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AS FILED PURSUANT TO RULE 424(b)(2)
REGISTRATION NO. 333-89667
PROSPECTUS
VORNADO REALTY TRUST
16,064 COMMON SHARES
We are a fully-integrated real estate investment trust. We may issue up to
16,064 common shares to holders of up to 16,064 units of limited partnership
interest in Vornado Realty L.P. upon tender of those units for redemption.
Vornado Realty L.P. is the operating partnership through which we own our assets
and operate our business. The units that may be redeemed for common shares were
issued in connection with our acquisition of a 60% interest in a leasehold for
an office building located at 20 Broad Street in Manhattan, New York City, on
August 5, 1998.
We are required to register the 16,064 common shares pursuant to
registration rights agreements with the holders of those units. We will acquire
units from the redeeming unit holders in exchange for any common shares that we
issue. We have registered the issuance of the common shares to permit their
holders to sell them without restriction in the open market or otherwise, but
the registration of the shares does not necessarily mean that any holders will
elect to redeem their units. Also, upon any redemption, we may elect to pay cash
for the units tendered rather than issue common shares. Although we will incur
expenses in connection with the registration of the 16,064 common shares, we
will not receive any cash proceeds upon their issuance.
The common shares are listed on the New York Stock Exchange under the symbol
'VNO.'
In order to maintain our qualification as a real estate investment trust for
federal income tax purposes and for other purposes, no person may own more than
6.7% of the outstanding common shares. Shares owned in excess of this limit will
be deemed 'excess shares' under the declaration of trust. The holder of any
excess shares will lose some ownership rights with respect to these shares, and
we will have the right to purchase them from the holder.
SEE 'RISK FACTORS' BEGINNING ON PAGE 4 FOR INFORMATION ABOUT FACTORS
RELEVANT TO AN INVESTMENT IN THE COMMON SHARES.
Neither the Securities and Exchange Commission nor any other regulatory body
has approved or disapproved of these securities or passed upon the accuracy or
adequacy of this prospectus. Any representation to the contrary is a criminal
offense.
The date of this prospectus is February 8, 2000.
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YOU SHOULD RELY ONLY ON THE INFORMATION INCORPORATED BY REFERENCE OR
PROVIDED IN THIS PROSPECTUS OR ANY PROSPECTUS SUPPLEMENT. WE HAVE NOT AUTHORIZED
ANYONE ELSE TO PROVIDE YOU WITH DIFFERENT INFORMATION. WE ARE NOT MAKING AN
OFFER OF THESE SECURITIES IN ANY STATE WHERE THE OFFER IS NOT PERMITTED. YOU
SHOULD NOT ASSUME THAT THE INFORMATION IN THIS PROSPECTUS OR ANY PROSPECTUS
SUPPLEMENT IS ACCURATE AS OF ANY DATE OTHER THAN THE DATE ON THE FRONT OF THOSE
DOCUMENTS.
When we say 'we,' 'our,' 'us' or 'Vornado,' we mean Vornado Realty Trust and
its consolidated subsidiaries, except where we make it clear that we mean only
the parent company. When we say the 'operating partnership,' we mean Vornado
Realty L.P. When we say 'you' without any further specification, we mean the
holders of units that were issued in connection with our acquisition of a 60%
interest in a leasehold for an office building located at 20 Broad Street in
Manhattan, New York City, on August 5, 1998.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and other
information with the SEC. Our SEC filings are available to the public over the
Internet at the SEC's web site at http://www.sec.gov. You may also read and copy
any document we file at the SEC's public reference rooms in Washington, D.C.,
New York, New York and Chicago, Illinois. Please call the SEC at 1-800-SEC-0330
for further information on the public reference rooms.
This prospectus is part of a registration statement on Form S-3 filed by
Vornado with the SEC under the Securities Act. As permitted by the rules and
regulations of the SEC, this prospectus omits some of the information contained
in the registration statement. You should read the registration statement and
related exhibits for further information about Vornado and the common shares
offered by this prospectus. Statements in this prospectus about the provisions
of any document filed as an exhibit to the registration statement or otherwise
filed with the SEC are only summaries, and in each instance you should read the
document so filed for complete information about its provisions. Each statement
in this prospectus about the provisions of any document filed with the SEC is
qualified in its entirety by reference to the document.
The SEC allows us to 'incorporate by reference' the information we file with
them, which means that we can disclose important information to you by referring
you to those documents. The information incorporated by reference is an
important part of this prospectus, and information that we file later with the
SEC will automatically update and supersede this information. We incorporate by
reference the documents listed below and any future filings made with the SEC
under Sections 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934
until we sell all of the securities.
Our Annual Report on Form 10-K for the year ended December 31, 1998;
Our Quarterly Reports on Form 10-Q for the periods ended March 31, 1999,
June 30, 1999 and September 30, 1999;
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Our Current Reports on Form 8-K, filed with the SEC on February 9, 1999,
February 12, 1999, March 17, 1999, May 26, 1999, July 7, 1999, October 22,
1999, October 25, 1999 and December 23, 1999; and
Our Current Reports on Form 8-K/A, filed with the SEC on February 9 and
February 24, 1999.
You may request a copy of these filings, at no cost, by writing or
telephoning us at the following address:
Vornado Realty Trust
Park 80 West, Plaza II
Saddle Brook, New Jersey 07663
(201) 587-1000
Attn: Secretary
FORWARD-LOOKING STATEMENTS
This prospectus includes and incorporates by reference forward-looking
statements. We have based these forward-looking statements on our current
expectations and projections about future events. Various factors could cause
our actual results to differ materially from the results described in the
forward-looking statements. Factors that might cause a material difference of
this kind include, but are not limited to:
changes in the general economic climate;
local conditions such as an oversupply of space or a reduction in demand
for real estate in the area;
conditions of our tenants;
competition from other available space;
increased operating costs and interest expense;
the timing of and costs associated with property improvements;
changes in taxation or zoning laws;
government regulations;
our failure to continue to qualify as a real estate investment trust;
availability of financing on acceptable terms;
potential liability under environmental or other laws or regulations;
general competitive factors; and
failure by us, or by other companies with which we do a significant amount
of business, to remediate possible Year 2000 problems in computer software
or embedded technology.
We undertake no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
See 'Risk factors' for more information about some of these factors.
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RISK FACTORS
You should carefully consider, among other factors, the matters described
below.
IF YOU REDEEM YOUR UNITS, YOU MAY INCUR ADVERSE TAX CONSEQUENCES AND THE NATURE
OF YOUR INVESTMENT WILL CHANGE.
YOU SHOULD CAREFULLY CONSIDER THE TAX CONSEQUENCES OF REDEEMING YOUR UNITS.
The exercise of your right to require the redemption of your units will be
treated for tax purposes as a sale of your units. This sale will be fully
taxable to you, and you will be treated as realizing for tax purposes an amount
equal to the sum of the cash or the value of the common shares received in the
exchange plus the amount of the operating partnership liabilities (including the
operating partnership's share of the liabilities of certain entities in which
the operating partnership owns an interest) considered allocable to the redeemed
units at the time of the redemption. Depending upon your particular
circumstances, it is possible that the amount of gain recognized (or even the
tax liability resulting from that gain) could exceed the amount of cash and the
value of other property (e.g., the common shares) received upon the disposition.
See 'Redemption of units -- Tax consequences of redemption' for more information
on these tax consequences.
THE NATURE OF YOUR INVESTMENT WILL CHANGE UPON A REDEMPTION OF YOUR UNITS.
Unless we elect to assume and perform the operating partnership's obligation
with respect to redeeming your units, you will receive cash on the specified
redemption date (for class A units, which are the kind of units that you hold,
this is generally the tenth business day after we receive your notice of
redemption if our common shares are publicly traded) from the operating
partnership in an amount equal to the market value of the units to be redeemed.
In lieu of the operating partnership's acquiring the units for cash, we have the
right (except as described below, if the common shares are not publicly traded)
to elect to acquire the units on the specified redemption date directly from
you, in exchange for either cash or common shares, and upon acquiring the units,
we will become the owner of your units. See 'Redemption of units' for more
information about our right to acquire your units for either cash or common
shares when you redeem them. If you receive cash, you will no longer have any
interest in the operating partnership or Vornado and will not benefit from any
subsequent increases in the price of the common shares and will not receive any
future distributions from the operating partnership or Vornado (unless you
currently own or acquire in the future additional common shares or units). If
you receive common shares, you will become a shareholder of Vornado rather than
a holder of units in the operating partnership. Although an investment in common
shares is substantially equivalent to an investment in units in the operating
partnership, there are some differences between ownership of units and ownership
of common shares.
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These differences, some of which may be material to you, are discussed in
'Comparison of ownership of units and common shares.'
REAL ESTATE INVESTMENTS' VALUE AND INCOME FLUCTUATE DUE TO VARIOUS FACTORS
INCLUDING THOSE DESCRIBED BELOW.
THE VALUE OF REAL ESTATE FLUCTUATES DEPENDING ON CONDITIONS IN THE GENERAL
ECONOMY AND THE REAL ESTATE BUSINESS. THESE CONDITIONS MAY ALSO LIMIT OUR
REVENUES AND AVAILABLE CASH.
The factors that affect the value of our real estate include, among other
things:
national, regional and local economic conditions;
oversupply of competing properties in a property's area;
reduced demand for space in a property's area;
whether tenants consider a property attractive;
how well we manage our properties;
competition from comparable properties;
whether we are able to collect rent from tenants;
any bankruptcies of our major tenants;
increases or decreases in market rental rates;
how much it costs us to repair, renovate and rent space, including
substantial costs of tenant improvements and leasing expenses to release
office space;
increases in operating costs due to inflation, increased real estate taxes
and other factors;
whether we are able to pass some or all of our increased operating costs
through to tenants;
government regulations and changes in zoning or tax laws;
market interest rates;
whether we are able to obtain financing and the terms of our financing; and
our potential liability for environmental or other legal claims.
The rents we receive and the occupancy levels at our properties might decline as
a result of changes in any of these factors. If our rental revenues decline, we
might have less cash available to distribute to our shareholders. In addition,
some of our major expenses, including mortgage payments, real estate taxes and
maintenance costs, generally do not decline when the related rents decline. If
rents decline while costs remain the same, our income and funds available for
distribution to our shareholders would decline.
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WE DEPEND ON LEASING SPACE TO TENANTS ON ECONOMICALLY FAVORABLE TERMS AND
COLLECTING RENT FROM OUR TENANTS, WHO MAY NOT BE ABLE TO PAY.
Our financial results depend on leasing space in our real estate properties
to tenants on economically favorable terms. In addition, because substantially
all of our income comes from rentals of real property, our income and funds
available for distribution to our shareholders will decrease if a significant
number of our tenants cannot pay their rent. If a tenant does not pay its rent,
we might not be able to enforce our rights as landlord without delays and we
might incur substantial legal costs. See ' -- Bankruptcy of tenants may decrease
our revenues and available cash' for information about the bankruptcy and
court-approved reorganization of Bradlees Inc., one of our tenants, and the
status of Bradlees' leases.
BANKRUPTCY OF TENANTS MAY DECREASE OUR REVENUES AND AVAILABLE CASH.
A number of retail companies, including some of our tenants, have declared
bankruptcy in recent years, and other tenants may declare bankruptcy or become
insolvent in the future. If a major tenant declares bankruptcy or becomes
insolvent, the shopping centers where it leases space may have lower revenue and
operational difficulties, and we may have difficulty leasing the remainder of
the affected shopping centers. Our leases generally do not contain restrictions
designed to ensure the creditworthiness of the tenants. As a result, the
bankruptcy or insolvency of a major tenant could result in a lower level of
funds from operations available for distribution to our shareholders.
In June 1995, Bradlees filed for protection under Chapter 11 of the U.S.
Bankruptcy Code. Bradlees emerged from bankruptcy in January 1999, when its plan
of reorganization was confirmed. We withdrew our objection to Bradlees' proposed
plan of reorganization after obtaining Bradlees' agreement that its lease of our
14th Street and Union Square property in New York City would terminate in March
2000. The lease was scheduled to expire in October 2019, and contained an option
to renew for an additional ten years. In addition, the rent under the lease was
increased by $1,100,000 per annum to $3,400,000 per annum from January 1999 to
the March 2000 termination date. As part of this agreement, we paid $11,000,000
to Bradlees. We are considering various alternatives for the redevelopment of
this site. We currently lease 15 other locations to Bradlees. Of these
locations, the leases for 14 are fully guaranteed by Stop & Shop Companies,
Inc., a wholly-owned subsidiary of Royal Ahold NV, a leading international food
retailer, and one is guaranteed as to 70% of the rent. If Bradlees or Stop &
Shop fails to perform its obligations under these leases, our rental revenues
could decline and, as a result, our funds from operations available for
distribution to our shareholders could also decline.
WE MAY ACQUIRE OR DEVELOP NEW PROPERTIES, AND THIS MAY CREATE RISKS.
We may acquire or develop properties or acquire other real estate companies
when we believe that an acquisition or development matches our business
strategies. We might not succeed in consummating desired acquisitions or in
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completing developments on time or within our budget. We also might not succeed
in leasing newly developed or acquired properties at rents sufficient to cover
their costs of acquisition or development and operations.
We have experienced rapid growth in recent years, increasing our total
assets from approximately $565 million at December 31, 1996 to approximately
$5,308 million at September 30, 1999. We may continue this rapid growth for the
foreseeable future by acquiring or developing properties when we believe that
market circumstances and investment opportunities are attractive. We may not,
however, be able to manage our growth effectively or to maintain a similar rate
of growth in the future, and the failure to do so may have a material adverse
effect on our financial condition and results of operations.
If persons selling properties to us wish to defer the payment of taxes on
the sales proceeds, we are likely to pay them in units of the operating
partnership. In transactions of this kind, we may also agree not to sell the
acquired properties or reduce the mortgage indebtedness on them for significant
periods of time. If we borrow funds or assume indebtedness to acquire or develop
properties, the operating partnership's indebtedness as a percentage of
Vornado's asset value or market capitalization might increase. If this happens,
the increased leverage may impair our ability to take actions that would
otherwise be in the best interests of Vornado and our security holders. If our
indebtedness increases significantly, the operating partnership might not be
able to make required principal and interest payments with respect to
indebtedness. See also ' -- Vornado's organizational and financial structure
gives rise to operational and financial risks, including those described
below -- We have indebtedness, and this indebtedness may increase' for further
information about our leverage.
IT MAY BE DIFFICULT TO BUY AND SELL REAL ESTATE QUICKLY, AND TRANSFER
RESTRICTIONS APPLY TO SOME OF OUR MORTGAGED PROPERTIES.
Equity real estate investments are relatively difficult to buy and sell
quickly. We therefore have limited ability to vary our portfolio promptly in
response to changes in economic or other conditions.
Some of our properties are mortgaged to secure payment of indebtedness. If
we were unable to meet our mortgage payments, the lender could foreclose on the
properties and we could incur a loss. In addition, if we wish to dispose of one
or more of the mortgaged properties, we might not be able to obtain release of
the lien on such mortgaged property. If a lender forecloses on a mortgaged
property or if a mortgage lien prevents us from selling a property, our funds
available for distribution to our shareholders could decline. See 'Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources' in our Annual Report on Form 10-K for the year
ended December 31, 1998, and the Notes to the Consolidated Financial Statements
in the same report for information regarding the mortgages on our properties.
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A SIGNIFICANT PROPORTION OF OUR PROPERTIES ARE IN THE NEW YORK CITY/NEW JERSEY
REGION AND ARE AFFECTED BY THAT REGION'S ECONOMIC CYCLE.
For the year ended December 31, 1998, 59% of our earnings before interest
expense, taxes, depreciation and amortization on a historical basis came from
properties located in the New York City metropolitan area and New Jersey. We
refer to earnings before interest expense, taxes, depreciation and amortization
as 'EBITDA.' The proportion of our EBITDA derived from properties in these areas
in that year was 54% on a pro forma basis, giving effect to the completed and
pending acquisitions described under 'Business -- Acquisitions and Investments'
in our Annual Report on Form 10-K for the year ended December 31, 1998, as if
they had occurred on January 1, 1998. In addition, we may concentrate a
significant portion of our future acquisitions in New York City and New Jersey.
Like other real estate markets, the real estate market in New York City and New
Jersey experienced economic downturns in the past, including most recently in
the late 1980s and early 1990s. Future declines in the economy or the real
estate markets in New York City and New Jersey could hurt our financial
performance and the value of our properties. The factors affecting economic
conditions in this region include:
business layoffs or downsizing;
industry slowdowns;
relocations of businesses;
changing demographics;
increased telecommuting and use of alternative work places;
financial performance and productivity of the publishing, financial,
technology, retail, insurance and real estate industries
infrastructure quality; and
any oversupply of or reduced demand for real estate.
The economy or the real estate markets in New York City and New Jersey might not
remain strong.
ALL OF OUR COLD STORAGE WAREHOUSES ARE LEASED TO ONE TENANT, AND THAT TENANT MAY
DEFER RENT IN SOME CIRCUMSTANCES.
Vornado owns a 60% interest in partnerships that own 88 warehouse facilities
nationwide with an aggregate of approximately 450 million cubic feet of
refrigerated, frozen and dry storage space. Crescent Real Estate Equities
Company owns the other 40% interest in these partnerships. We refer to these
partnerships as the 'Vornado/Crescent Real Estate partnerships.' On March 12,
1999, the Vornado/Crescent Real Estate partnerships sold all of the non-real
estate assets encompassing the operations of the cold storage business for
approximately $48,000,000 to a new partnership owned 60% by Vornado Operating
Company (which was spun off from Vornado in October 1998) and 40% by Crescent
Operating Inc. The new partnership conducts the cold storage business under the
name AmeriCold Logistics. AmeriCold Logistics leases the
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underlying cold storage warehouses used in this business from the
Vornado/Crescent Real Estate partnerships that continue to own the real estate
and manages 13 additional warehouses containing approximately 80 million cubic
feet. The leases have a 15-year term with two five-year renewal options and
provide for the payment of fixed base rent and percentage rent based on customer
revenues. AmeriCold Logistics is required to pay for all costs arising from the
operation, maintenance and repair of the properties as well as property capital
expenditures in excess of $5,000,000 annually. Fixed base rent and percentage
rent amounted to $87 million for the period March 12, 1999 (the date when the
lease started) through September 30, 1999. AmeriCold Logistics has the right to
defer a portion of the rent for up to three years beginning on March 12, 1999 to
the extent that available cash, as defined in the leases, is insufficient to pay
that portion of the rent.
To the extent that operations of AmeriCold Logistics may affect its ability
to pay rent and the amount of percentage rent due under the leases, Vornado
indirectly bears the risks associated with AmeriCold Logistics' cold storage
business. That business faces national, regional and local competition. Breadth
of service, warehouse locations and customer mix are major competitive factors,
since frozen food manufacturers and distributors incur transportation costs
which typically are significantly greater than warehousing costs. In addition,
in some locations, customers depend upon pooling shipments, which involves
combining their products with the products of other customers destined for the
same markets. In these cases, the mix of customers in a warehouse can
significantly influence the cost of delivering products to markets. The size of
a warehouse is important because large customers prefer to have all of the
products needed to serve a given market in a single location to have the
flexibility to increase storage in that single location during seasonal peaks.
If there are several storage locations that satisfy customer mix and size
requirements, AmeriCold Logistics believes that customers generally will select
a storage facility based upon the types of service available, service
performance and price. Vornado does not control AmeriCold Logistics.
WE MAY INCUR COSTS TO COMPLY WITH ENVIRONMENTAL LAWS.
Under various Federal, state and local laws, ordinances and regulations, a
current or previous owner or operator of real estate may be required to
investigate and clean up specified hazardous or toxic substances released at a
property. The owner or operator may also be held liable to a governmental entity
or to third parties for property damage or personal injuries and for
investigation and clean-up costs incurred by those parties because of the
contamination. These laws often impose liability without regard to whether the
owner or operator knew of the release of the substances or was responsible for
the release. The presence of contamination or the failure to remediate
contamination may impair the owner's ability to sell or lease real estate or to
borrow using the real estate as collateral. Other Federal, state and local laws,
ordinances and regulations require abatement or removal of asbestos-containing
materials in the event of demolition, renovations or remodeling and also govern
emissions of and exposure
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to asbestos fibers in the air. The operation and subsequent removal of some
underground storage tanks are also regulated by Federal and state laws. We could
be held liable for the costs of remedial action with respect to the foregoing
regulated substances or tanks or related claims arising out of environmental
contamination at our properties.
WE ARE IN A COMPETITIVE BUSINESS.
The real estate industry is highly competitive. In each region where we
operate, we compete for tenants with a large number of real estate property
owners. Principal means of competition are rents charged, attractiveness of
location and quality of service. In addition, we expect other major real estate
investors with significant capital will compete with us for attractive
investment opportunities. These competitors include other REITs, investment
banking firms and private institutional investors. This competition has
increased prices for commercial properties and may impair our ability to make
suitable property acquisitions on favorable terms in the future.
WE MAY NOT BE ABLE TO OBTAIN CAPITAL TO MAKE INVESTMENTS.
We depend primarily on external financing to fund the growth of our
business. This is because one of the requirements of the Internal Revenue Code
of 1986, as amended, for a REIT is that it distribute 95% of its net taxable
income, excluding net capital gains, to its shareholders. Our access to debt or
equity financing depends on banks' willingness to lend and on conditions in the
capital markets. We and other companies in the real estate industry have
experienced limited availability of bank loans and capital markets financing
from time to time, including during the latter half of 1998. Although we believe
that we will be able to finance any investments we wish to make in the
foreseeable future, financing other than what we already have available might
not be available on acceptable terms. See 'Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Liquidity and Capital
Resources' in our Annual Report on Form 10-K for the year ended December 31,
1998 and the Notes to the Consolidated Financial Statements in the same report
for information about our available sources of funds.
SOME OF OUR POTENTIAL LOSSES MAY NOT BE COVERED BY INSURANCE.
We carry comprehensive liability, fire, extended coverage and rental loss
insurance on all of our properties. We believe the policy specifications and
insured limits of these policies are adequate and appropriate. There are,
however, some types of losses, including lease and other contract claims, that
generally are not insured. If an uninsured loss or a loss in excess of insured
limits occurs, we could lose all or a portion of the capital we have invested in
a property, as well as the anticipated future revenue from the property. If this
happens, we might nevertheless remain obligated for any mortgage debt or other
financial obligations related to the property.
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VORNADO'S OWNERSHIP STRUCTURE AND RELATED-PARTY TRANSACTIONS MAY GIVE RISE TO
CONFLICTS OF INTEREST.
STEVEN ROTH AND INTERSTATE PROPERTIES MAY EXERCISE SUBSTANTIAL INFLUENCE OVER
VORNADO. THEY AND SOME OF VORNADO'S OTHER TRUSTEES AND OFFICERS HAVE INTERESTS
OR POSITIONS IN OTHER ENTITIES THAT MAY COMPETE WITH VORNADO.
As of September 30, 1999, Interstate Properties and its partners owned
approximately 17.9% of the outstanding common shares of Vornado, 27.5% of
Alexander's Inc.'s common stock and 7.9% of Vornado Operating Company's common
stock, or 17.1% assuming conversion into shares of all of Interstate Properties'
limited partnership units of Vornado Operating L.P. Vornado Operating L.P. is a
Delaware limited partnership of which Vornado Operating Company is the general
partner and through which Vornado Operating Company conducts its business.
Interstate Properties is a general partnership in which Steven Roth, David
Mandelbaum and Russell B. Wight, Jr. are partners. Mr. Roth is the Chairman of
the Board and Chief Executive Officer of Vornado, the Managing General Partner
of Interstate Properties and the Chief Executive Officer and a director of both
Alexander's and Vornado Operating Company. Mr. Wight is a trustee of Vornado and
is also a director of both Alexander's and Vornado Operating Company. Mr.
Mandelbaum is a trustee of Vornado and is also a director of Alexander's.
As of September 30, 1999, Vornado owned 29.3% of the outstanding common
stock of Alexander's, Inc. On October 21, 1999, Vornado increased its ownership
to 32% of the outstanding common stock of Alexander's Inc. Alexander's is a REIT
engaged in leasing, managing, developing and redeveloping properties, focusing
primarily on the locations where its department stores operated before they
ceased operations in 1992. Alexander's has eight properties, which are located
in the New York City metropolitan area. Mr. Roth and Michael D. Fascitelli,
Vornado's President and a member of the Board of Trustees, are directors of
Alexander's. Messrs. Mandelbaum, Richard R. West and Wight are trustees of
Vornado and are also directors of Alexander's.
Vornado formed Vornado Operating Company for the purpose of owning assets
that Vornado could not itself own and conducting activities that Vornado could
not itself conduct. Vornado Operating Company is able to do so because it is
taxable as a regular C corporation rather than as a REIT. On October 16, 1998,
the operating partnership distributed all of the shares of Vornado Operating
Company to its partners, including Vornado, in proportion to their ownership of
operating partnership units, and Vornado distributed the shares it received to
the holders of its common shares in proportion to their ownership of Vornado
common shares. Four members of Vornado's Board of Trustees, Messrs. Roth,
Fascitelli, West and Wight, are members of Vornado Operating Company's Board of
Directors, and certain members of senior management of Vornado hold
corresponding positions with Vornado Operating Company. Members of Vornado's
Board of Trustees and Vornado Operating Company's Board of Directors and senior
management may have different percentage equity interests in Vornado and Vornado
Operating Company.
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Because of the foregoing, Mr. Roth and Interstate Properties may have
substantial influence on Vornado, Alexander's and Vornado Operating Company and
on the outcome of any matters submitted to Vornado's, Alexander's or Vornado
Operating Company's shareholders or stockholders for approval. In addition,
there may be conflicts of interest among Messrs. Roth, Mandelbaum and Wight and
Interstate Properties and Vornado's other shareholders concerning Vornado's
operations or financial structure. In addition, Mr. Roth and Interstate
Properties may in the future engage in a wide variety of other activities in the
real estate business, and these activities may result in conflicts of interest
with respect to matters affecting Vornado, Alexander's or Vornado Operating
Company. Matters that may give rise to conflicts of these kinds include:
determination of which of these entities or persons, if any, may take
advantage of potential business opportunities;
decisions concerning the business focus of these entities, including
decisions concerning the types of properties and geographic locations in
which they make investments;
potential competition between business activities conducted, or sought to
be conducted, by these entities or persons, including competition for
properties and tenants;
possible corporate transactions, such as acquisitions; and
other strategic decisions affecting the future of these parties.
VORNADO ENGAGES IN TRANSACTIONS WITH VORNADO OPERATING COMPANY WHOSE TERMS MAY
OR MAY NOT BE COMPARABLE TO THOSE VORNADO COULD NEGOTIATE WITH UNAFFILIATED
THIRD PARTIES.
Vornado and Vornado Operating Company have entered into an intercompany
agreement under which, among other things:
Vornado agreed under specified circumstances to offer Vornado Operating
Company an opportunity to lease real property owned now or in the future by
Vornado under mutually satisfactory lease terms; and
Vornado Operating Company agreed not to make any real estate investment or
other REIT-qualified investment unless it first offers Vornado the
opportunity to make the investment and Vornado has rejected that
opportunity.
Vornado capitalized Vornado Operating Company with an equity contribution of $25
million of cash and has extended to Vornado Operating Company a $75 million
unsecured five-year revolving line of credit under a credit agreement. The
intercompany agreement and the credit agreement were not negotiated at arm's
length because Vornado Operating Company was a subsidiary of Vornado at the time
they were negotiated. Therefore, the terms of these agreements may not be
comparable to those Vornado could have negotiated with an unaffiliated third
party.
Vornado and Vornado Operating Company may enter into additional transactions
in the future. Because Vornado and Vornado Operating Company
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share common senior management and because a majority of Vornado's Trustees also
constitute the majority of Vornado Operating Company's Directors, the terms of
the foregoing agreements and any future agreements between Vornado and Vornado
Operating Company may not be comparable to those Vornado could have negotiated
with an unaffiliated third party.
THERE MAY BE CONFLICTS OF INTEREST BETWEEN VORNADO AND ALEXANDER'S.
Vornado has agreed to manage Alexander's business affairs and manage and
develop Alexander's properties for an annual fee under a management and
development agreement between Vornado and Alexander's. Vornado assigned this
management agreement to Vornado Management Corp. Vornado owns 100% of the
outstanding shares of non-voting stock of Vornado Management, which entitles
Vornado to 95% of the economic benefits of Vornado Management through
distributions. Messrs. Roth and West own 100% of the outstanding shares of
voting stock of Vornado Management. Vornado also acts as a leasing agent for
Alexander's properties on a fee basis under a leasing agreement. In addition,
Alexander's owes Vornado $45 million which was borrowed in March 1995 and is the
subordinated tranche of a loan in the original amount of $75 million, which has
a current outstanding balance of $65 million. On October 19, 1999, Vornado
announced that it has agreed to lend Alexander's another $50 million, under the
same terms as the existing $45 million loan. None of Mr. Roth, Interstate
Properties or Vornado is obligated to present to Alexander's any particular
investment opportunity which comes to his or its attention, even if the
opportunity might be suitable for investment by Alexander's.
AN AFFILIATED COMPANY PROVIDES CLEANING AND SECURITY SERVICES TO OUR OFFICE
PROPERTIES UNDER CONTRACTS THAT WERE NOT NEGOTIATED AT ARM'S LENGTH.
David R. Greenbaum, the Chief Executive Officer of Vornado's Mendik
Division, and other investors own a company which provides cleaning and related
services and security services to office properties. We refer to Messrs.
Greenbaum and these other investors as the 'Mendik group.' We have entered into
contracts with the Mendik group to provide services to our office properties.
These contracts were not negotiated at arm's length, and their terms may not be
comparable to those we could have negotiated with unaffiliated third parties.
However, we believe, based upon comparable fees charged to other real estate
companies, that our contracts with the Mendik group are fair to us.
VORNADO'S ORGANIZATIONAL AND FINANCIAL STRUCTURE GIVES RISE TO OPERATIONAL AND
FINANCIAL RISKS, INCLUDING THOSE DESCRIBED BELOW.
WE DO NOT CONTROL SOME OF OUR AFFILIATES.
Some of our businesses are currently conducted through corporations in which
Vornado owns all of the non-voting stock and none of the voting stock, and these
corporations provide all of our management, operating and leasing services. We
refer to these corporations as 'preferred stock affiliates.' Ownership of the
non-voting stock entitles Vornado to substantially all of the distributed income
of
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these affiliates. The non-voting stock of the preferred stock affiliates is
owned by officers and/or trustees of Vornado. Accordingly, Vornado is not able
to elect the Boards of Directors of the preferred stock affiliates and does not
have the authority to control the management and operations of these affiliates
or the timing or amount of dividends paid by them. Vornado therefore does not
have the authority to require that funds be distributed to it by any of these
entities.
VORNADO DEPENDS ON ITS DIRECT AND INDIRECT SUBSIDIARIES' DIVIDENDS AND
DISTRIBUTIONS, AND THESE SUBSIDIARIES' CREDITORS AND PREFERRED SECURITY HOLDERS
ARE ENTITLED TO PAYMENT OF AMOUNTS PAYABLE TO THEM BY THE SUBSIDIARIES BEFORE
THE SUBSIDIARIES MAY PAY ANY DIVIDENDS OR DISTRIBUTIONS TO VORNADO.
Substantially all of our assets consist of our partnership interests in the
operating partnership. The operating partnership holds substantially all of its
properties and assets through subsidiaries. The operating partnership therefore
depends for substantially all of its revenue on cash distributions to it by its
subsidiaries, and Vornado in turn depends for substantially all of its revenue
on cash distributions to it by the operating partnership. The creditors of each
direct and indirect subsidiary of Vornado are entitled to payment of that
subsidiary's obligations to them, when due and payable, before distributions may
be made by that subsidiary to its equity holders. In addition, the holders of
preferred units of the operating partnership are entitled to receive preferred
distributions before payment of distributions to holders of common units,
including Vornado. Thus, the operating partnership's ability to make
distributions to holders of units depends on its subsidiaries' ability first to
satisfy their obligations to their creditors and then to make distributions to
the operating partnership. Likewise, Vornado's ability to pay dividends to
holders of common and preferred shares depends on the operating partnership's
ability first to satisfy its obligations to its creditors and make distributions
payable to holders of preferred units and then to make distributions to Vornado.
See 'Description of the units and the operating partnership -- Ranking of units'
for information about the outstanding preferred units. In addition, Vornado's
shareholders will have the right to participate in any distribution of the
assets of any of Vornado's direct or indirect subsidiaries upon the liquidation,
reorganization or insolvency of the subsidiary, and consequently to participate
in those assets, only after the claims of the creditors, including trade
creditors, and preferred security holders, if any, of the subsidiary are
satisfied.
WE HAVE INDEBTEDNESS, AND THIS INDEBTEDNESS MAY INCREASE.
As of September 30, 1999, we had aggregate indebtedness outstanding of
approximately $2,073 million, approximately $1,680 million of which was secured
by our properties. Substantially all of the secured indebtedness was
non-recourse to Vornado, while approximately $393 million of Vornado's aggregate
indebtedness was unsecured, recourse indebtedness of the operating partnership.
The operating partnership's ability to make required principal and interest
payments with respect to indebtedness represented by its debt securities depends
on the earnings of its subsidiaries and on its ability to receive funds from its
subsidiaries
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through dividends or other payments, since the debt securities are obligations
of the operating partnership only and its subsidiaries are not obligated to pay
any amounts due under the terms of the debt securities or to make funds
available for payment of these amounts in the form of dividends or advances to
the operating partnership.
As of September 30, 1999, the level of Vornado's debt to enterprise value
was 44%, based on debt of $3,269 million, which included Vornado's proportionate
share of debt of partially-owned entities of $1,196 million. When we say
'enterprise value' in the preceding sentence, we mean market equity value plus
debt less cash. Historically, we have maintained a lower debt-to-enterprise-
value ratio. In the future, in connection with our strategy for growth, this
percentage may change. We may review and modify this policy from time to time
without the vote of our shareholders.
LOSS OF OUR KEY PERSONNEL COULD HARM OUR OPERATIONS.
We depend on the efforts of Steven Roth, the Chairman of the Board of
Trustees and Chief Executive Officer of Vornado, and Michael D. Fascitelli, the
President of Vornado. While we believe that we could find replacements for these
key personnel, the loss of their services could harm our operations.
WE MIGHT FAIL TO QUALIFY OR REMAIN QUALIFIED AS A REIT.
Although we believe that Vornado will remain organized and will continue to
operate so as to qualify as a REIT for Federal income tax purposes, we might
fail to remain qualified in this way. Qualification as a REIT for Federal income
tax purposes is governed by highly technical and complex provisions of the
Internal Revenue Code for which there are only limited judicial or
administrative interpretations. Vornado's qualification as a REIT also depends
on various facts and circumstances that are not entirely within our control. In
addition, legislation, new regulations, administrative interpretations or court
decisions might significantly change the tax laws with respect to the
requirements for qualification as a REIT or the Federal income tax consequences
of qualification as a REIT. A number of recent legislative proposals could
affect the way Vornado conducts its business. At this time it is unclear whether
these proposals will be enacted into law and, if enacted into law, the exact
form these proposals would take and the effect that they would have upon
Vornado's operations.
If, with respect to any taxable year, Vornado fails to maintain its
qualification as a REIT, it could not deduct distributions to shareholders in
computing its taxable income and would have to pay Federal income tax on its
taxable income at regular corporate rates. The Federal income tax payable would
include any applicable alternative minimum tax. If Vornado had to pay Federal
income tax, the amount of money available to distribute to shareholders would be
reduced for the year or years involved, and Vornado would no longer be required
to distribute money to shareholders. In addition, Vornado would also be
disqualified from treatment as a REIT for the four taxable years following the
year during which qualification was lost, unless Vornado was entitled to relief
under the relevant
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statutory provisions. Although Vornado currently intends to operate in a manner
designed to allow it to qualify as a REIT, future economic, market, legal, tax
or other considerations may cause it to revoke the REIT election.
VORNADO'S CHARTER DOCUMENTS AND APPLICABLE LAW MAY HINDER ANY ATTEMPT TO ACQUIRE
VORNADO.
Generally, for Vornado to maintain its qualification as a REIT under the
Internal Revenue Code, not more than 50% in value of the outstanding shares of
beneficial interest of Vornado may be owned, directly or indirectly, by five or
fewer individuals at any time during the last half of Vornado's taxable year.
The Internal Revenue Code defines 'individuals' for purposes of the requirement
described in the preceding sentence to include some types of entities. Under
Vornado's Amended and Restated Declaration of Trust, no person may own more than
6.7% of the outstanding common shares or 9.9% of the outstanding preferred
shares, with some exceptions for persons who held common shares in excess of the
6.7% limit before Vornado adopted the limit. These restrictions on
transferability and ownership may delay, deter or prevent a change in control of
Vornado or other transaction that might involve a premium price or otherwise be
in the best interest of the shareholders. We refer to Vornado's Amended and
Restated Declaration of Trust, as amended, as the 'declaration of trust.'
Vornado's Board of Trustees is divided into three classes of trustees.
Trustees of each class are chosen for three-year staggered terms. Staggered
terms of trustees may reduce the possibility of a tender offer or an attempt to
change control of Vornado, even though a tender offer or change in control might
be in the best interest of our shareholders. Vornado's declaration of trust
authorizes the Board of Trustees:
to cause Vornado to issue additional authorized but unissued common shares
or preferred shares;
to classify or reclassify, in one or more series, any unissued preferred
shares; and
to set the preferences, rights and other terms of any classified or
reclassified shares that Vornado issues.
The Board of Trustees could establish a series of preferred shares whose
terms could delay, deter or prevent a change in control of Vornado or other
transaction that might involve a premium price or otherwise be in the best
interest of our shareholders, although the Board of Trustees does not now intend
to establish a series of preferred shares of this kind. Vornado's declaration of
trust and bylaws contain other provisions that may delay, deter or prevent a
change in control of Vornado or other transaction that might involve a premium
price or otherwise be in the best interest of the shareholders.
Under the Maryland General Corporation Law, as amended, as applicable to
real estate investment trusts, specified 'business combinations' between a
Maryland real estate investment trust and an Interested Shareholder (as defined
below) or an affiliate of the Interested Shareholder are prohibited for five
years
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after the most recent date on which the Interested Shareholder becomes an
Interested Shareholder. Business combinations for purposes of the preceding
sentence are defined by the statute to include specified mergers,
consolidations, share exchanges and asset transfers and some issuances and
reclassifications of equity securities. After the end of the five-year period,
any business combination with an Interested Shareholder or an affiliate of the
Interested Shareholder must be recommended by the Board of Trustees of the trust
and approved by the affirmative vote of at least:
80% of the votes entitled to be cast by holders of outstanding shares of
beneficial interest of the trust; and
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 or held
by an affiliate or associate of the Interested Shareholder, voting together
as a single voting group.
These percentage approval requirements do not apply if, among other conditions,
the trust's common shareholders receive a statutorily defined minimum price for
their shares and the consideration is received in cash or in the same form as
previously paid by the Interested Shareholder for its common shares. The
provisions of the Maryland General Corporation Law also do not apply to business
combinations that are approved or exempted by the Board of Trustees of the trust
before the Interested Shareholder becomes an Interested Shareholder. The
Maryland General Corporation Law defines 'Interested Shareholder' as any person
who beneficially owns ten percent or more of the voting power of the trust's
shares or an affiliate or an associate (as defined in the Maryland General
Corporation Law) of the trust who, at any time within the two-year period before
the date in question, was the beneficial owner of ten percent or more of the
voting power of the then outstanding voting shares of beneficial interest of the
trust. A person is not an Interested Shareholder if, prior to the time the
person would have become an Interested Shareholder, the Board approved the
transaction which would have resulted in the person becoming an Interested
Shareholder.
Vornado's Board of Trustees has adopted a resolution exempting any business
combination between Vornado and any Trustee or officer of Vornado or an
affiliate of any Trustee or officer of Vornado. As a result, the Trustees and
officers of Vornado and their affiliates may be able to enter into business
combinations with Vornado which may not be in the best interest of shareholders.
With respect to business combinations with other persons, the business
combination provisions of the Maryland General Corporation Law may delay, deter
or prevent a change in control of Vornado or other transaction that might
involve a premium price or otherwise be in the best interest of the
shareholders.
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THE MARKET FOR VORNADO'S SHARES GIVES RISE TO VARIOUS RISKS, INCLUDING THOSE
DESCRIBED BELOW.
VORNADO HAS MANY SHARES AVAILABLE FOR FUTURE SALE, WHICH COULD HURT THE MARKET
PRICE OF OUR SHARES.
As of September 30, 1999, 23,291,025 common shares were reserved for
issuance upon redemption of units. These shares may be sold in the public market
after registration under the Securities Act of 1933 under registration rights
agreements between Vornado and the holders of the units. These shares may also
be sold in the public market under Rule 144 under the Securities Act or other
available exemptions from registration. In addition, we have reserved a number
of common shares for issuance under our employee benefit plans, and these common
shares will be available for sale from time to time. We have granted options to
purchase additional common shares to some of our executive officers and
employees. We cannot predict the effect that future sales of common shares, or
the perception that sales of common shares could occur, will have on the market
prices of our equity securities.
CHANGES IN MARKET CONDITIONS COULD HURT THE MARKET PRICE OF OUR SHARES.
The value of our shares depends on various market conditions, which may
change from time to time. Among the market conditions that may affect the value
of our shares are the following:
the extent of institutional investor interest in Vornado;
the reputation of REITs generally and the attractiveness of their equity
securities in comparison to other equity securities, including securities
issued by other real estate companies, and fixed income securities;
our financial condition and performance; and
general financial market conditions.
In addition, the stock market in recent years has experienced extreme price and
volume fluctuations that have often been unrelated or disproportionate to the
operating performance of companies.
INCREASED MARKET INTEREST RATES MAY HURT THE VALUE OF OUR SHARES.
We believe that investors consider the distribution rate on REIT shares,
expressed as a percentage of the price of the shares, relative to market
interest rates as an important factor in deciding whether to buy or sell the
shares. If market interest rates go up, prospective purchasers of REIT shares
may expect a higher distribution rate. Higher interest rates would not, however,
result in more funds for us to distribute and, in fact, would likely increase
our borrowing costs and might decrease our funds available for distribution.
Thus, higher market interest rates could cause the market price of our shares to
decline.
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VORNADO AND THE OPERATING PARTNERSHIP
Vornado is a fully-integrated real estate investment trust. Vornado conducts
its business through, and substantially all of its interests in properties are
held by, the operating partnership. Vornado is the sole general partner of, and
owned approximately 86% of the common limited partnership interest in, the
operating partnership at September 30, 1999.
The operating partnership currently owns directly or indirectly:
all or portions of 23 office building properties in the New York City
metropolitan area (primarily Manhattan) containing approximately 14.1
million square feet;
a 34% limited partnership interest in Charles E. Smith Commercial Realty
L.P., a limited partnership which owns interests in and manages
approximately 10.7 million square feet of office properties in Northern
Virginia and Washington, D.C., and manages an additional 7.9 million square
feet of office and other commercial properties in the Washington, D.C.
area;
59 shopping center properties in seven states and Puerto Rico containing
12.2 million square feet, including 1.4 million square feet built by
tenants on land leased from us;
a 60% interest in partnerships that own 88 warehouse facilities nationwide
with an aggregate of approximately 450 million cubic feet of refrigerated,
frozen and dry storage space, which excludes 13 additional warehouses
containing approximately 80 million cubic feet managed by AmeriCold
Logistics;
the Merchandise Mart Properties portfolio containing 6.7 million square
feet, including the 3.4 million square foot Merchandise Mart in Chicago;
approximately 32% of the outstanding common stock of Alexander's, which has
eight properties in the New York City metropolitan area;
the Hotel Pennsylvania, a New York City hotel which contains 800,000 square
feet of space with 1,700 rooms and 400,000 square feet of retail and office
space;
eight dry warehouse/industrial properties in New Jersey containing 2.0
million square feet; and
other real estate and investments.
The principal executive offices of Vornado and the operating partnership are
located at Park 80 West, Plaza II, Saddle Brook, N.J. 07663; telephone
(201) 587-1000.
USE OF PROCEEDS
Vornado will not receive any cash proceeds from the issuance of the shares
offered by this prospectus but will acquire units in the operating partnership
in exchange for any shares that Vornado may issue to a redeeming unit holder.
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REDEMPTION OF UNITS
At any time after November 1, 1999, you have the right to have your units
redeemed in whole or in part by the operating partnership for cash equal to the
fair market value, at the time of redemption, of one common share of Vornado for
each unit redeemed. We have the right to issue you one common share for each
unit tendered instead of paying the cash redemption amount. You may redeem units
only in compliance with the securities laws, the Second Amended and Restated
Agreement of Limited Partnership of the operating partnership, dated as of
October 20, 1997, as amended, the Limited Partner Acceptance of Partnership
Agreement that you signed when you received your units, and the declaration of
trust's limits on ownership of common shares. We refer to the Second Amended and
Restated Agreement of Limited Partnership of the operating partnership, as
amended, as the 'partnership agreement.'
You may exercise the right to redeem your units by providing a notice of
redemption, substantially in the form attached as an exhibit to the partnership
agreement, to the operating partnership, with a copy to Vornado. You may also be
required to furnish the operating partnership and Vornado with certain other
certificates and forms. The partnership agreement establishes some limitations
on your right to redeem units. Unless we elect to assume and perform the
operating partnership's obligation with respect to the redemption, as described
below, you will receive cash on the specified redemption date from the operating
partnership in an amount equal to the market value of the units to be redeemed.
When we say 'specified redemption date' in the context of class A units, which
are the kind of units that you hold, we mean:
if Vornado's common shares are publicly traded, the tenth business day
after we receive a notice of redemption; and
if Vornado's common shares are not publicly traded, the thirtieth business
day after we receive a notice of redemption.
When we say 'business day,' we mean a day that is not a Saturday, Sunday or
other day on which commercial banks in New York, New York are authorized or
required by law to close. The market value of a unit for the purpose of
redemption will be equal to the average of the closing trading price of a
Vornado common share on the NYSE for the ten trading days before the day on
which we received the notice of redemption or, if that day is not a business
day, the first business day after that day.
Instead of the operating partnership's acquiring the units for cash, we have
the right to acquire the units on the specified redemption date directly from
you, in exchange for either the market value of the units in cash or for common
shares. However, we do not have this right if the common shares are not publicly
traded, as described below. If we acquire the units, we will become their owner.
In either case, acquisition of the units by Vornado will be treated as a sale of
the units to Vornado for Federal income tax purposes. The payment of the
redemption price may be conditioned on our sole satisfaction that any New York
Real Estate Transfer Tax and New York City Real Property Transfer Tax payable by
reason of your redeeming units prior to the second anniversary of the date on
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which such units were issued to you have been paid in full or that adequate
provision has been made therefor. If we elect to acquire the units in exchange
for shares, then you are obligated, as a condition to the effective exercise of
the redemption right, to escrow with Vornado an amount equal to the New York
Real Estate Transfer Tax and New York City Real Property Transfer Tax that would
have been payable as of the exercise of the redemption right, assuming that you
transfer the shares received prior to the second anniversary of the date on
which the units were issued to you. Such escrow may be used by us or you for the
payment of the taxes described above, provided, in the latter event, that we
have determined, in our good faith discretion, that such tax will be paid. See
' -- Tax consequences of redemption -- Tax treatment of redemption of units' for
information about the tax consequences of redeeming units to the redeeming unit
holder.
If we determine to acquire the units in exchange for common shares, the
total number of common shares to be paid to you will be equal to the product of
the number of units times the conversion factor. See 'Description of
units -- Sales of assets' for further information about the conversion factor,
which is 1.0 as of the date of this prospectus. Vornado currently anticipates
that it generally will elect to acquire directly units tendered for redemption
and to issue common shares in exchange for the units rather than paying cash,
but we will decide whether to pay cash or issue common shares upon redemption of
units when units are tendered for redemption.
When you redeem units, your right to receive distributions for the units so
redeemed or exchanged will cease, unless the record date for a distribution was
a date before the specified redemption date. You must redeem at least 1,000
units at a time, or all of your remaining units if you own less than 1,000
units. No redemption or exchange can occur if delivery of common shares on the
specified redemption date to the unit holder seeking redemption would be
prohibited either under Vornado's declaration of trust or under applicable
Federal or state securities laws as long as the common shares are publicly
traded.
Each unit holder has agreed with Vornado under the partnership agreement
that all units delivered for redemption must be delivered to the operating
partnership or Vornado, as the case may be, free and clear of all liens. Neither
Vornado nor the operating partnership will be under any obligation to acquire
units if there are liens on the units. Each unit holder has also agreed to pay
any state or local property transfer tax that is payable as a result of the
transfer of his or her units to the operating partnership or Vornado.
If a unit holder assigns his or her units to another person, that person may
redeem the units. In that case, the redemption price will be paid directly to
that person and not to the unit holder.
If Vornado provides notice to the unit holders that it intends to make an
extraordinary distribution of cash or property to its shareholders or to effect
a merger, a sale of all or substantially all of its assets or any other similar
extraordinary transaction, the right to redeem units will be exercisable during
the
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period commencing on the date on which Vornado provides that notice and ending
on either:
if there is a record date to determine shareholders eligible to receive the
extraordinary distribution or to vote upon the approval of the merger, sale
or other extraordinary transaction, the record date; or
if there is no record date of this kind, the date that is twenty days after
the date on which Vornado provides notice of the extraordinary distribution
or extraordinary transaction.
A holder must have held his or her units for at least one year from the date of
issuance to have the right to redeem them under these circumstances. If this
paragraph applies, the specified redemption date will be the sooner of:
the tenth business day after the operating partnership receives the notice
of redemption; or
the business day immediately preceding the record date to determine
shareholders eligible to receive the extraordinary distribution or vote on
approval of the extraordinary transaction.
However, if the specified redemption date occurs in less than ten business days
and the operating partnership elects to redeem the units for cash, the operating
partnership will have up to ten business days after receiving the notice of
redemption to deliver payment for the units.
If Vornado merges or consolidates with another company or sells all or
substantially all of its assets as a whole and Vornado's shareholders are
obligated to accept cash and/or debt obligations in full or partial payment for
their common shares in the transaction, then the portion of the payment per unit
payable upon redemption of the units that must be accepted in cash and/or debt
obligations will be equal to an amount of cash equal to the sum of:
the cash payable for one common share multiplied by the conversion factor;
and
the value, on the date on which the transaction is consummated, of the debt
obligations to be received with respect to one common share multiplied by
the conversion factor.
The balance of the amount payable per unit when units are redeemed will be
payable in an amount calculated consistently with the second paragraph of this
section. If a transaction of the kind described in this paragraph occurs at a
time when the consent of some unit holders is required under those lockup
agreements that are contained in the partnership agreement, then the portion of
the payment per unit to those unit holders payable upon redemption of their
units that they must accept in cash and/or debt obligations will be increased by
an amount that will provide them with an internal rate of return on that portion
of the payment from the date of the transaction to the date of redemption of the
units equal to the treasury constant yield, as defined in the partnership
agreement. The lockup agreements are described under 'Description of units and
the operating partnership -- Borrowing by the operating partnership.'
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If the common shares are not publicly traded but another entity whose shares
are publicly traded owns more than 50% of the shares of Vornado, the unit
holders' right to redeem units will be determined by reference to the publicly
traded stock of that majority owner of Vornado. In that case, the general
partner of the operating partnership will have the right to elect to acquire the
units to be redeemed for publicly traded stock of the majority owner of Vornado.
If the common shares are not publicly traded and there is no majority owner of
Vornado with publicly traded stock, the unit holders' right to redeem units
would be based upon the net fair market value of the operating partnership's
assets at the time the units are redeemed, as determined in good faith by
Vornado. In that case, Vornado and the operating partnership would be obligated
to pay for redeemed units in cash, payable on the thirtieth business day after
Vornado receives the notice of redemption.
REGISTRATION RIGHTS
Under registration rights agreements between Vornado and the unit holders
named in these agreements, which have been filed as an exhibit to the
registration statement of which this prospectus forms a part, those unit holders
have the right to demand registration of the common shares for which their units
may be redeemed when they redeem their units, unless the shares they receive are
already registered under an effective registration statement filed with the SEC.
The registration rights agreements provide that Vornado will pay all expenses of
registering the shares. The agreements also provide that the holders of the
shares will pay any brokerage and sales commissions, fees and disbursements of
counsel to the holders, accountants and other advisors, and any transfer taxes
relating to the sale or disposition of the shares by the holders.
TAX CONSEQUENCES OF REDEMPTION
The following discussion summarizes the material Federal income tax
considerations that may be relevant to a unit holder who redeems his or her
units. This discussion only applies to unit holders that provide an affidavit to
the operating partnership, at the time their units are redeemed, stating that
the unit holder is not a foreign person and stating the unit holder's taxpayer
identification number, under penalties of perjury.
YOU SHOULD CONSULT YOUR OWN TAX ADVISORS REGARDING THE TAX CONSEQUENCES TO
YOU OF REDEEMING YOUR UNITS, INCLUDING THE FEDERAL, STATE, LOCAL AND FOREIGN TAX
CONSEQUENCES OF REDEEMING UNITS IN YOUR PARTICULAR CIRCUMSTANCES AND POTENTIAL
CHANGES IN APPLICABLE LAWS.
TAX TREATMENT OF REDEMPTION OF UNITS
If Vornado assumes and performs the redemption obligation, the partnership
agreement provides that the redemption will be treated by Vornado, the operating
partnership and the redeeming unit holder as a sale of units by the redeeming
unit holder to Vornado at the time the units are redeemed. This sale will be
fully
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taxable to the redeeming unit holder, and the redeeming unit holder will be
treated as realizing for tax purposes an amount equal to the sum of:
the cash or the value of the common shares received in the exchange; plus
the amount of operating partnership liabilities allocable to the redeemed
units at the time they are redeemed.
The amount of operating partnership liabilities considered in this calculation
will include the operating partnership's share of the liabilities of some
entities in which the operating partnership owns an interest. The determination
of the amount of gain or loss is discussed more fully under ' -- Tax treatment
of disposition of units by unit holders generally' below.
If Vornado does not elect to assume the obligation to redeem a unit holder's
units, the operating partnership will redeem the units for cash. If the
operating partnership redeems units for cash that Vornado contributes to the
operating partnership for that purpose, the redemption likely would be treated
for tax purposes as a sale of the units to Vornado in a fully taxable
transaction, although this is not certain. If the redemption is treated that way
for tax purposes, the redeeming unit holder would be treated as realizing an
amount equal to the sum of:
the cash received in the exchange; plus
the amount of operating partnership liabilities allocable to the redeemed
units at the time they are redeemed.
The amount of operating partnership liabilities considered in this calculation
will include the operating partnership's share of the liabilities of some
entities in which the operating partnership owns an interest. The determination
of the amount of gain or loss if a redemption is treated as a sale for tax
purposes is discussed more fully under ' -- Tax treatment of disposition of
units by unit holders generally' below.
If, instead, the operating partnership chooses to redeem units for cash that
is not contributed by Vornado for that purpose, the tax consequences would be
the same as described in the previous paragraph with the following exception. If
the operating partnership redeems less than all of a unit holder's units, the
unit holder would not be permitted to recognize any loss occurring on the
transaction and would recognize taxable gain only to the extent that the amount
he or she would be treated as receiving, as described above, exceeded his or her
adjusted basis in all of his or her units immediately before the redemption.
POTENTIAL APPLICATION OF DISGUISED SALE REGULATIONS TO A REDEMPTION OF UNITS
A redemption of units may cause the original transfer of property to the
operating partnership in exchange for units to be treated as a 'disguised sale'
of property. The Internal Revenue Code and the Treasury regulations under the
Internal Revenue Code generally provide that, unless one of the prescribed
exceptions is applicable, a partner's contribution of property to a partnership
and a simultaneous or subsequent transfer of money or other consideration from
the
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partnership to the partner, including the partnership's assumption of a
liability or taking the property subject to a liability, will be presumed to be
a sale, in whole or in part, of the property by the partner to the partnership.
Further, the Treasury regulations provide generally that, in the absence of an
applicable exception, if a partnership transfers money or other consideration to
a partner within two years after the partner contributed property to the
partnership, the transactions will be presumed to be a sale of the contributed
property unless the facts and circumstances clearly establish that the transfers
do not constitute a sale. The Treasury regulations also provide that if two
years have passed between the time when the partner contributed property to the
partnership and the time when the partnership transferred money or other
consideration to the partner, the transactions will be presumed not to be a sale
unless the facts and circumstances clearly establish that the transfers
constitute a sale.
Accordingly, if the operating partnership redeems a unit, the Internal
Revenue Service could contend that the redemption should be treated as a
disguised sale because the redeeming unit holder will receive cash or common
shares after having contributed property to the operating partnership. If the
IRS took that position successfully, the issuance of the units in exchange for
the contributed property could be taxable as a disguised sale under the Treasury
regulations.
TAX TREATMENT OF DISPOSITION OF UNITS BY UNIT HOLDERS GENERALLY
If a unit holder redeems units in a manner that is treated as a sale of the
units, the gain or loss from the sale or other disposition will be based on the
difference between:
the amount considered realized for tax purposes; and
the unit holder's tax basis in the units.
See ' -- Basis of units' below for information about the tax basis of units.
If a unit holder sells units, the 'amount realized' will be measured by the
sum of
the cash and fair market value of other property received, including any
common shares; plus
the portion of the operating partnership's liabilities allocable to the
units sold.
The amount of operating partnership liabilities considered in this calculation
will include the operating partnership's share of the liabilities of some
entities in which the operating partnership owns an interest.
A selling unit holder will recognize gain to the extent that the amount he
or she realizes in the sale exceeds his or her basis in the units sold. It is
possible that the amount of gain recognized or even the tax liability resulting
from the gain could exceed the amount of cash and the value of any other
property, including common shares, received in exchange for the units.
Except as described below, any gain recognized upon a sale or other
disposition of units will be treated as gain attributable to the sale or
disposition of
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a capital asset. To the extent, however, that the amount realized upon the sale
of a unit attributable to a unit holder's share of 'unrealized receivables' of
the operating partnership (as defined in Section 751 of the Internal Revenue
Code) exceeds the basis attributable to those assets, this excess will be
treated as ordinary income. Unrealized receivables include, to the extent not
previously included in operating partnership income, any rights to payment for
services rendered or to be rendered. Unrealized receivables also include amounts
that would be subject to recapture as ordinary income if the operating
partnership had sold its assets at their fair market value at the time of the
transfer of a unit.
For non-corporate holders, the maximum rate of tax on the net capital gain
from the sale or exchange or a capital asset held for more than one year is 20%.
The maximum rate for net capital gains attributable to the sale of depreciable
real property held for more than one year is 25% to the extent of the prior
deductions for depreciation that are not otherwise recaptured as ordinary income
under the existing depreciation recapture rules.
The IRS has authority to issue regulations that could, among other things,
apply these rates on a look-through basis in the case of 'pass-through' entities
such as Vornado and the operating partnership. The IRS has not yet issued
regulations of this kind. If it does not issue regulations of this kind in the
future, the rate of tax that would apply to the disposition of a unit by a
non-corporate holder would be determined based upon the period of time over
which the non-corporate holder held the unit. The IRS might, however, issue
regulations that would provide that the rate of tax that would apply to the
disposition of a unit by a non-corporate holder would be determined based upon
the nature of the assets of the operating partnership and the periods of time
over which the operating partnership held the assets. Moreover, if the IRS
adopts regulations of this kind, they might apply retroactively.
BASIS OF UNITS
In general, a unit holder who received units in exchange for contributing an
interest in a partnership has an initial tax basis in the units equal to his or
her basis in the contributed partnership interest. A unit holder's initial basis
in his or her units generally is increased by:
the unit holder's share of operating partnership taxable and tax-exempt
income;
increases in his or her share of the liabilities of the operating
partnership, including the operating partnership's share of the liabilities
of some entities in which the operating partnership owns an interest; and
any gain recognized under Section 737 of the Internal Revenue Code due to
the receipt of a distribution from the operating partnership within seven
years after the unit holder contributed property to the operating
partnership.
Generally, a unit holder's initial basis in his or her units is decreased by:
his or her share of operating partnership distributions;
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decreases in his or her share of liabilities of the operating partnership,
including the operating partnership's share of the liabilities of some
entities in which the operating partnership owns an interest;
his or her share of losses of the operating partnership; and
his or her share of nondeductible expenditures of the operating partnership
that are not chargeable to capital.
However, a unit holder's initial basis will not decrease below zero.
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DESCRIPTION OF COMMON SHARES
The following description of the common shares does not describe every
aspect of the common shares and is only a summary of, and is qualified in its
entirety by reference to, the provisions governing the common shares contained
in the declaration of trust and bylaws. Copies of the declaration of trust and
bylaws are exhibits to the registration statement of which this prospectus is a
part. See 'Where you can find more information' for information about how to
obtain copies of the declaration of trust and bylaws.
VORNADO'S AUTHORIZED AND OUTSTANDING CLASSES OF SHARES
The declaration of trust authorizes the issuance of up to 340,000,000 shares
of beneficial interest, consisting of 125,000,000 common shares, $.04 par value
per share, 45,000,000 preferred shares of beneficial interest no par value per
share, and 170,000,000 excess shares of beneficial interest, $.04 par value per
share. We refer to the excess shares of beneficial interest, $.04 par value per
share, as 'excess shares.' See ' -- Restrictions on ownership' for a discussion
of the possible issuance of excess shares.
As of September 30, 1999, 85,946,899 common shares were issued and
outstanding, 5,789,239 series A preferred shares were issued and outstanding,
3,400,000 8.5% series B cumulative redeemable preferred shares were issued and
outstanding, 4,600,000 8.5% series C cumulative redeemable preferred shares were
issued and outstanding, and no 8.5% series D-1 cumulative redeemable preferred
shares, no 8.375% series D-2 cumulative redeemable preferred shares, no 8.25%
series D-3 cumulative redeemable preferred shares, no 8.25% series D-4
cumulative redeemable preferred shares or excess shares were issued and
outstanding. The common shares of Vornado are listed on the NYSE under the
symbol 'VNO'. As of November 24, 1999 no 8.25% Series D-5 cumulative redeemable
preferred shares were issued and outstanding.
DIVIDEND AND VOTING RIGHTS OF HOLDERS OF COMMON SHARES
The holders of common shares are entitled to receive dividends when, if and
as authorized by the Board of Trustees and declared by Vornado out of assets
legally available to pay dividends, if receipt of the dividends is in compliance
with the provisions in the declaration of trust restricting the transfer of
shares of beneficial interest. However, if any preferred shares are at the time
outstanding, Vornado may only pay dividends or other distributions on common
shares or purchase common shares if full cumulative dividends have been paid on
outstanding preferred shares and there is no arrearage in any mandatory sinking
fund on outstanding preferred shares. The terms of the series of preferred
shares that are now issued and outstanding do not provide for any mandatory
sinking fund.
The holders of common shares are entitled to one vote for each share on all
matters on which shareholders are entitled to vote, including elections of
trustees. 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. The holders of common shares do not
have any conversion, redemption or preemptive rights to subscribe to any
securities of
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Vornado. If Vornado is dissolved, liquidated or wound up, holders of common
shares are entitled to share proportionally in any assets remaining after the
prior rights of creditors, including holders of Vornado's indebtedness, and the
aggregate liquidation preference of any preferred shares then outstanding are
satisfied in full.
The common shares have equal dividend, distribution, liquidation and other
rights and have no preference, appraisal or exchange rights. All outstanding
common shares are, and any common shares offered by a prospectus supplement,
upon issuance, will be, duly authorized, fully paid and non-assessable.
The transfer agent for the common shares is First Union National Bank,
Charlotte, North Carolina.
RESTRICTIONS ON OWNERSHIP OF COMMON SHARES
THE COMMON SHARES BENEFICIAL OWNERSHIP LIMIT
For Vornado to maintain its qualification as a REIT under the Internal
Revenue Code, not more than 50% of the value of its outstanding shares of
beneficial interest may be owned, directly or indirectly, by five or fewer
individuals at any time during the last half of a taxable year and the shares of
beneficial interest 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. The Internal Revenue Code defines 'individuals' to
include some entities for purposes of the preceding sentence. All references to
a shareholder's ownership of common shares in this section ' -- The common
shares beneficial ownership limit' assume application of the applicable
attribution rules of the Internal Revenue Code under which, for example, a
shareholder is deemed to own shares owned by his or her spouse.
The declaration of trust contains a number of provisions which restrict the
ownership and transfer of shares and which are designed to safeguard Vornado
against an inadvertent loss of its REIT status. The declaration of trust
contains a limitation that restricts, with some exceptions, shareholders from
owning more than a specified percentage of the outstanding common shares. We
call this percentage the 'common shares beneficial ownership limit'. The common
shares beneficial ownership limit was initially set at 2.0% of the outstanding
common shares. The Board of Trustees subsequently adopted a resolution raising
the common shares beneficial ownership limit from 2.0% to 6.7% of the
outstanding common shares. The shareholders who owned more than 6.7% of the
common shares immediately after the merger of Vornado, Inc. into Vornado in May
1993 may continue to do so and may acquire additional common shares through
stock option and similar plans or from other shareholders who owned more than
6.7% of the common shares immediately after that merger. However, common shares
cannot be transferred if, as a result, more than 50% in value of the outstanding
shares of Vornado would be owned by five or fewer individuals. While the
shareholders who owned more than 6.7% of the common shares immediately after the
merger of Vornado, Inc. into Vornado in May 1993 are not generally permitted to
acquire additional common shares from any other source, these
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shareholders may acquire additional common shares from any source if Vornado
issues additional common shares, up to the percentage held by them immediately
before Vornado issues the additional shares.
Shareholders should be aware that events other than a purchase or other
transfer of common shares can result in ownership, under the applicable
attribution rules of the Internal Revenue Code, of common shares in excess of
the common shares beneficial ownership limit. For instance, if two shareholders,
each of whom owns 3.5% of the outstanding common shares, were to marry, then
after their marriage both shareholders would be deemed to own 7.0% of the
outstanding common shares, which is in excess of the common shares beneficial
ownership limit. Similarly, if a shareholder who owns 4.9% of the outstanding
common shares were to purchase a 50% interest in a corporation which owns 4.8%
of the outstanding common shares, then the shareholder would be deemed to own
7.3% of the outstanding common shares. You should consult your own tax advisors
concerning the application of the attribution rules of the Internal Revenue Code
in your particular circumstances.
THE CONSTRUCTIVE OWNERSHIP LIMIT
Under the Internal Revenue Code, rental income received by a REIT from
persons in which the REIT is treated, under the applicable attribution rules of
the Internal Revenue Code, as owning a 10% or greater interest does not
constitute qualifying income for purposes of the income requirements that REITs
must satisfy. For these purposes, a REIT is treated as owning any stock owned,
under the applicable attribution rules of the Internal Revenue Code, by a person
that owns 10% or more of the value of the outstanding shares of the REIT. The
attribution rules of the Code applicable for these purposes are different from
those applicable with respect to the common shares beneficial ownership limit.
All references to a shareholder's ownership of common shares in this section
' -- The constructive ownership limit' assume application of the applicable
attribution rules of the Internal Revenue Code.
In order to ensure that rental income of Vornado will not be treated as
nonqualifying income under the rule described in the preceding paragraph, and
thus to ensure that Vornado will not inadvertently lose its REIT status as a
result of the ownership of shares by a tenant, or a person that holds an
interest in a tenant, the declaration of trust contains an ownership limit that
restricts, with some exceptions, shareholders from owning more than 9.9% of the
outstanding shares of any class. We refer to this 9.9% ownership limit as the
'constructive ownership limit.' The shareholders who owned shares in excess of
the constructive ownership limit immediately after the merger of Vornado, Inc.
into Vornado in May 1993 generally are not subject to the constructive ownership
limit. The declaration of trust also contains restrictions that are designed to
ensure that the shareholders who owned shares in excess of the constructive
ownership limit immediately after the merger of Vornado, Inc. into Vornado in
May 1993 will not, in the aggregate, own a large enough interest in a tenant or
subtenant of the REIT to cause rental income received, directly or indirectly,
by the REIT from that tenant or subtenant to be treated as nonqualifying income
for
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purposes of the income requirements that REITs must satisfy. The restrictions
described in the preceding sentence have an exception for tenants and subtenants
from whom the REIT receives, directly or indirectly, rental income that is not
in excess of a specified threshold.
Shareholders should be aware that events other than a purchase or other
transfer of shares can result in ownership, under the applicable attribution
rules of the Internal Revenue Code, of shares in excess of the constructive
ownership limit. As the attribution rules that apply with respect to the
constructive ownership limit differ from those that apply with respect to the
common shares beneficial ownership limit, the events other than a purchase or
other transfer of shares which can result in share ownership in excess of the
constructive ownership limit can differ from those which can result in share
ownership in excess of the common shares beneficial ownership limit. You should
consult your own tax advisors concerning the application of the attribution
rules of the Internal Revenue Code in your particular circumstances.
ISSUANCE OF EXCESS SHARES IF THE OWNERSHIP LIMITS ARE VIOLATED
The declaration of trust provides that a transfer of common shares that
would otherwise result in ownership, under the applicable attribution rules of
the Internal Revenue Code, of common shares in excess of the common shares
beneficial ownership limit or the constructive ownership limit, or which would
cause the shares of beneficial interest of Vornado to be beneficially owned by
fewer than 100 persons, will have no effect and the purported transferee will
acquire no rights or economic interest in the common shares. In addition, the
declaration of trust provides that common shares that would otherwise be owned,
under the applicable attribution rules of the Internal Revenue Code, in excess
of the common shares beneficial ownership limit or the constructive ownership
limit will be automatically exchanged for excess shares. These excess shares
will be transferred, by operation of law, to Vornado as trustee of a trust for
the exclusive benefit of a beneficiary designated by the purported transferee or
purported holder. While so held in trust, excess shares are not entitled to vote
and are not entitled to participate in any dividends or distributions made by
Vornado. Any dividends or distributions received by the purported transferee or
other purported holder of the excess shares before Vornado discovers the
automatic exchange for excess shares must be repaid to Vornado upon demand.
If the purported transferee or purported holder elects to designate a
beneficiary of an interest in the trust with respect to the excess shares, he or
she may designate only a person whose ownership of the shares will not violate
the common shares beneficial ownership limit or the constructive ownership
limit. When the designation is made, the excess shares will be automatically
exchanged for common shares. The declaration of trust contains provisions
designed to ensure that the purported transferee or other purported holder of
the excess shares may not receive, in return for transferring an interest in the
trust with respect to the excess shares, an amount that reflects any
appreciation in the common shares for which the excess shares were exchanged
during the period that the excess shares were outstanding but will bear the
burden of any decline in value during that period. Any amount received by a
purported transferee or
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other purported holder for designating a beneficiary in excess of the amount
permitted to be received must be turned over to Vornado. The declaration of
trust provides that Vornado, or its designee, may purchase any excess shares
that have been automatically exchanged for common shares as a result of a
purported transfer or other event. The price at which Vornado, or its designee,
may purchase the excess shares will be equal to the lesser of:
in the case of excess shares resulting from a purported transfer for value,
the price per share in the purported transfer that resulted in the
automatic exchange for excess shares, or in the case of excess shares
resulting from some other event, the market price of the common shares
exchanged on the date of the automatic exchange for excess shares; and
the market price of the common shares exchanged for the excess shares on
the date that Vornado accepts the deemed offer to sell the excess shares.
Vornado's right to buy the excess shares will exist for 90 days, beginning on
the date that the automatic exchange for excess shares occurred or, if Vornado
did not receive a notice concerning the purported transfer that resulted in the
automatic exchange for excess shares, the date that the Board of Trustees
determines in good faith that an exchange for excess shares has occurred.
OTHER PROVISIONS CONCERNING THE RESTRICTIONS ON OWNERSHIP
The Board of Trustees may exempt persons from the common shares beneficial
ownership limit or the constructive ownership limit, including the limitations
applicable to holders who owned in excess of 6.7% of the common shares
immediately after the merger of Vornado, Inc. into Vornado in May 1993, if
evidence satisfactory to the Board of Trustees is presented showing that the
exemption will not jeopardize Vornado's status as a REIT under the Internal
Revenue Code. Before granting an exemption of this kind, the Board of Trustees
may require a ruling from the IRS and/or an opinion of counsel satisfactory to
it and/or representations and undertakings from the applicant with respect to
preserving the REIT status of Vornado.
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 Vornado to attempt to qualify, or to continue to qualify, as a REIT.
All persons who own, directly or by virtue of the applicable attribution
rules of the Internal Revenue Code, more than 2.0% of the outstanding common
shares must give a written notice to Vornado containing the information
specified in the declaration of trust by January 31 of each year. In addition,
each shareholder will be required to disclose to the Company upon demand any
information that Vornado may request, in good faith, to determine Vornado's
status as a REIT or to comply with Treasury regulations promulgated under the
REIT provisions of the Internal Revenue Code.
The ownership restrictions described above may have the effect of precluding
acquisition of control of Vornado unless the Board of Trustees determines that
maintenance of REIT status is no longer in the best interests of Vornado.
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DESCRIPTION OF THE UNITS AND THE OPERATING PARTNERSHIP
The following description of the material terms of the units and some
material provisions of the partnership agreement does not describe every aspect
of the units or the partnership agreement and is only a summary of, and
qualified in its entirety by reference to, applicable provisions of Delaware law
and the partnership agreement. A copy of the partnership agreement is filed as
an exhibit to the registration statement of which this prospectus is a part. See
'Where you can find more information' for information about how to obtain a copy
of the partnership agreement. For a comparison of the voting rights and some
other rights of unit holders in the operating partnership and shareholders of
Vornado, see 'Comparison of ownership of units and common shares.'
THE OPERATING PARTNERSHIP'S OUTSTANDING CLASSES OF UNITS
Holders of units, other than Vornado in its capacity as general partner,
hold a limited partnership interest in the operating partnership. All holders of
units, including Vornado in its capacity as general partner, are entitled to
share in cash distributions from, and in the profits and losses of, the
operating partnership.
Holders of units have the rights to which limited partners are entitled
under the partnership agreement and the Delaware Revised Uniform Limited
Partnership Act. The units are not registered under any Federal or state
securities laws, and they are not listed on any exchange or quoted on any
national market system. The partnership agreement imposes restrictions on the
transfer of units. See ' -- Restrictions on transfers of units' below for
further information about these restrictions.
As of September 30, 1999, there were outstanding:
5,789,239 series A preferred units;
3,400,000 series B pass-through preferred units;
4,600,000 series C pass-through preferred units;
899,566 series B-1 convertible preferred units;
449,783 series B-2 restricted convertible preferred units;
747,912 series C-1 convertible preferred units;
3,500,000 series D-1 preferred units;
549,336 series D-2 preferred units;
8,000,000 series D-3 preferred units;
5,000,000 series D-4 preferred units;
4,998,000 Series E-1 convertible preferred units;
92,194,728 class A units, including 6,247,829 not held by Vornado; and
1,256,908 class D units.
In addition, as of November 24, 1999, there were outstanding:
7,480,000 series D-5 preferred units.
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DISTRIBUTIONS WITH RESPECT TO UNITS
The partnership agreement provides for distributions, as determined in the
manner provided in the partnership agreement, to Vornado and the limited
partners in proportion to their percentage interests in the operating
partnership, subject to the distribution preferences that are described in the
next paragraph. As general partner of the operating partnership, Vornado has the
exclusive right to declare and cause the operating partnership to make
distributions as and when Vornado deems appropriate or desirable in its sole
discretion. For so long as Vornado elects to qualify as a REIT, Vornado will
make reasonable efforts, as determined by it in its sole discretion, to make
distributions to partners in amounts such that Vornado will be able to pay
shareholder dividends that will satisfy the requirements for qualification as a
REIT and avoid any Federal income or excise tax liability for Vornado.
Distributions vary among the holders of different classes of units:
The series A preferred units entitle Vornado as their holder to a
cumulative preferential distribution at an annual rate of $3.25 per
series A preferred unit, which we refer to as the 'series A preferred
distribution preference'. The series A preferred units correspond to the
series A preferred shares of Vornado.
The series B pass-through preferred units entitle Vornado as their holder
to a cumulative preferential distribution at an annual rate of $2.125 per
unit, which we call the 'series B pass-through preferred distribution
preference'. The series B pass-through preferred units correspond to the
series B preferred shares of Vornado.
The series C pass-through preferred units entitle Vornado as their holder
to a cumulative preferential distribution at an annual rate of $2.125 per
unit, which we call the 'series C pass-through preferred distribution
preference'. The series C pass-through preferred units correspond to the
series C preferred shares of Vornado.
The series B-1 convertible preferred units entitle their holder to a
preferential distribution at the annual rate of $2.50 per unit, and the
series B-2 restricted preferred units entitle their holders to a
preferential distribution at the annual rate of $4.00 per unit. We refer to
these preferential distributions as the 'series B-1 and B-2 preferred
distribution preferences'.
The series C-1 preferred units entitle their holder to a preferential
distribution at the annual rate of $3.25 per unit, which we refer to as the
'series C-1 preferred distribution preference'.
The series D-1 preferred units entitle their holder to a preferential
distribution at the annual rate of $2.125 per unit, which we refer to as
the 'series D-1 preferred distribution preference'.
The series D-2 preferred units entitle their holder to a preferential
distribution at the annual rate of $4.1875 per unit, which we refer to as
the 'series D-2 preferred distribution preference'.
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The series D-3 preferred units entitle their holder to a preferential
distribution at the annual rate of $2.0625 per unit, which we refer to as
the 'series D-3 preferred distribution preference'.
The series D-4 preferred units entitle their holder to a preferential
distribution at the annual rate of $2.0625 per unit, which we refer to as
the 'series D-4 preferred distribution preference'.
The series D-5 preferred units entitle their holder to a preferential
distribution at the annual rate of $2.0625 per unit, which we refer to as
the 'series D-5 preferred distribution preference'.
The series E-1 preferred units entitle their holder to a preferential
distribution at the annual rate of (a) $3.00 per unit for distributions
paid in respect of the period from the date of issuance through, but
excluding, the first anniversary of that date, (b) $3.125 per unit for
distributions paid in respect of the period from the first anniversary of
the date of issuance through, but excluding, the second anniversary of that
date, (c) $3.25 per unit for distributions paid in respect of the period
from the second anniversary of the date of issuance through, but excluding,
the seventh anniversary of the date of issuance and (d) $3.375 per unit for
distributions paid in respect of any period thereafter. We refer to this
preferential distribution as the 'series E-1 preferred distribution
preference'.
The class D units entitle their holder to a preferential quarterly
distribution of $0.50375 per unit, which we refer to as the 'class D
distribution preference,' until the operating partnership has made four
consecutive quarterly distributions of at least $0.50375 per unit to the
holders of the class A units.
We sometimes refer to the series A preferred distribution preference, the
series B pass-through preferred distribution preference, the series C
pass-through preferred distribution preference, the series B-1 and B-2 preferred
distribution preferences, the series C-1 preferred distribution preference, the
series D-1 preferred distribution preference, the series D-2 preferred
distribution preference, the series D-3 preferred distribution preference, the
series D-4 preferred distribution preference, the series D-5 preferred
distribution preference and the series E-1 preferred distribution preference as
the 'preferred distribution preferences'. We sometimes refer to the preferred
distribution preferences, and the class D distribution preference together as
the 'distribution preferences'.
The value of each common unit, regardless of its class, equates to one
common share of Vornado. Preferred units do not have a value equating to one
common share, but have the liquidation preferences and conversion prices for
conversion into class A units or terms for redemption for cash or corresponding
preferred shares that are established in the partnership agreement.
The partnership agreement provides that the operating partnership will make
distributions when, as and if declared by Vornado in the order of preference
provided for in the partnership agreement. The order of preference in the
partnership agreement provides that distributions will be paid first to Vornado
as
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necessary to enable Vornado to pay REIT expenses. The partnership agreement
defines 'REIT expenses' to mean:
costs and expenses relating to the continuity of existence of Vornado and
any entity in which Vornado owns an equity interest;
costs and expenses relating to any offer or registration of securities by
Vornado;
costs and expenses associated with preparing and filing periodic reports of
Vornado under Federal, state and local laws, including SEC filings;
costs and expenses associated with Vornado's compliance with laws, rules
and regulations applicable to it; and
all other operating or administrative expenses incurred by Vornado in the
ordinary course of its business.
After the operating partnership pays Vornado distributions as necessary to
enable Vornado to pay REIT expenses, distributions will be paid:
first, to holders of any class of preferred units ranking senior, as to
distributions or redemption or voting rights, to class D units;
second, to holders of class D units for any accumulated and unpaid class D
distribution preferences and on an equal priority to holders of preferred
units not ranking senior to the class D units for any accumulated and
unpaid preferred distribution preferences; and
third, to holders of class A units.
The series A preferred units, series B pass-through preferred units, and
series C pass-through preferred units rank senior to the class D units. The
other series of preferred units do not rank senior to the class D units. See
' -- Ranking of units' for more information about the relative priorities of the
various series and classes of units. Class D unit holders will also share in any
distribution per quarter to class A unit holders above $0.50375 per unit.
Before the automatic conversion of class D units to class A units as
described under ' -- Ranking of units' below, Vornado will be permitted to cause
the operating partnership to make a distribution to holders of class A units of
cash up to an aggregate maximum amount of $878,912 representing any funds from
operations that could have been and were not distributed to holders of class A
units (without requiring proportional distributions to holders of class D units)
during the twelve calendar quarters preceding the quarter in which the
distribution is made.
RANKING OF UNITS
The series A preferred units, series B pass-through preferred units, and
series C pass-through preferred units rank senior to the class A units and
class D units with respect to the payment of distributions and amounts upon
liquidation, dissolution or winding up of the operating partnership. The series
A preferred units, series B pass-through preferred units, series C pass-through
preferred units, series B-1 convertible preferred units, series B-2 restricted
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preferred units, series C-1 preferred units, series D-1 preferred units, series
D-2 preferred units, series D-3 preferred units, series D-4 preferred units,
series D-5 preferred units, series E-1 preferred units and any other units
designated as 'parity units' all rank on a parity with each other, in each case
with respect to the payment of distributions and amounts upon liquidation,
dissolution or winding up of the operating partnership, without preference or
priority one over the other, except that:
For so long as the class D units are outstanding, the series B-1
convertible preferred units, series B-2 restricted preferred units,
series C-1 preferred units, series D-1 preferred units, series D-2
preferred units, series D-3 preferred units, series D-4 preferred units,
series D-5 preferred units, and series E-1 preferred units will not rank
senior to the class D units as to preferential distributions or redemption
or voting rights. The class D units automatically will be converted into
class A units when all holders of class A units have received quarterly
distributions equal to $.50375 per unit per quarter for four consecutive
quarters.
The series of preferred units have the following liquidation preferences:
$50.00 per Series A Preferred Unit, series B-1 convertible preferred unit,
series B-2 restricted preferred unit, series C-1 preferred unit,
series D-2 preferred unit, and series E-1 convertible preferred unit;
$25.00 per series B pass-through preferred unit; series C pass-through
preferred unit, series D-3 preferred unit, series D-4 preferred unit,
series D-5 preferred unit; and
an amount per series D-1 preferred unit equal to the capital account of the
series D-1 preferred unit. The capital account of the series D-1 preferred
units is equal to an original capital contribution of $25.00 per unit,
adjusted from time to time to reflect the operating partnership's income,
gains, losses and deductions that are allocated to the series D-1 preferred
units and actual or deemed distributions to, or capital contributions by,
the holders of series D-1 preferred units.
Until the class D units are converted into class A units, the partnership
agreement will prohibit the operating partnership from issuing any class of
limited partnership interests ranking senior, as to distributions or redemption
or voting rights, to class D units, unless either:
the new limited partnership interests are substantially similar to the
terms of securities issued by Vornado and the proceeds of the issuance of
those securities have been contributed to the operating partnership; or
the issuance of the new limited partnership interests has been approved by
the holders of a majority of the class D units issued in 1997 and then
outstanding, taken together as a group.
The operating partnership may create additional classes of parity units or
issue series of parity units without the consent of any holder of series A
preferred shares, series B preferred shares, or series C preferred shares.
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REDEMPTION OR CONVERSION OF UNITS
The holders of class A units, other than Vornado or any subsidiary of
Vornado, have the right to redeem their units for cash or, at Vornado's option,
common shares. See 'Redemption of units' above for further information about
this right.
The series A preferred units are redeemable at Vornado's option for class A
units at any time beginning on April 1, 2001, and are convertible at Vornado's
option into class A units at any time, provided that an equivalent number of
series A preferred shares are concurrently converted into common shares by their
holders. The number of class A units into which the series A preferred units are
redeemable or convertible is equal to the aggregate liquidation preference of
the series A preferred units being redeemed or converted divided by their
conversion price. The conversion price of the series A preferred units is now
$36.10 and may be adjusted from time to time to take account of stock dividends
and other transactions.
The series B pass-through preferred units are redeemable at Vornado's option
for cash equal to $25.00 per unit and any accumulated and unpaid distributions
owing in respect of the series B pass-through preferred units at any time
beginning on March 17, 2004, provided that an equivalent number of series B
preferred shares are concurrently redeemed by Vornado.
The series C pass-through preferred units are redeemable at Vornado's option
for cash equal to $25.00 per unit and any accumulated and unpaid distributions
owing in respect of the series C pass-through preferred units at any time
beginning on May 17, 2004, provided that an equivalent number of series C
preferred shares are concurrently redeemed by Vornado.
The series B-1 convertible preferred units are redeemable at any time
beginning on January 1, 2008 at Vornado's option for a number of class A units
equal to the aggregate liquidation preference of the series B-1 convertible
preferred units of $50.00 per unit divided by the conversion price of the series
B-1 convertible preferred units of $54.7050. The series B-2 restricted preferred
units are redeemable at any time beginning on January 1, 2008 at Vornado's
option for cash of $50 per unit. The series B-1 convertible preferred units and
series B-2 restricted preferred units are convertible at any time at the option
of their holders in groups of two series B-1 convertible preferred units and one
series B-2 restricted preferred unit into a number of class A units equal to the
aggregate series B-1 and B-2 preferred liquidation preferences of the units
being converted divided by the conversion price of $54.7050.
The series C-1 preferred units are perpetual and may be redeemed without
penalty in whole or in part by the operating partnership at any time beginning
on November 24, 2003 for 1.1431 class A units per series C-1 preferred unit,
subject to anti-dilution adjustments. Holders of series C-1 preferred units have
the right to convert all or a portion of their series C-1 preferred units at any
time into class A units at the same rate.
The series D-1 preferred units are perpetual and may be redeemed without
penalty in whole or in part by the operating partnership at any time beginning
on
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November 12, 2003 for cash equal to $25.00 per unit and any accumulated and
unpaid distributions owing in respect of the series D-1 units being redeemed. At
any time beginning on November 12, 2008, or earlier upon the occurrence of
specified events, holders of series D-1 preferred units will have the right to
have their series D-1 preferred units redeemed by the operating partnership for
either:
cash equal to $25.00 for each series D-1 preferred unit and any accumulated
and unpaid distributions owing in respect of the series D-1 preferred units
being redeemed; or
at Vornado's option, one series D-1 8.5% cumulative redeemable preferred
share of beneficial interest, no par value, of Vornado for each series D-1
preferred unit redeemed.
The series D-2 preferred units are perpetual and may be redeemed without
penalty in whole or in part by the operating partnership at any time beginning
on May 27, 2004 for cash equal to $50.00 per unit and any accumulated and unpaid
distributions owing in respect of the series D-2 units being redeemed. At any
time beginning on May 27, 2009, or earlier upon the occurrence of specified
events, holders of series D-2 preferred units will have the right to have their
series D-2 preferred units redeemed by the operating partnership for either:
cash equal to $50.00 for each series D-2 preferred unit and any accumulated
and unpaid distributions owing in respect of the series D-2 preferred units
being redeemed; or
at Vornado's option, one series D-2 preferred share of Vornado for each
series D-2 preferred unit redeemed.
The series D-3 preferred units are perpetual and may be redeemed without
penalty in whole or in part by the operating partnership at any time beginning
on September 3, 2004 for cash equal to $25.00 per unit and any accumulated and
unpaid distributions owing in respect of the series D-3 units being redeemed. At
any time beginning on September 3, 2009, or earlier upon the occurrence of
specified events, holders of series D-3 preferred units will have the right to
have their series D-3 preferred units redeemed by the operating partnership for
either:
cash equal to $25.00 for each series D-3 preferred unit and any accumulated
and unpaid distributions owing in respect of the series D-3 preferred units
being redeemed; or
at Vornado's option, one series D-3 referred share of Vornado for each
series D-3 preferred unit redeemed.
The series D-4 preferred units are perpetual and may be redeemed without
penalty in whole or in part by the operating partnership at any time beginning
on September 3, 2004 for cash equal to $25.00 per unit and any accumulated and
unpaid distributions owing in respect of the series D-4 units being redeemed. At
any time beginning on September 3, 2009, or earlier upon the occurrence of
specified events, holders of series D-4 preferred units will have the right to
have their series D-4 preferred units redeemed by the operating partnership for
either:
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cash equal to $25.00 for each series D-4 preferred unit and any accumulated
and unpaid distributions owing in respect of the series D-4 preferred units
being redeemed; or
at Vornado's option, one series D-4 preferred share of Vornado for each
series D-4 preferred unit redeemed.
The series D-5 preferred units are perpetual and may be redeemed without
penalty in whole or in part by the operating partnership at any time beginning
on November 24, 2004 for cash equal to $25.00 per unit and any accumulated and
unpaid distributions owing in respect of the series D-5 units being redeemed. At
any time beginning on November 24, 2009, or earlier upon the occurrence of
specified events, holders of series D-5 preferred units will have the right to
have their series D-5 preferred units redeemed by the operating partnership for
either:
cash equal to $25.00 for each series D-5 preferred unit and any accumulated
and unpaid distributions owing in respect of the series D-5 preferred units
being redeemed; or
at Vornado's option, one series D-5 preferred share of Vornado for each
series D-5 preferred unit redeemed.
The series E-1 convertible preferred units are redeemable at any time
beginning on March 3, 2004 at Vornado's option for cash equal to $50.00 for each
series E-1 convertible preferred unit and any accumulated and unpaid
distributions owing in respect of the series E-1 convertible preferred units
being redeemed. Commencing on May 1, 2000, holders of series E-1 convertible
preferred units will have the right to have their series E-1 convertible
preferred units redeemed by the operating partnership for either:
a number of class A units equal to the aggregate liquidation preferences of
the series E-1 convertible preferred units being converted divided by the
conversion price of $44.00, subject to customary antidilution adjustments;
or
at the holder's option, cash equal to that same number of class A units
multiplied by the value on the redemption date of one common share.
FORMATION OF THE OPERATING PARTNERSHIP
The operating partnership was formed as a limited partnership under the
Delaware Revised Uniform Limited Partnership Act on October 2, 1996. Vornado is
the sole general partner of, and owned approximately 86% of the common limited
partnership interest in, the operating partnership at September 30, 1999.
PURPOSES, BUSINESS AND MANAGEMENT OF THE OPERATING PARTNERSHIP
The purpose of the operating partnership includes the conduct of any
business that may be lawfully conducted by a limited partnership formed under
the Delaware Revised Uniform Limited Partnership Act, except that the
partnership agreement requires the business of the operating partnership to be
conducted in a manner that will permit Vornado to be classified as a REIT under
Section 856 of the Internal Revenue Code, unless Vornado ceases to qualify as
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a REIT for any reason. In furtherance of its business, the operating partnership
may enter into partnerships, joint ventures, limited liability companies or
similar arrangements and may own interests in any other entity engaged, directly
or indirectly, in any of the foregoing.
Vornado, as the general partner of the operating partnership, has the
exclusive power and authority to conduct the business of the operating
partnership, except that the consent of the limited partners is required in some
limited circumstances discussed under ' -- Meetings and voting' below. No
limited partner may take part in the operation, management or control of the
business of the operating partnership by virtue of being a holder of units.
In particular, the limited partners expressly acknowledge in the partnership
agreement that the general partner is acting on behalf of the operating
partnership and Vornado's shareholders collectively, and is under no obligation
to consider the tax consequences to, or other separate interests of, limited
partners when making decisions on behalf of the operating partnership. Except as
required by the lockup agreements, Vornado intends to make decisions in its
capacity as general partner of the operating partnership taking into account the
interests of Vornado and the operating partnership as a whole, independent of
the tax effects on the limited partners. See ' -- Borrowing by the operating
partnership' below for a discussion of the lockup agreements. Vornado and its
trustees and officers will have no liability to the operating partnership or to
any partner or assignee for any losses sustained, liabilities incurred or
benefits not derived as a result of errors in judgment or mistakes of fact or
law or any act or omission if Vornado acted in good faith.
ABILITY OF VORNADO TO ENGAGE IN OTHER BUSINESSES; CONFLICTS OF INTEREST
Vornado generally may not conduct any business other than through the
operating partnership without the consent of the holders of a majority of the
common limited partnership interests, excluding the limited partnership
interests held by Vornado. Other persons including officers, trustees,
employees, agents and other affiliates of Vornado are not prohibited under the
partnership agreement from engaging in other business activities and are not
required to present any business opportunities to the operating partnership. In
addition, the partnership agreement does not prevent another person or entity
that acquires control of Vornado in the future from conducting other businesses
or owning other assets, even though those businesses or assets may be ones that
it would be in the best interests of the limited partners for the operating
partnership to own.
BORROWING BY THE OPERATING PARTNERSHIP
Vornado is authorized to cause the operating partnership to borrow money and
to issue and guarantee debt as it deems necessary for the conduct of the
activities of the operating partnership. The operating partnership's debt may be
secured by mortgages, deeds of trust, liens or encumbrances on the operating
partnership's properties. Vornado also may cause the operating partnership to
borrow money to enable the operating partnership to make distributions,
including
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distributions in an amount sufficient to permit Vornado to avoid the payment of
any Federal income tax.
From time to time in connection with acquisitions of properties or other
assets in exchange for limited partner interests in the operating partnership,
Vornado and the operating partnership have entered into contractual arrangements
that impose restrictions on the operating partnership's ability to sell,
finance, refinance and, in some instances, pay down existing financing on
certain of the operating partnership's properties or other assets. These
arrangements are sometimes referred to as 'lockup agreements' and include, for
example, arrangements in which the operating partnership agrees that it will not
sell the property or other assets in question for a period of years unless the
operating partnership also pays the contributing partner a portion of the
Federal income tax liability that will accrue to that partner as a result of the
sale. Arrangements of this kind may significantly reduce the operating
partnership's ability to sell, finance or repay indebtedness secured by the
subject properties or assets. Vornado expects to cause the operating partnership
to continue entering into transactions of this type in the future and may do so
without obtaining the consent of any partners in the operating partnership.
REIMBURSEMENT OF VORNADO; TRANSACTIONS WITH VORNADO AND ITS AFFILIATES
Vornado does not receive any compensation for its services as general
partner of the operating partnership. Vornado, however, as a partner in the
operating partnership, has the same right to allocations and distributions with
respect to the units it holds as other partners in the operating partnership
holding the same classes of units. In addition, the operating partnership
reimburses Vornado for all expenses it incurs relating to the ongoing operation
of Vornado and any other offering of additional partnership interests in the
operating partnership, securities of Vornado or rights, options, warrants or
convertible or exchangeable securities, including expenses in connection with
this registration of common shares for issuance in exchange for units if Vornado
assumes the obligation to redeem units and elects to redeem them for common
shares instead of cash when a limited partner in the operating partnership
exercises the right to redeem units. See 'Redemption of units' above for further
information about the right to redeem units.
Except as expressly permitted by the partnership agreement, the operating
partnership will not, directly or indirectly, sell, transfer or convey any
property to, or purchase any property from, or borrow funds from, or lend funds
to, any partner in the operating partnership or any affiliate of the operating
partnership or Vornado that is not also a subsidiary of the operating
partnership, except in a transaction that has been approved by a majority of the
disinterested trustees of Vornado, taking into account the fiduciary duties of
Vornado to the limited partners of the operating partnership.
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LIABILITY OF VORNADO AND LIMITED PARTNERS
Vornado, as general partner of the operating partnership, is liable for all
general recourse obligations of the operating partnership to the extent not paid
by the operating partnership. Vornado is not liable for the nonrecourse
obligations of the operating partnership.
The limited partners in the operating partnership are not required to make
additional contributions to the operating partnership. Assuming that a limited
partner does not take part in the control of the business of the operating
partnership and otherwise complies with the provisions of the partnership
agreement, the liability of a limited partner for obligations of the operating
partnership under the partnership agreement and the Delaware Revised Uniform
Limited Partnership Act will be limited, with some exceptions, generally to the
loss of the limited partner's investment in the operating partnership
represented by his or her units. Under the Delaware Revised Uniform Limited
Partnership Act, a limited partner may not receive a distribution from the
operating partnership if, at the time of the distribution and after giving
effect to the distribution, the liabilities of the operating partnership, other
than liabilities to parties on account of their interests in the operating
partnership and liabilities for which recourse is limited to specified property
of the operating partnership, exceed the fair value of the operating
partnership's assets, other than the fair value of any property subject to
nonrecourse liabilities of the operating partnership, but only to the extent of
such liabilities. The Delaware Revised Uniform Limited Partnership Act provides
that a limited partner who receives a distribution knowing at the time that it
violates the foregoing prohibition is liable to the operating partnership for
the amount of the distribution. Unless otherwise agreed, a limited partner in
the circumstances described in the preceding sentence will not be liable for the
return of the distribution after the expiration of three years from the date of
the distribution.
The operating partnership has qualified to conduct business in the State of
New York and may qualify in certain other jurisdictions. Maintenance of limited
liability may require compliance with legal requirements of those jurisdictions
and some other jurisdictions. Limitations on the liability of a limited partner
for the obligations of a limited partnership have not been clearly established
in many jurisdictions. Accordingly, if it were determined that the right, or
exercise of the right by the limited partners, to make some amendments to the
partnership agreement or to take other action under the partnership agreement
constituted 'control' of the operating partnership's business for the purposes
of the statutes of any relevant jurisdiction, the limited partners might be held
personally liable for the operating partnership's obligations.
EXCULPATION AND INDEMNIFICATION OF VORNADO
The partnership agreement generally provides that Vornado, as general
partner of the operating partnership, will incur no liability to the operating
partnership or any limited partner for losses sustained, liabilities incurred or
benefits not derived as a result of errors in judgment or mistakes of fact or
law
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or any act or omission, if Vornado acted in good faith. In addition, Vornado is
not responsible for any misconduct or negligence on the part of its agents,
provided Vornado appointed those agents in good faith. Vornado may consult with
legal counsel, accountants, appraisers, management consultants, investment
bankers and other consultants and advisors, and any action it takes or omits to
take in reliance upon the opinion of those persons, as to matters that Vornado
reasonably believes to be within their professional or expert competence, will
be conclusively presumed to have been done or omitted in good faith and in
accordance with the opinion of those persons.
The partnership agreement also provides for indemnification of Vornado, the
trustees and officers of Vornado and any other persons that Vornado may from
time to time designate against any and all losses, claims, damages, liabilities,
expenses, judgments, fines, settlements and other amounts incurred by an
indemnified person in connection with any proceeding and related to the
operating partnership or Vornado, the formation and operations of the operating
partnership or Vornado or the ownership of property by the operating partnership
or Vornado, unless it is established by a final determination of a court of
competent jurisdiction that:
the act or omission of the indemnified person was material to the matter
giving rise to the proceeding and either was committed in bad faith or was
the result of active and deliberate dishonesty;
the indemnified person actually received an improper personal benefit in
money, property or services; or
in the case of any criminal proceeding, the indemnified person had
reasonable cause to believe that the act or omission was unlawful.
SALES OF ASSETS
Under the partnership agreement, Vornado generally has the exclusive
authority to determine whether, when and on what terms assets of the operating
partnership will be sold, as long as any sale of a property covered by the
lockup agreements complies with those provisions. The partnership agreement
prohibits Vornado from engaging in any merger, consolidation or other
combination with or into another person, sale of all or substantially all of its
assets or any reclassification, recapitalization or change of the terms of any
outstanding common shares unless, in connection with the transaction, all
limited partners other than Vornado and entities controlled by Vornado will have
the right to elect to receive, or will receive, for each unit an amount of cash,
securities or other property equal to the conversion factor multiplied by the
greatest amount of cash, securities or other property paid to a holder of shares
of beneficial interest of Vornado, if any, corresponding to that unit in
consideration of one share of that kind. We refer to transactions described in
the preceding sentence as 'termination transactions'. The conversion factor is
initially 1.0, but will be adjusted as necessary to prevent dilution or
inflation of the interests of limited partners that would result if Vornado were
to pay a dividend on its outstanding shares of beneficial interest in shares of
beneficial interest, subdivide its outstanding shares
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of beneficial interest or combine its outstanding shares of beneficial interest
into a smaller number of shares, in each case without a corresponding issuance
to, or redemption or exchange of interests held by, limited partners in the
operating partnership.
See ' -- Borrowing by the operating partnership' above for information about
the lockup agreements, which limit our ability to sell some of our properties.
REMOVAL OF THE GENERAL PARTNER; TRANSFER OF VORNADO'S INTERESTS
The partnership agreement provides that the limited partners may not remove
Vornado as general partner of the operating partnership with or without cause.
In addition, the partnership agreement prohibits Vornado from engaging in any
termination transaction unless all limited partners other than Vornado and
entities controlled by Vornado will have the right in the termination
transaction to elect to receive, or will receive, for each unit an amount of
cash, securities or other property equal to the conversion factor multiplied by
the greatest amount of cash, securities or other property paid to a holder of
shares of beneficial interest of Vornado, if any, corresponding to that unit in
consideration of one share of Vornado. The lock-out provisions and the gross-up
provisions do not apply to a sale or other transfer by Vornado of its interests
as a partner in the operating partnership, but they would apply to transfers of
assets of the operating partnership undertaken during the period when the lockup
agreements are in effect as part of any sale or other transfer by Vornado of its
interests as a partner in the operating partnership. See ' -- Borrowing by the
operating partnership' for a description of the restrictions on transfers of
assets under the lockup agreements.
The partnership agreement does not prevent a transaction in which another
entity acquires control or all of the shares of Vornado and that other entity
owns assets and conducts businesses outside of the operating partnership.
RESTRICTIONS ON TRANSFERS OF UNITS BY LIMITED PARTNERS
Before the expiration of the initial holding period with respect to his or
her units, a limited partner may not transfer any of his or her rights as a
limited partner without the consent of Vornado, which consent Vornado may
withhold in its sole discretion. The initial holding period expired. Any
attempted transfer in violation of this restriction will have no force or
effect. After the expiration of the initial holding period with respect to his
or her units, a limited partner, other than Vornado, some members of the Mendik
group and FW/Mendik REIT, will be permitted to transfer all or any portion of
his or her units without restriction, provided that the limited partner obtains
Vornado's prior written consent, which Vornado may withhold only if it
determines in its sole discretion exercised in good faith that the transfer
would cause the operating partnership or any or all of the partners other than
the partner seeking to make the transfer to incur tax liability. In addition,
limited partners other than Vornado or any subsidiary of Vornado will be
permitted to dispose of their units following the expiration of the initial
holding
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period by exercising their right to redeem units as described under 'Redemption
of units' above.
Any permitted transferee of units may become a substituted limited partner
only with the consent of Vornado, and Vornado may withhold its consent in its
sole and absolute discretion. If Vornado does not consent to the admission of a
transferee of units as a substituted limited partner, then the transferee will
succeed to the economic rights and benefits attributable to the units, including
the right to redeem units, but will not become a limited partner or possess any
other rights of limited partners, including the right to vote.
NO WITHDRAWAL BY LIMITED PARTNERS
No limited partner has the right to withdraw from or reduce his or her
capital contribution to the operating partnership, except as a result of the
redemption, exchange or transfer of units under the terms of the partnership
agreement.
ISSUANCE OF LIMITED PARTNERSHIP INTERESTS
Vornado is authorized, without the consent of the limited partners, to cause
the operating partnership to issue limited partnership interests to Vornado, to
the limited partners and to other persons for the consideration and upon the
terms and conditions that Vornado deems appropriate. The operating partnership
also may issue partnership interests in different series or classes. See
' -- Ranking' above for a description of restrictions on the issuance of units
while the class D units remain outstanding. Units may be issued to Vornado only
if Vornado issues shares of beneficial interest and contributes to the operating
partnership the proceeds received by Vornado from the issuance of the shares.
Consideration for partnership interests may be cash or any property or other
assets permitted by the Delaware Revised Uniform Limited Partnership Act. No
limited partner has preemptive, preferential or similar rights with respect to
capital contributions to the operating partnership or the issuance or sale of
any partnership interests.
MEETINGS AND VOTING
Meetings of the limited partners may be proposed and called only by Vornado.
Limited partners may vote either in person or by proxy at meetings. Any action
that is required or permitted to be taken by the limited partners may be taken
either at a meeting of the limited partners or without a meeting if consents in
writing stating the action so taken are signed by limited partners owning not
less than the minimum number of units that would be necessary to authorize or
take the action at a meeting of the limited partners at which all limited
partners entitled to vote on the action were present. On matters in which
limited partners are entitled to vote, each limited partner, including Vornado
to the extent it holds units, will have a vote equal to the number of common
units he or she holds. At this time, there is no voting preference among the
classes of common units. The preferred units have no voting rights, except as
required by law or the terms of a particular series of preferred units. A
transferee of units who has not been admitted as a substituted limited partner
with respect to his or her transferred units will have no voting rights with
respect to those Units, even if the transferee
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holds other units as to which he or she has been admitted as a limited partner,
and units owned by the transferee will be deemed to be voted on any matter in
the same proportion as all other interests held by limited partners are voted.
The partnership agreement does not provide for annual meetings of the limited
partners, and Vornado does not anticipate calling such meetings.
AMENDMENT OF THE PARTNERSHIP AGREEMENT
Amendments to the partnership agreement may be proposed only by Vornado.
Vornado generally has the power, without the consent of any limited partners, to
amend the partnership agreement as may be required to reflect any changes to the
agreement that Vornado deems necessary or appropriate in its sole discretion,
provided that the amendment does not adversely affect or eliminate any right
granted to a limited partner that is protected by the special voting provisions
described below. Limitations on Vornado's power to amend the partnership
agreement are described below.
The partnership agreement provides that it generally may not be amended with
respect to any partner adversely affected by the amendment without the consent
of that partner if the amendment would:
convert a limited partner's interest into a general partner's interest;
modify the limited liability of a limited partner;
amend Section 7.11.A, which prohibits Vornado from taking any action in
contravention of an express prohibition or limitation in the partnership
agreement without the written consent of all partners adversely affected by
the action or any lower percentage of the limited partnership interests
that may be specifically provided for in the partnership agreement or under
the Delaware Revised Uniform Limited Partnership Act;
amend Article V, which governs distributions, Article VI, which governs
allocations of income and loss for capital account purposes, or Section
13.2A(3), which provides for distributions, after payment of partnership
debts, among partners according to their capital accounts upon a winding up
of the operating partnership;
amend Section 8.6, which provides redemption rights; or
amend the provision being described in this paragraph.
In addition, except with the consent of a majority of the common limited
partners, excluding Vornado and entities controlled by Vornado, Vornado may not
amend:
Section 4.2.A, which authorizes issuance of additional limited partnership
interests;
Section 5.1.C, which requires that if Vornado is not a REIT or a publicly
traded entity it must for each taxable year make cash distributions equal
to at least 95% of the operating partnership's taxable income;
Section 7.5, which prohibits Vornado from conducting any business other
than in connection with the ownership of interests in the operating
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partnership except with the consent of a majority of the common limited
partners, excluding Vornado and any entity controlled by Vornado;
Section 7.6, which limits the operating partnership's ability to enter
transactions with affiliates;
Section 7.8, which establishes limits on Vornado's liabilities to the
operating partnership and the limited partners;
Section 11.2, which limits Vornado's ability to transfer its interests in
the operating partnership;
Section 13.1, which describes the manner and circumstances in which the
operating partnership will be dissolved;
Section 14.1.C, which establishes the limitations on amendments being
described in this paragraph; or
Section 14.2, which establishes the rules governing meetings of partners.
In addition, any amendment that would affect those lockup agreements that
are part of the partnership agreement requires the consent of 75% of the limited
partners benefited by those lockup agreements, with some exceptions. See
'Description of the units and the operating partnership -- Borrowing by the
operating partnership' for information about the lockup agreements.
BOOKS AND REPORTS
Vornado is required to keep the operating partnership's books and records at
the principal office of the operating partnership. The books of the operating
partnership are required to be maintained for financial and tax reporting
purposes on an accrual basis in accordance with generally accepted accounting
principles, which we refer to as 'GAAP'. The limited partners have the right,
with some limitations, to receive copies of the most recent annual and quarterly
reports filed with the SEC by Vornado, the operating partnership's Federal,
state and local income tax returns, a list of limited partners, the partnership
agreement and the partnership certificate and all amendments to the partnership
certificate. Vornado may keep confidential from the limited partners any
information that Vornado believes to be in the nature of trade secrets or other
information whose disclosure Vornado in good faith believes is not in the best
interests of the operating partnership or which the operating partnership is
required by law or by agreements with unaffiliated third parties to keep
confidential.
Vornado will furnish to each limited partner, no later than the date on
which Vornado mails its annual report to its shareholders, an annual report
containing financial statements of the operating partnership, or of Vornado, if
Vornado prepares consolidated financial statements including the operating
partnership, for each fiscal year, presented in accordance with GAAP. The
financial statements will be audited by a nationally recognized firm of
independent public accountants selected by Vornado. In addition, if and to the
extent that Vornado mails quarterly reports to its shareholders, Vornado will
furnish to each limited partner, no later than the date on which Vornado mails
the quarterly reports to its shareholders, a report containing unaudited
financial statements of the operating partnership, or of
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<PAGE>
Vornado, if the reports are prepared on a consolidated basis, as of the last day
of the quarter and any other information that may be required by applicable law
or regulation or that Vornado deems appropriate.
Vornado will use reasonable efforts to furnish to each limited partner,
within 90 days after the close of each taxable year, the tax information
reasonably required by the limited partners for Federal and state income tax
reporting purposes.
POWER OF ATTORNEY
Under the terms of the partnership agreement, each limited partner and each
assignee appoints Vornado, any liquidator, and the authorized officers and
attorneys-in-fact of each, as the limited partner's or assignee's
attorney-in-fact to do the following:
to execute, swear to, acknowledge, deliver, file and record in the
appropriate public offices (a) all certificates, documents and other
instruments including, among other things, the partnership agreement and
the certificate of limited partnership and all amendments or restatements
of the certificate of limited partnership that Vornado or any liquidator
deems appropriate or necessary to form, qualify or maintain the existence
of the operating partnership as a limited partnership in the State of
Delaware and in all other jurisdictions in which the operating partnership
may conduct business or own property, (b) all instruments that Vornado or
any liquidator deems appropriate or necessary to reflect any amendment or
restatement of the partnership agreement in accordance with its terms, (c)
all conveyances and other instruments that Vornado or any liquidator deems
appropriate or necessary to reflect the dissolution and liquidation of the
operating partnership under the terms of the partnership agreement, (d) all
instruments relating to the admission, withdrawal, removal or substitution
of any partner, any transfer of units or the capital contribution of any
partner and (e) all certificates, documents and other instruments relating
to the determination of the rights, preferences and privileges of
partnership interests; and
to execute, swear to, acknowledge and file all ballots, consents,
approvals, waivers, certificates and other instruments appropriate or
necessary, in the sole and absolute discretion of Vornado or any
liquidator, to make, evidence, give,
confirm or ratify any vote, consent, approval, agreement or other action
which is made or given by the partners under the partnership agreement or
is consistent with the terms of the partnership agreement or appropriate or
necessary, in the sole discretion of Vornado or any liquidator, to
effectuate the terms or intent of the partnership agreement.
The partnership agreement provides that this power of attorney is irrevocable,
will survive the subsequent incapacity of any limited partner and the transfer
of all or any portion of the limited partner's or assignee's units and will
extend to the
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<PAGE>
limited partner's or assignee's heirs, successors, assigns and personal
representatives.
DISSOLUTION, WINDING UP AND TERMINATION
The operating partnership will continue until December 31, 2095, as this
date may be extended by the General Partner in its sole discretion, unless
sooner dissolved and terminated. The operating partnership will be dissolved
before the expiration of its term, and its affairs wound up upon the occurrence
of the earliest of:
the withdrawal of Vornado as general partner without the permitted transfer
of Vornado's interest to a successor general partner, except in some
limited circumstances;
the sale of all or substantially all of the operating partnership's assets
and properties, subject to the lockup agreements during the period when the
lockup agreements are in effect;
the entry of a decree of judicial dissolution of the operating partnership
under the provisions of the Delaware Revised Uniform Limited Partnership
Act;
the entry of a final non-appealable order for relief in a bankruptcy
proceeding of the general partner, or the entry of a final non-appealable
judgment ruling that the general partner is bankrupt or insolvent, except
that, in either of these cases, in some circumstances the limited partners
other than Vornado may vote to continue the operating partnership and
substitute a new general partner in place of Vornado); or
on or after December 31, 2046, on election by Vornado, in its sole and
absolute discretion.
Upon dissolution, Vornado, as general partner, or any liquidator will proceed to
liquidate the assets of the operating partnership and apply the proceeds from
the liquidation in the order of priority provided in the partnership agreement.
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<PAGE>
COMPARISON OF OWNERSHIP OF UNITS AND COMMON SHARES
The information below highlights a number of the significant differences and
similarities between the operating partnership and Vornado relating to, among
other things, form of organization, investment objectives, policies and
restrictions, asset diversification, capitalization, management structure,
duties, liability, exculpation and indemnification of the general partner and
the trustees and investor voting and other rights. These comparisons are
intended to assist you in understanding how your investment will be changed if
you redeem your units and Vornado exercises its right to assume the operating
partnership's obligation with respect to the redemption and to acquire the units
in exchange for common shares. See 'Redemption of units' for a description of
your right to have your units redeemed and Vornado's right to redeem the units
for common shares instead of cash. THE DISCUSSION BELOW IS ONLY A SUMMARY OF
THESE MATTERS, AND YOU SHOULD CAREFULLY REVIEW THE BALANCE OF THIS PROSPECTUS
FOR ADDITIONAL IMPORTANT INFORMATION.
<TABLE>
<CAPTION>
THE OPERATING PARTNERSHIP VORNADO
FORM OF ORGANIZATION AND PURPOSE
<S> <C>
The operating partnership is a Vornado is a Maryland real estate
limited partnership organized under investment trust organized under
the laws of the State of Delaware. Title 8 of the Corporations and
The operating partnership owns Associations Article of the Annotated
interests in office building Code of Maryland, as amended. We
properties, shopping center refer to Title 8 as the 'Maryland
properties, cold storage facilities, REIT law'. Although Vornado currently
trade showroom properties, intends to continue to qualify as a
industrial/warehouse properties and REIT under the Internal Revenue Code
various other properties and and to operate as a self-administered
investments. See 'Vornado and the REIT, Vornado is not under any
operating partnership' for further contractual obligation to continue to
information about the operating qualify as a REIT and Vornado may not
partnership's assets. The operating continue to maintain this
partnership may also invest in other qualification or mode of operation in
types of real estate and in any the future. Although Vornado has no
geographic areas that Vornado deems intention of ceasing to qualify as a
appropriate. Vornado conducts the REIT, some other real estate
business of the operating partnership companies that previously operated as
in a manner intended to permit REITs have chosen to cease to qualify
Vornado to be classified as a REIT as REITs. Except as otherwise
under the Internal Revenue Code. permitted in the partnership
agreement, Vornado is obligated to
conduct its activities through the
operating partnership. Vornado is the
sole general partner of the operating
partnership.
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
THE OPERATING PARTNERSHIP VORNADO
NATURE OF INVESTMENT
<S> <C>
The units constitute equity The common shares constitute
interests entitling each limited equity interests in Vornado. Vornado
partner in the operating partnership is entitled to receive its
to his or her proportional share of proportionate share of distributions
cash distributions made to the made by the operating partnership
limited partners in the operating with respect to the class A units
partnership, consistent with the owned by it. Each holder of common
class preferences provided for in the shares of Vornado is entitled to his
partnership agreement. See or her proportionate share of any
'Description of dividends or distributions paid with
units -- Distributions' for further respect to those common shares, and
information about distributions to these distributions will generally
limited partners. match distributions made in respect
The units entitle their holders of class A units. The dividends
to participate in the growth and payable to holders of common shares
income of the operating partnership. are not fixed in amount and are only
The partnership agreement grants paid if, when and as authorized by
Vornado discretion to determine the the Board of Trustees and declared by
frequency and amount of distributions Vornado out of assets legally
by the operating partnership. The available to pay dividends. If any
operating partnership and thus preferred shares are at the time
Vornado generally expect to retain outstanding, dividends on the common
and reinvest proceeds of any sale of shares and other distributions,
property and refinancings, except in including purchases by Vornado of
some limited circumstances. Thus, common shares, may be made only if
limited partners in the operating full cumulative dividends have been
partnership will not be able to declared and paid on the outstanding
realize upon their investments preferred shares and there are no
through distributions of sale and arrearages in any mandatory sinking
refinancing proceeds. Instead, fund on outstanding preferred shares.
limited partners will be able to To qualify as a REIT, Vornado must
realize upon their investments distribute to its shareholders at
primarily by redeeming units and, if least 95% of its taxable income
Vornado issues common shares in excluding capital gains, and
exchange for redeemed units, by corporate income tax will apply to
subsequently selling the common any taxable income including capital
shares. gains not distributed.
LENGTH OF INVESTMENT
The operating partnership has a Vornado has a perpetual term and
stated term expiring on December 31, intends to continue its operations
2095, which can be extended by for an indefinite time period. Under
Vornado in its sole discretion. The the declaration of trust, the
operating partnership has no specific dissolution of Vornado must be
plans for disposition of its assets. approved at any meeting of
To the extent that the operating shareholders called for that purpose
by the affirmative vote of the
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
THE OPERATING PARTNERSHIP VORNADO
<S> <C>
partnership sells or refinances holders of not less than a majority
its assets, the net proceeds from the of 'shares', as defined in the
sale or refinancing generally will be declaration of trust, outstanding.
retained by the operating partnership Vornado has an indirect interest in
for working capital and new the properties and property service
investments rather than being businesses owned by the operating
distributed to its partners, partnership.
including Vornado, except that Shareholders of Vornado are expected
Vornado currently expects that it to realize liquidity of their
generally will distribute the capital investments by the trading of the
gains portion of proceeds it receives common shares on the NYSE.
from the sale of properties. The
operating partnership constitutes a
vehicle for taking advantage of
future investment opportunities that
may be available in the real estate
market.
The operating partnership
generally will reinvest the proceeds
of asset dispositions, if any, in new
properties or other appropriate
investments consistent with its
investment objectives. After the
expiration of the applicable holding
period with respect to their units,
limited partners in the operating
partnership are entitled to exercise
the right to have their units
redeemed either for common shares or
for cash, at the option of Vornado.
LIQUIDITY
Units are not registered under Any common shares issued in
the Securities Act or any state exchange for redeemed units will be
securities laws and therefore may not registered under the Securities Act
be sold, pledged, hypothecated or and freely transferable, as long as
otherwise transferred unless first the shareholder complies with the
registered under the Securities Act ownership limits in the declaration
and any applicable state securities of trust. Vornado's common shares are
laws, or unless an exemption from currently listed on the NYSE under
registration is available. Units also the ticker symbol of 'VNO' and have
may not be sold or otherwise been so listed by Vornado and its
transferred unless the other transfer predecessor for over 35 years. The
restrictions discussed below have future breadth and strength of this
been satisfied. Vornado and the secondary market will depend, among
operating partnership do not intend other things, upon the number of
to register the units under the common shares outstanding, Vornado's
Securities Act or any state financial results and prospects, the
securities laws.
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
THE OPERATING PARTNERSHIP VORNADO
<S> <C>
Limited partners in the general interest in Vornado's and
operating partnership may not other real estate investments, and
transfer any of their rights as Vornado's dividend yield compared to
limited partners without the consent that of other debt and equity
of Vornado, and Vornado may withhold securities.
its consent in its sole discretion if
it determines that the transfer would
cause any or all of the limited
partners other than the limited
partner seeking to transfer his or
her rights to incur tax liability as
a result of the transfer. Limited
partners in the operating partnership
may, after the expiration of the
applicable holding period with
respect to their units, transfer
beneficial interests in units without
the consent of Vornado as general
partner of the operating partnership,
if they comply with restrictions
designed to avoid violations of any
Federal or state securities laws. A
transferee of units has no right to
become a substituted limited partner
without the consent of Vornado, which
Vornado may withhold in its sole and
absolute discretion. Limited partners
will have the right, upon the
expiration of the initial holding
period, to elect to have their units
redeemed by the operating
partnership. Upon redemption of
units, a limited partner will receive
cash or, at the election of Vornado,
common shares of Vornado in exchange
for the redeemed units.
POTENTIAL DILUTION OF RIGHTS
Vornado as general partner of the The Board of Trustees of Vornado
operating partnership is authorized, may, in its discretion, authorize the
in its sole discretion and without issuance of additional common shares
limited partner approval, to cause and other equity securities of
the operating partnership to issue Vornado, including one or more
additional limited partnership classes or series of common or
interests and other equity securities preferred shares of beneficial
for any partnership purpose at any interest, with the voting rights,
time to Vornado, the limited partners dividend or interest rates,
or other persons on terms established preferences, subordinations,
by Vornado. Until all class D units conversion or redemption prices or
have been converted into rights, maturity dates, distribution,
exchange or
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
THE OPERATING PARTNERSHIP VORNADO
<S> <C>
class A units, the partnership liquidation rights or other rights
agreement will prohibit the operating that the Board of Trustees may
partnership from issuing any class of specify at the time. The issuance of
limited partnership interests ranking additional shares of either common
senior as to distributions or shares or other similar equity
redemption or voting rights to securities may result in the dilution
class D units, unless either: of the interests of the shareholders.
the newly issued limited As permitted by the Maryland REIT
partnership interests are Law, the declaration of trust
substantially similar to the contains a provision permitting the
terms of securities issued by Board of Trustees, without any action
Vornado and the proceeds of the by the shareholders of Vornado, to
issuance of the Vornado amend the declaration of trust to
securities have been contributed increase or decrease the aggregate
to the operating partnership; or number of shares of beneficial
the issuance of the limited interest or the number of shares of
partnership interests has been any class of shares of beneficial
approved by the holders of a interest that Vornado has authority
majority of the class D units to issue. Under the declaration of
issued in 1997 and then trust, holders of common shares do
outstanding. not have any preemptive rights to
The interests with respect to subscribe to any securities of
cash available for distribution of Vornado.
the limited partners in the operating
partnership may be diluted if
Vornado, in its sole discretion,
causes the operating partnership to
issue additional units or other
equity securities.
MANAGEMENT CONTROL
All management powers over the The Board of Trustees has
business and affairs of the operating exclusive control over the management
partnership are vested in Vornado as of Vornado's business and affairs,
the general partner of the operating limited only by express restrictions
partnership, and no limited partner on the Board's control in the
of the operating partnership has any declaration of trust and bylaws, the
right to participate in or exercise partnership agreement and applicable
control or management power over the law. The Board of Trustees is
business and affairs of the operating classified into three classes of
partnership, except as described trustees. At each annual meeting of
under 'Description of the shareholders of Vornado, the
Units -- Borrowing by the operating successors of the class of trustees
partnership' and ' -- Sales of whose terms expire at that
Assets'.
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
THE OPERATING PARTNERSHIP VORNADO
<S> <C>
Vornado may not be removed as meeting are elected. The policies
general partner by the limited adopted by the Board of Trustees may
partners with or without cause. be altered or eliminated without a
vote of the shareholders.
Accordingly, except for their vote in
the elections of trustees,
shareholders have no control over the
ordinary business policies of
Vornado.
Because a portion of the Board of Trustees is elected each year by the
shareholders at Vornado's annual meeting, the shareholders have greater
control over the management of Vornado than the limited partners have over
the operating partnership.
DUTIES OF GENERAL PARTNER AND TRUSTEES
Under Delaware law, Vornado as Under Maryland law, there is no
the general partner of the operating statute specifying the duties of
partnership is accountable to the trustees of a REIT like Vornado.
operating partnership as a fiduciary However, counsel to Vornado believes
and, consequently, is required to that it is likely that a Maryland
exercise good faith and integrity in court would refer to the Maryland
all of its dealings with respect to General Corporation Law, which
partnership affairs. However, under requires directors of a Maryland
the partnership agreement, Vornado is corporation to perform their duties
expressly under no obligation to in good faith, in a manner that they
consider the separate interests of reasonably believe to be in the best
the limited partners in deciding interests of the corporation and with
whether to cause the operating the care of an ordinarily prudent
partnership to take or decline to person in a like position under
take any actions, and Vornado is not similar circumstances. The Maryland
liable for monetary damages for General Corporation Law presumes that
losses sustained, liabilities a director's standard of care has
incurred or benefits not derived by been satisfied.
limited partners as a result of
Vornado's decisions, provided that
the general partner has acted in good
faith.
MANAGEMENT LIABILITY AND INDEMNIFICATION
As a matter of Delaware law, the The Maryland REIT law permits a
general partner has liability for the Maryland real estate investment trust
payment of the obligations and debts to include in its declaration of
of the operating partnership unless trust a provision limiting the
limitations upon this liability are liability of its trustees and
stated in the document or instrument officers to the trust and its
evidencing the obligation. Under the shareholders for money damages except
partnership agreement, the operating for liability resulting from:
partnership has agreed to indemnify actual receipt of any improper
benefit or profit in money,
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
THE OPERATING PARTNERSHIP VORNADO
<S> <C>
Vornado and any trustee or property or services; or
officer of Vornado from and against active and deliberate dishonesty
all losses, claims, damages, material to the cause of action
liabilities, joint or several, established by a final judgment.
expenses including legal fees, fines, The declaration of trust of Vornado
settlements and other amounts contains a provision of this kind
incurred in connection with any which eliminates the liability of
actions relating to the operations of Vornado's trustees and officers to
the operating partnership as Vornado and its shareholders to the
described in the partnership maximum extent permitted by the
agreement in which Vornado or any Maryland REIT law.
such trustee or officer is involved, Vornado's declaration of trust
unless: authorizes it, to the extent
the act was in bad faith and was permitted in the bylaws, to
material to the action; indemnify, and to pay or reimburse
the party seeking reasonable expenses to, as they are
indemnification received an incurred by, each trustee or officer,
improper personal benefit; or including any person who, while a
in the case of any criminal trustee of Vornado, is or was serving
proceeding, the party seeking at the request of Vornado as a
indemnification had reasonable director, officer, partner, trustee,
cause to believe the act was employee or agent of another foreign
unlawful. or domestic corporation, partnership,
The reasonable expenses incurred by joint venture, trust, other
an indemnified party may be advanced enterprise or employee benefit plan,
by the operating partnership before from all claims and liabilities to
the final disposition of the which the indemnified person may
proceeding upon receipt by the become subject by reason of being or
operating partnership of an having been a trustee or officer.
affirmation by the indemnified person Vornado's bylaws require it to
of his, her or its good faith belief indemnify to the maximum extent
that the standard of conduct permitted by the Maryland REIT law:
necessary for indemnification has any present or former trustee or
been met and an undertaking by the officer, including, without
indemnified person to repay the limitation, any individual who,
amount if it is determined that this while a trustee or officer and at
standard was not met. the request of Vornado, serves or
has served another corporation,
partnership, joint venture, trust,
employee benefit plan or any other
enterprise as a director, officer,
partner or trustee of that
corporation, partnership, joint
venture, trust, employee benefit
plan or other enterprise,
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
THE OPERATING PARTNERSHIP VORNADO
<S> <C>
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 that status,
against reasonable expenses incurred
by him in connection with the
proceeding; and
any present or former trustee or
officer against any claim or
liability to which that person may
become subject by reason of that
status unless it is established that
(a) that person's act or omission
was material to the cause of action
giving rise to the proceeding and
was committed in bad faith or was
the result of active and deliberate
dishonesty, (b) he or she actually
received an improper personal
benefit in money, property or
services or (c) in the case of a
criminal proceeding, he or she had
reasonable cause to believe that his
or her act or omission was unlawful.
In addition, Vornado's bylaws require
Vornado to pay or reimburse, in
accordance with the Maryland REIT
law, in advance of final disposition
of a proceeding, reasonable expenses
incurred by a present or former
trustee or officer made a party to a
proceeding by reason of that status
provided that Vornado has received
a written affirmation by the trustee
or officer of his good faith belief
that he has met the applicable
standard of conduct necessary for
indemnification by Vornado as
authorized by the bylaws; and
a written undertaking by him or
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
THE OPERATING PARTNERSHIP VORNADO
<S> <C>
on his behalf to repay the amount
paid or reimbursed by Vornado if it
is ultimately determined that the
applicable standard of conduct was
not met.
Vornado's bylaws also:
permit Vornado to provide
indemnification and payment or
reimbursement of expenses to a
present or former trustee or officer
who served a predecessor of Vornado
in that capacity and to any employee
or agent of Vornado or a predecessor
of Vornado;
provide that any indemnification or
payment or reimbursement of the
expenses permitted by the bylaws
shall be furnished in accordance
with the procedures provided for
indemnification or payment or
reimbursement of expenses, as the
case may be, under Section 2-418 of
the Maryland General Corporation Law
for directors of Maryland
corporations; and
permit Vornado to provide any other
and further indemnification or
payment or reimbursement of expenses
that may be permitted by the
Maryland General Corporation Law for
directors of Maryland corporations.
The Maryland REIT law permits a
Maryland real estate investment trust
to indemnify and advance expenses to
its trustees and officers to the same
extent as permitted by the Maryland
General Corporation Law for directors
and officers of Maryland
corporations. The Maryland General
Corporation Law permits a corporation
to indemnify its
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
THE OPERATING PARTNERSHIP VORNADO
<S> <C>
present and former directors and
officers, among others, against
judgments, penalties, fines,
settlements and reasonable expenses
actually incurred by them in
connection with any proceeding to
which they may be made a party by
reason of their service in those or
other capacities unless it is
established that:
the act or omission of the director
or officer was material to the
matter giving rise to the proceeding
and (a) was committed in bad faith
or (b) was the result of active and
deliberate dishonesty;
the director or officer actually
received an improper personal
benefit in money, property or
services; or
in the case of any criminal
proceeding, the director or officer
had reasonable cause to believe that
the act or omission was unlawful.
However, under the Maryland General
Corporation Law, a Maryland
corporation may not indemnify for an
adverse judgment in a suit by or in
the right of the corporation or for a
judgment of liability on the basis
that personal benefit was improperly
received, unless in either case a
court orders indemnification and then
only for expenses. In addition, the
Maryland General Corporation Law
permits a corporation to advance
reasonable expenses to a director or
officer upon the corporation's
receipt of:
a written affirmation by the director
or officer of his good faith belief
that he has met the standard of
conduct necessary
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
THE OPERATING PARTNERSHIP VORNADO
<S> <C>
for indemnification by the
corporation; and
a written undertaking by him or on
his behalf to repay the amount paid
or reimbursed by the corporation if
it is ultimately determined that the
standard of conduct was not met.
Thus, the management of the operating partnership and Vornado have
substantially the same rights to indemnification.
LIABILITY OF INVESTORS
Under the partnership agreement Under the Maryland REIT law,
and applicable state law, the shareholders are not personally
liability of the limited partners for liable for the obligations of
the operating partnership's debts and Vornado. The common shares, upon
obligations generally is limited to issuance, will be fully paid and
the amount of their investments in nonassessable.
the operating partnership, together
with their interest in the operating
partnership's undistributed income,
if any.
Thus, the limited partners in the operating partnership and the
shareholders of Vornado have substantially the same limited personal
liability.
VOTING RIGHTS
Under the partnership agreement, The business and affairs of
the limited partners have limited Vornado are managed under the
voting rights. The limited partners direction of the Board of Trustees,
have the right to vote on any which currently consists of seven
proposed action of the general members in classes having three-year
partner that would contravene any staggered terms of office. One class
express prohibition or limitation in is elected by the shareholders at
the partnership agreement, and any each annual meeting of Vornado
such action requires unanimous shareholders. Maryland law requires
approval by the limited partners. The that certain major corporate
limited partners do not have the transactions, including most
right to vote on any proposed sale, amendments to the declaration of
exchange, transfer or disposal of all trust, may be consummated only with
or substantially all of the assets of the approval of shareholders.
the operating partnership, except as The declaration of trust permits any
required under the lock-out action which may be taken at a
provisions. See 'Description of meeting of shareholders to be taken
units -- Sales of assets'. In without a meeting if a written
addition, the limited partners do not consent to the action is signed by
have the right to propose amendments holders of
to the partnership agreement and
their rights to vote on
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
THE OPERATING PARTNERSHIP VORNADO
<S> <C>
amendments are restricted as outstanding shares of beneficial
described under the caption interest having not less than the
'Description of Units -- Amendment of minimum number of votes that would be
the partnership agreement'. Any necessary to authorize or take the
amendment which requires the approval action at a meeting at which all
of the limited partners may be shares entitled to vote were present
approved by a majority of the limited and voted.
partners, except that any amendment Vornado had 5,789,239 series A
which would change the limited preferred shares, 3,400,000 series B
liability of a limited partner, preferred shares, and 4,600,000
change the voting requirements for series C preferred shares issued and
specified actions or amendments under outstanding as of September 30, 1999.
the partnership agreement or change The holders of preferred shares
specified provisions in the generally have no right to vote,
partnership agreement with respect to except that:
distributions and allocations or the if and whenever six quarterly
right to redeem units must be dividends, whether or not
approved by each limited partner consecutive, payable on either
adversely affected by the amendment. series of preferred shares are in
In addition, some series of preferred arrears, which, with respect to any
units have special voting rights that quarterly dividend, means that the
require their consent for actions dividend has not been paid in full,
that would adversely affect their whether or not the dividend was
preferences. earned or declared, the holders of
that series will have the right,
voting as a class, to elect two
additional Trustees; and
so long as any preferred shares
are outstanding, the affirmative
vote of at least two-thirds of
the outstanding preferred shares
and all other series of voting
preferred shares, voting as a
single class regardless of
series, will be necessary to (a)
amend, alter or repeal the
declaration of trust so as to
materially and adversely affect
the voting powers, rights or
preferences of the holders of the
preferred share or (b) authorize,
create or increase the authorized
amount of any shares ranking
prior to the preferred shares in
the distribution of assets or any
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
THE OPERATING PARTNERSHIP VORNADO
<S> <C>
liquidation or in the payment of
dividends.
The Board of Trustees has the power,
however, to create additional classes
of parity and junior shares, increase
the authorized number of parity and
junior shares, and issue additional
series of parity and junior shares
without the consent of any holder of
preferred shares.
AMENDMENT OF THE PARTNERSHIP AGREEMENT OR THE DECLARATION OF TRUST
Vornado generally has the power, Under the Maryland REIT law and
without the consent of any limited the declaration of trust, the
partners, to amend the partnership trustees, by a two-thirds vote, may
agreement as may be required to at any time amend the declaration of
reflect any changes that Vornado trust, without the approval of
deems necessary or appropriate in its shareholders, to enable Vornado to
sole discretion, provided that the qualify as a REIT under the Internal
amendment does not adversely affect Revenue Code or as a real estate
or eliminate any right granted to a investment trust under the Maryland
limited partner that is protected by REIT law. As permitted by the
specified special voting provisions. Maryland REIT law, the declaration of
See 'Description of trust authorizes Vornado's Board of
Units -- Amendment of the partnership Trustees, without any action by the
agreement' for further information shareholders, to amend the
about Vornado's power to amend the declaration of trust from time to
partnership agreement and the limits time to increase or decrease the
on that power. aggregate number of shares of
beneficial interest or the number of
shares of beneficial interest of any
class that Vornado is authorized to
issue. Except for certain specified
amendments which require the vote of
the holders of two-thirds of the
outstanding shares, other amendments
to the declaration of trust require
the vote of holders of a majority of
the outstanding shares, as defined in
the declaration of trust.
REVIEW OF INVESTOR LISTS
Under the partnership agreement, Under the Maryland General
limited partners in the operating Corporation Law, as applicable to
partnership, upon written demand with REITs, one or more shareholders
a statement of the purpose of the holding of record for at least six
demand and at the limited partner's months at least 5% of the outstanding
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
THE OPERATING PARTNERSHIP VORNADO
<S> <C>
expense, are entitled to obtain a shares of beneficial interest of any
current list of the name and last class of a real estate investment
known business, residence or mailing trust may, upon written request,
address of each limited partner of inspect and copy during usual
the operating partnership. business hours the share ledger of
the real estate investment trust or,
if the real estate investment trust
does not maintain an original or
duplicate share ledger at its
principal office, obtain a verified
list of shareholders, setting forth
their names and addresses and the
number of shares of each class held
by each shareholder.
Thus, the limited partners in the operating partnership and the
shareholders of Vornado have similar rights to inspect and, at their own
expense, make copies of investor lists, with some limitations.
REVIEW OF BOOKS AND RECORDS
Under the partnership agreement, Under the Maryland General
limited partners in the operating Corporation Law, as applicable to
partnership, upon written demand with REITs, any shareholder or his agent
a statement of the purpose of the may inspect and copy during normal
demand and at the limited partner's business hours the following real
expense, are entitled to obtain a estate investment trust documents:
copy of the operating partnership's bylaws;
Federal, state and local income tax minutes of the proceedings of
returns, to obtain a copy of the most shareholders;
recent annual and quarterly reports annual statements of affairs; and
filed by Vornado with the SEC and to voting trust agreements on file at
obtain some other records and the real estate investment trust's
information as provided in the principal office.
partnership agreement. Limited In addition, one or more shareholders
partners in the operating partnership holding of record at least 5% of the
do not have any right to inspect the outstanding shares of beneficial
books of the operating partnership. interest of any class of a real
estate investment trust may, upon
written request, inspect and copy
during usual business hours the books
of account of the real estate
investment trust.
ISSUANCE OF ADDITIONAL EQUITY
The operating partnership is The Board of Trustees may
generally authorized to issue units authorize the issuance, in its
and discretion,
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
THE OPERATING PARTNERSHIP VORNADO
<S> <C>
other partnership interests, of additional common shares and other
including partnership interests of equity securities of Vornado,
different series or classes, as including one or more classes of
determined by Vornado as the general common or preferred shares, with the
partner in its sole discretion. The preferences, conversion or other
operating partnership may issue units rights, voting powers, restrictions,
and other partnership interests to limitations as to dividends,
Vornado, as long as these interests qualifications and terms and
are issued in connection with a conditions of redemption that the
comparable issuance of securities of Board of Trustees may establish.
Vornado and proceeds raised in
connection with the issuance of the
Vornado securities are contributed to
the operating partnership. The terms
of some series of preferred units
limit Vornado's ability to issue
other series of units ranking prior
to them.
The operating partnership and Vornado both have substantial flexibility
to raise equity through the sale of additional units, shares of beneficial
interest or other securities to finance the business and affairs of the
operating partnership.
BORROWING POLICIES
The operating partnership has no Vornado is not restricted under
restrictions on borrowings, and its declaration of trust from
Vornado as general partner has full borrowing. However, under the
power and authority to borrow money partnership agreement, Vornado, as
on behalf of the operating general partner, may not issue debt
partnership. However, under the terms securities or otherwise incur any
of the lockup provisions, the debts unless it contributes the
operating partnership is limited in proceeds from the incurrence of debts
its ability to refinance the to the operating partnership.
indebtedness secured by some of its Therefore, all indebtedness incurred
properties, unless affected limited by Vornado will be for the benefit of
partners are compensated for adverse the operating partnership.
tax consequences in accordance with
the lockup agreements. See
'Description of units and the
operating partnership -- Borrowing by
the operating partnership' for
further information about the lockup
agreements.
PERMITTED INVESTMENTS
The operating partnership's Under its declaration of trust,
purpose is to conduct any business Vornado may engage in any lawful
that may be lawfully conducted by a activity permitted by the Maryland
Delaware limited partnership, REIT law. Under the partnership
provided that this business is to be agreement, Vornado, as general
conducted in partner, agrees
</TABLE>
65
<PAGE>
<TABLE>
<CAPTION>
THE OPERATING PARTNERSHIP VORNADO
<S> <C>
a manner that permits Vornado to that it will not, directly or
be qualified as a REIT unless Vornado indirectly, enter into or conduct any
ceases to qualify as a REIT for any business other than in connection
reason. The operating partnership is with the ownership, acquisition and
authorized to perform any and all disposition of partnership interests
acts for the furtherance of the in the operating partnership except
purposes and business of the with the consent of a majority of the
operating partnership, including holders of common units other than
making investments, provided that the Vornado.
Operating partnership may not take, Vornado is also permitted to acquire,
or refrain from taking, any action directly or indirectly, up to a 1%
which, in the judgment of Vornado as interest in any partnership or
general partner: limited liability company at least
could adversely affect the ninety- nine percent (99%) of whose
ability of the general partner equity is owned by the operating
to continue to qualify as a partnership.
REIT;
could subject the general
partner to any additional taxes
under Section 857 or Section
4981 of the Internal Revenue
Code; or
could violate any law or
regulation of any governmental
body.
The operating partnership may take
any action or inaction described in
the preceding sentence only with
Vornado's specific consent.
Vornado and the operating partnership may invest in any types of real
estate and geographic areas that Vornado deems appropriate. Subject to
restrictions relating to the protection of Vornado's REIT status, the
operating partnership may perform all acts necessary for the furtherance of
the operating partnership's business, including diversifying its portfolio
to protect the value of its assets or as a prudent hedge against the risk of
having too many of its investments limited to a single asset group or in a
particular region of the country. Vornado, as general partner of the
operating partnership, generally may not conduct any business other than
through the operating partnership without the consent of the holders of a
majority of the common limited partnership interests, not including the
limited partnership interests held by Vornado in its capacity as a limited
partner in the operating partnership.
OTHER INVESTMENT RESTRICTIONS
Other than restrictions Vornado's declaration of trust
precluding investments by the authorizes Vornado to enter into any
operating partnership that would contract or transaction of any kind,
adversely affect the qualification of including the purchase or sale of
Vornado as a REIT
</TABLE>
66
<PAGE>
<TABLE>
<CAPTION>
THE OPERATING PARTNERSHIP VORNADO
<S> <C>
and restrictions on transactions property, with any person, including
with affiliates, the partnership any trustee, officer, employee or
agreement does not generally restrict agent of Vornado, whether or not any
the operating partnership's authority of them has a financial interest in
to make investments, lend operating the transaction.
partnership funds or reinvest the
operating partnership's cash flow and
net sale or refinancing proceeds.
</TABLE>
67
<PAGE>
FEDERAL INCOME TAX CONSIDERATIONS
This section summarizes the taxation of Vornado and the material Federal
income tax consequences to holders of the common shares for your general
information only. It is not tax advice. The tax treatment of a holder of common
shares will vary depending upon the holder's particular situation, and this
discussion addresses only holders that hold common shares as capital assets and
does not deal with all aspects of taxation that may be relevant to particular
holders in light of their personal investment or tax circumstances. This section
also does not deal with all aspects of taxation that may be relevant to certain
types of holders to which special provisions of the Federal income tax laws
apply, including:
broker-dealers;
traders in securities that elect to mark-to-market;
banks;
tax-exempt organizations;
certain insurance companies;
persons liable for the alternative minimum tax;
persons that hold securities that are a hedge, that are hedged against
currency risks or that are part of a straddle or conversion transaction;
and
persons whose functional currency is not the U.S. dollar.
This summary is based on the Internal Revenue Code, its legislative history,
existing and proposed regulations under the Internal Revenue Code, published
rulings and court decisions. This summary describes the provisions of these
sources of law only as they are currently in effect. All of these sources of law
may change at any time, and any change in the law may apply retroactively.
WE URGE YOU TO CONSULT WITH YOUR OWN TAX ADVISORS REGARDING THE TAX
CONSEQUENCES TO YOU OF ACQUIRING, OWNING AND SELLING COMMON SHARES, INCLUDING
THE FEDERAL, STATE, LOCAL AND FOREIGN TAX CONSEQUENCES OF ACQUIRING, OWNING AND
SELLING COMMON SHARES IN YOUR PARTICULAR CIRCUMSTANCES AND POTENTIAL CHANGES IN
APPLICABLE LAWS.
TAXATION OF VORNADO AS A REIT
In the opinion of Sullivan & Cromwell, commencing with its taxable year
ended December 31, 1993, Vornado has been organized and operated in conformity
with the requirements for qualification and taxation as a REIT under the
Internal Revenue Code, and Vornado's proposed method of operation will enable it
to continue to meet the requirements for qualification and taxation as a REIT
under the Code. Investors should be aware, however, that opinions of counsel are
not binding upon the Internal Revenue Service or any court.
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<PAGE>
In providing its opinion, Sullivan & Cromwell is relying
as to certain factual matters upon the statements and representations
contained in certificates provided to Sullivan & Cromwell by Vornado and
Two Penn Plaza, REIT, Inc.;
without independent investigation, as to certain factual matters upon the
statements and representations contained in the certificate provided to
Sullivan & Cromwell by Alexander's; and
without independent investigation, upon the opinion of Shearman & Sterling
concerning the qualification of Alexander's as a REIT for each taxable year
commencing with its taxable year ending December 31, 1995.
In providing its opinion regarding the qualification of Alexander's as a
REIT for Federal income tax purposes, Shearman & Sterling is relying, as to
certain factual matters, upon representations received from Alexander's.
Vornado's qualification as a REIT will depend upon the continuing
satisfaction by Vornado and, given Vornado's current ownership interest in
Alexander's and Two Penn, by Alexander's and Two Penn, of the requirements of
the Internal Revenue Code relating to qualification for REIT status. Some of
these requirements depend upon actual operating results, distribution levels,
diversity of stock ownership, asset composition, source of income and
recordkeeping. Accordingly, while Vornado intends to continue to qualify to be
taxed as a REIT, the actual results of Vornado's, Two Penn's or Alexander's
operations for any particular year might not satisfy these requirements. Neither
Sullivan & Cromwell nor Shearman & Sterling will monitor the compliance of
Vornado, Two Penn or Alexander's with the requirements for REIT qualification on
an ongoing basis.
The sections of the Internal Revenue Code applicable to REITs are highly
technical and complex. The following discussion summarizes material aspects of
these sections of the Internal Revenue Code.
As a REIT, Vornado generally will not have to pay Federal corporate income
taxes on its net income that it currently distributes to shareholders. This
treatment substantially eliminates the 'double taxation' at the corporate and
shareholder levels that generally results from investment in a regular
corporation.
However, Vornado will have to pay federal income tax as follows.
First, Vornado will have to pay tax at regular corporate rates on any
undistributed real estate investment trust taxable income, including
undistributed net capital gains.
Second, under certain circumstances, Vornado may have to pay the
alternative minimum tax on its items of tax preference.
Third, if Vornado has (a) net income from the sale or other disposition of
foreclosure property, as defined in the Internal Revenue Code, which is
held primarily for sale to customers in the ordinary course of business or
(b) other non-qualifying income from foreclosure property, it will have to
pay tax at the highest corporate rate on that income.
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<PAGE>
Fourth, if Vornado has net income from 'prohibited transactions', as
defined in the Internal Revenue Code, Vornado will have to pay a 100% tax
on that income. Prohibited transactions are, in general, certain sales or
other dispositions of property, other than foreclosure property, held
primarily for sale to customers in the ordinary course of business.
Fifth, if Vornado should fail to satisfy the 75% gross income test or the
95% gross income test, as discussed below under ' -- Requirements for
qualification -- Income tests', but has nonetheless maintained its
qualification as a REIT because Vornado has satisfied some other
requirements, it will have to pay a 100% tax on an amount equal to (a) the
gross income attributable to the greater of the amount by which Vornado
fails the 75% or 95% test, multiplied by (b) a fraction intended to reflect
Vornado's profitability.
Sixth, if Vornado should fail to distribute during each calendar year at
least the sum of (a) 85% of its real estate investment trust ordinary
income for that year, (b) 95% of its real estate investment trust capital
gain net income for that year and (c) any undistributed taxable income from
prior periods, Vornado would have to pay a 4% excise tax on the excess of
that required distribution over the amounts actually distributed.
Seventh, if during the 10-year period beginning on the first day of the
first taxable year for which Vornado qualified as a REIT, Vornado
recognizes gain on the disposition of any asset held by Vornado as of the
beginning of that period, then, to the extent of the excess of (a) fair
market value of that asset as of the beginning of that period over
(b) Vornado's adjusted basis in that asset as of the beginning of that
period, Vornado will have to pay tax on that gain at the highest regular
corporate rate under Treasury regulations that have not yet been
promulgated. We refer to the excess of fair market value over adjusted
basis described in the preceding sentence as 'built-in gain'.
Notwithstanding the taxation of built-in gain described in the preceding
paragraph of this bullet point, Vornado will not have to pay tax on
recognized built-in gain with respect to assets held as of the first day of
the 10-year period beginning on the first day of the first taxable year for
which Vornado qualified as a REIT, to the extent that the aggregate amount
of that recognized built-in gain exceeds the net aggregate amount of
Vornado's unrealized built-in gain as of the first day of that period.
Eighth, if Vornado acquires any asset from a C corporation in certain
transactions in which Vornado must adopt the basis of the asset or any
other property in the hands of the C corporation as the basis of the asset
in the hands of Vornado, and Vornado recognizes gain on the disposition of
that asset during the 10-year period beginning on the date on which Vornado
acquired that asset, then, under the Treasury regulations that have not yet
been issued and to the extent of the built-in gain, Vornado will have to
pay tax on that gain at the highest regular corporate rate. A
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C corporation means generally a corporation that has to pay full corporate-
level tax.
Ninth, for taxable years beginning after December 31, 2000, if Vornado
receives non-arms length income from a taxable REIT subsidiary (as defined
under ' -- Asset tests'), or as a result of services provided by a taxable
REIT subsidiary to tenants of the trust, Vornado will be subject to a 100%
tax on the amount of Vornado's non-arms length income.
REQUIREMENTS FOR QUALIFICATION
The Internal Revenue Code defines a REIT as a corporation, trust or
association
which is managed by one or more trustees or directors;
the beneficial ownership of which is evidenced by transferable shares, or
by transferable certificates of beneficial interest;
which would otherwise be taxable as a domestic corporation, but for
Sections 856 through 859 of the Code;
which is neither a financial institution nor an insurance company to which
certain provisions of the Code apply;
the beneficial ownership of which is held by 100 or more persons;
during the last half of each taxable year, not more than 50% in value of
the outstanding stock of which is owned, directly or constructively, by
five or fewer individuals, as defined in the Internal Revenue Code to
include certain entities; and
which meets certain other tests, described below, regarding the nature of
its income and assets.
The Internal Revenue Code provides that the conditions described in the first
through fourth bullet points above must be met during the entire taxable year
and that the condition described in the fifth bullet point above must be met
during at least 335 days of a taxable year of 12 months, or during a
proportionate part of a taxable year of less than 12 months.
Vornado has satisfied the conditions described in the first through fifth
bullet points of the preceding paragraph and believes that it has also satisfied
the condition described in the sixth bullet point of the preceding paragraph. In
addition, Vornado's declaration of trust provides for restrictions regarding the
ownership and transfer of Vornado's shares of beneficial interest. These
restrictions are intended to assist Vornado in continuing to satisfy the share
ownership requirements described in the fifth and sixth bullet points of the
preceding paragraph. The ownership and transfer restrictions pertaining to the
common shares are described above under the heading 'Description of common
shares -- Restrictions on ownership of common shares'.
Vornado owns a number of wholly-owned subsidiaries. Internal Revenue Code
Section 856(i) provides that a corporation which is a 'qualified REIT
subsidiary', as defined in the Code, will not be treated as a separate
corporation,
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<PAGE>
and all assets, liabilities, and items of income, deduction, and credit of a
qualified REIT subsidiary will be treated as assets, liabilities and items of
these kinds of the REIT. Thus, in applying the requirements described in this
section, Vornado's qualified REIT subsidiaries will be ignored, and all assets,
liabilities and items of income, deduction, and credit of such subsidiaries will
be treated as assets, liabilities and items of these kinds of Vornado. Vornado
believes that all of its wholly-owned subsidiaries are qualified REIT
subsidiaries.
If a REIT is a partner in a partnership, Treasury regulations provide that
the REIT will be deemed to own its proportionate share of the assets of the
partnership and will be deemed to be entitled to the income of the partnership
attributable to that share. In addition, the character of the assets and gross
income of the partnership will retain the same character in the hands of the
REIT for purposes of Section 856 of the Internal Revenue Code, including
satisfying the gross income tests and the asset tests. Thus, Vornado's
proportionate share of the assets, liabilities and items of income of any
partnership in which Vornado is a partner, including the operating partnership,
will be treated as assets, liabilities and items of income of Vornado for
purposes of applying the requirements described in this section. Thus, actions
taken by partnerships in which Vornado owns an interest either directly or
through one or more tiers of partnerships or qualified REIT subsidiaries, can
affect Vornado's ability to satisfy the REIT income and assets tests and the
determination of whether Vornado has net income from prohibited transactions.
See the fourth bullet point on page 74 for a discussion of prohibited
transactions.
INCOME TESTS. In order to maintain its qualification as a REIT, Vornado
annually must satisfy three gross income requirements.
First, Vornado must derive at least 75% of its gross income, excluding
gross income from prohibited transactions, for each taxable year directly
or indirectly from investments relating to real property or mortgages on
real property, including 'rents from real property', as defined in the
Internal Revenue Code, or from certain types of temporary investments.
Rents from real property generally include expenses of Vornado that are
paid or reimbursed by tenants.
Second, at least 95% of Vornado's gross income, excluding gross income from
prohibited transactions, for each taxable year must be derived from real
property investments as described in the preceding bullet point, dividends,
interest and gain from the sale or disposition of stock or securities, or
from any combination of these types of source.
Third, for its taxable years before 1998, short-term gain from the sale or
other disposition of stock or securities, gain from prohibited transactions
and gain on the sale or other disposition of real property held for less
than four years, apart from involuntary conversions and sales of
foreclosure property, was required to represent less than 30% of Vornado's
gross income, including gross income from prohibited transactions, for each
of these taxable years.
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<PAGE>
Rents that Vornado receives will qualify as rents from real property in
satisfying the gross income requirements for a REIT described above only if the
rents satisfy several conditions.
First, the amount of rent must not be based in whole or in part on the
income or profits of any person. However, an amount received or accrued
generally will not be excluded from rents from real property solely because
it is based on a fixed percentage or percentages of receipts or sales.
Second, the Internal Revenue Code provides that rents received from a
tenant will not qualify as rents from real property in satisfying the gross
income tests if the REIT, directly or under the applicable attribution
rules, owns a 10% or greater interest in that tenant; provided, however,
that for tax years beginning after December 31, 2000, rent received from a
taxable REIT subsidiary (as defined under ' -- Asset tests', below) will,
under certain circumstances, qualify as rents from real property even if
Vornado owns more than a 10% interest in such subsidiary. We refer to a
tenant in which Vornado owns a 10% or greater interest as a 'related party
tenant'.
Third, if rent attributable to personal property leased in connection with
a lease of real property is greater than 15% of the total rent received
under the lease, then the portion of rent attributable to the personal
property will not qualify as rents from real property.
Finally, for rents received to qualify as rents from real property, the
REIT generally must not operate or manage the property or furnish or render
services to the tenants of the property, other than through an independent
contractor from whom the REIT derives no revenue or through a taxable REIT
subsidiary. However, Vornado may directly perform certain services that
landlords usually or customarily render when renting space for occupancy
only or that are not considered rendered to the occupant of the property.
Vornado does not derive significant rents from related party tenants. Vornado
also does not and will not derive rental income attributable to personal
property, other than personal property leased in connection with the lease of
real property, the amount of which is less than 15% of the total rent received
under the lease.
Vornado directly performs services for some of its tenants. Vornado does not
believe that the provision of these services will cause its gross income
attributable to these tenants to fail to be treated as rents from real property.
If Vornado were to provide services to a tenant that are other than those
landlords usually or customarily provide when renting space for occupancy only,
amounts received or accrued by Vornado for any of these services will not be
treated as rents from real property for purposes of the REIT gross income tests.
However, the amounts received or accrued for these services will not cause other
amounts received with respect to the property to fail to be treated as rents
from real property unless the amounts treated as received in respect of the
services, together with amounts received for certain management services,
exceeds 1% of all amounts received or accrued by Vornado during the taxable year
with respect to the property. If the sum of the amounts received in respect of
the services to
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tenants and management services described in the preceding sentence exceeds the
1% threshold, then all amounts received or accrued by Vornado with respect to
the property will not qualify as rents from real property, even if Vornado
provides the impermissible services to some, but not all, of the tenants of the
property.
The term 'interest' generally does not include any amount received or
accrued, directly or indirectly, if the determination of that amount depends in
whole or in part on the income or profits of any person. However, an amount
received or accrued generally will not be excluded from the term interest solely
because it is based on a fixed percentage or percentages of receipts or sales.
If Vornado fails to satisfy one or both of the 75% or 95% gross income tests
for any taxable year, it may nevertheless qualify as a REIT for that year if it
satisfies the requirements of other provisions of the Internal Revenue Code that
allow relief from disqualification as a REIT. These relief provisions will
generally be available if
Vornado's failure to meet the income tests was due to reasonable cause and
not due to willful neglect;
Vornado attaches a schedule of the sources of its income to its Federal
income tax return; and
any incorrect information on the schedule was not due to fraud with intent
to evade tax.
Vornado might not be entitled to the benefit of these relief provisions,
however. As discussed in the fifth bullet point on page 74, even if these relief
provisions apply, Vornado would have to pay a tax on the excess income.
ASSET TESTS. Vornado, at the close of each quarter of its taxable year, must
also satisfy three tests relating to the nature of its assets.
First, at least 75% of the value of Vornado's total assets must be
represented by real estate assets, including (a) real estate assets held by
Vornado's qualified REIT subsidiaries, Vornado's allocable share of real
estate assets held by partnerships in which Vornado owns an interest and
stock issued by another REIT, (b) for a period of one year from the date of
Vornado's receipt of proceeds of an offering of its shares of beneficial
interest or debt with a term of at least five years, stock or debt
instruments purchased with these proceeds and (c) cash, cash items and
government securities.
Second, not more than 25% of Vornado's total assets may be represented by
securities other than those in the 75% asset class.
Third, for taxable years beginning prior to January 1, 2001, of the
investments included in the 25% asset class, the value of any one issuer's
securities, other than securities issued by another REIT, owned by Vornado
may not exceed 5% of the value of Vornado's total assets and Vornado may
not own more than 10% of any one issuer's outstanding voting securities.
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Fourth, for taxable years beginning after December 31, 2000, not more than
20% of Vornado's total assets may constitute securities issued by taxable
REIT subsidiaries, and of the investments included in the 25% asset class,
the value of any one issuer's securities, other than securities issued by
another REIT or by a taxable REIT subsidiary, owned by Vornado may not
exceed 5% of the value of Vornado's total assets and Vornado may not own
more than 10% of the vote or value of the outstanding securities of any one
issuer, except for issuers that are taxable REIT subsidiaries. For these
purposes, a taxable REIT subsidiary is any corporation in which Vornado
owns an interest, that joins with Vornado in making an election to be
treated as a taxable REIT subsidiary and that does not engage in certain
activities.
The test described in Third, above, and not that described in Fourth, above,
will apply for taxable years of Vornado that begin after December 31, 2000, with
respect to stock in any corporation owned by Vornado prior to July 12, 1999, so
long as a taxable REIT subsidiary election is not made with respect to such
corporation and such corporation does not acquire substantial new assets or
engage in a substantial new line of business.
Since March 2, 1995, Vornado has owned more than 10% of the voting
securities of Alexander's. Since April of 1997, Vornado's ownership of
Alexander's has been through the operating partnership rather than direct.
Vornado's ownership interest in Alexander's will not cause Vornado to fail to
satisfy the asset tests for REIT status so long as Alexander's qualified as a
REIT for each of taxable years beginning with its taxable year ending December
31, 1995 and continues to so qualify. In the opinion of Shearman & Sterling,
commencing with Alexander's taxable year ended December 31, 1995, Alexander's
has been organized and operated in conformity with the requirements for
qualification and taxation as a REIT under the Internal Revenue Code, and its
proposed method of operation will enable it to continue to meet the requirements
for qualification and taxation as a REIT under the Internal Revenue Code. In
providing its opinion, Shearman & Sterling is relying upon representations
received from Alexander's.
Since April of 1997, Vornado has also owned, through the operating
partnership, more than 10% of the voting securities of Two Penn. Vornado's
indirect ownership interest in Two Penn will not cause Vornado to fail to
satisfy the asset tests for REIT status so long as Two Penn qualifies as a REIT
for its first taxable year and each subsequent taxable year. Vornado believes
that Two Penn will also qualify.
In order to ensure compliance with the 95% gross income test described in
the second bullet point on page 77, Vornado transferred certain contract rights
and obligations to VMC, a New Jersey corporation, in return for all of VMC's
nonvoting preferred stock. Since April of 1997, the operating partnership has
held this stock. This stock entitles its holder to 95% of the dividends paid by
VMC. Vornado does not believe that its indirect ownership of this stock will
adversely affect its ability to satisfy the asset tests described above.
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Vornado also owns, through the operating partnership, nonvoting shares in a
number of corporations. Vornado does not believe that the characteristics or
value of these shares will cause Vornado to fail to satisfy the REIT asset tests
described above.
ANNUAL DISTRIBUTION REQUIREMENTS. Vornado, in order to qualify as a REIT, is
required to distribute dividends, other than capital gain dividends, to its
shareholders in an amount at least equal to (1) the sum of (a) 95% of Vornado's
'real estate investment trust taxable income', computed without regard to the
dividends paid deduction and Vornado's net capital gain, and (b) 95% of the net
after-tax income, if any, from foreclosure property minus (2) the sum of certain
items of non-cash income.
For taxable years beginning after December 31, 2000, the required amount of
distributions described above will be reduced from 95% to 90% of the amount of
Vornado's income or gain, as the case may be.
In addition, if Vornado disposes of any asset within 10 years of acquiring
it, Vornado will be required, under Treasury regulations which the Treasury has
not yet promulgated, to distribute at least 95% of the after-tax built-in gain,
if any, recognized on the disposition of the asset.
These distributions must be paid in the taxable year to which they relate,
or in the following taxable year if declared before Vornado timely files its tax
return for the year to which they relate and if paid on or before the first
regular dividend payment after the declaration.
To the extent that Vornado does not distribute all of its net capital gain
or distributes at least 95%, but less than 100%, of its real estate investment
trust taxable income, as adjusted, it will have to pay tax on those amounts at
regular ordinary and capital gain corporate tax rates. Furthermore, if Vornado
fails to distribute during each calendar year at least the sum of (a) 85% of its
ordinary income for that year, (b) 95% of its capital gain net income for that
year, and (c) any undistributed taxable income from prior periods, Vornado would
have to pay a 4% excise tax on the excess of the required distribution over the
amounts actually distributed.
Vornado intends to satisfy the annual distribution requirements.
From time to time, Vornado may not have sufficient cash or other liquid
assets to meet the 95% distribution requirement due to timing differences
between (a) when Vornado actually receives income and when it actually pays
deductible expenses and (b) when Vornado includes the income and deducts the
expenses in arriving at its taxable income. If timing differences of this kind
occur, in order to meet the 95% distribution requirement, Vornado may find it
necessary to arrange for short-term, or possibly long-term, borrowings or to pay
dividends in the form of taxable stock dividends.
Under certain circumstances, Vornado may be able to rectify a failure to
meet the distribution requirement for a year by paying 'deficiency dividends' to
shareholders in a later year, which may be included in Vornado's deduction for
dividends paid for the earlier year. Thus, Vornado may be able to avoid being
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taxed on amounts distributed as deficiency dividends; however, Vornado will be
required to pay interest based upon the amount of any deduction taken for
deficiency dividends.
FAILURE TO QUALIFY AS A REIT
If Vornado fails to qualify for taxation as a REIT in any taxable year, and
the relief provisions do not apply, Vornado will have to pay tax, including any
applicable alternative minimum tax, on its taxable income at regular corporate
rates. Vornado will not be able to deduct distributions to shareholders in any
year in which it fails to qualify, nor will Vornado be required to make
distributions to shareholders. In this event, to the extent of current and
accumulated earnings and profits, all distributions to shareholders will be
taxable as ordinary income and corporate distributees may be eligible for the
dividends received deduction if they satisfy the relevant provisions of the
Internal Revenue Code. Unless entitled to relief under specific statutory
provisions, Vornado will also be disqualified from taxation as a REIT for the
four taxable years following the year during which qualification was lost.
Vornado might not be entitled to the statutory relief described in this
paragraph in all circumstances.
TAXATION OF HOLDERS OF COMMON SHARES
U.S. SHAREHOLDERS
As used in this section, the term 'U.S. shareholder' means a holder of
common shares who, for United States Federal income tax purposes, is
a citizen or resident of the United States;
a corporation organized under the laws of the United States or any State;
an estate whose income is subject to United States Federal income taxation
regardless of its source; or
a trust if a United States court is able to exercise primary supervision
over administration of the trust and one or more United States persons have
authority to control all substantial decisions of the trust.
As long as Vornado qualifies as a REIT, distributions made by Vornado out of
its current or accumulated earnings and profits, and not designated as capital
gain dividends, will constitute dividends taxable to its taxable U.S.
shareholders as ordinary income. Distributions of this kind will not be eligible
for the dividends received deduction in the case of U.S. shareholders that are
corporations. Distributions made by Vornado that Vornado properly designates as
capital gain dividends will be taxable to U.S. shareholders as gain from the
sale of a capital asset held for more than one year, to the extent that they do
not exceed Vornado's actual net capital gain for the taxable year, without
regard to the period for which a U.S. shareholder has held his shares. Thus,
with certain limitations, capital gains dividends received by an individual U.S.
shareholder may be eligible for 20% or 25% capital gains rates of taxation. U.S.
shareholders that are
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corporations may, however, be required to treat up to 20% of certain capital
gain dividends as ordinary income.
To the extent that Vornado makes distributions, not designated as capital
gain dividends, in excess of its current and accumulated earnings and profits,
these distributions will be treated first as a tax-free return of capital to
each U.S. shareholder. Thus, these distributions will reduce the adjusted basis
which the U.S. shareholder has in his shares for tax purposes by the amount of
the distribution, but not below zero. Distributions in excess of a U.S.
shareholder's adjusted basis in his shares will be taxable as capital gains,
provided that the shares have been held as a capital asset. For purposes of
determining the portion of distributions on separate classes of shares that will
be treated as dividends for Federal income tax purposes, current and accumulated
earnings and profits will be allocated to distributions resulting from priority
rights of preferred shares before being allocated to other distributions.
Dividends authorized by Vornado in October, November, or December of any
year and payable to a shareholder of record on a specified date in any of these
months will be treated as both paid by Vornado and received by the shareholder
on December 31 of that year, provided that Vornado actually pays the dividend on
or before January 31 of the following calendar year. Shareholders may not
include in their own income tax returns any net operating losses or capital
losses of Vornado.
U.S. shareholders holding shares at the close of Vornado's taxable year will
be required to include, in computing their long-term capital gains for the
taxable year in which the last day of Vornado's taxable year falls, the amount
that Vornado designates in a written notice mailed to its shareholders. Vornado
may not designate amounts in excess of Vornado's undistributed net capital gain
for the taxable year. Each U.S. shareholder required to include the designated
amount in determining the shareholder's long-term capital gains will be deemed
to have paid, in the taxable year of the inclusion, the tax paid by Vornado in
respect of the undistributed net capital gains. U.S. shareholders to whom these
rules apply will be allowed a credit or a refund, as the case may be, for the
tax they are deemed to have paid. U.S. shareholders will increase their basis in
their shares by the difference between the amount of the includible gains and
the tax deemed paid by the shareholder in respect of these gains.
Distributions made by Vornado and gain arising from a U.S. shareholder's
sale or exchange of shares will not be treated as passive activity income. As a
result, U.S. shareholders generally will not be able to apply any passive losses
against that income or gain.
When a U.S. shareholder sells or otherwise disposes of shares, the
shareholder will recognize gain or loss for Federal income tax purposes in an
amount equal to the difference between (a) the amount of cash and the fair
market value of any property received on the sale or other disposition, and (b)
the holder's adjusted basis in the shares for tax purposes. This gain or loss
will be capital gain or loss if the U.S. shareholder has held the shares as a
capital asset. The gain or loss will be long-term gain or loss if the U.S.
shareholder has
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held the shares for more than one year. A maximum tax rate of 20% generally
applies to long-term capital gain of an individual U.S. shareholder. In general,
any loss recognized by a U.S. shareholder when the shareholder sells or
otherwise disposes of shares of Vornado that the shareholder has held 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 received by the
shareholder from Vornado which were required to be treated as long-term capital
gains.
BACKUP WITHHOLDING. Vornado will report to its U.S. shareholders and the IRS
the amount of dividends paid during each calendar year, and the amount of tax
withheld, if any. Under the backup withholding rules, backup withholding at the
rate of 31% may apply to a shareholder with respect to dividends paid unless the
holder (a) is a corporation or comes within certain other exempt categories and,
when required, demonstrates this fact, or (b) provides a taxpayer identification
number, certifies as to no loss of exemption from backup withholding, and
otherwise complies with applicable requirements of the backup withholding rules.
The IRS may also impose penalties on a U.S. shareholder that does not provide
Vornado with his correct taxpayer identification number. A shareholder may
credit any amount paid as backup withholding against the shareholder's income
tax liability. In addition, Vornado may be required to withhold a portion of
capital gain distributions to any shareholders who fail to certify their
non-foreign status to Vornado.
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 when received by a tax-exempt entity. Based on that
ruling, provided that a tax-exempt shareholder is not one of the types of entity
described in the next paragraph and has not held its shares as 'debt financed
property' within the meaning of the Internal Revenue Code and the shares are not
otherwise used in a trade or business, the dividend income from shares will not
be unrelated business taxable income to a tax-exempt shareholder. Similarly,
income from the sale of shares will not constitute unrelated business taxable
income unless the tax-exempt shareholder has held the shares as 'debt financed
property' within the meaning of the Internal Revenue Code or has used the shares
in a trade or business.
Income from an investment in Vornado's shares will constitute unrelated
business taxable income for tax-exempt shareholders that are social clubs,
voluntary employee benefit associations, supplemental unemployment benefit
trusts, and qualified group legal services plans exempt from Federal income
taxation under the applicable subsections of Section 501(c) of the Internal
Revenue Code, unless the organization is able to properly deduct amounts set
aside or placed in reserve for certain purposes so as to offset the income
generated by its shares. Prospective investors of the types described in the
preceding sentence should consult their own tax advisors concerning these 'set
aside' and reserve requirements.
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Notwithstanding the foregoing, however, a portion of the dividends paid by a
'pension-held REIT' will be treated as unrelated business taxable income to any
trust which
is described in Section 401(a) of the Internal Revenue Code;
is tax exempt under Section 501(a) of the Code; and
holds more than 10% (by value) of the equity interests in the REIT.
Tax-exempt pension, profit-sharing and stock bonus funds that are described in
Section 401(a) of the Internal Revenue Code are referred to below as 'qualified
trusts'. A REIT is a 'pension-held REIT' if
it would not have qualified as a REIT but for the fact that Section
856(h)(3) of the Internal Revenue Code provides that stock owned by
qualified trusts will be treated, for purposes of the 'not closely held'
requirement, as owned by the beneficiaries of the trust (rather than by the
trust itself); and
either (a) at least one qualified trust holds more than 25% by value of the
interests in the REIT or (b) one or more 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 unrelated business taxable income
is equal to the ratio of (a) the gross income of the REIT from unrelated trades
or businesses, determined as though the REIT were a qualified trust, less direct
expenses related to this gross income, to (b) the total gross income of the
REIT, less direct expenses related to the total gross income. A de minimis
exception applies where this percentage is less than 5% for any year. Vornado
does not expect to be classified as a pension-held REIT.
The rules described above under the heading ' -- U.S. shareholders'
concerning the inclusion of Vornado's designated undistributed net capital gains
in the income of its shareholders will apply to tax-exempt entities. Thus,
tax-exempt entities will be allowed a credit or refund of the tax deemed paid by
these entities in respect of the includible gains.
NON-U.S. SHAREHOLDERS
The rules governing U.S. Federal income taxation of nonresident alien
individuals, foreign corporations, foreign partnerships and other foreign
shareholders, which we call 'non-U.S. shareholders', are complex. The following
discussion is only a limited summary of these rules. Prospective non-U.S.
shareholders should consult with their own tax advisors to determine the impact
of U.S. Federal, state and local income tax laws with regard to an investment in
shares, including any reporting requirements.
ORDINARY DIVIDENDS. Distributions, other than distributions that are treated
as attributable to gain from sales or exchanges by Vornado of U.S. real property
interests, as discussed below, and other than distributions designated by
Vornado as capital gain dividends, will be treated as ordinary income to the
extent that they are made out of current or accumulated earnings and profits of
Vornado. A withholding tax equal to 30% of the gross amount of the distribution
will ordinarily
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apply to distributions of this kind to non-U.S. shareholders, unless an
applicable tax treaty reduces that tax. However, if income from the investment
in the shares is treated as effectively connected with the non-U.S.
shareholder's conduct of a U.S. trade or business, tax at graduated rates will
generally apply to the non-U.S. shareholder in the same manner as U.S.
shareholders are taxed with respect to dividends, and the 30% branch profits tax
may also apply if the shareholder is a foreign corporation. Vornado expects to
withhold U.S. tax at the rate of 30% on the gross amount of any dividends, other
than dividends treated as attributable to gain from sales or exchanges of U.S.
real property interests and capital gain dividends, paid to a non-U.S.
shareholder, unless (a) a lower treaty rate applies and the required form
evidencing eligibility for that reduced rate is filed with Vornado or the
appropriate withholding agent or (b) the non-U.S. shareholder files an IRS Form
4224 or a successor form with Vornado or the appropriate withholding agent
claiming that the distributions are effectively connected with the non-U.S.
shareholder's conduct of a U.S. trade or business.
Distributions to a non-U.S. shareholder that are designated by Vornado at
the time of distribution as capital gain dividends which are not attributable to
or treated as attributable to the disposition by Vornado of a U.S. real property
interest generally will not be subject to U.S. Federal income taxation, except
as described below.
RETURN OF CAPITAL. Distributions in excess of Vornado's current and
accumulated earnings and profits, which are not treated as attributable to the
gain from Vornado's disposition of a U.S. real property interest, will not be
taxable to a non-U.S. shareholder to the extent that they do not exceed the
adjusted basis of the non-U.S. shareholder's shares. Distributions of this kind
will instead reduce the adjusted basis of the shares. To the extent that
distributions of this kind exceed the adjusted basis of a non-U.S. shareholder's
shares, they will give rise to tax liability if the non-U.S. shareholder
otherwise would have to pay tax on any gain from the sale or disposition of its
shares, as described below. If it cannot be determined at the time a
distribution is made whether the distribution will be in excess of current and
accumulated earnings and profits, withholding will apply to the distribution at
the rate applicable to dividends. However, the non-U.S. shareholder may seek a
refund of these amounts from the IRS if it is subsequently determined that the
distribution was, in fact, in excess of current accumulated earnings and profits
of Vornado.
CAPITAL GAIN DIVIDENDS. For any year in which Vornado qualifies as a REIT,
distributions that are attributable to gain from sales or exchanges by Vornado
of U.S. 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, as
amended. Under this statute, these distributions are taxed to a non-U.S.
shareholder as if the gain were effectively connected with a U.S. business.
Thus, non-U.S. shareholders will be taxed on the distributions at the normal
capital gain rates applicable to U.S. shareholders, subject to any applicable
alternative minimum tax and special alternative minimum tax in the case of
nonresident alien individuals. Vornado is required by applicable Treasury
regulations under this statute to withhold 35% of any distribution that Vornado
could designate as a
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capital gain dividend. However, if Vornado designates as a capital gain dividend
a distribution made before the day Vornado actually effects the designation,
then although the distribution may be taxable to a non-U.S. shareholder,
withholding does not apply to the distribution under this statute. Rather,
Vornado must effect the 35% withholding from distributions made on and after the
date of the designation, until the distributions so withheld equal the amount of
the prior distribution designated as a capital gain dividend. The non-U.S.
shareholder may credit the amount withheld against its U.S. tax liability.
SALES OF SHARES. Gain recognized by a non-U.S. shareholder upon a sale or
exchange of common shares generally will not be taxed under the Foreign
Investment in Real Property Tax Act if Vornado is a 'domestically controlled
REIT', defined generally as a REIT, less than 50% in value of whose stock is and
was held directly or indirectly by foreign persons at all times during a
specified testing period. Vornado believes that it is and will continue to be a
domestically controlled REIT, and, therefore, that taxation under this statute
generally will not apply to the sale of Vornado shares. However, gain to which
this statute does not apply will be taxable to a non-U.S. shareholder if
investment in the shares is treated as effectively connected with the non-U.S.
shareholder's U.S. trade or business. In this case, the same treatment will
apply to the non-U.S. shareholder as to U.S. shareholders with respect to the
gain. In addition, gain to which the Foreign Investment in Real Property Tax Act
does not apply will be taxable to a non-U.S. shareholder if the non-U.S.
shareholder is a nonresident alien individual who was present in the United
States for 183 days or more during the taxable year and has a 'tax home' in the
United States, or maintains an office or a fixed place of business in the United
States to which the gain is attributable. In this case, a 30% tax will apply to
the nonresident alien individual's capital gains. A similar rule will apply to
capital gain dividends to which this statute does not apply.
If Vornado were not a domestically-controlled REIT, tax under the Foreign
Investment in Real Property Tax Act would apply to a non-U.S. shareholder's sale
of shares only if the selling non-U.S. shareholder owned more than 5% of the
class of shares sold at any time during a specified period. This period is
generally the shorter of the period that the non-U.S. shareholder owned the
shares sold or the five-year period ending on the date when the shareholder
disposed of the shares. If tax under this statute applies to the gain on the
sale of shares, the same treatment would apply to the non-U.S. shareholder as to
U.S. shareholders with respect to the gain, subject to any applicable
alternative minimum tax and a special alternative minimum tax in the case of
nonresident alien individuals.
TREATY BENEFITS. Under current Treasury regulations, dividends paid to an
address in a country outside the United States are generally presumed to be paid
to a resident of that country for purposes of determining whether the
withholding discussed above applies and whether a tax treaty rate applies.
Shareholders that are partnerships or entities that are similarly fiscally
transparent for Federal income tax purposes, and persons holding shares through
such
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entities, may not be able to claim benefits under U.S. tax treaties.
Shareholders of these kinds should consult a tax advisor.
Under recently issued Treasury regulations that are effective for payments
made after December 31, 2000, however, a non-U.S. shareholder who wishes to
claim the benefit of an applicable treaty rate would be required to satisfy
applicable certification requirements. In addition, under these regulations, in
the case of shares held by a foreign partnership, (x) the certification
requirement would generally apply to the partners in the partnership and (y) the
partnership would be required to provide certain information, including a United
States taxpayer identification number. These regulations provide look-through
rules in the case of tiered partnerships.
OTHER TAX CONSEQUENCES
State or local taxation may apply to Vornado and its shareholders in various
state or local jurisdictions, including those in which it or they transact
business or reside. The state and local tax treatment of Vornado and its
shareholders may not conform to the Federal income tax consequences discussed
above. Consequently, prospective shareholders should consult their own tax
advisors regarding the effect of state and local tax laws on an investment in
Vornado.
PLAN OF DISTRIBUTION
This prospectus relates to the possible issuance by Vornado of up to 16,064
shares, if, and to the extent that, Vornado elects to issue common shares to
holders of up to 16,064 units, upon the tender of the units for redemption.
Vornado will not receive any cash proceeds from the issuance of the common
shares to holders of units upon receiving a notice of redemption. Vornado will
acquire one unit from a redeeming partner, in exchange for each common share
that Vornado issues. Consequently, with each redemption, Vornado's interest in
the operating partnership will increase.
All costs, expenses and fees in connection with the registration of the
common shares will be borne by Vornado.
EXPERTS
The consolidated financial statements and the related consolidated financial
statement schedules incorporated in this prospectus by reference from Vornado's
Annual Report on Form 10-K for the year ended December 31, 1998, and the
statement of revenues and certain expenses of 888 7th Avenue for the year ended
December 31, 1997 incorporated in this prospectus by reference from Vornado's
Current Report on Form 8-K/A, dated August 12, 1998 and filed with the SEC on
February 24, 1999, have been audited by Deloitte & Touche LLP, independent
auditors, as stated in their reports, which are incorporated herein by
reference, and have been so incorporated in reliance upon the reports of such
firm given upon their authority as experts in accounting and auditing.
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The statement of revenues and certain expenses of 689 Fifth Avenue for the
year ended December 31, 1997, incorporated in this prospectus by reference from
Vornado's Current Report on Form 8-K, dated August 12, 1998 and filed with the
SEC on February 12, 1999, has been audited by Friedman Alpren & Green LLP,
independent auditors, as stated in their report which is incorporated by
reference, and has been so incorporated in reliance upon the report of that firm
given upon their authority as experts in accounting and auditing.
The statement of income and expense of certain properties of Market Square
Limited Partnership for the year ended December 31, 1997, incorporated in this
prospectus by reference from Vornado's Current Report on Form 8-K, dated August
12, 1998 and filed with the SEC on February 12, 1999, has been audited by
Sharrard, McGee & Co. P.A., independent certified public accountants, as stated
in their report which is incorporated by reference, and has been so incorporated
in reliance upon the report of that firm given upon their authority as experts
in accounting and auditing.
The consolidated balance sheets of Mendik Real Estate Limited Partnership
and consolidated venture as of December 31, 1997 and 1996, and the related
consolidated statements of operations, partners' capital (deficit), and cash
flows for each of the years in the three-year period ended December 31, 1997,
incorporated in this prospectus by reference from Vornado's Current Report on
Form 8-K, dated August 12, 1998 and filed with the SEC on February 12, 1999,
have been audited by KPMG LLP, independent auditors, as stated in their report,
which is incorporated in this prospectus by reference, and have been so
incorporated in reliance upon the report of such firm given upon their authority
as experts in accounting and auditing.
VALIDITY OF THE COMMON SHARES
The validity of the common shares issued under this prospectus will be
passed upon for Vornado by Ballard Spahr Andrews & Ingersoll, LLP, Baltimore,
Maryland, Maryland counsel to Vornado.
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