (53%);
LINTHICUM, MD Nationwide Mutual (21%)
849 International Drive EMC Corporation (13%);
LINTHICUM, MD Coca Cola (11%);
U.S. Department of Defense (11%)
1201 Winterson Road Ciena Corporation (100%)
LINTHICUM, MD
7318 Parkway Drive U.S. Department of Defense (100%)
LINTHICUM, MD
930 International Drive Ciena Corporation (100%)
HANOVER, MD
900 International Drive Ciena Corporation (100%)
HANOVER, MD
921 Elkridge Landing Road Aerotek, Inc. (100%)
LINTHICUM, MD
939 Elkridge Landing Road Agency Holding (68%);
LINTHICUM, MD U.S. Department of Defense (24%)
800 International Drive Raytheon E-Systems (94%)
LINTHICUM, MD
1340 Ashton Road Lockheed Martin (100%)
HANOVER, MD
7321 Parkway Drive U.S. Department of Defense (100%)
HANOVER, MD
</TABLE>
S-16
<PAGE>
<TABLE>
<CAPTION>
Total Rental
Total Revenue Per
Year Built/ Rentable Percentage Rental Occupied
Property and Location Submarket Renovated Sq. Ft. Occupied Revenue(1) Sq. Ft.
- --------------------------------- ------------------ ----------- ----------- --------------- ------------- ---------------
(thousands)
<S> <C> <C> <C> <C> <C> <C>
7609 Energy Parkway Drive BWI Airport 1982 38,513 91.2% $ 217 $ 6.17
RIVIERA BEACH, MD
1334 Ashton Road BWI Airport 1989 37,631 96.6 559 15.38
HANOVER, MD
1331 Ashton Road BWI Airport 1989 29,936 100.0 378 12.61
HANOVER, MD
1350 Dorsey Road BWI Airport 1989 19,706 83.4 243 14.79
HANOVER, MD
1344 Ashton Road BWI Airport 1989 16,865 100.0 321 19.06
HANOVER, MD
1341 Ashton Road BWI Airport 1989 15,825 100.0 156 9.88
HANOVER, MD
1343 Ashton Road BWI Airport 1989 9,962 100.0 122 12.23
HANOVER, MD
1615 - 1629 Thames Street Downtown Baltimore 1889/1989 103,670 98.9 1,617 15.77
BALTIMORE, MD
7200 Riverwood Drive Howard County 1986 160,000 100.0 2,771 17.32
COLUMBIA, MD Perimeter
6950 Columbia Gateway Drive Howard County 1998 107,778 100.0 2,185 20.27
COLUMBIA, MD Perimeter
6740 Alexander Bell Drive Howard County 1989/1992 59,576 100.0 1,266 21.26
COLUMBIA, MD Perimeter
8815 Centre Park Drive Howard County 1987 53,635 100.0 979 18.25
COLUMBIA, MD Perimeter
6716 Alexander Bell Drive Howard County 1989/1992 51,980 100.0 903 17.37
COLUMBIA, MD Perimeter
6760 Alexander Bell Drive Howard County 1989/1992 37,248 100.0 702 18.85
LINTHICUM, MD Perimeter
14502 Greenview Drive Laurel 1988 71,870 96.3 1,148 16.59
LAUREL, MD
14504 Greenview Drive Laurel 1985 69,194 93.1 1,107 17.18
LAUREL, MD
6009 - 6011 Oxon Hill Road Southern Prince 1990 181,236 98.8 3,433 19.17
OXON HILL, MD George's County
----------- -------------
TOTAL/AVERAGE NORTHERN BALTIMORE/WASHINGTON CORRIDOR 2,736,612 98.0 44,381 16.55
----------- -------------
BLUE BELL/PHILADELPHIA:
753 Jolly Road (3) Blue Bell 1960/92-94 419,472 100.0 2,972 7.09
BLUE BELL, PA
785 Jolly Road (3) Blue Bell 1970/1996 219,065 100.0 2,124 9.69
BLUE BELL, PA
760 Jolly Road (3) Blue Bell 1974/1994 208,854 100.0 2,567 12.29
BLUE BELL, PA
751 Jolly Road (3) Blue Bell 1966/1991 112,958 100.0 1,459 12.92
BLUE BELL, PA
----------- -------------
TOTAL/AVERAGE BLUE BELL/PHILADELPHIA 960,349 100.0 9,122 9.50
----------- -------------
<CAPTION>
Major Tenants
(10% or More
Property and Location Rentable Sq. Ft.)
- --------------------------------- ---------------------------------
<S> <C>
7609 Energy Parkway Drive Rapid Response (50%);
RIVIERA BEACH, MD BGE Environmental (19%)
1334 Ashton Road Science Applications (60%);
HANOVER, MD Merrill Corporation (37%)
1331 Ashton Road Booz Allen Hamilton (71%);
HANOVER, MD Aerosol Monitoring (29%)
1350 Dorsey Road Aerotek, Inc.(24%);
HANOVER, MD Noodles, Inc. (13%);
Hunan Pagoda (12%);
Electronic System (11%)
1344 Ashton Road Titan Systems (28%);
HANOVER, MD Student Travel Services (23%);
AMP Corporation (16%);
Dazer / MD Corporation (14%);
Citizens National Bank (12%)
1341 Ashton Road Supertots Childcare, Inc. (71%);
HANOVER, MD Preston Trucking, Inc. (29%)
1343 Ashton Road Meridian Sciences (100%)
HANOVER, MD
1615 - 1629 Thames Street JHPEIGO Corporation (30%);
BALTIMORE, MD Lista's (14%)
7200 Riverwood Drive U.S. Department of Defense (100%)
COLUMBIA, MD
6950 Columbia Gateway Drive Magellan Behavioral Health
COLUMBIA, MD (100%)(4)
6740 Alexander Bell Drive Johns Hopkins University (42%);
COLUMBIA, MD Sky Alland Research, Inc. (21%);
Science Applications (20%);
Amtel Corporation (16%)
8815 Centre Park Drive COMI (25%);
COLUMBIA, MD National Association of Credit
Management (20%);
Reap/REMAX, Inc. (16%);
H.C. Copeland Associates (11%)
6716 Alexander Bell Drive Sun Microsystems, Inc. (81%);
COLUMBIA, MD Science Applications (10%)
6760 Alexander Bell Drive Cadence Design Systems, Inc.
LINTHICUM, MD (65%)
14502 Greenview Drive Sky Alland Research, Inc. (22%);
LAUREL, MD Greenman-Pedersen, Inc. (15%)
14504 Greenview Drive Great West Life & Annuity (17%);
LAUREL, MD Laurel Consulting Group (16%);
Moore USA, Inc. (11%)
6009 - 6011 Oxon Hill Road U.S. Department of Treasury
OXON HILL, MD (47%); Constellation Real Estate
(24%)
TOTAL/AVERAGE NORTHERN BALTIMORE/
BLUE BELL/PHILADELPHIA:
753 Jolly Road (3) Unisys (100%)
BLUE BELL, PA
785 Jolly Road (3) Unisys with 100% sublease to
BLUE BELL, PA Merck
760 Jolly Road (3) Unisys (100%)
BLUE BELL, PA
751 Jolly Road (3) Unisys (100%)
BLUE BELL, PA
TOTAL/AVERAGE BLUE BELL/PHILADELP
</TABLE>
S-17
<PAGE>
<TABLE>
<CAPTION>
Total Rental
Total Revenue Per
Year Built/ Rentable Percentage Rental Occupied
Property and Location Submarket Renovated Sq. Ft. Occupied Revenue(1) Sq. Ft.
- --------------------------------- ------------------ ----------- ----------- --------------- ------------- ---------------
(thousands)
<S> <C> <C> <C> <C> <C> <C>
GREATER HARRISBURG:
2605 Interstate Drive East Shore 1990 84,268 100.0% $ 1,199 $ 14.23
HARRISBURG, PA
2601 Market Place East Shore 1989 67,753 100.0 1,118 16.50
HARRISBURG, PA
6385 Flank Drive East Shore 1995 32,800 100.0 438 13.36
HARRISBURG, PA
----------- -------------
TOTAL/AVERAGE GREATER HARRISBURG 184,821 100.0 2,755 14.91
----------- -------------
NORTHERN/CENTRAL NEW JERSEY:
431 Ridge Road Exit 8A - Cranbury 1958/1998 170,000 100.0 3,503 20.61
DAYTON, NJ
429 Ridge Road Exit 8A - Cranbury 1966/1996 142,385 100.0 2,580 18.12
DAYTON, NJ
19 Commerce Drive Exit 8A - Cranbury 1989 65,277 100.0 1,252 19.18
CRANBURY, NJ
104 Interchange Plaza Exit 8A - Cranbury 1990 47,142 100.0 866 18.36
CRANBURY, NJ
101 Interchange Plaza Exit 8A - Cranbury 1985 43,886 92.2 753 18.62
CRANBURY, NJ
47 Commerce Drive Exit 8A - Cranbury 1992/1998 35,048 100.0 476 13.60
CRANBURY, NJ
437 Ridge Road Exit 8A - Cranbury 1962/1996 30,000 100.0 583 19.43
DAYTON, NJ
3 Centre Drive Exit 8A - Cranbury 1987 20,436 100.0 333 16.29
CRANBURY, NJ
7 Centre Drive Exit 8A - Cranbury 1989 19,466 93.8 325 17.79
CRANBURY, NJ
8 Centre Drive Exit 8A - Cranbury 1986 16,199 100.0 348 21.50
CRANBURY, NJ
2 Centre Drive Exit 8A - Cranbury 1989 16,132 100.0 449 27.81
CRANBURY, NJ
695 Route 46 Wayne 1990 158,348 74.0 2,151 18.34
FAIRFIELD, NJ
710 Route 46 Wayne 1985 101,791 95.0 1,670 17.27
FAIRFIELD, NJ
----------- -------------
TOTAL/AVERAGE NORTHERN/CENTRAL NEW JERSEY 866,110 94.1 15,289 18.75
----------- -------------
TOTAL/AVERAGE OFFICE PROPERTIES 4,747,892 97.8% $ 71,547 $ 15.41
----------- -------------
----------- -------------
<CAPTION>
Major Tenants
(10% or More
Property and Location Rentable Sq. Ft.)
- --------------------------------- ---------------------------------
<S> <C>
GREATER HARRISBURG:
2605 Interstate Drive Commonwealth of Pennsylvania
HARRISBURG, PA (56%);
Health Central, Inc. (32%)
2601 Market Place Penn State Geisinger Systems
HARRISBURG, PA (38%); Ernst & Young LLP (26%);
Texas Eastern Pipeline (26%)
6385 Flank Drive Cowles Enthusiast Media (34%);
HARRISBURG, PA Orion Capital Companies (26%);
Pitney Bowes, Inc. (21%)
TOTAL/AVERAGE GREATER HARRISBURG
NORTHERN/CENTRAL NEW JERSEY:
431 Ridge Road IBM with 100% sublease to AT&T
DAYTON, NJ Local Services
429 Ridge Road AT&T Local Services (100%)
DAYTON, NJ
19 Commerce Drive The Associated Press (100%)
CRANBURY, NJ
104 Interchange Plaza S.M.I.P.A. LLC (24%);
CRANBURY, NJ Utica Mutual Insurance (15%);
Laborer's International Union
(13%);
Lanier Worldwide, Inc. (12%);
Somerset Real Estate Management,
Inc. (10%)
101 Interchange Plaza Ford Motor Credit Company (33%);
CRANBURY, NJ Arquest, Inc. (16%);
Middlesex County Improvement
Authority (13%);
Trans Union Corporation (11%)
47 Commerce Drive Somfy Systems, Inc. (100%)
CRANBURY, NJ
437 Ridge Road IBM with 100% sublease to AT&T
DAYTON, NJ Local Services
3 Centre Drive Matrix Development Group (100%)
CRANBURY, NJ
7 Centre Drive Paradise Software, Inc. (17%);
CRANBURY, NJ System Freight, Inc. (14%);
Compugen, Inc. (12%)
8 Centre Drive AON Risk Services, Inc. (100%)
CRANBURY, NJ
2 Centre Drive Summit Bancorp (100%)
CRANBURY, NJ
695 Route 46 Pearson, Inc. (22%);
FAIRFIELD, NJ United Healthcare Services (15%);
The Museum Company (12%);
Morgan Stanley Dean Witter (12%)
710 Route 46 Midsco, Inc. (19%);
FAIRFIELD, NJ Radian International, LLC (12%);
Continental Casualty (12%);
Lincoln Financial Group (11%)
TOTAL/AVERAGE NORTHERN/CENTRAL NE
TOTAL/AVERAGE OFFICE PROPERTIES
</TABLE>
- ------------------------
(1) Total Rental Revenue is the monthly contractual base rent as of April 30,
1999 multiplied by 12 plus the estimated annualized expense reimbursements
under existing office leases.
(2) The Northern Baltimore/Washington Corridor encompasses Anne Arundel and
Howard Counties. In addition, we own three properties in suburban Washington
D.C., specifically in the Laurel and Southern Prince George's County
submarkets.
(3) Property subject to substantial leases which remit rental revenue on a
triple net lease basis.
(4) Magellan is the doing-business name of Green Spring Health Services, Inc.
S-18
<PAGE>
MAJOR TENANTS
The following table contains information, as of April 30, 1999, regarding
our 20 largest office tenants:
<TABLE>
<CAPTION>
Percentage Percentage
Total of Total of Total Wtd. Avg.
Number Occupied Occupied Total Rental Rental Remaining
Tenant of Leases Sq. Ft. Sq. Ft. Revenue(1) Revenue Lease Term(2)
- ---------------------------------------- ------------- ----------- ------------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
(thousands) (years)
Agencies of the U.S. Government(3)...... 14 832,337 17.9% $ 13,855 19.4% 6.0
Unisys(4)............................... 3 741,284 16.0 6,998 9.8 10.2
IBM(5).................................. 3 200,000 4.3 4,086 5.7 8.9
AT&T Local Services(5).................. 1 142,385 3.1 2,580 3.6 8.8
Magellan Behavioral Health, Inc......... 1 107,778 2.3 2,185 3.1 4.5
Merck & Co., Inc.(4).................... 1 219,065 4.7 2,124 3.0 10.2
Ciena Corporation....................... 3 182,183 3.9 1,921 2.7 4.9
e.spire Communications, Inc............. 2 83,800 1.8 1,636 2.3 4.4
Credit Management Solutions, Inc........ 1 70,982 1.5 1,278 1.8 9.6
The Associated Press.................... 1 65,277 1.4 1,252 1.7 3.4
Johns Hopkins University................ 4 62,521 1.3 1,196 1.7 5.4
Aerotek................................. 4 71,144 1.5 1,128 1.6 3.4
Travelers Casualty and Surety Company... 1 40,823 0.9 970 1.4 1.7
Booz Allen Hamilton..................... 2 58,478 1.3 970 1.4 3.2
Constellation Real Estate, Inc.(6)...... 4 56,334 1.2 954 1.3 1.5
Raytheon E-Systems...................... 2 53,616 1.2 851 1.2 1.2
First Annapolis Consulting.............. 1 49,446 1.1 772 1.1 7.3
Sun Microsystems........................ 1 42,147 0.9 722 1.0 1.4
Science Applications.................... 3 39,749 0.9 718 1.0 1.1
Stanford Telecom........................ 1 39,880 0.9 668 0.9 4.3
--- ----------- ----- ------------- -----------
Subtotal............................ 53 3,159,229 68.1 46,864 65.7 6.5
All remaining tenants................... 228 1,483,229 31.9 24,683 34.3 3.2
--- ----------- ----- ------------- -----------
TOTAL/WEIGHTED AVERAGE.................. 281 4,642,458 100.0% $ 71,547 100.0% 5.4
--- ----------- ----- ------------- -----------
--- ----------- ----- ------------- -----------
</TABLE>
- ------------------------------
(1) Total Rental Revenue is the monthly contractual base rent as of April 30,
1999 multiplied by 12 plus the estimated annualized expense reimbursements
under existing office leases.
(2) Based on Total Rental Revenue.
(3) Many of these government leases are subject to certain early termination
provisions which are customary to government leases. The weighted average
remaining lease term was computed assuming no exercise of such early
termination rights.
(4) Merck & Co., Inc. subleases 219,065 rentable square feet from Unisys'
960,349 leased rentable square feet.
(5) AT&T Local Services subleases and occupies all of IBM's 200,000 leased
rentable square feet through March 2002. AT&T Local Services has signed
direct leases with us for such space (except for 26,928 rentable square
feet) from March 2002 through 2006 and 2009.
(6) Constellation Real Estate, Inc. ("CREI") was the previous owner of these
buildings and holds 41.8% of our outstanding Common Shares as of March 31,
1999.
S-19
<PAGE>
LEASE EXPIRATIONS
The following table presents certain information, as of April 30, 1999,
regarding the expiration of our office leases:
<TABLE>
<CAPTION>
Total Rental
Revenue of Percentage of
Year of Number of Square Footage Percentage of Expiring Total Office
Lease Leases of Leases Total Occupied Office Rental
Expiration(1) Expiring Expiring Sq. Ft. Leases(2) Revenue Expiring
- --------------------- --------------- -------------- ----------------- --------------- ---------------------
<S> <C> <C> <C> <C> <C>
(thousands)
1999 32 135,816 2.9% $ 2,255 3.2%
2000 59 527,759 11.4 8,843 12.4
2001 57 512,424 11.0 8,143 11.4
2002 44 685,376 14.8 11,040 15.4
2003 45 620,400 13.4 11,088 15.5
2004 18 157,245 3.4 2,795 3.9
2005 3 42,394 0.9 766 1.1
2006 3 138,650 3.0 1,987 2.8
2007 6 171,499 3.7 2,424 3.4
2008 9 547,474 11.8 10,018 14.0
2009 & Thereafter 5 1,103,421 23.7 12,188 16.9
--- -------------- ----- ------- -----
TOTAL/WEIGHTED
AVERAGE 281 4,642,458 100.0% $ 71,547 100.0%
--- -------------- ----- ------- -----
--- -------------- ----- ------- -----
<CAPTION>
Total Rental
Year of Revenue of
Lease Expiring Leases
Expiration(1) Per Occupied Sq. Ft.
- --------------------- ---------------------
<S> <C>
1999 $ 16.60
2000 16.76
2001 15.89
2002 16.11
2003 17.87
2004 17.78
2005 18.07
2006 14.33
2007 14.13
2008 18.30
2009 & Thereafter 11.04
TOTAL/WEIGHTED
AVERAGE $ 15.87
</TABLE>
- ------------------------------
(1) Many of our government leases are subject to certain early termination
provisions which are customary to government leases. The year of lease
expiration was computed assuming no exercise of such early termination
rights.
(2) Total Rental Revenue is the monthly contractual base rent as of April 30,
1999 multiplied by 12 plus the estimated annualized expense reimbursements
under existing office leases.
RECURRING CAPITAL EXPENDITURES
The following table summarizes our recurring capital expenditures,
principally associated with re-tenanting and releasing, for our office portfolio
for the three months ended March 31, 1999 and the year ended December 31, 1998:
<TABLE>
<CAPTION>
Three Months Ended Year Ended
March 31, 1999 December 31, 1998
------------------- -----------------
<S> <C> <C>
Total recurring capital expenditures (in thousands)...................... $668 $537
Average rentable square feet............................................. 4,368,488 2,688,295
Recurring capital expenditures per rentable square foot.................. $0.15 $0.20
</TABLE>
PENDING ACQUISITION
We are negotiating the sale to a third party of one office building that we
own and our right to purchase two additional properties aggregating
approximately 230,000 rentable square feet, all located within the Baltimore
metropolitan area. Under the proposed terms of the transaction, the third party
would have the right, after acquiring the additional properties, to transfer the
properties back to us, on or before March 31, 2000, in exchange for total
consideration of approximately $40.0 million consisting of cash and cumulative
preferred units in the operating partnership that would rank junior in priority
to the Series B Preferred Units. These units will mirror the terms of the Series
B Preferred Shares. Upon the transfer, the third party would also be entitled to
elect one Trustee to our Board. We can give no assurance that this transaction
will be completed.
S-20
<PAGE>
HISTORICAL LEASING ACTIVITY
The following table sets forth certain information regarding our office
leasing activity for the three months ended March 31, 1999 and the year ended
December 31, 1998:
<TABLE>
<CAPTION>
Three Months Ended Year Ended
March 31, 1999 December 31, 1998
------------------- -----------------
<S> <C> <C>
RENEWALS
Number of renewals..................................................... 13 17
Rentable square feet................................................... 58,074 249,413
Base rent per square foot(1)........................................... $ 16.77 $ 10.48
Tenant improvements per square foot(2)................................. $ 1.23 $ 0.21
Leasing commissions per square foot(3)................................. $ 0.41 $ 0.23
Effective rent per square foot(4)...................................... $ 16.28 $ 10.35
Retention rate (% based on square feet renewed)........................ 90.9% 92.8%
NEW LEASES
Number of leases....................................................... 7 11
Rentable square feet................................................... 34,711 27,044
Base rent per square foot.............................................. $ 17.81 $ 18.89
Tenant improvements per square foot.................................... $ 4.58 $ 10.09
Leasing commissions per square foot.................................... $ 0.34 $ 1.07
Effective rent per square foot......................................... $ 16.91 $ 16.45
RENEWED AND NEW LEASES
Number of renewed and new leases....................................... 20 28
Rentable square feet................................................... 92,785 276,457
Base rent per square foot.............................................. $ 17.16 $ 11.30
Tenant improvements per square foot.................................... $ 2.48 $ 1.18
Leasing commissions per square foot.................................... $ 0.38 $ 0.31
Effective rent per square foot......................................... $ 16.49 $ 9.72
SAME COMPARABLE SPACE ANALYSIS(5)
Same comparable space square feet...................................... 87,667 261,618
Expiring base rent per square foot..................................... $ 16.34 $ 9.23
Renewed and new base rent per square foot.............................. $ 17.09 $ 10.95
Percentage change in base rent per square foot......................... 4.6% 18.6%
</TABLE>
- ------------------------
(1) Base rent is defined as total contractual rent to be received during the
entire term of all lease transactions executed during the respective period,
divided by the terms, in months, for such leases, multiplied by 12, and
divided by the total rentable square feet under such leases.
(2) Tenant improvements are defined as capital costs incurred by us for
leasehold improvements including, but not limited to, costs for items such
as HVAC, plumbing, electrical upgrades, interior walls, wall finishes,
ceiling treatment and floor covering.
(3) Leasing commissions are brokerage commission fees paid by us in connection
with new leases or lease renewals and capital costs associated with internal
leasing services.
(4) Effective rent is defined as base rent to be received during the entire term
of all lease transactions executed during the respective period, minus all
tenant improvements and leasing commissions from such leases divided by the
terms in months, for such leases, multiplied by 12, and divided by the total
rentable space feet under such leases.
(5) Excludes leasing of vacant space at newly acquired properties and newly
developed properties.
S-21
<PAGE>
OTHER PROPERTIES
In addition to our office properties, as of April 30, 1999, we owned five
retail properties totaling 311,026 rentable square feet. Four of the properties
were part of the portfolio of our predecessor company, Royale Investments, Inc.,
and a fifth property was acquired as part of the Constellation entity
transaction. We do not consider these properties part of our core business.
Subsequent to April 30, 1999, we sold one property totaling 36,248 rentable
square feet for $1.9 million. We intend to sell the remaining retail assets, as
market conditions permit, and redeploy the net proceeds from any such sales into
our core business.
MORTGAGE INDEBTEDNESS
The following table sets forth our mortgage indebtedness as of March 31,
1999:
<TABLE>
<CAPTION>
Outstanding Maturity
Debt Interest Rate Date
----------- --------------------- -----------------
<S> <C> <C> <C>
(thousands)
Bankers Trust Company Secured Term Credit Facility............ $ 100,000 7.50% October 2000(1)
Teachers Insurance and Annuity Association of America......... 84,482 6.89% November 2008
Bankers Trust Company Secured Revolving Credit Facility....... 81,950 LIBOR + 1.75% May 2000(2)
Aegon USA Realty Advisors, Inc................................ 6,332 8.29% May 2007
FMB Bank...................................................... 4,866(3) LIBOR + 1.60% February 2001(2)
Provident Bank of Maryland.................................... 2,886 LIBOR + 1.75% September 2000
Provident Bank of Maryland.................................... 2,736(4) LIBOR + 1.75% February 2001(2)
Other Mortgages--Retail Properties............................ 7,584 Fixed rates ranging Ranging from
from 7.63% to 8.00% 2011 to 2014
-----------
TOTAL......................................................... $ 290,836
-----------
-----------
</TABLE>
- ------------------------------
(1) May be extended, at our option, for two one-year periods, subject to
customary conditions.
(2) May be extended, at our option, for a one-year period, subject to customary
conditions.
(3) Total construction loan commitment of $9,825.
(4) Total construction loan commitment of $10,875.
S-22
<PAGE>
MANAGEMENT
<TABLE>
<CAPTION>
Name Age Office
- ---------------------------------- ---
<S> <C> <C>
TRUSTEES AND EXECUTIVE OFFICERS
Jay H. Shidler.................... 53 Chairman of the Board of Trustees
Clay W. Hamlin, III............... 54 Chief Executive Officer and Trustee
Betsy Z. Cohen.................... 57 Trustee
Edward A. Crooke.................. 60 Trustee
Robert L. Denton.................. 46 Trustee
Steven D. Kesler.................. 47 Trustee
Kenneth S. Sweet, Jr. ............ 66 Trustee
William H. Walton................. 46 Trustee
Kenneth D. Wethe.................. 57 Trustee
Randall M. Griffin................ 54 President and Chief Operating Officer
Roger A. Waesche, Jr. ............ 45 Senior Vice President and Chief Financial
Officer
John H. Gurley.................... 60 Secretary, Vice President and General Counsel
Thomas D. Cassel.................. 40 Vice President, Finance and Treasurer
KEY MANAGEMENT PERSONNEL
Michael D. Kaiser................. 48 CRM - President
Dwight S. Taylor.................. 54 CDS - Senior Vice President, Development
Stanley A. Link................... 51 CDS - Senior Vice President, Construction
</TABLE>
JAY H. SHIDLER has been Chairman of our Board of Trustees since October
1997. Mr. Shidler is the Managing Partner of The Shidler Group, a nationally
recognized real estate investment company. Mr. Shidler has over 25 years of
experience in real estate investment and has been directly involved in the
acquisition and management of over 1,000 properties in 40 states and Canada
totaling over $4 billion in aggregate value. Mr. Shidler is a founder and
current Chairman of the Board of Directors of First Industrial Realty Trust,
Inc. and is a founder and former director and Co-Chairman of TriNet Corporate
Realty Trust, Inc. Mr. Shidler is also founder and Chairman of the Board of
Trustees of CGA Group, Ltd., a holding company whose subsidiary is a AAA rated
financial guarantor.
CLAY W. HAMLIN, III has been a Trustee and our Chief Executive Officer since
October 1997. From May 1989 until joining us, Mr. Hamlin was the Managing
Partner of The Shidler Group's Mid-Atlantic region, where he acquired, managed
and leased over four million square feet of commercial property. A resident of
Philadelphia for over 30 years, Mr. Hamlin has been active in the real estate
business for 26 years. Mr. Hamlin is a founding shareholder of both First
Industrial Realty Trust, Inc. and TriNet Corporate Realty Trust, Inc.
BETSY Z. COHEN has been a Trustee since May 1999. Mrs. Cohen has been
Chairman and Chief Executive Officer of JeffBanks, Inc., a bank holding company,
since its inception in 1981 and also is Chairman and Chief Executive Officer of
its subsidiaries, Jefferson Bank, which she founded in 1974, and Jefferson Bank
New Jersey, which she founded in 1987. Since 1997, Mrs. Cohen also has served as
Chairman, Chief Executive Officer and trustee of Resource Asset Investment
Trust, a real estate investment trust. From 1985 until 1993, Mrs. Cohen was a
director of First Union Corp. of Virginia, a bank holding company, and its
predecessor, Dominion Bankshares, Inc. Mrs. Cohen also is a director of The
Maine Merchant Bank, L.L.C., Aetna, Inc. and Life Technologies, Inc.
EDWARD A. CROOKE has been one of our Trustees since September 1998. Mr.
Crooke has been the Vice Chairman of Constellation Energy Group, Inc.
("Constellation Energy"), formerly known as BGE, since May 1999. He held the
positions of Vice-Chairman of BGE from March 1998 to May 1999 and of President
and Chief Operating Officer from 1992 to 1998. Mr. Crooke presently serves as
Chairman of the Board, President and Chief Executive Officer of Constellation
Enterprises, Inc., a wholly-owned
S-23
<PAGE>
direct subsidiary of Constellation Energy. Throughout his 30-year career with
Constellation Energy, Mr. Crooke advanced from Vice President-Finance &
Accounting and Secretary during the period from 1978 through 1987 to
President-Utility Operations from 1988 to 1992. Mr. Crooke has been a member of
Constellation Energy's Board of Directors since 1988. Mr. Crooke serves as a
director on First Maryland Bancorp, First National Bank of Maryland, Goucher
College and Baltimore Equitable Insurance.
ROBERT L. DENTON has been one of our Trustees since May 1999. Mr. Denton
joined The Shidler Group in 1994 and is currently a Managing Partner and the
resident principal in the New York office. From 1991 to 1994, Mr. Denton was
with Providence Capital, Inc., an investment banking firm which he co-founded.
Mr. Denton is also a trustee of CGA Group, Ltd.
STEVEN D. KESLER has been one of our Trustees since September 1998. Mr.
Kesler is the Chief Executive Officer and President of Constellation
Investments, Inc., a wholly-owned indirect subsidiary of Constellation Energy.
Mr. Kesler manages a corporate investment entity, Constellation Energy's pension
plan, Constellation Energy's nuclear decommissioning trust and a portfolio of
real estate assets. Prior to joining Constellation Investments, Inc. in 1986,
Mr. Kesler was Controller of Westinghouse-Hittman Nuclear, Inc. and Manager of
Budgets, Planning and Analysis with Maryland National Corporation. Mr. Kesler is
currently a director of Capital Re Corporation, a publicly traded insurance
company.
KENNETH S. SWEET, JR. has been one of our Trustees since October 1997. Mr.
Sweet is the Managing Director of Gordon Stuart Associates, Inc., a venture
capital and real estate partnership with assets of over $300 million, which he
founded in 1991. In 1971, Mr. Sweet founded K.S. Sweet Associates which
specialized in real estate and venture capital investments. From 1957 to 1971,
he was with The Fidelity Mutual Life Insurance Company. Mr. Sweet serves as a
director, chairman of the real estate committee and a member of the finance
committee of Main Line Health and the Philadelphia Chapter of the Nature
Conservancy and is on the Advisory Committee of the Arthur Ashe Youth Tennis
Center.
WILLIAM H. WALTON has been one of our Trustees since October 1997. Mr.
Walton is a Managing Principal of Westbrook Partners, LLC, a fully-integrated
real estate investment management company which controls approximately $4
billion of real estate assets, which he co-founded in April 1994. Prior to
co-founding Westbrook, Mr. Walton was a managing director at Morgan Stanley
Realty.
KENNETH D. WETHE has been one of our Trustees since January 1990. Since
1990, Mr. Wethe has been the owner and principal officer of Wethe & Associates,
a Dallas-based firm providing independent risk management, insurance and
employee benefit services to school districts and governmental agencies. Mr.
Wethe's background includes over 25 years experience in the group insurance and
employee benefits area.
RANDALL M. GRIFFIN has been our President and Chief Operating Officer since
September 1998. Mr. Griffin previously served as President of Constellation
since June 1993. From 1990 through March 1993, Mr. Griffin worked as Vice
President--Development for EuroDisney Development in Paris, France. From 1976 to
1990, Mr. Griffin worked for Linclay Corporation, a St. Louis based real estate
development, management and investment company, most recently as Executive Vice
President and Chief Operating Officer. Mr. Griffin serves on the Boards of
Directors of The National Aquarium as its Vice Chairman and Columbia Festival of
the Arts. He is Vice-Chairman of the Maryland Economic Development Commission,
and serves on its Executive Committee.
ROGER A. WAESCHE, JR. has been our Chief Financial Officer since September
1998. Prior to joining us, Mr. Waesche was responsible for all financial
operations of CREI, including treasury, accounting, budgeting and financial
planning. Mr. Waesche also had primary responsibility for CREI's asset
investment and disposition activities. Prior to joining CREI, Mr. Waesche was a
practicing Certified Public Accountant with Coopers & Lybrand L.L.P.
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JOHN H. GURLEY has been our Secretary, Vice President and General Counsel
since September 1998. Prior to joining us, Mr. Gurley served as Vice President
and General Counsel of Constellation. Prior to joining Constellation, Mr. Gurley
spent 17 years with The Rouse Company where he worked eight years as Assistant
General Counsel. Before that he worked in private practice for five years with
Semmes, Bowen & Semmes where he provided a broad spectrum of real estate related
services to various clients.
THOMAS D. CASSEL has been our Vice President, Finance and Treasurer since
October 1997. Mr. Cassel is a Certified Public Accountant with over 19 years
experience in real estate accounting, finance, acquisitions and management. From
1995 until October 1997, Mr. Cassel was Vice President and Chief Financial
Officer of Delancey Investment Group, Inc., a Philadelphia-based real estate
investment and management company. Prior to joining Delancey, he was a real
estate consulting manager for Arthur Andersen, LLP for four years and Kenneth
Leventhal & Co. for two years.
MICHAEL D. KAISER is President of CRM, our property management subsidiary.
Mr. Kaiser has more than 21 years of real estate experience, including a
background in development, leasing and management of real estate projects in the
Baltimore-Washington area.
DWIGHT S. TAYLOR is Senior Vice President of CDS, our development
subsidiary. Mr. Taylor has more than 24 years of real estate experience,
including 14 years with CREI and four years with The Rouse Company. From 1977 to
1981 Mr. Taylor was Senior Vice President of the Baltimore Economic Development
Corporation. He currently serves as Secretary/Treasurer of the Maryland Chapter
of NAIOP and served as Chairman of the Associated Black Charities from 1989 to
1991. He also serves on the Board of Directors of Micros Systems, Inc.
STANLEY A. LINK is Senior Vice President of Construction for CDS, our
development subsidiary. He has over 29 years of experience in engineering and
project/construction management. Prior to joining us, Mr. Link was with CREI for
15 years. During that time he directed the design and construction of over 3.2
million square feet of commercial properties. Prior to joining CREI, Mr. Link
was with BGE for 13 years. Mr. Link is a member of the Institute of Electrical
and Electronic Engineers.
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DESCRIPTION OF SERIES B PREFERRED SHARES
The following summary of the terms and provisions of the Series B Preferred
Shares does not purport to be complete and is qualified in its entirety by
reference to the pertinent sections of our Declaration of Trust and the Articles
Supplementary to the Declaration of Trust establishing the Series B Preferred
Shares, each of which is available from us as described in "Where You Can Find
More Information." This description of the particular terms of the Series B
Preferred Shares supplements, and to the extent inconsistent therewith,
replaces, the description of the general terms and provisions of our preferred
shares set forth in the accompanying prospectus.
GENERAL
Under our Declaration of Trust, we are authorized to issue up to 45,000,000
Common Shares and 5,000,000 preferred shares. As of March 31, 1999, 1,025,000
shares were classified as 5.5% Series A Convertible Preferred Shares and 984,308
5.5% Series A Convertible Preferred Shares were issued and outstanding. Our
Board of Trustees may increase the authorized number of Common Shares and
Preferred Shares without shareholder approval. As of March 31, 1999, 16,801,876
Common Shares were issued and outstanding.
We are authorized to issue preferred shares in one or more classes or
subclasses, with such designations, preferences, conversion and other rights,
voting powers, restrictions, limitations as to dividends, qualifications and
terms and conditions of redemption, in each case, as are permitted by Maryland
law and as our Board of Trustees may determine by resolution. See "Description
of Shares" in the accompanying prospectus. The Series B Preferred Shares will be
a class of our preferred shares. It is expected that 1,437,500 Series B
Preferred Shares will be authorized. Except for the 5.5% Series A Convertible
Preferred Shares, there are currently no other classes or series of authorized
preferred shares.
RANKING
The Series B Preferred Shares will, with respect to dividend rights and
rights upon our liquidation, dissolution or winding-up, rank (i) prior or senior
to the Common Shares and any other class or series of our equity securities
authorized or designated in the future if the holders of Series B Preferred
Shares shall be entitled to the receipt of dividends or of amounts distributable
upon liquidation, dissolution or winding-up in preference or priority to the
holders of shares of such class or series ("Junior Shares"); (ii) on a parity
with the 5.5% Series A Convertible Preferred Shares and any other class or
series of our equity securities authorized or designated in the future if the
holders of such class or series of securities and the Series B Preferred Shares
shall be entitled to the receipt of dividends and of amounts distributable upon
liquidation, dissolution or winding up in proportion to their respective amounts
of accrued and unpaid dividends per share or liquidation preferences, without
preference or priority of one over the other ("Parity Shares"); and (iii) junior
to any class or series of our equity securities authorized or designated in the
future if the holders of such class or series shall be entitled to the receipt
of dividends and amounts distributable upon liquidation, dissolution or winding
up in preference or priority to the holders of the Series B Preferred Shares
("Senior Shares").
As of March 31, 1999, there were outstanding 2,100,000 Initial Preferred
Units and 984,308 Series A Preferred Units of our operating partnership. Each
Initial Preferred Unit is entitled to a priority annual distribution of $1.625,
payable quarterly, prior to distributions with respect to Common Units and is
convertible into 3.5714 Common Units on or after October 1, 1999. Each Series A
Preferred Unit, subject to certain exceptions is entitled to a priority annual
distribution of $1.375, payable quarterly, prior to distributions with respect
to Common Units and is convertible into 1.8748 Common Units beginning on
scheduled dates from September 28, 2000 to December 30, 2000. The Series A
Preferred Units were issued to us by our operating partnership when we
contributed the
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proceeds from the sale of our 5.5% Series A Convertible Preferred Shares to our
operating partnership and have terms substantially equivalent to the terms of
those 5.5% Series A Convertible Preferred Shares. The Initial Preferred Units
were issued to third parties, including Messrs. Shidler and Hamlin, in exchange
for properties contributed by them to our operating partnership.
We intend to contribute the proceeds of this offering to our operating
partnership in exchange for a number of Series B Preferred Units equal to the
number of Series B Preferred Shares that we sell in this offering. The terms of
the Series B Preferred Units will be substantially equivalent to the economic
terms of the Series B Preferred Shares. The Initial Preferred Units and the
Series A Preferred Units are treated equally (i.e., are pari passu) in priority
over our Common Shares with respect to quarterly distributions. By their terms,
the Initial Preferred Units would be pari passu with the Series B Preferred
Units with respect to quarterly distributions; however, all of the holders of
the Initial Preferred Units, including Messrs. Shidler and Hamlin, have agreed,
in connection with this offering, to subordinate, concurrent with the closing of
this offering, the priority distributions attributable to their Initial
Preferred Units to the priority quarterly distributions attributable to the
Series A and Series B Preferred Units. Additionally, they have agreed to
exercise their conversion rights in full on October 1, 1999, the earliest
allowable date for conversion.
DIVIDENDS
Holders of Series B Preferred Shares shall be entitled to receive, when and
as declared by our Board of Trustees, out of our funds legally available for
payment, quarterly cash dividends on the Series B Preferred Shares at the rate
of % of the $25.00 liquidation preference per year (equivalent to $ per
year per Series B Preferred Share). Such dividends shall be cumulative from the
date of original issue, whether or not in any dividend period or periods such
dividends shall be declared or there shall be funds legally available for the
payment of such dividends, and shall be payable quarterly on January 15, April
15, July 15 and October 15 of each year (or, if not a business day, the next
succeeding business day) (each a "Dividend Payment Date"), commencing July 15,
1999. Any dividend payable on the Series B Preferred Shares for any partial
dividend period will be computed ratably on the basis of twelve 30-day months
and a 360-day year. The initial quarterly dividend payable on the Series B
Preferred Shares will be $ per share. Dividends will be payable in arrears to
holders of record as they appear on our share records at the close of business
on the applicable record date, which shall be fixed by our Board of Trustees and
which shall be not more than 60 nor less than 10 days prior to such Dividend
Payment Date. Holders of Series B Preferred Shares shall not be entitled to
receive any dividends in excess of cumulative dividends on the Series B
Preferred Shares. No interest, or sum of money in lieu of interest, shall be
payable in respect of any dividend payment or payments on the Series B Preferred
Shares that may be in arrears.
When dividends are not paid in full upon the Series B Preferred Shares or
any other class or series of Parity Shares, or a sum sufficient for such payment
is not set apart, all dividends declared upon the Series B Preferred Shares and
any Parity Shares shall be declared ratably in proportion to the respective
amounts of dividends accrued and unpaid on the Series B Preferred Shares and
accrued and unpaid on such Parity Shares. Except as set forth in the preceding
sentence, unless dividends on the Series B Preferred Shares equal to the full
amount of accrued and unpaid dividends have been or contemporaneously are
declared and paid or declared and a sum sufficient for the payment thereof has
been or contemporaneously is set apart for such payment, for all past dividend
periods, no dividends shall be declared or paid or set apart for payment by us
and no other distribution of cash or other property may be declared or made,
directly or indirectly, by us with respect to any Parity Shares. Unless
dividends equal to the full amount of all accrued and unpaid dividends on the
Series B Preferred Shares have been paid, or declared and set apart for payment,
for all past dividend periods, no dividends (other than dividends or
distributions paid in Junior Shares or options, warrants or rights to subscribe
for or purchase Junior Shares) may be declared or paid or set apart for payment
by us and
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no other distribution of cash or other property may be declared or made,
directly or indirectly, by us with respect to any Junior Shares, nor shall any
Junior Shares be redeemed, purchased or otherwise acquired (except for a
redemption, purchase or other acquisition of Common Shares made for purposes of
our employee incentive or benefit plan or any such plan of any of our
subsidiaries) for any consideration (or any monies be paid to or made available
for a sinking fund for the redemption of any such Junior Shares), directly or
indirectly, by us (except by conversion into or exchange for Junior Shares, or
options, warrants or rights to subscribe for or purchase Junior Shares), nor
shall any other cash or other property be paid or distributed to or for the
benefit of holders of Junior Shares. Notwithstanding the provisions described
above, we shall not be prohibited from (i) declaring or paying or setting apart
for payment any dividend or distribution on any Parity Shares or (ii) redeeming,
purchasing or otherwise acquiring any Parity Shares, in each case, if such
declaration, payment, redemption, purchase or other acquisition is necessary to
maintain our qualification as a REIT.
LIQUIDATION PREFERENCE
Upon any voluntary or involuntary liquidation, dissolution or winding-up,
before any payment or distribution by us shall be made to or set apart for the
holders of any Junior Shares, the holders of Series B Preferred Shares shall be
entitled to receive a liquidation preference of $25.00 per share (the "Series B
Liquidation Preference"), plus an amount equal to all accrued and unpaid
dividends (whether or not earned or declared) to the date of final distribution
to such holders; but such holders shall not be entitled to any further payment.
Until the holders of the Series B Preferred Shares have been paid the Series B
Liquidation Preference in full, plus an amount equal to all accrued and unpaid
dividends (whether or not earned or declared) to the date of final distribution
to such holders, no payment shall be made to any holder of Junior Shares upon
our liquidation, dissolution or winding-up. If upon any liquidation, dissolution
or winding-up, our assets, or proceeds thereof, distributable among the holders
of Series B Preferred Shares shall be insufficient to pay in full the above
described preferential amount and liquidating payments on any other shares of
any class or series of Parity Shares, then our assets, or the proceeds thereof,
shall be distributed among the holders of Series B Preferred Shares and any such
other Parity Shares ratably in the same proportion as the respective amounts
that would be payable on such Series B Preferred Shares and any such other
Parity Shares if all amounts payable thereon were paid in full. A voluntary or
involuntary liquidation, dissolution or winding-up shall not include a
consolidation or merger of us with or into one or more other entities, a sale or
transfer of all or substantially all of our assets, or a statutory share
exchange. Upon any liquidation, dissolution or winding-up, after payment shall
have been made in full to the holders of Series B Preferred Shares and any
Parity Shares, any other series or class or classes of Junior Shares shall be
entitled to receive any and all of our assets remaining to be paid or
distributed, and the holders of the Series B Preferred Shares and any Parity
Shares shall not be entitled to share therein.
OPTIONAL REDEMPTION
The Series B Preferred Shares will not be redeemable by us prior to July 15,
2004 (except in certain limited circumstances relating to our maintenance of our
ability to qualify as a REIT as described in "--Restrictions on Ownership and
Transfer"). On or after July 15, 2004, we may, at our option, redeem the Series
B Preferred Shares, in whole or from time to time in part, at a cash redemption
price equal to 100% of the Series B Liquidation Preference, plus all accrued and
unpaid dividends, if any, to the redemption date. The redemption price for the
Series B Preferred Shares (other than any portion thereof consisting of accrued
and unpaid dividends) shall be payable solely with the proceeds from the sale of
equity securities by us or our operating partnership (whether or not such sale
occurs concurrently with such redemption). For purposes of the preceding
sentence, "equity securities" means any common shares, preferred shares,
depositary shares, partnership or other interests, participations or other
ownership interests (however designated) and any rights (other than debt
securities convertible into or exchangeable at the option of the holder for
equity securities (unless
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and to the extent such debt securities are subsequently converted into equity
securities)) or options to purchase any of the foregoing of or in us or our
operating partnership.
In the event of a redemption of any Series B Preferred Shares, if the
redemption date occurs after a dividend record date and on or prior to the
related Dividend Payment Date, the dividend payable on such Dividend Payment
Date in respect of such Series B Preferred Shares called for redemption shall be
payable on such Dividend Payment Date to the holders of record at the close of
business on such dividend record date, and shall not be payable as part of the
redemption price for such Series B Preferred Shares. The redemption date shall
be selected by us and shall not be less than 30 days nor more than 60 days after
the date notice of redemption is sent by us. If full cumulative dividends on all
outstanding Series B Preferred Shares have not been paid or declared and set
apart for payment, no Series B Preferred Shares may be redeemed unless all
outstanding Series B Preferred Shares are simultaneously redeemed and neither we
nor any of our affiliates may purchase or acquire Series B Preferred Shares
otherwise than pursuant to a purchase or exchange offer made on the same terms
to all holders of Series B Preferred Shares.
If fewer than all the outstanding Series B Preferred Shares are to be
redeemed, we will select those Series B Preferred Shares to be redeemed pro rata
in proportion to the numbers of Series B Preferred Shares held by holders (with
adjustment to avoid redemption of fractional shares) or by lot or in such other
manner as the Board of Trustees may determine.
Notice of redemption will be given by publication in a newspaper of general
circulation in the City of New York, such publication to be made once a week for
two consecutive weeks commencing not less than 30 nor more than 60 days prior to
the redemption date. A similar notice shall be mailed by us not less than 30
days nor more than 60 days prior to the redemption date to each holder of record
of the Series B Preferred Shares to be redeemed by first class mail, postage
prepaid at such holder's address as the same appears on our share records. Any
notice which was mailed as described above shall be conclusively presumed to
have been duly given on the date mailed whether or not the holder receives the
notice. Each notice shall state: (i) the redemption date; (ii) the number of
Series B Preferred Shares to be redeemed; (iii) the place or places where
certificates for such Series B Preferred Shares are to be surrendered for cash;
and (iv) the redemption price payable on such redemption date, including,
without limitation, a statement as to whether or not accrued and unpaid
dividends will be (x) payable as part of the redemption price, or (y) payable on
the next Dividend Payment Date to the record holder at the close of business on
the relevant record date as described above. From and after the redemption date
(unless we shall default in the payment of our redemption obligation), dividends
on the Series B Preferred Shares to be redeemed will cease to accrue, such
shares shall no longer be deemed to be outstanding and all rights of the holders
thereof shall cease (except (a) the right to receive the cash payable upon such
redemption without interest thereon, and (b) if the redemption date occurs after
a dividend record date and on or prior to the related Dividend Payment Date, the
right of record holders at the close of business on such record date to receive
the dividend payable on such Dividend Payment Date).
The Series B Preferred Shares will have no stated maturity and will not be
subject to any sinking fund or mandatory redemption provisions except as
provided under "--Restrictions on Ownership and Transfer."
Subject to applicable law and the limitation on purchases when dividends on
the Series B Preferred Shares are in arrears, we may, at any time and from time
to time, purchase any Series B Preferred Shares in the open market, by tender or
by private agreement.
VOTING RIGHTS
Holders of Series B Preferred Shares will not have any voting rights, except
as set forth below and except as otherwise required by applicable law.
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If and whenever dividends on any Series B Preferred Shares or any series or
class of Parity Shares shall be in arrears for six or more quarterly periods
(whether or not consecutive), the number of Trustees then constituting our Board
of Trustees shall be increased by two (if not already increased by reason of
similar types of provisions with respect to Parity Shares of any other class or
series which is entitled to similar voting rights (the "Voting Parity Shares")),
and the holders of Series B Preferred Shares, together with the holders of all
other Voting Parity Shares then entitled to exercise similar voting rights,
voting as a single class regardless of series, will be entitled to vote for the
election of the two additional Trustees at any annual meeting of shareholders or
at a special meeting of the holders of the Series B Preferred Shares and of the
Voting Parity Shares called for that purpose. At any time when such right to
elect Trustees separately shall have so vested, we must call such special
meeting upon the written request of the holders of record of not less than 20%
of the total number of Series B Preferred Shares and shares of any series of
Voting Parity Shares then outstanding. Such special meeting shall be held, in
the case of such written request, within 90 days after the delivery of such
request, provided that we shall not be required to call such a special meeting
if such request is received less than 120 days before the date fixed for the
next ensuing annual meeting of shareholders and the holders of Series B
Preferred Shares and such other Voting Parity Shares are offered the opportunity
to elect such Trustees at such annual meeting of shareholders. If, prior to the
end of the term of any Trustee so elected, a vacancy in the office of such
Trustee shall occur by reason of death, resignation, or disability, such vacancy
shall be filled for the unexpired term of such former Trustee by the appointment
of a new Trustee by the remaining Trustee or Trustees so elected. Whenever
dividends in arrears on outstanding Series B Preferred Shares and Voting Parity
Shares shall have been paid and dividends thereon for the current quarterly
dividend period shall have been paid or declared and set apart for payment, then
the right of the holders of the Series B Preferred Shares and Voting Parity
Shares to elect such additional two Trustees shall cease and the terms of office
of such Trustees shall terminate and the number of Trustees constituting our
Board of Trustees shall be reduced accordingly. Our 5.5% Series A Convertible
Preferred Shares are not Voting Parity Shares. Holders of 5.5% Series A
Convertible Preferred Shares, as a separate class, are entitled to elect two
additional Trustees if we shall fail at any time or from time to time to pay
when due two consecutive quarterly dividend payments on our 5.5% Series A
Convertible Preferred Shares, and such Trustees are entitled to serve as
Trustees thereafter until all accrued and unpaid dividends on our 5.5% Series A
Convertible Preferred Shares have been paid in full.
The affirmative vote or consent of at least two-thirds of the votes entitled
to be cast by the holders of the outstanding Series B Preferred Shares and the
holders of all other classes or series of Voting Parity Shares entitled to vote
on such matters, voting as a single class, will be required to (i) authorize,
create, increase the authorized amount of, or issue any shares of any class of
Senior Shares or any security convertible into shares of any class of Senior
Shares, or (ii) amend, alter or repeal any provision of, or add any provision
to, our Declaration of Trust or Bylaws, if such action would materially
adversely affect the voting powers, rights or preferences of the holders of the
Series B Preferred Shares; provided, however, that no such vote of the holders
of Series B Preferred Shares shall be required if, at or prior to the time such
amendment, alteration or repeal is to take effect or the issuance of any such
Senior Shares or convertible security is to be made, as the case may be,
provisions are made for the redemption of all outstanding Series B Preferred
Shares. The amendment of or supplement to our Declaration of Trust to authorize,
create, increase or decrease the authorized amount of or to issue Junior Shares,
Series B Preferred Shares or any shares of any class of Parity Shares shall not
be deemed to materially adversely affect the voting powers, rights or
preferences of the holders of Series B Preferred Shares. Holders of 5.5% Series
A Convertible Preferred Shares do not vote with the holders of Series B
Preferred Shares as a single class with respect to the matters referred to
above. With respect to these matters, the holders of 5.5% Series A Convertible
Preferred Shares vote as a separate class with the affirmative vote or consent
of at least two-thirds of the votes entitled to be cast by the holders of our
5.5% Series A Convertible Preferred Shares being required.
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With respect to the exercise of the above-described voting rights, each
Series B Preferred Share shall have one (1) vote per share, except that when any
other class or series of preferred shares shall have the right to vote with the
Series B Preferred Shares as a single class, then the Series B Preferred Shares
and such other class or series shall have one quarter of one (0.25) vote per
$25.00 of liquidation preference.
NEW YORK STOCK EXCHANGE LISTING
Before this offering, there has been no public trading market for the Series
B Preferred Shares. We intend to file an application to list the Series B
Preferred Shares on the NYSE under the symbol "OFC PFD.B." If approved for
listing, trading of the Series B Preferred Shares is expected to begin within 30
days of the original issuance of the Series B Preferred Shares. The
representatives have advised us that they intend to make a market in the Series
B Preferred Shares prior to the commencement of trading on the NYSE. However,
the representatives are not obligated to do so and may discontinue market-making
at any time without notice. We cannot give any assurance about the liquidity of
any trading market for the Series B Preferred Shares which may exist.
CONVERSION
The Series B Preferred Shares are not convertible into or exchangeable for
any other property or securities.
TRANSFER AGENT
The registrar and transfer agent for the Series B Preferred Shares will be
Norwest Bank.
BOOK ENTRY, DELIVERY AND FORM
The Series B Preferred Shares will be issued in the form of a fully
registered Global Certificate (the "Global Certificate"). The Global Certificate
will be deposited on or about the date of original issuance with, or on behalf
of, The Depository Trust Company (the "Depositary") and will be registered in
the name of Cede & Co., as nominee of the Depositary (such nominee being
referred to herein as the "Global Certificate Holder").
The Depositary is a limited-purpose trust company which was created to hold
securities for its participating organizations (collectively, the "Participant"
or the "Depositary's Participants") and to facilitate the clearance and
settlement of transactions in such securities between Participants through
electronic book-entry changes in accounts of its Participants. The Depositary's
Participants include securities brokers and dealers (including the
underwriters), banks and trust companies, clearing corporations and certain
other organizations. Access to the Depositary's system is also available to
other entities such as banks, brokers, dealers and trust companies
(collectively, the "Indirect Participants" or the "Depositary's Indirect
Participants") that clear through or maintain a custodial relationship with a
participant, either directly or indirectly. Persons who are not Participants may
beneficially own securities held by or on behalf of the Depositary only through
the Depositary's Participants or the Depositary's Indirect Participants.
We expect that pursuant to procedures established by the Depositary (i) upon
deposit of the Global Certificate, the Depositary will credit the accounts of
Participants designated by the underwriters with portions of the principal
amount of the Global Certificate and (ii) ownership of the Series B Preferred
Shares will be shown on, and the transfer of ownership thereof will be effected
only through, records maintained by the Depositary (with respect to the
interests of the Depositary's Participants), the Depositary's Participants and
the Depositary's Indirect Participants. Prospective purchasers of the Series B
Preferred Shares are advised that the laws of some states require that
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certain persons take physical delivery in definitive form of securities that
they own. Consequently, the ability to transfer Series B Preferred Shares will
be limited to such extent.
So long as the Global Certificate Holder is the registered owner of any
Series B Preferred Shares, the Global Certificate Holder will be considered the
sole owner or holder of such Series B Preferred Shares. Except as provided
below, owners of Series B Preferred Shares will not be entitled to have Series B
Preferred Shares registered in their names and will not receive or be entitled
to receive physical delivery of Series B Preferred Shares in certificated form.
As a result, the ability of a person having a beneficial interest in Series B
Preferred Shares represented by the Global Certificate to pledge such interest
to persons or entities that do not participate in the Depositary's system or to
otherwise take actions in respect of such interest may be affected by the lack
of a physical certificate evidencing such interest.
Neither COPT nor the Transfer Agent will have any responsibility or
liability for any aspect of the records relating to or payments made on account
of Series B Preferred Shares by the Depositary, or for maintaining, supervising
or reviewing any records of the Depositary relating to the Series B Preferred
Shares.
Payments of distributions on any Series B Preferred Shares registered in the
name of the Global Certificate Holder on the applicable record date will be
payable to or at the direction of the Global Certificate Holder. Neither COPT
nor the Transfer Agent will have any responsibility or liability for the payment
of such amounts to beneficial owners of the Series B Preferred Shares.
We believe, however, that it is currently the policy of the Depositary to
immediately credit the accounts of the relevant Participants with such payment,
in amounts proportionate to their respective holdings in principal amount of
beneficial interests in the relevant security as shown on the records of the
Depositary. Payments by the Depositary's Participants and the Depositary's
Indirect Participants to the beneficial owner of Series B Preferred Shares will
be governed by standing instructions and customary practice and will be the
responsibility of the Depositary's Participants or the Depositary's Indirect
Participants.
CERTIFICATED SHARES
Any person having a beneficial interest in the Global Certificate may, upon
request to us or the Transfer Agent, exchange such beneficial interest for
physical delivery of Series B Preferred Shares in certificated form. Upon any
such issuance, the Transfer Agent is required to register such Series B
Preferred Shares in the name of, and cause the same to be delivered to, such
person or such person's nominee. In addition, if (i) we notify the Transfer
Agent in writing that the Depositary is no longer willing or able to act as a
depositary and we are unable to locate a qualified successor within 90 days or
(ii) we, at our option, notify the Transfer Agent in writing that we elect to
cause the issuance of the Series B Preferred Shares in certificated form, then,
upon surrender by the Global Certificate Holder of the Global Certificate,
Series B Preferred Shares in certificated form will be issued to each person
that the Global Certificate Holder and the Depositary identify as the beneficial
owner of Series B Preferred Shares.
Neither COPT nor the Transfer Agent will be liable for any delay by the
Global Certificate Holder or the Depositary in identifying the beneficial owners
of Series B Preferred Shares, and each person may conclusively rely on, and
shall be protected in relying on, instructions from the Global Certificate
Holder or the Depositary for all purposes, including with respect to the
registration and delivery, and the respective principal amounts, of the Series B
Preferred Shares to be issued.
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RESTRICTIONS ON OWNERSHIP AND TRANSFER
For us to qualify as a REIT (as defined in the Internal Revenue Code of
1986, as amended (the "Code") to include certain entities), our shares of
beneficial interest generally must be beneficially owned by 100 or more persons
during at least 335 days of a taxable year of 12 months or during a
proportionate part of a shorter taxable year. Also, not more than 50% of the
value of the outstanding shares of beneficial interest may be owned, directly or
indirectly, by five or fewer individuals (under the Code) at any time during the
last half of a taxable year (other than the first year for which an election to
be a REIT has been made). This test is applied by "looking through" certain
shareholders which are not individuals (e.g., corporations or partnerships) to
determine indirect ownership of us by individuals.
Our Declaration of Trust, subject to certain exceptions, contains certain
restrictions on the number of our shares of beneficial interest that a person
may own. Our Declaration of Trust provides that no person may own, or be deemed
to own by virtue of the attribution provisions of the Code, more than 9.8% (the
"Aggregate Share Ownership Limit") of the number or value of our outstanding
shares of beneficial interest. In addition, our Declaration of Trust prohibits
any person from acquiring or holding, directly or indirectly, in excess of 9.8%
of our total outstanding Common Shares, in value or in number of shares,
whichever is more restrictive (the "Common Share Ownership Limit"). Our Board of
Trustees, in its sole discretion, may exempt a proposed transferee from the
Aggregate Share Ownership Limit and the Common Share Ownership Limit (an
"Excepted Holder"). However, our Board of Trustees may not grant such an
exemption to any person if such exemption would result in us being "closely
held" within the meaning of Section 856(h) of the Code or otherwise would result
in our failing to qualify as a REIT. In order to be considered by our Board of
Trustees as an Excepted Holder, a person also must not own, directly or
indirectly, an interest in a tenant of ours (or a tenant of any entity owned or
controlled by us) that would cause us to own, directly or indirectly, more than
a 9.9% interest in such a tenant. The person seeking an exemption must represent
to the satisfaction of our Board of Trustees that it will not violate the two
aforementioned restrictions. The person also must agree that any violation or
attempted violation of any of the foregoing restrictions will result in the
automatic transfer of the shares of stock causing such violation to the Share
Trust (as defined below). Our Board of Trustees may require a ruling from the
Internal Revenue Service or an opinion of counsel, in either case in form and
substance satisfactory to our Board of Trustees, in its sole discretion, in
order to determine or ensure our status as a REIT.
Our Declaration of Trust further prohibits (i) any person from beneficially
or constructively owning our shares of beneficial interest that would result in
us being "closely held" under Section 856(h) of the Code or otherwise cause us
to fail to qualify as a REIT and (ii) any person from transferring shares of our
beneficial interest if such transfer would result in our shares of beneficial
interest being owned by fewer than 100 persons. Any person who acquires or
attempts or intends to acquire beneficial or constructive ownership of our
shares of beneficial interest that will or may violate any of the foregoing
restrictions on transferability and ownership, or any person who would have
owned our shares of the beneficial interest that resulted in a transfer of
shares to the Share Trust, is required to give notice immediately to us and
provide us with such other information as we may request in order to determine
the effect of such transfer on our status as a REIT. The foregoing restrictions
on transferability and ownership will not apply if our Board of Trustees
determines that it is no longer in our best interests to attempt to qualify, or
to continue to qualify, as a REIT.
If any transfer of our shares of beneficial interest occurs which, if
effective, would result in any person beneficially or constructively owning
shares of beneficial interest in us in excess or in violation of the above
transfer or ownership limitations (a "Prohibited Owner"), then that number of
our shares of beneficial interest, the beneficial or constructive ownership of
which otherwise would cause such person to be in excess of the ownership limit
(rounded to the nearest whole share) will automatically be transferred to a
trust (the "Share Trust") for the exclusive benefit of one or more charitable
beneficiaries (the "Charitable Beneficiary"), and the Prohibited Owner shall not
acquire any rights in
S-33
<PAGE>
such shares. Such automatic transfer shall be deemed to be effective as of the
close of business on the Business Day (as defined in our Declaration of Trust)
prior to the date of such violative transfer. Shares of beneficial interest held
in the Share Trust shall be issued and outstanding shares of beneficial interest
in us. The Prohibited Owner may not benefit economically from ownership of any
shares of beneficial interest held in the Share Trust, may have no rights to
dividends and may not possess any other rights attributable to the shares of
beneficial interest held in the Share Trust. The trustee of the Share Trust (the
"Share Trustee") will have all voting rights and rights to dividends or other
distributions with respect to shares of beneficial interest held in the Share
Trust, which rights will be exercised for the exclusive benefit of the
Charitable Beneficiary. Any dividend or other distribution paid prior to the
discovery by us that shares of beneficial interest have been transferred to the
Share Trust will be paid by the recipient of such dividend or distribution to
the Share Trustee upon demand, and any dividend or other distribution authorized
but unpaid will be paid when due to the Share Trustee. Any dividend or
distribution so paid to the Share Trustee will be held in the Share Trust for
the Charitable Beneficiary. The Prohibited Owner will have no voting rights with
respect to shares of beneficial interest held in the Share Trust and, subject to
Maryland law, effective as of the date that such shares of beneficial interest
have been transferred to the Share Trust, the Share Trustee will have the
authority (at the Share Trustee's sole discretion) (i) to rescind as void any
vote cast by a Prohibited Owner prior to the discovery by us that such shares
have been transferred to the Share Trust and (ii) to recast such vote in
accordance with the desires of the Share Trustee acting for the benefit of the
Charitable Beneficiary. However, if we have already taken irreversible trust
action, then the Share Trustee will not have the authority to rescind and recast
such vote.
Within 20 days of receiving notice from us that shares of beneficial
interest in us have been transferred to the Share Trust, the Share Trustee will
sell the shares of beneficial interest held in the Share Trust to a person,
designated by the Share Trustee, whose ownership of the shares will not violate
the ownership limitations set forth in the Declaration of Trust. Upon such sale,
the interest of the Charitable Beneficiary in the shares sold will terminate and
the Share Trustee will distribute the net proceeds of the sale to the Prohibited
Owner and to the Charitable Beneficiary as described below. The Prohibited Owner
will receive the lesser of (i) the price paid by the Prohibited Owner for the
shares or, if the Prohibited Owner did not give value for the shares in
connection with the event causing the shares to be held in the Share Trust
(e.g., a gift, devise or other such transaction), the Market Price (as defined
in the Declaration of Trust) of such shares on the day of the event causing the
shares to be received by the Share Trustee and (ii) the price per share received
by the Share Trustee from the sale or other disposition of the Common Shares
held in the Share Trust. Any net sale proceeds in excess of the amount payable
to the Prohibited Owner will be paid immediately to the Charitable Beneficiary.
If, prior to the discovery by us that shares of beneficial interest have been
transferred to the Share Trust, such shares are sold by a Prohibited Owner, then
(i) such shares will be deemed to have been sold on behalf of the Share Trust
and (ii) to the extent that the Prohibited Owner received an amount for shares
that exceeds the amount that such Prohibited Owner was entitled to receive as
described above, such excess will be paid to the Share Trustee upon demand.
In addition, shares of beneficial interest in us held in the Share Trust
will be deemed to have been offered for sale to us, or our designee, at a price
per share equal to the lesser of (i) the price per share in the transaction that
resulted in such transfer to the Share Trust (or, in the case of a devise or
gift, the Market Price at the time of such devise or gift) and (ii) the Market
Price on the date we, or our designee, accept such offer. We shall have the
right to accept such offer until the Share Trustee has sold the shares of
beneficial interest held in the Share Trust. Upon such a sale to us, the
interest of the Charitable Beneficiary in the shares sold will terminate and the
Share Trustee will distribute the net proceeds of the sale to the Prohibited
Owner.
All certificates representing the Series B Preferred Shares will bear a
legend referring to the restrictions described above.
S-34
<PAGE>
Every owner of more than 5% (or such other percentage as required by the
Code or the regulations promulgated thereunder) of all classes or series of our
shares of beneficial interest, including the Series B Preferred Shares, is
required to give written notice to us, within 30 days after the end of each
taxable year, stating the name and address of such owner, the number of shares
of each class and series of shares of beneficial interest of us which the owner
beneficially owns and a description of the manner in which such shares are held.
Each such owner shall provide to us such additional information as we may
request in order to determine the effect, if any, of such beneficial ownership
on our status as a REIT and to ensure compliance with the Aggregate Share
Ownership Limit. In addition, each shareholder shall upon demand be required to
provide to us such information as we may request, in good faith, in order to
determine our status as a REIT and to comply with the requirements of any taxing
authority or governmental authority or to determine such compliance.
These ownership limitations could delay, defer or prevent a change in
control of us or other transaction that might involve a premium over the then
prevailing market price for the Series B Preferred Shares or other attributes
that the shareholders may consider to be desirable.
CERTAIN FEDERAL INCOME TAX MATTERS
The following summary of certain Federal income tax considerations regarding
an investment in the Series B Preferred Shares is based on current law, is for
general information only and is not tax advice. This summary supplements the
discussion set forth in the accompany prospectus under the heading "Federal
Income Tax Matters." This discussion does not purport to deal with all aspects
of taxation that may be relevant to particular investors in light of their
personal investment or tax circumstances.
EACH PROSPECTIVE PURCHASER IS ADVISED TO CONSULT HIS OR HER OWN TAX ADVISOR
REGARDING THE SPECIFIC TAX CONSEQUENCES TO HIM OR HER OF THE PURCHASE, OWNERSHIP
AND SALE OF SERIES B PREFERRED SHARES AND OF OUR ELECTION TO BE TAXED AS A REIT,
INCLUDING THE FEDERAL, STATE, LOCAL, FOREIGN INCOME AND OTHER TAX CONSEQUENCES
OF SUCH PURCHASE, OWNERSHIP, SALE AND ELECTION, AND OF POTENTIAL CHANGES IN
APPLICABLE TAX LAWS.
DISTRIBUTIONS ON SERIES B PREFERRED SHARES
For a discussion of the treatment of dividends and other distributions with
respect to the Series B Preferred Shares, see "Federal Income Tax
Matters--Taxation of Shareholders" in the accompanying prospectus. In
determining the extent to which a distribution with respect to the Series B
Preferred Shares constitutes a dividend for tax purposes, our earnings and
profits will be allocated, on a pro rata basis, first to distributions with
respect to any class of preferred shares, and then to our Common Shares.
REDEMPTION OF SERIES B PREFERRED SHARES
A redemption of the Series B Preferred Shares will be treated under Section
302 of the Code as a dividend taxable at ordinary income tax rates (to the
extent of our current or accumulated earnings and profits), unless the
redemption satisfies certain tests set forth in Section 302(b) of the Code
enabling the redemption to be treated as a sale or exchange of the Series B
Preferred Shares. The redemption will satisfy such test if it (i) is
"substantially disproportionate" with respect to the holder, (ii) results in a
"complete termination" of the holder's stock interest in us, or (iii) is "not
essentially equivalent to a dividend" with respect to the holder, all within the
meaning of Section 302(b) of the Code. In determining whether any of these tests
have been met, shares considered to be owned by the holder by reason of certain
constructive ownership rules set forth in the Code, as well as shares actually
owned, must generally be taken into account. Because the determination as to
whether any of the alternative tests of Section 302(b) of the Code is satisfied
with respect to any particular holder of the Series B
S-35
<PAGE>
Preferred Shares will depend upon the facts and circumstances as of the time the
redemption occurs, prospective investors are advised to consult their own tax
advisors to determine such tax treatment.
If a redemption of the Series B Preferred Shares is treated as a
distribution that is taxable as a dividend, the amount of the distribution would
be measured by the amount of cash and the fair market value of any property
received by the shareholder. The shareholder's adjusted tax basis in such
redeemed Series B Preferred Shares would be transferred to the holder's
remaining shareholdings in us. If, however, the shareholder has no remaining
shareholdings in us, such basis may, under certain circumstances, be transferred
to a related person or it may be lost entirely.
Under Section 305(c) of the Code and the applicable Treasury Regulations
thereunder, if the cash redemption price of preferred stock exceeds its issue
price, the difference (the "redemption premium") may be taxable as a
constructive dividend of additional shares of preferred stock to holders over a
certain period. Because the terms of the Series B Preferred Shares provide for
an optional right of redemption for cash by us at a price in excess of its issue
price, holders could be required to recognize such redemption premium under an
economic accrual method if, based on all of the facts and circumstances, the
optional redemption is more likely than not to occur. We believe that the
existence of our optional redemption right for cash does not result in a
constructive dividend to holders of Series B Preferred Shares.
POTENTIAL LEGISLATIVE ACTION REGARDING REITS
On February 1, 1999, the Clinton Administration released a summary of its
proposed budget plan and on April 28, 1999, the Real Estate Investment Trust
Modernization Act of 1999 (the "RMA") was introduced in Congress, both of which
contained several proposals affecting REITs. Each such proposal, if enacted in
its present form, would prohibit a REIT from holding securities representing
more than 10% of the voting stock or value of all classes of stock of any
corporation other than (i) a qualified REIT subsidiary, (ii) another REIT or
(iii) certain corporations known as "taxable REIT subsidiaries." Taxable REIT
subsidiaries would be subject to full corporate level taxation on their
earnings, but would be permitted to engage in certain types of real estate
management activities (such as those performed by COMI) which cannot currently
be performed by REITs or their controlled subsidiaries without jeopardizing REIT
status.
Under each of the two pending legislative proposals, we would be allowed to
elect to combine or convert our existing stock interest in COMI into a "taxable
REIT subsidiary," subject to certain transition rules. In addition, the RMA
contains certain "grandfather" rules which would make the limitations on stock
ownership described above inapplicable to our ownership of COMI, even in the
absence of an election to treat COMI as a "taxable REIT subsidiary." In such
case, however, the RMA would terminate our ability to rely on the grandfather
rule if COMI were either to engage in new trades or businesses or acquire
substantial new assets. Accordingly, in the absence of such election, the RMA
may limit the future activities and growth of COMI. No prediction can be made as
to whether either of the legislative proposals described above or any other
proposal affecting REITs will be enacted into law, or the impact of any such
legislation on our operations.
S-36
<PAGE>
UNDERWRITING
We have entered into an underwriting agreement with the underwriters named
below, for whom Prudential Securities Incorporated; Deutsche Bank Securities
Inc.; Donaldson, Lufkin & Jenrette Securities Corporation; Janney Montgomery
Scott Inc.; and Tucker Anthony Cleary Gull are acting as representatives. We are
obligated to sell, and the underwriters are obligated to purchase, all of the
Series B Preferred Shares offered on the cover page of this prospectus
supplement, if any are purchased. Subject to certain conditions of the
underwriting agreement, each underwriter has severally agreed to purchase the
Series B Preferred Shares indicated opposite its name:
<TABLE>
<CAPTION>
NUMBER OF
SERIES B
PREFERRED
UNDERWRITERS SHARES
- ------------------------------------------------------------------------------------------- ----------
<S> <C>
Prudential Securities Incorporated.........................................................
Deutsche Bank Securities Inc...............................................................
Donaldson, Lufkin & Jenrette Securities Corporation........................................
Janney Montgomery Scott Inc................................................................
Tucker Anthony Cleary Gull.................................................................
----------
Total.................................................................................. 1,250,000
----------
----------
</TABLE>
The underwriters may sell more Series B Preferred Shares than the total
number of Series B Preferred Shares offered on the cover page of this prospectus
supplement and they have, for a period of 30 days from the date of this
prospectus supplement, an over-allotment option to purchase up to 187,500
additional Series B Preferred Shares from us. If any additional Series B
Preferred Shares are purchased, the underwriters will severally purchase the
Series B Preferred Shares in the same proportion as per the table above.
The representatives of the underwriters have advised us that the Series B
Preferred Shares will be offered to the public at the offering price indicated
on the cover page of this prospectus supplement. The underwriters may allow to
selected dealers a concession not in excess of $ per Series B Preferred Share
and such dealers may reallow a concession not in excess of $ per Series B
Preferred Share to certain other dealers. After the Series B Preferred Shares
are released for sale to the public, the representatives may change the offering
price and the concessions.
We have agreed to pay the underwriters the following fees, assuming both no
exercise and full exercise of the underwriters' over-allotment option to
purchase additional Series B Preferred Shares:
<TABLE>
<CAPTION>
TOTAL FEES
----------------------------------------------
<S> <C> <C> <C>
FEE PER
SERIES B WITHOUT EXERCISE OF FULL EXERCISE OF
PREFERRED SHARE OVER-ALLOTMENT OPTION OVER-ALLOTMENT OPTION
--------------- ----------------------- ---------------------
Fees paid by us................................. $ $ $
</TABLE>
In addition, we estimate that we will spend approximately $ in
expenses for this offering. We and our operating partnership have agreed to
indemnify the underwriters against certain liabilities, including liabilities
under the Securities Act of 1933, as amended, or contribute to payments that the
underwriters may be required to make in respect to these liabilities.
Prudential Securities Incorporated, on behalf of the underwriters, may
engage in the following activities in accordance with applicable securities
rules:
- Over-allotments involving sales in excess of the offering size, creating a
short position. Prudential Securities Incorporated may elect to reduce
this short position by exercising some or all of the over-allotment
option.
S-37
<PAGE>
- Stabilizing and short covering: stabilizing bids to purchase the Series B
Preferred Shares are permitted if they do not exceed a specified maximum
price. After the distribution of the Series B Preferred Shares has been
completed, short covering purchases in the open market may also reduce the
short position. These activities may cause the price of the Series B
Preferred Shares to be higher than would otherwise exist in the open
market.
- Penalty bids permitting the representatives to reclaim concessions from a
syndicate member for the Series B Preferred Shares purchased in the
stabilizing or short covering transactions.
Such activities, which may be commenced and discontinued at any time, may be
effected on the NYSE, in the over-the-counter market or otherwise.
In order to meet the requirements for listing the Series B Preferred Shares
on the NYSE, the underwriters have undertaken to sell (i) Series B Preferred
Shares to ensure a minimum of 100 beneficial holders with a minimum of 100,000
Series B Preferred Shares outstanding and (ii) sufficient shares of Series B
Preferred Shares so that following this offering we have a minimum aggregate
market value of at least $2.0 million.
Prudential Securities Incorporated and one or more other underwriters have,
from time to time, performed, and may in the future perform, various investment
banking, financial advisory and other services for us for which they have been
paid, or will be paid, fees. Bankers Trust Company, an affiliate of one of the
underwriters in this offering, will receive $29.9 million of the net proceeds
from this offering in repayment of a portion of our secured revolving credit
facility.
EXPERTS
The financial statements incorporated in this prospectus and prospectus
supplement by reference to the Annual Report on Form 10-K of Corporate Office
Properties Trust for the year ended December 31, 1998, and (1) the audited
combined statement of revenue and certain expenses of the Centerpoint
Properties, as defined in footnote 1 of that statement, for the year ended
December 31, 1997, included in the Corporate Office Properties Trust Form 8-K/A
filed on January 14, 1999; (2) the audited combined statement of revenue and
certain expenses of the Gateway Properties, as defined in footnote 1 of that
statement, for the year ended December 31, 1997, included in the Corporate
Office Properties Trust Form 8-K/A filed on February 3, 1999; and (3) the
audited combined statement of revenue and certain expenses of the Commons
Corporate Properties, as defined in footnote 1 of that statement, for the year
ended December 31, 1998, included in the Corporate Office Properties Trust Form
8-K filed on June 14, 1999, have been so incorporated in reliance on the reports
of PricewaterhouseCoopers LLP, independent accountants, given on the authority
of said firm as experts in auditing and accounting.
LEGAL MATTERS
Certain legal matters in connection with the Series B Preferred Shares
offered hereby will be passed upon for us by Morgan, Lewis & Bockius LLP,
Philadelphia, Pennsylvania and for the underwriters by Rogers & Wells LLP, New
York, New York.
S-38
<PAGE>
WHERE YOU CAN FIND MORE INFORMATION
We have filed a registration statement on Form S-3 with the SEC in
connection with this offering. In addition, we file annual, quarterly, and
current reports, proxy statements and other information with the SEC. You may
read and copy the registration statement and any other documents filed by us at
the SEC's Public Reference Room at 450 Fifth Street, N.W., Washington, D.C.
20549. Please call the SEC at 1-800-SEC-0330 for further information on the
Public Reference Room. Our SEC filings are also available to the public at the
SEC's Internet site at http://www.sec.gov.
This prospectus supplement and the accompanying prospectus do not contain
all of the information included in the registration statement. If a reference is
made in this prospectus supplement or the accompanying prospectus to any of our
contracts or other documents, the reference may not be complete and you should
refer to the exhibits that are a part of the registration statement for a copy
of the contract or document.
The SEC allows us to "incorporate by reference" into this prospectus
supplement the information we file with the SEC, which means that we can
disclose important information to you by referring you to those documents.
Information incorporated by reference is part of this prospectus supplement.
Later information filed with the SEC will update and supersede this information.
We incorporate by reference the document listed below and any future filings
we make with the SEC under Sections 13(a), 13(c), 14 or 15(d) of the Securities
Exchange Act of 1934 until this offering is completed:
- Annual Report on Form 10-K for the year ended December 31, 1998;
- Quarterly Report on Form 10-Q for the quarter ended March 31, 1999; and
- Current Report on Form 8-K dated January 14, 1999, Current Reports on Form
8-K/A dated January 14, 1999 and February 3, 1999 and Current Report on
Form 8-K dated June 14, 1999.
You may request a copy of these filings, at no cost, by contacting Janet
Point, Vice President-- Investor Relations, Corporate Office Properties Trust,
401 City Avenue, Suite 615, Bala Cynwyd, Pennsylvania 19004, by telephone at
610-538-1800, by facsimile at 610-538-1801, or by e-mail at [email protected] or by
visiting our website, www.copt.com. The information contained on our website is
not part of this prospectus supplement.
S-39
<PAGE>
CORPORATE OFFICE PROPERTIES TRUST
$250,000,000
COMMON SHARES OF BENEFICIAL INTEREST
PREFERRED SHARES OF BENEFICIAL INTEREST
WARRANTS TO PURCHASE COMMON SHARES
WARRANTS TO PURCHASE PREFERRED SHARES
- --------------------------------------------------------------------------------
This prospectus pertains to the offer and sale by Corporate Office Properties
Trust of one or more of its securities of the type identified above. Corporate
Office Properties Trust is referred to in this prospectus as "we," "us" or
"COPT."
We may offer and sell any combination of the securities described in this
prospectus in one or more offerings up to a total dollar amount of $250,000,000.
This prospectus provides you with a general description of the securities we may
offer. Each time we offer securities, we will provide a prospectus supplement
which will accompany this prospectus. This prospectus may not be used to sell
these securities unless accompanied by a prospectus supplement. The prospectus
supplement will contain specific information about the terms of the securities
being offered at that time. The prospectus supplement may also add, update or
change information contained in this prospectus. You should read both this
prospectus and any prospectus supplement, including the documents we have
referred to under the heading "Where You Can Find More Information," together
with any additional information you may need to make your investment decision.
------------------------
BEFORE INVESTING IN OUR SECURITIES, YOU SHOULD REVIEW THE SECTION OF THIS
PROSPECTUS CALLED "RISK FACTORS" WHICH BEGINS ON PAGE 4.
---------------------
Our Common Shares are listed on the New York Stock Exchange under the symbol
"OFC." To ensure that we maintain our qualification as a real estate investment
trust, ownership by any person is limited to 9.8% of the lesser of the number or
value of outstanding Common Shares, subject to certain exceptions.
------------------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
June 8, 1999
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
SUMMARY................................................................................ 3
RISK FACTORS........................................................................... 4
USE OF PROCEEDS........................................................................ 10
RATIOS OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED SHARE DIVIDENDS............. 10
GENERAL DESCRIPTION OF THE OFFERED SECURITIES.......................................... 10
DESCRIPTION OF SHARES.................................................................. 11
FEDERAL INCOME TAX MATTERS............................................................. 20
PLAN OF DISTRIBUTION................................................................... 31
EXPERTS................................................................................ 32
LEGAL MATTERS.......................................................................... 32
WHERE YOU CAN FIND MORE INFORMATION.................................................... 32
</TABLE>
2
<PAGE>
SUMMARY
THIS PROSPECTUS SUMMARY CALLS YOUR ATTENTION TO SELECTED INFORMATION IN THIS
DOCUMENT, BUT IT DOES NOT CONTAIN ALL THE INFORMATION THAT IS IMPORTANT TO YOU.
TO UNDERSTAND US AND THE SECURITIES THAT MAY BE OFFERED THROUGH THIS PROSPECTUS,
YOU SHOULD READ THE ENTIRE PROSPECTUS CAREFULLY, ESPECIALLY THE "RISK FACTORS"
SECTION AND THE DOCUMENTS WE REFER YOU TO IN THE SECTION CALLED "WHERE YOU CAN
FIND MORE INFORMATION."
CORPORATE OFFICE PROPERTIES TRUST
GENERAL. We are a fully-integrated, self-managed real estate investment
trust ("REIT") that focuses principally on the acquisition, management,
ownership and development of suburban office properties in targeted suburban
submarkets principally in the Mid-Atlantic region of the United States. As of
March 31, 1999:
- we owned 49 suburban office properties in Maryland, Pennsylvania and New
Jersey containing approximately 4.4 million rentable square feet;
- we owned five retail properties containing approximately 311,000 rentable
square feet;
- our properties were 97.4% leased;
- we had options to purchase from related parties 156 acres of land
contiguous to certain of our office properties; and
- we were developing three office properties totaling 269,000 square feet.
We conduct almost all of our operations through our operating partnership,
Corporate Office Properties, L.P., a Delaware limited partnership. We are the
managing general partner of Corporate Office Properties, L.P. Interests in our
operating partnership are in the form of common and preferred units. As of March
31, 1999, we owned approximately 84% of the outstanding common units and
approximately 32% of the outstanding preferred units. The remaining common and
preferred units in our operating partnership were owned by third parties which
included certain of our officers and Trustees. If all preferred units were
converted into common units, we would have owned approximately 62% of the common
units as of March 31, 1999.
We are the successor to a corporation organized in 1988 and elected to be
taxed as a REIT commencing with the taxable year ended December 31, 1992. We
believe that we are organized and have operated in a manner that permits us to
satisfy the requirements for taxation as a REIT under the Internal Revenue Code
of 1986, as amended, and we intend to continue to operate in such a manner. If
we qualify for taxation as a REIT, we generally will not be subject to federal
income tax on our taxable income that is distributed to our shareholders. A REIT
is subject to a number of organizational and operational requirements, including
a requirement that it currently distribute to its shareholders at least 95% of
its annual taxable income (excluding net capital gains).
Our executive offices are located at 401 City Avenue, Suite 615, Bala
Cynwyd, PA 19004 and our telephone number is (610) 538-1800.
FORWARD-LOOKING STATEMENTS
THIS PROSPECTUS AND OUR DOCUMENTS INCORPORATED BY REFERENCE HEREIN CONTAIN
"FORWARD-LOOKING" STATEMENTS, AS DEFINED IN THE PRIVATE SECURITIES LITIGATION
REFORM ACT OF 1995, THAT ARE BASED ON OUR CURRENT EXPECTATIONS, ESTIMATES AND
PROJECTIONS. STATEMENTS THAT ARE NOT HISTORICAL FACTS, INCLUDING STATEMENTS
ABOUT OUR BELIEFS AND EXPECTATIONS, ARE FORWARD-LOOKING STATEMENTS. THESE
STATEMENTS ARE NOT GUARANTEES OF FUTURE PERFORMANCE, EVENTS OR RESULTS AND
INVOLVE POTENTIAL RISKS AND UNCERTAINTIES. ACCORDINGLY, ACTUAL RESULTS MAY
DIFFER MATERIALLY. WE UNDERTAKE NO OBLIGATION TO UPDATE PUBLICLY ANY
FORWARD-LOOKING STATEMENTS, WHETHER AS A RESULT OF NEW INFORMATION, FUTURE
EVENTS OR OTHERWISE.
IMPORTANT FACTS THAT MAY AFFECT THESE EXPECTATIONS, ESTIMATES OR PROJECTIONS
INCLUDE, BUT ARE NOT LIMITED TO: OUR ABILITY TO BORROW ON FAVORABLE TERMS;
GENERAL ECONOMIC AND BUSINESS CONDITIONS, WHICH WILL, AMONG OTHER THINGS, AFFECT
OFFICE PROPERTY DEMAND AND RENTS, TENANT CREDITWORTHINESS AND FINANCING
AVAILABILITY; ADVERSE CHANGES IN THE REAL ESTATE MARKETS INCLUDING, AMONG OTHER
THINGS, COMPETITION WITH OTHER COMPANIES; RISKS OF REAL ESTATE ACQUISITION AND
DEVELOPMENT; GOVERNMENTAL ACTIONS AND INITIATIVES; ENVIRONMENTAL REQUIREMENTS;
AND THE OTHER FACTORS DESCRIBED IN THIS PROSPECTUS UNDER THE HEADING "RISK
FACTORS" BEGINNING ON PAGE 4.
3
<PAGE>
RISK FACTORS
BEFORE YOU INVEST IN OUR SECURITIES, YOU SHOULD BE AWARE THAT THERE ARE
VARIOUS RISKS. WE HAVE DESCRIBED FOR YOU BELOW SOME OF THE RISKS INVOLVED IN
INVESTING IN THE COMMON SHARES WHICH MAY BE OFFERED UNDER THIS PROSPECTUS. A
WORD OF CAUTION: THE LIST BELOW IS NOT A COMPLETE LIST. YOU SHOULD CAREFULLY
CONSIDER EACH OF THESE FACTORS AND ALL OF THE INFORMATION BOTH IN THIS
PROSPECTUS AND THE DOCUMENTS WE REFER YOU TO IN THE SECTION CALLED "WHERE YOU
CAN FIND MORE INFORMATION."
WE MAY INCUR PROBLEMS WITH OUR REAL ESTATE FINANCING
GENERALLY. Our strategy is to operate with higher debt levels than most
other REITs. Our organizational documents do not limit the amount of
indebtedness that we may incur. Most of our properties have been mortgaged to
collateralize indebtedness. In addition, we will rely on borrowings to fund some
or all of the costs of new property acquisitions, capital expenditures and other
items.
As of March 31, 1999, our total outstanding debt was $290.8 million. Our
debt to total market capitalization ratio was 58.8% based upon the closing per
share market price for the Common Shares of $6.44 on March 31, 1999. Total
market capitalization is the sum of total debt plus the value of all outstanding
Common Shares and common units at such market price and the total Preferred
Shares and preferred units at their liquidation value.
Payments of principal and interest on our debt may leave us with
insufficient cash to operate our properties or pay distributions to our
shareholders required to maintain our qualification as a REIT. We are also
subject to the risks that:
- We may not be able to refinance our existing indebtedness, or refinance on
terms as favorable as the terms of our existing indebtedness;
- Certain debt agreements of our operating partnership could restrict the
ability of our operating partnership to make cash distributions to us,
which could result in reduced distributions to our shareholders or the
need to incur additional debt to fund distributions; and
- If we are unable to pay our debt service on time, our lenders could
foreclose on our properties securing such debt and in some cases other
properties and assets which we own. A number of our loans are
cross-collateralized, which means that separate groups of properties from
our portfolio secure each of these loans. More importantly, almost all of
our loans are cross-defaulted, which means that failure to pay interest or
principal on any of our loans will create a default on certain of our
other loans. In addition, if we are in default and the value of the
properties securing a loan is less than the loan balance, the lender may
require payment from our other assets.
As of March 31, 1999, approximately 21.5% of our total debt had adjustable
interest rates. Consequently, if short term interest rates were to rise, our
debt service payments would increase, which would lower our net income and could
decrease our distributions to our shareholders.
WE MUST REFINANCE OUR MORTGAGE DEBT IN THE FUTURE. As of March 31, 1999,
our scheduled debt payments over the next five years, including maturities, are
as follows:
<TABLE>
<S> <C>
1999 $ 1,242,000
2000 $183,871,000
2001 $12,363,000
2002 $ 2,146,000
2003 $ 2,305,000
</TABLE>
Of the debt due in 2000, we have the right to extend $100.0 million to 2002
and approximately $82.0 million to 2001. Of the debt due in 2001, we have the
right to extend $7.6 million of construction loans for a one-year period,
subject to certain conditions.
4
<PAGE>
We do not expect our operations to generate enough cash flow to repay some
or all of this debt without additional borrowings or new equity investment. If
we cannot refinance, extend the debt due dates, or raise additional equity prior
to the date when our debt matures, we would default on our existing debt.
WE RELY ON A FEW TENANTS FOR MOST OF OUR REVENUE
As of March 31, 1999, ten tenants accounted for 53.4% of our annualized
rents. Two of these tenants accounted for approximately 28.4% of our total
annualized rents. Our largest tenant is the United States federal government,
two agencies of which lease space in eleven of our office properties. These
leases represented approximately 18.1% of our total annualized office rents as
of March 31, 1999. Generally, these government leases provide for one-year terms
or provide for one-year termination rights. The government may terminate its
leases if, among other reasons, Congress fails to provide funding. The Congress
of the United States has appropriated funds for these leases through September
of 1999. The second largest tenant, Unisys Corporation, represented 10.3% of our
annualized office rents as of March 31, 1999 and a larger percentage of our net
operating income because Unisys pays all of its property operating expenses
directly. Unisys occupies space in three of our office properties. If either the
federal government or Unisys fails to make rental payments to us, or if the
federal government elects to terminate several of its leases and the space
cannot be re-leased on satisfactory terms, our financial performance and ability
to make expected distributions to shareholders would be materially adversely
affected.
OUR PROPERTIES ARE LOCATED MAINLY IN ONE REGION--THE MID-ATLANTIC
All of our office properties are located in the Mid-Atlantic region of the
United States, and 58.7% of our total office rental income for the quarter ended
March 31, 1999, was earned from our office properties located in the
Baltimore-Washington corridor. Consequently, we do not have a broad geographic
distribution of our properties. As a result, a decline in the real estate market
or economic conditions generally in the Mid-Atlantic region could have a
material adverse effect on our operations.
WE MAY HAVE DIFFICULTY MANAGING OUR RAPID GROWTH
We have grown rapidly. In 1998, we completed numerous acquisitions,
expanding our total portfolio of properties from 1.9 million square feet to 5.0
million square feet. Our acquisition of properties from Constellation Real
Estate, Inc., the initial stage of which closed in September 1998, is our
largest acquisition to date. We also plan to expand in the future. In order to
successfully manage our growth, we must, among other things, integrate the
personnel and operations of the acquired properties while effectively managing
our corporate overhead costs. We cannot assure you that we will be able to
accomplish these goals. If we fail to successfully manage our growth, we could
be materially adversely affected.
THE LEVEL OF OUR SHAREHOLDER DISTRIBUTIONS COULD DECLINE
We intend to make regular quarterly cash distributions to our shareholders.
However, distribution levels depend on a number of factors, some of which are
beyond our control.
Commencing on October 1, 1999, holders of preferred units in our operating
partnership will be able to convert those units into common units and, if
current distribution levels remain unchanged, receive increased distributions.
These increased distributions would total approximately $2.0 million annually if
all holders of preferred units converted. Although we believe that we would have
sufficient cash flow to pay that increase, such conversion could require a
reduction in per share distributions on our Common Shares and common units or
restrict our ability to increase these distributions in the future. Our loan
agreements also contain provisions which could also restrict future
distributions. Our ability to sustain our current distribution level also will
be dependent, in part, on other matters including continued property occupancy
and profitability of tenants, the amount of future capital expenditures and
expenses relating to our properties, the level of leasing activity and future
rental
5
<PAGE>
rates, the strength of the commercial real estate market, competition, the costs
of compliance with environmental and other laws, our corporate overhead levels,
the amount of uninsured losses and our decisions whether to reinvest rather than
distribute available cash.
A THIRD PARTY COULD HAVE DIFFICULTY IN SEEKING TO ACQUIRE CONTROL OF US
CONSTELLATION'S COMMON SHARE OWNERSHIP AND OUR OWNERSHIP LIMITS ARE
IMPORTANT FACTORS. Constellation Real Estate, Inc. currently owns approximately
41.8% of our outstanding Common Shares. Under our charter, two-thirds of the
outstanding Common Shares must approve a merger, a sale of substantially all our
assets, any amendment to our charter, the removal of a Trustee, and the
termination of COPT. Because Constellation Real Estate, Inc. owns more than
one-third of our voting stock, it has the ability to veto any of those
transactions, which will make it more difficult for any third party to acquire
control of us. Such change of control could involve a premium over the market
price for the Common Shares or other attributes that the shareholders may
consider desirable. In addition, our charter limits ownership of our Common
Shares by any single shareholder to 9.8% of the number of the outstanding shares
or 9.8% or the value of the outstanding shares. We call these restrictions the
"Ownership Limit." Our charter allows our Board of Trustees to exempt
shareholders from the Ownership Limit, and the Board has exempted Constellation
Real Estate, Inc. from the Ownership Limit.
OUR CHARTER PROVIDES OTHER POTENTIAL DEFENSES. Subject to the requirements
of the New York Stock Exchange, the Board of Trustees has the authority without
shareholder approval to issue additional securities of COPT on terms that could
delay, defer or prevent a change in control of COPT. In addition, our Board has
the authority to reclassify any of our unissued Common Shares into Preferred
Shares. The Board may issue Preferred Shares with such preferences, rights,
powers and restrictions as the Board may determine. Our Board has already issued
the Series A Preferred Shares, which have features which make it harder for a
third party to acquire control of us. See "Description of Shares-- Series A
Preferred Shares."
Our Board is divided into three classes of Trustees. The terms of the first,
second and third classes of the Trustees will expire in 2002, 2000 and 2001,
respectively. In the future, we will elect Trustees for staggered three-year
terms. Staggered elections make it more difficult for a third party to acquire
control of us. See "Description of Shares--Classification of Board, Vacancies
and Removal of Trustees."
THE MARYLAND BUSINESS STATUTES ALSO IMPOSE POTENTIAL RESTRICTIONS. Various
Maryland laws may have the effect of discouraging offers to acquire us, even if
the acquisition would be advantageous to shareholders. Our Bylaws exempt us from
such laws, but our Board of Trustees can change our Bylaws at any time to make
these provisions applicable to us. See "Description of Shares--Possible
Antitakeover Effect of Certain Provisions of Maryland Law."
OUR PERFORMANCE IS SUBJECT TO RISKS ASSOCIATED WITH THE REAL ESTATE INDUSTRY
GENERALLY. We earn income from renting our properties. Our operating costs
do not necessarily fluctuate in relation to changes in our rental income. This
means our costs will not necessarily decline even if our revenues do. Also, our
operating costs may increase while our revenues do not.
For new tenants or upon lease expiration for existing tenants, we generally
must make improvements and pay other tenant-related costs for which we may not
receive increased rents. We also make building-related capital improvements for
which tenants may not reimburse us.
If our properties do not generate income sufficient to meet our operating
expenses and capital costs, we may have to borrow additional amounts to cover
these costs. In such circumstances, we would likely have lower profits or
possibly incur losses. Moreover, there may be less or no cash available for
distributions to our shareholders.
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<PAGE>
OUR LEASE RENEWALS POSE CERTAIN UNCERTAINTIES. When leases expire at our
properties, our tenants may not renew or may renew on terms less favorable to us
than the terms of the original lease. As of March 31, 1999, our scheduled lease
expirations, as a percentage of total annualized rents, for the next five years
were:
<TABLE>
<S> <C>
1999 (9 months ) 4.5%
2000 10.0%
2001 10.9%
2002 15.0%
2003 16.3%
</TABLE>
If a tenant leaves, we can expect to incur a vacancy for some period of time
as well as higher capital costs than if a tenant renews. In either case, our net
income and ability to make expected distributions to our shareholders could be
adversely affected.
COMPETITION MAY CAUSE DIFFICULTY IN OUR LEASING ACTIVITY. The commercial
real estate market is highly competitive. Numerous commercial properties compete
for tenants with our properties and our competitors are building additional
properties in the markets in which our properties are located. Some of these
competing properties may be newer or have more desirable locations than our
properties. If the market does not absorb newly constructed space, market
vacancies will increase and market rents may decline. As a result, we may have
difficulty leasing space at our properties and we may be forced to lower the
rents we charge on new leases to compete effectively.
COMPETITION MAY CAUSE DIFFICULTY IN OUR STRATEGY OF ACQUIRING NEW
PROPERTY. We compete for the purchase of commercial property with many
entities, including other publicly traded commercial REITs. Many of our
competitors have substantially greater financial resources than ours. In
addition, our competitors may be willing to accept lower returns on their
investments. If our competitors prevent us from buying the amount of properties
that we have targeted for acquisition, we may not be able to meet our property
acquisition and development goals.
OUR DEVELOPMENT AND CONSTRUCTION ACTIVITIES POSE CERTAIN RISKS. Although
the majority of our investments are in currently leased properties, to a lesser
extent we also develop properties, including some which are not fully
pre-leased. When we develop properties, we run the risks that development costs
will exceed our budgets, that we will experience construction or development
delays and that projected leasing will not occur.
WE ARE SUBJECT TO POSSIBLE ENVIRONMENTAL LIABILITIES. We are subject to
various federal, state and local environmental laws. These laws can impose
liability on property owners or operators for the costs of removal or
remediation of certain hazardous substances released on a property, even if the
property owner was not responsible for the release of the hazardous substances.
The presence of hazardous substances on our properties may adversely affect
occupancy and our ability to sell or borrow against those properties. In
addition to the costs of government claims under environmental laws, private
plaintiffs may bring claims for personal injury or similar reasons. Various laws
also impose liability for the costs of removal or remediation of hazardous
substances at the disposal or treatment facility. Anyone who arranges for the
disposal or treatment of hazardous substances at such a facility is potentially
liable under such laws. These laws often impose liability whether or not the
facility is or ever was owned or operated by such person.
WE CANNOT SELL OUR PROPERTIES QUICKLY. Equity real estate investments like
our properties are relatively difficult to sell and convert to cash quickly.
Such illiquidity will tend to limit our ability to vary our portfolio of
properties promptly in response to changes in economic or other conditions. In
addition, the Internal Revenue Code imposes certain penalties on a REIT that
sells property held for less than four years. As a result, we may be unable to
sell a property at an advantageous time.
WE ARE SUBJECT TO OTHER POSSIBLE LIABILITIES. Our properties may be subject
to other risks relating to current or future laws including laws benefiting
disabled persons, and state or local zoning,
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<PAGE>
construction or other regulations. These laws may require significant property
modifications in the future for which we may not have budgeted and could result
in fines being levied against us. In addition, although we believe that we
adequately insure our properties, we are subject to the risk that our insurance
may not cover all of the costs to restore a property which is damaged by a fire
or other similar catastrophic event. The occurrence of any of these events could
have an adverse impact on our cash flows and ability to make distributions to
shareholders.
WE AND OUR SHAREHOLDERS ARE SUBJECT TO CERTAIN TAX RISKS
OUR FAILURE TO QUALIFY AS A REIT WOULD HAVE ADVERSE TAX CONSEQUENCES. We
believe that since 1992 we have qualified for taxation as a REIT for federal
income tax purposes. We plan to continue to meet the requirements for taxation
as a REIT. Many of these requirements, however, are highly technical and
complex. The determination that we are a REIT requires an analysis of various
factual matters and circumstances that may not be totally within our control.
For example, to qualify as a REIT, at least 95% of our gross income must come
from certain sources that are itemized in the REIT tax laws. We are also
required to distribute to shareholders at least 95% of our REIT taxable income
(excluding capital gains). The fact that we hold most of our assets through our
operating partnership and its subsidiaries further complicates the application
of the REIT requirements. Even a technical or inadvertent mistake could
jeopardize our REIT status. Furthermore, Congress and the IRS might make changes
to the tax laws and regulations, and the courts might issue new rulings that
make it more difficult, or impossible for us to remain qualified as a REIT.
If we fail to qualify as a REIT, we would be subject to federal income tax
at regular corporate rates. Also, unless the IRS granted us relief under certain
statutory provisions, we would remain disqualified as a REIT for four years
following the year we first fail to qualify. If we fail to qualify as a REIT, we
would have to pay significant income taxes and would therefore have less money
available for investments or for distributions to our shareholders. This would
likely have a significant adverse effect on the value of our securities. In
addition, we would no longer be required to make any distributions to our
shareholders.
WE HAVE CERTAIN DISTRIBUTION REQUIREMENTS. As a REIT, we must distribute
95% of our annual taxable income. The required distribution limits the amount of
cash we have available for other business purposes, including amounts to fund
our growth. Also, it is possible that because of the differences between the
time we actually receive revenue or pay expenses and the period we report those
items for distribution purposes, we may have to borrow funds on a short-term
basis to meet the 95% distribution requirement.
WE ARE ALSO SUBJECT TO OTHER TAX LIABILITIES. Even if we qualify as a REIT,
we may be subject to certain federal, state and local taxes on our income and
property. Any such taxes would reduce our operating cash flow.
When we purchased certain office properties located in Pennsylvania, we only
purchased 89% of the partnership which owned each property. The remaining 11%
will be acquired by the operating partnership not later than December 2000. This
structure is intended to comply with informal advice from the Pennsylvania
Department of Revenue that such two-stage transfers are not subject to
Pennsylvania real estate transfer taxes. However, we have not obtained a formal
ruling from the Pennsylvania Department of Revenue on this issue. If the
Pennsylvania Department of Revenue were to successfully change this structure,
or the remaining interests were required to be transferred for financing or
other purposes prior to October 14, 2000, we would be subject to Pennsylvania
state and local transfer taxes of approximately $2.7 million.
ISSUANCES OF LARGE AMOUNTS OF OUR COMMON SHARES COULD CAUSE OUR SHARE PRICE TO
DECLINE
As of March 31, 1999, 16,801,876 Common Shares were outstanding. This
prospectus may be used for the issuance of additional Common Shares. If we issue
a significant number of Common Shares in a short period of time, there could be
a decrease in the market price of the Common Shares.
8
<PAGE>
WE LACK CONTROL OVER OUR MANAGEMENT COMPANY
We receive substantially all of the economic benefits of Corporate Office
Management, Inc. ("COMI"), the company which manages our properties. We are not
able to elect directors or officers of COMI because we hold only 1% of COMI's
voting stock. The majority of COMI's voting stock is owned by persons who are
not our officers or Trustees. Therefore, we cannot directly influence the
operations of COMI. As a result, the board of directors and management of COMI
may implement business policies or decisions that would not have been
implemented by us. These policies or decisions could be adverse to our interests
or lead to adverse financial results, which could adversely impact our net
operating income and cash flow.
Although we believe that the contracts between us and COMI for management
services are no less favorable to us than those which could be obtained from a
third party, such contracts are not the result of arm's length negotiations and,
therefore, we cannot assure you that those contracts are just as favorable.
CERTAIN OFFICERS AND TRUSTEES OF COPT HAVE POTENTIAL CONFLICTS OF INTEREST
The Chairman of our Board, our Chief Executive Officer, and certain other
officers own direct and indirect interests in office properties and other real
estate assets in which we have an interest. The interests of these persons may
give rise to certain conflicts of interest concerning the fulfillment of their
responsibilities as our officers and Trustees. We have adopted certain policies
designed to minimize conflicts of interest. We cannot assure you, however, that
these policies will be successful in eliminating the influence of such
conflicts, and if they are not successful, decisions could be made that might
fail to reflect fully the interests of all shareholders of COPT. For example,
the Chairman of our Board of Trustees and our Chief Executive Officer own a
significant share of the units of our operating partnership. If our operating
partnership sells or refinances certain of the properties that these officers
contributed to the operating partnership, they could suffer adverse tax
consequences. Therefore, they could oppose such a transaction.
WE ARE DEPENDENT ON OUR KEY PERSONNEL
We are dependent on the efforts of our Trustees and executive officers,
including Mr. Shidler, our Chairman of the Board of Trustees, Mr. Hamlin, our
Chief Executive Officer, and Mr. Griffin, our President. The loss of any of
their services could have an adverse effect on our operations. Although certain
of our officers have entered into employment agreements with us, we cannot
assure you that they will remain employed with us.
WE MAY CHANGE OUR POLICIES WITHOUT SHAREHOLDER APPROVAL
Our Board of Trustees determines all of our policies, including our
investment, financing and distribution policies. Although our Board of Trustees
has no current plans to do so, it may amend or revise these policies at any time
without a vote of our shareholders. Policy changes could adversely affect our
financial condition, results of operations, the market price of the Common
Shares or our ability to pay dividends or distributions.
WE ARE SUBJECT TO THE "YEAR 2000 RISK"
The "Year 2000 Risk" arises because certain computer programs have been
written using two digits rather than four to define the applicable years.
Consequently, date-sensitive software may recognize a date using "00" as the
year 1900 rather than the year 2000. This could result in system failures or
miscalculations causing disruptions of operations, including, among others,
building system failures and a temporary inability to process transactions, send
invoices, or engage in similar normal business activities. Our accounting
software vendor has certified that the software package we use is year 2000
compliant; however, we have not independently determined that this package is
year 2000 compliant and we cannot assure you it is free of Year 2000 Risk.
9
<PAGE>
We rely on third-party suppliers for a number of key services. If supplier
operations are interrupted due to the Year 2000 Risk, that interruption could
affect our operations. Although some of our suppliers have assured us that they
are year 2000 compliant, we cannot assure you that our vendors are free of Year
2000 Risk. We also depend upon our tenants for revenue and cash flow.
Interruptions in tenant operations due to the Year 2000 Risk could result in
reduced revenue, increased receivable levels and cash flow reductions.
USE OF PROCEEDS
Unless otherwise indicated in an accompanying prospectus supplement, we
intend to use the net proceeds from the sale of the securities offered by this
prospectus for general trust purposes, including capital expenditures,
acquisition or development of additional properties, repayment of indebtedness
and meeting our working capital needs.
RATIOS OF EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED SHARE DIVIDENDS
The following table sets forth COPT's consolidated ratios of earnings to
combined fixed charges and Preferred Share dividends for the three months ended
March 31, 1999, and for each of the last five calendar years. For purposes of
calculating the ratio of earnings to combined fixed charges and Preferred Share
dividends, earnings were calculated by adding fixed charges, excluding Preferred
Share dividends, and minority interests of common unitholders to net income.
Fixed charges consist of interest costs, amortization of debt issuance costs and
distributions to preferred unitholders.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED YEARS ENDED
MARCH 31, -------------------------------------------------------
1999 1998 1997 1996 1995 1994
--------------- --------- ----- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Ratio of earnings to combined fixed charges and
Preferred Share dividends............................... 1.53 1.33 (A) 1.23 1.21 1.27
--- --- --- --- --- ---
--- --- --- --- --- ---
</TABLE>
- ------------------------
(A) During the year ended December 31, 1997, COPT's net income included a
non-recurring expense of $1,353,000 associated with the termination of an
advisory agreement. As a result, earnings were inadequate to cover fixed
charges by $902,000 in the year ended December 31, 1997. If such
non-recurring expense had not been incurred, COPT's ratio of earnings to
combined fixed charges and Preferred Share dividends for 1997 would have
been 1.12.
GENERAL DESCRIPTION OF THE OFFERED SECURITIES
We may use this prospectus to offer our Common Shares, Preferred Shares,
warrants to purchase Common Shares or warrants to purchase Preferred Shares,
which we refer to collectively as the "securities", or any combination of the
foregoing, either individually or as units consisting of two or more such
securities. The aggregate offering price of our securities will not exceed
$250,000,000. If securities offered by this prospectus are offered as units, the
terms of the units will be set forth in a related prospectus supplement.
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<PAGE>
DESCRIPTION OF SHARES
THE FOLLOWING SUMMARY OF THE TERMS OF THE SECURITIES OF CORPORATE OFFICE
PROPERTIES TRUST ("COPT") DOES NOT PURPORT TO BE COMPLETE AND IS SUBJECT TO AND
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE DECLARATION OF TRUST AND THE
BYLAWS OF COPT, COPIES OF WHICH ARE EXHIBITS TO THE REGISTRATION STATEMENT OF
WHICH THIS PROSPECTUS IS A PART.
GENERAL
The Declaration of Trust provides that COPT may issue up to 45,000,000
Common Shares and 5,000,000 Preferred Shares of beneficial interest, par value
$.01 per share (the "Preferred Shares"), 1,025,000 of which are designated
Series A Convertible Preferred Shares (the "Series A Preferred Shares"). As of
March 31, 1999, there were 16,801,876 Common Shares and 984,308 Series A
Preferred Shares issued and outstanding. The Declaration of Trust contains a
provision permitting the Board of Trustees, without any action by the
shareholders of COPT, to amend the Declaration of Trust to increase or decrease
the aggregate number of shares of beneficial interest or the number of shares of
any class of shares of beneficial interest that COPT has authority to issue. The
additional shares of beneficial interest, which could include Common Shares,
will be available for issuance without further action by COPT's shareholders,
subject to the requirements of the New York Stock Exchange.
Both Title 8 of the Corporations and Associations Article of the Annotated
Code of Maryland, as amended (the "Maryland REIT Law") and the Declaration of
Trust provide that no shareholder of COPT will be personally liable for any
obligation of COPT solely as a result of such shareholder's status as a
shareholder of COPT. The Declaration of Trust provides that COPT shall have the
power, to the maximum extent permitted by Maryland law in effect from time to
time, to obligate itself to indemnify, and to pay or reimburse reasonable
expenses in advance of a final disposition of a proceeding to, any shareholder
or any former shareholder from and against any claim or liability to which such
person may become subject or which such person may incur by reason of his status
as a present or former shareholder of COPT. The Bylaws of COPT obligate it, to
the maximum extent permitted by Maryland law, to indemnify any shareholder or
any former shareholder (including, without limitation, any individual who, while
a shareholder and at the request of COPT, serves or has served another real
estate investment trust, corporation, partnership, joint venture, trust,
employee benefit plan or any other enterprise as a trustee, director, officer,
partner, employee or agent of such real estate investment trust, corporation,
partnership, joint venture, trust, employee benefit plan or other enterprise)
who has been successful, on the merits or otherwise, in the defense of a
proceeding to which he was made a party by reason of being a shareholder,
against reasonable expenses incurred by him in connection with the proceeding.
Inasmuch as COPT carries public liability insurance which it considers adequate,
any risk of personal liability to shareholders not covered by the Maryland REIT
Law is limited to situations in which COPT's assets plus its insurance coverage
would be insufficient to satisfy the claims against COPT and its shareholders.
COMMON SHARES
All Common Shares offered hereby will be duly authorized, fully paid and
nonassessable. Subject to the preferential rights of any other shares or series
of beneficial interest and to the provisions of the Declaration of Trust
regarding the restriction on transfer of Common Shares, holders of Common Shares
are entitled to receive dividends on such shares if, as and when authorized and
declared by the Board of Trustees out of assets legally available therefor and
to share ratably in the assets of COPT legally available for distribution to its
shareholders in the event of its liquidation, dissolution or winding-up after
payment of, or adequate provision for, all known debts and liabilities of COPT.
Subject to the provisions of the Declaration of Trust regarding restrictions
on transfer of shares of beneficial interest, each outstanding Common Share
entitles the holder thereof to one vote on all
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<PAGE>
matters submitted to a vote of shareholders, including the election of Trustees,
and, except as provided with respect to any other class or series of shares of
beneficial interest, the holders of such Common Shares possess the exclusive
voting power. There is no cumulative voting in the election of Trustees, which
means that the holders of a majority of the outstanding Common Shares can elect
all of the Trustees then standing for election. Constellation Real Estate, Inc.
is currently entitled to appoint two of the nine Trustees. See "--Series A
Preferred Shares."
Holders of Common Shares have no preference, conversion, sinking fund,
redemption or appraisal rights and have no preemptive rights to subscribe for
any securities of COPT. Subject to the provisions of the Declaration of Trust
regarding the restriction on transfer of Common Shares, the Common Shares have
equal dividend, distribution, liquidation and other rights.
The Declaration of Trust provides for approval by a majority of the votes
cast by holders of Common Shares entitled to vote on the matter in all
situations permitting or requiring action by the shareholders, except with
respect to: (i) the election of Trustees (which requires a plurality of all the
votes cast at a meeting of shareholders of COPT at which a quorum is present),
(ii) the removal of Trustees (which requires the affirmative vote of the holders
of two-thirds of the outstanding shares of beneficial interest of COPT entitled
to vote generally in the election of Trustees, which action can only be taken
for cause by vote at a shareholder meeting), (iii) the merger of COPT with
another entity or the sale (or other disposition) of all or substantially all of
the assets of COPT (which requires the affirmative vote of the holders of
two-thirds of the outstanding shares of beneficial interest entitled to vote on
the matter), (iv) the amendment of the Declaration of Trust (which requires the
affirmative vote of two-thirds of all the votes entitled to be cast on the
matter), (v) the termination of COPT (which requires the affirmative vote of
two-thirds of the outstanding shares of beneficial interest entitled to be cast
on the matter); and (vi) certain voting rights of Constellation Real Estate,
Inc. See "--Series A Preferred Shares." The Declaration of Trust permits the
Trustees, without any action by the holders of Common Shares, (a) by a
two-thirds vote, to amend the Declaration of Trust from time to time to qualify
as a real estate investment trust under the Internal Revenue Code or the
Maryland REIT Law and (b) by a majority vote to amend the Declaration of Trust
to increase or decrease the aggregate number of shares of beneficial interest or
the number of shares of any class of shares of beneficial interest that COPT has
authority to issue.
CLASSIFICATION OR RECLASSIFICATION OF COMMON SHARES OR PREFERRED SHARES
The Declaration of Trust authorizes the Board of Trustees to reclassify any
unissued shares of Common or Preferred Shares into other classes or series of
classes of shares and to establish the number of shares in each class or series
and to set the preferences, conversion and other rights, voting powers,
restrictions, limitations and restrictions on ownership, limitations as to
dividends or other distributions, qualifications and terms or conditions of
redemption for each such class or series. Thus, in addition to the Series A
Preferred Shares, the Board of Trustees could authorize the issuance of other
Preferred Shares with terms and conditions which could also have the effect of
delaying, deferring or preventing a change in control of COPT or other
transaction that might involve a premium over the then prevailing market price
for Common Shares or other attributes that the shareholders may consider to be
desirable.
SERIES A PREFERRED SHARES
The outstanding 984,308 Series A Preferred Shares were issued to
Constellation Real Estate, Inc., with terms as follows:
VOTING RIGHTS. Except as set forth below and as required by applicable law,
the Series A Preferred Shares do not entitle the holder thereof to any vote. If
an amendment to COPT's Declaration of Trust or a reclassification of Preferred
Shares would amend, alter or repeal any of the rights, preferences or
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<PAGE>
powers of the Series A Preferred Shares, then the affirmative vote of holders of
two-thirds of the outstanding Series A Preferred Shares, voting as a separate
class, would be required for its adoption. Constellation Real Estate, Inc. has
the right to designate up to two members of the Board of Trustees depending on
Constellation Real Estate, Inc.'s ownership percentage of outstanding shares.
This right is set forth as a term of the Series A Preferred Shares, such that so
long as Constellation Real Estate, Inc. holds any Series A Preferred Shares (and
it beneficially owns 30% of the Common Shares), Constellation Real Estate, Inc.
will have the right to designate up to two Trustees. If Constellation Real
Estate, Inc.'s Common Share beneficial holdings fall below 30% but above 15%,
Constellation Real Estate, Inc. may designate one Trustee.
DIVIDENDS. Holders of Series A Preferred Shares will be entitled to
cumulative dividends, payable quarterly and in preference to dividends payable
on Common Shares, accruing from the date of issue, when, as and if declared by
the Board of Trustees out of funds legally available therefor, at the annual
rate of $1.375 per share, which is 5.5% of the $25.00 liquidation preference of
the Series A Preferred Shares.
LIQUIDATION. In the event of any liquidation, dissolution or winding-up of
COPT's affairs, holders of Series A Preferred Shares will be entitled to
receive, out of the assets of COPT legally available for distribution to its
shareholders, the sum of $25.00 for each Preferred Share, plus an amount equal
to all dividends accrued and unpaid on each such Series A Preferred Share up to
the date fixed for distribution, before any distribution may be made to holders
of COPT's Common Shares.
CONVERSION. The Series A Preferred Shares are convertible into Common
Shares on the basis of 1.8748 Common Shares for each Series A Preferred Share
(subject to adjustment upon certain events, such as dividends paid in Common
Shares) as follows:
<TABLE>
<CAPTION>
SERIES A COMMON
PREFERRED SHARES IF
CONVERSION DATE SHARES CONVERTED
- ---------------------------------------------------------------------- ----------- ----------
<S> <C> <C>
September 28, 2000.................................................... 865,566 1,622,763
October 22, 2000...................................................... 72,509 135,940
December 30, 2000..................................................... 46,233 86,678
----------- ----------
Total................................................................. 984,308 1,845,381
----------- ----------
----------- ----------
</TABLE>
Notwithstanding the foregoing, Series A Preferred Shares held by
Constellation Real Estate, Inc. may not be converted into Common Shares if after
such conversion Constellation Real Estate, Inc. and its affiliates would own 45%
or more of COPT's outstanding Common Shares. In the event of such attempted
conversion, Constellation Real Estate, Inc. may elect to receive dividends
issued on the Common Shares it would have received if the conversion had been
completed, in lieu of dividends on its Preferred Shares.
ADDITIONAL PARITY AND JUNIOR SHARES. Any shares issued which are senior to
the Series A Preferred Shares require an affirmative vote of two-thirds of the
holders of Series A Preferred Shares. COPT may issue any class of capital shares
with voting rights which are on parity with or junior to the Series A Preferred
Shares without consent of the holders of Series A Preferred Shares. However, an
affirmative vote of two-thirds of the holders of Series A Preferred Shares is
required for any issuance or sale of greater than $50 million in Common Shares
at a price less than $9.50 per share.
ISSUANCE OF ADDITIONAL PREFERRED SHARES
The following description of our Preferred Shares of beneficial interest
sets forth general terms and provisions of the Preferred Shares to which any
prospectus supplement may relate. The statements below describing the Preferred
Shares are in all respects subject to and qualified in their entirety by
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<PAGE>
reference to our Declaration of Trust, Bylaws and any applicable amendment to
the Declaration of Trust designating terms of a series of Preferred Shares (a
"Designating Amendment"). The Preferred Shares, when issued, will be fully paid
and non-assessable. Because our Board of Trustees has the power to establish the
preferences, powers and rights of each series of Preferred Shares, subject to
the rights of the holders of the Series A Preferred Shares, our Board may afford
the holders of any series of Preferred Shares preferences, powers and rights,
voting or otherwise, senior to the rights of holders of Common Shares. The
issuance of additional series of Preferred Shares could have the effect of
delaying or preventing a change of control that might involve a premium price
for shareholders or otherwise be in their best interest.
The rights, preferences, privileges and restrictions of the Preferred Shares
of each series will be fixed by the Designating Amendment relating to the
series. A prospectus supplement, relating to each series, will specify the terms
of the Preferred Shares, as follows:
- the title and stated value of the Preferred Shares;
- the number of Preferred Shares offered, the liquidation preference per
share and the offering price of the Preferred Shares;
- the dividend rate(s), period(s) and/or payment date(s) or method(s) of
calculation applicable to the Preferred Shares;
- the date from which dividends on the Preferred Shares will accumulate, if
applicable;
- the procedures for any auction and remarketing, if any, for the Preferred
Shares;
- the provision for a sinking fund, if any, for the Preferred Shares;
- the provision for redemption, if applicable, of the Preferred Shares;
- any listing of the Preferred Shares on any securities exchange;
- the terms and conditions, if applicable, upon which the Preferred Shares
will be convertible into Common Shares, including the conversion price (or
manner of calculation) and conversion period;
- any other specific terms, preferences, rights, limitations or restrictions
of the Preferred Shares;
- a discussion of certain material federal income tax considerations
applicable to the Preferred Shares;
- the relative ranking and preferences of the Preferred Shares as to
dividend rights and rights upon the liquidation, dissolution or winding-up
of our affairs;
- any limitation on issuance of any series of Preferred Shares ranking
senior to or on a parity with the series of Preferred Shares as to
dividend rights and rights upon the liquidation, dissolution or winding-up
of our affairs; and
- any limitations on direct or beneficial ownership and restrictions on
transfer of the Preferred Shares, in each case as may be appropriate to
preserve our status as a REIT.
RESTRICTIONS ON TRANSFER
For COPT to qualify as a REIT under the Internal Revenue Code, its shares of
beneficial interest generally must be beneficially owned by 100 or more persons
during at least 335 days of a taxable year of 12 months or during a
proportionate part of a shorter taxable year. Also, not more than 50% of the
value of the outstanding shares of beneficial interest may be owned, directly or
indirectly, by five or fewer individuals (as defined in the Internal Revenue
Code to include certain entities) at any time during the last half of a taxable
year. This test is applied by "looking through" certain shareholders
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<PAGE>
which are not individuals (e.g., corporations or partnerships) to determine
indirect ownership of COPT by individuals.
The Declaration of Trust, subject to certain exceptions, contains certain
restrictions on the number of shares of beneficial interest of COPT that a
person may own. The Declaration of Trust provides that no person may own, or be
deemed to own by virtue of the attribution provisions of the Internal Revenue
Code, more than 9.8 of the number or value of the outstanding shares of
beneficial interest of COPT. In addition, the Declaration of Trust prohibits any
person from acquiring or holding, directly or indirectly, Common Shares in
excess of 9.8% (in value or in number of shares, whichever is more restrictive)
of the aggregate of the outstanding Common Shares.
The Board of Trustees, in its sole discretion, may exempt a proposed
transferee from the 9.8% ownership limitation. However, the Board of Trustees
may not grant such an exemption to any person if such exemption would result in
COPT being "closely held" within the meaning of Section 856(h) of the Internal
Revenue Code or otherwise would result in COPT failing to qualify as a REIT. In
order to be considered by the Board of Trustees for an exemption, a person also
must not own, directly or indirectly, more than a 9.9% interest in a tenant of
COPT (or a tenant of any entity owned or controlled by COPT). The person seeking
an exemption must represent to the satisfaction of the Board of Trustees that it
will not violate the two aforementioned restrictions. The person also must agree
that any violation or attempted violation of any of the foregoing restrictions
will result in the automatic transfer of the shares causing such violation to
the Share Trust (as defined below). The Board of Trustees may require a ruling
from the Internal Revenue Service or an opinion of counsel, in either case in
form and substance satisfactory to the Board of Trustees in its sole discretion,
in order to determine or ensure COPT's status as a REIT. Constellation Real
Estate, Inc., Mr. Jay H. Shidler and Mr. Clay W. Hamlin, III are all Excepted
Holders. However, as of March 31, 1999, Messrs. Shidler and Hamlin collectively
owned only 3.6% of the outstanding Common Shares.
The Declaration of Trust further prohibits (a) any person from beneficially
or constructively owning shares of beneficial interest of COPT that would result
in COPT being "closely held" under Section 856(h) of the Internal Revenue Code
or otherwise cause COPT to fail to qualify as a REIT and (b) any person from
transferring shares of beneficial interest of COPT if such transfer would result
in shares of beneficial interest of COPT being owned by fewer than 100 persons.
Any person who acquires or attempts or intends to acquire beneficial or
constructive ownership of shares of beneficial interest of COPT that will or may
violate any of the foregoing restrictions on transferability and ownership, or
any person who would have owned shares of the beneficial interest of COPT that
resulted in a transfer of shares to the Share Trust (as hereinafter defined), is
required to give notice immediately to COPT and provide COPT with such other
information as COPT may request in order to determine the effect of such
transfer on COPT's status as a REIT. The foregoing restrictions on
transferability and ownership will not apply if the Board of Trustees determines
that it is no longer in the best interests of COPT to attempt to qualify, or to
continue to qualify, as a REIT.
If any transfer of shares of beneficial interest of COPT occurs which, if
effective, would result in any person beneficially or constructively owning
shares of beneficial interest of COPT in excess or in violation of the above
transfer or ownership limitations (a "Prohibited Owner"), then that number of
shares of beneficial interest of COPT in excess of the ownership limit will
automatically be transferred to a trust (the "Share Trust") for the exclusive
benefit of one or more charitable beneficiaries (the "Charitable Beneficiary"),
and the Prohibited Owner shall not acquire any rights in such shares. The
Prohibited Owner may not benefit economically from ownership of any shares of
beneficial interest held in the Share Trust, may have no rights to dividends and
may not possess any other rights attributable to the shares of beneficial
interest held in the Share Trust. The trustee of the Share Trust (the "Share
Trustee") will have all voting rights and rights to dividends or other
distributions with respect to shares of beneficial interest held in the Share
Trust, which rights will be exercised for the exclusive benefit of the
Charitable Beneficiary. Any dividend or other distribution paid prior to the
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<PAGE>
discovery by COPT that shares of beneficial interest have been transferred to
the Share Trust will be paid by the recipient of such dividend or distribution
to the Share Trustee upon demand, and any dividend or other distribution
authorized but unpaid will be paid when due to the Share Trustee. Any dividend
or distribution so paid to the Share Trustee will be held in the Share Trust for
the Charitable Beneficiary. The Prohibited Owner will have no voting rights with
respect to shares of beneficial interest held in the Share Trust and, subject to
Maryland law, effective as of the date that such shares of beneficial interest
have been transferred to the Share Trust, the Share Trustee will have the
authority (at the Share Trustee's sole discretion) (i) to rescind as void any
vote cast by a Prohibited Owner prior to the discovery by COPT that such shares
have been transferred to the Share Trust and (ii) to recast such vote in
accordance with the desires of the Share Trustee acting for the benefit of the
Charitable Beneficiary. However, if COPT has already taken irreversible trust
action, then the Share Trustee will not have the authority to rescind and recast
such vote.
Within 20 days of receiving notice from COPT that shares of beneficial
interest of COPT have been transferred to the Share Trust, the Share Trustee
will sell the shares of beneficial interest held in the Share Trust to a person,
designated by the Share Trustee, whose ownership of the shares will not violate
the ownership limitations set forth in the Declaration of Trust. Upon such sale,
the interest of the Charitable Beneficiary in the shares sold will terminate and
the Share Trustee will distribute the net proceeds of the sale to the Prohibited
Owner and to the Charitable Beneficiary as described below. The Prohibited Owner
will receive the lesser of (i) the price paid by the Prohibited Owner for the
shares or, if the Prohibited Owner did not give value for the shares in
connection with the event causing the shares to be held in the Share Trust
(E.G., a gift, devise or other such transaction), the Market Price (as defined
in the Declaration of Trust) of such shares on the day of the event causing the
shares to be received by the Share Trustee and (ii) the price per share received
by the Share Trustee from the sale or other disposition of the Common Shares
held in the Share Trust. Any net sale proceeds in excess of the amount payable
to the Prohibited Owner will be paid immediately to the Charitable Beneficiary.
If, prior to the discovery by COPT that shares of beneficial interest have been
transferred to the Share Trust, such shares are sold by a Prohibited Owner, then
(i) such shares will be deemed to have been sold on behalf of the Share Trust
and (ii) to the extent that the Prohibited Owner received an amount for shares
that exceeds the amount that such Prohibited Owner was entitled to receive as
described above, such excess will be paid to the Share Trustee upon demand.
In addition, shares of beneficial interest of COPT held in the Share Trust
will be deemed to have been offered for sale to COPT, or its designee, at a
price per share equal to the lesser of (i) the price per share in the
transaction that resulted in such transfer to the Share Trust (or, in the case
of a devise or gift, the Market Price at the time of such devise or gift) and
(ii) the Market Price on the date COPT, or its designee, accepts such offer.
COPT shall have the right to accept such offer until the Share Trustee has sold
the shares of beneficial interest held in the Share Trust. Upon such a sale to
COPT, the interest of the Charitable Beneficiary in the shares sold will
terminate and the Share Trustee will distribute the net proceeds of the sale to
the Prohibited Owner.
All certificates representing Common Shares will bear a legend referring to
the restrictions described above.
Every owner of more than 5% (or such other percentage as required by the
Internal Revenue Code or the regulations promulgated thereunder) of all classes
or series of COPT's shares of beneficial interest, including Common Shares, is
required to give written notice to COPT within 30 days after the end of each
taxable year stating the name and address of such owner, the number of shares of
each class and series of shares of beneficial interest of COPT which the owner
beneficially owns and a description of the manner in which such shares are held.
Each such owner shall provide to COPT such additional information as COPT may
request in order to determine the effect, if any, of such beneficial ownership
on COPT's status as a REIT and to ensure compliance with the Aggregate Share
Ownership Limit. In addition, each shareholder shall upon demand be required to
provide to COPT such
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<PAGE>
information as COPT may request, in good faith, in order to determine COPT's
status as a REIT and to comply with the requirements of any taxing authority or
governmental authority or to determine such compliance.
These ownership limitations could delay, defer or prevent a change in
control of COPT or other transaction that might involve a premium over the then
prevailing Market Price for the Common Shares or other attributes that the
shareholders may consider to be desirable.
ISSUANCE OF WARRANTS
We have no outstanding warrants to purchase our Common Shares or outstanding
warrants to purchase our Preferred Shares (collectively, the "Warrants"). We
may, however, issue Warrants in the future. Warrants may be issued by any
prospectus supplement independently or together with any other securities
offered and may be attached to or separate from those securities. Each series of
Warrants will be issued under a separate warrant agreement to be entered into
between us and a warrant agent specified in a prospectus supplement, the form of
which will be filed or incorporated by reference as an exhibit to the
registration statement of which this prospectus forms a part. The warrant agent
will act solely as our agent in connection with the Warrants of such series and
will not assume any obligation or relationship of agency or trust for or with
any provisions of the Warrants offered hereby. Further terms of the Warrants and
the applicable warrant agreements will be set forth in the applicable prospectus
supplement relating to the issuance of any Warrants.
A prospectus supplement will describe the terms of the Warrants in respect
of which this prospectus is being delivered including, where applicable, the
following:
- the title of the Warrants;
- the aggregate number of the Warrants;
- the price or prices at which the Warrants will be issued;
- the designation, terms and number of Common Shares or Preferred Shares
purchasable upon exercise of the Warrants;
- the designation and terms of the securities, if any, with which the
Warrants are issued and the number of the Warrants issued with each such
offered security;
- the date, if any, on and after which the Warrants and the related
Preferred Shares or Common Shares will be separately transferable;
- the price (or manner of calculation) at which each Common Share or
Preferred Share purchasable upon exercise of the Warrants may be
purchased;
- the date on which the right to exercise the Warrants shall commence and
the date on which the right shall expire;
- the minimum or maximum amount of the Warrants which may be exercised at
any one time;
- information with respect to book-entry procedures, if any;
- a discussion of certain material federal income tax considerations; and
- any other terms of the Warrants, including terms, procedures and
limitations relating to the exchange and exercise of the Warrants.
The exercise of any Warrants will be subject to and limited by the transfer and
ownership restrictions in our declaration of trust. See "--Restrictions on
Transfer."
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<PAGE>
CLASSIFICATION OF BOARD, VACANCIES AND REMOVAL OF TRUSTEES
The Declaration of Trust provides for a staggered Board of Trustees. COPT
presently has nine Trustees divided into three classes, with terms of three
years each. Constellation Real Estate, Inc. currently may appoint two Trustees.
See "--Series A Preferred Shares." Currently, the number of Trustees in each
class and the expiration of each class's term is as follows:
<TABLE>
<S> <C> <C>
Class 1 2 Trustees Expires 2002
Class 2 3 Trustees Expires 2000
Class 3 4 Trustees Expires 2001
</TABLE>
At each annual meeting of shareholders of COPT, successors of the class of
Trustees whose term expires at that meeting will be elected for a three-year
term and the Trustees in the other two classes will continue in office. A
classified board may delay, defer or prevent a change in control of COPT or
other transaction that might involve a premium over the then prevailing market
price for the Common Shares or other attributes that the shareholders may
consider to be desirable. In addition, a classified board could prevent
shareholders who do not agree with the policies of the Board of Trustees from
replacing a majority of the Board of Trustees for two years, except in the event
of removal for cause.
The Bylaws of COPT provide that any vacancy on the Board of Trustees may be
filled by a majority of the remaining Trustees. Any individual so elected
Trustee will hold office for the unexpired term of the Trustee he or she is
replacing. The Declaration of Trust provides that a Trustee may be removed at
any time only for cause upon the affirmative vote of at least two-thirds of the
votes entitled to be cast in the election of Trustees, but only by a vote taken
at a shareholder meeting. These provisions preclude shareholders from removing
incumbent Trustees, except for cause and upon a substantial affirmative vote,
and filling the vacancies created by such removal with their own nominees.
ADVANCE NOTICE OF NOMINATIONS AND NEW BUSINESS
The Bylaws provide that, with respect to an annual meeting of shareholders,
nominations of persons for election to the Board of Trustees and the proposal of
business to be considered by shareholders may be made only (a) pursuant to
COPT's notice of the meeting, (b) by the Board of Trustees or (c) by a
shareholder who is entitled to vote at the meeting and has complied with the
advance notice procedures set forth in the Bylaws. With respect to special
meetings of shareholders, the Bylaws provide that only the business specified in
COPT's notice of meeting may be brought before the meeting of shareholders and
nominations of persons for election to the Board of Trustees may be made only
(a) pursuant to COPT's notice of the meeting, (b) by the Board of Trustees or
(c) provided that the Board of Trustees has determined that Trustees shall be
elected at such meeting, by a shareholder who is entitled to vote at the meeting
and has complied with the advance notice provisions set forth in the Bylaws.
POSSIBLE ANTITAKEOVER EFFECT OF CERTAIN PROVISIONS OF MARYLAND LAW
The Maryland General Corporations Law ("MGCL") contains provisions that may
be deemed to have an antitakeover effect. The provisions applicable to COPT are
set forth below.
CERTAIN BUSINESS COMBINATIONS. Under the MGCL, as applicable to Maryland
real estate investment trusts, certain business combinations (including certain
mergers, consolidations, share exchanges and asset transfers and certain
issuances and reclassifications of equity securities) between a Maryland real
estate investment trust and any person who beneficially owns ten percent or more
of the voting power of the trust's shares or an affiliate of the trust who, at
any time within the two-year period prior to the date in question, was the
beneficial owner of ten percent or more of the voting power of the then
outstanding voting shares of such trust (an "Interested Shareholder"), or an
affiliate of such an Interested Shareholder, are prohibited for five years after
the most recent date on which the
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<PAGE>
Interested Shareholder becomes an Interested Shareholder. Thereafter, any such
business combination must be recommended by the board of trustees of such trust
and approved by the affirmative votes of at least (i) 80% of the votes entitled
to be cast by holders of outstanding voting shares of the trust and (ii)
two-thirds of the votes entitled to be cast by holders of voting shares of the
trust other than shares held by the Interested Shareholder with whom (or with
whose affiliate) the business combination is to be effected, unless, among other
conditions, the trust's common shareholders receive a minimum price (as defined
in the MGCL) for their shares and the consideration is received in cash or in
the same form as previously paid by the Interested Shareholder for its shares.
These provisions of Maryland law do not apply, however, to business combinations
that are approved or exempted by the board of trustees of the trust prior to the
time that the Interested Shareholder becomes an Interested Shareholder. The
Board of Trustees has opted out of this statute by resolution. The Board of
Trustees may, however, rescind its resolution at any time to make these
provisions of Maryland law applicable to COPT.
CONTROL SHARE PROVISIONS. The MGCL generally provides that control shares
of a Maryland real estate investment trust acquired in a control share
acquisition have no voting rights unless those rights are approved by a vote of
two-thirds of the disinterested shares (generally shares held by persons other
than the acquiror, officers or trustees who are employees of the trust). An
acquiror is deemed to own control shares the first time that the acquiror's
voting power in electing trustees equals or exceeds twenty percent of all such
voting power. Control shares do not include shares the acquiring person is then
entitled to vote as a result of having previously obtained shareholder approval.
A control share acquisition means the acquisition of control shares, subject to
certain exceptions.
A person who has made or proposes to make a control share acquisition, upon
satisfaction of certain conditions (including an undertaking to pay expenses),
may compel the Board of Trustees to call a special meeting of shareholders to be
held within 50 days of the demand to consider whether the control shares will
have voting rights. The trust may present the question at any shareholders'
meeting on its own initiative.
If voting rights are not approved at the meeting or if the acquiring person
does not deliver an acquiring person statement as required by the statute, then,
subject to certain conditions and limitations, the trust may redeem any or all
of the control shares (except those for which voting rights have previously been
approved) for fair value, determined without regard to the absence of voting
rights for the control shares. Fair value will be determined as of the date of
the last control share acquisition by the acquiror or of any meeting of
shareholders at which the voting rights of such shares are considered and not
approved. If voting rights for control shares are approved at a shareholders'
meeting and the acquiror becomes entitled to vote a majority of the shares
entitled to vote, all other shareholders may exercise appraisal rights. The fair
value of the shares as determined for purposes of such appraisal rights may not
be less than the highest price per share paid by the acquiror in the control
share acquisition.
The control share provisions do not apply (a) to shares acquired in a
merger, consolidation or share exchange if the trust is a party to the
transaction or (b) to acquisitions approved or exempted by the declaration of
trust or bylaws of the trust. The Bylaws contain a provision exempting from the
control share acquisition statute any and all acquisitions by any person of
COPT's shares of beneficial interest. The Board of Trustees may, however, amend
the Bylaws at any time to eliminate such provision, either prospectively or
retroactively.
DISSOLUTION OF THE COMPANY; TERMINATION OF REIT STATUS
The Declaration of Trust permits the termination of COPT and the
discontinuation of the operations of COPT by the affirmative vote of the holders
of not less than two-thirds of the outstanding Common Shares entitled to be cast
on the matter at a meeting of shareholders or by written consent. In addition,
the Declaration of Trust permits the termination of COPT's qualification as a
REIT if such qualification, in the opinion of the Board of Trustees, is no
longer advantageous to the shareholders.
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<PAGE>
FEDERAL INCOME TAX MATTERS
COPT was organized in 1988 and elected to be taxed as a REIT commencing with
its taxable year ended December 31, 1992. COPT believes that it was organized
and has operated in a manner that permits it to satisfy the requirements for
taxation as a REIT under the applicable provisions of the Internal Revenue Code
and intends to continue to operate in such a manner. No assurance can be given,
however, that such requirements have been or will continue to be met. The
following is a summary of the material federal income tax considerations that
may be relevant to COPT and its shareholders, including the continued treatment
of COPT as a REIT for federal income tax purposes. For purposes of this
discussion of federal income tax matters the term "COPT" refers only to
Corporate Office Properties Trust and not to any other affiliated entities.
The following discussion is based on the law existing and in effect on the
date hereof and COPT's qualification and taxation as a REIT will depend on
compliance with such law and with any future amendments or modifications to such
law. The qualification and taxation as a REIT will further depend upon the
ability to meet, on a continuing basis through actual operating results, the
various qualification tests imposed under the Internal Revenue Code discussed
below. No assurance can be given that COPT will satisfy such tests on a
continuing basis.
In brief, an entity that invests primarily in real estate can, if it meets
the REIT provisions of the Internal Revenue Code described below, claim a tax
deduction for the dividends it pays to its shareholders. Such an entity
generally is not taxed on its "REIT taxable income" to the extent such income is
currently distributed to shareholders, thereby substantially eliminating the
"double taxation" (i.e, at both the entity and shareholder levels) that
generally results from an investment in an entity which is taxed as a
corporation. However, as discussed in greater detail below, such an entity
remains subject to tax in certain circumstances even if it qualifies as a REIT.
Further, if the entity were to fail to qualify as a REIT in any year, it would
not be able to deduct any portion of the dividends it paid to its shareholders
and would be subject to full federal corporate income taxation on its earnings,
thereby significantly reducing or eliminating the cash available for
distribution to its shareholders.
Morgan, Lewis & Bockius LLP has opined that, for federal income tax
purposes, COPT has properly elected and otherwise qualified to be taxed as a
REIT under the Internal Revenue Code for taxable years commencing on or after
June 1, 1992, and that its proposed method of operations as described in this
prospectus and as represented to Morgan, Lewis & Bockius LLP by COPT will enable
COPT to continue to satisfy the requirements for such qualification and taxation
as a REIT under the Internal Revenue Code for future taxable years. This
opinion, however, is based upon certain factual assumptions and representations
made by COPT. Moreover, such qualification and taxation as a REIT depends upon
the ability of COPT to meet, for each taxable year, various tests imposed under
the Internal Revenue Code as discussed below, and Morgan, Lewis & Bockius LLP
has not reviewed in the past, and may not review in the future, COPT's
compliance with these tests. Accordingly, no assurance can be given that the
actual results of the operations of COPT for any particular taxable year will
satisfy such requirements.
TAXATION OF COPT
GENERAL. In any year in which COPT qualifies as a REIT, it will not
generally be subject to federal income tax on that portion of its REIT taxable
income or capital gain which is distributed to shareholders. COPT will, however,
be subject to tax at normal corporate rates upon any taxable income or capital
gains not distributed. Under recently enacted legislation, shareholders are
required to include their proportionate share of the REIT's undistributed
long-term capital gain in income but would receive a credit for their share of
any taxes paid on such gain by the REIT.
Notwithstanding its qualification as a REIT, COPT also may be subject to
taxation in certain other circumstances. If COPT should fail to satisfy either
the 75% or the 95% gross income test (each as discussed below), and nonetheless
maintains its qualification as a REIT because certain other
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requirements are met, it will be subject to a 100% tax on the greater of the
amount by which COPT fails either the 75% or the 95% test, multiplied by a
fraction intended to reflect COPT's profitability. COPT will also be subject to
a tax of 100% on net income from any "prohibited transaction" (as described
below), and if COPT has (i) net income from the sale or other disposition of
"foreclosure property" which is held primarily for sale to customers in the
ordinary course of business or (ii) other non-qualifying income from foreclosure
property, it will be subject to tax on such income from foreclosure property at
the highest corporate rate. In addition, if COPT should fail to distribute
during each calendar year at least the sum of (i) 85% of its REIT ordinary
income for such year, (ii) 95% of its REIT capital gain net income for such year
and (iii) any undistributed taxable income from prior years, COPT would be
subject to a 4% excise tax on the excess of such required distribution over the
amounts actually distributed. COPT also may be subject to the corporate
alternative minimum tax, as well as to tax in certain situations not presently
contemplated. COPT will use the calendar year both for federal income tax
purposes, as is required of a REIT under the Internal Revenue Code, and for
financial reporting purposes.
FAILURE TO QUALIFY. If COPT fails to qualify for taxation as a REIT in any
taxable year and the relief provisions do not apply, COPT will be subject to tax
(including any applicable alternative minimum tax) on its taxable income at
regular corporate rates. Distributions to shareholders in any year in which COPT
fails to qualify as a REIT will not be deductible by COPT, nor generally will
they be required to be made under the Internal Revenue Code. In such event, to
the extent of current and accumulated earnings and profits, all distributions to
shareholders will be taxable as ordinary income, and subject to certain
limitations in the Internal Revenue Code, corporate distributees may be eligible
for the dividends-received deduction. Unless entitled to relief under specific
statutory provisions, COPT also will be disqualified from reelecting taxation as
a REIT for the four taxable years following the year during which qualification
was lost.
REIT QUALIFICATION REQUIREMENTS
In order to qualify as a REIT, COPT must meet the following requirements,
among others:
SHARE OWNERSHIP TESTS. COPT's shares of beneficial interest must be held by
a minimum of 100 persons for at least 335 days in each taxable year (or a
proportionate number of days in any short taxable year). In addition, at all
times during the second half of each taxable year, no more than 50% in value of
the outstanding shares of beneficial interest of COPT may be owned, directly or
indirectly and taking into account the effects of certain constructive ownership
rules, by five or fewer individuals, which for this purpose includes certain
tax-exempt entities (the "50% Limitation"). However, for purposes of this test,
any shares of beneficial interest held by a qualified domestic pension or other
retirement trust will be treated as held directly by its beneficiaries in
proportion to their actuarial interest in such trust rather than by such trust.
In addition, for purposes of the 50% Limitation, shares of beneficial interest
owned, directly or indirectly, by a corporation will be considered as being
owned proportionately by its shareholders.
In order to attempt to ensure compliance with the foregoing share ownership
tests, COPT's Declaration of Trust places certain restrictions on the transfer
of its shares of beneficial interest to prevent additional concentration of
stock ownership. Moreover, to evidence compliance with these requirements,
Treasury Regulations require COPT to maintain records which disclose the actual
ownership of its outstanding shares of beneficial interest. In fulfilling its
obligations to maintain records, COPT must and will demand written statements
each year from the record holders of designated percentages of its shares of
beneficial interest disclosing the actual owners of such shares of beneficial
interest (as prescribed by Treasury Regulations). A list of those persons
failing or refusing to comply with such demand must be maintained as part of
COPT's records. A shareholder failing or refusing to comply with COPT's written
demand must submit with his tax return a similar statement disclosing the actual
ownership of COPT shares of beneficial interest and certain other information.
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Currently, Constellation Real Estate, Inc. owns approximately 41.8% of the
Common Shares outstanding, and 984,308 Series A Convertible Preferred Shares
convertible into 1,845,381 Common Shares. Under COPT's Declaration of Trust a
person is generally prohibited from owning more than 9.8% of the aggregate
outstanding Common Shares or more than 9.8% in value of the aggregate
outstanding shares of beneficial interest unless such person makes certain
representations to the Board of Trustees and the Board of Trustees ascertains
that ownership of a greater percentage of shares will not cause COPT to violate
either the 50% Limitation or the gross income tests described below. The Board
of Trustees has exempted Constellation Real Estate, Inc. from the 9.8%
limitation set forth in the Declaration of Trust and has determined that
Constellation Real Estate, Inc. may hold up to 45% of the outstanding Common
Shares. The Board of Trustees has determined, based upon representations made by
Constellation Real Estate, Inc., that this will not result in a violation of the
50% Limitation or otherwise adversely affect COPT's ability to qualify as a REIT
for federal income tax purposes.
ASSET TESTS. At the close of each quarter of COPT's taxable year, COPT must
satisfy two tests relating to the nature of its assets (determined in accordance
with generally accepted accounting principles). First, at least 75% of the value
of COPT's total assets must be represented by interests in real property,
interests in mortgages on real property, shares in other REITs, cash, cash
items, government securities and qualified temporary investments. Second,
although the remaining 25% of COPT's assets generally may be invested without
restriction, securities in this class may not exceed (i) in the case of
securities of any one non-government issuer, 5% of the value of COPT's total
assets (the "Value Test") or (ii) 10% of the outstanding voting securities of
any one such issuer (the "Voting Stock Test"). Where COPT invests in a
partnership (such as the operating partnership), it will be deemed to own a
proportionate share of the partnership's assets, and the partnership interest
will not constitute a security for purposes of these tests. Accordingly, COPT's
investment in real properties through its interests in the operating partnership
(which itself holds real properties through other partnerships) will constitute
an investment in qualified assets for purposes of the 75% asset test.
GROSS INCOME TESTS. There are two separate percentage tests relating to the
sources of COPT's gross income which must be satisfied for each taxable year.
For purposes of these tests, where COPT invests in a partnership, COPT will be
treated as receiving its share of the income and loss of the partnership, and
the gross income of the partnership will retain the same character in the hands
of COPT as it has in the hands of the partnership. The two tests are described
below.
THE 75% TEST. At least 75% of COPT's gross income for the taxable year must
be "qualifying income." Qualifying income generally includes: (i) rents from
real property (except as modified below); (ii) interest on obligations secured
by mortgages on, or interests in, real property; (iii) gains from the sale or
other disposition of interests in real property and real estate mortgages, other
than gain from property held primarily for sale to customers in the ordinary
course of COPT's trade or business ("dealer property"); (iv) dividends or other
distributions on shares in other REITs, as well as gain from the sale of such
shares; (v) abatements and refunds of real property taxes; (vi) income from the
operation, and gain from the sale, of property acquired at or in lieu of a
foreclosure of the mortgage secured by such property ("foreclosure property");
and (vii) commitment fees received for agreeing to make loans secured by
mortgages on real property or to purchase or lease real property.
Rents received from a tenant will not, however, qualify as rents from real
property in satisfying the 75% gross income test (or the 95% gross income test
described below) if COPT, or an owner of 10% or more of COPT, directly or
constructively owns 10% or more of such tenant. In addition, if rent
attributable to personal property leased in connection with a lease of real
property is greater than 15% of the total rent received under the lease, then
the portion of rent attributable to such personal property will not qualify as
rents from real property. Moreover, an amount received or accrued will not
qualify as rents from real property (or as interest income) for purposes of the
75% and 95% gross income tests if it is based in whole or in part on the income
or profits of any person, although an amount received or accrued generally will
not be excluded from "rents from real property" solely by
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reason of being based on a fixed percentage or percentages of receipts or sales.
Finally, for rents received to qualify as rents from real property for purposes
of the 75% and 95% gross income tests, COPT generally must not operate or manage
the property or furnish or render services to customers, other than through an
"independent contractor" from whom COPT derives no income, except that the
"independent contractor" requirement does not apply to the extent that the
services provided by COPT are "usually or customarily rendered" in connection
with the rental of space for occupancy only, and are not otherwise considered
"rendered to the occupant for his convenience." In addition, under recently
enacted legislation, beginning with its taxable year ending December 31, 1998,
COPT may directly perform a de minimis amount of non-customary services. COPT
believes that the services provided with regard to COPT's properties by the
operating partnership (or its agents) are now (and, it is believed, will in the
future be) usual or customary services. Any services that cannot be provided
directly by the operating partnership will be performed by independent
contractors.
THE 95% TEST. In addition to deriving 75% of its gross income from the
sources listed above, at least 95% of COPT's gross income for the taxable year
must be derived from the above-described qualifying income or from dividends,
interest, or gains from the sale or other disposition of stock or other
securities that are not dealer property. Dividends and interest on obligations
not collateralized by an interest in real property are included for purposes of
the 95% test, but not for purposes of the 75% test. COPT intends to monitor
closely its non-qualifying income and anticipates that non-qualifying income
from its activities will not result in COPT failing to satisfy either the 75% or
95% gross income test.
For purposes of determining whether COPT complies with the 75% and the 95%
gross income tests, gross income does not include income from prohibited
transactions. A "prohibited transaction" is a sale of dealer property (excluding
foreclosure property); however, a sale of property will not be a prohibited
transaction if such property is held for at least four years and certain other
requirements (relating to the number of properties sold in a year, their tax
bases and the cost of improvements made thereto) are satisfied.
Even if COPT fails to satisfy one or both of the 75% and 95% gross income
tests for any taxable year, it may still qualify as a REIT for such year if it
is entitled to relief under certain provisions of the Internal Revenue Code.
These relief provisions will generally be available if: (i) COPT's failure to
comply is due to reasonable cause and not to willful neglect; (ii) COPT reports
the nature and amount of each item of its income included in the tests on a
schedule attached to its tax return; and (iii) any incorrect information on this
schedule is not due to fraud with intent to evade tax. If these relief
provisions apply, however, COPT will nonetheless be subject to a 100% tax on the
greater of the amount by which it fails either the 75% or 95% gross income test,
multiplied by a fraction intended to reflect COPT's profitability.
COMPLIANCE WITH INCOME TESTS. Constellation Real Estate, Inc. and certain
affiliated companies are obligated as tenants to pay annual rent of
approximately $950,000 with respect to properties owned by the operating
partnership. Some of this rental income may not constitute qualifying rental
income for purposes of the 75% and 95% gross income tests. COPT expects, based
on current rent levels, that its annual gross income in 1999 will be at least
$70 million. Accordingly, COPT estimates that it can earn up to $3.5 million of
non-qualifying income per year without violating the 95% gross income test.
Aside from this rental income, COPT does not expect that it will earn material
amounts of non-qualifying income from either Constellation Real Estate, Inc. or
its existing properties. Based on the foregoing, COPT has determined that it
will continue to satisfy the 75% and 95% gross income tests. The fact that
affiliates of Constellation Real Estate, Inc. will be paying substantial amounts
of non-qualifying income may, however, restrict the ability of COPT and the
operating partnership to acquire additional properties that generate
non-qualifying income.
To avoid a violation of the 95% gross income test, the operating partnership
established COMI in 1998 to own a 75% interest in Corporate Realty Management,
LLC, the operating partnership's
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property management company ("CRM"). In addition, COMI has entered into a
services agreement with Constellation Real Estate, Inc. for development and
other services, since income from such services is also considered
non-qualifying income.
The operating partnership currently holds indebtedness issued by COMI and
its subsidiaries and 95% of the aggregate amount of voting and non-voting common
stock issued by COMI, but only holds 1% of the aggregate amount of voting common
stock issued by COMI. As discussed above, to satisfy the Voting Stock Test COPT
may not directly or indirectly hold 10% or more of the voting stock of COMI. In
addition to holding the 75% interest in CRM, COMI provides, either directly or
through subsidiaries, management and development services to affiliates of
Constellation Real Estate, Inc., the operating partnership and unrelated
parties.
Because it is a corporate entity (as opposed to a partnership) which is not
wholly owned by COPT, the management fee income earned by COMI as a result of
its ownership interest in CRM, or as a result of management or development
services performed by COMI or its subsidiaries, although it is non-qualifying
income, is not treated as non-qualifying income earned by COPT for purposes of
the 95% or 75% gross income tests. However, any interest or dividends paid or
distributed by COMI to the operating partnership is considered as qualifying
income for purposes of the 95% test, but is not considered qualifying income for
purposes of the 75% gross income test. To the extent that COMI earns net taxable
income from its activities, it is required to pay federal and state income
taxes, which reduces the amount of dividends it is able to pay to the operating
partnership and its other shareholders.
On February 1, 1999, the United States Department of the Treasury released
its General Explanations of the Administration's Revenue Proposals, outlining
proposed amendments to the Internal Revenue Code. Among such proposals is a
recommendation that the Voting Stock Test described above be changed to a "vote
or value" test, which change is intended to prevent REITs from undertaking
prohibited activities through "preferred stock subsidiaries," such as COMI. The
proposal would also include an exception to the five-percent and 10% asset
tests, as modified, so that REITs could own either of two types of "taxable REIT
subsidiaries" without violating the asset tests. Such taxable REIT subsidiaries
would be permitted to undertake certain types of activities--including
non-tenant related activities that currently generate non-qualifying income for
a REIT (such as third-party management and development), and non-customary and
other currently prohibited services with respect to REIT tenants--without
jeopardizing the REIT's status as a REIT under the Internal Revenue Code. A
number of constraints would be imposed on such taxable REIT subsidiaries,
however, to insure that the REIT could not, through such subsidiaries, engage in
substantial non-real estate activities, and to insure that such subsidiaries pay
corporate-level tax on their earnings. Such constraints would include (1)
limitations on the percentage of a REIT's total asset value which could be
composed of taxable REIT subsidiaries; (2) disallowance of interest paid by any
such taxable REIT subsidiaries to the REIT; (3) a 100% excise tax imposed on
certain excess payments and expenses made or shared between the taxable REIT
subsidiaries and the REIT; and (4) limitations on the level of intercompany
rentals between the taxable REIT subsidiaries and the REIT. The proposal is
intended to be effective after the date of enactment, but would provide
considerable time for a REIT to restructure its operations and investments so as
to convert preferred stock subsidiaries into taxable REIT subsidiaries on a
tax-free basis.
COPT believes that the Administration's proposed amendment to the Voting
Stock Test should not have a significant impact on COPT's current operations or
assets, even if enacted in its proposed form. COPT intends to monitor this and
any other proposed legislation closely, however, to assess the possible effect
of any such legislation on its future operations and tax profile.
COPT intends to continue to monitor its operations and investments in the
context of these standards so as to continue to satisfy the 75% and 95% gross
income tests. While the operating partnership or its affiliates provide certain
services with respect to the properties in which COPT owns interests and
possibly with respect to any newly acquired properties, COPT believes that for
purposes
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of the 75% and 95% gross income tests the services provided at such properties
and any other services and amenities provided by the operating partnership or
its agents with respect to such properties will be of the type usually or
customarily rendered in connection with the rental of space for occupancy only
and not rendered to the occupants of such properties. COPT intends that services
that cannot be provided directly by the operating partnership or other agents
will be performed by independent contractors.
ANNUAL DISTRIBUTION REQUIREMENTS. In order to qualify as a REIT, COPT is
required to distribute dividends to its shareholders each year in an amount at
least equal to (A) the sum of (i) 95% of COPT's REIT taxable income (computed
without regard to the dividends received deduction and COPT's net capital gain)
and (ii) 95% of the net income (after tax), if any, for foreclosure property,
minus (B) the sum of certain items of non-cash income. Such distributions must
be paid in the taxable year to which they relate, or in the following taxable
year if declared before COPT timely files its tax return for such year and if
paid on or before the first regular dividend payment after the declaration. To
the extent that COPT does not distribute all of its net capital gain or
distributes at least 95%, but less than 100%, of its REIT taxable income, as
adjusted, it will be subject to tax on the undistributed amount at regular
capital gain or ordinary corporate tax rates, as the case may be.
COPT intends to make timely distributions sufficient to satisfy the annual
distribution requirements described in the first sentence of the preceding
paragraph. In this regard, the operating partnership agreement authorizes COPT
in its capacity as General Partner to take such steps as may be necessary to
cause the operating partnership to distribute to its partners an amount
sufficient to permit COPT to meet the distribution requirements. It is possible
that COPT may not have sufficient cash or other liquid assets to meet the 95%
distribution requirement, either due to timing differences between the actual
receipt of income and actual payment of expenses on the one hand, and the
inclusion of such income and deduction of such expenses in computing COPT's REIT
taxable income on the other hand, or for other reasons. COPT will monitor
closely the relationship between its REIT taxable income and cash flow and, if
necessary, intends to borrow funds (or cause the operating partnership or other
affiliates to borrow funds) in order to satisfy the distribution requirement.
However, there can be no assurance that such borrowing would be available at
such time.
If COPT fails to meet the 95% distribution requirement as a result of an
adjustment to COPT's tax return by the Service, COPT may retroactively cure the
failure by paying a "deficiency dividend" (plus applicable penalties and
interest) within a specified period.
TAXATION OF SHAREHOLDERS
TAXATION OF TAXABLE DOMESTIC SHAREHOLDERS. As long as COPT qualifies as a
REIT, distributions made to its taxable domestic shareholders out of current or
accumulated earnings and profits (and not designated as capital gain dividends)
will constitute dividends taxable as ordinary income, and corporate shareholders
will not be eligible for the dividends received deduction as to such amounts.
Distributions that are designated as capital gain dividends will be taxed as
gain from the sale or exchange of a capital asset (to the extent they do not
exceed COPT's actual net capital gain for the taxable year) without regard to
the period for which the shareholder has held its shares. In the event COPT
designates any portion of a dividend as a capital gain dividend, a shareholder's
share of such capital gain dividend would be an amount which bears the same
ratio to the total amount of dividends paid to such shareholder for the taxable
year as the total amount of capital gain dividends bears to the total amount of
all dividends paid on all classes of shares for the taxable year. However,
corporate shareholders may be required to treat up to 20% of certain capital
gain dividends as ordinary income. COPT may elect to retain and pay income tax
on any net long-term capital gain, in which case its domestic shareholders would
include in their income as long-term capital gain their proportionate share of
such undistributed net long-term capital gain. A domestic shareholder would also
receive a refundable tax credit for such shareholder's proportionate share of
the tax paid by COPT on such retained capital gains and an increase in its basis
in its shares in an amount equal to the difference between the undistributed
long-term capital gains and the amount of tax paid by COPT. See "--Capital Gains
and Losses."
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Distributions in excess of current and accumulated earnings and profits will
not be taxable to a shareholder to the extent that they do not exceed the
adjusted basis of the shareholder's shares of beneficial interest, but rather
will reduce the adjusted basis of such shares. To the extent that such
distributions exceed the adjusted basis of a shareholder's shares of beneficial
interest, they will be included in income as short-term or long-term capital
gain (depending on the length of time the shares have been held), assuming the
shares are capital assets in the hands of the shareholder. In addition, any
dividend declared by COPT in October, November or December of any year and
payable to a shareholder of record on a specific date in any such month shall be
treated as both paid by COPT and received by the shareholder on December 31 of
such year, provided that the dividend is actually paid by COPT during January of
the following calendar year.
Domestic shareholders may not include in their individual income tax returns
any of COPT's net operating losses or capital losses. Instead, such losses would
be carried over by COPT for potential offset against future income (subject to
certain limitations). Distributions made by COPT and gain arising from the sale
or exchange of shares will not be treated as passive activity income, and, as a
result, shareholders generally will not be able to apply any "passive losses"
against such income and gain. In addition, taxable distributions from COPT
generally will be treated as investment income. Capital gain dividends
(including distributions treated as such) and capital gain from the disposition
of shares, however, will be treated as investment income only if a shareholder
so elects, in which case such capital gain will be taxed at ordinary income
rates. COPT will notify shareholders after the close of its taxable year as to
the portions of distributions attributable to that year that constitute ordinary
income, return of capital and capital gain.
In general, a domestic shareholder will realize capital gain or loss on the
disposition of COPT's shares of beneficial interest equal to the difference
between (i) the amount of cash and the fair market value of any property
received on such disposition, and (ii) the shareholder's adjusted basis of such
shares of beneficial interest. Such gain or loss generally will constitute
short-term capital gain or loss if the shareholder has not held such shares for
more than one year and long-term capital gain or loss if the shareholder has
held such shares for more than one year. See "--Capital Gains and Losses" below.
Loss upon a sale or exchange of COPT's shares of beneficial interest by a
shareholder who has held such shares for six months or less (after applying
certain holding period rules) will be treated as a long-term capital loss to the
extent of distributions from COPT required to be treated by such shareholder as
long-term capital gain.
CAPITAL GAINS AND LOSSES. The maximum marginal individual income tax rate
is 39.6%. The maximum tax rate on net capital gains applicable to individuals,
trusts and estates from the sale or exchange of capital assets held for more
than 18 months is 20%, and the maximum rate is reduced to 18% for assets
acquired after December 31, 2000 and held for more than five years. For
individuals, trusts and estates who would be subject to a maximum tax rate of
15%, the rate on net capital gains is reduced to 10%, and, effective for taxable
years commencing after December 31, 2000, the rate is reduced to 8% for assets
held for more than five years. The maximum rate for net capital gains
attributable to the sale of depreciable real property held for more than 18
months is 25% to the extent of the deductions for depreciation (other than
certain depreciation recapture taxable as ordinary income) with respect to such
property. The maximum rate of capital gains tax for capital assets held more
than one year but not more than 18 months is 28%. Accordingly, the tax rate
differential between capital gain and ordinary income for noncorporate taxpayers
may be significant. In addition, the characterization of income as capital or
ordinary may affect the deductibility of capital losses. Capital losses not
offset by capital gains may be deducted against a noncorporate taxpayer's
ordinary income only up to a maximum annual amount of $3,000. Unused capital
losses may be carried forward. All net capital gain of a corporate taxpayer is
subject to tax at ordinary corporate rates. A corporate taxpayer can deduct
capital losses only to the extent of capital gains, with unused losses being
carried back three years and forward five years.
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BACKUP WITHHOLDING. COPT will report to its domestic shareholders and the
IRS the amount of dividends paid during each calendar year and the amount of tax
withheld, if any, with respect thereto. Under the backup withholding rules, a
shareholder may be subject to backup withholding at the rate of 31% with respect
to dividends paid unless such holder (i) is a corporation or comes within
certain other exempt categories and, when required, demonstrates this fact or
(ii) provides a taxpayer identification number, certifies as to no loss of
exemption and otherwise complies with the applicable requirements of the backup
withholding rules. Any amount paid as backup withholding will be creditable
against the shareholder's income tax liability. The United States Treasury has
recently issued final regulations (the "Final Regulations") regarding the
withholding and information reporting rules discussed above. In general, the
Final Regulations do not alter the substantive withholding and information
reporting requirements but unify current certification procedures and forms and
clarify and modify reliance standards. The Final Regulations are generally
effective for payments made on or after January 1, 2000, subject to certain
transition rules. Prospective investors should consult their own tax advisors
concerning the adoption of the Final Regulations and the potential effect on
their ownership of COPT's shares of beneficial interest.
In addition, COPT may be required to withhold a portion of capital gain
distributions made to shareholders that fail to certify their non-foreign status
to COPT. See "--Taxation of Foreign Shareholders."
TAXATION OF TAX-EXEMPT SHAREHOLDERS. The IRS has ruled that amounts
distributed as dividends by a REIT generally do not constitute unrelated
business taxable income ("UBTI") when received by a tax-exempt entity. Based on
that ruling, dividend income from COPT's shares of beneficial interest will not
be UBTI to a tax-exempt shareholder, provided that the tax-exempt shareholder
has not held its shares as "debt financed property" within the meaning of the
Internal Revenue Code and such shares are not otherwise used in a trade or
business. Similarly, income from the sale of COPT's shares of beneficial
interest will not constitute UBTI unless such tax-exempt shareholder has held
such shares as "debt financed property" within the meaning of the Internal
Revenue Code or has used the shares in a trade or business.
Notwithstanding the above, however, a portion of the dividends paid by a
"pension held REIT" will be treated as UBTI as to any trust which is described
in Section 401(a) of the Internal Revenue Code, is tax-exempt under Section
501(a) of the Internal Revenue Code (a "qualified trust") and which holds more
than 10% (by value) of the interests in the REIT. A REIT is a "pension held
REIT" if (i) it would not have qualified as a REIT but for the application of a
"look-through" exception to the 50% Limitation applicable to qualified trusts,
and (ii) either (1) at least one such qualified trust holds more than 25% (by
value) of the interests in the REIT, or (2) one or more such qualified trusts,
each of which owns more than 10% (by value) of the interests in the REIT, hold
in the aggregate more than 50% (by value) of the interests in the REIT. The
percentage of any REIT dividend treated as UBTI is equal to the ratio of (i) the
gross income (less direct expenses related thereto) of the REIT from unrelated
trades or businesses (determined as if the REIT were a qualified trust) to (ii)
the total gross income (less direct expenses related thereto) of the REIT. A de
minimis exception applies where this percentage is less than 5% for any year.
The provisions requiring qualified trusts to treat a portion of REIT
distributions as UBTI will not apply if the REIT is able to satisfy the 50%
Limitation without relying upon the "look-through" exception with respect to
qualified trusts. As a result of certain limitations on transfer and ownership
of COPT's shares of beneficial interest contained in the Charter, COPT does not
expect to be classified as a "pension held REIT."
TAXATION OF FOREIGN SHAREHOLDERS. The rules governing the United States
federal income taxation of the ownership and disposition of COPT's shares of
beneficial interest by persons that are, for purposes of such taxation,
nonresident alien individuals, foreign corporations, foreign partnerships and
other foreign shareholders (collectively, "Non-U.S. Shareholders") are complex
and no attempt will be made herein to provide more than a summary of such rules.
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PROSPECTIVE NON-U.S. SHAREHOLDERS 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 COPT'S SHARES OF BENEFICIAL INTEREST, INCLUDING ANY
REPORTING REQUIREMENTS, AS WELL AS THE TAX TREATMENT OF SUCH AN INVESTMENT UNDER
THEIR HOME COUNTRY LAWS.
In general, Non-U.S. Shareholders will be subject to regular United States
federal income taxation with respect to their investment in COPT's shares of
beneficial interest in the same manner as a U.S. shareholder (I.E., at graduated
rates on a net basis, after allowance of deductions) if such investment is
"effectively connected" with the conduct by such Non-U.S. Shareholder of a trade
or business in the United States. A Non-U.S. Shareholder that is a corporation
and that receives income with respect to its investment in COPT's shares of
beneficial interest that is (or is treated as) "effectively connected" with the
conduct of a trade or business in the United States may also be subject to the
30% branch profits tax imposed under Section 884 of the Internal Revenue Code,
which is payable in addition to the regular United States corporate income tax.
The following discussion addresses only the federal income taxation of Non-U.S.
Shareholders whose investment in COPT's shares of beneficial interest is not
"effectively connected" with the conduct of a trade or business in the United
States. Prospective investors whose investment in COPT's shares of beneficial
interest may be "effectively connected" with the conduct of a United States
trade or business should consult their own tax advisors as to the tax
consequences thereof.
Distributions that are not attributable to gain from sales or exchanges of
United States real property interests and that are not designated by COPT as
capital gain dividends will be treated as dividends of ordinary income to the
extent that they are made out of COPT's current or accumulated earnings and
profits. Such distributions ordinarily will be subject to a withholding tax
equal to 30% of the gross amount of the distribution unless an applicable tax
treaty reduces or eliminates that tax. Pursuant to the Final Regulations,
dividends paid to an address in a country outside the United States will no
longer be presumed to be paid to a resident of such country for purposes of
determining the applicability of withholding discussed above and the
availability of a reduced tax treaty rate. A Non-U.S. Shareholder who wishes to
claim the benefit of an applicable treaty rate will now be required to satisfy
certain certification and other requirements. Distributions that COPT makes in
excess of its current and accumulated earnings and profits will not be taxable
to a Non-U.S. Shareholder to the extent they do not exceed the adjusted basis of
such Non-U.S. Shareholder's shares, but rather will reduce the adjusted basis of
such shares (but not below zero). To the extent that such distributions exceed
the adjusted basis of a Non-U.S. Shareholder's shares, they will give rise to
tax liability if such Non-U.S. Shareholder would otherwise be subject to tax on
any gain from the sale or disposition of shares, as described below.
For withholding tax purposes, COPT is currently required to treat all
distributions as if made out of its current or accumulated earnings and profits
and thus intends to withhold at the rate of 30% (or a reduced treaty rate if
applicable) on the amount of any distribution (other than distributions
designated as capital gain dividends) made to a Non-U.S. Shareholder. Under the
Final Regulations, generally effective for distributions on or after January 1,
2000, COPT would not be required to withhold at the 30% rate on distributions
COPT reasonably estimates to be in excess of its current and accumulated
earnings and profits. If it cannot be determined at the time a distribution is
made whether such distribution will be in excess of current and accumulated
earnings and profits, the distribution will be subject to withholding at the
rate applicable to ordinary dividends. However, a Non-U.S. Shareholder may seek
a refund of such amounts from the IRS if it is subsequently determined that such
distribution was, in fact, in excess of its current or accumulated earnings and
profits, and the amount withheld exceeded the Non-U.S. Shareholder's United
States tax liability, if any, with respect to the distribution.
For any year in which COPT qualifies as a REIT, distributions that are
attributable to gain from sales or exchanges of United States real property
interests will be taxed to a Non-U.S. Shareholder under the provisions of the
Foreign Investment in Real Property Tax Act of 1980 ("FIRPTA"). Under
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FIRPTA, these distributions are taxed to a Non-U.S. Shareholder as if such gain
were effectively connected with the conduct of a United States trade or
business. Non-U.S. Shareholders would thus be taxed at the normal capital gain
rates applicable to domestic shareholders (subject to applicable alternative
minimum tax and special alternative minimum tax in the case of nonresident alien
individuals), without regard as to whether such distributions are designated by
COPT as capital gain dividends. Also, distributions subject to FIRPTA may be
subject to a 30% branch profits tax in the hands of a foreign corporate
shareholder not entitled to treaty exemption. COPT is required by Treasury
Regulations to withhold 35% of any distribution to a Non-U.S. Shareholder that
could be designated as a capital gain dividend. This amount is creditable
against the Non-U.S. Shareholder's FIRPTA tax liability.
Gain recognized by a Non-U.S. Shareholder upon a sale of COPT's shares of
beneficial interest generally will not be subject to United States taxation
unless such shares constitute a "United States real property interest" within
the meaning of FIRPTA. COPT's shares of beneficial interest will not constitute
a "United States real property interest" so long as COPT is a "domestically
controlled REIT." A "domestically controlled REIT" is generally a REIT in which
at all times during a specified testing period less than 50% in value of its
shares was held directly or indirectly by Non-U.S. Shareholders. COPT believes
that it will be a "domestically controlled REIT" and, therefore, the sale of
COPT's shares of beneficial interest will not be subject to taxation under
FIRPTA. However, because COPT's shares of beneficial interest will be publicly
traded, no assurance can be given that COPT will continue to be a "domestically
controlled REIT." Notwithstanding the foregoing, gain from the sale or exchange
of its shares not otherwise subject to FIRPTA generally will be taxable to a
Non-U.S. Shareholder if the Non-U.S. Shareholder is a nonresident alien
individual who is present in the United States for 183 days or more during the
taxable year and has a "tax home" in the United States. In such case, the
nonresident alien individual will be subject to a 30% United States withholding
tax on the amount of such individual's gain.
If COPT does not qualify as or ceases to be a "domestically controlled
REIT," whether gain arising from the sale or exchange by a Non-U.S. Shareholder
of COPT's shares of beneficial interest would be subject to U.S. taxation under
FIRPTA will depend on whether the shares are "regularly traded" (as defined in
applicable Treasury Regulations) on an established securities market (such as
the New York Stock Exchange on which COPT's shares of beneficial interest are
traded) and on the size of the selling Non-U.S. Shareholder's interest in COPT.
If the gain on the sale of COPT's shares of beneficial interest were to be
subject to tax under FIRPTA, the Non-U.S. Shareholder would be subject to the
same treatment as a domestic shareholder with respect to such gain (subject to
applicable alternative minimum tax and a special alternative minimum tax in the
case of nonresident alien individuals and the possible application of the 30%
branch profits tax in the case of foreign corporations), and the purchaser would
be required to withhold and remit to the IRS 10% of the purchase price. In
addition, if COPT is not a "domestically controlled REIT," distributions in
excess of its current and accumulated earnings and profits would be subject to
withholding at a rate of 10%.
Dividends paid in the United States with respect to COPT's shares of
beneficial interest, and proceeds from the sale of COPT's shares of beneficial
interest, through a United States broker (or certain brokers having significant
connections with the United States) may be subject to the information reporting
requirements of the Internal Revenue Code. Under the backup withholding rules, a
shareholder may be subject to backup withholding at the rate of 31% unless such
shareholder (i) is a corporation or comes within certain other exempt categories
and, when required, demonstrates this fact, or (ii) provides a taxpayer
identification number and certifies as to no loss of exemption, and otherwise
complies with the applicable requirements of the backup withholding rules.
Non-U.S. Shareholders are generally exempt from information reporting and backup
withholding, but may be required to provide a properly completed Form W-8 or
otherwise comply with applicable certification and identification procedures in
order to prove their exemption. Any amount paid as backup withholding will be
creditable against the Non-U.S. Shareholder's United States income tax
liability.
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The Final Regulations, issued by the United States Treasury on October 6,
1997, affect the rules applicable to payments to foreign persons. In general,
the Final Regulations do not alter the substantive withholding and information
reporting requirements but unify current certification procedures and modify
reliance standards. In addition, the Final Regulations also address certain
issues relating to intermediary certification procedures designed to simplify
compliance by withholding agents. The Final Regulations are generally effective
for payments made on or after January 1, 2000, subject to certain transition
rules. Prospective investors should consult their own tax advisors concerning
the adoption of the Final Regulations and the potential effect on their
ownership of COPT's shares of beneficial interest.
OTHER TAX CONSIDERATIONS
EFFECT OF TAX STATUS OF THE OPERATING PARTNERSHIP ON REIT
QUALIFICATION. All of COPT's investments are through the operating partnership.
COPT believes that the operating partnership is properly treated as a
partnership for tax purposes (and not as an association taxable as a
corporation). If, however, the operating partnership were to be treated as an
association taxable as a corporation, COPT would cease to qualify as a REIT.
Furthermore, in such a situation, the operating partnership would be subject to
corporate income taxes and COPT would not be able to deduct its share of any
losses generated by the operating partnership in computing its taxable income.
TAX ALLOCATIONS WITH RESPECT TO THE PROPERTIES. The operating partnership
was formed, in part, by way of contributions of appreciated property. When
property is contributed to a partnership in exchange for an interest in the
partnership, the partnership generally takes a carryover basis in that property
for tax purposes equal to the adjusted basis of the contributing partner in the
property, rather than a basis equal to the fair market value of the property at
the time of contribution (this difference is referred to as a "Book-Tax
Difference"). The partnership agreement of the operating partnership requires
allocations of income, gain, loss and deduction with respect to contributed
property to be made in a manner consistent with the special rules in Section
704(c) of the Internal Revenue Code, and the regulations thereunder, which tend
to eliminate the Book-Tax Differences with respect to the contributed properties
over the depreciable lives of the contributed properties. However, because of
certain technical limitations, the special allocation rules of Section 704(c)
may not always entirely eliminate the Book-Tax Difference on an annual basis or
with respect to a specific taxable transaction such as a sale. Thus, the
carryover basis of the contributed properties in the hands of the operating
partnership could cause COPT to be allocated lower amounts of depreciation and
other deductions for tax purposes than would be allocated to COPT if all
properties were to have a tax basis equal to their fair market value at the time
of acquisition. The foregoing principles also apply in determining its earnings
and profits for purposes of determining the portion of distributions taxable as
dividend income. The application of these rules over time may result in a higher
portion of distributions being taxed as dividends than would have occurred had
COPT purchased its interests in all properties at their agreed value.
Treasury Regulations under Section 704(c) of the Internal Revenue Code allow
partnerships to use any reasonable method of accounting for Book-Tax Differences
so that the contributing partner receives the tax benefits and burdens of any
built-in gain or loss associated with the property. The operating partnership
has determined to use the "traditional method" (which is specifically approved
in the Treasury Regulations) for accounting for Book-Tax Differences with
respect to the contributed properties.
STATE AND LOCAL TAXES. COPT and its shareholders may be subject to state or
local taxation in various state or local jurisdictions, including those in which
COPT or they transact business or reside. The state and local tax treatment of
us and our shareholders may not conform to the federal income tax consequences
discussed above. Consequently, prospective shareholders should consult with
their own tax advisors regarding the effect of state, local and other tax laws
of any investment in COPT's shares of beneficial interest.
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PLAN OF DISTRIBUTION
We may sell the securities offered pursuant to this prospectus and the
accompanying prospectus supplement to or through one or more underwriters or
dealers or may sell the securities to investors directly or through agents. Any
such underwriter or agent involved in the offer and sale of the securities will
be named in the applicable prospectus supplement. We may sell securities
directly to investors on our own behalf in those jurisdictions where we are
authorized to do so.
Underwriters may offer and sell the securities at a fixed price or prices,
which may be changed, at market prices prevailing at the time of sale, at prices
related to such prevailing market prices or at negotiated prices. We also may,
from time to time, authorize dealers or agents to offer and sell these
securities upon such terms and conditions as may be set forth in the applicable
prospectus supplement. In connection with the sale of any of these securities,
underwriters may receive compensation from us in the form of underwriting
discounts or commissions and may also receive commissions from purchasers of the
securities for whom they may act as agent. Underwriters may sell the securities
to or through dealers, and such dealers may receive compensation in the form of
discounts, concessions or commissions from the underwriters or commissions from
the purchasers for which they may act as agents.
The Common Shares may also be sold in one or more of the following
transactions: (a) block transactions (which may involve crosses) in which a
broker-dealer may sell all or a portion of such shares as agent but may position
and resell all or a portion of the block as principal to facilitate the
transaction; (b) purchases by any such broker-dealer as principal and resale by
such broker-dealer for its own account pursuant to a prospectus supplement; (c)
a special offering, an exchange distribution or a secondary distribution in
accordance with applicable New York Stock Exchange or other stock exchange
rules; (d) ordinary brokerage transactions and transactions in which any such
broker-dealer solicits purchasers; (e) sales "at the market" to or through a
market maker or into an existing trading market, on an exchange or otherwise,
for such shares; and (f) sales in other ways not involving market makers or
established trading markets, including direct sales to purchasers.
Broker-dealers may also receive compensation from purchasers of the Common
Shares which is not expected to exceed that customary in the types of
transactions involved.
Any underwriting compensation paid by us to underwriters or agents in
connection with the offering of these securities, and any discounts or
concessions or commissions allowed by underwriters to participating dealers,
will be set forth in the applicable prospectus supplement. Dealers and agents
participating in the distribution of the securities may be deemed to be
underwriters, and any discounts and commissions received by them and any profit
realized by them on resale of the securities may be deemed to be underwriting
discounts and commissions.
Underwriters, dealers and agents may be entitled, under agreements entered
into with us, to indemnification against and contribution toward certain civil
liabilities, including liabilities under the Securities Act. Unless otherwise
set forth in the accompanying prospectus supplement, the obligations of any
underwriters to purchase any of these securities will be subject to certain
conditions precedent, and the underwriters will be obligated to purchase all of
such series of securities, if any are purchased.
Underwriters, dealers and agents may engage in transactions with, or perform
services for, us and our affiliates in the ordinary course of business.
In connection with the offering of the securities hereby, certain
underwriters, and selling group members and their respective affiliates may
engage in transactions that stabilize, maintain or otherwise affect the market
price of the applicable securities. Such transactions may include stabilization
transactions effected in accordance with Rule 104 of Regulation M promulgated by
the Securities and Exchange Commission pursuant to which such persons may bid
for or purchase securities for the purpose of stabilizing their market price.
The underwriters in an offering of securities may also create a
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"short position" for their account by selling more securities in connection with
the offering than they are committed to purchase from us. In such case, the
underwriters could cover all or a portion of such short position by either
purchasing securities in the open market following completion of the offering of
such securities or by exercising any over-allotment option granted to them by
us. In addition, the managing underwriter may impose "penalty bids" under
contractual arrangements with other underwriters, which means that they can
reclaim from an underwriter (or any selling group member participating in the
offering) for the account of the other underwriters, the selling concession with
respect to securities that are distributed in the offering but subsequently
purchased for the account of the underwriters in the open market. Any of the
transactions described in this paragraph or comparable transactions that are
described in any accompanying prospectus supplement may result in the
maintenance of the price of the securities at a level above that which might
otherwise prevail in the open market. None of such transactions described in
this paragraph or in an accompanying prospectus supplement are required to be
taken by any underwriters and, if they are undertaken, may be discontinued at
any time.
The Common Shares are listed on the New York Stock Exchange under the symbol
"OFC." The Preferred Shares and the Warrants will be new issues of securities
with no established trading market and may or may not be listed in a national
securities exchange. Any underwriters or agents to or through which securities
are sold by us may make a market in such securities, but such underwriters or
agents will not be obligated to do so and any of them may discontinue any market
making at any time without notice. No assurance can be given as to the liquidity
of or trading market for any Preferred Shares or Warrants.
EXPERTS
The financial statements incorporated in this prospectus by reference to the
Annual Report on Form 10-K of Corporate Office Properties Trust for the year
ended December 31, 1998, and (1) the combined statement of revenue and certain
expenses of the Centerpoint Properties included in the Company's Form 8-K/A
filed on January 14, 1999, and (2) the combined statement of revenue and certain
expenses of the Gateway Properties included in the Company's Form 8-K/A filed on
February 3, 1999, have been so incorporated in reliance on the reports of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
LEGAL MATTERS
The validity of the Common Shares offered hereby is being passed upon for
COPT by Morgan, Lewis & Bockius LLP. The opinion of counsel as described under
the heading "Federal Income Tax Matters" is being rendered by Morgan, Lewis &
Bockius LLP, which opinion is subject to various assumptions and is based on
current tax law. The validity of the securities offered by this prospectus may
be passed upon for any of the underwriters or agents by counsel named in the
applicable prospectus supplement.
WHERE YOU CAN FIND MORE INFORMATION
COPT has filed a registration statement on Form S-3 with the Securities and
Exchange Commission in connection with this offering. In addition, COPT files
annual, quarterly, and current reports, proxy statements and other information
with the Securities and Exchange Commission. You may read and copy the
registration statement and any other documents filed by COPT at the Securities
and Exchange Commission's Public Reference Room at 450 Fifth Street, N.W.,
Washington, D.C. 20549. Please call the Securities and Exchange Commission at
1-800-SEC-0330 for further information on the Public Reference Room. COPT's
Securities and Exchange Commission filings are also available to the public at
the Securities and Exchange Commission's Internet site at HTTP://WWW.SEC.GOV.
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This prospectus is part of the registration statement and does not contain
all of the information included in the registration statement. If a reference is
made in this prospectus or any prospectus supplement to any contract or other
document of COPT, the reference may not be complete and you should refer to the
exhibits that are a part of the registration statement for a copy of the
contract or document.
The Securities and Exchange Commission allows COPT to "incorporate by
reference" into this prospectus the information COPT files with the Commission,
which means that COPT can disclose important information to you by referring you
to those documents. Information incorporated by reference is part of this
prospectus. Later information filed with the Securities and Exchange Commission
will update and supersede this information.
COPT incorporates by reference the documents listed below and any future
filings made with the Securities and Exchange Commission under Sections 13(a),
13(c), 14 or 15(d) of the Securities Exchange Act of 1934 until this offering is
completed:
- Annual Report on Form 10-K for the year ended December 31, 1998.
- Quarterly Report on Form 10-Q for the quarter ended March 31, 1999.
- Current Report on Form 8-K dated January 14, 1999, and Current Reports on
Form 8-K/A, dated January 14, 1999 and February 3, 1999.
- Proxy Statement dated April 6, 1999.
You may request a copy of these filings, at no cost, by contacting COPT,
Vice President-Investor Relations, 401 City Avenue, Suite 615, Bala Cynwyd,
Pennsylvania 19004, by telephone at 610-538-1800, by facsimile at 610-538-1801,
or by e-mail at [email protected].
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[LOGO]
PRUDENTIAL SECURITIES
DEUTSCHE BANC ALEX. BROWN
DONALDSON, LUFKIN & JENRETTE
JANNEY MONTGOMERY SCOTT INC.
TUCKER ANTHONY CLEARY GULL
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