<PAGE> 1
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED SEPTEMBER 11, 1997)
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4,000,000 Shares
EQUITY
RESIDENTIAL PROPERTIES TRUST
[LOGO]
Common Shares of Beneficial Interest
- --------------------------------------------------------------------------------
Equity Residential Properties Trust (the "Company") is a Maryland real estate
investment trust ("REIT") which, as of December 31, 1997, owned or had interests
in a portfolio of 489 multifamily properties (individually a "Property" and
collectively the "Properties") containing 140,467 apartment units and managed
9,295 additional units owned by affiliated entities. The Company is the largest
publicly traded REIT owner of multifamily properties (based on the number of
apartment units owned and total revenues earned), with Properties located in 35
states throughout the United States.
All of the common shares of beneficial interest of the Company, $.01 par value
per share (the "Common Shares"), offered hereby are being offered by the Company
(the "Offering"). To ensure that the Company qualifies as a REIT, transfer of
the Common Shares is restricted and ownership by any person is limited to 5% of
the lesser of the number or value of the Company's outstanding shares of
beneficial interest, subject to certain exceptions. See "Description of Shares
of Beneficial Interest-- Restrictions on Transfer" in the accompanying
Prospectus.
The Common Shares are listed on the New York Stock Exchange ("NYSE") under the
symbol "EQR." On January 21, 1998, the last reported sales price of the Common
Shares on the NYSE was $50.4375 per Common Share. See "Price Range of Common
Shares and Distributions."
SEE "RISK FACTORS" ON PAGES 5 TO 9 OF THE ACCOMPANYING PROSPECTUS FOR A
DISCUSSION OF CERTAIN MATERIAL FACTORS WHICH SHOULD BE CONSIDERED IN CONNECTION
WITH AN INVESTMENT IN THE COMMON SHARES OFFERED HEREBY.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS TO WHICH IT
RELATES. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
======================================================================================================================
Underwriting
Price to Discounts and Proceeds to
Public Commissions(1)(2) Company(2)(3)
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<S> <C> <C> <C>
Per Common Share $50.4375 $2.65 $47.7875
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Total(4) $201,750,000 $10,600,000 $191,150,000
======================================================================================================================
</TABLE>
(1) The Company and the Operating Partnership have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended (the "Securities Act"). See
"Underwriting."
(2) The Company has agreed to pay the Underwriters compensation for the
placement of the Common Shares as set forth in the table; provided, that
compensation for sales of 10,000 or more Common Shares to a single purchaser
will be $1.01 per Common Share. Therefore, to the extent of such sales, the
actual amount of Underwriting Discounts and Commissions will be less than
the aggregate amount specified in the table and the aggregate Proceeds to
Company correspondingly will be more than the amount indicated in the table.
See "Underwriting."
(3) Before deducting Offering expenses payable by the Company estimated to be
$75,000.
(4) The Company has granted the Underwriters a 30-day over-allotment option to
purchase up to 600,000 additional Common Shares on the same terms and
conditions as set forth in the table above. If all such Common Shares are
purchased by the Underwriters, the total Price to Public will be
$232,012,500, the total Underwriting Discounts and Commissions will be
$12,190,000 and the total Proceeds to Company will be $219,822,500. See
"Underwriting."
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The Common Shares are offered by the Underwriters, subject to delivery by the
Company and acceptance by the Underwriters, to prior sale and to withdrawal,
cancellation or modification of the offer without notice. Delivery of the Common
Shares to the Underwriters is expected to be made through the facilities of the
Depository Trust Company, New York, New York, on or about January 27, 1998.
PRUDENTIAL SECURITIES INCORPORATED J.P. MORGAN & CO.
January 21, 1998
<PAGE> 2
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON SHARES,
INCLUDING PURCHASES OF THE COMMON SHARES, THE SERIES E PREFERRED SHARES
(DEFINED BELOW) OR THE SERIES G PREFERRED SHARES (DEFINED BELOW) TO STABILIZE
THEIR MARKET PRICES AND PURCHASES OF COMMON SHARES TO COVER SOME OR ALL OF A
SHORT POSITION AND THE IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF THESE
ACTIVITIES, SEE "UNDERWRITING."
S-2
<PAGE> 3
The following information contained in this Prospectus Supplement is qualified
in its entirety by the detailed information appearing elsewhere in this
Prospectus Supplement or the accompanying Prospectus or incorporated therein by
reference. As used herein, the term "Company" includes Equity Residential
Properties Trust and those entities owned or controlled by it (collectively,
the "Subsidiaries"), as the survivor of the mergers between Equity Residential
Properties Trust ("EQR") and each of Wellsford Residential Property Trust
("Wellsford") and Evans Withycombe Residential, Inc. ("EWR"), and each of EQR,
Wellsford and EWR as predecessors to the Company, unless the context indicates
otherwise. All information in this Prospectus Supplement assumes that the
Underwriters' over-allotment option will not be exercised.
THE COMPANY
GENERAL
Equity Residential Properties Trust, one of the largest publicly traded
REITs (based on the aggregate market value of its outstanding equity
capitalization), is a self-administered and self-managed equity REIT. EQR was
organized in March 1993 and commenced operations as a publicly traded company
on August 18, 1993 upon completion of its initial public offering (the "EQR
IPO"). EQR was formed to continue the multifamily property business objectives
and acquisition strategies of certain affiliated entities controlled by Mr.
Samuel Zell, Chairman of the Board of Trustees of the Company. These entities
had been engaged in the acquisition, ownership and operation of multifamily
properties since 1969. In May 1997, EQR completed the acquisition of the
multifamily property business of Wellsford through the tax free merger of EQR
and Wellsford. In December 1997, EQR completed the acquisition of the
multifamily property business of EWR through the tax free merger of EQR and
EWR. The Company's senior executives average over 23 years of experience in
the multifamily property business.
As of December 31, 1997, the Company owned or had interests in a portfolio
of 489 multifamily properties (individually a "Property" and collectively the
"Properties") containing 140,467 apartment units and managed 9,295 additional
units owned by affiliated entities. Since the EQR IPO, at which time EQR owned
69 Properties, and through December 31, 1997, the Company acquired, directly or
indirectly, interests in an additional 438 Properties containing 123,777 units
for a total purchase price of approximately $6.6 billion, including the
assumption of approximately $1.9 billion of mortgage indebtedness. Since the
EQR IPO and through December 31, 1997, the Company disposed of 18 of its
properties containing 5,035 units for a total sales price of approximately
$128.9 million and the release of mortgage indebtedness in the amount of
approximately $20.5 million. The Company's interest in 11 of the Properties at
the time of acquisition thereof consisted solely of ownership of the debt
collateralized by such Properties and in 21 of the Properties consists solely
of investments in partnership interests and subordinated mortgages
collateralized by such Properties. At December 31, 1997, the Properties had an
average occupancy rate of approximately 95%. As of December 31, 1997, the
Properties were located throughout the United States in the following 35
states: Alabama, Arizona, Arkansas, California, Colorado, Connecticut,
Florida, Georgia, Idaho, Illinois, Indiana, Iowa, Kansas, Kentucky, Maine,
Maryland, Massachusetts, Michigan, Minnesota, Missouri, New Hampshire, New
Jersey, New Mexico, Nevada, North Carolina, Ohio, Oklahoma, Oregon, South
Carolina, Tennessee, Texas, Utah, Virginia, Washington and Wisconsin.
The Company is the largest publicly traded REIT owner of multifamily
properties (based on the number of apartment units owned and total revenues
earned). All of the Company's interests in the Properties are held directly or
indirectly by, and substantially all of its operations relating to the
Properties are conducted through, ERP Operating Limited Partnership (the
"Operating Partnership"). The Operating Partnership currently has eight
classes of limited partnership interests outstanding: (i) partnership interests
("OP Units"), which may be exchanged by the holders thereof for either Common
Shares, on a one-for-one basis or, at the Company's option, cash; (ii) 9 3/8%
Cumulative Redeemable Preference Units ("9 3/8% Preference Units"); (iii) 9
1/8% Cumulative Redeemable Preference Units ("9 1/8% Series B Preference
Units"); (iv) 9 1/8% Series C Cumulative Redeemable Preference Units ("9 1/8%
Series C Preference Units"); (v) 8.60% Cumulative Redeemable Preference Units
("8.60% Series D Preference Units"); (vi) Series E Cumulative Convertible
Preference Units ("Series E Preference Units"); (vii) 9.65% Series F Cumulative
Redeemable Preference Units ("9.65% Series F Preference Units"), and (viii) 7
1/4% Series G Convertible Cumulative Preference Units ("7 1/4% Series G
Preference Units"). The 9 3/8% Preference Units, the 9 1/8% Series B
Preference Units, the 9 1/8% Series C Preference Units, the 8.60% Series D
Preference Units, the Series E Preference Units, the 9.65% Series F Preference
Units, and the 7 1/4% Series G Preference Units are owned by the Company and
mirror the payments of distributions, including accrued and unpaid
distributions upon redemption, and the liquidating preference amount of the
Company's 9 3/8% Series A Cumulative Redeemable Preferred Shares of Beneficial
Interest, $.01 par value per share (the "Series A Preferred Shares"), the
Company's 9 1/8% Series B Cumulative Redeemable Preferred Shares of Beneficial
Interest, $.01 par value per share (the "Series B Preferred Shares"), the
Company's 9 1/8% Series C Cumulative Redeemable Preferred Shares of Beneficial
Interest, $.01 per value per share (the "Series C Preferred Shares"), the
Company's 8.60% Series D Cumulative Redeemable Preferred Shares of Beneficial
Interest, $.01 par value per share (the "Series D Preferred Shares"), the
Company's Series E Cumulative Convertible Preferred Shares of Beneficial
Interest, $.01 par value per share (the "Series E Preferred Shares"), the
Company's 9.65% Series F Preferred Shares of Beneficial Interest, $.01 par
value per share (the "Series F
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<PAGE> 4
Preferred Shares"), and the Company's 7 1/4% Series G Convertible Cumulative
Preferred Shares of Beneficial Interest, $.01 par value per share (the "Series
G Preferred Shares"), respectively.
The Company controls the Operating Partnership as the sole general partner
and, as of December 31, 1997, owned approximately 90% of all of the Operating
Partnership's outstanding partnership interests, excluding the 9 3/8%
Preference Units, the 9 1/8% Series B Preference Units, the 9 1/8% Series C
Preference Units, the 8.60% Series D Preference Units, the Series E Preference
Units, the 9.65% Series F Preference Units, and the 7 1/4% Series G Preference
Units. It is the Company's policy that Equity Residential Properties Trust
shall not incur indebtedness other than short-term trade, employee
compensation, dividends payable or similar indebtedness that will be paid in
the ordinary course of business, and that indebtedness shall instead be
incurred by the Operating Partnership to the extent necessary to fund the
business activities conducted by the Operating Partnership and its
subsidiaries.
The Company's corporate headquarters and executive offices are located at
Two North Riverside Plaza, Suite 400, Chicago, Illinois 60606, and its
telephone number is (312) 474-1300. In addition, the Company has 24 management
offices in the following cities: Chicago, Illinois; Denver, Colorado; Seattle,
Washington; Bethesda, Maryland; Atlanta, Georgia; Las Vegas, Nevada; Phoenix,
Arizona; Portland, Oregon; Dallas, Houston and San Antonio, Texas; Irvine and
Stockton, California; Ypsilanti, Michigan; Charlotte and Raleigh, North
Carolina; Tampa and Ft. Lauderdale, Florida; Kansas City, Kansas; Minneapolis,
Minnesota; Louisville, Kentucky; Tulsa, Oklahoma; Boston, Massachusetts; and
Nashville, Tennessee.
S-4
<PAGE> 5
RECENT DEVELOPMENTS
MERGER ACTIVITY
On May 30, 1997, the Company completed the acquisition of the multifamily
property business of Wellsford, a Maryland real estate investment trust,
through the tax-free merger of the Company and Wellsford (the "Wellsford
Merger"). The transaction was valued at approximately $1 billion and included
72 multifamily properties of Wellsford containing 19,004 units. In the
Wellsford Merger, each outstanding common share of beneficial interest of
Wellsford was converted into .625 of a Common Share.
On December 23, 1997, the Company completed the acquisition of the
multifamily property business of EWR, a Maryland corporation, through the
tax-free merger of the Company and EWR (the "EWR Merger"). The transaction was
valued at approximately $1 billion and included 51 multifamily properties
containing 14,995 units and four properties under expansion expected to contain
953 units. In the EWR Merger, each outstanding share of common stock of EWR
was converted into .50 of a Common Share of the Company.
ACQUISITIONS
In addition to the EWR Merger and the Wellsford Merger, from January 1,
1997 through December 31, 1997, the Company acquired 125 Properties containing
an aggregate of 33,878 units at a total purchase price of approximately $2
billion (including the assumption of mortgage indebtedness of approximately
$609.4 million). The Company purchased 12 of such Properties for an aggregate
purchase price of approximately $162.2 million (including the assumption of
mortgage indebtedness of approximately $107.1 million) from affiliates of the
Company, Zell/Merrill Lynch Real Estate Opportunity Partners Limited
Partnership ("Zell/Merrill I") and subsidiaries of Zell/Merrill Lynch Real
Estate Opportunity Partners Limited Partnership II ("Zell/Merrill II"). The
Company funded the cash portion of these acquisitions primarily from its
working capital and proceeds from previous securities issuances by the Company.
See "Securities Issuances" below.
In addition, in April 1997, the Company made an $88 million investment in
six mortgage loans collateralized by five Properties. This investment was
funded from the Company's $500 million unsecured line of credit (the "Line of
Credit") which it pays down from time to time with the net proceeds of equity
or debt offerings by the Company or the Operating Partnership, respectively.
See "Securities Issuances" below.
PROBABLE ACQUISITIONS
As of December 31, 1997, the Company had entered into contracts with
unaffiliated sellers to acquire 11 additional properties containing 2,288 units
which are located in six states (collectively, the "Properties Under
Contract"). The total combined purchase price for the Properties Under
Contract is approximately $162.3 million, including the assumption of
approximately $57.2 million of mortgage indebtedness. There can be no assurance
that these 11 Properties Under Contract will be acquired or, if acquired, that
the terms of such acquisitions will not change from the terms presently
contemplated. The Company anticipates that the acquisition of the Properties
Under Contract will be funded with the net proceeds of the Offering, its
working capital, its Line of Credit and/or proceeds from previous securities
issuances by the Company. The Company believes that the Properties Under
Contract can be integrated into its system of Regional Operations Centers and
area offices without any significant corresponding increase in the costs of
operations of such offices.
PENDING ACQUISITIONS
Additional Properties Under Contract
As of December 31, 1997, the Company had entered into contracts with
various unaffiliated sellers to acquire five additional properties under
contract (the "Additional Properties Under Contract") for a total combined
purchase price of approximately $58.3 million, including the assumption of
approximately $13.3 million of mortgage indebtedness. These Additional
Properties Under Contract contain 1,584 units and are located in three states.
The contracts for the Additional Properties Under Contract contain due
diligence contingency provisions that allow the Company to conduct extensive
investigative procedures of such properties and give the Company the option to
terminate such contracts with a full refund of earnest money if the Company
becomes dissatisfied with the Additional Properties Under Contract in any way,
in its sole discretion, during such review period. The purchase price for the
Additional Properties Under Contract is expected to be funded primarily with
the net proceeds of the Offering and/or from the Company's Line of Credit.
There can be no assurance that the Additional Properties Under Contract will be
acquired or, if acquired, that the terms of such acquisitions will not change
from the terms presently contemplated.
S-5
<PAGE> 6
Properties Under Negotiation
The Company is also negotiating with various sellers for the acquisition
of ten additional properties (the "Properties Under Negotiation") containing
2,445 units for a purchase price of approximately $155.7 million, including the
assumption of approximately $54 million of mortgage indebtedness. With respect
to the Properties Under Negotiation, the Company is negotiating the significant
terms of the purchase contracts for such properties. The Company anticipates
that, if and when entered into, the purchase contracts for the Properties Under
Negotiation will contain due diligence contingency provisions that will allow
the Company to conduct extensive investigations of such properties and will
give the Company flexibility to terminate such contracts with a full refund of
earnest money if the Company becomes dissatisfied with the Properties Under
Negotiation in any way, in its sole discretion, during such review period. If
the Company acquires the Properties Under Negotiation, it is expected that the
terms and conditions of such acquisitions will be similar to other acquisitions
of Properties made by the Company. The purchase price for the Properties Under
Negotiation is expected to be funded primarily with the Company's Line of
Credit. In addition, the Company or the Operating Partnership may consider
issuing additional equity or debt securities to finance some or all of such
potential acquisitions. There can be no assurance, however, that the
Properties Under Negotiation will be acquired or, if acquired, that the terms
of such acquisitions will not change from the terms presently contemplated.
DISPOSITIONS
Since January 1, 1997, the Company disposed of its interests in seven
properties containing 1,248 units for an aggregate sales price of approximately
$33.2 million. The net proceeds of these dispositions were or will be used for
the acquisition of additional properties.
SECURITIES ISSUANCES
Since January 1, 1997, the Company has raised an aggregate of
approximately $720.2 million pursuant to 12 separate public offerings of its
Common Shares and an aggregate of approximately $473.1 million pursuant to the
public offering of depositary shares representing the Series D Preferred Shares
and Series G Preferred Shares. Since January 1, 1997, the Operating
Partnership has raised approximately $345.9 million pursuant to two separate
public offerings of its notes.
FINANCINGS
On September 9, 1997, the Company entered into its Second Amended and
Restated Revolving Credit Agreement, with Morgan Guaranty Trust Company of New
York as Lead Agent, which increased available borrowings under the Line of
Credit to $500 million.
RISK FACTORS
Investors should consider the material risk factors involved in connection
with an investment in the Common Shares and the impact to investors from
various events which could adversely affect the Company's business. See "Risk
Factors" in the accompanying Prospectus.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the Common Shares offered
hereby are estimated to be approximately $191.1 million after the deduction of
the underwriting discounts and commissions and the estimated Offering expenses.
The Company will contribute or otherwise transfer the net proceeds of the sale
of the Common Shares to the Operating Partnership in exchange for OP Units.
The Operating Partnership presently intends to use the net proceeds for the
acquisition of additional multifamily properties, including all or some of the
Properties Under Contract and the Additional Properties Under Contract, and to
reduce the outstanding balance of the Company's Line of Credit.
The Line of Credit matures on November 15, 1999, unless extended by the
parties, and outstanding borrowings under the Line of Credit currently bear
interest at a weighted average rate equal to approximately 6.46% per annum. As
of January 21, 1998, the Company had an outstanding balance on the Line of
Credit of approximately $235 million.
S-6
<PAGE> 7
PRICE RANGE OF COMMON SHARES AND DISTRIBUTIONS
The Common Shares have been traded on the NYSE under the symbol "EQR"
since the EQR IPO. The following table sets forth the quarterly high and low
sales prices per share reported on the NYSE, as well as the quarterly
distributions declared per Common Share during the periods indicated.
<TABLE>
<CAPTION>
High Low Distributions
-------- ------- -------------
<S> <C> <C> <C>
1996
First Quarter............................... $33 3/4 $28 1/4 $0.59
Second Quarter.............................. 33 1/2 30 7/8 0.59
Third Quarter............................... 36 1/8 32 7/8 0.59
Fourth Quarter.............................. 43 3/8 35 5/8 0.625
1997
First Quarter............................... $48 7/8 $39 3/4 $0.625
Second Quarter.............................. 47 1/2 41 1/4 0.625
Third Quarter............................... 54 9/16 47 1/8 0.625
Fourth Quarter.............................. 55 47 3/8 0.67(1)
1998
First Quarter (through January 21, 1998).... $52 7/16 $50 1/4 N/A
</TABLE>
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(1) The fourth quarter distribution was paid on December 30, 1997 to
shareholders of record as of December 15, 1997 and represented an annual
distribution rate of $2.68 per share.
On January 21, 1998 the last reported sales price of a Common Share on the
NYSE was $50.4375 per Common Share. As of January 19, 1998, the Company's
transfer agent reported approximately 1,320 record holders of Common Shares
and, as of November 1997, certain depository entities held Common Shares on
behalf of approximately 25,000 beneficial owners.
The Company intends to continue to pay regular quarterly distributions to
holders of Common Shares. The Company has increased its annual distribution
each year since the EQR IPO. For the year ended December 31, 1997, the Company
declared distributions of $2.545 per Common Share to holders of Common Shares.
This distribution rate represents an approximate 6% increase over the Company's
1996 distribution rate and an approximate 17% increase over the Company's 1995
distribution rate. Future distributions will be at the discretion of the board
of trustees and will depend on the actual cash available for distribution by
the Company, the Company's financial condition, capital requirements, credit
agreement restrictions, the annual distribution requirements under the REIT
provisions of the Internal Revenue Code of 1986, as amended, and such other
factors as the board of trustees deems relevant. A portion of the Company's
distribution may represent a nontaxable return of capital and/or a capital gain
dividend. For the year ended December 31, 1997, this portion varied from
distribution to distribution. Of the Company's declared distributions in 1997
of $2.545 per Common Share, the nontaxable return of capital ranged from 0% to
approximately 15% and the portion which represented long-term capital gain
ranged from 0% to approximately 3%.
S-7
<PAGE> 8
BUSINESS AND PROPERTIES
The Company is a self-administered and self-managed equity REIT. EQR was
established to continue the multifamily property business objectives and
acquisition strategies of certain affiliated entities controlled by Mr. Zell,
Chairman of the Board of Trustees of the Company. These entities had been
engaged in the multifamily property business since 1969. The Company is a
fully integrated real estate concern that acquires, improves, operates and
manages its Properties. The Company has benefited, and expects to benefit,
from the following elements:
DIVERSIFIED PORTFOLIO
As of December 31, 1997, the Company owned or had interests in a portfolio
of 489 Properties containing 140,467 apartment units located in 35 states. As
of such date, the Company's portfolio was the largest multifamily property
portfolio controlled by a publicly traded REIT (based on the number of
apartment units owned and total revenues earned). The Company's interest in 11
of the Properties at the time of acquisition thereof consisted solely of
ownership of the debt collateralized by such Properties and in 21 Properties
consists solely of investments in partnership interests and subordinated
mortgages collateralized by such Properties. No single Property represents
more than 1.01% of the total apartment units. The distribution of the
Properties throughout the United States reflects the Company's belief that
geographic diversification helps insulate the portfolio from regional and local
economic influences. At the same time, the Company has sought to create
clusters of Properties within each of its primary markets to achieve economies
of scale in management and operation. The Company has established 24
management offices in the following cities: Chicago, Illinois; Denver,
Colorado; Seattle, Washington; Bethesda, Maryland; Atlanta, Georgia; Las Vegas,
Nevada; Phoenix, Arizona; Portland, Oregon; Dallas, Houston and San Antonio,
Texas; Irvine and Stockton, California; Ypsilanti, Michigan; Charlotte and
Raleigh, North Carolina; Tampa and Ft. Lauderdale, Florida; Kansas City,
Kansas; Minneapolis, Minnesota; Louisville, Kentucky; Tulsa, Oklahoma; Boston,
Massachusetts and Nashville, Tennessee.
EXPERIENCED MANAGEMENT
The Company's senior executives average over 23 years of experience in the
multifamily property business. The Company has a fully integrated management
team; an Acquisitions Department that is dedicated exclusively to the property
acquisition function and is in constant contact with principals and brokers
nationwide; an Asset Management Department that establishes strategic plans
with respect to the portfolio including the development and implementation of
long-term business plans, asset financings, property repositionings,
expansions, and property disposition decisions; a Property Management
Department that aggressively manages the portfolio through significant
interaction with on-site property managers at each Property; an Accounting and
Finance Department that maintains the books and records of the Properties and
generates timely financial reports; a Capital Markets Department that manages
investor relations and capital raising; and a Legal Department that oversees
all of the Company's legal affairs.
SOPHISTICATED MANAGEMENT INFORMATION SYSTEMS
The Company makes extensive use of management information systems. The
Company has installed on-site computers at every Property, except for the newly
acquired Properties at which such computers will be installed, that are capable
of compiling and forwarding to the Company's Regional Operations Centers on a
daily basis numerous standardized reports including daily occupancy, lease
expiration and renewals, prospective tenants and rental rate information.
Quality controls are assured with the Company's practice of (i) conducting
resident satisfaction surveys, (ii) surveying residents that move out of the
Properties, and (iii) surveying prospective tenants who select alternative
housing.
THE PROPERTIES
As of December 31, 1997, the Company owned or had interests in a portfolio
of 489 Properties located in 35 states containing 140,467 apartment units with
the largest having 1,420 units and the smallest having 40 units. The average
number of units per Property was approximately 287. The units are typically
contained in a series of two-story buildings. As of December 31, 1997, the
Properties had an average occupancy rate of approximately 95%. Tenant leases
are generally year-to-year and require security deposits. The Properties
typically provide residents with attractive amenities, including a clubhouse,
swimming pool, laundry facilities and cable television access. Certain
Properties offer additional amenities such as saunas, whirlpools, spas, sports
courts and exercise rooms.
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<PAGE> 9
The following chart sets forth certain information regarding the
Properties on a state-by-state basis.
PROPERTIES BY STATE
(AS OF DECEMBER 31, 1997)
<TABLE>
<CAPTION>
STATE NUMBER OF PROPERTIES NUMBER OF UNITS % OF UNITS IN PORTFOLIO
- ----- -------------------- --------------- -------------------------
<S> <C> <C> <C>
Alabama 2 400 0.3%
Arizona 74 21,802 15.5%
Arkansas 4 1,039 0.8%
California 53 14,599 10.4%
Colorado 23 6,392 4.6%
Connecticut 1 144 0.1%
Florida 41 10,811 7.7%
Georgia 20 5,811 4.1%
Idaho 1 120 0.1%
Illinois 7 3,322 2.4%
Indiana 1 320 0.2%
Iowa 2 386 0.3%
Kansas 6 2,392 1.7%
Kentucky 7 1,977 1.4%
Maine 2 340 0.2%
Maryland 13 3,795 2.7%
Massachusetts 3 737 0.5%
Michigan 9 3,644 2.6%
Minnesota 12 2,987 2.1%
Missouri 7 1,576 1.1%
Nevada 11 3,279 2.3%
New Hampshire 1 390 0.3%
New Jersey 1 704 0.5%
New Mexico 4 1,073 0.8%
North Carolina 20 5,216 3.7%
Ohio 6 2,683 1.9%
Oklahoma 14 3,981 2.8%
Oregon 11 3,448 2.5%
South Carolina 6 1,045 0.7%
Tennessee 16 4,318 3.1%
Texas 51 16,969 12.1%
Utah 4 1,426 1.0%
Virginia 9 2,821 2.0%
Washington 44 9,834 7.0%
Wisconsin 3 686 0.5%
--- ------- -----
TOTAL 489 (1) 140,467 100.0%
=== ======= =====
</TABLE>
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(1) The Company's interest in 11 of the Properties at the time of
acquisition thereof consisted solely of ownership of the debt
collateralized by such Properties and in 21 Properties consists
solely of investments in partnership interests and subordinated
mortgages collateralized by such Properties.
For additional information with respect to the Properties, see the Company's
Annual Report on Form 10-K, as amended by Form 10-K/A, for the year ended
December 31, 1996 and the Company's Quarterly Report on Form 10-Q for the
period ended September 30, 1997.
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<PAGE> 10
UNDERWRITING
Prudential Securities Incorporated and J.P. Morgan Securities Inc.
(collectively, the "Underwriters") have severally agreed, subject to the terms
and conditions contained in the terms agreement among the Underwriters, the
Company and the Operating Partnership (collectively, the "Underwriting
Agreement") and the related standard underwriting provisions incorporated by
reference therein, to purchase from the Company the number of Common Shares set
forth below opposite their respective names. The Company is obligated to sell,
and the Underwriters are obligated to purchase, all of the Common Shares
offered hereby, if any are purchased.
<TABLE>
<CAPTION>
Number of
Underwriter Common Shares
----------- -------------
<S> <C>
Prudential Securities Incorporated................ 2,000,000
J.P. Morgan Securities Inc........................ 2,000,000
---------
Total............................................. 4,000,000
=========
</TABLE>
The Underwriting Agreement provides that the Company will pay as
compensation to the Underwriters $2.65 per Common Share; provided, that
compensation for sales of 10,000 or more Common Shares to a single purchaser
will be $1.01 per Common Share.
The Underwriters have advised the Company that they propose to offer the
Common Shares initially at the public offering price set forth on the cover
page of this Prospectus Supplement, that the Underwriters may allow to selected
dealers a concession of $1.50 per Common Share; provided, that the concession
for sales of 10,000 or more Common Shares to a single purchaser will be $0.60
per Common Share; and such dealers may reallow a concession of $0.10 per Common
Share to certain other dealers. After the Offering, the public offering price
and concessions may be changed by the Underwriters.
The Company has granted to the Underwriters an option, exercisable for 30
days after the date of this Prospectus Supplement, to purchase up to 600,000
additional Common Shares at the public offering price, less the underwriting
discounts and commissions, as set forth on the cover page of this Prospectus
Supplement. The Underwriters may exercise such option solely for the purpose
of covering over-allotments incurred in the sale of the Common Shares offered
hereby. To the extent such option to purchase is exercised, each Underwriter
will become obligated, subject to certain conditions, to purchase approximately
the same percentage of such additional Common Shares as the number set forth
next to each Underwriter's name in the preceding table bears to 4,000,000.
Simultaneously with the Offering, Prudential Securities Incorporated will
execute a block trade of 300,000 Common Shares on behalf of an existing
shareholder of the Company and reoffering these shares at the same price per
Common Share as the public offering price on the cover page of this Prospectus
Supplement.
The Company has agreed that it will not, directly or indirectly, offer,
sell, offer to sell, grant any option to purchase or otherwise sell or dispose
(or announce any offer, sale, offer of sale, grant of any option to purchase or
other sale or disposition) of any Common Shares for a period of 30 days from
the date of the Underwriting Agreement, subject to certain exceptions, without
the prior written consent of Prudential Securities Incorporated on behalf of
the Underwriters. Prudential Securities Incorporated may, in its sole
discretion, at any time and without notice, release all or any portion of the
Common Shares subject to such agreement.
The Company and the Operating Partnership have agreed to indemnify the
Underwriters and to contribute to losses arising out of certain liabilities
under the Securities Act.
In connection with the Offering, the Underwriters and their respective
affiliates may engage in transactions that stabilize, maintain or otherwise
affect the market price of the Common Shares, the Series E Preferred Shares and
the Series G Preferred Shares. Such transactions may include stabilization
transactions effected in accordance with Rule 104 of Regulation M, pursuant to
which such persons may bid for or purchase Common Shares, Series E Preferred
Shares and Series G Preferred Shares for the purpose of stabilizing their
market prices. The Underwriters also may create a short position for their
account by selling more Common Shares in connection with the Offering than they
are committed to purchase from the Company, and in such case may purchase
Common Shares in the open market following completion of the Offering to cover
all or a portion of such short position. The Underwriters may also cover all
or a portion of such short position, up to 600,000 Common Shares, by exercising
the Underwriters' over-allotment option referred to above. In addition,
Prudential Securities Incorporated, on behalf of the Underwriters, may impose
"penalty bids" under contractual arrangements with the Underwriters whereby it
may reclaim from an Underwriter for its account the selling concession with
respect to Common Shares that are distributed in the Offering but subsequently
purchased for the account of the Underwriters in the open market. Any of the
transactions described in this
S-10
<PAGE> 11
paragraph may result in the maintenance of the price of the Common Shares at a
level above that which might otherwise prevail in the open market. None of the
transactions described in this paragraph is required and, if they are
undertaken, they may be discontinued at any time.
The Underwriters from time to time provide investment banking and
financial advisory services to the Company and the Operating Partnership and
other entities owned or controlled by Mr. Zell, and affiliates of the
Underwriters from time to time may provide financing to such entities.
S-11
<PAGE> 12
PROSPECTUS
EQUITY RESIDENTIAL PROPERTIES TRUST
$1,025,832,122
PREFERRED SHARES, COMMON SHARES AND DEPOSITARY SHARES
Equity Residential Properties Trust (the "Company") may from
time to time offer (i) in one or more series its preferred shares
of beneficial interest, $0.01 par value per share ("Preferred
Shares"); (ii) common shares of beneficial interest, $0.01 par
value per share ("Common Shares"); and (iii) in one or more
series its Preferred Shares represented by depositary shares (the
"Depositary Shares"), with an aggregate public offering price of
up to $1,025,832,122 ( or its equivalent based on the exchange
rate at the time of sale) in amounts, at prices and on terms to
be determined at the time of offering. The Preferred Shares,
Common Shares and Depositary Shares (collectively, the
"Securities") may be offered, separately or together, in separate
series (with respect to Preferred Shares and Depositary Shares)
in amounts, at prices and on terms to be described in one or more
supplements to this Prospectus (a "Prospectus Supplement").
The specific terms of the Securities in respect of which
this Prospectus is being delivered will be set forth in the
applicable Prospectus Supplement and will include, where
applicable: (i) in the case of Preferred Shares, the specific
title and stated value, any distribution, liquidation,
redemption, conversion, voting and other rights, and any initial
public offering price; (ii) in the case of Common Shares, any
initial public offering price; and (iii) in the case of
Depositary Shares, the fractional Preferred Shares represented by
each Depositary Share. In addition, such specific terms may
include limitations on direct or beneficial ownership and
restrictions on transfer of the Securities, in each case as may
be appropriate to assist in maintaining the status of the Company
as a real estate investment trust for federal income tax
purposes.
The applicable Prospectus Supplement also will contain
information, where applicable, about the material U.S. federal
income tax considerations relating to, and any listing on a
securities exchange of, the Securities covered by such Prospectus
Supplement, not contained in this Prospectus.
The Securities may be offered directly, through agents
designated from time to time by the Company, or to or through
underwriters or dealers. If any agents or underwriters are
involved in the sale of any of the Securities, their names, and
any applicable purchase price, fee, commission or discount
arrangement with, between or among them, will be set forth, or
will be calculable from the information set forth, in an
accompanying Prospectus Supplement. See "Plan of Distribution."
No Securities may be sold without delivery of a Prospectus
Supplement describing the method and terms of the offering of
such Securities.
SEE "RISK FACTORS" BEGINNING ON PAGE 5 FOR A DISCUSSION OF
CERTAIN FACTORS RELATING TO AN INVESTMENT IN THE SECURITIES.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION
OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS SEPTEMBER 11, 1997.
<PAGE> 13
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this Prospectus and the documents incorporated by
reference herein and any accompanying Prospectus Supplement, including those
set forth in "Risk Factors" and "Use of Proceeds" herein, constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995 (the "Reform Act"). Such forwarding-looking
statements involve known and unknown risks, uncertainties and other factors
which may cause the actual results, performance or achievements of the Company
or industry results to be materially different from any future results,
performance or achievements expressed or implied by such forward-looking
statements. Such factors include, among others, the following: general
economic and business conditions which will, among other things, affect demand
for multifamily properties, availability and credit worthiness of prospective
tenants, lease rents and the availability of financing, adverse changes in the
real estate markets including, among other things, competition with other
companies, risks of real estate acquisition, governmental actions and
initiatives, and environmental/safety requirements. See "Risk Factors."
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act") and, in accordance
therewith, files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). The Registration
Statement, the exhibits and schedules forming a part thereof and the reports,
proxy statements and other information filed by the Company with the Commission
in accordance with the Exchange Act can be inspected and copied at the
Commission's Public Reference Section, 450 Fifth Street, N.W., Washington, D.C.
20549, and at the following regional offices of the Commission: Seven World
Trade Center, Suite 1300, New York, New York 10048 and 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of such material can
be obtained from the Public Reference Section of the Commission, 450 Fifth
Street, N.W., Washington, D.C. 20549, at prescribed rates. The Commission
maintains a Web site at http://www.sec.gov containing reports, proxy and
information statements and other information regarding registrants, including
the Company, that file electronically with the Commission. In addition, the
Common Shares and certain of the Company's Cumulative Redeemable Preferred
Shares of Beneficial Interest are listed on the New York Stock Exchange (the
Common Shares are listed under the symbol "EQR") and similar information
concerning the Company can be inspected and copied at the offices of the New
York Stock Exchange, Inc., 20 Broad Street, New York, New York 10005.
The Company has filed with the Commission a registration statement on Form
S-3 (the "Registration Statement"), of which this Prospectus is a part, under
the Securities Act of 1933, as amended (the "Securities Act"), with respect to
the Securities offered hereby. This Prospectus does not contain all of the
information set forth in the Registration Statement, certain portions of which
have been omitted as permitted by the rules and regulations of the Commission.
Statements contained in this Prospectus as to the contents of any contract or
other documents are not necessarily complete, and in each instance reference is
made to the copy of such contract or other documents filed as an exhibit to the
Registration Statement, each such statement being qualified in all respects by
such reference and the exhibits and schedules thereto. For further information
regarding the Company and the Securities, reference is hereby made to the
Registration Statement and such exhibits and schedules which may be obtained
from the Commission at its principal office in Washington, D.C. upon payment of
the fees prescribed by the Commission.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The documents listed below have been filed by the Company under the
Exchange Act with the Commission and are incorporated herein by reference:
a. The Company's Annual Report on Form 10-K, as amended by Form
10-K/A (filed on April 3, 1997), for the year ended December 31,
1996.
b. The Company's Second Amended and Restated Declaration of Trust
(the "Declaration of Trust") filed as Exhibit 3.1 to the Company's
Current Report on Form 8-K dated May 30, 1997, filed on June 5, 1997.
c. The Company's Second Amended and Restated Bylaws, filed as
Exhibit 3.2 to the Company's Current Report on Form 8-K, dated May
30, 1997, filed on June 5, 1997.
d. The Company's Joint Proxy Statement/Prospectus dated April 25,
1997.
2
<PAGE> 14
e. The Company's definitive Proxy Statement relating to the
Company's Annual Meeting of Shareholders dated June 17, 1997.
f. The description of the Company's Common Shares contained in the
Company's Registration Statement on Form 8-A/A dated August 10, 1993.
g. The Company's Quarterly Reports on Form 10-Q for the periods
ended March 31, 1997 and June 30, 1997.
h. The Company's Current Reports on Form 8-K dated May 23, 1996,
November 15, 1996, January 16, 1997, March 12, 1997, March 17, 1997,
March 19, 1997, March 20, 1997, March 24, 1997, April 3, 1997, May
16, 1997, May 20, 1997, May 30, 1997 (2), June 5, 1997, June 9, 1997,
June 10, 1997, June 23, 1997, August 15, 1997, August 27, 1997 and
September 10, 1997, the Company's Current Reports on Form 8-K/A dated
May 23, 1996 and November 15, 1996.
All documents filed by the Company pursuant to Sections 13(a), 13(c), 14
and 15(d) of the Exchange Act subsequent to the date of this Prospectus and
prior to the termination of the offering of all Securities to which this
Prospectus relates shall be deemed to be incorporated by reference in this
Prospectus and to be part hereof from the date of filing such documents.
Any statement contained herein or in a document incorporated or deemed to
be incorporated by reference herein shall be deemed to be modified or
superseded for purposes of this Prospectus to the extent that a statement
contained in the Prospectus (in the case of a statement in a previously filed
document incorporated or deemed to be incorporated by reference herein), in any
applicable Prospectus Supplement relating to a specific offering of Securities,
or in any other subsequently filed document which also is or is deemed to be
incorporated by reference herein modifies or supersedes such statement. Any
such statement so modified or superseded shall not be deemed, except as so
modified or superseded, to constitute a part of this Prospectus or any
accompanying Prospectus Supplement. Subject to the foregoing, all information
appearing in this Prospectus and each accompanying Prospectus Supplement is
qualified in its entirety by the information appearing in the documents
incorporated by reference.
Copies of all documents which are incorporated herein by reference (not
including the exhibits to such information, unless such exhibits are
specifically incorporated by reference in such information) will be provided
without charge to each person, including any beneficial owner, to whom this
Prospectus is delivered upon written or oral request. Requests should be
directed to Equity Residential Properties Trust, Two North Riverside Plaza,
Suite 400, Chicago, Illinois 60606, Attention: Cynthia McHugh (telephone
number: (312) 474-1300).
3
<PAGE> 15
As used herein, the term "Company" includes Equity Residential Properties
Trust and those entities owned or controlled by it (collectively, the
"Subsidiaries"), as the survivor of the merger between Wellsford Residential
Property Trust ("Wellsford") and Equity Residential Properties Trust ("EQR")
and both EQR and Wellsford as predecessors to the Company, unless the context
indicates otherwise.
THE COMPANY
GENERAL
Equity Residential Properties Trust, one of the largest publicly traded
REITs (based on the aggregate market value of its outstanding equity
capitalization), is a self-administered and self-managed equity REIT. EQR was
organized in March 1993 and commenced operations as a publicly traded company
on August 18, 1993 upon completion of its initial public offering (the "EQR
IPO"). EQR was formed to continue the multifamily property business objectives
and acquisition strategies of certain affiliated entities controlled by Mr.
Samuel Zell, Chairman of the Board of Trustees of the Company. These entities
had been engaged in the acquisition, ownership and operation of multifamily
properties since 1969. In May 1997, EQR completed the acquisition of the
multifamily property business of Wellsford through the tax free merger of EQR
and Wellsford. The Company's senior executives average over 23 years of
experience in the multifamily property business.
The Company is the largest publicly traded REIT owner of multifamily
properties (based on the number of apartment units owned and total revenues
earned). All of the Company's interests in its multifamily properties (the
"Properties") are held directly or indirectly by, and substantially all of its
operations relating to the Properties are conducted through, ERP Operating
Limited Partnership (the "Operating Partnership"). The Operating Partnership
currently has seven classes of limited partnership interests outstanding: (i)
partnership interests ("OP Units"), which may be exchanged by the holders
thereof for either common shares of beneficial interest of the Company, $0.01
par value per share ("Common Shares"), on a one-for-one basis or, at the
Company's option, cash; (ii) 9 3/8% Cumulative Redeemable Preference Units ("9
3/8% Preference Units"); (iii) 9 1/8% Cumulative Redeemable Preference Units
("9 1/8% Series B Preference Units"); (iv) 9 1/8% Series C Cumulative
Redeemable Preference Units ("9 1/8% Series C Preference Units"); (v) 8.60%
Cumulative Redeemable Preference Units ("8.60% Series D Preference Units");
(vi) Series E Cumulative Convertible Preference Units ("Series E Preference
Units") and (vii) 9.65% Series F Cumulative Redeemable Preference Units ("9.65%
Series F Preference Units"). The 9 3/8% Preference Units, the 9 1/8% Series B
Preference Units, the 9 1/8% Series C Preference Units, the 8.60% Series D
Preference Units, the Series E Preference Units and the 9.65% Series F
Preference Units are owned by the Company and mirror the payments of
distributions, including accrued and unpaid distributions upon redemption, and
of the liquidating preference amount of the Company's 9 3/8% Series A
Cumulative Redeemable Preferred Shares of Beneficial Interest, $.01 par value
per share (the "Series A Preferred Shares"), the Company's 9 1/8% Series B
Cumulative Redeemable Preferred Shares of Beneficial Interest, $.01 par value
per share (the "Series B Preferred Shares"), the Company's 9 1/8% Series C
Cumulative Redeemable Preferred Shares of Beneficial Interest, $.01 per value
per share (the "Series C Preferred Shares"), the Company's 8.60% Cumulative
Redeemable Preferred Shares of Beneficial Interest, $0.01 par value per share
(the "Series D Preferred Shares"), the Company's Series E Cumulative
Convertible Preferred Shares of Beneficial Interest, $0.01 par value per share
(the "Series E Preferred Shares"), and the Company's 9.65% Series F Preferred
Shares of Beneficial Interest, $0.01 par value per share (the "Series F
Preferred Shares"), respectively. The Company controls the Operating
Partnership as the sole general partner and, as of September 11, 1997, owned
approximately 91% of all of the Operating Partnership's outstanding partnership
interests, excluding the 9 3/8% Preference Units, the 9 1/8% Series B
Preference Units, the 9 1/8% Series C Preference Units, the 8.60% Series D
Preference Units, the Series E Preference Units and the 9.65% Series F
Preference Units. It is the Company's policy that Equity Residential
Properties Trust shall not incur indebtedness other than short-term trade,
employee compensation, dividends payable or similar indebtedness that will be
paid in the ordinary course of business, and that indebtedness shall instead be
incurred by the Operating Partnership to the extent necessary to fund the
business activities conducted by the Operating Partnership and its
subsidiaries.
The Company's corporate headquarters and executive offices are located at
Two North Riverside Plaza, Suite 400, Chicago, Illinois 60606, and its
telephone number is (312) 474-1300.
4
<PAGE> 16
RISK FACTORS
Prospective investors should carefully consider, among other factors, the
matters described below prior to making an investment decision regarding the
Securities offered hereby.
ADVERSE CONSEQUENCES OF DEBT FINANCING AND PREFERRED SHARES
General Risks. As of June 30, 1997, the Properties were subject to
approximately $961 million of mortgage indebtedness and the Company's total
debt equaled approximately $1.7 billion, $361.5 million of which was floating
rate debt. In addition, in June 1995, the Company issued 6,120,000 Series A
Preferred Shares pursuant to a preferred share offering; in November 1995, the
Company issued 5,000,000 depositary shares each representing a 1/10 fractional
interest in a Series B Preferred Share pursuant to a depositary share offering;
in September 1996, the Company issued 4,600,000 depositary shares each
representing a 1/10 fractional interest in a Series C Preferred Share pursuant
to a depositary share offering; in May 1997, the Company issued 7,000,000
depositary shares each representing a 1/10 fractional interest in a Series D
Preferred Share pursuant to a depositary share offering and also in May 1997,
subsequent to the merger of the Company with Wellsford Residential Property
Trust ("Wellsford"), Wellsford's 3,999,800 Series A Cumulative Convertible
Preferred Shares of Beneficial Interest were redesignated as the Company's
3,999,800 Series E Preferred Shares and Wellsford's 2,300,000 Series B
Cumulative Redeemable Preferred Shares of Beneficial Interest were redesignated
as the Company's 2,300,000 Series F Preferred Shares (collectively, the
"Preferred Share Offerings"). The Company used the proceeds from the Preferred
Share Offerings to repay indebtedness and to acquire additional Properties.
The Company is subject to the risks normally associated with debt or preferred
equity financing, including the risk that the Company's cash flow will be
insufficient to meet required payments of principal and interest, the risk that
existing indebtedness may not be refinanced or that the terms of such
refinancing will not be as favorable as the terms of current indebtedness and
the risk that necessary capital expenditures for such purposes as renovations
and other improvements may not be financed on favorable terms or at all. If the
Company were unable to refinance its indebtedness on acceptable terms, or at
all, the Company might be forced to dispose of one or more of the Properties on
disadvantageous terms, which might result in losses to the Company and might
adversely affect the cash available for distributions to shareholders. If
interest rates or other factors at the time of the refinancing result in higher
interest rates upon refinancing, the Company's interest expense would increase,
which would affect the Company's ability to make distributions to its
shareholders. Furthermore, if a Property is mortgaged to secure payment of
indebtedness and the Company is unable to meet mortgage payments, the mortgagee
could foreclose upon the Property, appoint a receiver and receive an assignment
of rents and leases or pursue other remedies, all with a consequent loss of
income and asset value to the Company. Foreclosures could also create taxable
income without accompanying cash proceeds, thereby hindering the Company's
ability to meet the REIT distribution requirements of the Internal Revenue Code
of 1986, as amended (the "Code").
Restrictions on the Company's Activities. A substantial portion of the
Company's debt was issued pursuant to certain indentures (the "Indentures")
which restrict the amount of indebtedness (including acquisition financing) the
Company may incur. Accordingly, in the event that the Company is unable to
raise additional equity or borrow money because of the debt restrictions in the
indentures, the Company's ability to acquire additional properties may be
limited. If the Company is unable to acquire additional properties, its ability
to increase the distributions with respect to Common Shares, as it has done in
the past, will be limited to management's ability to increase funds from
operations, and thereby cash available for distributions, from the existing
Properties in the Company's portfolio at such time.
Bond Compliance Requirements. The Company owns several Properties that are
subject to restrictive covenants or deed restrictions relating to current or
previous tax-exempt bond financing and owns the bonds collateralized by several
additional Properties. The Company has retained an independent outside
consultant to monitor compliance with the restrictive covenants and deed
restrictions that affect these Properties. The bond compliance requirements may
have the effect of limiting the Company's income from certain of these
Properties if the Company is required to lower its rental rates to attract low
or moderate income tenants, or eligible/qualified tenants.
CONTROL AND INFLUENCE BY SIGNIFICANT SHAREHOLDERS
As of September 11, 1997, Mr. Zell, certain of the current holders (the
"Zell Holders") of certain OP Units ("Original OP Units") issued at the time of
the initial public offering of common shares of EQR (the "EQR IPO") to certain
affiliates of Mr. Zell which contributed 33 of the Properties at the time of
the EQR IPO (the "Zell Original Owners"), Equity Properties Management Corp.
("EPMC") and other affiliates of Mr. Zell owned in the aggregate approximately
5.8% of the Common Shares (assuming that all of the partnership interests in
the Operating Partnership are exchanged for Common Shares), and certain
entities controlled by Starwood Capital Partners L.P. ("Starwood") and its
affiliates which contributed 23 of the Properties at the time of the EQR IPO
(the "Starwood Original Owners") owned in the aggregate approximately 2.3% of
the Common Shares (assuming that all of the OP Units are exchanged for Common
5
<PAGE> 17
Shares). The Starwood Original Owners, together with the Zell Original Owners,
shall be referred to collectively as the "Original Owners." As of September
11, 1997, the Company had options outstanding to purchase approximately 3.8
million Common Shares which it has granted to certain officers, employees and
trustees of the Company and consultants to the Company, some of whom are
affiliated with Mr. Zell, representing in the aggregate approximately 4.5% of
the Common Shares (assuming that all such options are exercised for Common
Shares and all of the outstanding OP Units are exchanged for Common Shares).
Further, the consent of affiliates of Mr. Zell who are Zell Holders and of the
Starwood Original Owners is required for certain amendments to the Operating
Partnership's Fourth Amended and Restated ERP Operating Limited Partnership
Agreement of Limited Partnership (the "Partnership Agreement"). Accordingly,
Mr. Zell and the Starwood Original Owners may continue to have substantial
influence over the Company, which influence might not be consistent with the
interests of other shareholders, and on the outcome of any matters submitted to
the Company's shareholders for approval. In addition, although there is no
current agreement, understanding or arrangement for these shareholders to act
together on any matter, these shareholders would be in a position to exercise
significant influence over the affairs of the Company if they were to act
together in the future.
POTENTIAL ENVIRONMENTAL LIABILITY AFFECTING THE COMPANY
Under various federal, state and local environmental laws, ordinances and
regulations, an owner of real estate may be liable for the costs of removal or
remediation of certain hazardous or toxic substances on such property. These
laws often impose environmental liability without regard to whether the owner
knew of, or was responsible for, the presence of such hazardous or toxic
substances. The presence of such substances, or the failure properly to
remediate such substances, may adversely affect the owner's ability to sell or
rent the property or to borrow using the property as collateral. Persons who
arrange for the disposal or treatment of hazardous or toxic substances may also
be liable for the costs of removal or remediation of such substances at a
disposal or treatment facility, whether or not such facility is owned or
operated by such person. Certain laws impose liability for release of
asbestos-containing materials ("ACMs") into the air and third parties may seek
recovery from owners or operators of real properties for personal injury
associated with ACMs. In connection with the ownership (direct or indirect),
operation, management and development of real properties, the Company or the
Subsidiaries, as the case may be, may be considered an owner or operator of
such properties or as having arranged for the disposal or treatment of
hazardous or toxic substances and, therefore, potentially liable for removal or
remediation costs, as well as for certain other related costs, including
governmental fines and injuries to persons and property.
All of the Properties have been the subject of a Phase I and, in certain
cases, a supplemental environmental assessment completed by qualified
independent environmental consultant companies. The most recent environmental
assessments for each of the Properties were conducted within the last five
years. Environmental assessments were obtained prior to the acquisition by the
Company of each of the Properties. These environmental assessments have not
revealed, nor is the Company aware of, any environmental liability that the
Company's management believes would have a material adverse effect on the
Company's business, results of operations, financial condition or liquidity.
No assurance can be given that existing environmental assessments with
respect to any of the Properties reveal all environmental liabilities, that any
prior owner of a Property did not create any material environmental condition
not known to the Company, or that a material environmental condition does not
otherwise exist as to any one or more Properties.
GENERAL REAL ESTATE INVESTMENT CONSIDERATIONS; CHANGES IN LAWS
General. Real property investments are subject to varying degrees of risk
and are relatively illiquid. Income from real property investments and the
Company's resulting ability to make expected distributions to shareholders may
be adversely affected by the general economic climate, local conditions such as
oversupply of apartment units or a reduction in demand for apartment units in
the area, the attractiveness of the Properties to tenants, zoning or other
regulatory restrictions, the ability of the Company to provide adequate
maintenance and insurance, and increased operating costs (including insurance
premiums and real estate taxes). The Company's income would also be adversely
affected if tenants were unable to pay rent or the Company were unable to rent
apartment units on favorable terms. If the Company were unable to promptly
relet units or renew the leases for a significant number of apartment units, or
if the rental rates upon such renewal or reletting were significantly lower
than expected rates, then the Company's funds from operations and ability to
make expected distributions to shareholders may be adversely affected. In
addition, certain expenditures associated with each equity investment (such as
real estate taxes and maintenance costs) generally are not reduced when
circumstances cause a reduction in income from the investment. Furthermore,
real estate investments are relatively illiquid and, therefore, will tend to
limit the ability of the Company to vary its portfolio promptly in response to
changes in economic or other conditions.
6
<PAGE> 18
Changes in Laws. Increases in real estate taxes, income taxes and service
or other taxes generally are not passed through to tenants under existing
leases and may adversely affect the Company's funds from operations and its
ability to make distributions to shareholders. Similarly, changes in laws
increasing the potential liability for environmental conditions existing on
properties or increasing the restrictions on discharges or other conditions
may result in significant unanticipated expenditures, which would adversely
affect the Company's funds from operations and its ability to make
distributions to shareholders.
OWNERSHIP LIMIT AND LIMITS ON CHANGES IN CONTROL
5% Ownership Limit; Inapplicability to Mr. Zell and Others. In order to
maintain its qualification as a REIT under the Code, not more than 50% of the
value of the outstanding shares of beneficial interest of the Company may be
owned, directly or indirectly, by five or fewer individuals (as defined in the
Code to include certain entities). Certain beneficial owners of the Zell
Holders and EPMC (i.e., beneficiaries of trusts established for the benefit of
Mr. Zell and his family and trusts established for the benefit of the family of
Mr. Robert Lurie, a deceased partner of Mr. Zell (the "Lurie Family Trusts")),
of the Starwood Original Owners and Mr. Henry H. Goldberg, a Trustee of the
Company (through their potential ownership of Common Shares) together
constitute five individuals for purposes of this test and, under the Internal
Revenue Service's (the "Service") rules applicable to determining percentages
of ownership, will be deemed to own approximately 6.2% of the value of the
outstanding shares of beneficial interest of the Company. Due to such
concentration of ownership of the Company, ownership of more than 5% of the
lesser of the number or value of the outstanding shares of beneficial interest
of the Company by any single shareholder has been restricted, with certain
exceptions, for the purpose of maintaining the Company's qualification as a
REIT under the Code. Such restrictions in the Company's Declaration of Trust do
not apply to the ownership of the 5,541,331 Common Shares subject to
acquisition by the holders of Original OP Units and EPMC through the exchange
of Original OP Units. Additionally, the Company's Declaration of Trust allows
certain transfers of such Common Shares without the transferees being subject
to the 5% ownership limit, provided such transfers do not result in an
increased concentration in the ownership of the Company. The Company's Board of
Trustees, upon receipt of a ruling from the Service, an opinion of counsel or
other evidence satisfactory to the Board of Trustees and upon such other
conditions as the Board of Trustees may direct, may also exempt a proposed
transferee from this restriction. See "Description of Shares of Beneficial
Interest--Common Shares--Restrictions on Transfer."
The 5% ownership limit, as well as the ability of the Company to issue
additional Common Shares or other shares of beneficial interest (which may have
rights and preferences senior to the Common Shares), may discourage a change of
control of the Company and may also (i) deter tender offers for the Common
Shares, which offers may be advantageous to shareholders, and (ii) limit the
opportunity for shareholders to receive a premium for their Common Shares that
might otherwise exist if an investor were attempting to assemble a block of
Common Shares in excess of 5% of the outstanding shares of beneficial interest
of the Company or otherwise effect a change of control of the Company.
Possible Adverse Consequences of Ownership Limit. To maintain its
qualification as a REIT for federal income tax purposes, not more than 50% in
value of the outstanding shares of beneficial interest of the Company may be
owned, directly or indirectly, by five or fewer individuals (as defined in the
Code, to include certain entities). See "Federal Income Tax
Considerations--Taxation of the Company--Share Ownership Test." Certain
beneficial owners of the Zell Holders (i.e., beneficiaries of trusts
established for benefit of Mr. Zell and his family and the family of Mr. Robert
Lurie, a deceased partner of Mr. Zell) and EPMC, together with the Starwood
Original Owners and Mr. Goldberg (through their potential ownership of Common
Shares) together constitute five individuals for purposes of this test and,
under the Service's rules applicable to determining percentages of ownership,
are deemed to own approximately 6.2% of the value of the outstanding shares of
beneficial interest of the Company. To facilitate maintenance of its
qualification as a REIT for federal income tax purposes, the Company generally
will prohibit ownership, directly or by virtue of the attribution provisions of
the Code, by any single shareholder of more than 5% of the issued and
outstanding Common Shares and generally will prohibit ownership, directly or by
virtue of the attribution provisions of the Code, by any single shareholder of
more than 5% of the issued and outstanding shares of any class or series of the
Company's Preferred Shares (collectively, the "Ownership Limit"). The Board of
Trustees may, in its reasonable discretion, waive or modify the Ownership Limit
with respect to one or more persons who would not be treated as "individuals"
for purposes of the Code if it is satisfied, based upon information required to
be provided by the party seeking the waiver, that ownership in excess of this
limit will not cause a person who is an individual to be treated as owning
Common Shares or Preferred Shares in excess of the Ownership Limit, applying
the applicable constructive ownership rules, and will not otherwise jeopardize
the Company's status as a REIT for federal income tax purposes. The Company's
Declaration of Trust also exempts from the Ownership Limit certain of the
beneficial owners of the Original Owners and EPMC, who would exceed the
Ownership Limit as a result of the exchange of the OP Units for Common Shares,
which OP Units were received by them at the time of the formation of EQR.
Absent any such exemption or waiver, Common Shares or Preferred Shares acquired
or held in violation of the Ownership Limit will be transferred to a trust for
the benefit of a designated charitable beneficiary, with the person who
acquired such Common Shares and/or Preferred Shares
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in violation of the Ownership Limit not entitled to receive any
distributions thereon, to vote such Common Shares or Preferred Shares, or to
receive any proceeds from the subsequent sale thereof in excess of the lesser
of the price paid therefore or the amount realized from such sale. A transfer
of Common Shares and/or Preferred Shares to a person who, as a result of the
transfer, violates the Ownership Limit may be void under certain circumstances.
See "Description of Shares of Beneficial Interest--Restrictions on Ownership
and Transfer." The Ownership Limit may have the effect of delaying, deferring
or preventing a change in control and, therefore, could adversely affect the
shareholder's ability to realize a premium over the then-prevailing market
price for the Common Shares in connection with such transaction.
Staggered Board. The Board of Trustees of the Company has been divided
into three classes of trustees. As the term of each class expires, trustees
for that class will be elected for a three-year term and the trustees in the
other two classes will continue in office. The staggered terms for trustees may
impede the shareholders' ability to change control of the Company even if a
change in control were in the shareholders' interest.
Preferred Shares. The Company's Declaration of Trust authorizes the Board
of Trustees to issue up to 100,000,000 preferred shares of beneficial interest,
$.01 par value per share ("Preferred Shares"), and to establish the preferences
and rights (including the right to vote and the right to convert into Common
Shares) of any Preferred Shares issued. The power to issue Preferred Shares
could have the effect of delaying or preventing a change in control of the
Company even if a change in control were in the shareholders' interest. As of
September 11, 1997, 14,079,800 Preferred Shares were issued and outstanding.
CONSEQUENCES OF FAILURE TO QUALIFY AS A REIT
Taxation as a Corporation. The Company believes that it has qualified and
will continue to qualify as a REIT under the Code, commencing with its taxable
year ended December 31, 1992. However, no assurance can be given that the
Company was organized and has been operated and will be able to operate in a
manner so as to qualify or remain so qualified. Qualification as a REIT
involves the satisfaction of numerous requirements (some on an annual and
quarterly basis) established under highly technical and complex Code provisions
for which there are only limited judicial or administrative interpretations,
and involves the determination of various factual matters and circumstances not
entirely within the Company's control.
If the Company were to fail to qualify as a REIT in any taxable year, the
Company would be subject to federal income tax (including any applicable
alternative minimum tax) on its taxable income at corporate rates. Moreover,
unless entitled to relief under certain statutory provisions, the Company also
would be disqualified from treatment as a REIT for the four taxable years
following the year during which qualification is lost. This treatment would
reduce the net earnings of the Company available for investment or distribution
to shareholders because of the additional tax liability to the Company for the
years involved. In addition, distributions to shareholders would no longer be
required to be made. See "Federal Income Tax Considerations."
Other Tax Liabilities. Even if the Company qualifies as a REIT, it will be
subject to certain federal, state and local taxes on its income and property.
See "Federal Income Tax Considerations--Other Tax Considerations--State and
Local Taxes." In addition, the Company's management operations, which are
conducted through Equity Residential Properties Management Limited Partnership
and Equity Residential Properties Management Limited Partnership II
(collectively, the "Management Partnerships") generally will be subject to
federal income tax at regular corporate rates. See "Federal Income Tax
Considerations--Other Tax Considerations."
Consequences of Failure to Qualify as Partnerships. The Company believes
that the Operating Partnership, the Management Partnerships and each of the
other partnership and limited liability company Subsidiaries have been
organized as partnerships and will qualify for treatment as such under the
Code. If any of such Subsidiaries fails to qualify for such treatment under the
Code, the Company would cease to qualify as a REIT, and such Subsidiary would
be subject to federal income tax (including any alternative minimum tax) on its
income at corporate rates. See "Federal Income Tax Considerations--Taxation of
the Company--Failure to Qualify" and "--Tax Aspects of the Company's
Investments in Partnerships--General."
DEPENDENCE ON KEY PERSONNEL
The Company is dependent on the efforts of its executive officers. While
the Company believes that it could find replacements for these key personnel,
the loss of their services could have a temporary adverse effect on the
operations of the Company. None of these officers has entered into employment
agreements with the Company.
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DISTRIBUTION REQUIREMENTS POTENTIALLY INCREASING INDEBTEDNESS OF THE COMPANY
The Company may be required from time to time, under certain
circumstances, to accrue as income for tax purposes interest and rent earned
but not yet received. In such event, or upon the repayment by the Company or
its Subsidiaries of principal on debt, the Company could have taxable income
without sufficient cash to enable the Company to meet the distribution
requirements of a REIT. Accordingly, the Company could be required to borrow
funds or liquidate investments on adverse terms in order to meet such
distribution requirements. See "Federal Income Tax Considerations--Taxation of
the Company--Annual Distribution Requirements."
EXEMPTIONS FOR MR. ZELL AND OTHERS FROM MARYLAND BUSINESS COMBINATION LAW WHICH
TEND TO INHIBIT TAKEOVERS
Under the Maryland General Corporation Law, as amended ("MGCL"), certain
"business combinations" (including a merger, consolidation, share exchange or,
in certain circumstances, an asset transfer or issuance or reclassification of
equity securities) between a Maryland real estate investment trust and any
person who beneficially owns 10% or more of the voting power of the trust's
shares of beneficial interest or an affiliate of the trust who, at any time
within the two-year period prior to the date in question, was the beneficial
owner of 10% or more of the voting power of the trust's shares of beneficial
interest (an "Interested Shareholder"), or an affiliate of such Interested
Shareholder, are prohibited for five years after the most recent date on which
the Interested Shareholder becomes an Interested Shareholder. Thereafter, any
such business combination must be recommended by the board of trustees of such
trust and approved by the affirmative vote of at least (a) 80% of the votes
entitled to be cast by holders of outstanding voting shares of beneficial
interest of the trust and (b) two-thirds of the votes entitled to be cast by
holders of voting shares of beneficial interest of the trust other than shares
held by the Interested Shareholder with whom (or with whose affiliate) the
business combination is to be effected, (unless, among other conditions, the
holders of the common shares of the trust receive a minimum price (as defined
in the MGCL) for their shares and the consideration is received in cash or in
the same form as previously paid by the Interested Shareholder for its common
shares. As permitted by the MGCL, the Company has exempted any business
combination involving Mr. Zell, the Zell Original Owners, EPMC and their
respective affiliates and associates, present or future, or any other person
acting in concert or as a group with any of the foregoing persons and,
consequently, the five-year prohibition and the super-majority vote
requirements will not apply to a business combination between any of them and
the Company. As a result, Mr. Zell, the Zell Original Owners, EPMC, any
present or future affiliate or associate of theirs or any other person acting
in concert or as a group with any of the foregoing persons may be able to enter
into business combinations with the Company, which may not be in the best
interest of the shareholders, without compliance by the Company with the
super-majority vote requirements and other provisions of the MGCL.
USE OF PROCEEDS
Unless otherwise indicated in the accompanying Prospectus Supplement, the
Company will contribute or otherwise transfer the net proceeds of any sale of
Securities to the Operating Partnership in exchange for additional partnership
interests in the Operating Partnership, the economic terms of which will be
substantially identical to the Securities sold. The Operating Partnership will
use such net proceeds for general business purposes including, without
limitation, the repayment of certain outstanding debt and the acquisition of
multifamily residential properties.
DESCRIPTION OF SHARES OF BENEFICIAL INTEREST
The summary of the terms of the shares of beneficial interest of the
Company set forth below does not purport to be complete and is subject to and
qualified in its entirety by reference to the Second Amended and Restated
Declaration of Trust, as amended and/or restated from time to time (the
"Declaration of Trust"), and the Second Amended and Restated Bylaws, as amended
and/or restated from time to time ("Bylaws"), of the Company, each of which is
incorporated herein by reference.
The Declaration of Trust of the Company provides that the Company may
issue up to 300,000,000 shares of beneficial interest, consisting of
200,000,000 Common Shares and 100,000,000 Preferred Shares. As of September
11, 1997, 73,703,131 Common Shares and 14,079,800 Preferred Shares were issued
and outstanding. In addition, as of September 11, 1997, 7,424,239 Common Shares
were issuable upon exchange of OP Units currently held by the Zell Holders, the
Starwood Original Owners, EPMC and holders who were issued OP Units in exchange
for the contribution of certain of the Properties to the Operating Partnership
subsequent to the EQR IPO. The OP Units are exchangeable on a one-for-one
basis for Common Shares or, at the Company's option, cash.
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<PAGE> 21
Both the Maryland REIT law and the Company's Declaration of Trust provide
that no shareholder of the Company will be liable for any debt or obligation of
the Company solely as a result of his status as a shareholder of the Company.
The Company's Bylaws further provide that the Company shall indemnify each
shareholder against any claim or liability to which the shareholder may become
subject by reason of his being or having been a shareholder and that the
Company shall reimburse each shareholder for all reasonable expenses incurred
by him in connection with any such claim or liability. However, with respect
to tort claims, contractual claims where shareholder liability is not so
negated, claims for taxes and certain statutory liability, the shareholders
may, in some jurisdictions, be personally liable to the extent that such claims
are not satisfied by the Company. Inasmuch as the Company carries public
liability insurance which it considers adequate, any risk of personal liability
to shareholders is limited to situations in which the Company's assets plus its
insurance coverage would be insufficient to satisfy the claims against the
Company and its shareholders.
PREFERRED SHARES
The following description of the Preferred Shares sets forth certain
general terms and provisions of the Preferred Shares to which any Prospectus
Supplement may relate.
The Board of Trustees is empowered by the Company's Declaration of Trust
to designate and issue from time to time one or more series of Preferred Shares
without shareholder approval. The Board of Trustees may determine the relative
rights, preferences and privileges of each series of Preferred Shares so
issued. Because the Board of Trustees has the power to establish the
preferences and rights of each series of Preferred Shares, it may afford the
holders of any series of Preferred Shares preferences, powers and rights,
voting or otherwise, senior to the rights of holders of Common Shares. The
Preferred Shares will, when issued, be fully paid and nonassessable.
The Company currently has outstanding 6,120,000 Series A Preferred Shares
(liquidation preference $25.00 per share), 5,000,000 depositary shares
representing a 1/10 fractional interest in 500,000 Series B Preferred Shares
(liquidation preference $250.00 per share, equivalent to $25.00 per depositary
share), 4,600,000 depositary shares representing a 1/10 fractional interest in
460,000 Series C Preferred Shares (liquidation preference $250.00 per share,
equivalent to $25.00 per depositary share), 7,000,000 depositary shares
representing a 1/10 fractional interest in 700,000 Series D Preferred Shares
(liquidation preference $250.00 per share, equivalent to $25.00 per depositary
share), 3,999,800 Series E Preferred Shares (liquidation preference $25.00 per
share) and 2,300,000 Series F Preferred Shares (liquidation preference $25.00
per share) that are listed on the New York Stock Exchange under the symbols
"EQR-PrA," "EQR-PrB," "EQR-PrC," "EQR-PrD," "EQR-PrE," and "EQR-PrF,"
respectively. Distributions on the Series A Preferred Shares, the Series B
Preferred Shares, the Series C Preferred Shares, the Series D Preferred Shares,
and the Series F Preferred Shares are cumulative from the date of original
issue and payable quarterly on or about the fifteenth day of January, April,
July and October of each year, at the rate of 9 3/8%, 9 1/8%, 9 1/8%, 8.60% and
9.65%, respectively, of the liquidation preference per annum of such shares.
Distributions on the Series E Preferred Shares are cumulative from the date of
original issue and payable quarterly on the first day of January, April, July
and October of each year, at the rate of 7.0% of the liquidation preference per
annum of such shares.
The Series A Preferred Shares are not redeemable prior to June 1, 2000.
On or after June 1, 2000, the Series A Preferred Shares may be redeemed for
cash at the option of the Company in whole or in part, at a redemption price of
$25.00 per share, plus accrued and unpaid distributions, if any, thereon. The
Series B Preferred Shares are not redeemable prior to October 15, 2005. On or
after October 15, 2005, the Series B Preferred Shares may be redeemed for cash
at the option of the Company in whole or in part, at a redemption price of
$250.00 per share (equivalent to $25.00 per depositary share), plus accrued and
unpaid distributions, if any, thereon. The Series C Preferred Shares are not
redeemable prior to September 9, 2006. On or after September 9, 2006, the
Series C Preferred Shares may be redeemed for a cash at the option of the
Company in whole or in part, at a redemption price of $250.00 per share
(equivalent to $25.00 per depositary share), plus accrued and unpaid
distributions, if any, thereon. The Series D Preferred Shares are not
redeemable prior to July 15, 2007. On or after July 15, 2007, the Series D
Preferred Shares may be redeemed for cash at the option of the Company in whole
or in part, at a redemption price of $250.00 per share (equivalent to $25.00
per depositary share), plus accumulated unpaid distributions, if any, thereon.
Each Series E Preferred Share is convertible at the option of the holder
thereof at any time into Common Shares of the Company, at a conversion price of
$44.93 per Common Share (equivalent to a conversion rate of approximately .5564
Common Share for each Series E Preferred Share), subject to adjustments under
certain conditions. The Series E Preferred Shares are not redeemable prior to
November 1, 1998. On or after November 1, 1998, the Series E Preferred Shares
may be redeemed for cash at the option of the Company in whole or in part,
initially at $25.875 per share and thereafter at prices declining to $25.00 per
share on and after November 1, 2003, plus in each case accrued and unpaid
distributions, if any, to the redemption date. The Series F Preferred Shares
are not redeemable prior to August 24, 2000. On or after August 24, 2000, the
Series F Preferred Shares may be redeemed for cash at the option of the Company
in whole or in part, at a redemption price of $25.00 per share, plus accrued
and unpaid distributions, if any, thereon. The redemption price of such
Preferred Shares (other than the portion thereof consisting of accrued and
unpaid distributions) is payable solely out of the sale
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<PAGE> 22
proceeds of other shares of beneficial interest of the Company which may
include other series of Preferred Shares. The Series A Preferred Shares, the
Series B Preferred Shares, the Series C Preferred Shares, the Series D
Preferred Shares, the Series E Preferred Shares and the Series F Preferred
Shares have no stated maturity and are not subject to any sinking fund or
mandatory redemption and, with the exception of the Series E Preferred Shares,
are not convertible into any other securities of the Company. However, the
Company may redeem Series A Preferred Shares, Series B Preferred Shares, Series
C Preferred Shares, the Series D Preferred Shares, the Series E Preferred
Shares or the Series F Preferred Shares in certain circumstances relating to
maintenance of its status as a REIT for federal income tax purposes. See
"-Redemption" and "-Restrictions on Transfer" below. The other terms of the
Preferred Shares are described generally below.
The Prospectus Supplement relating to any Preferred Shares offered thereby
will contain the specific terms thereof, including, without limitation:
(1) The title and stated value of such Preferred Shares;
(2) The number of such Preferred Shares offered, the liquidation
preference per share and the offering price of such Preferred Shares;
(3) The distribution rate(s), period(s) and /or payment date(s) or
method(s) of calculation thereof applicable to such Preferred Shares;
(4) The date from which distributions on such Preferred Shares shall
accumulate, if applicable;
(5) The procedures for any auction and remarketing, if any, for such
Preferred Shares;
(6) The provision for a sinking fund, if any, for such Preferred Shares;
(7) The provision for redemption, if applicable, of such Preferred
Shares;
(8) Any listing of such Preferred Shares on any securities exchange;
(9) The terms and conditions, if applicable, upon which such Preferred
Shares will be convertible into Common Shares of the Company, including
the conversion price (or manner of calculation thereof);
(10) Whether interests in such Preferred Shares will be represented by
Depositary Shares;
(11) Any other specific terms, preferences, rights, limitations or
restrictions of such Preferred Shares;
(12) A discussion of all material federal income tax considerations, if
any, applicable to such Preferred Shares that are not discussed in this
Prospectus;
(13) The relative ranking and preferences of such Preferred Shares as to
distribution rights and rights upon liquidation, dissolution or winding
up of the affairs of the Company;
(14) Any limitations on issuance of any series of Preferred Shares ranking
senior to or on a parity with such series of Preferred Shares as to
distribution rights and rights upon liquidation, dissolution or winding
up of the affairs of the Company; and
(15) Any limitations on direct or beneficial ownership and restrictions on
transfer, in each case as may be appropriate to preserve the status of
the Company as a REIT.
Rank. Unless otherwise specified in the Prospectus Supplement, the
Preferred Shares will, with respect to distribution rights and rights upon
liquidation, dissolution or winding up of the Company, rank (i) senior to all
classes or series of Common Shares of the Company, and to all equity securities
ranking junior to such Preferred Shares; (ii) on a parity with all equity
securities issued by the Company the terms of which specifically provide that
such equity securities rank on a parity with the Preferred Shares; and (iii)
junior to
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all equity securities issued by the Company the terms of which specifically
provide that such equity securities rank senior to the Preferred Shares. The
term "equity securities" does not include convertible debt securities.
Distributions. Holders of the Preferred Shares of each series will be
entitled to receive, when, as and if declared by the Board of Trustees of the
Company, out of assets of the Company legally available for payment, cash
distributions (or distributions in kind or in other property if expressly
permitted and described in the applicable Prospectus Supplement) at such rates
and on such dates as will be set forth in the applicable Prospectus Supplement.
Each such distribution shall be payable to holders of record as they appear on
the share transfer books of the Company on such record dates as shall be fixed
by the Board of Trustees of the Company.
Distributions on any series of Preferred Shares may be cumulative or
non-cumulative, as provided in the applicable Prospectus Supplement.
Distributions, if cumulative, will be cumulative from and after the date set
forth in the applicable Prospectus Supplement. If the Board of Trustees of the
Company fails to declare a distribution payable on a distribution payment date
on any series of the Preferred Shares for which distributions are
non-cumulative, then the holders of such series of the Preferred Shares will
have no right to receive a distribution in respect of the distribution period
ending on such distribution payment date, and the Company will have no
obligation to pay the distribution accrued for such period, whether or not
distributions on such series are declared payable on any future distribution
payment date.
Unless otherwise specified in the Prospectus Supplement, if any Preferred
Shares of any series are outstanding, no full distributions shall be declared
or paid or set apart for payment on any shares of beneficial interest of the
Company of any other series ranking, as to distributions, on a parity with or
junior to the Preferred Shares of such series for any period unless (i) if such
series of Preferred Shares has a cumulative distribution, full cumulative
distributions have been or contemporaneously are declared and paid or declared
and a sum sufficient for the payment thereof set apart for such payment on the
Preferred Shares of such series for all past distribution periods and the then
current distribution period or (ii) if such series of Preferred Shares does not
have a cumulative distribution, full distributions for the then current
distribution period have been or contemporaneously are declared and paid or
declared and a sum sufficient for the payment thereof set apart for such
payment on the Preferred Shares of such series. When distributions are not
paid in full (or a sum sufficient for such full payment is not so set apart)
upon Preferred Shares of any series and the shares of any other series of
Preferred Shares ranking on a parity as to distributions with the Preferred
Shares of such series, all distributions declared upon Preferred Shares of such
series and any other series of Preferred Shares ranking on a parity as to
distributions with such Preferred Shares shall be declared pro rata so that the
amount of distributions declared per share of Preferred Shares of such series
and such other series of Preferred Shares shall in all cases bear to each other
the same ratio that accrued distributions per share on the Preferred Shares of
such series (which shall not include any accumulation in respect of unpaid
distributions for prior distribution periods if such Preferred Shares do not
have a cumulative distribution) and such other series of Preferred Shares bear
to each other. No interest, or sum of money in lieu of interest, shall be
payable in respect of any distribution payment or payments on Preferred Shares
of such series which may be in arrears.
Except as provided in the immediately preceding paragraph, unless (i) if
such series of Preferred Shares has a cumulative distribution, full cumulative
distributions on the Preferred Shares of such series have been or
contemporaneously are declared and paid or declared and a sum sufficient for
the payment thereof set apart for payment for all past distribution periods and
the then current distribution period, and (ii) if such series of Preferred
Shares does not have a cumulative distribution, full distributions on the
Preferred Shares of such series have been or contemporaneously are declared and
paid or declared and a sum sufficient for the payment thereof set apart for
payment, for the then current distribution period, no distributions (other than
in Common Shares or other shares of beneficial interest ranking junior to the
Preferred Shares of such series as to distributions and upon liquidation) shall
be declared or paid or set aside for payment or other distribution upon the
Common Shares, or any other shares of beneficial interest of the Company
ranking junior to or on a parity with the Preferred Shares of such series as to
distributions or upon liquidation, nor shall any Common Shares, or any other
shares of beneficial interest of the Company ranking junior to or on a parity
with the Preferred Shares of such series as to distributions or upon
liquidation be redeemed, purchased or otherwise acquired for any consideration
(or any moneys be paid to or made available for a sinking fund for the
redemption of any such shares) by the Company (except by conversion into or
exchange for other shares of beneficial interest of the Company ranking junior
to the Preferred Shares of such series as to distributions and upon
liquidation).
If, for any taxable year, the Company elects to designate as "capital gain
dividends" (as defined in Section 857 of the Code) any portion (the "Capital
Gains Amount") of the dividends (within the meaning of the Code) paid or made
available for the year to holders of all classes of shares of beneficial
interest (the "Total Dividends"), then the portion of the Capital Gains Amount
that will be allocable to the holders of Preferred Shares will be the Capital
Gains Amount multiplied by a fraction, the numerator of which will be the total
dividends (within the meaning of the Code) paid or made available to the
holders of the Preferred Shares for the year and the denominator of which shall
be the Total Dividends.
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Redemption. If so provided in the applicable Prospectus Supplement, the
Preferred Shares will be subject to mandatory redemption or redemption at the
option of the Company, in whole or in part, in each case upon the terms, at the
times and at the redemption prices set forth in such Prospectus Supplement.
The Prospectus Supplement relating to a series of Preferred Shares that is
subject to mandatory redemption will specify the number of such Preferred
Shares that shall be redeemed by the Company in each year commencing after a
date to be specified, at a redemption price per share to be specified, together
with an amount equal to all accrued and unpaid distributions thereon (which
shall not, if such Preferred Shares do not have a cumulative distribution,
include any accumulation in respect of unpaid distributions for prior
distribution periods) to the date of redemption. The redemption price may be
payable in cash or other property, as specified in the applicable Prospectus
Supplement. If the redemption price for Preferred Shares of any series is
payable only from the net proceeds of the issuance of shares of beneficial
interest of the Company, the terms of such Preferred Shares may provide that,
if no such shares of beneficial interest shall have been issued or to the
extent the net proceeds from any issuance are insufficient to pay in full the
aggregate redemption price then due, such Preferred Shares shall automatically
and mandatorily be converted into the applicable shares of beneficial interest
of the Company pursuant to conversion provisions specified in the applicable
Prospectus Supplement.
Notwithstanding the foregoing, unless (i) if such series of Preferred
Shares has a cumulative distribution, full cumulative distributions on all
Preferred Shares of any series shall have been or contemporaneously are
declared and paid or declared and a sum sufficient for the payment thereof set
apart for payment for all past distribution periods and the current
distribution period and (ii) if such series of Preferred Shares does not have a
cumulative distribution, full distributions on the Preferred Shares of any
series have been or contemporaneously are declared and paid or declared and a
sum sufficient for the payment thereof set apart for payment for the then
current distribution period, no Preferred Shares of any series shall be
redeemed unless all outstanding Preferred Shares of such series are
simultaneously redeemed; provided, however, that the foregoing shall not
prevent the purchase or acquisition of Preferred Shares of such series to
preserve the REIT status of the Company or pursuant to a purchase or exchange
offer made on the same terms to holders of all outstanding Preferred Shares of
such series. In addition, unless (i) if such series of Preferred Shares has a
cumulative distribution, full cumulative distributions on all outstanding
shares of any series of Preferred Shares have been or contemporaneously are
declared and paid or declared and a sum sufficient for the payment thereof set
apart for payment for all past distributions periods and the then current
distribution period, and (ii) if such series of Preferred Shares does not have
a cumulative distribution, full distributions on the Preferred Shares of any
series have been or contemporaneously are declared and paid or declared and a
sum sufficient for the payment thereof set apart for payment for the then
current distribution period, the Company shall not purchase or otherwise
acquire directly or indirectly any Preferred Shares of such series (except by
conversion into or exchange for shares of beneficial interest of the Company
ranking junior to the Preferred Shares of such series as to distributions and
upon liquidation); provided, however, that the foregoing shall not prevent the
purchase or acquisition of Preferred Shares of such series to assist in
maintaining the REIT status of the Company or pursuant to a purchase or
exchange offer made on the same terms to holders of all outstanding Preferred
Shares of such series.
If fewer than all of the outstanding Preferred Shares of any series are to
be redeemed, the number of shares to be redeemed will be determined by the
Company and such shares may be redeemed pro rata from the holders of record of
such shares in proportion to the number of such shares held or for which
redemption is requested by such holder (with adjustments to avoid redemption of
fractional shares) or by lot in a manner determined by the Company.
Notice of redemption will be mailed at least 30 days but not more than 60
days before the redemption date to each holder of record of Preferred Shares of
any series to be redeemed at the address shown on the share transfer books of
the Company. Each notice shall state: (i) the redemption date; (ii) the number
and series of Preferred Shares to be redeemed; (iii) the place or places where
certificates for such Preferred Shares are to be surrendered for payment of the
redemption price; (iv) that distributions on the shares to be redeemed will
cease to accrue on such redemption date; and (v) the date upon which the
holder's conversion rights, if any, as to such shares shall terminate. If
fewer than all of the Preferred Shares of any series are to be redeemed, the
notice mailed to each such holder thereof shall also specify the number of
Preferred Shares to be redeemed from each such holder. If notice of redemption
of any Preferred Shares has been given and if the funds necessary for such
redemption have been set aside by the Company in trust for the benefit of the
holders of any Preferred Shares so called for redemption, then from and after
the redemption date distributions will cease to accrue on such Preferred
Shares, and all rights of the holders of such shares will terminate, except the
right to receive the redemption price.
Liquidation Preference. Upon any voluntary or involuntary liquidation,
dissolution or winding up of the affairs of the Company, then, before any
distribution or payment shall be made to the holders of any Common Shares or
any other class or series of shares of beneficial interest of the Company
ranking junior to the Preferred Shares in the distribution of assets upon any
liquidation, dissolution or
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winding up of the Company, the holders of each series of Preferred Shares
shall be entitled to receive out of assets of the Company legally available for
distribution to shareholders liquidating distributions in the amount of the
liquidation preference per share (set forth in the applicable Prospectus
Supplement), plus an amount equal to all distributions accrued and unpaid
thereon (which shall not include any accumulation in respect of unpaid
distributions for prior distribution periods if such Preferred Shares do not
have a cumulative distribution). After payment of the full amount of the
liquidating distributions to which they are entitled, the holders of Preferred
Shares will have no right or claim to any of the remaining assets of the
Company. In the event that, upon any such voluntary or involuntary
liquidation, dissolution or winding up, the available assets of the Company are
insufficient to pay the amount of the liquidating distributions on all
outstanding Preferred Shares and the corresponding amounts payable on all
shares of other classes or series of shares beneficial interest of the Company
ranking on a parity with the Preferred Shares in the distribution of assets,
then the holders of the Preferred Shares and all other such classes or series
of shares of beneficial interest shall share ratably in any such distribution
of assets in proportion to the full liquidating distributions to which they
would otherwise be respectively entitled.
If liquidating distributions shall have been made in full to all holders
of Preferred Shares, the remaining assets of the Company shall be distributed
among the holders of any other classes or series of shares of beneficial
interest ranking junior to the Preferred Shares upon liquidation, dissolution
or winding up, according to their respective rights and preferences and in each
case according to their respective number of shares. For such purposes, the
consolidation or merger of the Company with or into any other corporation,
trust or entity, or the sale, lease or conveyance of all or substantially all
of the property or business of the Company, shall not be deemed to
constitute a liquidation, dissolution or winding up of the Company.
Voting Rights. Holders of Preferred Shares will not have any voting
rights, except as set forth below or as otherwise from time to time required by
law or as indicated in the applicable Prospectus Supplement.
Whenever distributions on any Preferred Shares shall be in arrears for six
or more quarterly periods, the holders of such Preferred Shares (voting
separately as a class with all other series of Preferred Shares upon which like
voting rights have been conferred and are exercisable) will be entitled to vote
for the election of two additional Trustees of the Company at a special meeting
called by the holders of record of at least ten percent (10%) of any series of
Preferred Shares so in arrears (unless such request is received less than 90
days before the date fixed for the next annual or special meeting of the
shareholders) or at the next annual meeting of shareholders, and at each
subsequent annual meeting until (i) if such series of Preferred Shares has a
cumulative distribution, all distributions accumulated on such series of
Preferred Shares for the past distribution periods and the then current
distribution period shall have been fully paid or declared and a sum sufficient
for the payment thereof set aside for payment or (ii) if such series of
Preferred Shares do not have a cumulative distribution, four consecutive
quarterly distributions shall have been fully paid or declared and a sum
sufficient for the payment thereof set aside for payment. In such case, the
entire Board of Trustees of the Company will be increased by two Trustees.
Unless provided otherwise for any series of Preferred Shares, so long as
any Preferred Shares remain outstanding, the Company will not, without the
affirmative vote or consent of the holders of at least two-thirds of each
series of Preferred Shares outstanding at the time, given in person or by
proxy, either in writing or at a meeting (such series voting separately as a
class), (i) authorize or create, or increase the authorized or issued amount
of, any class or series of shares of beneficial interest ranking prior to such
series of Preferred Shares with respect to the payment of distributions or the
distribution of assets upon liquidation, dissolution or winding up or
reclassify any authorized shares of beneficial interest of the Company into
such shares, or create, authorize or issue any obligation or security
convertible into or evidencing the right to purchase any such shares; or (ii)
amend, alter or repeal the provisions of the Company's Declaration of Trust or
the Articles Supplementary for such series of Preferred Shares, whether by
merger, consolidation or otherwise (an "Event"), so as to materially and
adversely affect any right, preference, privilege or voting power of such
series of Preferred Shares or the holders thereof; provided, however, with
respect to the occurrence of any of the Events set forth in (ii) above, so long
as the Preferred Shares remain outstanding with the terms thereof materially
unchanged, taking into account that upon the occurrence of an Event, the
Company may not be the surviving entity, the occurrence of any such Event shall
not be deemed to materially and adversely affect such rights, preferences,
privileges or voting power of holders of Preferred Shares and provided further
that (x) any increase in the amount of the authorized Preferred Shares or the
creation or issuance of any other series of Preferred Shares, or (y) any
increase in the amount of authorized shares of such series or any other series
of Preferred Shares, in each case ranking on a parity with or junior to the
Preferred Shares of such series with respect to payment of distributions or the
distribution of assets upon liquidation, dissolution or winding up, shall not
be deemed to materially and adversely affect such rights, preferences,
privileges or voting powers.
The foregoing voting provisions will not apply if, at or prior to the time
when the act with respect to which such vote would otherwise be required shall
be effected, all outstanding Preferred Shares of such series shall have been
redeemed or called for redemption and sufficient funds shall have been
deposited in trust to effect such redemption.
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Conversion Rights. The terms and conditions, if any, upon which any
series of Preferred Shares is convertible into Common Shares will be set forth
in the applicable Prospectus Supplement relating thereto. Such terms will
include the number of Common Shares into which the Preferred Shares are
convertible, the conversion price (or manner of calculation thereof), the
conversion period, provisions as to whether conversion will be at the option of
the holders of the Preferred Shares or the Company, the events requiring an
adjustment of the conversion price and provisions affecting conversion in the
event of the redemption of such series of Preferred Shares.
Registrar and Transfer Agent. The registrar and transfer agent for the
Preferred Shares will be set forth in the applicable Prospectus Supplement.
COMMON SHARES
All Common Shares offered hereby will be duly authorized, fully paid and
nonassessable. Subject to the preferential rights of any other shares of
beneficial interest and to the provisions of the Company's Declaration of Trust
regarding Excess Shares (as defined herein), holders of Common Shares are
entitled to receive distributions if, as and when authorized and declared by
the Board of Trustees out of assets legally available therefor and to share
ratably in the assets of the Company legally available for distribution to its
shareholders in the event of its liquidation, dissolution or winding-up after
payment of, or adequate provision for, all known debts and liabilities of the
Company. The Company currently pays regular quarterly distributions.
Subject to the provisions of the Company's Declaration of Trust regarding
Excess Shares, each outstanding Common Share entitles the holder to one vote on
all matters submitted to a vote of shareholders, including the election of
Trustees, and, except as otherwise required by law or except as provided with
respect to any other class or series of shares of beneficial interest, the
holders of such Common Shares will possess the exclusive voting power. There
is no cumulative voting in the election of Trustees, which means that the
holders of a majority of the outstanding Common Shares can elect all of the
Trustees then standing for election and the holders of the remaining shares of
beneficial interest, if any, will not be able to elect any Trustees.
Holders of Common Shares have no conversion, sinking fund, redemption or
preemptive rights to subscribe for any securities of the Company. Subject to
the provisions of the Company's Declaration of Trust regarding Excess Shares,
Common Shares have equal distribution, liquidation and other rights, and have
no preference, exchange or, except as expressly required by the Maryland REIT
law, appraisal rights.
Pursuant to the Maryland REIT law, a REIT generally cannot dissolve, amend
its declaration of trust or merge, unless approved by the affirmative vote or
written consent of shareholders holding at least two-thirds of the shares
entitled to vote on the matter unless a lesser percentage (but not less than a
majority of all of the votes entitled to be cast on the matter) is set forth in
the REIT's declaration of trust. The Company's Declaration of Trust provides
that a dissolution or merger, and amendments to the Declaration of Trust in
connection with such transactions, may be approved by the affirmative vote of
the holders of not less than a majority of the shares then outstanding and
entitled to vote thereon. A declaration of trust may permit the trustees by a
two-thirds vote to amend the declaration of trust from time to time to qualify
as a REIT under the Code or the Maryland REIT law without the affirmative vote
or written consent of the shareholders. The Company's Declaration of Trust
permits such action by the Board of Trustees.
The registrar and transfer agent for the Common Shares is Boston EquiServe
Limited Partnership, an affiliate of The First National Bank of Boston.
RESTRICTIONS ON OWNERSHIP AND TRANSFER
For the Company to qualify as a REIT under the Code, no more than 50% in
value of its outstanding shares of beneficial interest may be owned, actually
or constructively, by five or fewer individuals (as defined in the Code to
include certain entities) during the last half of a taxable year (other than
the first year for which an election to be treated as a REIT has been made) or
during a proportionate part of a shorter taxable year. A REIT's shares also
must be beneficially owned by 100 or more persons during at least 335 days of a
taxable year of twelve months or during a proportionate part of a shorter
taxable year (other than the first year for which an election to be treated as
a REIT has been made).
Because the Board of Trustees believes it is desirable for the Company to
qualify as a REIT, the Declaration of Trust, subject to certain exceptions,
provides that no holder may own, or be deemed to own by virtue of the
attribution provisions of the Code, more than
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<PAGE> 27
the Ownership Limit. The Declaration of Trust prohibits ownership,
directly or by virtue of the attribution rules of the Code, by any single
shareholder of more than 5% of the issued and outstanding Common Shares and
generally will prohibit ownership, directly or by virtue of the attributions
provisions of the Code, by any single shareholder of more than 5% of the issued
and outstanding shares of any class or series of the Company's Preferred Shares
(collectively, the "Ownership Limit"). Certain beneficial owners of the Zell
Holders (i.e., beneficiaries of trusts established for the benefit of Mr. Zell
and his family and the family of Mr. Robert Lurie, a deceased partner of Mr.
Zell) and EPMC, together with the Starwood Original Owners and Mr. Goldberg
(through their potential ownership of Common Shares) together constitute five
individuals for purposes of this test and, under the Service's rules applicable
to determining percentages of ownership, are deemed to own approximately 6.2%
of the value of the outstanding shares of beneficial interest of the Company.
The ownership attribution rules under the Code are complex and may cause Common
Shares owned actually or constructively by a group of related individuals
and/or entities to be owned constructively by one individual or entity. As a
result, the acquisition of less than 5% of the Common Shares (or the
acquisition of an interest in an entity that owns, actually or constructively,
Common Shares) by an individual or entity, could, nevertheless cause that
individual or entity, or another individual or entity, to own constructively in
excess of 5% of the outstanding Common Shares and thus subject such Common
Shares to the Ownership Limit. The Board of Trustees may in its reasonable
discretion grant an exemption from the Ownership Limit with respect to one or
more persons who would not be treated as "individuals" for purposes of the Code
if it is satisfied, based upon the advice of counsel or a ruling from the
Service, that such ownership will not cause a person who is an individual to be
treated as owning Common Shares in excess of the Ownership Limited, applying
the applicable constructive ownership rules, and will not otherwise jeopardize
the Company's status as a REIT. As a condition of such waiver, the Board of
Trustees may require undertakings or representations from the applicant with
respect to preserving the REIT status of the Company. Under certain
circumstances, the Board of Trustees may, in its sole and absolute discretion,
grant an exemption for individuals to acquire Preferred Shares in excess of the
Ownership Limit, provided that certain conditions are met and any
representations and undertakings that may be required by the Board of Trustees
are made. The Company's Declaration of Trust also exempts from the
Ownership Limit certain of the beneficial owners of the Original Owners and
EPMC, who would exceed the Ownership Limit as a result of the exchange of the
OP Units for Common Shares, which OP Units were received by them at the time of
the formation of EQR. These persons may also acquire additional shares of
beneficial interest through the Company's Option and Award Plan, but in no
event will such persons be entitled to acquire additional shares such that the
five largest beneficial owners of the Company's shares of beneficial interest
hold more than 50% in number or value of the total outstanding shares of
beneficial interest.
The Board of Trustees of the Company will have the authority to increase
the Ownership Limit from time to time, but will not have the authority to do so
to the extent that after a giving effect to such increase, five beneficial
owners of Common Shares could beneficially own in the aggregate more than 49.5%
of the outstanding Common Shares.
The Declaration of Trust further prohibits (a) any person from actually or
constructively owning shares of beneficial interest of the Company that would
result in the Company being "closely held" under Section 856(h) of the Code or
otherwise cause the Company to fail to qualify as a REIT and (b) any person
from transferring shares of beneficial interest of the Company if such transfer
would result in shares of beneficial interest of the Company being owned by
fewer than 100 persons.
Any person who acquires or attempts or intends to acquire actual or
constructive ownership of shares of beneficial interest of the Company that
will or may violate any of the foregoing restrictions on transferability and
ownership is required to give notice immediately to the Company and provide the
Company with such other information as the Company may request in order to
determine the effect of such transfer on the Company's status as a REIT.
If any purported transfer of shares of beneficial interest of the Company
or any other event would otherwise result in any person violating the Ownership
Limit or the other restrictions in the Declaration of Trust, then any such
purported transfer will be void and of no force or effect with respect to the
purported transferee (the "Prohibited Transferee") as to that number of shares
that exceeds the Ownership Limit (referred to as "excess shares") and the
Prohibited Transferee shall acquire no right or interest (or, in the case of
any event other than a purported transfer, the person or entity holding record
title to any such shares in excess of the Ownership Limit (the "Prohibited
Owner") shall cease to own any right or interest) in such excess shares. Any
such excess shares described above will be transferred automatically, by
operation of law, to a trust, the beneficiary of which will be a qualified
charitable organization selected by the Company (the "Beneficiary"). Such
automatic transfer shall be deemed to be effective as of the close of business
on the Business Day (as defined in the Declaration of Trust) prior to the date
of such violating transfer. Within 20 days of receiving notice from the
Company of the transfer of shares to the trust, the trustee of the trust (who
shall be designated by the Company and be unaffiliated with the Company and any
Prohibited Transferee or Prohibited Owner) will be required to sell such excess
shares to a person or entity who could own such shares without violating the
Ownership Limit, and distribute to the Prohibited Transferee an amount equal to
the lesser of the price paid by the Prohibited Transferee for such excess
shares or the sales proceeds received by the trust for such excess shares. In
the
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<PAGE> 28
case of any excess shares resulting from any event other than a transfer,
or from a transfer for no consideration (such as a gift), the trustee will be
required to sell such excess shares to a qualified person or entity and
distribute to the Prohibited Owner an amount equal to the lesser of the fair
market value of such excess shares as of the date of such event or the sales
proceeds received by the trust for such excess shares. In either case, any
proceeds in excess of the amount distributable to the Prohibited Transferee or
Prohibited Owner, as applicable, will be distributed to the Beneficiary. Prior
to a sale of any such excess shares by the trust, the trustee will be entitled
to receive, in trust for the Beneficiary, all dividends and other distributions
paid by the Company with respect to such excess shares, and also will be
entitled to exercise all voting rights with respect to such excess shares.
Subject to Maryland law, effective as of the date that such shares have been
transferred to the trust, the trustee shall have the authority (at the
trustee's sole discretion and subject to applicable law) (i) to rescind as void
any vote cast by a Prohibited Transferee prior to the discovery by the Company
that such shares have been transferred to the trust and (ii) to recast such
vote in accordance with the desires of the trustee acting for the benefit of
the Beneficiary. However, if the Company has already taken irreversible
corporate action, then the trustee shall not have the authority to rescind and
recast such vote. Any dividend or other distribution paid to the Prohibited
Transferee or Prohibited Owner (prior to the discovery by the Company that such
shares had been automatically transferred to a trust as described above) will
be required to be repaid to the trustee upon demand for distribution to the
Beneficiary. If the transfer to the trust as described above is not
automatically effective (for any reason) to prevent violation of the Ownership
Limit, then the Declaration of Trust provides that the transfer of the excess
shares will be void.
In addition, shares of beneficial interest of the Company held in the
trust shall be deemed to have been offered for sale to the Company, or its
designee, at a price per share equal to the lesser of (i) the price per share
in the transaction that resulted in such transfer to the trust (or, in the case
of a devise or gift, the market value at the time of such devise or gift) and
(ii) the market value of such shares on the date the Company, or its designee,
accepts such offer. The Company shall have the right to accept such offer
until the trustee has sold the shares of beneficial interest held in the Trust.
Upon such a sale to the Company, the interest of the Beneficiary in the shares
sold shall terminate and the trustee shall distribute the net proceeds of the
sale to the Prohibited Owner.
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 the Company to attempt to qualify, or to continue to qualify, as a
REIT.
All certificates representing shares of beneficial interest shall bear a
legend referring to the restrictions described above.
All persons who own, directly or by virtue of the attribution provisions
of the Code, more than 5% (or such other percentage between of 1% and 5% as
provided in the rules and regulations promulgated under the Code) of the lesser
of the number or value of the outstanding shares of beneficial interest of the
Company must give a written notice to the Company by January 31 of each year.
In addition, each shareholder will, upon demand, be required to disclose to the
Company in writing such information with respect to the direct, indirect and
constructive ownership of shares of beneficial interest as the Board of
Trustees deems reasonably necessary to comply with the provisions of the Code
applicable to a REIT, to comply with the requirements of any taxing authority
or governmental agency or to determine any such compliance.
These ownership limitations could have the effect of delaying, deferring
or preventing a takeover or other transaction in which holders of some, or a
majority, of Common Shares might receive a premium for their Common Shares over
the then prevailing market price or which such holders might believe to be
otherwise in their best interest.
DESCRIPTION OF DEPOSITARY SHARES
GENERAL
The Company may issue receipts ("Depositary Receipts") for Depositary
Shares, each of which will represent a fractional interest of a share of a
particular series of Preferred Shares, as specified in the applicable
Prospectus Supplement. Preferred Shares of each series represented by
Depositary Shares will be deposited under a separate Deposit Agreement (each, a
"Deposit Agreement") among the Company, the depositary named therein (the
"Preferred Share Depositary") and the holders from time to time of the
Depositary Receipts. Subject to the terms of the Deposit Agreement, each owner
of a Depositary Receipt will be entitled, in proportion to the fractional
interest of a share of a particular series of Preferred Shares represented by
the Depositary Shares evidenced by such Depositary Receipt, to all the rights
and preferences of the Preferred Shares represented by such Depositary Shares
(including distribution, voting, conversion, redemption and liquidation
rights).
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The Depositary Shares will be evidenced by Depositary Receipts issued
pursuant to the applicable Deposit Agreement. Immediately following the
issuance and delivery of the Preferred Shares by the Company to the Preferred
Share Depositary, the Company will cause the Preferred Share Depositary to
issue, on behalf of the Company, the Depositary Receipts. Copies of the
applicable form of Deposit Agreement and Depositary Receipt may be obtained
from the Company upon request, and the following summary of the form thereof
filed as an exhibit to the Registration Statement of which this Prospectus is a
part is qualified in its entirety by reference thereto.
DISTRIBUTIONS
The Preferred Share Depositary will distribute all cash distributions
received in respect of the Preferred Shares to the record holders of Depositary
Receipts evidencing the related Depositary Shares in proportion to the number
of such Depositary Receipts owned by such holders, subject to certain
obligations of holders to file proofs, certificates and other information and
to pay certain charges and expenses to the Preferred Share Depositary.
In the event of a distribution other than in cash, the Preferred Share
Depositary will distribute property received by it to the record holders of
Depositary Receipts entitled thereto, subject to certain obligations of holders
to file proofs, certificates and other information and to pay certain charges
and expenses to the Preferred Share Depositary, unless the Preferred Share
Depositary determines that it is not feasible to make such distribution, in
which case the Preferred Share Depositary may, with the approval of the
Company, sell such property and distribute the net proceeds from such sale to
such holders.
No distribution will be made in respect of any Depositary Share to the
extent that it represents any Preferred Shares converted into Excess Shares.
WITHDRAWAL OF SHARES
Upon surrender of the Depositary Receipts at the corporate trust office of
the Preferred Share Depositary (unless the related Depositary Shares have
previously been called for redemption or converted into Excess Shares), the
holders thereof will be entitled to delivery at such office, to or upon such
holder's order, of the number of whole or fractional Preferred Shares and any
money or other property represented by the Depositary Shares evidenced by such
Depositary Receipts. Holders of Depositary Receipts will be entitled to
receive whole or fractional shares of the related Preferred Shares on the basis
of the proportion of the Preferred Shares represented by each Depositary Share
as specified in the applicable Prospectus Supplement, but holders of such
Preferred Shares will not thereafter be entitled to receive Depositary Shares
therefor. If the Depositary Receipts delivered by the holder evidence a number
of Depositary Shares in excess of the number of Depositary Shares representing
the number of Preferred Shares to be withdrawn, the Preferred Share Depositary
will deliver to such holder at the same time a new Depositary Receipt
evidencing such excess number of Depositary Shares.
REDEMPTION OF DEPOSITARY SHARES
Whenever the Company redeems Preferred Shares held by the Preferred Share
Depositary, the Preferred Share Depositary will redeem as of the same
redemption date the number of Depositary Shares representing the Preferred
Shares so redeemed, provided the Company shall have paid in full to the
Preferred Share Depositary the redemption price of the Preferred Shares to be
redeemed plus an amount equal to any accrued and unpaid distributions thereon
to the date fixed for redemption. The redemption price per Depositary Share
will be equal to the redemption price and any other amounts per share payable
with respect to the Preferred Shares. If fewer than all the Depositary Shares
are to be redeemed, the Depositary Shares to be redeemed will be selected pro
rata (as nearly as may be practicable without creating fractional Depositary
Shares) or by any other equitable method determined by the Company that will
not result in the issuance of any Excess Shares.
From and after the date fixed for redemption, all distributions in respect
of the Preferred Shares so called for redemption will cease to accrue, the
Depositary Shares so called for redemption will no longer be deemed to be
outstanding and all rights of the holders of the Depositary Receipts evidencing
the Depositary Shares so called for redemption will cease, except the right to
receive any monies payable upon such redemption and any money or other property
to which the holders of such Depositary Receipts were entitled upon such
redemption upon surrender thereof to the Preferred Share Depositary.
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VOTING OF THE PREFERRED SHARES
Upon receipt of notice of any meeting at which the holders of the
Preferred Shares are entitled to vote, the Preferred Share Depositary will mail
the information contained in such notice of meeting to the record holders of
the Depositary Receipts evidencing the Depositary Shares which represent such
Preferred Shares. Each record holder of Depositary Receipts evidencing
Depositary Shares on the record date (which will be the same date as the record
date for the Preferred Shares) will be entitled to instruct the Preferred Share
Depositary as to the exercise of the voting rights pertaining to the amount of
Preferred Shares represented by such holder's Depositary Shares. The Preferred
Share Depositary will vote the amount of Preferred Shares represented by such
Depositary Shares in accordance with such instructions, and the Company will
agree to take all reasonable action which may be deemed necessary by the
Preferred Share Depositary in order to enable the Preferred Share Depositary to
do so. The Preferred Share Depositary will abstain from voting the amount of
Preferred Shares represented by such Depositary Shares to the extent it does
not receive specific instructions from the holders of Depositary Receipts
evidencing such Depositary Shares. The Preferred Share Depositary shall not be
responsible for any failure to carry out any instruction to vote, or for the
manner or effect of any such vote made, as long as any such action or
non-action is in good faith and does not result from negligence or willful
misconduct of the Preferred Share Depositary.
LIQUIDATION PREFERENCE
In the event of the liquidation, dissolution or winding up of the Company,
whether voluntary or involuntary, the holders of each Depositary Receipt will
be entitled to the fraction of the liquidation preference accorded each
Preferred Share represented by the Depositary Share evidenced by such
Depositary Receipt, as set forth in the applicable Prospectus Supplement.
CONVERSION OF PREFERRED SHARES
The Depositary Shares, as such, are not convertible into Common Shares or
any other securities or property of the Company, except in connection with
certain conversions in connection with the preservation of the Company's status
as a REIT. Nevertheless, if so specified in the applicable Prospectus
Supplement relating to an offering of Depositary Shares, the Depositary
Receipts may be surrendered by holders thereof to the Preferred Share
Depositary with written instructions to the Preferred Share Depositary to
instruct the Company to cause conversion of the Preferred Shares represented by
the Depositary Shares evidenced by such Depositary Receipts into whole Common
Shares, other Preferred Shares (including Excess Shares) of the Company or
other shares of beneficial interest, and the Company has agreed that upon
receipt of such instructions and any amounts payable in respect thereof, it
will cause the conversion thereof utilizing the same procedures as those
provided for delivery of Preferred Shares to effect such conversion. If the
Depositary Shares evidenced by a Depositary Receipt are to be converted in part
only, a new Depositary Receipt or Receipts will be issued for any Depositary
Shares not to be converted. No fractional Common Shares will be issued upon
conversion, and if such conversion will result in a fractional share being
issued, an amount will be paid in cash by the Company equal to the value of the
fractional interest based upon the closing price of the Common Shares on the
last business day prior to the conversion.
AMENDMENT AND TERMINATION OF THE DEPOSIT AGREEMENT
The form of Depositary Receipt evidencing the Depositary Shares which
represent the Preferred Shares and any provision of the Deposit Agreement may
at any time be amended by agreement between the Company and the Preferred Share
Depositary. However, any amendment that materially and adversely alters the
rights of the holders of Depositary Receipts or that would be materially and
adversely inconsistent with the rights granted to the holders of the related
Preferred Shares will not be effective unless such amendment has been approved
by the existing holders of at least a majority of the Depositary Shares
evidenced by the Depositary Receipts then outstanding. No amendment shall
impair the right, subject to certain exceptions in the Depositary Agreement, of
any holder of Depositary Receipts to surrender any Depositary Receipt with
instructions to deliver to the holder the related Preferred Shares and all
money and other property, if any, represented thereby, except in order to
comply with law. Every holder of an outstanding Depositary Receipt at the time
any such amendment becomes effective shall be deemed, by continuing to hold
such Depositary Receipt, to consent and agree to such amendment and to be bound
by the Deposit Agreement as amended thereby.
The Deposit Agreement may be terminated by the Company upon not less than
30 days' prior written notice to the Preferred Share Depositary if (i) such
termination is necessary to assist in maintaining the Company's status as a
REIT or (ii) a majority of each series of Preferred Shares affected by such
termination consents to such termination, whereupon the Preferred Share
Depositary shall deliver or make available to each holder of Depositary
Receipts, upon surrender of the Depositary Receipts held by such holder, such
number of whole or fractional Preferred Shares as are represented by the
Depositary Shares evidenced by such Depositary Receipts together with any
19
<PAGE> 31
other property held by the Preferred Share Depositary with respect to such
Depositary Receipts. The Company has agreed that if the Deposit Agreement is
terminated to assist in maintaining the Company's status as a REIT, then, if
the Depositary Shares are listed on a national securities exchange, the Company
will use its best efforts to list the Preferred Shares issued upon surrender of
the related Depositary Shares on a national securities exchange. In addition,
the Deposit Agreement will automatically terminate if (i) all outstanding
Depositary Shares shall have been redeemed, (ii) there shall have been a final
distribution in respect of the related Preferred Shares in connection with any
liquidation, dissolution or winding up of the Company and such distribution
shall have been distributed to the holders of Depositary Receipts evidencing
the Depositary Shares representing such Preferred Shares or (iii) each share of
the related Preferred Shares shall have been converted into shares of
beneficial interest of the Company not so represented by Depositary Shares.
CHARGES OF PREFERRED SHARE DEPOSITARY
The Company will pay all transfer and other taxes and governmental charges
arising solely from the existence of the Deposit Agreement. In addition, the
Company will pay the fees and expenses of the Preferred Share Depositary in
connection with the performance of its duties under the Deposit Agreement.
However, holders of Depositary Receipts will pay certain other transfer and
other taxes and governmental charges as well as the fees and expenses of the
Preferred Share Depositary for any duties requested by such holders to be
performed which are outside of those expressly provided for in the Deposit
Agreement.
RESIGNATION AND REMOVAL OF DEPOSITARY
The Preferred Share Depositary may resign at any time by delivering to the
Company notice of its election to do so, and the Company may at any time remove
the Preferred Share Depositary, any such resignation or removal to take effect
upon the appointment of a successor Preferred Share Depositary. A successor
Preferred Share Depositary must be appointed within 60 days after delivery of
the notice of resignation or removal and must be a bank or trust company having
its principal office in the United States and having a combined capital and
surplus of at least $50,000,000.
MISCELLANEOUS
The Preferred Share Depositary will forward to holders of Depositary
Receipts any reports and communications from the Company which are received by
the Preferred Share Depositary with respect to the related Preferred Shares.
Neither the Preferred Share Depositary nor the Company will be liable if
it is prevented from or delayed in, by law or any circumstances beyond its
control, performing its obligations under the Deposit Agreement. The
obligations of the Company and the Preferred Share Depositary under the Deposit
Agreement will be limited to performing their duties thereunder in good faith
and without negligence (in the case of any action or inaction in the voting of
Preferred Shares represented by the Depositary Shares), gross negligence or
willful misconduct, and the Company and the Preferred Share Depositary will not
be obligated to prosecute or defend any legal proceeding in respect of any
Depositary Receipts, Depositary Shares or Preferred Shares represented thereby
unless satisfactory indemnity is furnished. The Company and the Preferred
Share Depositary may rely on written advice of counsel or accountants, or
information provided by persons presenting Preferred Shares represented thereby
for deposit, holders of Depositary Receipts or other persons believed in good
faith to be competent to give such information, and on documents believed in
good faith to be genuine and signed by a proper party.
In the event the Preferred Share Depositary shall receive conflicting
claims, requests or instructions from any holders of Depositary Receipts, on
the one hand, and the Company, on the other hand, the Preferred Share
Depositary shall be entitled to act on such claims, requests or instructions
received from the Company.
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<PAGE> 32
RATIOS OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED SHARE DISTRIBUTIONS
The following table sets forth the Company's ratios of earnings to
combined fixed charges and preferred share distributions for the periods shown.
<TABLE>
<CAPTION>
For the Years Ended December 31,
-----------------------------------------
For the Six For the Six
Months Ended Months Ended
June 30, 1997 June 30, 1996 1996 1995 1994 1993 1992
- ------------- ------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
1.69 1.57 1.59 1.54 2.18 1.25 .91
</TABLE>
Ratio of earnings to combined fixed charges and preferred share
distributions represents the ratio of income before gain on disposition of
properties, extraordinary items and allocation to Minority Interests plus fixed
charges (principally interest expense incurred) to fixed charges and preferred
share distributions.
The reorganization and recapitalization of the Company effected in
connection with the EQR IPO in 1993 permitted the Company to significantly
deleverage the Properties resulting in an improved ratio of earnings to
combined fixed charges and preferred share distributions for periods subsequent
to the EQR IPO.
FEDERAL INCOME TAX CONSIDERATIONS
GENERAL
The following discussion summarizes all material federal income tax
considerations to a holder of Common Shares. The applicable Prospectus
Supplement will contain information about additional federal income tax
considerations, if any, relating to Securities other than Common Shares. The
following discussion, which is not exhaustive of all possible tax
considerations, does not give a detailed discussion of any state, local or
foreign tax considerations. Nor does it discuss all of the aspects of federal
income taxation that may be relevant to a prospective shareholder in light of
his or her particular circumstances or to certain types of shareholders
(including insurance companies, tax-exempt entities, financial institutions or
broker-dealers, foreign corporations and persons who are not citizens or
residents of the United States) who are subject to special treatment under the
federal income tax laws. As discussed below, the Taxpayer Relief Act of 1997
(the "1997 Act") contains certain changes to the REIT qualification
requirements and to the taxation of REITs that may be material to a holder of
Securities, but which will become effective only for the Company's taxable
years commencing on or after January 1, 1998.
EACH PROSPECTIVE PURCHASER OF SECURITIES IS ADVISED TO CONSULT WITH HIS OR
HER OWN TAX ADVISOR REGARDING THE SPECIFIC TAX CONSEQUENCES TO HIM OR HER, IN
LIGHT OF HIS OR HER SPECIFIC OR UNIQUE CIRCUMSTANCES, OF THE PURCHASE,
OWNERSHIP AND SALE OF SECURITIES IN AN ENTITY ELECTING TO BE TAXED AS A REIT,
INCLUDING THE FEDERAL, STATE, LOCAL, FOREIGN AND OTHER TAX CONSEQUENCES OF SUCH
PURCHASE, OWNERSHIP, SALE AND ELECTION AND OF POTENTIAL CHANGES IN APPLICABLE
TAX LAWS.
TAXATION OF THE COMPANY
General. The Company elected REIT status commencing with its taxable year
ending December 31, 1992. In the opinion of Hogan & Hartson L.L.P., special
tax counsel to the Company, the Company was organized and has operated in
conformity with the requirements for qualification and taxation as a REIT under
the Code for its taxable years ended December 31, 1992, December 31, 1993,
December 31, 1994, December 31, 1995 and December 31, 1996, and the Company's
current organization and method of operation should enable it to continue to
meet the requirements for qualification and taxation as a REIT. It must be
emphasized that this opinion is based on various assumptions relating to the
organization, prior and expected operation of the Company, the Operating
Partnership, the Management Partnerships, Equity Residential Properties
Management Corp., Equity Residential Properties Management Corp. II and
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<PAGE> 33
Equity Residential Properties Management Corp. III (collectively, the three
management corporations shall be referred to as the "Management Corps."), the
limited partnerships and limited liability companies (the "Financing
Partnerships") that own the beneficial interest of certain Properties
encumbered by mortgage financing, and various qualified REIT subsidiaries
wholly owned by the Company (each a "QRS Corporation") (collectively, the
Management Partnerships, the Management Corps., the Financing Partnerships and
the QRS Corporations may be referred to as the "Subsidiary Entities"), and is
conditioned upon certain representations made by the Company and the Operating
Partnership as to certain relevant factual matters, including matters related
to the organization, expected operation, and assets of the Company (including
its predecessors EQR and Wellsford), the Operating Partnership and the
Subsidiary Entities. Moreover, the Company's qualification and taxation as a
REIT depend upon the Company's ability to meet on a continuing basis, through
actual annual operating and other results, the various requirements under the
Code and described in the Prospectus with regard to, among other things, the
sources of its gross income, the composition of its assets, the level of its
dividends to shareholders, and the diversity of its share ownership. Hogan &
Hartson L.L.P. will not review the Company's compliance with these requirements
on a continuing basis. No assurance can be given that the actual results of
the operations of the Company, the Operating Partnership, and the Subsidiary
Entities, the sources of their income, the nature of their assets, the level of
the Company's dividends to shareholders and the diversity of its share
ownership for any given taxable year will satisfy the requirements under the
Code for qualification and taxation as a REIT.
In any year in which the Company qualifies as a REIT, generally it will
not be subject to federal income tax on that portion of its REIT taxable income
or capital gain which is distributed to shareholders. This treatment
substantially eliminates the "double taxation" (at both the corporate and
shareholder levels) that generally results from the use of corporate investment
vehicles. The Company may, however, be subject to tax at normal corporate
rates upon any taxable income or capital gain not distributed.
If the Company should fail to satisfy either the 75% or the 95% gross
income test (as discussed below), and nonetheless maintains its qualification
as a REIT because certain other requirements are met, it will be subject to a
100% tax on the greater of the amount by which it fails the 75% or the 95%
test, multiplied by a fraction intended to reflect its profitability. The
Company will also be subject to a tax of 100% on net income from any
"prohibited transaction," as described below. In addition, if the Company
should fail to distribute during each calendar year at least the sum of (i) 85%
of its REIT ordinary income for such year, (ii) 95% of its REIT capital gain
net income for such year, and (iii) any undistributed taxable income from prior
years, the Company would be subject to a 4% excise tax on the excess of such
required distribution over the amounts actually distributed. The Company may
also be subject to the corporate "alternative minimum tax," as well as tax in
certain situations and on certain transactions not presently contemplated. The
Company will use the calendar year both for federal income tax purposes and for
financial reporting purposes.
In order to qualify as a REIT, the Company must meet, among others, the
following requirements:
Share Ownership Tests. Shares of beneficial interest of the Company must
be held by a minimum of 100 persons for at least, approximately, 92% of the
days in each taxable year subsequent to 1992. In addition, at all times during
the second half of each taxable year subsequent to 1992, no more than 50% in
value of the shares of beneficial interest of the Company may be owned,
directly or indirectly and by applying certain constructive ownership rules, by
five or fewer individuals (i.e., the Company may not be "closely held"). The
Company believes that it has satisfied both of these tests, and it believes it
will continue to do so. In order to help comply with the second of these
tests, the Company has placed certain restrictions on the transfer of the
Common Shares and Preferred Shares that are intended to prevent further
concentration of share ownership. Pursuant to the 1997 Act, for the Company's
taxable years commencing on or after January 1, 1998, if the Company complies
with regulatory rules pursuant to which it is required to send annual letters
to holders of Securities requesting information regarding the actual ownership
of Securities, but does not know, or exercising reasonable diligence would not
have known, whether it failed to meet the requirement that it not be closely
held, the Company will be treated as having met the requirement.
Asset Tests. At the close of each quarter of the Company's taxable year,
the Company must satisfy two tests relating to the nature of its assets.
First, at least 75% of the value of the Company's total assets must be
represented by any combination of interests in real property, interests in
mortgages on real property, shares in other REITs, cash, cash items and certain
government securities. Second, although the remaining 25% of the Company's
assets generally may be invested without restriction, securities in this class
may not exceed either (i) 5% of the value of the Company's total assets as to
any one issuer, or (ii) 10% of the outstanding voting securities of any one
issuer. Where the Company invests in a partnership, it will be deemed to own a
proportionate share of the partnership's assets. The Company's investment in
the Properties through its interest in the Operating Partnership will
constitute qualified assets for purposes of the 75% asset test.
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<PAGE> 34
The Operating Partnership owns none of the voting stock, but owns 100% of
the non-voting stock of each of the Management Corps. By virtue of its
partnership interest in the Operating Partnership, the Company is deemed to own
its pro rata share of the assets of the Operating Partnership, including the
stock of the Management Corps. as described above and Wellsford Real
Properties, Inc. ("WRP Newco"), a company in which the Operating Partnership
owns non-voting preferred stock and a minority of the common stock. The
Operating Partnership has not and will not own more than 10% of the voting
securities of either WRP Newco or the Management Corps. In addition, based
upon its analysis of the estimated value of the stock of the Management Corps.
and WRP Newco owned by the Operating Partnership relative to the estimated
value of the other assets owned by the Operating Partnership, the Company
believes that its pro rata share of the stock of each Management Corp. and WRP
Newco held by the Operating Partnership has not exceeded and does not exceed 5%
of the total value of the Company's assets. No independent appraisals,
however, have been obtained to support this conclusion. This 5% limitation
must be satisfied not only on the date that the Company first acquired stock of
a Management Corp., and WRP Newco but also at the end of each quarter in which
the Company increases its interest in WRP Newco or any of the Management Corps.
(including as a result of increasing its interest in the Operating Partnership
as the holders of OP Units exercise their exchange rights). Although the
Company plans to take steps to ensure that it satisfies the 5% value test for
any quarter with respect to which retesting is to occur, there can be no
assurance that such steps will always be successful or will not require a
reduction in the Operating Partnership's overall interest in the Management
Corps. or WRP Newco.
The Company's indirect interests as a general partner in the Financing
Partnerships are held through the QRS Corporations, each of which is organized
and operated as a "qualified REIT subsidiary" within the meaning of the Code.
For federal income tax purposes, qualified REIT subsidiaries are not treated as
separate entities from their parent REIT. Instead, all assets, liabilities and
items of income, deduction and credit of each QRS Corporation will be treated
as assets, liabilities and items of the Company. Each QRS Corporation
therefore will not be subject to federal corporate income taxation, although it
may be subject to state or local taxation. In addition, the Company's
ownership of the voting stock of each QRS Corporation will not violate the
general restriction against ownership of more than 10% of the voting securities
of any issuer.
Gross Income Tests. There are three separate percentage tests relating to
the sources of the Company's gross income which must be satisfied for each
taxable year. For purposes of these tests, where the Company invests in a
partnership, the Company will be treated as receiving its share of the income
and loss of the partnership, and the gross income of the partnership will
retain the same character in the hands of the Company as it has in the hands of
the partnership.
1. The 75% Test. At least 75% of the Company's gross income for each
taxable year must be "qualifying income." Qualifying income generally includes
(i) rents from real property (except as modified below); (ii) interest on
obligations collateralized by mortgages on, or interests in, real property;
(iii) gains from the sale or other disposition of interests in real property
and real estate mortgages, other than gain from property held primarily for
sale to customers in the ordinary course of the Company's trade or business
("dealer property"); (iv) distributions on shares in other REITs, as well as
gain from the sale of such shares; (v) abatements and refunds of real property
taxes; (vi) income from the operation, and gain from the sale, of property
acquired at or in lieu of a foreclosure of the mortgage collateralized by such
property ("foreclosure property"); (vii) commitment fees received for agreeing
to make loans collateralized by mortgages on real property or to purchase or
lease real property; and (viii) certain qualified temporary investment income
attributable to the investment of new capital received by the Company in
exchange for its shares (including the Securities offered hereby) during the
one-year period following the receipt of such new capital.
Rents received from a tenant will not, however, qualify as rents from real
property in satisfying the 75% test (or the 95% gross income test described
below) if the Company, or an owner of 10% or more of the Company, directly or
constructively owns 10% or more of such tenant. In addition, if rent
attributable to personal property leased in connection with a lease of real
property is greater than 15% of the total rent received under the lease, then
the portion of rent attributable to such personal property will not qualify as
rents from real property. Moreover, an amount received or accrued will not
qualify as rents from real property (or as interest income) for purposes of the
75% and 95% gross income tests if it is based in whole or in part on the income
or profits of any person. Finally, for rents received to qualify as rents from
real property, the Company generally must not operate or manage the property or
furnish or render services to tenants, other than through an "independent
contractor" from whom the Company derives no revenue. The "independent
contractor" requirement, however, does not apply to the extent that the
services provided by the Company are "usually or customarily rendered" in
connection with the rental of space for occupancy only, and are not otherwise
considered "rendered to the occupant" ("Permissible Services"). Pursuant to
the 1997 Act, however, for the Company's taxable years commencing on or after
January 1, 1998, rents received generally will qualify as rents from real
property notwithstanding the fact that the Company provides services that are
not Permissible Services so long as the amount received for such services is de
minimis.
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<PAGE> 35
The Company, through the Management Partnerships, provides certain
services with respect to the Properties and any newly acquired multifamily
residential properties. The Company believes that the services provided by the
Management Partnerships are usually or customarily rendered in connection with
the rental of space for occupancy only, and therefore that the provision of
such services has not caused, and will not in the future cause the rents
received with respect to the Properties to fail to qualify as rents from real
property for purposes of the 75% and 95% gross income tests.
2. The 95% Test. At least 95% of the Company's gross income for the
taxable year must be derived from the above-described qualifying income, or
from dividends, interest or gains from the sale or disposition of stock or
other securities that are not dealer property. Dividends (including the
Company's share of dividends paid by the Management Corps. or WRP Newco) and
interest on any obligations not collateralized by an interest in real property
and any payments made on behalf of the Company by a financial institution
pursuant to a rate protection agreement will be included as qualifying income
for purposes of the 95% gross income test, but not for purposes of the 75%
test. For purposes of determining whether the Company complies with the 75%
and 95% income tests, gross income does not include income from prohibited
transactions. A "prohibited transaction" is a sale of dealer property,
excluding certain dealer property held by the Company for at least four years
and excluding foreclosure property.
The Company's investment in the Properties, through the Operating
Partnership, in major part gives rise to rental income qualifying under the 75%
and 95% gross income tests. Gains on sales of the Properties or of the
Company's interest in the Operating Partnership will generally qualify under
the 75% and 95% gross income tests. The Company believes that the income on
its other investments, including dividend and interest income from its indirect
investments, has not resulted in the Company failing the 75% or 95% gross
income test for any year, and the Company anticipates that this will continue
to be the case.
Even if the Company fails to satisfy one or both of the 75% or 95% gross
income tests for any taxable year, it may still qualify as a REIT for such year
if it is entitled to relief under certain provisions of the Code. These relief
provisions will generally be available if: (i) the Company's failure to comply
was due to reasonable cause and not to willful neglect; (ii) the Company
reports the nature and amount of each item of its income included in the tests
on a schedule attached to its tax return; and (iii) any incorrect information
on this schedule is not due to fraud with intent to evade tax. If these relief
provisions apply, the Company, however, will still be subject to a 100% tax
based upon the greater of the amount by which it fails either the 75% or 95%
gross income test for that year, less certain adjustments.
3. The 30% Test. The Company must have derived in prior taxable years,
and for its current taxable year the Company must derive, less than 30% of its
gross income from the sale or other disposition of (i) real property held for
less than four years (other than foreclosure property and involuntary
conversions), (ii) stock or securities held for less than one year, and (iii)
property in a prohibited transaction. Pursuant to the 1997 Act, the Company
will not have to meet this test for its taxable years commencing on or after
January 1, 1998. The Company has not had and does not anticipate that it will
have any substantial difficulty in complying with this test.
Annual Distribution Requirements. The Company, in order to qualify as a
REIT, is required to make dividend distributions (other than capital gain
dividends) to its shareholders each year in an amount at least equal to (A) the
sum of (i) 95% of the Company's REIT taxable income (computed without regard to
the dividends paid deduction and the Company's net capital gain) and (ii) 95%
of the net income (after tax), if any, from foreclosure property, minus (B) the
sum of certain items of non-cash income. Such distributions must be paid in
the taxable year to which they relate, or in the following taxable year if
declared before the Company timely files its tax return for such year and if
paid on or before the first regular dividend payment after such declaration.
To the extent that the Company does not distribute all of its net capital gain
or distributes at least 95%, but less than 100%, of its REIT taxable income, as
adjusted, it will be subject to tax on the undistributed amount at regular
capital gains or ordinary corporate tax rates, as the case may be.
The Company has made and intends to continue to make timely distributions
sufficient to satisfy the annual distribution requirements. In this regard,
the partnership agreement of the Operating Partnership authorizes the Company,
as general partner, to take such steps as may be necessary to cause the
Operating Partnership to distribute to its partners an amount sufficient to
permit the Company to meet these distribution requirements. It is possible
that the Company may not have sufficient cash or other liquid assets to meet
the 95% dividend requirement, due to the payment of principal on debt or to
timing differences between the actual receipt of income and actual payment of
expenses on the one hand, and the inclusion of such income and deduction of
such expenses in computing the Company's REIT taxable income on the other hand.
To avoid any problem with the 95% distribution requirement, the Company will
closely monitor the relationship between its REIT taxable income and cash flow
and, if necessary, will borrow funds (or cause the Operating Partnership or
other affiliates to borrow funds) in order to satisfy the distribution
requirement.
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<PAGE> 36
Failure to Qualify. If the Company fails to qualify for taxation as a
REIT in any taxable year and the relief provisions do not apply, the Company
will be subject to tax (including any applicable alternative minimum tax) on
its taxable income at regular corporate rates. Distributions to shareholders
in any year in which the Company fails to qualify will not be required and, if
made, will not be deductible by the Company. In such event, to the extent of
current and accumulated earnings and profits, all distributions to shareholders
will be taxable as ordinary income, and, subject to certain limitations in the
Code, corporate distributees may be eligible for the dividends received
deduction. Unless entitled to relief under specific statutory provisions, the
Company also will be ineligible for qualification as a REIT for the four
taxable years following the year during which qualification was lost.
TAX ASPECTS OF THE COMPANY'S INVESTMENTS IN PARTNERSHIPS
General. The Company holds direct or indirect interests in the Operating
Partnership, the Management Partnerships and certain Financing Partnerships
(each individually a "Partnership" and, collectively, the "Partnerships"). The
Company believes that each of the Partnerships qualifies as a partnership (as
opposed to an association taxable as a corporation) for federal income tax
purposes. If any of the Partnerships were to be treated as an association, it
would be taxable as a corporation and therefore subject to an entity-level tax
on its income. In such a situation, the character of the Company's assets and
items of gross income would change, which would preclude the Company from
satisfying the asset tests and possibly the income tests (see "Federal Income
Tax Considerations--Taxation of the Company--Asset Tests" and "--Gross Income
Tests"), and in turn would prevent the Company from qualifying as a REIT.
Tax Allocations with Respect to the Properties. Pursuant to Section
704(c) of the Code, income, gain, loss and deduction attributable to
appreciated or depreciated property that is contributed to a partnership in
exchange for an interest in the partnership (such as certain of the 69
Properties contributed at the time of the EQR IPO (the "Initial Properties"))
must be allocated in a manner such that the contributing partner is charged
with, or benefits from, respectively, the unrealized gain or unrealized loss
associated with the property at the time of the contribution. The amount of
such unrealized gain or unrealized loss is generally equal to the difference
between the fair market value and the adjusted tax basis of contributed
property at the time of contribution (a "Book-Tax Difference"). Such
allocations are solely for federal income tax purposes and do not affect the
book capital accounts or other economic or legal arrangements among the
partners. The Operating Partnership was formed by way of contributions of
appreciated property (including certain of the Initial Properties).
Consequently, the Operating Partnership partnership agreement (as well as the
Financing Partnerships agreements) requires such allocations to be made in a
manner consistent with Section 704(c). As a result, certain limited partners
of the Operating Partnership will be allocated lower amounts of depreciation
deductions for tax purposes and increased taxable income and gain on sale by
the Partnerships of the contributed assets (including certain of the Initial
Properties). These allocations will tend to eliminate the Book-Tax Difference
over the life of the Partnerships. However, the special allocation rules of
Section 704(c) as applied by the Company do not always entirely rectify the
Book-Tax Difference on an annual basis or with respect to a specific taxable
transaction such as a sale. Thus, the carryover basis of the contributed
assets in the hands of the Partnerships will cause the Company to be allocated
lower depreciation and other deductions, and possibly greater amounts of
taxable income in the event of a sale of such contributed assets in excess of
the economic or book income allocated to it as a result of such sale. This may
cause the Company to recognize taxable income in excess of cash proceeds, which
might adversely affect the Company's ability to comply with the REIT
distribution requirements. See "Federal Income Tax Considerations--Taxation of
the Company--Annual Distribution Requirements."
Sale of the Properties. The Company's share of any gain realized by the
Operating Partnership on the sale of any dealer property generally will be
treated as income from a prohibited transaction that is subject to a 100%
penalty tax. See "Federal Income Tax Considerations--Taxation of the
Company--Gross Income Tests--The 95% Test." Under existing law, whether
property is dealer property is a question of fact that depends on all the facts
and circumstances with respect to the particular transaction. The Partnerships
have held and intend to continue to hold the Properties for investment with a
view to long-term appreciation, to engage in the business of acquiring,
developing, owning and operating the Properties and other multifamily
residential properties and to make such occasional sales of the Properties as
are consistent with the Company's investment objectives. Based upon such
investment objectives, the Company believes that in general the Properties
should not be considered dealer property and that the amount of income from
prohibited transactions, if any, will not be material.
TAXATION OF TAXABLE DOMESTIC SHAREHOLDERS
General. As long as the Company qualifies as a REIT, distributions made
to the Company's taxable domestic shareholders, with respect to their
Securities out of current or accumulated earnings and profits (and not
designated as capital gain dividends) will be taken into account by them as
ordinary income and will not be eligible for the dividends received deduction
for shareholders that are corporations. For purposes of determining whether
distributions on the Securities are out of current or accumulated earnings and
profits,
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<PAGE> 37
the earnings and profits of the Company will be allocated first to the
Preferred Shares and second to the Common Shares. There can be no
assurance, however, that the Company will have sufficient earnings and profits
to cover distributions on the Preferred Shares. Dividends that are designated
as capital gain dividends will be taxed as long-term capital gains (to the
extent that they do not exceed the Company's actual net capital gain for the
taxable year) without regard to the period for which the shareholder has held
its Securities. However, corporate shareholders may be required to treat up to
20% of certain capital gain dividends as ordinary income. For a discussion on
the manner in which that portion of any dividends designated by the Company as
capital gains dividends will be allocated among the holders of Preferred Shares
and Common Shares, see "Description of Shares of Beneficial Interest--Preferred
Shares--Distributions." To the extent that the Company makes distributions in
excess of current and accumulated earnings and profits, these distributions are
treated first as a tax-free return of capital to the shareholder, reducing the
tax basis of a shareholder's Securities by the amount of such distribution (but
not below zero), with distributions in excess of the shareholder's tax basis
taxable as capital gains (if the Securities are held as a capital asset). In
addition, any dividend declared by the Company in October, November or December
of any year and payable to a shareholder of record on a specific date in any
such month shall be treated as both paid by the Company and received by the
shareholder on December 31 of such year, provided that the dividend is actually
paid by the Company during January of the following calendar year.
Shareholders may not include in their individual income tax returns any net
operating losses or capital losses of the Company.
In general, any loss upon a sale or exchange of Securities by a
shareholder who has held such Securities for six months or less (after applying
certain holding period rules) will be treated as a long-term capital loss, to
the extent of distributions from the Company received by such shareholder are
required to be treated by such shareholder as long-term capital gains.
Pursuant to the 1997 Act, for the Company's taxable years commencing on or
after January 1, 1998, the Company may elect to require holders of Securities
to include the Company's undistributed net capital gains in their income. If
the Company makes such an election, holders of Securities will (i) include in
their income as long-term capital gains their proportionate share of such
undistributed capital gains and (ii) be deemed to have paid their proportionate
share of the tax paid by the Company on such undistributed capital gains and
thereby receive a credit or refund for such amount. A holder of Securities
will increase the basis in its Securities by the difference between the amount
of capital gain included in its income and the amount of the tax it is deemed
to have paid. The earnings and profits of the Company will be adjusted
appropriately. The 1997 Act, however, did not change the 4% excise tax imposed
upon a failure to make required distributions.
Additional Tax Consequences for Holders of Preferred Shares and Depositary
Shares. If the Company offers one or more series of Preferred Shares or
Depositary Shares, then there may be additional tax consequences for the
holders of such Preferred Shares or Depositary Shares. For a discussion of any
such additional consequences, see the applicable Prospectus Supplement.
TAXATION OF TAX-EXEMPT SHAREHOLDERS
Most tax-exempt employees' pension trusts are not subject to federal
income tax except to the extent of their receipt of "unrelated business taxable
income" as defined in Section 512(a) of the Code ("UBTI"). Distributions by the
Company to a shareholder that is a tax-exempt entity should not constitute
UBTI, provided that the tax-exempt entity has not financed the acquisition of
its Securities with "acquisition indebtedness" within the meaning of the Code
and the Securities are not otherwise used in an unrelated trade or business of
the tax-exempt entity. In addition, for taxable years beginning on or after
January 1, 1994, certain pension trusts that own more than 10% of a
"pension-held REIT" must report a portion of the distribution that they receive
from such a REIT as UBTI. The Company has not been and does not expect to be
treated as a pension-held REIT for purposes of this rule.
TAXATION OF FOREIGN SHAREHOLDERS
The following is a discussion of certain anticipated U.S. federal income
tax consequences of the ownership and disposition of Securities applicable to
Non-U.S. Holders of such Securities. A "Non-U.S. Holder" is any person other
than (i) a citizen or resident of the United States, (ii) a corporation or
partnership created or organized in the United States or under the laws of the
United States or of any state thereof, or (iii) an estate or trust whose income
is includable in gross income for U.S. federal income tax purposes regardless
of its source. The discussion is based on current law and is for general
information only.
Distributions From the Company. 1. Ordinary Dividends. The portion of
dividends received by Non-U.S. Holders payable out of the Company's earnings
and profits which are not attributable to capital gains of the Company or of
the Operating Partnership and which are not effectively connected with a U.S.
trade or business of the Non-U.S. Holder will be subject to U.S. withholding
tax at the rate of 30% (unless reduced by an applicable treaty). In general,
Non-U.S. Holders will not be considered engaged in a U.S. trade or business
26
<PAGE> 38
solely as a result of their ownership of Securities. In cases where
the dividend income from a Non-U.S. Holder's investment in Securities is (or is
treated as) effectively connected with the Non-U.S. Holder's conduct of a U.S.
trade or business, the Non-U.S. Holder generally will be subject to U.S. tax at
graduated rates, in the same manner as U.S. shareholders are taxed with
respect to such dividends (and may also be subject to the 30% branch profits
tax in the case of a Non-U.S. Holder that is a foreign corporation).
2. Non-Dividend Distributions. Distributions in excess of current or
accumulated earnings and profits of the Company will not be taxable to a Non-U.
S. Holder to the extent that they do not exceed the adjusted basis of the
shareholder's Common Shares, but rather will reduce the adjusted basis of such
Common Shares. To the extent that such distributions exceed the adjusted basis
of a Non-U. S. Holder's Common Shares, they will give rise to gain from the
sale or exchange of its Common Shares, the tax treatment of which is described
below. As a result of a legislative change made by the Small Business Job
Protection Act of 1996, it appears that the Company will be required to
withhold 10% of any distribution in excess of the Company's current and
accumulated earnings and profits. Consequently, although the Company intends
to withhold at a rate of 30% on the entire amount of any distribution (or a
lower applicable treaty rate), to the extent that the Company does not do so,
any portion of a distribution not subject to withholding at a rate of 30% (or a
lower applicable treaty rate) will be subject to withholding at a rate of 10%.
However, the Non-U.S. Holder may seek a refund of such amounts from the Service
if it subsequently determined that such distribution was, in fact, in excess of
current or accumulated earnings and profits of the Company, and the amount
withheld exceeded the Non-U. S. Holder's United States tax liability, if any,
with respect to the distribution.
3. Capital Gain Dividends. Under the Foreign Investment in Real Property
Tax Act of 1980 ("FIRPTA"), a distribution made by the Company to a Non-U.S.
Holder, to the extent attributable to gains from dispositions of United States
Real Property Interests ("USRPIs") such as the Properties beneficially owned by
the Company ("USRPI Capital Gains"), will be considered effectively connected
with a U.S. trade or business of the Non-U.S. Holder and subject to U.S. income
tax at the rate applicable to U.S. individuals or corporations, without regard
to whether such distribution is designated as a capital gain dividend. In
addition, the Company will be required to withhold tax equal to 35% of the
amount of dividends to the extent such dividends constitute USRPI Capital
Gains. Distributions subject to FIRPTA may also be subject to a 30% branch
profits tax in the hands of a foreign corporate shareholder that is not
entitled to treaty exemption.
Dispositions of Securities. Unless Securities constitute a USRPI, a sale
of Securities by a Non-U.S. Holder generally will not be subject to U.S.
taxation under FIRPTA. The Securities will not constitute a USRPI if the
Company is a "domestically controlled REIT." A domestically controlled REIT is
a REIT in which, at all times during a specified testing period, less than 50%
in value of its Securities is held directly or indirectly by Non-U.S. Holders.
The Company believes that it has been and anticipates that it will continue to
be a domestically controlled REIT, and therefore that the sale of Securities
will not be subject to taxation under FIRPTA. Because the Securities will be
publicly traded, however, no assurance can be given the Company will continue
to be a domestically controlled REIT. If the Company does not constitute a
domestically controlled REIT, a Non-U.S. Holder's sale of Securities generally
will still not be subject to tax under FIRPTA as a sale of a USRPI provided
that (i) the Securities are "regularly traded" (as defined by applicable
Treasury regulations) on an established securities market and (ii) the selling
Non-U.S. Holder held 5% or less of the Company's outstanding Securities at all
times during a specified testing period.
If gain on the sale of Securities were subject to taxation under FIRPTA,
the Non-U.S. Holder would be subject to the same treatment as a U.S.
shareholder with respect to such gain (subject to applicable alternative
minimum tax and a special alternative minimum tax in the case of nonresident
alien individuals) and the purchaser of Securities could be required to
withhold 10% of the purchase price and remit such amount to the Service.
Capital gains not subject to FIRPTA will nonetheless be taxable in the United
States to a Non-U.S. Holder in two cases: (i) if the Non-U.S. Holder's
investment in Securities is effectively connected with a U.S. trade or business
conducted by such Non-U.S. Holder, the Non-U.S. Holder will be subject to the
same treatment as a U.S. shareholder with respect to such gain, or (ii) if the
Non-U.S. Holder 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, the nonresident alien individual will be subject to a 30% tax on
the individual's capital gain.
RECENT LEGISLATION
As described above, 1997 Act contains certain changes to the REIT
qualification requirements and to the taxation of REITs. The 1997 Act also
contains certain changes to the taxation of capital gains of individuals,
trusts and estates.
Capital Gain Rates. Subject to certain exceptions, for individuals,
trusts and estates, the maximum rate of tax on the net capital gain from a sale
or exchange occurring after July 28, 1997 of a capital asset held for more than
18 months has been reduced from 28% to 20%. The maximum rate has been reduced
to 18% for capital assets acquired after December 21, 2000 and held for
27
<PAGE> 39
more than five years. The maximum rate for capital assets held for more
than one year but not more than 18 months remains at 28%. The maximum rate for
net capital gains attributable to the sale of depreciable real property held
for more than 18 months is 25% to the extent of the prior deductions for
depreciation with respect to such property. Capital gain from the sale of
depreciable real property held for more than 18 months allocated by the Company
to a non-corporate shareholder will be subject to the 25% rate to the extent
that the capital gain on the real property sold by the Company does not exceed
prior depreciation deductions with respect to such property. With respect to
any depreciable real property held by the Company for more than one year but
not more than 18 months, prior depreciation deductions claimed in excess of the
depreciation that would have been allowed if computed on a straight-line basis
will be taxed at the rates applicable to ordinary income with the remaining
gain being taxed at a maximum rate of 28%. The 1997 Act provides the IRS with
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
the Company. The taxation of capital gains of corporations was not changed by
the 1997 Act.
REIT Provisions. In addition to the provisions discussed above, the 1997
Act contains a number of technical provisions that either (i) reduce the risk
that the Company will inadvertently cease to qualify as a REIT, or (ii) provide
additional flexibility with which the Company can meet the REIT qualification
requirements. These provisions are effective for the Company's taxable years
commencing on or after January 1, 1998.
OTHER TAX CONSIDERATIONS
The Management Corps. A portion of the cash to be used by the Operating
Partnership to fund distributions to its partners, including the Company, is
expected to come from the Management Corps. through payments of dividends on
the non-voting stock of the Management Corps. held by the Operating
Partnership. The Management Corps. pay federal and state income tax at the
full applicable corporate rates. The Management Corps. will attempt to
minimize the amount of such taxes, but there can be no assurance whether or the
extent to which measures taken to minimize taxes will be successful. To the
extent that the Management Corps. are required to pay federal, state or local
taxes, the cash available for distribution by the Company to shareholders will
be reduced accordingly.
State and Local Taxes. The Company and its shareholders may be subject to
state or local taxation in various jurisdictions, including those in which it
or they transact business or reside. The state and local tax treatment of the
Company and its shareholders may not conform to the federal income tax
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 the shares of beneficial interest of the Company.
28
<PAGE> 40
PLAN OF DISTRIBUTION
The Company may sell the Securities to one or more underwriters for public
offering and sale by them or may sell the Securities to investors directly or
through agents. Any such underwriter or agent involved in the offer and sale
of the Securities will be named in the applicable Prospectus Supplement.
The Company may offer and sell the Securities at a fixed price or prices,
which may be changed, at prices related to the prevailing market prices at the
time of sale or at negotiated prices for cash or assets in transactions that do
not constitute a business combination within the meaning of Rule 145
promulgated under the Securities Act. The Company also may, from time to time,
authorize underwriters acting as the Company's agents to offer and sell the
Securities upon the terms and conditions as are set forth in the applicable
Prospectus Supplement. In connection with the sale of the Securities,
underwriters may be deemed to have received compensation from the Company in
the form of underwriting discounts or commissions and may also receive
commissions from purchasers of the Securities for whom they may act as agent.
Underwriters may sell Securities to or through dealers, and such dealers may
receive compensation in the form of discounts, concessions or commissions from
the underwriters and/or commissions from the purchasers for whom they may act
as agent.
Any underwriting compensation paid by the Company to underwriters or
agents in connection with the offering of the Securities, and any discounts,
concessions or commissions allowed by underwriters to participating dealers,
will be set forth in the applicable Prospectus Supplement. Underwriters,
dealers and agents participating in the distribution of the Securities may be
deemed to be underwriters, and any discounts and commissions received by them
and any profit realized by them on resale of the Securities may be deemed to be
underwriting discounts and commissions, under the Securities Act.
Underwriters, dealers and agents may be entitled, under agreements entered into
with the Company, to indemnification against and contribution toward certain
civil liabilities, including liabilities under the Securities Act.
If so indicated in the applicable Prospectus Supplement, the Company will
authorize dealers acting as the Company's agents to solicit offers by certain
institutions to purchase Securities from the Company at the public offering
price set forth in such Prospectus Supplement pursuant to Delayed Delivery
Contracts ("Contracts") providing for payment and delivery on the date or dates
stated in such Prospectus Supplement. Each Contract will be for an amount not
less than, and the aggregate principal amount of Securities sold pursuant to
Contracts shall be not less nor more than, the respective amounts stated in the
applicable Prospectus Supplement. Institutions with whom Contracts, when
authorized, may be made include commercial and savings banks, insurance
companies, pension funds, investment companies, educational and charitable
institutions, and other institutions but will in all cases be subject to the
approval of the Company. Contracts will not be subject to any conditions
except (i) the purchase by an institution of the Securities covered by its
Contracts shall not at the time of delivery be prohibited under the laws of any
jurisdiction in the United States to which such institution is subject, and
(ii) if the Securities are being sold to underwriters, the Company shall have
sold to such underwriters the total principal amount of the Securities less the
principal amount thereof covered by Contracts.
Certain of the underwriters and their affiliates may engage in
transactions with and perform services for the Company and its Subsidiaries in
the ordinary course of business.
29
<PAGE> 41
EXPERTS
The Consolidated Financial Statements of the Company as of December 31,
1996 and for the year ended December 31, 1996 incorporated in this Prospectus
by reference to the Company's 1996 Annual Report (Form 10-K, as amended by Form
10-K/A); the Combined Statement of Revenue and Certain Expenses for the year
ended December 31, 1995 of the 1996 Acquired Properties and Probable
Properties, appearing in the Current Report of the Company on Form 8-K, as
amended by Form 8-K/A, dated May 23, 1996; the Combined Statement of Revenue
and Certain Expenses for the year ended December 31, 1995 of the 1996 Acquired
Properties, appearing in the Current Report of the Company on Form 8-K, as
amended by Form 8-K/A, dated November 15, 1996; all of the individual and
combined Statements of Revenue and Certain Expenses of certain of the
properties acquired in 1997 for the year ended December 31, 1996 or for the
three years in the period ended December 31, 1996, as applicable, each of which
appear in the Current Report of the Company on Form 8-K, dated May 20, 1997;
the Statements of Revenue and Certain Expenses of certain other properties
acquired in 1997 for the year ended December 31, 1996, each of which appear in
the Current Report of the Company on Form 8-K, dated August 15, 1997; the
combined financial statements of WRP Newco (Predecessor), at December 31, 1996
and 1995 and for the year ended December 31, 1996, and for the period from
March 22 to December 31, 1995, appearing in the Company's Joint Proxy
Statement/Prospectus, dated April 25, 1997; the consolidated financial
statements of Wellsford and its subsidiaries at December 31, 1996 and 1995, and
for each of the three years in the period ended December 31, 1996 appearing in
Wellsford's 1996 Annual Report (Form 10-K) incorporated by reference in the
Company's Joint Proxy Statement/Prospectus, dated April 25, 1997; and the
consolidated financial statements of Evans Withycombe Residential, Inc.,
appearing in the Current Report of the Company on Form 8-K, dated September 10,
1997; have all been audited by Ernst & Young LLP, independent auditors, and the
consolidated financial statements of the Company as of December 31, 1995 and
for each of the two years in the period ended December 31, 1995, appearing in
the Company's 1996 Annual Report (Form 10-K, as amended by Form 10-K/A), have
been audited by Grant Thornton LLP, independent auditors, as set forth in their
respective reports thereon included therein and incorporated herein by
reference. Such financial statements are incorporated herein by reference in
reliance upon such reports given upon the authority of such firms as experts in
accounting and auditing.
LEGAL MATTERS
The legality of the Securities offered hereby will be passed upon for the
Company by Rosenberg & Liebentritt, P.C., Chicago, Illinois. Rosenberg &
Liebentritt, P.C. will rely on Hogan & Hartson L.L.P., Washington, D.C., as to
certain matters of Maryland law. Certain federal income tax matters described
under "Federal Income Tax Considerations" will be passed on for the Company by
Hogan & Hartson L.L.P. With respect to any underwritten offering of
Securities, certain legal matters will be passed upon for the underwriters by
Hogan & Hartson L.L.P. Hogan & Hartson L.L.P. from time to time provides
services to the Company and other entities controlled by Mr. Zell.
Sheli Z. Rosenberg, a principal of Rosenberg & Liebentritt, P.C., is a
trustee of the Company. The Company incurred legal fees to Rosenberg &
Liebentritt, P.C. of approximately $725,000 in 1996 and, through July 31, 1997,
approximately $870,000 in 1997. Attorneys of Rosenberg & Liebentritt, P.C.
beneficially own less than 1% of the outstanding Common Shares, either directly
or upon the exercise of options.
30
<PAGE> 42
============================================================
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS IN CONNECTION WITH THE
OFFER MADE BY THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS, AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. NEITHER THIS
PROSPECTUS SUPPLEMENT NOR THE ACCOMPANYING PROSPECTUS CONSTITUTES AN OFFER TO
SELL OR THE SOLICITATION OF ANY OFFER TO BUY ANY SECURITY OTHER THAN THE COMMON
SHARES OFFERED HEREBY, NOR DO THEY CONSTITUTE AN OFFER TO SELL OR A SOLICITATION
OF ANY OFFER TO BUY ANY OF THE COMMON SHARES BY ANYONE IN ANY JURISDICTION IN
WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON
MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO
WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF
THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE
HEREOF.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PROSPECTUS SUPPLEMENT
The Company................................ S-3
Recent Developments........................ S-5
Risk Factors............................... S-6
Use of Proceeds............................ S-6
Price Range of Common Shares and
Distributions............................ S-7
Business and Properties.................... S-8
Underwriting............................... S-10
PROSPECTUS
Special Note Regarding Forward-Looking
Statements............................... 2
Available Information...................... 2
Incorporation of Certain Documents by
Reference................................ 2
The Company................................ 4
Risk Factors............................... 5
Use of Proceeds............................ 9
Description of Shares of Beneficial
Interest................................. 9
Description of Depositary Shares........... 17
Ratios of Earnings to Combined Fixed
Charges and Preferred Share
Distributions............................ 20
Federal Income Tax Considerations.......... 21
Plan of Distribution....................... 29
Experts.................................... 30
Legal Matters.............................. 30
</TABLE>
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4,000,000 Shares
EQUITY LOGO
Common Shares
of
Beneficial Interest
----------------------------------
PROSPECTUS SUPPLEMENT
----------------------------------
PRUDENTIAL SECURITIES INCORPORATED
J.P. MORGAN & CO.
January 21, 1998
============================================================
