<PAGE> 1
This filing is made pursuant
to Rule 424(b)(5) under
the Securities Act of
1933 in connection with
Registration Nos. 333-02798
333-18847
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED JANUARY 14, 1997)
- --------------------------------------------------------------------------------
2,000,000 Shares
[LOGO] PACIFIC GULF PROPERTIES INC.
Common Stock
- --------------------------------------------------------------------------------
Pacific Gulf Properties Inc. (the "Company"), a self-administered and
self-managed equity real estate investment trust (a "REIT"), owns, operates,
leases, acquires and rehabilitates industrial and multifamily properties. In
addition, the Company has recently begun to develop properties, including an
industrial property and an active senior residential property. The Company
focuses on properties located in California and the Pacific Northwest, with the
largest concentration in Southern California. The Company currently owns a
portfolio of 21 industrial properties, containing an aggregate of approximately
4.6 million leasable square feet, and 22 multifamily properties, containing
4,110 apartment units. See "Recent Developments -- 1996 Acquisitions and
Disposition."
All of the shares of common stock of the Company, par value $.01 per share
("Common Stock"), offered hereby are being sold by the Company (the "Offering").
The Common Stock is listed on the New York Stock Exchange (the "NYSE") under the
symbol "PAG." On January 15, 1997, the last reported sales price of the Common
Stock on the NYSE was $21.25 per share. See "Price Range of Common Stock and
Distributions."
The Company operates as a REIT for federal income tax purposes and expects to
pay regular quarterly dividends to its stockholders, subject to the discretion
of the Company's Board of Directors. See "Price Range of Common Stock and
Distributions." The shares of Common Stock are subject to certain restrictions
on ownership designed to preserve the Company's status as a REIT for federal
income tax purposes. See "Description of Common Stock" in the accompanying
Prospectus.
SEE "RISK FACTORS" ON PAGES 5 TO 9 OF THE ACCOMPANYING PROSPECTUS FOR A
DISCUSSION OF CERTAIN MATERIAL FACTORS THAT SHOULD BE CONSIDERED IN CONNECTION
WITH AN INVESTMENT IN THE COMMON STOCK OFFERED HEREBY.
- --------------------------------------------------------------------------------
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. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
Underwriting
Price to Discounts and Proceeds to
Public Commissions(1) Company(2)
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share.......................................... $20.50 $0.97 $19.53
- ------------------------------------------------------------------------------------------------------------------
Total(3)........................................... $41,000,000 $1,940,000 $39,060,000
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The Company has agreed to indemnify the Underwriter against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting expenses payable by the Company estimated to be $520,000.
(3) The Company has granted the Underwriter a 30-day over-allotment option to
purchase up to 300,000 additional shares of Common Stock on the same terms
and conditions set forth above. If all such shares are purchased by the
Underwriter, the total Price to Public will be $47,150,000, the total
Underwriting Discounts and Commissions will be $2,231,000, and total
Proceeds to Company will be $44,919,000. See "Underwriting."
- --------------------------------------------------------------------------------
The shares of Common Stock are offered by the Underwriter, subject to delivery
by the Company and acceptance by the Underwriter, to prior sale and withdrawal,
cancellation or modification of the offer without notice. Delivery of the shares
to the Underwriter is expected to be made at the office of Prudential Securities
Incorporated, One New York Plaza, New York, New York, on or about January 21,
1997.
PRUDENTIAL SECURITIES INCORPORATED
January 15, 1997
<PAGE> 2
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
OFFERED HEREBY AND/OR THE COMPANY'S 8.375% CONVERTIBLE SUBORDINATED DEBENTURES
DUE 2001 AT LEVELS ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET.
SUCH TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE, THE AMERICAN
STOCK EXCHANGE, IN THE OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING,
IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
THE COMMON STOCK MAY NOT BE OFFERED OR SOLD IN OR INTO THE UNITED KINGDOM
EXCEPT TO PERSONS WHOSE ORDINARY ACTIVITIES INVOLVE THEM IN ACQUIRING, HOLDING,
MANAGING OR DISPOSING OF INVESTMENTS (AS PRINCIPAL OR AGENT) FOR THE PURPOSES OF
THEIR BUSINESSES (OR IN OTHER CIRCUMSTANCES THAT DO NOT CONSTITUTE AN OFFER TO
THE PUBLIC IN THE UNITED KINGDOM FOR THE PURPOSES OF THE PUBLIC OFFERS OF
SECURITIES REGULATIONS 1995), AND THIS DOCUMENT MAY ONLY BE ISSUED OR PASSED ON
IN OR INTO THE UNITED KINGDOM TO ANY PERSON TO WHOM THE DOCUMENT MAY LAWFULLY BE
ISSUED OR PASSED ON BY REASON OF, OR OF ANY REGULATION MADE UNDER, SECTION 58
FINANCIAL SERVICES ACT 1986.
ALL APPLICABLE PROVISIONS OF THE PUBLIC OFFERS OF SECURITIES REGULATIONS
1995 AND THE FINANCIAL SERVICES ACT 1986 MUST BE COMPLIED WITH IN RESPECT OF
ANYTHING DONE IN RELATION TO THE COMMON STOCK IN, FROM OR OTHERWISE INVOLVING,
THE UNITED KINGDOM.
S-2
<PAGE> 3
PROSPECTUS SUPPLEMENT SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and financial statements
appearing elsewhere in this Prospectus Supplement, in the accompanying
Prospectus and in the documents incorporated herein by reference. Unless
otherwise indicated, all information in this Prospectus Supplement assumes that
the Underwriter's over-allotment option will not be exercised.
THE COMPANY
The Company, a self-administered and self-managed equity real estate
investment trust (a "REIT"), owns, operates, leases, acquires and rehabilitates
industrial and multifamily properties. In addition, the Company has recently
begun to develop properties, including an industrial property consisting of
approximately 327,000 square feet and an active senior residential property
consisting of approximately 166 units. The Company's properties are located in
California and the Pacific Northwest, with the largest concentration in Southern
California. The Company focuses on this geographic region due to management's
extensive experience in these markets and management's belief that these markets
present potential for long-term economic growth. The Company currently owns a
portfolio of 21 industrial properties, containing an aggregate of approximately
4.6 million leasable square feet (the "Industrial Properties") and 22
multifamily properties, containing 4,110 apartment units (the "Multifamily
Properties", and collectively with the Industrial Properties, the "Properties").
As of November 30, 1996, the Company's Industrial Properties and Multifamily
Properties experienced occupancy rates of 98% and 94%, respectively.
Since its February 1994 initial public offering (the "IPO"), the Company
has increased (i) the amount of leaseable square footage in its Industrial
Property portfolio by 126% to 4.6 million square feet, (ii) the number of units
in its Multifamily Property portfolio by 44% to 4,110 units, and (iii) the
number of shares of its Common Stock outstanding by 141%. In mid-1996, the
Company received gross proceeds of approximately $39.9 million from the issuance
of 2,435,581 shares of Common Stock at $16.375 per share (the "1996 Public
Common Stock Offering"). Since the 1996 Public Common Stock Offering, the
Company has:
- - Purchased 11 Industrial Properties comprised of approximately 1.9 million
leasable square feet, at an aggregate purchase price of approximately $68.0
million,
- - Purchased one additional Multifamily Property consisting of 165 apartment
units at a purchase price of approximately $6.2 million,
- - Acquired and commenced redevelopment of an approximately 327,000 leaseable
square foot industrial building with an anticipated total cost of
approximately $10.2 million,
- - Commenced development of a 166 unit senior (age 55 and over) apartment complex
with an estimated total capitalized cost of approximately $8.6 million,
- - Moved its Common Stock from the American Stock Exchange (the "ASE") to the
NYSE,
- - Increased its quarterly dividend on the Common Stock from $.40 per share to
$.41 per share,
- - Completed an exchange offer (the "Exchange Offer") pursuant to which it
exchanged an aggregate of 2,440,002 shares of Common Stock for an aggregate of
approximately $42.1 million principal amount of its outstanding 8.375%
Convertible Subordinated Debentures Due 2001 (the "Debentures"), and
- - Agreed to sell $25.0 million in Preferred Stock to an institutional investor.
S-3
<PAGE> 4
Management believes that focusing on two property types allows the Company
greater investment opportunities and flexibility than would be available by
investing in only one property type. Apartments have shorter term leases than
industrial properties and, hence, apartment rental income reacts more quickly to
changes in economic conditions. Lease income on industrial properties reacts
more slowly to changes in the economy due to longer term leases on such
properties. The values of these two property types and the opportunities they
present for growth are affected by the timing of such rental adjustments. This
distinction, along with other market factors that impact the demand for
multifamily and industrial properties differently, provides the Company with
greater options in implementing its investment, disposition and property
management strategies.
The Company seeks to maximize cash flow per share by improving the net
operating income (rental property income less rental property expenses) of
existing properties, by acquiring additional properties and by reducing its cost
of capital. Management closely monitors rental operations and administrative
expenses, utilizes new technologies, periodically conducts contract reviews, and
seeks opportunities to maximize economies of scale in order to control costs,
reduce tenant turnover and assure that the Company is competitive in all aspects
of its operations. The Company also seeks to increase shareholder value through
the acquisition of properties that provide attractive initial returns and
opportunities to increase net operating income. Additionally, the Company seeks
well-located properties in strong markets where values have suffered due to poor
management or maintenance and that can be acquired at less than replacement
cost. See "Risk Factors" in the accompanying Prospectus.
The Company was incorporated in Maryland in August 1993. The Company's
executive offices are located at 363 San Miguel Drive, Newport Beach, California
92660; and its telephone number is (714) 721-2700. Unless the context otherwise
requires, as used herein the term "Company" includes Pacific Gulf Properties
Inc. and its consolidated subsidiaries, including without limitation its
operating partnership, PGP Inland Communities, L.P.
THE OFFERING
<TABLE>
<S> <C>
Common Stock Offered Hereby........................... 2,000,000 shares(1)
Common Stock to be Outstanding after the Offering..... 11,758,273 shares(1)(2)(3)
Use of Proceeds....................................... To complete the Probable Acquisitions
(as defined below) and to repay
indebtedness outstanding under the
Company's revolving line of credit.
See "Use of Proceeds."
NYSE Symbol........................................... PAG
</TABLE>
- ---------------
(1) Does not include up to 300,000 shares of Common Stock issuable if the
Underwriter exercises the over-allotment option.
(2) Includes 2,440,002 shares of Common Stock issued pursuant to the Exchange
Offer.
(3) Excludes 615,404 shares of Common Stock reserved for issuance under the
Company's 1993 Share Option Plan and 247,663 shares of Common Stock reserved
for issuance under the Company's Dividend Reinvestment Plan. Also excludes
an aggregate of 225,452 shares of Common Stock which the Company will have
the right, but not the obligation, to issue to the holders of the limited
partnership interests ("OP Units") in the Company's subsidiary operating
partnership, PGP Inland Communities, L.P., if such holders exercise their
right in the future to require the operating partnership to purchase their
OP Units.
S-4
<PAGE> 5
RECENT DEVELOPMENTS
1996 ACQUISITIONS AND DISPOSITION
In March 1996, the Company acquired an industrial property located in
Garden Grove, California with approximately 189,000 leasable square feet, for an
aggregate purchase price of approximately $6.8 million. The Company financed the
purchase with the proceeds from a 10 year, 7.3% fixed interest rate loan secured
by an existing property located in Kent, Washington.
In June and July 1996, the Company acquired nine industrial properties
located in California containing an aggregate of approximately 1.4 million
leasable square feet, for an aggregate purchase price of approximately $54.0
million, including budgeted capital expenditures of approximately $1.8 million.
The Company financed the acquisition of such properties primarily with the
proceeds of the 1996 Public Common Stock Offering. See "-- Equity Financing
Activities" below.
In August 1996, the Company acquired an industrial property located in the
City of Industry, California with approximately 327,000 leasable square feet for
approximately $8.8 million. The Company intends to expend approximately $1.4
million to redevelop this property. Also in August 1996, the Company acquired
approximately 4.6 acres of land in Rancho Santa Margarita, California for
approximately $1.6 million, on which the Company is developing a 166 unit active
senior housing apartment community with estimated total capitalized costs of
approximately $8.6 million. See "-- Development Activity" below.
In August 1996, the Company sold approximately 14.3 acres of land and an
approximately 56,000 leasable square foot industrial building located in Baldwin
Park, California to an existing tenant for aggregate consideration of
approximately $7.7 million under the terms of an option to purchase contained in
the original leases.
In October 1996, the Company acquired the Miramar Business Park in San
Diego, California, a multi-tenant industrial/warehouse consisting of
approximately 186,000 leasable square feet, for a purchase price of
approximately $7.2 million. The Miramar Business Park is subject to a ground
lease expiring in July 2035.
In November 1996, the Company acquired the Raintree Apartments, a 165 unit
apartment community located in Ontario, California, for a purchase price of
approximately $6.2 million which was financed by the seller for a five year
term.
PROBABLE ACQUISITIONS
The Company is actively pursuing and is in preliminary negotiations
regarding the acquisition of a number of industrial and multifamily properties,
but no assurance can be given that it will continue to pursue or consummate any
acquisitions as a result of these negotiations. On November 19, 1996, the
Company entered into an agreement to purchase a multitenant industrial park
located in Santa Ana, California with approximately 323,000 leasable square feet
for a total consideration of approximately $15.2 million (the "Santa Ana
Acquisition"). On December 5, 1996, the Company entered into an agreement to
purchase a warehouse/distribution property located in Algona, Washington with
approximately 201,000 leasable square feet for total consideration of
approximately $9.6 million (the "Algona Acquisition", and together with the
Santa Ana Acquisition, the "Probable Acquisitions"). Because the Probable
Acquisitions remain subject to certain conditions to closing, there can be no
assurance that such acquisitions will be consummated.
REDUCTION IN PUBLIC INDEBTEDNESS
In December 1996, the Company initiated the Exchange Offer, pursuant to
which it offered to exchange 58 shares of its Common Stock for each $1,000 in
principal amount of its Debentures. On December 26, 1996, the Company completed
the Exchange Offer by issuing an aggregate of 2,440,002 shares of Common Stock
in exchange for approximately $42.1 million in aggregate principal amount of
Debentures. Approximately $14.4 million in principal amount of Debentures
remains outstanding after the consummation of the Exchange Offer. The Debentures
are traded on the ASE.
S-5
<PAGE> 6
The Company believes the Exchange Offer improved the Company's
capitalization by increasing its outstanding equity base and decreasing its
indebtedness. The issuance of additional shares of Common Stock may have
improved the trading and liquidity of the Common Stock, which in turn may
enhance the attractiveness of the Common Stock to institutional and other
investors. Additionally, the reduction in the Company's indebtedness has
improved the Company's interest coverage ratio and may lower its long-term
capital costs. The Company believes the improvement in its capitalization
provided by the Exchange Offer will provide it with enhanced access to the
capital markets and expand its opportunities for future growth.
INCREASE IN DISTRIBUTIONS
The Company has increased its distributions paid to stockholders twice
since its IPO. On November 6, 1996, the Company increased its quarterly
distribution from $0.40 per share to $0.41 per share of Common Stock. On
December 12, 1995, the Company increased its quarterly distribution from $0.39
per share to $0.40 per share of Common Stock. See "Price Range of Common Stock
and Distributions."
DEVELOPMENT ACTIVITY
The Company has begun redevelopment of the its newly-acquired industrial
property located in the City of Industry, California. See "-- 1996 Acquisitions
and Disposition." The redevelopment, which the Company expects to cost
approximately $1.4 million, will include the installation of additional loading
facilities, sprinkler upgrades, mezzanine level upgrades, parking lot upgrades,
and cosmetic rehabilitation of the property.
In December 1996, the Company began construction on a 166-unit active
senior apartment community in the master planned area of Rancho Santa Margarita,
California. The Company estimates the total capitalized cost of this project
will be approximately $8.6 million. The community is being developed as a
community for residents 55 years and older and will be the first apartment
community in Rancho Santa Margarita specifically designed to meet the needs of
active seniors. The project is being financed with a 24 month construction loan.
Subject to completing construction and the property achieving certain lease up
and operating requirements, the Company anticipates that it will refinance the
construction loan with tax-exempt credit-enhanced bonds. See "Debt Financing
Activities."
EQUITY FINANCING ACTIVITIES
In mid-1996, the Company received gross proceeds of approximately $39.9
million from the issuance of 2,435,581 shares of Common Stock (including
proceeds from the issuance of 420,000 shares of Common Stock sold pursuant to
the exercise of the underwriters' over-allotment option) in the 1996 Public
Common Stock Offering at a price of $16.375 per share. The shares of Common
Stock were issued under the Company's shelf registration statement on Form S-3
covering a maximum aggregate offering price of approximately $112 million (the
"Shelf Registration Statement"). The Company used the proceeds of the 1996
Public Common Stock Offering to fund the acquisition of certain properties, to
repay debt and for general corporate purposes. In December 1996, the Company
filed a registration statement on Form S-3 pursuant to Rule 462(b) under the
Securities Act, increasing the maximum aggregate offering amount under the Shelf
Registration Statement by approximately $14.5 million.
On December 31, 1996, the Company entered into an agreement to issue
1,351,351 shares of Class A Senior Cumulative Convertible Preferred Stock (the
"Class A Preferred Shares") to Five Arrows Realty Securities L.L.C. ("Five
Arrows") at a price of $18.50 per share. The Company is obligated to issue the
Class A Preferred Shares over the course of 1997 in a maximum of three separate
issuances, the timing of which may be specified by the Company, provided that
the Company will be charged with certain availability fees if all of the Class A
Preferred Shares are not issued before July 1, 1997. Management believes the
issuance of the Class A Preferred Shares will provide the Company with ready
access to additional capital in order to complete additional acquisitions or to
provide additional working capital. The Class A Preferred Shares will be issued
under the Shelf Registration Statement.
The holders of the Class A Preferred Shares and the holders of the Common
Stock vote together as a single class. Each Class A Preferred Share is
convertible into one share of Common Stock, subject to
S-6
<PAGE> 7
adjustment upon certain events. The annual dividend per share on the Class A
Preferred Shares is (i) $1.70 from the date of issuance until December 31, 1997,
and (ii) the greater of $1.70 or 104% of the then-current dividend on the Common
Stock thereafter. The liquidation preference of the Class A Preferred Shares is
$18.50 per share, plus an amount equal to any accumulated, accrued and unpaid
dividends. The Company may redeem the Class A Preferred Shares beginning on
December 31, 2001 for cash in an amount equal to $18.50 per Class A Preferred
Share plus accrued and unpaid dividends and plus a premium initially equal to
6.0% of $18.50. This premium decreases to zero after December 31, 2009.
The Company has granted to Five Arrows, for as long as Five Arrows
maintains its ownership of either all of the Class A Preferred Shares or an
amount of voting securities that, if converted into Common Stock, would exceed
10% of the outstanding Common Stock, a seat on the Company's Board of Directors.
In addition, upon the occurrence of the failure of the Company to pay a
quarterly dividend on the Common Stock in an amount of at least $.40 per share,
the failure of the Company to meet certain earnings before interest,
depreciation and amortization budgets for three consecutive quarters or the
failure of the Company to pay accrued dividends on the Class A Preferred Shares,
Five Arrows would be granted one additional seat on the Board.
Five Arrows is prohibited from transferring any Class A Preferred Shares,
or any shares of Common Stock into which such Class A Preferred Shares have been
converted, until December 31, 1997. At that time, Five Arrows will have the
right, subject to certain conditions, to demand the Company effect the
registration under the Securities Act of 1933, as amended, of the Class A
Preferred Shares or the shares of Common Stock into which such Class A Preferred
Shares have been converted.
DEBT FINANCING ACTIVITIES
Tax-Exempt Projects. In December 1996, the Company completed a refinancing
of all of its $24.9 million tax-exempt financed projects. As part of the
refinancing, the Company established a pool agreement with the Federal National
Mortgage Association ("FNMA") to provide 30 year credit enhancement on the tax-
exempt projects. The effective interest rate on the currently outstanding bonds
that are part of such pool agreement (other than the bonds related to Rancho
Santa Margarita project), after giving effect to credit enhancement and other
costs, has been fixed at 6.3% for 10 years.
In addition to refinancing its tax-exempt projects, the Company also
received from FNMA a forward commitment, expiring December 1, 1998, to provide
credit enhancement for the senior residential community located in Rancho Santa
Margarita, California, that the Company is currently developing. The commitment
is subject to the completion of the project and the property achieving certain
lease up and operating requirements. The effective interest rate on the
currently outstanding bonds in this commitment, after giving effect to credit
enhancement and other costs, has been fixed at 6.4% for ten years.
Property Refinancings. In 1996, the Company incurred indebtedness on two
separate occasions in order to reduce the outstanding balance on the Company's
line of credit. First, in October 1996, the Company borrowed an aggregate of
approximately $16.9 million pursuant to three separate 14 year term loans that
bear interest at a rate of 8% for the first seven years and a fixed rate based
upon the then-prevailing market rate thereafter. Such loans are secured by the
following industrial projects: Golden West, Vista and Garden Grove Industrial
Park. Second, in December 1996, the Company borrowed an additional $24.5 million
pursuant to a 15 year term loan that bears interest at a rate of 7.75% for the
first five years and a fixed rate based upon the then-prevailing market rate
thereafter. This loan is secured by six of the properties acquired with the
proceeds of the 1996 Public Common Stock Offering, namely Riverview Industrial
Park, Pacific Park, North County Business Park, Bell Ranch Industrial Park,
Escondido Business Center and Bay San Marcos Industrial Park. Each of these
financings provides the Company with the ability to prepay, without penalty, the
balance of outstanding loans at the time the interest rates are reset.
The above property refinancings reduced the Company's line of credit
obligation by approximately $39.4 million, thereby significantly reducing the
Company's exposure to interest rate fluctuations.
LISTING OF COMMON STOCK ON NEW YORK STOCK EXCHANGE
On October 29, 1996, the Company's Common Stock moved from the ASE to the
NYSE. The Company believes trading on the NYSE may provide greater exposure for
the Company and increase its ability to raise additional capital.
S-7
<PAGE> 8
USE OF PROCEEDS
The net proceeds to the Company from the sale of the Common Stock offered
hereby, after deduction of underwriting discounts and commissions and estimated
offering expenses, is estimated to be approximately $38.5 million ($44.4 million
if the Underwriter's over-allotment option is exercised in full). The Company
presently intends to use the net proceeds from the Offering to complete the
Probable Acquisitions and to reduce outstanding borrowings under its revolving
credit facility. The principal balance outstanding under such credit facility,
which as of September 30, 1996 was approximately $39.2 million, has been reduced
as described under "Recent Developments -- Debt Financing Activities." The
revolving credit facility matures in July 1998 and had an interest rate of 7.47%
as of September 30, 1996 (floating interest rate of LIBOR plus 1.75%). To the
extent the net proceeds are not used as described above, they will be used for
working capital purposes. Pending such uses, which the Company anticipates will
occur shortly following the consummation of the Offering, the Company may invest
such net proceeds in short-term income-producing investments such as investment
grade commercial paper, government securities or money market funds that invest
in government securities.
S-8
<PAGE> 9
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
September 30, 1996, on a historical and pro forma basis as adjusted to give
effect to (i) the acquisition of properties completed or pending subsequent to
September 30, 1996, (ii) the Exchange Offer and (iii) the completion of this
Offering and the application of net proceeds as described below and under "Use
of Proceeds." The information set forth in the following table should be read in
conjunction with the Company's pro forma consolidated financial statements
incorporated by reference herein including the statements filed with the Current
Report on Form 8-K dated January 13, 1997 and the consolidated and combined
financial statements and notes thereto incorporated by reference in the
accompanying Prospectus.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
------------------------
HISTORICAL PRO FORMA
---------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Debt:
Loans payable(1)......................................................... $ 137,774 $ 143,974
Revolving line of credit(1)(4)........................................... 39,244 32,320
8.375% Convertible Subordinated Debentures, net of debenture
discount(2)........................................................... 55,722 14,237
-------- --------
Total debt....................................................... 232,740 190,531
Shareholders' equity:
Preferred shares, $.01 par value; 5,000,000 shares authorized; no shares
outstanding(3)........................................................ -- --
Common shares, $.01 par value; 25,000,000 shares authorized; 7,317,403
shares issued and outstanding; 11,757,405 shares issued and
outstanding on a pro forma basis (2)(4)(5)............................ 74 118
Excess shares, $.01 par value; 30,000,000 shares authorized; no shares
outstanding........................................................... -- --
Outstanding restricted stock............................................. (918) (918)
Additional paid-in capital(2)(4)......................................... 114,877 196,294
Distributions in excess of earnings(2)................................... (10,868) (14,465)
-------- --------
Total shareholders' equity....................................... 103,165 181,029
-------- --------
Total capitalization............................................. $ 335,905 $ 371,560
======== ========
</TABLE>
- ---------------
(1) New borrowings of $7,100,000 under the Company's revolving line of credit
and $6,200,000 under a mortgage note payable to consummate the completed and
probable acquisitions more fully described in the Company's Current Report
on Form 8-K dated January 13, 1997. See "Recent Developments -- Debt
Financing Activities" for other activity subsequent to September 30, 1996
affecting the Company's revolving line of credit.
(2) Exchange of the Company's Debentures ($42,069,000 aggregate principal
amount, net of $584,000 unamortized Debenture cost) for 2,440,002 shares of
Common Stock, including 180,956 shares of Common Stock issued to induce the
exchange. Subsequent to the completion of the Exchange Offer, the Company
will recognize a one-time charge to earnings of approximately $3,597,000 for
the year ended December 31, 1996 related to the issuance of the shares of
Common Stock issued as an inducement at a price of $19.875 (the share price
at December 26, 1996, the Exchange Offer closing date). This nonrecurring
loss related to the Exchange Offer will not affect the Company's Funds From
Operations (as defined below).
(3) Excludes 1,351,351 shares of Class A Senior Cumulative Convertible Preferred
Stock to be issued pursuant to an agreement executed by the Company on
December 31, 1996. The Class A Preferred Shares, which will be issued in up
to three separate issuances at a price of $18.50 per share, bear an initial
annual dividend of $1.70 per share from the date of issuance until December
31, 1997, (increasing thereafter, see "Recent Developments -- Equity
Financing Activities"), are redeemable by the Company in whole or part, five
years from the date of issuance and are convertible into shares of Common
Stock, at any time, at the option of the holders based on an initial
conversion ratio of one share of Common Stock for each Class A Preferred
Share, subject to adjustment under certain circumstances.
(4) Net proceeds of $38,540,000 from the issuance of 2,000,000 shares of Common
Stock (excluding 300,000 shares of Common Stock that may be issued upon
exercise of the Underwriter's over-allotment option) pursuant to this
offering at $20.50 per share, net of underwriting discounts and commissions
and estimated offering expenses. Proceeds from the Offering will be used to
complete the Probable Acquisitions with the remaining $14,024,000 used to
reduce outstanding indebtedness on the revolving line of credit.
(5) Excludes 615,404 shares of Common Stock reserved for issuance under the
Company's 1993 Share Option Plan and 247,663 shares of Common Stock reserved
for issuance under the Company's Dividend Reinvestment Plan. Also excludes
an aggregate of 225,452 shares of Common Stock which the Company will have
the right, but not the obligation, to issue to the holders of the OP Units
in the Company's subsidiary operating partnership, PGP Inland Communities,
L.P., if such holders exercise their right in the future to require the
operating partnership to purchase their OP Units.
S-9
<PAGE> 10
PRICE RANGE OF COMMON STOCK AND DISTRIBUTIONS
The Common Stock of the Company began trading on the NYSE on October 29,
1996 under the symbol "PAG." From the date of the Company's IPO until October
28, 1996, the Company's Common Stock traded on the ASE under the same symbol.
The following table sets forth the high and low closing prices for the Common
Stock on the ASE or the NYSE, as applicable, and the distributions declared for
the periods indicated:
<TABLE>
<CAPTION>
DISTRIBUTIONS
HIGH LOW DECLARED
----- ----- -------------
<S> <C> <C> <C>
1994
1st Quarter.................................... $18 1/2 $17 1/4 $ .18
2nd Quarter.................................... 17 7/8 16 1/8 .39
3rd Quarter.................................... 17 1/2 15 1/2 .39
4th Quarter.................................... 16 7/8 12 3/4 .39
1995
1st Quarter.................................... 16 1/4 14 5/8 .39
2nd Quarter.................................... 16 1/4 14 1/2 .39
3rd Quarter.................................... 16 5/8 14 5/8 .39
4th Quarter.................................... 16 3/4 13 .40
1996
1st Quarter.................................... 18 3/4 16 1/8 .40
2nd Quarter.................................... 18 3/8 16 1/8 .40
3rd Quarter.................................... 18 3/4 16 1/2 .40
4th Quarter.................................... 20 18 1/8 .41
1997
1st Quarter (through January 15, 1997)......... 21 1/4 19 1/4
</TABLE>
The closing price of the Common Stock on the NYSE on January 15, 1997 was
$21.25 per share. As of such date there were approximately 239 record holders of
Common Stock.
Since the IPO, the Company has declared regular quarterly distributions to
its stockholders. Federal income tax law requires that a REIT distribute
annually at least 95% of its REIT taxable income -- for the Company,
approximately $2.5 million and $2.3 million in 1994 and 1995 ($.58 and $.48,
respectively, per share of Common Stock). See "Federal Income Tax
Considerations -- Annual Distribution Requirements". Future distributions by the
Company will be at the discretion of the Board of Directors and will depend upon
the actual Funds From Operations (as defined below) of the Company, its
financial condition, capital requirements, the annual distribution requirements
under the REIT provisions of the Internal Revenue Code, applicable legal
restrictions and such other factors as the Board of Directors deems relevant.
Although the Company intends to continue to make quarterly distributions to its
stockholders, no assurances can be given as to the amount of distributions, if
any, made in the future.
The Company anticipates that cash available for distribution will be
greater than earnings and profits due to non-cash expenses, primarily
depreciation and amortization, incurred by the Company. Distributions by the
Company to the extent of its current accumulated earnings and profits for
federal income tax purposes will be taxable to stockholders as ordinary dividend
income. Distributions in excess of earnings and profits generally will be
treated as non-taxable return of capital. Such distributions have the effect of
deferring taxation until the sale of a stockholder's Common Stock. In order to
maintain its qualification as a REIT, the Company could be required to make
distributions in excess of cash available for distribution. The Company
estimates that 35% and 68% of the distributions paid in 1994 and 1995,
respectively, were a return on capital for federal income tax purposes.
During 1995, the Company implemented a Dividend Reinvestment and Stock
Purchase Plan, which permits stockholders to acquire additional shares of Common
Stock by automatically reinvesting cash
S-10
<PAGE> 11
distributions and making optional cash purchases without payment of any broker
commissions or service charges. Stockholders who do not participate in such Plan
continue to receive cash distributions as paid.
Funds From Operations is defined by the National Association of Real Estate
Investment Trusts ("NAREIT") to mean net income, computed in accordance with
generally accepted accounting principles ("GAAP"), excluding gains (or losses)
from debt restructuring and sales of property, plus depreciation and
amortization, and after adjustments for unconsolidated partnerships and joint
ventures. Management generally considers Funds From Operations to be a useful
measure of the operating performance of an equity REIT because, together with
net income and cash flows, Funds From Operations provides investors with an
additional basis to evaluate the ability of a REIT to incur and service debt and
to fund acquisitions and other capital expenditures. Funds From Operations does
not represent cash flow from operations as defined by GAAP, should not be
considered as an alternative to net income as an indicator of the Company's
operating performance and is not indicative of cash available to fund all cash
flow needs. Funds From Operations does not measure whether cash flow is
sufficient to fund all of the Company's cash needs including principal
amortization, capital improvements and distributions to stockholders. Funds From
Operations also does not represent cash flows generated from operating,
investing or financing activities as defined by GAAP. Further, Funds From
Operations as disclosed by other REITs may not be comparable to the Company's
calculation of Funds From Operations. On March 3, 1995, NAREIT modified the
calculation of Funds From Operations to, among other things, eliminate
amortization of deferred financing costs and depreciation of non-real estate
assets as items added back to net income when computing Funds From Operations.
CURRENT MARKETS
Set forth below is a brief description of the current markets in which the
Company currently owns industrial properties. The information was derived from
data provided by, among other sources, CB Commercial Torto Wheaton Research.
Riverside-San Bernardino. The Riverside-San Bernardino metropolitan
statistical area is comprised of the two counties of Riverside and San
Bernardino. As of the fourth quarter of 1995, the population of the
Riverside-San Bernardino metropolitan statistical area was 2.9 million, making
it the 10th most populous metropolitan statistical area in the country. The
median per capita income in 1995 was $17,180, which is 17.5% below the national
average. Industries concentrated in the Riverside-San Bernardino metropolitan
statistical area include agricultural services and military.
At year end 1995, the Riverside-San Bernardino metropolitan statistical
area was the 21st largest industrial market (in terms of leasable industrial
property) nationally and that market had grown 11.4 million square feet since
1990. Warehouses comprised the largest part (50.3%) of the industrial property
rental market, with manufacturing facilities next at 35.8%. Vacancy rates ranged
from 6.5% in manufacturing space to 12.6% in warehouse properties.
Orange County. As of the fourth quarter of 1995, the population of the
Orange County metropolitan statistical area was 2.5 million, making it the 15th
most populous metropolitan statistical area in the country. The median per
capita income in 1995 was $25,022, which is 20.2% above the national average.
Industries concentrated in the Orange County metropolitan statistical area
include agricultural services, real estate and technology.
At year end 1995, the Orange County metropolitan statistical area was the
11th largest industrial market (in terms of leasable industrial property)
nationally and that market had grown 2.9 million square feet since 1990.
Manufacturing facilities comprised the largest part (54.8%) of the commercial
real estate market with research and development ("R&D") facilities next at
16.9%. Vacancy rates ranged from 8.1% from warehouse space to 15.8% in R&D
properties.
San Diego. As of the fourth quarter of 1995, the population of the San
Diego metropolitan statistical area was 2.6 million, making it the 14th most
populous metropolitan statistical area in the country. The median per capita
income in 1995 was $20,949 which is 0.6% above the national average. Industries
concentrated in the San Diego metropolitan statistical area include military and
tourism.
S-11
<PAGE> 12
At year end 1995, the San Diego metropolitan statistical area was the 28th
largest industrial market (in terms of leasable industrial property) nationally
and that market had grown 6.9 million square feet since 1990. Manufacturing
facilities comprised the largest part (38.7%) of the industrial property rental
market, with warehouses next at 24.8%. Vacancy rates ranged from 8.0% in
warehouse space to 19.8% in R&D properties.
Seattle. As of the fourth quarter of 1995, the population of the Seattle
metropolitan statistical area was 2.2 million, making it the 22nd most populous
metropolitan statistical area in the country. The median per capita income in
1995 was $26,122, which is 25.5% above the national average. Industries
concentrated in the Seattle metropolitan statistical area include transportation
equipment, technology and water transportation.
At year end 1995, the Seattle metropolitan statistical area was the 13th
largest industrial market (in terms of leasable industrial property) and that
market had grown 9.7 million square feet since 1990. Warehouses comprised the
largest part (49.9%) of the industrial property rental market, with
manufacturing facilities next at 37.9%. Vacancy rates ranged from 2.8% in
manufacturing space to 12.3% in R&D properties.
Los Angeles. As of the fourth quarter of 1995, the population of the Los
Angeles metropolitan statistical area was 9.2 million, making it the most
populous metropolitan statistical area in the country. The median per capita
income in 1995 was $21,660, which is 4.0% above the national average. Industries
concentrated in the Los Angeles metropolitan statistical area include defense,
entertainment, apparel & other textile products and transportation services.
At year end 1995, the Los Angeles metropolitan statistical area was the
second largest industrial market (in terms of leasable industrial property)
nationally and that market had grown 10.3 million square feet since 1990.
Manufacturing facilities comprised the largest part (40.7%) of the industrial
property rental market, with warehouses next at 40.4%. Vacancy rates ranged from
10.0% in warehouse space to 18.2% in R&D properties.
S-12
<PAGE> 13
BUSINESS AND PROPERTIES
GENERAL
The tables below set forth certain information relating to the Company's
Industrial and Multifamily Properties (excluding any properties under
development) by location and type as of September 30, 1996.
<TABLE>
<CAPTION>
NUMBER LEASABLE PERCENT OF NET
OF SQUARE RENTAL PROPERTY
PROPERTIES FEET EARNINGS(1) OCCUPANCY(2)
---------- --------- --------------- ------------
<S> <C> <C> <C> <C>
INDUSTRIAL
California
Inland Empire(3)........................ 4 1,306,394 23% 99%
San Diego............................... 4 802,132 15 99
Orange County........................... 6 857,241 17 96
Los Angeles............................. 1 567,605 21 100
Northern California..................... 1 193,358 3 88
Pacific Northwest
Seattle, WA............................. 4 660,666 21 97
-- --------- --- --
Total or Weighted Average................. 20 4,387,396 100% 98%
== ========= === ==
</TABLE>
<TABLE>
<CAPTION>
NUMBER PERCENT OF NET
OF RENTAL PROPERTY
PROPERTIES UNITS EARNINGS(1) OCCUPANCY(2)
---------- ----- --------------- ------------
<S> <C> <C> <C> <C>
MULTIFAMILY
California
Inland Empire(3)........................ 11 1,368 36% 92%
Orange County........................... 3 742 21 97
Pacific Northwest
Seattle, WA............................. 6 1,556 36 97
Portland, OR............................ 1 279 7 91
-- ----- --- --
Total or Weighted Average................. 21 3,945 100% 95%
== ===== === ==
</TABLE>
- ---------------
(1) Net rental property earnings is defined as rental revenues less rental
expenses and real estate taxes for the nine months ended September 30, 1996.
Operating results for projects acquired during the nine months ended
September 30, 1996. Properties for which the Company has insufficient data
are not annualized and reflect operations as of close of escrow.
(2) As of November 30, 1996, the Company experienced occupancy rates of 98% and
94% for its Industrial Properties and Multifamily Properties, respectively.
(3) Includes the eastern portion of Los Angeles County adjacent to the
Riverside-San Bernardino metropolitan statistical area.
The information in the following sections is forward looking and involves
risks and uncertainties that could significantly impact the Company's Funds From
Operations in the short and long term. Higher than expected acquisition, rental
and/or rehabilitation costs, delays in the rehabilitation of properties, a
downturn in the local economies and/or the lack of growth of such economies
could reduce the Company's Funds From Operations.
INDUSTRIAL PROPERTIES
The Company focuses on multi-tenant business parks and mid-size
warehouse/distribution facilities. Whenever possible, the Company seeks a
significant market share in its principal sub-markets so that it can accommodate
its tenants as their needs change and have an influence on trends in market
rents. The Company also seeks properties that are well-located and offer
convenient access to major distribution points, such as shipping ports, major
airports and major freeways.
S-13
<PAGE> 14
Management believes that the Southern California industrial property market
is poised for recovery based upon an increasing level of leasing interest and a
limited supply of new product. As evidence of this, the Company already has
observed recent increases in the prices for industrial properties and tenant
requests for longer term leases. With over 70% of its industrial leases expiring
during the next three years, the Company believes it is in a good position to
capitalize on anticipated rental rate increases. The Company's industrial
properties are currently occupied by over 400 tenants, and no one tenant
accounts for more than 2.5% of the Company's total rental revenues.
The Company generally offers industrial leases in the one- to five-year
range. Lease terms include, in most cases, annual adjustments based on changes
in the consumer price index and, in some cases, from one to three months' free
rent. The standard lease also includes some refurbishing and tenant improvement
allowance with the amount varying depending upon the length of the lease, the
size of the space leased and the use. The Company seeks tenants primarily
involved in warehouse, distribution, assembly and light manufacturing
activities.
The following table presents information concerning the Industrial
Properties, including the actual average rent per square foot and percentage of
the leasable square footage leased and occupied by tenants as of September 30,
1996:
<TABLE>
<CAPTION>
GROSS AVERAGE
LEASABLE MONTHLY
DATE SQUARE BASE RENT
INDUSTRIAL PROPERTY (1) LOCATION COMPLETED FOOTAGE PER SQ. FT. OCCUPANCY
- ------------------------------ ------------------------ --------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Seattle I..................... Seattle, WA 1968 42,240 $ 0.41 100%
Seattle II.................... Seattle, WA 1981 64,077 0.54 100
Seattle III................... Seattle, WA 1981 78,720 0.54 100
Pacific Gulf Business Park.... Tukwila, WA 1975-79 475,629 0.50 96
Etiwanda...................... Ontario, CA 1991 576,327 0.29 100
Golden West................... Rancho Cucamonga, CA 1990 296,821 0.36 95
Vista......................... Vista, CA 1990 356,800 0.38 100
Baldwin Industrial Park....... Baldwin Park, CA 1986 567,605 0.36 100
Pacific Gulf Business Park.... Garden Grove, CA 1986 189,526 0.62 94
Garden Grove Industrial
Park........................ Garden Grove, CA 1979 251,927 0.38 97
Crescent Business Center...... Rancho Cucamonga, CA 1981 136,066 0.38 100
Eden Landing Commerce Park.... Hayward, CA 1972-74 193,358 0.65 88
San Marcos Commerce Center.... San Marcos, CA 1985 72,100 0.38 100
Bay San Marcos Industrial
Center...................... San Marcos, CA 1988 121,768 0.41 100
Escondido Business Center..... Escondido, CA 1988-92 251,464 0.49 99
Bell Ranch Industrial Park.... Santa Fe Springs, CA 1981 128,640 0.27 100
La Mirada Business Center..... La Mirada, CA 1975 82,010 0.56 89
Pacific Park.................. Aliso Viejo, CA 1988 99,622 0.90 92
Riverview Industrial Park..... San Bernardino, CA 1980 297,180 0.26 100
North County Business Park.... Yorba Linda, CA 1987-89 105,516 0.57 100
--------- ---- ---
Sub-Total or Weighted Average
For Industrial Properties
(1)......................... 4,387,396 $ 0.51 98%
=========
INDUSTRIAL PROPERTY UNDER
DEVELOPMENT
- ------------------------------
City of Industry Distribution
Center...................... City of Industry, CA 1973-77 326,596 N/A N/A
</TABLE>
- ---------------
(1) Excludes Miramar Business Park, a multi-tenant industrial/warehouse project
consisting of approximately 186,000 square feet, acquired subsequent to
September 1996 that is subject to a ground lease expiring in July 2035.
S-14
<PAGE> 15
The following table shows scheduled lease expirations for all leases for
the Industrial Properties (excluding properties under development) as of
September 30, 1996.
<TABLE>
<CAPTION>
GROSS
LEASABLE PERCENTAGE
NUMBER OF AREA OF ANNUAL BASE OF GROSS PERCENTAGE
LEASES EXPIRING RENT OF EXPIRING LEASABLE AREA ANNUAL BASE
PROPERTY EXPIRING LEASES LEASES EXPIRING RENT EXPIRING
- -------------------------------- --------- --------- ---------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Fourth Quarter 1996............. 135 620,000 $ 2,948,000 14.8% 14.0%
1997............................ 303 944,000 5,090,000 22.6 24.2
1998............................ 194 940,000 5,184,000 22.5 24.7
1999............................ 105 650,000 3,118,000 15.5 14.8
2000............................ 32 304,000 1,274,000 7.3 6.1
2001............................ 29 209,000 1,195,000 5.0 5.7
2002............................ 4 321,000 1,144,000 7.7 5.4
2003............................ 7 91,000 534,000 2.2 2.5
2004............................ 1 90,000 469,000 2.2 2.2
2005 and thereafter............. 1 12,000 58,000 0.2 0.4
--- --------- ----------- ----- -----
TOTALS.......................... 811 4,181,000 $ 21,014,000 100.0% 100.0%
=== ========= =========== ===== =====
</TABLE>
- ---------------
(1) Of the square footage subject to leases that expired in the fourth quarter
of 1996, approximately 53,000 leasable square feet, as of January 14, 1996,
was vacant.
MULTIFAMILY PROPERTIES
The Company invests primarily in two types of multifamily apartment
communities: communities oriented to family-style living and communities for
active seniors ages 55 and older.
The Company focuses on family-style apartment communities with greater
concentrations of two- and three-bedroom units with rents affordable by middle
income families. The Company believes that there is a strong demand among middle
income families for affordable rental housing such as that offered by the
Company.
The Company also focuses on active senior housing for individuals ages 55
and older, where seniors can be involved in activities, social gatherings and
other types of entertainment with residents of their own age group. The Company
offers no assisted living or related services; the Company's properties are
oriented to those seniors interested in renting versus owning and who are able
to care for themselves. The Company believes that the senior population will
continue to grow and that the market for rental housing for active seniors will
be strong. In addition, management believes that active senior housing typically
has lower operating and management costs due to lower tenant turnover.
Each of the Multifamily Properties provides tenants with attractive
amenities, including a swimming pool (except Inn at Laguna Hills) and clubhouse,
and many include jacuzzis, tennis courts, sports courts and saunas. Many offer
additional features such as vaulted ceilings, fireplaces, washers and dryers,
cable television and limited access gates. None of the Multifamily Properties
currently are subject to rent control or rent stabilization regulations.
However, certain of these properties are subject to restrictions based upon tax-
exempt loan requirements, such as providing a percentage of units to low income
tenants. There can be no assurances that rent control or rent stabilization
regulations will not be imposed in the future.
S-15
<PAGE> 16
The following table presents information concerning the Multifamily
Properties, including average gross scheduled rents per unit and percentage of
units occupied as of September 30, 1996:
<TABLE>
<CAPTION>
AVERAGE
UNIT AVERAGE
YEAR SIZE RENT
MULTIFAMILY PROPERTIES(1) LOCATION COMPLETED UNITS (SQ FT) PER UNIT OCCUPANCY
- -------------------------- ---------------- --------- ------ ------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Applewood................. Santa Ana, CA 1972 406 801 $697 96%
Park Place................ Santa Ana, CA 1990 196 799 644 95
Inn at Laguna Hills(2).... Laguna Hills, CA 1994 140 500 603 100
Daisy 5(3)(4)............. Covina, CA 1977 38 897 713 92
Daisy 7(3)(4)............. Diamond Bar, CA 1978 204 950 788 94
Daisy 12(3)(4)............ San Dimas, CA 1979 102 952 692 96
Daisy 16(3)(4)............ West Covina, CA 1981 250 986 721 92
Daisy 17(3)(4)............ San Dimas, CA 1981 156 962 706 90
Lariat(3)(4).............. San Dimas, CA 1981 30 970 757 100
Daisy 19(3)(4)............ Ontario, CA 1983 125 1,019 723 93
Daisy 20(3)(4)............ Ontario, CA 1982 155 1,000 661 93
Sunnyside I(2)(3)(4)...... San Dimas, CA 1984 164 495 518 90
Sunnyside II(2)(3)(4)..... Ontario, CA 1983 60 493 505 83
Sunnyside III(2)(3)(4).... Ontario, CA 1985 84 504 511 95
Fulton's Landing.......... Everett, WA 1988 248 745 510 97
Fulton's Crossing......... Everett, WA 1986 256 803 535 98
Lora Lakes................ Burien, WA 1987 234 907 615 99
Holly Ridge............... Burien, WA 1987 146 946 638 97
Hampton Bay............... Kent, WA 1987 304 884 629 97
Heatherwood(3)............ Federal Way, WA 1985 368 741 535 97
Waterhouse................ Beaverton, OR 1990 279 937 664 91
----- ---
Sub-Total or Weighted
Average For Multifamily
Properties(1)........... 3,945 95%
----- ---
</TABLE>
<TABLE>
<CAPTION>
MULTIFAMILY PROPERTIES
UNDER DEVELOPMENT
- --------------------------
<S> <C> <C> <C> <C> <C> <C>
Rancho Santa Margarita Rancho Santa N/A 166 600 N/A N/A
Senior Community........ Margarita, CA
</TABLE>
- ---------------
(1) Excludes Raintree Apartments, a 165 unit apartment project acquired
subsequent to September 30, 1996, which, as of November 30, 1996, was 90%
occupied.
(2) Properties serving active senior tenants (individuals ages 55 and older).
(3) Under rehabilitation.
(4) Owned by PGP Inland Communities, L.P., a limited partnership in which the
Company has a minimum 78% equity interest, full management and control, and
the right to 100% of cash flow until certain net operating income levels are
achieved.
S-16
<PAGE> 17
FEDERAL INCOME TAX CONSIDERATIONS
The following summary of the material federal income tax considerations
regarding the Offering is based on current law, is for general information only
and is not tax advice. This discussion does not purport to deal with all aspects
of taxation that may be relevant to particular shareholders in light of their
personal investment or tax circumstances, or to certain types of shareholders
including insurance companies, tax-exempt organizations or retirement accounts
(except to the extent discussed under the heading " -- Taxation of Tax-Exempt
Shareholders"), financial institutions or brokerdealers, foreign corporations
and persons who are not citizens or residents of the United States (except to
the extent discussed under the heading " -- Taxation of Non-U.S. Shareholders"),
which are subject to special treatment under the federal income, estate and
other tax laws.
EACH PROSPECTIVE PURCHASER OF COMMON SHARES IS URGED TO CONSULT WITH ITS
TAX ADVISOR TO DETERMINE THE IMPACT OF SUCH PROSPECTIVE PURCHASER'S PERSONAL TAX
SITUATION ON THE ANTICIPATED TAX CONSEQUENCES OF THE PURCHASE, OWNERSHIP AND
SALE OF COMMON SHARES 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 has made an election to be taxed as a REIT under
Sections 856 through 860 of the Code, commencing with its taxable year ended
December 31, 1994. The Company believes that it has been organized and has
operated in such a manner as to qualify for taxation as a REIT under the Code,
and the Company intends to continue to operate in such a manner, but no
assurance can be given that it has operated or will operate in a manner so as to
qualify or remain qualified.
The sections of the Code and Treasury Regulations governing REITs are
highly technical and complex. The following sets forth the material aspects of
the sections that govern the federal income tax treatment of a REIT and its
shareholders. This summary is qualified in its entirety by the applicable Code
provisions, Treasury Regulations and rules promulgated thereunder, and
administrative and judicial interpretations thereof.
In the opinion of Gibson, Dunn & Crutcher LLP, special tax counsel to the
Company, commencing with the Company's taxable year ended December 31, 1994, the
Company was organized in conformity with the requirements for qualification as a
REIT, and its method of operation has enabled, and its proposed method of
operation will enable, it to meet the requirements under the Code for
qualification and taxation as a REIT. It must be emphasized that this opinion is
based on various assumptions and is conditioned upon the accuracy of certain
representations made by the Company as to factual matters relating to the
Company's organization, operations, income, assets, distributions and stock
ownership. The Company's qualification as a REIT depends on the Company having
met and continuing to meet -- through actual operating results, distribution
levels and diversity of stock ownership -- the various qualification tests
imposed under the Code and discussed below, the results of which will not be
reviewed by Gibson, Dunn & Crutcher LLP. Accordingly, no assurance can be given
that the actual results of the Company's operations for any particular taxable
year have satisfied or will satisfy such requirements. An opinion of counsel is
not binding on the IRS or the courts, and no assurance can be given that the IRS
will not challenge the Company's eligibility for taxation as a REIT. Further,
the anticipated federal income tax treatment described in this Prospectus
Supplement may be changed, perhaps retroactively, by legislative, administrative
or judicial action at any time. See " -- Failure to Qualify."
If the Company qualifies for taxation as a REIT, it generally will not be
subject to federal corporate income taxes on its net income that is currently
distributed to shareholders. This treatment substantially eliminates the "double
taxation" (at the corporate and shareholder levels) of income that generally
results from an investment in a regular corporation. However, the Company will
be subject to federal income tax as follows: First, the Company will be taxed at
regular corporate rates on any undistributed "REIT taxable income" (as defined
below), including undistributed net capital gains. Second, under certain
circumstances
S-17
<PAGE> 18
the Company may be subject to the "alternative minimum tax" as a consequence of
its items of tax preference to the extent that tax exceeds its regular tax.
Third, if the Company has (i) net income from the sale or other disposition of
"foreclosure property" (generally, property acquired by reason of default on
indebtedness held by the Company) that is held primarily for sale to customers
in the ordinary course of business or (ii) other nonqualifying income from
foreclosure property, it will be subject to tax at the highest corporate rate on
such income. Fourth, if the Company has net income from prohibited transactions
(which are, in general, certain sales or other dispositions of property held
primarily for sale to customers in the ordinary course of business, other than
foreclosure property), such income will be subject to a 100% tax. Fifth, if the
Company should fail to satisfy the 75% gross income test or the 95% gross income
test (as discussed below), but has nonetheless maintained its qualification as a
REIT because certain other requirements have been met, it will be subject to a
100% tax on an amount equal to (a) the greater of the amount by which the
Company fails the 75% or 95% test, multiplied by (b) a fraction intended to
reflect the Company's profitability. Sixth, if the Company should fail to
distribute during each calendar year at least the sum (i) 85% of its REIT
ordinary income for such year, (ii) 95% of its REIT capital gain net income for
such year, and (iii) any undistributed taxable income from prior periods, the
Company would be subject to a 4% excise tax on the excess of such required
distribution over the amounts actually distributed. Seventh, with respect to any
asset (a "Built-in Gain Asset") acquired by the Company from a corporation which
is or has been a C corporation (i.e., generally a corporation subject to full
corporate-level tax) in certain transactions in which the basis of the Built-in
Gain Asset in the hands of the Company is determined by reference to the basis
of the asset in the hands of the C corporation, if the Company recognizes gain
on the disposition of such asset during the 10-year period (the "Recognition
Period") beginning on the date on which such asset was acquired by the Company,
then, to the extent of the Built-in Gain (i.e., the excess of (a) the fair
market value of such asset over (b) the Company's adjusted basis in such asset,
determined as of the beginning of the Recognition Period), such gain will be
subject to tax at the highest regular corporate rate pursuant to IRS regulations
that have not yet been promulgated.
Requirements for Qualification. The Code defines a REIT as a corporation,
trust or association (i) that is managed by one or more trustees or directors;
(ii) the beneficial ownership of which is evidenced by transferable shares, or
by transferable certificates of beneficial interest; (iii) that would be taxable
as a domestic corporation but for Sections 856 through 859 of the Code; (iv)
that is neither a financial institution nor an insurance company subject to
certain provisions of the Code; (v) the beneficial ownership of which is held by
100 or more persons; (vi) in which during the last half of each taxable year not
more than 50% in value of its outstanding stock is owned, actually or
constructively, by five or fewer individuals (as defined in the Code to include
certain entities); and (vii) which meets certain other tests, described below,
regarding the nature of its income and assets. The Code provides that conditions
(i) to (iv), inclusive, must be met during the entire taxable year and that
condition (v) must be met during at least 335 days of a taxable year of 12
months, or during a proportionate part of a taxable year of less than 12 months.
The Company believes that it has issued sufficient shares to allow it to
satisfy conditions (v) and (vi). In addition, the Company's Charter provides for
restrictions regarding the transfer and ownership of shares, which restrictions
are intended to assist the Company in continuing to satisfy the share ownership
requirements described in (v) and (vi) above. Such transfer and ownership
restrictions are described in the accompanying Prospectus. These restrictions
may not ensure that the Company will, in all cases, be able to satisfy the share
ownership requirements described above. If the Company fails to satisfy such
share ownership requirements, the Company's status as a REIT will terminate. See
"Failure to Qualify."
To monitor the Company's compliance with the share ownership requirements,
the Company is required to maintain records regarding the actual ownership of
its shares. To do so, the Company must demand written statements each year from
the record holders of certain percentages of its shares of stock in which the
record holders are to disclose the actual owners of the shares (i.e., the
persons required to include in gross income the REIT dividends). A REIT with
2,000 or more record shareholders must demand statements from record holders of
5% or more of its shares, one with less than 2,000, but more than 200 record
shareholders must demand statements from record holders of 1% or more of the
shares, while a REIT with 200 or fewer record shareholders must demand
statements from record holders of 0.5% or more of the shares. A list of those
persons failing or refusing to comply with this demand must be maintained as
part of the Company's records.
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A shareholder who fails or refuses to comply with the demand must submit a
statement with its tax return disclosing the actual ownership of the shares and
certain other information.
In the case of a REIT which is a partner in a partnership, Treasury
Regulations provide that the REIT will be deemed to own its proportionate share
of the assets of the partnership and will be deemed to be entitled to the income
of the partnership attributable to such share. In addition, the character of the
assets and gross income of the partnership shall retain the same character in
the hands of the REIT for purposes of Section 856 of the Code, including
satisfying the gross income tests and the assets tests, discussed below. Thus,
the Company's proportionate share of the assets, liabilities and items of income
of PGP Inland Communities, L.P., the Company's subsidiary operating partnership
and Pacific Inland Communities, LLC, the entity used to effect certain
tax-exempt financing of the Company (collectively, the "Partnerships"), are
treated as assets, liabilities and items of income of the Company for purposes
of applying the requirements described herein. The Company controls the
Partnerships and believes it has operated the Partnerships in a manner
consistent with the requirements for qualification as a REIT, and intends to
continue to operate the Partnerships in such a manner. However, there can be no
assurance that the Company has operated or will actually operate the
Partnerships in a manner that has enabled or will enable the Company to continue
to satisfy the REIT provisions of the Code.
Income Tests. In order to maintain qualification as a REIT, the Company
annually must satisfy three gross income requirements. First, at least 75% of
the Company's gross income (excluding gross income from certain sales of real
property held primarily for sale) for each taxable year must be derived directly
or indirectly from investments relating to real property or mortgages on real
property (including "rents from real property" and, in certain circumstances,
interest) or from certain types of temporary investments. Second, at least 95%
of the Company's gross income (excluding gross income from certain sales of real
property held primarily for sale) for each taxable year must be derived from
items of income that qualify under the 75% test, dividends, interest and gain
from the sale or disposition of stock or securities (or from any combination of
the foregoing). Third, gain from the sale or other disposition of stock or
securities held for less than one year, gain from certain sales of real property
held primarily for sale and gain from the sale or other disposition of real
property held for less than four years (apart from involuntary conversions and
sales of foreclosure property) must represent less than 30% of the Company's
gross income for each taxable year.
Rents received by the Company qualify as "rents from real property" in
satisfying the gross income requirements for a REIT described above only if
several conditions are met. First, the amount of rent must not be based in whole
or in part on the income or profits of any person. However, an amount received
or accrued generally will not be excluded from the term "rents from real
property" solely by reason of being based on a fixed percentage or percentages
of receipts or sales. Second, rents received from a tenant will not qualify as
"rents from real property" in satisfying the gross income test if the Company,
or an owner of 10% or more of the Company, actually or constructively owns 10%
or more of such tenant (a "Related Party Tenant"). Third, if rent attributable
to personal property, leased in connection with a lease of real property, is
greater than 15% of the total rent received under the lease, then the portion of
rent attributable to such personal property will not qualify as "rents from real
property." 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 the tenants of such property, other than through an
independent contractor from whom the Company derives no revenue, provided,
however, the Company may directly perform certain services that are "usually or
customarily rendered" in connection with the rental of space for occupancy only
and not otherwise considered "rendered to the occupant" of the property. The
Company regularly monitors its activities to ensure that the foregoing tests are
satisfied. There can be no assurances, however, that the Company will not
realize income from Related Party Tenants that does not qualify as "rents from
real property," including as a result of the constructive ownership of an
interest in a tenant by Five Arrows. See "Recent Developments -- Equity
Financing Activities."
The Company receives fees in exchange for management services rendered to
the Partnerships. Although the percentage of those fees exceeding the Company's
capital interest in the Partnership paying such fee will not qualify under the
75% or 95% gross income tests, the aggregate amount of such income (together
with any other nonqualifying income) in any taxable year has not exceeded and is
not expected to exceed the limits on nonqualifying income under the gross income
tests.
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If the Company fails to satisfy one or both of the 75% or 95% gross income
tests for any taxable year, it may nevertheless qualify as a REIT for such year
if it is entitled to relief under certain provisions of the Code. These relief
provisions generally will be available if (i) the Company's failure to meet such
tests was due to reasonable cause and not due to willful neglect, (ii) the
Company attaches to its return for that year a schedule of the nature and amount
of each item of its income and (iii) any incorrect information on the schedule
was not due to fraud with intent to evade tax. However, in the event the Company
does not meet these tests, the Company would not be entitled to the benefit of
these relief provisions. If these relief provisions are inapplicable to a
particular set of circumstances involving the Company, the Company will not
qualify as a REIT. As discussed above in " -- General," even if these relief
provisions apply, a tax would be imposed with respect to the excess
nonqualifying income. There are no comparable relief provisions which could
mitigate the consequences of a failure to satisfy the 30% gross income test.
Asset Tests. The Company, at the close of each quarter of its taxable year,
must also satisfy three tests relating to the nature of its assets. First, at
least 75% of the value of the Company's total assets must be represented by real
estate assets, stock or debt instruments held for not more than one year
purchased with the proceeds of a stock offering or long-term (at least five
years) debt offering of the Company, cash, cash items and government securities.
Second, not more than 25% of Company's total assets may be represented by
securities other than those included in the 75% asset test. Third, of the
investments included in the 25% asset class, the value of any one issuer's
securities owned by the Company may not exceed 5% of the value of the Company's
total assets and the Company may not own more than 10% of any one issuer's
outstanding voting securities. In applying these tests, the Company will be
deemed to own a proportionate share of any assets owned, directly or indirectly,
by the Partnerships based on its capital interest in the Partnerships.
The Company believes that it has complied and will continue to comply with
the asset tests. Substantially all of the Company's investments represent
qualifying real estate assets, including the Company's share of the assets of
the Partnerships.
Annual Distribution Requirements. The Company, in order to qualify as a
REIT, is required to distribute dividends (other than capital gain dividends) to
its shareholders in an amount at least equal to (i) the sum of (a) 95% of the
Company's "REIT taxable income" (computed without regard to the dividends paid
deduction and the Company's net capital gain) and (b) 95% of the net income
(after tax), if any, from foreclosure property, minus (ii) the sum of certain
items of noncash income. "REIT taxable income" for any year means the taxable
income of the Company for such year (excluding any net income derived either
from property held primarily for sale to customers or from foreclosure
property), subject to certain adjustments provided in the REIT provisions of the
Code. In addition, if the Company disposes of any Built-in Gain Asset during
such asset's Recognition Period, the Company will be required, pursuant to IRS
regulations which have not yet been promulgated, to distribute at least 95% of
the Built-in Gain (after tax), if any, recognized on the disposition of such
asset. 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. The Company intends to make, and to cause the
Partnerships to make, timely distributions sufficient to satisfy these annual
distribution requirements. 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 thereon at
regular capital gain and ordinary corporate tax rates.
It is possible that the Company, from time to time, may not have sufficient
cash or other liquid assets to meet the distribution requirements described
above due to timing differences between the actual receipt of income and actual
payment of deductible expenses and the inclusion of such income and deduction of
such expenses in arriving at taxable income of the Company, or if nondeductible
capital expenditures such as principal amortization or capital expenditures
exceed the amount of noncash deductions. In the event that such timing
differences occur, in order to meet the distribution requirements, the Company
may find it necessary to arrange, or to cause the Partnerships to arrange, for
short-term or long-term borrowing, to sell assets, or to pay dividends in the
form of taxable stock dividends.
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Under certain circumstances, the Company may be able to rectify a failure
to meet the above distribution requirements for a year by paying "deficiency
dividends" to shareholders in a later year, which may be included in the
Company's deduction for dividends paid for the earlier year. The Company will,
however, be required to pay interest based upon the amount of any deduction
taken for deficiency dividends.
Furthermore, if the Company should fail to distribute each calendar year at
least the sum of (i) 85% of its REIT ordinary income for such year, (ii) 95% of
its REIT capital gain income for such year and (iii) any undistributed taxable
income from prior periods, the Company will be subject to a 4% excise tax on the
excess of such required distribution over the amounts actually distributed. Any
REIT taxable income and capital gains on which tax is imposed for any year is
treated as an amount distributed during that year for purposes of this excise
tax.
FAILURE TO QUALIFY
If the Company should fail 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
rates applicable to regular C corporations. Distributions to shareholders in any
year in which the Company fails to qualify as a REIT will not be deductible by
the Company nor will they be required to be made. As a result, the Company's
failure to qualify as a REIT will reduce the cash available for distribution by
the Company to shareholders. In addition, if the Company fails to qualify as a
REIT, all distributions to shareholders will be taxable as ordinary income to
the extent of the Company's current and accumulated earnings and profits, 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 will also be disqualified from
taxation as a REIT for the four taxable years following the year during which
qualification was lost. It is not possible to state whether in all circumstances
the Company would be entitled to such statutory relief. In addition, a recent
federal budget proposal contains language which, if enacted, would result in the
immediate taxation of all gain inherent in a C corporation's assets upon an
election by the corporation to become a REIT, and thus would effectively
preclude the Company from re-electing REIT status following a termination of its
REIT qualification.
TAXATION OF TAXABLE DOMESTIC SHAREHOLDERS
As long as the Company qualifies as a REIT, distributions made to the
Company's taxable domestic shareholders out of current or accumulated earnings
and profits (and not designated as capital gain dividends) will be taken into
account by them as ordinary income and will not be eligible for the dividends
received deduction for corporations. Distributions that are properly designated
by the Company as capital gain dividends will be taxed as long-term capital gain
(to the extent they do not exceed the Company's actual net capital gain for the
taxable year) without regard to the period for which the shareholder has held
its shares. However, corporate shareholders may be required to treat up to 20%
of certain capital gain dividends as ordinary income. Distributions (not
designated as capital gain dividends) in excess of current and accumulated
earnings and profits will be treated as tax-free returns of capital to the
extent of the shareholder's basis in the shares, and will reduce the adjusted
basis of such shares (but not below zero). To the extent distributions in excess
of current and accumulated earnings and profits exceed the basis of a
shareholder's shares they will be included in income as long-term capital gain
(or short-term capital gain if the shares have been held for one year or less),
assuming the shares are a capital asset in the hands of the shareholder. In
addition, any dividend declared by the Company in October, November or December
of any year payable to a shareholder of record on a specified 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.
Upon any sale or other disposition of shares, a domestic shareholder will
recognize gain or loss for federal income tax purposes in an amount equal to the
difference between (i) the amount of cash and the fair market value of any
property received on such sale or other disposition and (ii) the holder's
adjusted basis in such shares for tax purposes. In general, provided the shares
were held as a capital asset, any gain or loss realized on
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a taxable disposition of shares will be treated as long-term capital gain or
loss if the shares have been held for more than 12 months and otherwise as
short-term capital gain or loss. However, any loss upon a sale or exchange of
shares by a shareholder who has held such shares for six months or less (after
applying certain holding period rules) will be treated as a long-term capital
loss to the extent of distributions from the Company required to be treated by
such shareholder as long-term capital gain.
INFORMATION REPORTING AND BACKUP WITHHOLDING
The Company reports to its domestic shareholders and the IRS the amount of
dividends paid with respect to each calendar year, and the amount of tax
withheld therefrom, if any. Under the backup withholding rules, a shareholder
may be subject to backup withholding at a rate of 31% with respect to dividends
paid unless such holder (i) is a corporation or comes within certain other
exempt categories and, when required, demonstrates this fact or (ii) provides a
taxpayer identification number, certifies as to no loss of exemption from backup
withholding, and otherwise complies with applicable requirements of the backup
withholding rules. A shareholder that does not provide the Company with its
correct taxpayer identification number may also be subject to penalties imposed
by the IRS. Any amount withheld under the backup withholding rules will be
creditable against the shareholder's income tax liability. In addition, the
Company may be required to withhold a portion of capital gain distributions made
to any shareholders who fail to certify to their nonforeign status to the
Company. See " -- Taxation of Non-U.S. Shareholders."
TAXATION OF TAX-EXEMPT SHAREHOLDERS
The IRS has ruled that amounts distributed as dividends by a REIT do not
constitute unrelated business taxable income ("UBTI") when received by a
tax-exempt entity. Based on that ruling, dividend income from the Company should
not, subject to certain exceptions described below, be UBTI to a qualified plan,
IRA or other tax-exempt entity (a "Tax-Exempt Shareholder") provided the
Tax-Exempt Shareholder has not held its shares as "debt financed property"
within the meaning of Section 514 of the Code and the shares are not otherwise
used in an unrelated trade or business of the Tax-Exempt Shareholder. Similarly,
income from the sale of Common Stock should not, subject to certain exceptions
described below, constitute UBTI unless the Tax-Exempt Shareholder has held such
Common Stock as a dealer (under Section 512(b)(5)(B) of the Code) or as
"debt-financed property."
For Tax-Exempt Shareholders that are social clubs, voluntary employee
benefit associations, supplemental unemployment benefit trusts, and qualified
group legal services plans exempt from federal income taxation under Sections
501(c)(7), (c)(9), (c)(17) and (c)(20) of the Code, respectively, income from an
investment in the Company will constitute UBTI unless the organization is able
to properly deduct amounts set aside or placed in reserve for certain purposes
so as to offset the income generated by its investment in the Company. Such
prospective investors should consult their tax advisors concerning these
"set-aside" and reserve requirements.
Notwithstanding the above, however, a portion of the dividends paid by the
Company may be treated as UBTI to certain trusts if the Company is treated as a
"pension held REIT." A trust will be subject to this rule if it (i) is described
in Section 401(a) of the Code, (ii) is tax-exempt under Section 501(a) of the
Code and (iii) holds more than 10% (by value) of the interests in the REIT.
Tax-exempt pension funds that are described in Section 401(a) of the Code are
referred to below as "qualified trusts."
The Company will be treated as a "pension held REIT" if (i) it would not
have qualified as a REIT but for the fact that Section 856(h)(3) of the Code
provides that stock owned by qualified trusts shall be treated, for purposes of
the "five or fewer" shareholder requirement (discussed above), as owned by the
beneficiaries of the trust (rather than by the trust itself) and (ii) either (a)
at least one such qualified trust holds more than 25% (by value) of the
interests in the Company or (b) one or more such qualified trusts, each of whom
owns more than 10% (by value) of the interests in the Company, hold in the
aggregate more than 50% (by value) of the interests in the Company. The Company
believes that it has not been, and is not, a "pension held REIT."
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TAXATION OF NON-U.S. SHAREHOLDERS
The rules governing United States federal income taxation of the ownership
and disposition of stock by persons that are, for purposes of such taxation,
nonresident alien individuals, foreign corporations, foreign partnerships or
foreign estates or trusts (collectively, "Non-U.S. Shareholders") are complex,
and no attempt is made herein to provide more than a brief summary of such
rules. Accordingly, the discussion does not address all aspects of United States
federal income tax law and does not address state, local or foreign tax
consequences that may be relevant to a Non-U.S. Shareholder in light of its
particular circumstances. In addition, this discussion is based on current law,
which is subject to change, and assumes that the Company qualifies for taxation
as a REIT. Prospective Non-U.S. Shareholders should consult with their own tax
advisors to determine the impact of federal, state, local and foreign income and
other tax laws with regard to an investment in Common Stock, including any
reporting requirements.
Distributions. Distributions by the Company to a Non-U.S. Shareholder that
are neither attributable to gain from sales or exchanges by the Company of
United States real property interests nor designated by the Company as capital
gains dividends will be treated as dividends of ordinary income to the extent
that they are made out of current or accumulated earnings and profits of the
Company. Such distributions generally will be subject to withholding of United
States federal income tax at a 30% rate on the total amount distributed unless
an applicable income tax treaty reduces or eliminates that tax. However,
dividends that are "effectively connected" with the conduct of a trade or
business by the Non-U.S. Shareholder will be subject to tax on a net basis at
graduated rates, in the same manner as domestic shareholders are taxed with
respect to such dividends, and are generally not subject to withholding. Any
such "effectively connected" dividends received by a Non-U.S. Shareholder that
is a corporation may also be subject to an additional branch profits tax at a
30% rate or such lower rate as may be specified by an applicable income tax
treaty.
Pursuant to current Treasury Regulations, dividends paid to an address in a
country outside the United States are generally presumed to be paid to a
resident of such country for purposes of ascertaining the requirement of
withholding discussed above and the applicability of a tax treaty rate. Under
proposed Treasury Regulations not currently in effect, however, a Non-U.S.
Shareholder who seeks to claim the benefit of an applicable treaty rate would be
required to satisfy certain certification and other requirements. Under certain
treaties, lower withholding rates generally applicable to dividends do not apply
to dividends from a REIT, such as the Company. A Non-U.S. Shareholder must file
a properly completed and executed IRS Form 4224 (or, under proposed regulations
not currently in effect, IRS Form W-8) with the Company's withholding agent
certifying that the investment to which the distribution relates is effectively
connected with the conduct of a United States trade or business of such Non-U.S.
Shareholder in order to qualify for the exemption from withholding under the
effectively connected income exemption discussed above.
If the Company is a "domestically controlled REIT" (as described below),
distributions that are neither attributable to gain from sales or exchanges by
the Company of United States real property interests nor designated by the
Company as capital gains dividends and that are in excess of current or
accumulated earnings and profits of the Company will not be taxable to a
Non-U.S. Shareholder to the extent that they do not exceed the adjusted basis of
the shareholder's Common Stock, but rather will reduce the adjusted basis of
such Common Stock. To the extent such distributions in excess of the Company's
current and accumulated earnings and profits exceed the adjusted basis of a
Non-U.S. Shareholder's Common Stock, they will give rise to gain from the sale
or exchange of the Common Stock, the tax treatment of which is described below.
Under current Treasury Regulations, if it cannot be determined at the time a
distribution is made whether or not such distribution will be in excess of
current or accumulated earnings and profits, the entire distribution will
generally be treated as a dividend subject to withholding. However, amounts thus
withheld are generally refundable if it is subsequently determined that such
distribution was, in fact, in excess of current or accumulated earnings and
profits of the Company. Under proposed regulations not currently in effect, the
Company may, at its option, make a reasonable estimate of the portion of a
distribution that is out of current or accumulated earnings and profits and
withhold only with respect to such portion, although any such determination
would not affect the Non-U.S. Shareholder's liability for the 30% tax on the
amount ultimately determined to have been distributed out of the Company's
current or accumulated earnings and profits.
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Distributions to a Non-U.S. Shareholder that are attributable to gain from
sales or exchanges by the Company of United States real property interests will
be treated as income that is effectively connected with a United States trade or
business of the Non-U.S. Shareholder. Non-U.S. Shareholders would thus generally
be taxed on such distributions at the same rates applicable to domestic
shareholders (subject to a special alternative minimum tax in the case of
nonresident alien individuals). Also, such gain may be subject to a 30% branch
profits tax in the hands of a corporate Non-U.S. Shareholder that is not
entitled to a treaty exemption or rate reduction. The Company is required to
withhold 35% of any such distribution, and the withheld amount is creditable
against the Non-U.S. Shareholder's United States federal income tax liability.
Sale of Common Stock. Gain recognized by a Non-U.S. Shareholder upon a sale
or other disposition of Common Stock generally will not be subject to United
States federal income tax unless (i) the Company is not a "domestically
controlled REIT," or (ii) the investment in the Common Stock is effectively
connected with the Non-U.S. Shareholder's United States trade or business or
(iii) in the case of a Non-U.S. Shareholder who is a nonresident alien
individual, the individual is present in the United States for 183 days or more
during the taxable year and either has a "tax home" in the United States or sold
his shares under circumstances where the sale is attributable to a U.S. office.
A domestically controlled REIT is defined generally as a REIT in which at all
times during a specified testing period less than 50% in value of the stock was
held directly or indirectly by foreign persons. The Company currently believes
that it is a domestically controlled REIT. However, because the Common Stock
will be publicly traded, no assurance can be given that the Company is or will
continue to be a domestically-controlled REIT. In the circumstances described
above in clauses (i) and (ii), the Non-U.S. Shareholders will generally be
subject to the same treatment as domestic shareholders with respect to such gain
(subject to a special alternative minimum tax in the case of nonresident alien
individuals in the circumstances described above in clause (i) and, in the case
of foreign corporations, subject to the possible application of the 30% branch
profits tax, discussed above). In the circumstances described above in clause
(iii), the nonresident alien individual will be subject to a 30% tax on the
individual's capital gain.
Estate Tax. Common Stock owned or treated as owned by an individual who is
not a citizen or resident (as specially defined for United States federal estate
tax purposes) of the United States at the time of death will be includable in
the individual's gross estate for United States federal estate tax purposes,
unless an applicable estate tax treaty provides otherwise. Such individual's
estate may be subject to United States federal estate tax on the property
includable in the estate for United States federal estate tax purposes.
Information Reporting and Backup Withholding. The Company must report
annually to the IRS and to each Non-U.S. Shareholder the amount of distributions
subject to withholding as described above and the tax withheld with respect to
such distributions, regardless of whether withholding is actually required.
Copies of the information returns reporting such distributions and withholding
may also be made available to the tax authorities in the country in which the
Non-U.S. Shareholder resides under the provisions of an applicable income tax
treaty. Additional issues may arise pertaining to information reporting and
backup withholding for Non-U.S. Shareholders. Non-U.S. Shareholders should
consult their tax advisors with regard to U.S. information reporting and backup
withholding.
OTHER TAX CONSEQUENCES
The Company and its shareholders may be subject to state or local taxation
in various state or local jurisdictions, including those in which it or they
transact business or reside. The state and local tax treatment of the Company
and its shareholders may not conform to the federal income tax 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 Company.
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UNDERWRITING
Prudential Securities Incorporated ("Prudential Securities" or the
"Underwriter") has agreed, subject to the terms and conditions contained in the
Underwriting Agreement, to purchase from the Company the shares of Common Stock
offered hereby. The Company is obligated to sell, and the Underwriter is
obligated to purchase, all of the shares of Common Stock offered hereby if any
are purchased.
The Underwriter has advised the Company that it proposes to offer the
shares of Common Stock initially at the public offering price set forth on the
cover page of this Prospectus Supplement, that the Underwriter may allow to
selected dealers a concession of $0.54 per share and that such dealers may
reallow a concession of $0.10 per share to certain other dealers. After the
initial public offering, the offering price and concessions may be changed by
the Underwriter.
The Company has granted to the Underwriter an option, exercisable for 30
days after the date of this Prospectus Supplement, to purchase up to 300,000
additional shares of Common Stock at the initial public offering price, less the
underwriting discounts and commissions, as set forth on the cover page of this
Prospectus Supplement. The Underwriter may exercise such option solely for the
purpose of covering over-allotments incurred in the sale of the shares of Common
Stock offered hereby. To the extent such option to purchase is exercised, the
Underwriter will become obligated, subject to certain conditions, to purchase
such additional shares.
The Company has agreed to indemnify the Underwriter or to contribute to
losses arising out of certain liabilities, including liabilities under the
Securities Act.
The Company and its directors and executive officers have agreed that they
will not, directly or indirectly, offer, sell, offer to sell, contract to sell,
pledge, grant any option to purchase or otherwise sell or dispose (or announce
any offer, sale, offer of sale, contract of sale, pledge, grant of any option to
purchase or other sale or disposition) of any shares of Common Stock or other
capital stock of the Company, or any securities convertible into, or
exchangeable or exercisable for, any shares of Common Stock or other capital
stock of the Company for a period of 90 days from the date of this Prospectus
Supplement, without the prior written consent of the Underwriter.
LEGAL MATTERS
Certain legal matters will be passed upon for the Company by Gibson, Dunn &
Crutcher LLP, Los Angeles, California and Piper & Marbury L.L.P., Baltimore,
Maryland. Certain legal matters will be passed upon for the Underwriters by
Skadden, Arps, Slate, Meagher & Flom LLP, Los Angeles, California.
EXPERTS
The financial statements for Pacific Gulf Properties Inc. and the
Predecessor Multifamily and Industrial Operations included in the Company's
Annual Report on Form 10-K/A for the year ended December 31, 1995 and
incorporated by reference in the accompanying Prospectus have been audited by
Ernst & Young LLP, independent auditors, as stated in their report appearing
therein and has been so included in reliance upon the report given upon their
authority as experts in accounting and auditing.
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This filing is made pursuant
to Rule 424(b)(5) under
the Securities Act of
1933 in connection with
Registration Nos. 333-02798
333-18847
PROSPECTUS [LOGO]
PACIFIC GULF PROPERTIES INC.
$61,727,001
COMMON STOCK AND PREFERRED STOCK OF THE COMPANY
------------------------
Pacific Gulf Properties Inc. (the "Company") may from time to time offer
and sell shares of its common stock, par value $.01 per share (the "Common
Stock"), and shares of its preferred stock, par value $.01 per share (the
"Preferred Stock," and together with the Common Stock, the "Offered
Securities"), with an aggregate public offering price not to exceed $61,727,001
in Offered Securities. The Offered Securities may be offered separately or
together, in separate series, in amounts and at prices and terms to be set forth
in one or more supplements to this Prospectus (each a "Prospectus Supplement").
The terms of the Preferred Stock, including the specific designation and
stated value per share, any dividend, liquidation, redemption, conversion,
voting and other rights, preferences, privileges and restrictions of the
Preferred Stock will be set forth in the applicable Prospectus Supplement. In
addition, such specific terms may include limitations on direct or beneficial
ownership and restrictions on transfer of the Offered Securities, in each case
as may be appropriate to preserve the status of the Company as a real estate
investment trust ("REIT") for Federal income tax purposes. The specific number
of shares of Common Stock and issuance price per share will be set forth in the
applicable Prospectus Supplement.
The applicable Prospectus Supplement will also contain information about
all material Federal income tax considerations relating to, and any listing on a
securities exchange of, the Offered Securities covered by such Prospectus
Supplement.
The Company may sell all or a portion of any offering of its securities
directly, through agents designated from time to time, or to or through
underwriters or dealers. If any agents or underwriters are involved in the sale
of any of the Offered Securities, their names, and any applicable purchase
price, fee, commission or discount arrangement between or among them, will be
set forth, or will be calculable from the information set forth, in the
applicable Prospectus Supplement. No Offered Securities may be sold without
delivery of the applicable Prospectus Supplement describing the method and terms
of the offering of such Offered Securities.
SEE "RISK FACTORS" BEGINNING AT PAGE 5 OF THIS PROSPECTUS FOR CERTAIN RISK
FACTORS RELEVANT TO AN INVESTMENT IN THE COMMON STOCK OR THE PREFERRED STOCK.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE 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 JANUARY 14, 1997
<PAGE> 27
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (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 Offered Securities.
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 content of any contract or other document are not
necessarily complete, and in each instance reference is made to the copy of the
contract or other document filed as an exhibit to the Registration Statement,
each statement being qualified in all respects by that reference and the
exhibits to the Registration Statement. For further information regarding the
Company and the Offered Securities, reference is hereby made to the Registration
Statement, the exhibits to the Registration Statement, and the documents
incorporated by reference into the Registration Statement, which may be obtained
from the Commission at its principal office in Washington, D.C., upon payment of
fees prescribed by the Commission.
The Company is subject to the information requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy and information statements and other information
with the Commission. These reports, proxy and information statements, and other
information can be inspected and copied at the public reference facilities
maintained by the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549,
and at the regional offices of the Commission located at 13th Floor, 7 World
Trade Center, New York, New York 10048, and at 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 at Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549 at prescribed rates. Electronic filings
made through the Electronic Data Gathering, Analysis and Retrieval System are
publicly available through the Commission's web site (http://www.sec.gov.) The
Common Stock is traded on the New York Stock Exchange, Inc. ("NYSE"). The
reports, proxy and information statements and other information can also be
inspected at the offices NYSE, 20 Broad Street, New York, New York 10005.
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<PAGE> 28
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
There are incorporated herein by reference the following documents
heretofore filed by the Company under the Exchange Act with the Commission.
<TABLE>
<S> <C>
(a) The Company's Current Report on Form 8-K, dated August 30, 1995;
(b) The Company's Current Report on Form 8-K/A, dated October 27, 1995;
(c) The Company's Current Report on Form 8-K/A, dated May 7, 1996, amending the
Company's Current Report on Form 8-K/A, dated October 27, 1995;
(d) The Company's Current Report on Form 8-K/A, dated May 20, 1996, amending the
Company's Current Report on Form 8-K/A, dated May 7, 1996, amending the Company's
Current Report on Form 8-K/A, dated October 27, 1995;
(e) The Company's Current Report on Form 8-K, dated November 28, 1995;
(f) The Company's Current Report on Form 8-K/A, dated May 7, 1996, amending the
Company's Current Report on Form 8-K, dated November 28, 1995;
(g) The Company's Annual Report on Form 10-K, dated March 21, 1996;
(h) The Company's Annual Report on Form 10-K/A for the fiscal year ended December 31,
1995, dated May 7, 1996, amending the Company's Annual Report on Form 10-K, dated
March 21, 1996;
(i) The Company's Annual Report on Form 10-K/A for the fiscal year December 31, 1995,
dated May 20, 1996, amending the Company's Annual Report on Form 10-K/A, dated May
7, 1996.
(j) The Company's Quarterly Report on Form 10-Q, dated May 1, 1996;
(k) The Company's Quarterly Report on Form 10-Q/A for the quarter ended March 31, 1996,
dated May 7, 1996, amending the Company's Quarterly Report on Form 10-Q, dated May
1, 1996;
(l) The Company's Current Report on Form 8-K, dated May 7, 1996;
(m) The Company's Current Report on Form 8-K/A, dated May 20, 1996, amending the
Company's Current Report on Form 8-K, dated May 7, 1996;
(n) The Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996;
(o) The Company's Quarterly Report on Form 10-Q for the quarter ended September 30,
1996;
(p) The Company's Current Report on Form 8-K, dated November 4, 1996;
(q) The Company's Current Report on Form 8-K, filed January 14, 1997; and
(r) The description of the Company's Common Stock and 8.375% Convertible Subordinated
Debentures Due 2001 contained in its Registration Statement on Form 8-A/A filed with
the Commission, on January 25, 1994 (file no. 1-12546).
</TABLE>
All documents filed by the Company pursuant to Sections 13(a), 13(c), 14 or
15(d) of the Exchange Act subsequent to the date of this Prospectus and prior to
the termination of the offering made hereby shall be deemed to be incorporated
by reference into this Prospectus, and to be a part hereof from the date of
filing such documents. Any statement contained in a document incorporated or
deemed to be incorporated by reference herein shall be deemed to be modified or
superseded for purposes of the Registration Statement, this Prospectus, and any
applicable Prospectus Supplement to the extent that a statement contained in the
Registration Statement, this Prospectus, any applicable Prospectus or any other
subsequently filed document that is also incorporated by reference herein
modifies or supersedes that statement. Any statement so modified or superseded
shall not be deemed, except as so modified or superseded, to constitute a part
of this Prospectus.
The Company hereby undertakes to provide without charge to each person,
including any beneficial owner, to whom a Prospectus and accompanying Prospectus
Supplement is delivered, upon written or oral request of that person, a copy of
any document incorporated herein by reference (other than exhibits to those
documents unless the exhibits are specifically incorporated by reference into
the documents that this Prospectus incorporates by reference). Written or oral
requests should be directed to Shareholder Relations, Pacific Gulf Properties
Inc., 363 San Miguel Drive, Newport Beach, California 92660; telephone (714)
721-2700.
3
<PAGE> 29
THE COMPANY
Pacific Gulf Properties Inc., a self-administered and self-managed equity
REIT, owns, operates, manages, leases, acquires and rehabilitates multifamily
and industrial properties. At September 30, 1996, the Company owned a portfolio
of 21 multifamily properties, containing 3,945 units, and 21 industrial
properties, containing 4,713,992 leasable square feet.
The Company focuses on properties located in California and the Pacific
Northwest, with the largest concentration in Southern California. Management has
extensive experience in these markets, and believes that these markets present
potential for long-term economic growth because of their proximity to Pacific
Rim and NAFTA trading partners, access to ports and other facilities,
anticipated growth in population and employment, and desirable climate and
recreational environment.
Management believes that focusing on two property types allows the Company
greater opportunities and flexibility than would be available by investing only
in one property type. Multifamily and industrial property values move
differently within real estate cycles. Apartments have shorter leases than
industrial properties and, hence, apartment rental income reacts more quickly to
changes in economic conditions. Lease income on industrial properties lags
changes in the real estate market due to longer term leases on such properties.
The values of these properties and the potential they present for growth are
affected by the timing of these rental adjustments.
The Company's objective is to increase shareholder value by continuing to
grow its Funds from Operations by improving net operating income of existing
properties and through acquisitions. Management closely monitors rental
operations and administrative expenses, utilizes new technologies, periodically
conducts contract reviews, and seeks opportunities to maximize economies of
scale in order to control costs, reduce tenant turnover and assure that the
Company is competitive in all aspects of its operations. The Company also seeks
to increase shareholder value through the acquisition of properties that provide
attractive initial returns and opportunities to increase Funds from Operations.
Additionally, the Company seeks well-located properties in strong markets where
values have suffered due to poor management or maintenance and that can be
acquired at less than replacement cost.
The Company's Common Stock is listed on the New York Stock Exchange under
the symbol "PAG." The Company's executive offices are located at 363 San Miguel
Drive, Newport Beach, California, 92660. The telephone number is (714) 721-2700.
The Company was incorporated in Maryland in August of 1993.
4
<PAGE> 30
RISK FACTORS
An investment in the Common Stock offered hereby involves a high degree of
risk. Prospective investors should consider carefully the following factors, in
addition to other information contained in this Prospectus in connection with an
investment in the Common Stock offered hereby.
This Prospectus and the accompanying Prospectus Supplement include certain
statements that may be deemed to be "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933, as amended (the
"Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as
amended. All statements, other than statements of historical facts, included in
this Prospectus that address activities, events or developments that the Company
expects, believes or anticipates will or may occur in the future, including such
matters as future capital expenditures, dividends and acquisitions (including
the amount and nature thereof), the use of proceeds of this Offering, expansion
and other development trends of the real estate industry, business strategies,
expansion and growth of the Company's operations and other such matters are
forward-looking statements. These statements are based on certain assumptions
and analyses made by the Company in light of its experience and its perception
of historical trends, current conditions, expected future developments and other
factors it believes are appropriate. Such statements are subject to a number of
assumptions, risks and uncertainties, including the risk factors discussed
below, general economic and business conditions, the business opportunities that
may be presented to and pursued by the Company, changes in laws or regulations
and other factors, many of which are beyond the control of the Company.
Prospective investors are cautioned that any such statements are not guarantees
of future performance and that actual results or developments may differ
materially from those anticipated in the forward-looking statements.
DEBT FINANCING; RISK OF RISING INTEREST RATES
The Company is subject to the risks normally associated with debt
financing, including the risk that the Company's cash flow will be insufficient
to meet required payments of principal and interest, that the Company will not
be able to refinance existing indebtedness on its properties, or that the terms
of such refinancing will not be as favorable as the terms of existing
indebtedness. As of December 31, 1995, the Company had outstanding approximately
$150 million of indebtedness secured by certain of its properties.
If prevailing interest rates or other factors at the time of refinancing
result in higher interest rates on refinancing, the Company's interest expense
would increase, which would adversely affect the Company's cash provided by
operating activities and its ability to make distributions or payments to
holders of its securities. In addition, in the event the Company were unable to
secure refinancing of such indebtedness on acceptable terms, the Company might
be forced to dispose of properties upon disadvantageous terms, which might
result in losses to the Company and might adversely affect the Company's funds
from operations. In addition, if a property or properties are mortgaged to
secure payment of indebtedness and the Company is unable to meet mortgage
payments, the property could be foreclosed upon by or otherwise transferred to
the mortgagee with a consequent loss of income and asset value to the Company.
As of September 30, 1996, certain of the Company's properties were subject
to variable rate mortgage indebtedness. At that date, the weighted average
interest rate on such outstanding indebtedness was 7.26%. An increase in
interest rates will have an adverse effect on the Company's net income and
results of operations.
RISKS OF ACQUISITION AND DEVELOPMENT ACTIVITIES
The Company intends to actively continue to acquire industrial and
multifamily residential properties. Acquisitions of such properties entail risks
that investments will fail to perform in accordance with expectations. Estimates
of the costs of improvements to bring an acquired property up to standards
established for the market position intended for that property may prove
inaccurate. In addition, there are general real estate investment risks
associated with any new real estate investment.
The Company may also pursue industrial and multi-family residential
property development projects, although it has not heretofore done so. Such
projects generally require various governmental and other approvals, the receipt
of which cannot be assured. Such development activities will entail certain
risks,
5
<PAGE> 31
including the expenditure of funds on and devotion of management's time to
projects which may not come to fruition; the risk that construction costs of a
project may exceed original estimates, possibly making the project not
economical; the risk that occupancy rates and rents at a completed project will
be less than anticipated; and the risk that expenses at a completed development
will be higher than anticipated. These risks may result in a development project
causing a reduction in funds from operations or the funds available for
distribution.
GENERAL REAL ESTATE INVESTMENT RISKS
Real property investments are subject to a variety of risks. The yields
available from equity investments in real estate depend on the amount of income
generated and expenses incurred. If the Company's properties do not generate
sufficient income to meet operating expenses, including debt service and capital
expenditures, the Company's cash flow and ability to make distributions to its
stockholders will be adversely affected. The performance of the economy in each
of the areas in which the Company's properties are located affects occupancy,
market rental rates and expenses and, consequently, has an impact on the income
from the Company's properties and their underlying values. The financial results
of major local employers may have an impact on the cash flow and value of
certain of the Company's properties.
Increases in income, service or other taxes generally are not passed
through to tenants under leases and may adversely affect the Company's Funds
From Operations and its ability to make distributions to stockholders.
Similarly, compliance with current federal, state or local laws, or changes in
such laws, including (i) laws increasing the potential liability for
environmental conditions existing on properties or the restrictions on
discharges or other conditions, (ii) rent control or rent stabilization laws or
other laws regulating housing or (iii) laws (such as the Americans with
Disabilities Act) requiring modifications to existing buildings to improve
access to such buildings by disabled persons, may result in significant
unanticipated expenditures, which would adversely affect the Company's Funds
From Operations and its ability to make distributions to stockholders.
LACK OF GEOGRAPHIC DIVERSIFICATION
The Company's properties are located in California and the Pacific
Northwest, with the largest concentration in Southern California. Income from
the Company's properties may be adversely affected by the general economic
climate, local economic conditions in which the Properties are located, such as
an oversupply of space or a reduction in demand for rental space, the
attractiveness of the Company's properties to tenants, competition from other
available space, the ability of the Company to provide the adequate maintenance
and insurance and increased operating expenses. There is also the risk that as
leases on the Company's properties expire, tenants will enter into new leases on
terms that are less favorable to the Company. Income and real estate values may
also be adversely affected by such factors as applicable laws (e.g., ADA and tax
laws), interest rate levels and the availability of financing. In addition, 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.
AFFORDABLE HOUSING LAWS
Certain of the Company's multi-family properties are, and will be in the
future, subject to federal, state and local statutes or other restrictions
requiring that a percentage of apartment homes be made available to residents
whose incomes do not exceed a certain percentage of the local median. These laws
and regulations, as well as any changes thereto making it more difficult to meet
such requirements, or a reduction in or elimination of certain financing
advantages available to those persons satisfying such requirements, could
adversely affect the Company's profitability and its ability to develop certain
communities in the future.
A certain amount of the Company's properties are financed by tax-exempt
financing. The tax-exempt financing subjects these properties to certain deed
restrictions and restrictive covenants. In addition, the Internal Revenue Code
of 1986, as amended, and the regulations promulgated thereunder impose various
restrictions, conditions and requirements relating to the exclusion from gross
income for Federal income tax purposes of interest on qualified bond
obligations, including requirements that at least 20% of apartment units
6
<PAGE> 32
be made available to residents with gross incomes that do not exceed 50% of the
median income for the applicable family size as determined by the Housing and
Urban Development Department of the Federal government. In addition to Federal
requirements, certain state and local authorities may impose additional rental
restrictions. The bond compliance requirements and the requirements of any
future tax-exempt bond financing utilized by the Company may have the effect of
limiting the Company's income from the tax-exempt financed properties if the
Company is required to lower its rental rates to attract residents who satisfy
the median income test. If the required number of apartment homes are not
reserved for residents satisfying these income requirements, the tax-exempt
status of the bonds may be terminated, the obligations of the Company under the
bond documents may be accelerated and other contractual remedies against the
Company may be available.
COMPETITION
Numerous industrial and residential properties compete with the Company's
properties in attracting tenants to lease space. Some of these competing
properties are newer, better located or better capitalized than the Company's
properties. The number of competitive properties in a particular area could have
a material effect on the Company's ability to lease space in its properties or
at newly developed or acquired properties and on the rents charged.
POSSIBLE ENVIRONMENTAL LIABILITIES
Under various federal, state and local laws, ordinances and regulations, an
owner or operator of real estate is liable for the costs of removal or
remediation of certain hazardous or toxic substances on or in such property.
Such laws often impose such liability without regard to whether the owner or
operator knew of, or was responsible for, the presence of such hazardous or
toxic substances. The presence of such substances, or the failure to properly
remediate such substances, may adversely affect the owner's or operator's
ability to sell or rent such property or to borrow using such property as
collateral. Persons who arrange for the disposal or treatment of hazardous or
toxic substances may also be liable for the costs or removal or remediation of
such substances at a disposal or treatment facility, whether or not such
facility is owned or operated by such person. In connection with the ownership
(direct or indirect), operation, management and development of real properties,
the Company 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, may be potentially liable for removal or remediation costs, as
well as certain other costs, including governmental fines and injuries to
persons and property.
Certain environmental laws impose liability for any release of
asbestos-containing materials ("ACMs") into the air. In addition, third parties
may seek recovery from owners or operators of real properties for personal
injury associated with exposure to ACMs released from such properties. Limited
quantities of ACMs are present in various building materials such as floor
coverings, ceiling texture material, acoustical tiles and decorative treatments
located at certain of the Company's properties. The ACMs present at such
properties are generally in good condition, and possess low probabilities for
unintentional disturbance. The Company has implemented operations and
maintenance plans for properties where ACMs are present or reasonably suspected.
It is the Company's policy that generally ACMs will be removed by the Company in
the ordinary course of renovation and construction.
There may also be potential liability associated with lead-based paint
arising from lawsuits alleging personal injury and related claims. Typically,
the existence of lead paint is more of a concern in residential units than in
commercial properties. A structure built prior to 1978 may contain lead-based
paint and thus may present a potential for exposure to lead. Structures built
after 1978 are not likely to contain lead-based paint. While the Company's
existing multifamily properties have not been tested for lead-based paint, the
majority were constructed after 1978, and therefore are not likely to contain
lead-based paint.
The existence of electric transmission lines near the Company's properties
were not searched for. Electric transmission lines are one of many sources of
electro-magnetic fields ("EMFs") to which people may be exposed. Research into
potential health impacts associated with exposure to EMFs has produced
inconclusive results. Notwithstanding the lack of conclusive scientific
evidence, some states now regulate the strength of
7
<PAGE> 33
electric and magnetic fields emanating from electric transmission lines, while
others have required transmission facilities to measure for levels of EMFs. In
addition, the Company understands that lawsuits have, on occasion, been filed
(primarily against electric utilities) alleging personal injuries resulting from
exposure as well as fear of adverse health effects. In addition, fear of adverse
health effects from transmission lines has been a factor considered in
determining property values in obtaining financing and in condemnation
proceedings. Therefore, there is a potential for the value of the Company's
properties to be affected as a result of proximity to a transmission line and
for the Company to be exposed to damage claims by persons exposed to EMFs.
Each of the Company's properties has been subjected to a Phase I or similar
environmental assessment (which involves general inspections without soil
sampling or groundwater analysis and generally without radon testing) completed
by licensed and qualified independent environmental consultant companies. Some
of the properties have been subject to a limited subsurface investigation. These
environmental assessments have not revealed any environmental liability, 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, assets
or results of operations.
No assurance can be given that existing environmental assessments with
respect to any of the Properties would reveal all environmental liabilities,
that any prior owner of any of the Company's properties 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 of the
Company's properties.
GENERAL UNINSURED LOSSES
The Company carries comprehensive liability, fire, flood, extended coverage
and rental loss insurance for each of its properties, with policy
specifications, limits and deductibles customarily carried for similar
properties. There are, however, certain types of extraordinary losses which are
either uninsurable or not economically insurable. Further, all of the Company's
properties are located in areas that are subject to earthquake activity.
Although the Company has obtained certain limited earthquake insurance policies,
should one or more of the Company's properties sustain damage as a result of an
earthquake, the Company may sustain losses due to insurance deductibles,
co-payments on insured losses or uninsured losses.
ADVERSE CONSEQUENCES OF FAILURE TO QUALIFY AS A REIT
Tax Liabilities Upon Failure to Qualify as a REIT. The Company made the
election to be treated for federal income tax purposes as a REIT under the
Internal Revenue Code of 1986, as amended (the "Code"). No assurance can be
given that the Company will operate in a manner enabling it to remain so
qualified. Qualification as a REIT involves the application of highly technical
and complex Code provisions which have only a limited number of judicial or
administrative interpretations, and the determination of various factual matters
and circumstances not entirely within the Company's control may impact its
ability to qualify as a REIT. In addition, no assurance can be given that new
legislation, regulations, administrative interpretations or court decisions will
not significantly change the tax laws with respect to the qualification as a
REIT or the federal income tax consequences of such qualification.
If in any taxable year the Company does not qualify as a REIT, it would be
taxed as a regular corporation and distributions to the holders of the Common
Stock would not be deductible by the Company in computing its taxable income. In
addition, unless entitled to relief under certain statutory provisions, the
Company will also be disqualified from treatment as a REIT for the four taxable
years following the year during which qualification was lost. This treatment
would significantly reduce the funds from operations available for investment or
distribution or payment to holders of the securities because of the additional
tax liability to the Company for the year or years involved. In addition, the
Company would no longer be required by the Code to make any distributions.
To qualify as a REIT, the Company is required to distribute at least 95% of
its taxable income to its shareholders each year. Possible timing differences
between receipt of income and payment of expenses, and the inclusion and
deduction of such amounts in determining taxable income, could require the
Company to
8
<PAGE> 34
reduce its dividends below the level necessary to maintain its qualification as
a REIT, which would have material adverse tax consequences.
QUALIFICATION OF CERTAIN ENTITIES AS PARTNERSHIPS FOR FEDERAL INCOME TAX
PURPOSES; IMPACT ON REIT STATUS
PGP Inland Communities, L.P., the Company's subsidiary operating
partnership, and Pacific Inland Communities, LLC, the entity used to effect
certain tax-exempt financing of the Company (collectively, the "Partnerships")
are intended to be treated as partnerships for federal income tax purposes. If
the IRS were to challenge successfully the status of either or both of the
Partnerships as partnerships for federal income tax purposes, either or both of
the Partnerships would be treated as an association taxable as a corporation. In
such event, for federal income tax purposes the character of the Company's
assets and income pertaining to its interest in the Partnerships would change,
and could cause the Company to fail to meet the requirements for taxation as a
REIT for federal income tax purposes and therefore to be taxed as a regular
corporation. The imposition of a corporate tax on the Company and on one or both
of the Partnerships would significantly reduce the funds from operations
available for investment or distribution or payment to holders of the
securities.
Other REIT Taxes. Although qualified to be taxed as a REIT, certain
transactions or other events could lead to the Company being taxed at rates
ranging from 4% to 100% on certain income or gains.
DEPENDENCE ON KEY PERSONNEL
The Company's management has substantial experience in acquiring, managing
and financing multifamily and industrial properties. The Company believes that
its success will depend in significant part upon the efforts of such persons and
that it may be difficult to replace such persons with individuals having
comparable experience.
ISSUANCE OF SHARES MAY ADVERSELY AFFECT MARKET PRICE OF COMMON STOCK AND DILUTE
PER SHARE AMOUNTS AVAILABLE FOR DISTRIBUTION
Future issuances of substantial amounts of Common Stock upon conversion of
the Company's 8.375% Convertible Subordinated Debentures (the "Debentures")
could adversely affect the market price for the Common Stock and dilute per
share amounts available for distribution to shareholders. An aggregate of
$56,551,000 in principal amount of Debentures, convertible into an aggregate of
3,036,710 additional shares of Common Stock, was issued by the Company in
February 1994. In December 1996, the Company consummated an exchange offer (the
"Exchange Offer") pursuant to which it issued an aggregate of 2,440,002 shares
of Common Stock in exchange for an aggregate of $42,069,000 in principal amount
of Debentures (at a rate of 58 shares of Common Stock for each $1,000 principal
amount of Debentures). Following the Exchange Offer $14,437,000 in principal
amount of Debentures remain outstanding. The Debentures are convertible at any
time at the election of the holders at a rate of 53.6986 shares of Common Stock
per $1,000 principal amount of Debentures.
USE OF PROCEEDS
Unless otherwise described in the Prospectus Supplement which accompanies
this Prospectus, the Company intends to use the net proceeds from the sale of
the Company Offered Securities for general corporate purposes, which may include
acquiring additional industrial or multifamily properties or interests in
entities owning industrial or multifamily properties as suitable opportunities
arise, making improvements to properties, repaying certain then-outstanding
secured or unsecured indebtedness and for working capital. Pending use for the
foregoing purposes, such proceeds may be invested in short-term,
interest-bearing time or demand deposits with financial institutions, cash items
or qualified government securities.
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<PAGE> 35
RATIO OF EARNINGS TO FIXED CHARGES
The following table sets forth the ratios of earnings to fixed charges for
the Company and for the predecessor to the Company prior to February 18, 1994.
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED
-------------------------------------- SEPTEMBER 30,
1995 1994 1993 1992 1991 1996
------ ------ ------ ------ ------ -------------
<S> <C> <C> <C> <C> <C> <C>
Ratio of Earnings to Fixed Charges............ 1.12x 1.26x .74x .58x .55x 1.17x
</TABLE>
For the purpose of calculating the ratio of earnings to fixed charges,
earnings consist of net earnings before income taxes, extraordinary items,
minority/predecessor interest income and fixed charges. Fixed charges consist of
interest expense, capitalized interest and amortization of deferred financing
costs.
Prior to completion of the Company's initial public offering in February
1994, the predecessor of the Company operated in a highly leveraged manner. As a
result, although the Company and the predecessor have historically generated
positive net cash flow, the financial statements of the predecessor show net
losses for the periods prior to February 1994. Consequently, the computation of
the ratio of earnings to fixed charges for such periods indicate that earnings
were inadequate to cover fixed charges by approximately $1.6 million, $2.3
million and $1.9 million for the years ended December 31, 1993, 1992 and 1991
respectively.
PLAN OF DISTRIBUTION
The Company may sell the Offered Securities through one or more
underwriters or dealers, directly to one or more purchasers, through agents, or
through a combination of any such methods of sale. Any such underwriter or agent
involved in the offer and sale of the Offered Securities will be named in the
applicable Prospectus Supplement. Sales of Offered Securities pursuant to any
applicable Prospectus Supplement may be effected from time to time in one or
more transactions 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. The Company also may, from time to time, authorize underwriters acting
as the Company's agents to offer and sell the Offered Securities upon the terms
and conditions as are set forth in the applicable Prospectus Supplement. In
connection with the sale of the Offered 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
Offered Securities for whom they may act as agent. Underwriters may sell the
Offered 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 Offered 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 Offered 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 Offered 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. Underwriters,
dealers and agents may engage in transactions with, or perform services for, or
be customers of, the Company in the ordinary course of business.
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 the Offered 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 amount of the Offered 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 commer-
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cial 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
Offered 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 Offered Securities are being sold to
underwriters, the Company shall have sold to such underwriters the total amount
of the Offered Securities less the amount thereof covered by the Contracts.
Unless otherwise specified in the related Prospectus Supplement, each
series of Company Offered Securities will be a new issue with no established
trading market, other than the Common Stock which is listed on the New York
Stock Exchange. Any shares of Common Stock sold by the Company pursuant to a
Prospectus Supplement will be listed on such exchange, subject to official
notice of issuance. The Company may elect to list any series of Preferred Stock
on any exchange, but is not obligated to do so. It is possible that one or more
underwriters may make a market in a series of Offered Securities, but will not
be obligated to do so and may discontinue any market making at any time without
notice. Therefore, no assurance can be given as to the liquidity of the trading
market of the Offered Securities.
Certain of the underwriters and their affiliates may be customers of,
engage in transactions with and perform services for the Company and its
subsidiaries in the ordinary course of business.
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DESCRIPTION OF COMMON STOCK
The summary of the terms of the Company's Common Stock set forth below does
not purport to be complete and is subject to and qualified in its entirety by
reference to the Articles of Incorporation and Bylaws of the Company.
GENERAL
The Articles of Incorporation of the Company provide that the Company may
issue up to 60,000,000 shares of capital stock, consisting of 25,000,000 shares
of common stock, par value $.01 per share (the "Common Stock"), 30,000,000
shares of excess stock, par value $.01 per share (the "Excess Shares"), and
5,000,000 shares of preferred stock, par value $.01 per share (the "Preferred
Stock"). As of December 31, 1996, 9,757,917 shares of Common Stock and no shares
of Preferred Stock or Excess Shares were issued and outstanding. On December 31,
1996 the Company entered into an agreement to issue 1,351,351 shares of Class A
Senior Cumulative Convertible Preferred Stock to an institutional investor on or
before December 31, 1997. Under Maryland law, shareholders generally are not
liable for the corporation's debts or obligations.
TERMS
All shares of Common Stock offered hereby by the Company will be upon
issuance and delivery against payment, and all shares of Common Stock offered
hereby by the Selling Stockholder are, duly authorized, fully paid and
nonassessable. Subject to the preferential rights of any other shares or series
of capital stock and to the provisions of the Company's Articles of
Incorporation regarding Excess Shares, holders of Common Stock will be entitled
to receive distributions on such shares if, as and when authorized and declared
by the Board of Directors of the Company 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 commenced quarterly distributions on its Common Stock on April
15, 1994, and intends to continue making quarterly distributions on the
outstanding shares of Common Stock.
Subject to the provisions of the Company's Articles of Incorporation,
regarding Excess Shares and to the matters discussed under "Certain Provisions
of Maryland Law and of the Company's Articles of Incorporation and
Bylaws -- Control Share Acquisitions," each outstanding share of Common Stock
entitles the holder to one vote on all matters submitted to a vote of
shareholders, including the election of directors, and, except as otherwise
required by law or except as provided with respect to any other class or series
of stock, the holders of such Common Stock will possess the exclusive voting
power. There is no cumulative voting in the election of directors, which means
that the holders of all plurality of the outstanding Common Stock can elect all
of the directors then standing for election and the holders of the remaining
Common Stock will not be able to elect any directors.
Holders of Common Stock have no conversion, sinking fund, redemption rights
or preemptive rights to subscribe for any securities of the Company.
Subject to the provisions of the Company's Articles of Incorporation,
regarding Excess Shares, all Common Stock will have equal dividend,
distribution, liquidation and other rights, and will have no preference,
appraisal or exchange rights.
Pursuant to the Maryland General Corporation Law (the "MGCL"), a
corporation generally cannot dissolve, amend its Articles of Incorporation,
merge, transfer all or substantially all of its assets, engage in a share
exchange or engage in certain similar fundamental transactions unless
recommended by the Board of Directors and approved by the affirmative vote 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 corporation's
Articles of Incorporation. The Company's Articles of Incorporation require the
affirmative vote of shareholders holding at least a majority of all the votes
entitled to be cast on such matters. In addition, a number of other provisions
of the MGCL could have a significant effect
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<PAGE> 38
on the Common Stock and the rights and obligations of holders thereof. See
"Certain Provisions of Maryland Law of the Company's Articles of Incorporation
and Bylaws."
The transfer agent and registrar for the Common Stock is Harris Trust
Company of California.
DESCRIPTION OF PREFERRED STOCK
GENERAL
The following description of terms of the Preferred Stock sets forth
certain general terms and provisions of the Preferred Stock to which any
Prospectus Supplement may relate. Certain other terms of any series of the
Preferred Stock offered by any Prospectus Supplement will be described in such
Prospectus Supplement. The description of certain provisions of the Preferred
Stock set forth below and in any Prospectus Supplement does not purport to be
complete and is subject to and qualified in its entirety by reference to the
Company's Articles of Incorporation and the Board of Directors' resolution or
resolutions relating to each series of the Preferred Stock which will be filed
with the Commission and incorporated by reference as an exhibit to the
Registration Statement of which this Prospectus is a part at or prior to the
time of the issuance of such series of Preferred Stock.
Subject to limitations prescribed by the MGCL and the Articles of
Incorporation, the Board of Directors is authorized to issue shares of Preferred
Stock in one or more series, to establish from time to time the number of shares
of Preferred Stock to be included in any such series and to fix for any such
series the designation and any preferences, conversion and other rights, voting
powers, restrictions, limitations as to dividends, qualifications and terms and
conditions of redemption. The Company is authorized to issue five million shares
of Preferred Stock, of which no shares are currently outstanding.
The Preferred Stock shall have the dividend, liquidation, redemption and
voting rights set forth below, unless otherwise provided in a Prospectus
Supplement relating to a particular series of the Preferred Stock. Reference is
made to the Prospectus Supplement relating to the particular series of the
Preferred Stock offered thereby for specific terms, including: (i) the
designation and stated value per share of such Preferred Stock and the number of
shares offered; (ii) the amount of liquidation preference per share; (iii) the
initial public offering price at which such Preferred Stock will be issued; (iv)
the dividend rate (or method of calculation), the dates on which dividends shall
be payable and the dates from which dividends shall commence to cumulate, if
any; (v) any redemption or sinking fund provisions; (vi) any conversion right;
(vii) any listing of the Preferred Stock on any securities exchange; (viii) any
additional voting, dividend, liquidation, redemption, sinking fund and other
rights, preferences, privileges, limitations and restrictions not in conflict
with the Articles of Incorporation or the MGCL; (ix) a discussion of Federal
income tax considerations applicable to the Preferred Stock; (x) the relative
ranking and preferences of the Preferred Stock as to dividends and rights upon
liquidation; and (xi) any limitations on direct or beneficial ownership and
restrictions on transfer. The Preferred Stock will, when issued for lawful
consideration therefor, be fully paid and nonassessable and will have no
preemptive rights.
Unless otherwise indicated in a Prospectus Supplement relating thereto,
Harris Trust Company of California will be the transfer agent and registrar for
shares of each series of Preferred Stock.
RANK
Unless otherwise specified in the Prospectus Supplement, the Preferred
Stock will, with respect to dividend rights upon liquidation, dissolution or
winding up of the Company, rank: (i) senior to all classes or series of Common
Stock and to all equity securities ranking junior to such Preferred Stock; (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 Stock; and (iii) junior to all equity securities issued by the Company
the terms of which specifically provide that such equity securities rank senior
to the Preferred Stock. The rights of the holders of each series of Preferred
Stock will be subordinate to those of the Company's general creditors.
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DIVIDENDS
Holders of each series of Preferred Stock shall be entitled to receive,
when, as and if declared by the Board of Directors, out of assets of the Company
legally available for payment, cash dividends at such rates and on such dates as
will be set forth in the applicable Prospectus Supplement. Such rate may be
fixed or variable or both. Each such dividend 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 Directors, as specified in the
Prospectus Supplement relating to such series of Preferred Stock.
Dividends on any series of Preferred Stock may be cumulative or
noncumulative, as provided in the applicable Prospectus Supplement. Dividends,
if cumulative, will be cumulative from and after the date set forth in the
applicable Prospectus Supplement. If the Board of Directors fails to declare a
dividend payable on a dividend payment date on any series of Preferred Stock for
which dividends are noncumulative, then the holders of such series of Preferred
Stock will have no right to receive a dividend in respect of the dividend period
ending on such dividend payment date, and the Company will have no obligation to
pay the dividend accrued for such period, whether or not dividends on such
series are declared payable on any future dividend payment date. Dividends on
shares of each series of Preferred Stock for which dividends are cumulative will
accrue from the date on which the Company initially issues shares of such
series.
So long as any series of Preferred Stock shall be outstanding, unless: (i)
full dividends (including, if such dividends are cumulative, dividends for prior
dividend periods) shall have been paid or declared and set apart for payment on
all outstanding shares of Preferred Stock of such series and all other classes
and series of Preferred Stock (other than "Junior Stock," as defined below; and
(ii) the repurchase or other mandatory retirement of, or with respect to any
sinking or other analogous fund for, any shares of Preferred Stock of such
series or any other Preferred Stock of any class or series (other than Junior
Stock), the Company may not declare any dividends on any Common Stock or any
other equity securities of the Company ranking as to dividends or distributions
of assets junior to such series of Preferred Stock (the Common Stock and any
such other equity securities being herein referred to as "Junior Stock"), or
make any payment on account of, or set apart money for the purchase, redemption
of other retirement of or for a sinking or other analogous fund, for any Junior
Stock or make any distribution in respect thereof, whether in cash or property
or in obligations or equity securities of the Company, other than shares of
Junior Stock which are neither convertible into, nor exchangeable or exercisable
for, any securities of the Company other than shares of Junior Stock.
Any dividend payment made on a series of Preferred Stock shall first be
credited against the earliest accrued but unpaid dividend due with respect to
shares of such series which remains payable.
REDEMPTION
A series of Preferred Stock may be redeemable in whole or in part, from
time to time, at the option of the Company, or may be subject to mandatory
redemption pursuant to a sinking fund or otherwise, in each case upon the terms,
at the times and at the redemption prices set forth in the Prospectus Supplement
related to such series. Shares of Preferred Stock redeemed by the Company will
be restored to the status of authorized but unissued Preferred Stock of the
Company.
The Prospectus Supplement relating to a series of Preferred Stock that is
subject to mandatory redemption will specify the number of shares of such
Preferred Stock 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 dividends thereon (which
shall not, if such Preferred Stock does not have a cumulative dividend, include
any accumulation in respect of unpaid dividends for prior dividend 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 Stock of any series is payable only from the net
proceeds of the issuance of equity securities of the Company, the terms of such
series of Preferred Stock may provide that, if no such equity securities 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 Stock shall automatically and mandatorily be converted into the
applicable equity securities of the Company pursuant to conversion provisions
specified in the applicable Prospectus Supplement.
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So long as any dividends on shares of any series of Preferred Stock or any
other series of Preferred Stock of the Company ranking on a parity as to
dividends and distribution of assets with such series of Preferred Stock are in
arrears, no shares of any such series of Preferred Stock or such other series of
Preferred Stock of the Company will be redeemed (whether by mandatory or
optional redemption) unless all such shares are simultaneously redeemed, and the
Company will not purchase or otherwise acquire any such shares; provided,
however, that the foregoing will not prevent the purchase or acquisition of such
shares pursuant to a purchase or exchange offer made on the same terms to
holders of all such shares outstanding.
In the event that fewer than all of the outstanding shares of a series of
Preferred Stock are to be redeemed, whether by mandatory or optional redemption,
the number of shares to be redeemed will be determined by lot or pro rata
(subject to rounding to avoid fractional shares) as may be determined by the
Company or by any other method as may be determined by the Company in its sole
discretion to be equitable. From and after the redemption date (unless default
shall be made by the Company in providing for the payment of the redemption
price plus accumulated and unpaid dividends, if any), dividends shall cease to
accumulate on the shares of Preferred Stock called for redemption and all rights
of the holders thereof (except the right to receive the redemption price plus
accumulated and unpaid dividends, if any) shall cease.
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 Junior Stock, the holders of each series of Preferred
Stock shall be entitled to receive out of assets of the Company legally
available for distribution to stockholders, liquidating distributions in the
amount of the liquidation preference per share (set forth in the applicable
Prospectus Supplement), plus an amount equal to all dividends accrued and unpaid
thereon (which shall not include any accumulation in respect of unpaid dividends
for prior dividend periods if such Preferred Stock does not have a cumulative
dividend). After payment of the full amount of the liquidating distributions to
which they are entitled, the holders of Preferred Stock 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 Stock and the
corresponding amounts payable on all shares of other classes or series of equity
securities of the Company ranking on a parity with the Preferred Stock in the
distribution of assets, then the holders of the Preferred Stock and all other
such classes or series of equity securities 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 Stock, the remaining assets of the Company shall be distributed among
the holders of shares of Junior Stock, 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, or the sale, lease or conveyance of all or substantially all of the
assets or business of the Company, shall not be deemed to constitute a
liquidation, dissolution or winding up of the Company.
VOTING RIGHTS
Except as indicated below or in a Prospectus Supplement relating to a
particular series of Preferred Stock, or except as required by applicable law,
holders of the Preferred Stock will not be entitled to vote for any purpose.
So long as any series of Preferred Stock remains outstanding, the consent
or the affirmative vote of the holders of at least a majority of the votes
entitled to be cast with respect to the then outstanding shares of such series
of Preferred Stock together with any "Other Preferred Stock" (as defined below),
voting as one class, either expressed in writing or at a meeting called for that
purpose, will be necessary: (i) to permit, effect or validate the authorization,
or any increase in the authorized amount, of any class or series of equity
securities of the Company ranking prior to Preferred Stock of such series as to
dividends, voting or upon distribution of assets; and (ii) to repeal, amend or
otherwise change any of the provisions applicable to the Preferred Stock of
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<PAGE> 41
such series in any manner which adversely affects the powers, preferences,
voting power or other rights or privileges of such series of Preferred Stock. In
case any series of Preferred Stock would be so affected by any such action
referred to in clause (ii) above in a different manner than one or more series
of Other Preferred Stock which will be similarly affected, the holders of the
Preferred Stock of such series, together with any series of Other Preferred
Stock which will be similarly affected, will be entitled to be cast with respect
to each such series of Preferred Stock and Other Preferred Stock then
outstanding, in lieu of the consent or affirmative vote hereinafter otherwise
required.
With respect to any matter as to which the Preferred Stock of any series is
entitled to vote, holders of the Preferred Stock of such series and any other
series of Preferred Stock ranking on a parity with such series of Preferred
Stock as to dividends and distributions of assets and which by its terms
provides for similar voting rights (the "Other Preferred Stock") will be
entitled to cast the number of votes set forth in the Prospectus Supplement with
respect to that series of Preferred Stock. As a result of the provisions
described in the preceding paragraph requiring the holders of shares of a series
of Preferred Stock to vote together as a class with the holders of shares of one
or more series of Other Preferred Stock, it is possible that the holders of such
shares of Other Preferred Stock could approve action that would adversely affect
such series of Preferred Stock, including the creation of a class of shares of
beneficial interest ranking prior to such shares of Preferred Stock as to
dividends, voting or distributions of assets.
CONVERSION RIGHTS
The terms and conditions, if any, upon which shares of any series of
Preferred Stock are convertible into Common Stock will be set forth in the
applicable Prospectus Supplement relating thereto. Such terms will include the
number of shares of Common Stock into which the Preferred Stock is convertible,
the conversion price (or manner of calculation thereof), the conversion period,
the provisions as to whether conversion will be at the option of the holders of
the Preferred Stock or the Company, the events requiring an adjustment of the
conversion price and the provisions affecting conversion.
RESTRICTIONS ON OWNERSHIP
See "Restrictions on Transfer of Capital Stock" for a discussion of the
restrictions on transfers of shares of capital stock necessary for the Company
to qualify as a REIT under the Internal Revenue Code of 1986, as amended.
RESTRICTIONS ON TRANSFER OF CAPITAL STOCK
For the Company to qualify as a REIT under the Internal Revenue Code of
1986, as amended (the "Code"), not more than 50% in value of its issued and
outstanding capital stock may be owned, directly or constructively, by five or
fewer individuals (as defined in the Code to include certain entities) during
the last half of a taxable year, and the shares of issued and outstanding
capital stock of the Company 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). Because the Board of Directors
believes it is essential for the Company to qualify as a REIT, the Board of
Directors has included certain provisions in the Articles of Incorporation
restricting the acquisition of the Company's capital stock, including Common
Stock.
The provision setting forth the Ownership Limit provides that, subject to
certain exceptions, no shareholder (other than Realty) may own, or be deemed to
own by virtue of the constructive ownership provisions of the Code, more than
the Ownership Limit, which is equal to 9.8% in value or in number, whichever is
more restrictive, of the issued and outstanding capital stock of the Company.
The constructive ownership rules are complex and may cause Common Stock owned
directly or constructively by a group of related individuals or entities to be
constructively owned by one individual or entity. As a result, the acquisition
of less than 9.8% in value or in number of shares of the Common Stock (or the
acquisition of an interest in an entity which owns Common Shares) by an
individual or entity could cause that individual or entity (or another
individual or entity) to constructively own in excess of 9.8% in value or in
number of the issued and outstanding capital stock of the Company, and thus
subject such Common Stock to the Ownership
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Limit. In addition, for these purposes, Common Stock that may be acquired upon
conversion of the 8.375% Convertible Subordinated Debentures Due 2001 previously
issued by the Company (the "Debentures") owned or deemed owned by an investor,
but not Common Stock issuable with respect to Debentures held by others, are
deemed to be owned by the investor and outstanding prior to conversion, for
purposes of determining the percentage of ownership of Common Stock owned by
that investor.
The Board of Directors may waive the Ownership Limit with respect to a
particular shareholder if evidence satisfactory to the Board of Directors and
the Company's tax counsel is presented that such ownership will not then or in
the future jeopardize the Company's status as a REIT. As a condition of such
waiver, the Board of Directors may require opinions of counsel satisfactory to
it and an undertaking from the applicant with respect to preserving the REIT
status of the Company. If shares of Common Stock are issued or transferred to
any person, which would result in a violation of the Ownership Limit, or which
would cause the Company to be beneficially owned by fewer than 100 persons, such
issuance or transfer shall be null and void ab initio, and the intended
transferee will acquire no rights to, or economic interest in, the Common Stock.
The Articles of Incorporation provide that a transfer or other event that
results in a person owning Common Stock in excess of the Ownership Limit is null
and void ab initio as to the intended transferee or purported owner, and the
intended transferee or purported owner acquires or retains no rights or economic
interest in those shares of Common Stock. Common Stock purportedly owned, or
deemed to be owned, or transferred to a person in excess of the Ownership Limit,
will, in certain events, automatically be exchanged for shares of a separate
class of stock ("Excess Shares") that will be transferred, by operation of law,
to a trust for the exclusive benefit of the transferee or transferees to whom
the Common Stock may ultimately be transferred (without violating the Ownership
Limit). While held in trust, the Excess Shares will not be entitled to vote,
will not be considered outstanding for purposes of any shareholder vote or the
determination of a quorum for such vote, and will not be entitled to participate
in any distributions made by the Company. Any dividend or distribution paid to a
proposed transferree or owner on Excess Shares prior to the discovery by the
Company that such shares have become directly or constructively owned in
violation of the Company's Articles of Incorporation shall be repaid to the
Company upon demand. The intended transferree or owner may, at any time the
Excess Shares are held by the Company in trust, transfer the Excess Shares at a
price not to exceed the price paid by the intended transferee or owner to any
person whose ownership of such Excess Shares would be permitted under the
Ownership Limit, at which time the Excess Shares will automatically be exchanged
for shares of Common Stock. In addition, the Company would have the right, for a
period of 90 days during the time the Excess Shares are held by the Company in
trust, to purchase all or any portion of the Excess Shares from the intended
transferee or owner at a price equal to the lesser of the price paid for the
shares of Common Stock by the intended transferee or owner and the closing
market price for the shares of Common Stock on the date the Company exercises
its option to purchase the Common Stock. This period commences on the date of
the violative transfer of ownership if the intended transferee or owner gives
notice of the transfer to the Company, or the date the Board of Directors
determines that a violative transfer has occurred with no notices provided.
The Ownership Limit will not be automatically removed even if the REIT
provisions of the Code are changed so as to no longer contain any ownership
concentration limitation or if the Board of Directors and the shareholders of
the Company determine that it is no longer in the best interest of the Company
to attempt to qualify, or to continue to qualify, as a REIT. Except as otherwise
described above, any change of the Ownership Limit would require an amendment to
the Articles of Incorporation. Amendments to the Articles of Incorporation
require recommendation by the Board of Directors and the affirmative vote of
shareholders holding at least a majority of all the votes entitled to be cast on
the matter. In addition to preserving the Company's status as a REIT, the
Ownership Limit may have the effect of precluding an acquisition of control of
the REIT without the approval of the Board of Directors.
All certificates representing shares of Common Stock will bear a legend
referring to the restrictions described above.
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All persons who own a specified percentage (or more) of outstanding Common
Stock must file an affidavit with the Company containing information regarding
their ownership of Common Stock, as set forth in the Treasury Regulations. Under
current Treasury Regulations, the percentage will be set between one-half of one
percent and five percent, depending on the number of record holders of Common
Stock. In addition, each shareholder shall upon demand by the Company be
required to disclose to the Company in writing such information with respect to
the direct, indirect and constructive ownership of shares as the Board of
Directors deems necessary to comply with the provisions of the Code applicable
to a REIT or to comply with the requirements of any taxing authority or
government agency.
The ownership limitations could have the effect of discouraging a takeover
or other transaction in which holders of some, or a majority, of Common Stock
might receive a premium for their shares over the then prevailing market price
or which such holders might believe to be otherwise in their best interest.
CERTAIN PROVISIONS OF MARYLAND LAW AND OF
THE COMPANY'S ARTICLES OF INCORPORATION AND BYLAWS
The following paragraphs summarize certain provisions of Maryland law and
the Company's Articles of Incorporation and Bylaws. The summary does not purport
to be complete and is subject to and qualified in its entirety by reference to
the Company's Articles of Incorporation and Bylaws, copies of which are exhibits
to the Registration Statement of which this Prospectus is a part, as described
in "Additional Information," and to Maryland law.
CLASSIFICATION OF THE BOARD OF DIRECTORS
The Company's Articles of Incorporation provide that the number of
directors of the Company may be established by the Board of Directors, but may
not be fewer than three nor more than eleven. Any vacancy will be filled, at any
regular meeting or at any special meeting called for that purpose, by a majority
of the remaining directors, except that a vacancy resulting from an increase in
the number of directors will be filled by a majority of the entire Board of
Directors. Pursuant to the terms of the Articles of Incorporation, the directors
are divided into three classes -- i.e., Class I, Class II, and Class III.
Presently, one class will hold office for a term expiring at the annual meeting
of shareholders to be held in 1997 (i.e., Class III), another class will hold
office for a term expiring at the annual meeting of shareholders to be held in
1998 (i.e., Class I), and another class will hold office for a term expiring at
the annual meeting of shareholders to be held in 1999 (i.e., Class II). As the
term of each class expires, directors in that class will be elected for a term
of three years or until their successors are duly elected and qualify. The
Company believes that classification of the Board of Directors will help to
assure the continuity and stability of the Company's business strategies and
policies as determined by the Board of Directors.
The classified director provision could have the effect of making the
removal of incumbent directors more time-consuming and difficult, which could
discourage a third party from making a tender offer or otherwise attempting to
obtain control of the Company, even though such an attempt might be beneficial
to the Company and its shareholders. At least two annual meetings of
shareholders, instead of one, will generally be required to effect a change in a
majority of the Board of Directors. Thus, the classified board provision could
increase the likelihood that incumbent directors will retain their positions.
Holders of Common Stock will have no right to cumulative voting in the election
of directors. Consequently, at each annual meeting of shareholders, the holders
of a plurality of Common Stock will be able to elect all of the successors of
the class of directors whose term expires at that meeting.
REMOVAL OF DIRECTORS
The Articles of Incorporation provide that a director may be removed only
for cause and only by the affirmative vote of shareholders holding at least
two-thirds of all the votes entitled to be cast in the election of directors.
This provision, when coupled with the provision in the Bylaws authorizing the
Board of Directors to fill vacant directorships, precludes shareholders from
removing incumbent directors except upon a substantial
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affirmative vote and upon a finding of cause and filling the vacancies created
by such removal with their own nominees.
LIMITATION OF LIABILITY AND INDEMNIFICATION
The Company's Articles of Incorporation limit the liability of the
Company's directors and officers to the Company and its shareholders to the
fullest extent permitted from time to time by Maryland law. Maryland law
presently permits the liability of directors and officers to a corporation or
its shareholders for money damages to be limited, except (i) to the extent that
it is proved that the director or officer actually received an improper benefit
or profit, or (ii) if a judgment or other final adjudication is entered in a
proceeding based on a finding that the director's or officer's action, or
failure to act, was the result of active and deliberate dishonesty and was
material to the cause of action adjudicated in the proceedings. This provision
does not limit the ability of the Company or its shareholders to obtain other
relief, such as an injunction or rescission.
The Company's Bylaws require the Company to indemnify its directors,
officers and certain other parties to the fullest extent permitted from time to
time by Maryland law. The MGCL permits a corporation to indemnify its directors,
officers and certain other parties against judgments, penalties, fines,
settlements and reasonable expenses actually incurred by them in connection with
any proceeding to which they may be made a party by reason of their service to
or at the request of the corporation, unless it is established that the act or
omission of the indemnified party was material to the matter giving rise to the
proceeding and (i) was committed in bad faith or was the result of active and
deliberate dishonesty, (ii) the indemnified party actually received an improper
personal benefit, or (iii) in the case of any criminal proceeding, the
indemnified party had reasonable cause to believe that the act or omission was
unlawful. Indemnification may be made against judgments, penalties, fines,
settlements and reasonable expenses actually incurred by the director or officer
in connection with the proceeding; provided, however, that if the proceeding is
one by or in the right of the corporation, indemnification may not be made with
respect to any proceeding in which the director or officer has been adjudged to
be liable on the basis that personal benefit was improperly received. The
termination of any proceeding by conviction, or upon a plea of nolo contendere
or its equivalent, or an entry of any order of probation prior to judgment,
creates a rebuttable presumption that the director or officer did not meet the
requisite standard of conduct required for indemnification to be permitted. It
is the position of the Securities and Exchange Commission that indemnification
of directors and officers for liabilities arising under the Securities Act is
against public policy and is unenforceable pursuant to Section 14 of the
Securities Act.
BUSINESS COMBINATIONS
Under the 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
corporation and any person who beneficially owns ten percent or more of the
voting power of the corporation's shares or an affiliate of the corporation who,
at any time within the two-year period prior to the date in question, was the
beneficial owner of ten percent or more of the voting power of the then
outstanding voting stock of the corporation (an "Interested Stockholder") or an
affiliate thereof are prohibited for five years after the most recent date on
which the Interested Stockholder became an Interested Stockholder. Thereafter,
any such business combination must be recommended by the Board of Directors of
such corporation 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 the
corporation voting together as a single voting group, and (b) two-thirds of the
votes entitled to be cast by holders of voting shares other than shares held by
the Interested Stockholder with whom the business combination is to be effected,
unless, among other things, the corporation's shareholders receive a fair 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 Stockholder for
its shares. These provisions of Maryland law do not apply, however, to business
combinations that are approved or exempted by the Board of Directors of the
corporation prior to the time that the Interested Stockholder becomes an
Interested Stockholder. As permitted by Maryland law, the Articles of
Incorporation of the Company include a provision exempting all future business
combinations involving the Company from the operation of the business
combination statute.
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CONTROL SHARE ACQUISITIONS
The Company's Bylaws currently contain a provision exempting from the
control share acquisition statute described below any and all acquisitions by
any person of shares of capital stock of the Company, specifically including
Realty. The current or future directors of the Company may decide to eliminate
or amend this provision, although no such change is currently contemplated.
The MGCL provides that "control shares" of a Maryland corporation acquired
in a "control share acquisition" have no voting rights except to the extent
approved by a vote of two-thirds of the votes entitled to be cast on the matter,
excluding shares of stock owned by the acquiror or by officers or directors who
are employees of the corporation. "Control shares" are voting shares of stock
which, if aggregated with all other such shares of stock previously acquired by
such person, or in respect of which such person is able to exercise or direct
the exercise of voting power, would entitle the acquiror to exercise voting
power in electing directors within one of the following ranges of voting power:
(i) one-fifth or more but less than one-third; (ii) one-third or more but less
than a majority; or (iii) a majority of all voting power. Control shares do not
include shares the acquiring person is then entitled to vote as a result of
having previously obtained stockholder approval. A "control share acquisition"
means the acquisition of control shares, subject to certain exceptions.
A person who has made or proposes to make a control share acquisition, upon
satisfaction of certain conditions (including an undertaking to pay expenses),
may compel the Board of Directors to call a special meeting of shareholders to
be held within 50 days of demand to consider the voting rights of the shares. If
no request for a meeting is made, the corporation may itself present the
question at any shareholders meeting.
If voting rights are not approved at the meeting or if the acquiring person
does not deliver an acquiring person statement as required by the statute, then,
subject to certain conditions and limitations, the corporation may redeem any or
all of the control shares (except those for which voting rights have previously
been approved) for fair value determined, without regard to the absence of
voting rights for control shares, as of the date of the last control share
acquisition or, if a meeting of shareholders is held where the voting rights of
such shares are considered and not approved, as of the date of the meeting. If
voting rights for control shares are approved at a shareholders meeting and the
acquiror becomes entitled to vote a majority of the shares entitled to vote, all
other shareholders may exercise appraisal rights. The fair value of the shares
as determined for purposes of such appraisal rights may not be less than the
highest price per share paid in the control share acquisition, and certain
limitations and restrictions otherwise applicable to the exercise of dissenters'
rights do not apply in the context of a control share acquisition.
The control share acquisition statute does not apply to shares acquired in
a merger, consolidation or share exchange if the Company is a party to the
transaction and such transaction is otherwise effected under the provision of
the MGCL; or to acquisitions approved or exempted by the Articles of
Incorporation or Bylaws of the Company.
AMENDMENT TO THE ARTICLES OF INCORPORATION
The Company's Articles of Incorporation, including its provisions on
classification of the Board of Directors and removal of directors, may be
amended only with the recommendation of the Board of Directors and by the
affirmative vote of shareholders holding at least a majority of all the votes
entitled to be cast on the matter.
DISSOLUTION OF THE COMPANY
The dissolution of the Company must be approved by the affirmative vote of
shareholders holding at least a majority of all the votes entitled to be cast or
the written consent of all shares entitled to vote on this matter.
ADVANCE NOTICE OF DIRECTOR NOMINATIONS AND NEW BUSINESS
The Bylaws of the Company provide that (a) with respect to an annual
meeting of shareholders, nominations of persons for election to the Board of
Directors and the proposal of business to be considered by shareholders may be
made only (i) pursuant to the Company's notice of the meeting, (ii) by the Board
of
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Directors, or (iii) by a shareholder who is entitled to vote at the meeting and
who has complied with the advance notice procedures set forth in the Bylaws, and
(b) with respect to special meetings of shareholders, only the business
specified in the Company's notice of the meeting may be brought before the
meeting of shareholders, and nominations of persons for election to the Board of
Directors may be made only (i) pursuant to the Company's notice of meeting, (ii)
by the Board of Directors, or (iii) provided that the Board of Directors has
determined that directors shall be elected at such meeting, by a shareholder who
is entitled to vote at the meeting and who has complied with the advance notice
provisions set forth in the Bylaws.
The provisions in the Articles of Incorporation on classification of the
Board of Directors and removal of directors, the business combination and, if
the applicable provision in the Company's Bylaws is rescinded, control share
acquisition provisions of the MGCL, and the advance notice provisions of the
Bylaws could have the effect of discouraging a takeover or other transaction in
which holders of some, or a majority, of the Common Stock might receive a
premium for their Common Stock over the then prevailing market price or which
such holders might believe to be otherwise in their best interests.
FEDERAL INCOME TAX CONSIDERATIONS
The Company believes it has operated, and the Company intends to continue
to operate, in such a manner as to qualify as a REIT under the Code, but no
assurance can be given that it will at all times so qualify.
The provisions of the Code pertaining to REITs are highly technical and
complex. The following is a brief and general summary of certain provisions that
currently govern the federal income tax treatment of the Company and its
stockholders. For the particular provisions that govern the federal income tax
treatment of the Company and its stockholders, reference is made to Sections 856
through 860 of the Code and the regulations thereunder. The following summary is
qualified in its entirety by such reference.
Under the Code, if certain requirements are met in a taxable year, a REIT
generally will not be subject to federal income tax with respect to income that
it distributes to its stockholders. If the Company fails to qualify during any
taxable year as a REIT, unless certain relief provisions are available, it will
be subject to tax (including any applicable alternative minimum tax) on its
taxable income at regular corporate rates, which could have a material adverse
effect upon its stockholders.
In any year in which the Company qualifies to be taxed as a REIT,
distributions made to its stockholders out of current or accumulated earnings
and profits will be taxed to stockholders as ordinary income except that
distributions of net capital gains designated by the company as capital gain
dividends will be taxed as long-term capital gain income to the stockholders. To
the extent that distributions exceed current or accumulated earnings and
profits, they will constitute a return of capital, rather than dividend or
capital gain income, and will reduce the basis for the stockholder's securities
with respect to which the distribution is paid or, to the extent that they
exceed such basis, will be taxed in the same manner as gain from the sale of
those securities.
Investors are urged to consult their own tax advisors with respect to the
appropriateness of an investment in the Offered Securities and with respect to
the tax consequences arising under federal law and the laws of any state,
municipality or other taxing jurisdiction, including tax consequences resulting
from such investor's own tax characteristics. In particular, foreign investors
should consult their own tax advisors concerning tax consequences of an
investment in the Company, including the possibility of United States income tax
withholding on Company distributions.
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LEGAL MATTERS
Certain legal and tax matters will be passed upon for the Company by
Gibson, Dunn & Crutcher LLP, Los Angeles, California, and the legality of the
Offered Securities will be passed upon for the Company by Piper & Marbury
L.L.P., Baltimore, Maryland.
EXPERTS
The financial statements for Pacific Gulf Properties Inc. and the
Predecessor Multifamily and Industrial Operations included in the Company's
Annual Report on Form 10-K/A for the year ended December 31, 1995 and
incorporated by reference in this Prospectus have been audited by Ernst & Young
LLP, independent auditors, as stated in their report appearing therein and has
been so included in reliance upon the report given upon their authority as
experts in accounting and auditing.
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NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN OR
INCORPORATED BY REFERENCE 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 UNDERWRITER. NEITHER THIS PROSPECTUS SUPPLEMENT NOR THE ACCOMPANYING
PROSPECTUS CONSTITUTES AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER TO BUY
ANY SECURITY OTHER THAN THE SECURITIES OFFERED HEREBY, NOR DO THEY CONSTITUTE AN
OFFER TO SELL OR A SOLICITATION OF ANY OFFER TO BUY ANY OF THE SECURITIES
OFFERED HEREBY BY ANYONE IN ANY JURIS-DICTION 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 OR
THEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT ANY
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE
HEREOF.
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TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Prospectus Supplement Summary.............. S-3
Recent Developments........................ S-5
Use of Proceeds............................ S-8
Capitalization............................. S-9
Price Range of Common Stock and
Distributions............................ S-10
Current Markets............................ S-11
Business and Properties.................... S-13
Federal Income Tax Considerations.......... S-17
Underwriting............................... S-25
Legal Matters.............................. S-25
Experts.................................... S-25
PROSPECTUS
Available Information...................... 2
Incorporation of Certain Documents by
Reference................................ 3
The Company................................ 4
Risk Factors............................... 5
Use of Proceeds............................ 9
Ratio of Earnings to Fixed Charges......... 10
Plan of Distribution....................... 10
Description of Common Stock................ 12
Description of Preferred Stock............. 13
Restrictions on Transfer of Capital
Stock.................................... 16
Certain Provisions of Maryland Law and of
the Company's Articles of Incorporation
and Bylaws............................... 18
Federal Income Tax Considerations.......... 21
Legal Matters.............................. 22
Experts.................................... 22
</TABLE>
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2,000,000 Shares
LOGO
PACIFIC GULF
PROPERTIES INC.
Common Stock
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PROSPECTUS SUPPLEMENT
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PRUDENTIAL SECURITIES INCORPORATED
January 15, 1997
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