<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 15 1998
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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PACIFIC GULF PROPERTIES INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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MARYLAND 33-0577520
<S> <C>
(STATE OR OTHER JURISDICTION OF INCORPORATION OR (I.R.S. EMPLOYER IDENTIFICATION NO.)
ORGANIZATION)
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4220 VON KARMAN AVENUE
NEWPORT BEACH, CALIFORNIA 92660
(949) 223-5000
(ADDRESS, INCLUDING ZIP CODE AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
GLENN L. CARPENTER
CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER
PACIFIC GULF PROPERTIES INC.
4220 VON KARMAN AVENUE
NEWPORT BEACH, CALIFORNIA 92660
(949) 223-5000
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPIES TO:
DHIYA EL-SADEN, ESQ.
GIBSON, DUNN & CRUTCHER, LLP
333 SOUTH GRAND AVENUE
LOS ANGELES, CALIFORNIA 90067
(213) 229-7000
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
From time to time after the effective date of this Registration Statement.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box: [ ]
If any of the securities on this Form are to be offered on a delayed or
continuous basis pursuant to Rule 415 under the Securities Act of 1933, other
than securities offered only in connection with dividend or interest
reinvestment plans, check the following box: [X]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, please check the
following box and list the Securities Act registration statement number of the
earlier effective registration statement for the same offering: [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: [ ]
CALCULATION OF REGISTRATION FEE
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TITLE OF EACH CLASS OF PROPOSED MAXIMUM PROPOSED MAXIMUM
SECURITIES AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING AMOUNT OF
TO BE REGISTERED REGISTERED SHARE(1) PRICE(1) REGISTRATION FEE
- -------------------------------------------------------------------------------------------------------------------------
Common Stock, $.01 par
value per share(2)..... 211,921 22.53125 4,774,845 1,447
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(1) Estimated solely for the purposes of determining the registration fee.
Calculated on the basis of the average of the high and low reported prices
of the Registrant's Common Stock on the New York Stock Exchange on May 12,
1998.
(2) Each share of Common Stock includes one Preferred Stock Purchase Right as
described in the Registrant's registration statement on Form 8-A filed
December 17, 1997.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a)
MAY DETERMINE.
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INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED MAY 15, 1998
PROSPECTUS
LOGO
211,921 SHARES
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, rehabilitates and develops industrial and multifamily
properties. The Company's properties are located in California and the Pacific
Northwest, with the largest concentration in Southern California. The Company
focuses on the industrial and multifamily properties in this geographic region
due to management's extensive experience in these property types and markets and
management's belief that these markets present potential for long-term economic
growth. As of March 31, 1998, the Company owned a portfolio of 56 operating
industrial properties containing an aggregate of 11.8 million leasable square
feet, two industrial properties being rehabilitated containing approximately
639,000 leasable square feet and five industrial properties being developed that
will contain approximately 622,000 leasable square feet (the "Industrial
Properties"). As of March 31, 1998, the Company also owned a portfolio of 25
operating multifamily properties, which included 17 apartment communities
containing 3,383 units and eight active senior apartment communities containing
1,438 units (the "Multifamily Properties," and collectively with the Industrial
Properties, the "Properties"). As of March 31, 1998, the operating Industrial
Properties and Multifamily Properties then owned by the Company experienced
occupancy rates of 96% and 95%, respectively.
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
more flexibility in implementing its investment, disposition and property
management strategies.
This Prospectus relates to 211,921 shares (the "Exchange Shares" or the
"Securities") of Common Stock, par value $.01 per share (the "Common Stock"), of
the Company that may be offered and sold from time to time by the stockholders
of the Company listed herein under "Selling Stockholders" (the "Selling
Stockholders"). The Exchange Shares have been, or may be, issued by the Company
to the Selling Stockholders in exchange for 211,921 units ("Units") of limited
partnership interest in PGP Inland Properties, L.P., a Delaware limited
partnership (the "Inland Partnership"), pursuant to the Company's obligations
under that certain Exchange Rights Agreement, dated as of August 15, 1995, among
the Company, the Inland Partnership, and the limited partners of the Inland
Partnership (the "Limited Partners") (the "Exchange Rights Agreement"). The
Company is registering the offer and sale of the Exchange Shares by the Selling
Stockholders pursuant to its obligations under that certain Registration Rights
Agreement, dated as of August 15, 1995, among the Company and the Limited
Partners (the "Registration Rights Agreement"), but the registration of such
shares does not necessarily mean that any of such shares will be offered or sold
by the holders thereof.
The Company's Common Stock is traded on the New York Stock Exchange (the
"NYSE") under the symbol "PAG." On May 11, 1998, the closing sale price of the
Common Stock as reported on the NYSE was $22.5625 per share.
SEE "RISK FACTORS" BEGINNING AT PAGE 6 OF THIS PROSPECTUS FOR MATERIAL
RISK FACTORS RELEVANT TO AN INVESTMENT IN THE COMMON STOCK.
The Selling Stockholders may from time to time offer and sell the Exchange
Shares held by them directly or through agents or broker-dealers on terms to be
determined at the time of sale. To the extent required, the names of any agent
or broker-dealer and applicable commissions or discounts and any other required
information with respect to any particular offer will be set forth in an
accompanying Prospectus Supplement. See "Plan of Distribution." Each of the
Selling Stockholders reserves the sole right to accept or reject, in whole or in
part, any proposed purchase of the Exchange Shares to be made directly or
through agents.
The Company will not receive any proceeds from the sale of such Exchange
Shares by the Selling Stockholders, but has agreed to bear certain expenses of
registration of the Exchange Shares under Federal and state securities laws,
other than commissions and discounts of agents or broker-dealers and transfer
taxes, if any.
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. 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 Capital
Stock."
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.
------------------------
THE DATE OF THIS PROSPECTUS IS MAY , 1998
<PAGE> 3
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 Exchange Shares.
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 Exchange Shares, 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 though 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 of NYSE, 20 Broad Street, New York, New York 10005.
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<PAGE> 4
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.
(a) The Company's Annual Report on Form 10-K, for its fiscal year
ended December 31, 1997;
(b) The Company's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1998;
(c) 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), as supplemented by Form 8-A filed with the Commission on
October 29, 1996; and
(d) The description of the Registrant's Preferred Stock Purchase
Rights contained in its Registration Statement on Form 8-A filed with the
Commission on December 17, 1997 (File No. 1-12768).
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 Statement 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 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
Stockholder Relations, Pacific Gulf Properties Inc., 4220 Von Karman Avenue,
Newport Beach, California 92660; telephone (949) 223-5000.
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PROSPECTUS 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 and in the documents incorporated herein
by reference. Unless the context otherwise requires, as used herein the term
"Company" includes Pacific Gulf Properties Inc. and its consolidated
subsidiaries and partnerships. This Prospectus includes 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), 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 set forth herein, general economic and business
conditions, the business opportunities that may be presented to and pursued by
the Company, and 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.
THE COMPANY
The Company, a self-administered and self-managed equity REIT, owns,
operates, leases, acquires, rehabilitates and develops industrial and
multifamily properties. The Company's properties are located in California and
the Pacific Northwest, with the largest concentration in Southern California.
The Company focuses on the industrial and multifamily properties in this
geographic region due to management's extensive experience in these property
types and markets and management's belief that these markets present potential
for long-term economic growth. As of March 31, 1998, the Company owned a
portfolio of 56 operating Industrial Properties, containing an aggregate of 11.8
million leasable square feet, two industrial properties being rehabilitated
containing approximately 639,000 leasable square feet and five industrial
properties being developed that will contain approximately 622,000 leasable
square feet. As of March 31, 1998, the Company also owned a portfolio of 25
operating Multifamily Properties, which included 17 apartment communities
containing 3,383 units and eight active senior apartment communities containing
1,438 units. As of March 31, 1998, the operating Industrial Properties and
Multifamily Properties then owned by the Company experienced occupancy rates of
96% and 95%, respectively.
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
more flexibility in implementing its investment, disposition and property
management strategies.
The Company seeks to maximize cash flow from existing properties, making
accretive acquisitions of additional operating properties in its geographic
markets, rehabilitating acquired and existing properties and developing other
properties.
The Company's Common Stock is listed on the NYSE under the symbol "PAG."
The Company was incorporated in Maryland in August 1993. The Company's executive
offices are located at 4220 Von Karman
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Avenue, Newport Beach, California, 92660; and its telephone number is (949)
223-5000. Unless the context otherwise requires, as used herein the term
"Company" includes Pacific Gulf Properties Inc. and its consolidated
subsidiaries and partnerships.
THE INLAND PARTNERSHIP UNITS
The Inland Partnership was formed in 1995 by the Company, as general
partner, and the Limited Partners. The Limited Partners contributed certain
Properties to the Partnership in exchange for Units. In general, the Board of
Directors of the Company, in its capacity as sole general partner of the Inland
Partnership, manages the affairs of the Inland Partnership by directing the
affairs of the Company.
Pursuant to the Exchange Rights Agreement, the Limited Partners became
entitled in August 1997 to require the Company to purchase their Units for cash
or, at the option of the Company, shares of Common Stock. Pursuant to the
Registration Rights Agreement, the Company, upon the satisfaction of certain
conditions, is obligated to file and keep effective a registration statement
with respect to the offer and sale, from time to time, of such shares by such
Limited Partners.
The Selling Stockholders constitute Limited Partners who have exercised, or
may exercise, the above described rights and who have acquired, or may acquire,
shares of Common Stock as consideration for the Company's purchase of the Units.
This Prospectus constitutes a part of the Registration Statement pursuant to
which the Company has registered the offer and sale, from time to time, of such
shares by the Selling Stockholders.
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RISK FACTORS
Prospective investors should carefully consider the following information
in conjunction with the other information contained in this Prospectus before
investing in the shares of Common Stock offered hereby.
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, or that the terms of such
refinancing will not be as favorable as the terms of existing indebtedness.
As of March 31, 1998, the Company had outstanding approximately $295.0
million of indebtedness secured by certain of its Properties, and a debt to
total market capitalization ratio of 40%. There is no limitation on the amount
of indebtedness the Company may incur. The Company, therefore, could become more
highly leveraged than it currently is, resulting in an increase in debt service.
An increase in the Company's debt service will adversely affect the Company's
cash from operations, its ability to make expected distributions to stockholders
and its ability to comply with its other financial obligations. Risks normally
associated with debt financing include (i) the risk that cash from operations
will be insufficient to meet required payments of principal and interest, (ii)
the risk that existing indebtedness cannot be refinanced, (iii) the risk that
the terms of such refinancing will not be as favorable as the terms of existing
indebtedness and (iv) the risk that interest rates may increase, adversely
affecting the Company's ability to make distributions. If real property is
mortgaged to secure payment of indebtedness and the Company is unable to meet
mortgage payments, such property could be transferred to the mortgagee with a
consequent loss of income and asset value to the Company.
If prevailing interest rates or other factors at the time of a 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 maintain or improve its Properties or 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 cash flow or operating results. 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.
The Company will, on occasion, incur indebtedness secured by more than one
property. The Company may also incur separate pieces of indebtedness that
contain cross-default provisions pursuant to which a default under one piece of
indebtedness will result in a default under all other cross-defaulted pieces of
indebtedness. In any of such circumstances, the Company's inability to meet debt
service payments on one piece of indebtedness may result in a loss through
foreclosure of multiple properties due to the effects of such
cross-collateralization or cross-default provisions.
As of March 31, 1998, the three largest pools of loans that contained
cross-collateralization features amounted to $59.6 million (secured by 9
properties), $34.0 million (secured by 5 properties) and $24.5 million (secured
by 6 properties), respectively. Approximately $28.6 million of other term loan
indebtedness contained either a cross-collateralization or cross-default
feature.
As of March 31, 1998, certain of the Properties were subject to variable
rate mortgage indebtedness. At that date, the weighted average interest rate on
such outstanding indebtedness was 7.4%. 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 Properties. Acquisitions of such properties entail risks that
investments will fail to perform in accordance with expectations. Estimates
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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 has also recently begun to pursue Industrial and Multifamily
development projects. Such projects generally require various governmental and
other approvals, the receipt of which cannot be assured. Such development
activities entail certain risks, 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 cash flow or
operating results or the funds available for distribution from those
anticipated.
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 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 Properties are located affects occupancy, market
rental rates and expenses and, consequently, has an impact on the income from
the 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
Properties.
Increases in income, service or other taxes generally are not passed
through to tenants under leases and may adversely affect the Company's cash flow
or operating results 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 cash flow
or operating results and its ability to make distributions to stockholders.
LACK OF GEOGRAPHIC DIVERSIFICATION
The Properties are located in California and the Pacific Northwest, with
the largest concentration in Southern California. Income from the 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 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 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., Americans with Disabilities Act 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.
RISKS ASSOCIATED WITH POSSIBLE HEDGING
The Company may from time to time engage in hedging transactions to limit
the effects of changes in interest rates on its operations, including engaging
in interest rate swaps, caps, floors and other interest rate exchange contracts.
The use of these types of instruments to hedge a portfolio carries a certain
risks, including the risk that losses on a hedge position will reduce the funds
available for distribution to shareholders and that
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<PAGE> 9
such losses may exceed the amount invested in such instruments. There is no
perfect hedge for any investment, and a hedge may not perform its intended
purpose of offsetting losses on an investment.
AFFORDABLE HOUSING LAWS
Certain of the Company's Multifamily 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. For a discussion of the Multifamily Properties that
are subject to such laws and regulations, see Item 1 "Business -- Indebtedness"
in the Company's Annual Report on Form 10-K for its fiscal year ended December
31, 1997.
A certain amount of the 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, (the "Code") 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 be
occupied by 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 median income test. If the
required number of apartment homes are not reserved form 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 Properties
in attracting tenants to lease space. Some of these competing properties are
newer, better located or better capitalized than the 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. While the Company has not
experienced material competitive pressures confined to specific geographic
regions, it is possible that material adverse changes in regional economies or
in the operations of major regional employers (such as Boeing in the Pacific
Northwest) could have a material adverse effect on the ability of the Company to
lease its Properties and on the rents charged. Conversely, if any of the
regional geographic areas in which the Company owns Properties experiences
economic growth, the Company is likely to experience increased competition for
acquisition and development projects, thereby increasing the Company's costs of
acquisition and development and potentially reducing the Company's returns
therefrom.
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
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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 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 general
policy that ACMs will be removed by the Company in the ordinary course of
renovation and construction.
Moreover, there may 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. Although a structure built prior to 1978 may contain
lead-based paint and may present a potential for exposure to lead, structures
built after 1978 are not likely to contain lead-based paint. Although 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 Company also recognizes that the Properties' values may be affected by
the proximity of the Properties to electric transmission lines. Electric
transmission lines are one of many sources of electro-magnetic fields ("EMFs")
to which people may be exposed. Research completed regarding potential health
concerns associated with exposure to EMFs has produced inconclusive results.
Notwithstanding the lack of conclusive scientific evidence, some states now
regulate the strength of electric and magnetic fields emanating from electric
transmission lines, and other states have required transmission facilities to
measure for levels of EMFs. The Company understands that, on occasion, lawsuits
have been filed (primarily against electric utilities) that allege personal
injuries from exposure to transmission lines and EMFs, as well as from fear of
adverse health effects due to such exposure. This fear of adverse health effects
from transmission lines has been considered both when property values have been
determined to obtain financing, and in condemnation proceedings. The Company has
not searched for electric transmission lines near the Properties, but the
Company is aware of the potential exposure to damage claims by persons exposed
to EMFs.
Each of the Properties has been subjected to a Phase I or similar
environmental assessment. These assessments, completed by licensed and qualified
independent environmental consulting companies, usually are completed without
radon testing, and involve general inspections without soil sampling or
groundwater analysis. Some of the Company's properties have been subject to a
limited subsurface investigation. While these environmental assessments have not
revealed any environmental liability, no assurances can be given that such
assessments would reveal all such liabilities. Similarly, while the Company's
management is not aware of any environmental liability that it believes would
have a material adverse effect on the Company's business, assets or results of
operations, no assurances can be given that either a material environmental
condition does not otherwise exist as to any one or more of the Properties, or
that a prior owner of any of the Properties did not create any such condition
not known to the Company.
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. However, certain types of extraordinary losses exist which are
either uninsurable or not economically insurable. Further, all of the Properties
are located in areas subject to earthquake activity. Although the Company has
obtained certain limited earthquake insurance policies, should one or more of
the Properties sustain damage as a result of an earthquake, the Company may
sustain losses due to insurance deductibles and co-payments on insured or
uninsured losses.
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ADVERSE CONSEQUENCES OF FAILURE TO QUALIFY AS A REIT
Tax Liabilities Upon Failure to Qualify as a REIT. The Company has made the
election to be treated for Federal income tax purposes as a REIT under 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
numerous 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. See "Federal Income Tax
Considerations." 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 REIT qualification or the
Federal income tax consequences of such qualification, possibly with retroactive
effect.
If in any taxable year the Company does not qualify as a REIT, it would be
taxed as a regular corporation and distributions to its stockholders would not
be deductible by the Company in computing its taxable income. In addition,
unless entitled to relief under certain statutory provisions, the Company would
also be disqualified from REIT treatment for the four taxable years following
the year during which qualification was lost. This treatment would significantly
reduce the funds available for investment, distribution or payment to holders of
Exchange Shares because of the additional tax liability of 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 stockholders 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 borrow funds or dispose of assets in order to pay dividends, or to
reduce its dividends below the level necessary to maintain its qualification as
a REIT, which would have material adverse tax consequences.
Other REIT Taxes. Certain transactions or other events could lead to the
Company being taxed at rates ranging from 4% to 100% on certain income or gains.
See "Federal Income Tax Considerations."
DEPENDENCE ON KEY PERSONNEL
The Company's management has substantial experience in acquiring, managing
and financing industrial and multifamily 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.
RISKS ASSOCIATED WITH PREFERRED STOCK
The Company has issued and outstanding 1,351,351 shares of Class A Senior
Cumulative Convertible Preferred Stock (the "Class A Preferred Stock") and
1,411,765 shares of Class B Senior Cumulative Convertible Preferred Stock (the
"Class B Preferred Stock," and, together with the Class A Preferred Stock, the
"Outstanding Preferred Stock"). All shares of the Outstanding Preferred Stock
are owned by Five Arrows Realty Securities L.L.C. ("Five Arrows"). All
cumulative dividends on the Outstanding Preferred Stock must be paid in full
before any dividend or distribution can be made in respect of the Company's
Common Stock. Holders of the Outstanding Preferred Stock and holders of the
Company's Common Stock vote together as a single class, and thus holders of
Outstanding Preferred Stock dilute the voting control of holders of Common
Stock. Additionally, Five Arrows has the right to appoint one or more directors
to the Company's Board of Directors under certain circumstances. Generally, the
Outstanding Preferred Stock is convertible into shares of Common Stock on a
one-for-one basis. Under certain circumstances involving a Change of Control or
Put Event (as such terms are herein defined), holders of Outstanding Preferred
Stock have the right to require the Company to convert each share of Outstanding
Preferred Stock into more than one share of Common Stock. Thus, the Outstanding
Preferred Stock may dilute the value of the financial ownership of the Company
by holders of Common Stock, and may also discourage third parties from
attempting to acquire control of the Company. See "Description of Capital
Stock -- Class A Senior Cumulative Convertible Preferred Stock" and "-- Class B
Senior Cumulative Convertible Preferred Stock."
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ANTI-TAKEOVER PROVISIONS
Certain provisions of the Company's Articles of Incorporation and the
Maryland General Corporation Law (the "MGCL"), federal tax laws governing the
qualifications of REITs and the Company's outstanding Preferred Stock Purchase
Rights under its Rights Plan could have the effect of making it more difficult
for a third party to acquire, or of discouraging a third party from attempting
to acquire, control of the Company. Such provisions could limit the price that
certain investors might be willing to pay in the future for shares of Common
Stock. See "Description of Capital Stock," "Certain Provisions of Maryland Law
and of the Company's Articles of Incorporation and Bylaws" and "Federal Income
Tax Considerations."
Such provisions in the Articles of Incorporation and MGCL include a
classified board of directors, limitations on the ability of stockholders to
remove a director and limitations on the ownership of shares of capital stock of
the Company. See "Description of Capital Stock -- Ownership and Transfer
Restrictions and Redemption Provisions" and "Certain Provisions of Maryland Law
and of the Company's Articles of Incorporation and Bylaws."
ISSUANCE OF SHARES MAY ADVERSELY AFFECT MARKET PRICE OF COMMON STOCK AND DILUTE
PER SHARE AMOUNTS AVAILABLE FOR DISTRIBUTION
Future issuances 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 stockholders. An aggregate of $56.6 million 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 pursuant to which it issued an aggregate
of 2,440,002 shares of Common Stock in exchange for $42.1 million in principal
amount of Debentures (at a rate of 58 shares of Common Stock for each $1,000
principal amount of Debentures). An aggregate of $12.4 million in principal
amount of Debentures was outstanding as of March 31, 1998. Such 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, resulting in
approximately 669,000 issuable shares.
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DESCRIPTION OF CAPITAL STOCK
The summary of the terms of the Company's capital 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 Stock"), and
5,000,000 shares of preferred stock, par value $.01 per share (the "Preferred
Stock"), of which 1,351,351 shares have been classified as Class A Preferred
Stock and of which 1,411,765 shares have been classified as Class B Preferred
Stock. As of March 31, 1998, 19,987,145 shares of Common Stock, 1,351,351 shares
of Class A Preferred Stock and 1,411,765 shares of Class B Preferred Stock were
issued and outstanding. Under Maryland law, stockholders generally are not
liable for a corporation's debts or obligations.
COMMON STOCK
Any shares of Common Stock offered hereby by the Company will be issued and
delivered upon receipt of payment. Subject to the preferential rights of any
other shares or series of capital stock, 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 stockholders 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 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 stockholders, 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 a 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.
All shares of Common Stock will have equal dividend, distribution,
liquidation and other rights, and will have no preference, appraisal or exchange
rights.
Pursuant to 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 stockholders 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 stockholders 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 on the
Common Stock and the rights and obligations of holders thereof. See "Certain
Provisions of Maryland Law and of the Company's Articles of Incorporation and
Bylaws."
The transfer agent and registrar for the Common Stock is Harris Trust
Company of California.
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Purchasers of Common Stock will be subject to the restrictions on ownership
and transfer of the capital stock of the Company described below under the
heading "Ownership and Transfer Restrictions and Redemption Provisions." Such
provisions could affect a purchaser's ability to vote, to receive dividend and
other distributions, to convert or to otherwise obtain the benefit of
Securities.
PREFERRED STOCK PURCHASE RIGHTS
On December 11, 1997, the Company announced the adoption of a stockholder
rights plan (the "Rights Plan"). The record date for the distribution of rights
under the Rights Plan was December 29, 1997. For additional information
regarding the Rights Plan, see the Company's Current Report on Form 8-K filed
with the Commission on December 18, 1997 and incorporated herein by reference.
CLASS A SENIOR CUMULATIVE CONVERTIBLE PREFERRED STOCK
The Company has issued an aggregate of 1,351,351 shares of Class A
Preferred Stock to Five Arrows Realty Securities L.L.C. ("Five Arrows") at a
price of $18.50 per share.
The holders of the Class A Preferred Stock and the holders of the Common
Stock vote together as a single class. Each share of Class A Preferred Stock is
convertible into one share of Common Stock, subject to adjustment upon certain
events. The annual dividend per share on the Class A Preferred Stock 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 Stock is $18.50 per share, plus
an amount equal to any accumulated, accrued and unpaid dividends. The Company
may redeem the Class A Preferred Stock beginning on December 31, 2001 for cash
in an amount equal to $18.50 per share of Class A Preferred Stock 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 Stock 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 Stock,
Five Arrows would be granted one additional seat on the Board (all such
directors being "Preferred Directors").
If a Change in Control or Put Event (each, as defined below) occurs as a
result of the voluntary (and not legally compelled) act, omission or
participation of the Company, which act, omission, or participation the Company
had the discretion under existing laws and regulations to refrain from, then
each holder of shares of Class A Preferred Stock will have the right to require
the Company to redeem such holder's shares of Class A Preferred Stock at a
redemption price payable in cash in an amount equal to 102% of the Liquidation
Value thereof, plus accrued and unpaid dividends whether or not declared, if
any, to the date of purchase or the date that payment is made available. If a
Change of Control or Put Event occurs that is not the result of such voluntary
act, omission or participation of the Company, the Company may elect not to make
the foregoing put payment in which event the Conversion Ratio shall be revised
to the greater of (i) 75% of the then current Conversion Ratio so that each
share of Class A Preferred Stock will be convertible into 133% of the number of
shares of Common Stock into which it would otherwise have been convertible and
(ii) a fraction, the numerator of which is 75% of the then current market price
and the denominator of which is $18.50.
The following terms, as used herein, have the following meanings:
"Change of Control" means each occurrence of any of the following: (i)
the acquisition, directly or indirectly, by any individual or entity or
group (as such term is used in Section 13(d)(3) of the Exchange Act of
1934, as amended (the "Exchange Act")) of beneficial ownership (as defined
in Rule 13d-3 under the Exchange Act, except that such individual or entity
shall be deemed to have beneficial ownership of all shares that any such
individual or entity has the right to acquire, whether such right is
exercisable
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immediately or only after passage of time) of more than 25% of the
aggregate outstanding voting power of capital stock of the Company; (ii)
other than with respect to the election, resignation or replacement of the
Preferred Directors, during any period of two consecutive years,
individuals who at the beginning of such period constituted the Board of
Directors of the Company (together with any new directors whose election by
such Board of Directors or whose nomination for election by the
stockholders of the Company was approved by a vote of 66 2/3% of the
directors of the Company (excluding Preferred Directors) then still in
office who were either directors at the beginning of such period, or whose
election or nomination for election was previously so approved) cease for
any reason to constitute a majority of the Board of Directors of the
Company then in office; and (iii) (A) the Company consolidates with or
merges into another entity (the "Merger Entity") or conveys, transfers or
leases all or substantially all of its respective assets (including, but
not limited to, real property investments) to any individual or entity (the
"Acquiring Entity", and, together with the Merger Entity, the "Successor
Entity"), or (B) any corporation consolidates with or merges into the
Company, which in either event (A) or (B) is pursuant to a transaction in
which the outstanding voting capital stock of the Company is reclassified
or changed into or exchanged for cash, securities or other property (unless
the holders of the voting capital stock of the Company immediately prior to
such transaction hold immediately after such transaction more than 50% of
the outstanding voting capital stock of the Successor Entity.
"Put Event" means each occurrence of any of (i) the Company fails to
qualify as a real estate investment trust as described in Section 856 of
the Internal Revenue Code of 1986, as amended, other than as a result of
any action, or unreasonable failure to act, by any holder of Class A
Preferred Stock; (ii) the Company becomes a "Pension-held REIT" as defined
in Section 856(h)(3)(d) of the Internal Revenue Code of 1986, as amended,
other than as a result of any action, or unreasonable failure to act, by
the holders of Class A Preferred Stock; or (iii) the Company ceases to be
engaged primarily in the business of owning and managing multi-family
properties and/or industrial properties directly, or through subsidiaries,
as carried on as of the date hereof and described in the Company's Annual
Report on Form 10-K, as amended, as filed with the Securities and Exchange
Commission for the year ended December 31, 1996.
Five Arrows is prohibited from transferring any shares of Class A Preferred
Stock, or any shares of Common Stock into which such shares of Class A Preferred
Stock have been converted, until June 30, 1998. 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 shares of
Class A Preferred Stock or the shares of Common Stock into which such shares of
Class A Preferred Stock have been converted.
CLASS B SENIOR CUMULATIVE CONVERTIBLE PREFERRED STOCK
The Company has issued an aggregate of 1,411,765 shares of Class B
Preferred Stock to Five Arrows at a price of $21.25 per share.
As part of this transaction, Five Arrows agreed to waive certain
availability fees that were to be charged to the Company if all of the shares of
Class A Preferred Stock were not issued before July 1, 1997. Additionally, Five
Arrows agreed that it would not transfer any Class A Preferred Stock or Class B
Preferred Stock, or any shares of Common Stock into which such shares of
Preferred Stock have been converted, until June 30, 1998. The terms of the Class
B Preferred Stock are substantially similar to those of the Class A Preferred
Stock, except that (i) the liquidation preference of the Class B Preferred Stock
is $21.25 per share (plus accumulated, accrued and unpaid dividends) and (ii)
Five Arrows will not be entitled to designate any additional representatives to
the Company's Board of Directors while it owns both the Class A Preferred Stock
and the Class B Preferred Stock. See "Description of Capital Stock -- Class A
Senior Cumulative Convertible Preferred Stock" above.
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OWNERSHIP AND TRANSFER RESTRICTIONS AND REDEMPTION PROVISIONS
For the Company to qualify as a REIT under 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 it is
essential for the Company to qualify as a REIT, the Articles of Incorporation
include certain provisions restricting the acquisition of the Company's capital
stock, including Common Stock and Preferred Stock (the "Ownership Limit
Provision").
The Ownership Limit Provision provides that, subject to certain exceptions,
no stockholder 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 capital 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 capital stock (or the acquisition of an interest in
an entity which owns Common Stock) 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 capital stock to the Ownership Limit
Provision. In addition, for these purposes, Common Stock that may be acquired
upon conversion of Securities owned or deemed owned by an investor, but not
other Common Stock, is deemed to be owned by the investor and outstanding prior
to conversion, for purposes of determining the percentage of ownership of
capital stock owned by that investor.
The Board of Directors may waive the Ownership Limit Provision with respect
to a particular stockholder if (i) such person is not an individual for purposes
of applying the "five or fewer" rule described above, (ii) the Board of
Directors obtains such representations and undertakings as are reasonably
necessary to ascertain that no individual's actual or deemed ownership of
capital stock will violate the Ownership Limit Provision, and (iii) such person
agrees that, if an IRS Ruling Satisfactory to the Corporation (as defined below)
has been obtained, a violation of such representations and undertakings will
result in such capital stock being exchanged for Excess Stock. As a condition of
such waiver, the Board of Directors may require a ruling from the IRS or an
opinion of counsel satisfactory to it in its sole discretion as it may deem
necessary or advisable in order to determine or ensure the Company's status as a
REIT. The ability of the Board of Directors to waive the Ownership Limit
Provision does not apply to a waiver that would result in capital stock being
beneficially owned by fewer than 100 persons or that would result in a violation
of the "five or fewer" rule discussed above. In connection with its acquisition
of the Class A Preferred Stock and Class B Preferred Stock, Five Arrows has been
given a limited waiver of the Ownership Limit Provision.
The Articles of Incorporation provide that a transfer or other event that
results in a person owning capital 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 capital stock. However, if the Company
obtains a ruling by the IRS, that provides in form and substance satisfactory to
the Board of Directors of the Company that the issuance by the Company of Excess
Stock and the immediate conversion of the Common Stock or Preferred Stock into
such Excess Stock will not cause the Company to fail to satisfy the requirements
that must be met to qualify for treatment as a REIT (an "IRS Ruling Satisfactory
to the Corporation"), capital stock purportedly owned, or deemed to be owned, or
transferred to a person in excess of the Ownership Limit, will automatically be
exchanged for Excess Stock that will be transferred, by operation of law, to a
trust for the exclusive benefit of the transferee or transferees to whom the
capital stock may ultimately be transferred (without exceeding the Ownership
Limit). The Excess Stock will possess such terms, limitations and rights as set
forth in Articles Supplementary adopted by the Board of Directors and filed of
record with the Maryland State Department of Assessments and Taxation and as are
necessary or prudent to enable the Company to obtain the IRS Ruling Satisfactory
to the Corporation. It is anticipated that the proposed transferee or owner will
not be entitled to vote, and will not be entitled to participate in any
appreciation of, or any distributions made by the Company in respect of, such
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Excess Stock. It is also anticipated that any dividend or distribution paid on
Excess Stock to a purported transferee or owner prior to discovery by the
Company that such shares have become purportedly owned in violation of the
Ownership Limit Provision shall be held for the benefit of the beneficiary of
the trust in which such shares are held. In addition, the Company would have the
right, for a period of 90 days, to purchase all or any portion of the Excess
Stock at a price equal to the lesser of the price paid for the shares of capital
stock by the intended transferee or owner and the closing market price for the
shares of capital stock on the date the Company exercises its option to purchase
the capital stock. This 90-day 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 as required by the Articles of Incorporation, or the
date the Board of Directors determines that a violative transfer has occurred if
no such notice is provided.
The Ownership Limit Provision 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 stockholders 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 Provision 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 stockholders 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 Provision may have the effect of
precluding an acquisition of control of the Company without the approval of the
Board of Directors.
All certificates representing shares of capital stock will bear a legend
referring to the restrictions described above.
All persons who own a specified percentage (or more) of outstanding capital
stock must file an affidavit with the Company containing information regarding
their ownership of capital 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
capital stock. In addition, each stockholder 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 capital 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.
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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
vote by the stockholders or directors then in office. A director chosen by the
stockholders shall hold office for the balance of the term remaining. A director
so chosen by the remaining directors shall hold office until the next annual
meeting of stockholders, at which time the stockholders shall elect a director
to hold office for the balance of the term then remaining. 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 stockholders to be held
in 1998 (i.e., Class I), another class will hold office for a term expiring at
the annual meeting of stockholders to be held in 1999 (i.e., Class II), and
another class will hold office for a term expiring at the annual meeting of
stockholders to be held in 2000 (i.e., Class III). 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 stockholders. At least two annual meetings of
stockholders, 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 stockholders, 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 AND VACANCIES
The Articles of Incorporation provide that a director may be removed only
for cause and only by the affirmative vote of stockholders holding at least
two-thirds of all the votes entitled to be cast in the election of directors.
The Company's Bylaws provide that stockholders may elect a successor to fill a
vacancy on the Board of Directors that results from the removal of a director.
In addition, a vacant position occurring in the Board of Directors for any cause
other than an increase in the number of directors may be filled by a majority
vote of the remaining directors, even if such majority is less than a quorum or
by a majority vote of the stockholders. Any vacancy occurring in the Board of
Directors by reason of an increase in the number of directors may be filled by a
majority vote of the entire Board of Directors or by a majority vote of the
stockholders.
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 stockholders 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 stockholders for money damages to be limited, except (i) to the extent that
it is proved that the director or officer actually received an
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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 stockholders 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 or (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 to the corporation. In addition, a director or officer may not be
indemnified with respect to any proceeding charging improper personal benefit to
the director or officer in which the director or officer was adjudged to be
liable on the basis that personal benefit was improperly received. The
termination of any proceeding by judgment, order or settlement does not create a
presumption that the director did not meet the requisite standard of conduct
required for indemnification to be permitted. However, 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
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 outstanding 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 stockholders
receive a minimum price (as defined in the MGCL) for their shares and the
consideration is received in cash or in the same form as previously paid by the
Interested 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. 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 stockholders 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 stockholders 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 stockholders 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 stockholders meeting and the
acquiror becomes entitled to vote a majority of the shares entitled to vote, all
other stockholders 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 stockholders holding at least a majority of all the votes
entitled to be cast on the matters.
DISSOLUTION OF THE COMPANY
The dissolution of the Company must be approved by the affirmative vote of
stockholders holding at least a majority of all the votes entitled to be cast 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 stockholders, nominations of persons for election to the Board of
Directors and the proposal of business to be considered by stockholders 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 stockholder 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 stockholders, only the business
specified in the Company's notice of the meeting may be brought before the
meeting of stockholders, 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 stockholder 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.
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FEDERAL INCOME TAX CONSIDERATIONS
The following is a summary of certain of the material federal income tax
considerations regarding the Company and 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 investors in
light of their personal investment or tax circumstances, or to certain types of
investors including insurance companies, tax-exempt organizations or retirement
accounts (except to the extent discussed under the heading "-- Taxation of
Tax-Exempt Stockholders"), financial institutions or broker-dealers, foreign
corporations, persons who are not citizens or residents of the United States
(except to the extent discussed under the heading "-- Taxation of Non-U.S.
Stockholders"), and persons who own Securities as part of a conversion
transaction, as part of a hedging transaction, or as a position in a straddle
for tax purposes, which are subject to special treatment under the federal
income, estate and other tax laws.
EACH PURCHASER SHOULD CONSULT HIS OWN TAX ADVISOR AS TO THE SPECIFIC
FEDERAL INCOME TAX CONSEQUENCES OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF
SECURITIES AND THE APPLICABILITY AND EFFECT OF ANY STATE, LOCAL, FOREIGN OR
OTHER TAX LAWS AND OF ANY POTENTIAL CHANGES IN THE APPLICABLE TAX LAWS AFTER THE
DATE HEREOF.
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. However, 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. 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. Further, the anticipated federal
income tax treatment described in this Prospectus may be changed, perhaps
retroactively, by legislative, administrative or judicial action at any time.
See "-- Failure to Qualify."
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
stockholders. This summary is qualified in its entirety by the applicable Code
provisions, Treasury Regulations and rules promulgated thereunder, and
administrative and judicial interpretations thereof.
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 stockholders. This treatment substantially eliminates the "double
taxation" (at the corporate and stockholder 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. However, provided that the
Company properly elects to retain and pay tax on any undistributed net capital
gains, the stockholders will receive a credit for their proportionate share of
such tax. Second, under certain circumstances 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
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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 of
(i) 85% of its REIT ordinary income for such year, (ii) 95% of its REIT capital
gain net income for such year, and (iii) any undistributed taxable income from
prior 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. The result
described above with respect to recognition of "Built-in-Gain" assumes that the
Company will make an election pursuant to IRS Notice 88-19, if the Company
acquires such an asset.
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, directly or
indirectly, by five or fewer individuals (as defined in the Code to include
certain entities) (the "5/50 Rule"); 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 with sufficient
diversity of ownership 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
"Description of Capital Stock -- Ownership and Transfer Restrictions and
Redemption Provisions." 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 stockholders must demand statements from record holders of
5% or more of its shares, one with less than 2,000, but more than 200 record
stockholders must demand statements from record holders of 1% or more of the
shares, while a REIT with 200 or fewer record stockholders 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. A stockholder 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. For taxable years of the
Company beginning prior to January 1, 1998, failure to comply with the foregoing
requirements could have resulted in the Company's disqualification as a REIT.
The Company believes that it has complied with these requirements for such
taxable years. For taxable years of the Company beginning on or after January 1,
1998, the Company will be treated as satisfying the 5/50 Rule if it complies
with the demand letter and
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recordkeeping requirements described above, and if it does not know, and
exercising reasonable diligence would not have known, whether it failed to
satisfy the 5/50 Rule.
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 the partnerships and limited liability companies in which the Company has a
direct or indirect interest (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 (the "75% test").
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 (the "30% test").
The 30% test does not apply to taxable years of the Company beginning on or
after January 1, 1998.
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 ("Disqualified Services"), other
than through an independent contractor from whom the Company derives no revenue.
The Company may, however, 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. For
taxable years of the Company beginning on or after January 1, 1998, however, the
performance of Disqualified Services with respect to any property will not cause
rents from property to fail to be treated as "rents from real property" if the
amount received or accrued for such Disqualified Services is less than, or equal
to, one percent of all amounts received or accrued, directly or indirectly, by
the Company with respect to such property. For purposes of the preceding
sentence, the amount treated as received for any Disqualified Services shall not
be less than 150% of the direct cost of the Company in furnishing or rendering
the Disqualified Services. The Company monitors its activities to ensure that
the foregoing tests are satisfied. There can be no assurances, however, that the
Company will not realize rental
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income 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 "Class A Senior Cumulative Convertible Preferred Stock" and "Class B Senior
Cumulative Preferred Stock."
The Company includes its proportionate share (based on its capital
interest) of income, gain, loss, deduction and credit from the Partnerships in
applying these income tests. In addition, 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 Company
believes that 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.
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. No comparable relief provisions are available to mitigate
the consequences of a failure to satisfy the 30% test, which applies to taxable
years of the Company that commence prior to January 1, 1998.
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, property attributable to the temporary investment of capital
raised within the preceding one-year period, 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 class.
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.
Under Section 856(i) of the Code, a "qualified REIT subsidiary" means any
corporation if 100% of the stock of such corporation is held by the REIT. For
taxable years that begin prior to January 1, 1998, the stock of such corporation
must have been held by the REIT at all times during the period such corporation
was in existence. Under the Code, a corporation which is a qualified REIT
subsidiary is not treated as a separate corporation for federal income tax
purposes, and all assets, liabilities, and items of income, deduction, and
credit of the corporation shall be treated as assets, liabilities, and such
items (as the case may be) of the REIT.
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 stockholders 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
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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 enable the
Company 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 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.
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 stockholders in a later year, which may be included in the
Company's deduction for dividends paid for the earlier year. Thus, the Company
may be able to avoid being taxed on amounts distributed as deficiency dividends.
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 stockholders 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 would substantially reduce the cash available for
distribution by the Company to investors, and could result in the Company's
incurring substantial indebtedness (to the extent that borrowings are feasible)
or liquidating substantial investments in order to pay the resulting taxes. In
addition, if the Company fails to qualify as a REIT, all distributions to
stockholders 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.
TAXATION OF TAXABLE DOMESTIC STOCKHOLDERS
As used herein, the term "domestic stockholder" means a holder of shares of
Common Stock who (for United States federal income tax purposes) (i) is a
citizen or resident of the United States, (ii) is a corporation, partnership, or
other entity created or organized in or under the laws of the United States or
of any political subdivision thereof, (iii) is an estate, the income of which is
subject to United States federal
25
<PAGE> 27
income taxation regardless of its source or (iv) is a trust, if a court within
the United States is able to exercise primary supervision over the
administration of the trust and one or more United States persons have the
authority to control all substantial decisions of the trust. As long as the
Company qualifies as a REIT, distributions made to the Company's taxable
domestic stockholders 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 and that are out of current and accumulated earnings and
profits 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) from the sale
or disposition of a capital asset held for more than one year without regard to
the period for which the stockholder has held its shares. However, domestic
stockholders that are corporations 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 stockholder'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 stockholder's shares they will be included in income as long-term
capital gain (mid-term capital gain if the shares have been held for more than
one year but not more than eighteen months, 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 stockholder. In addition, any dividend declared by the
Company in October, November or December of any year payable to a stockholder of
record on a specified date in any such month shall be treated as both paid by
the Company and received by the stockholder on December 31 of such year,
provided that the dividend is actually paid by the Company during January of the
following calendar year. Stockholders may not include in their individual income
tax returns any net operating losses or capital losses of the Company.
Pursuant to the Taxpayer Relief Act of 1997 (the "1997 Act"), for taxable
years of the Company that begin on or after January 1, 1998, the Company may
elect to retain, rather than distribute as capital gain dividends, its net
long-term capital gain. In such event, the Company would pay tax on its net
long-term capital gain attributable to such taxable year. If the Company makes
this election, its domestic stockholders will be required to include in their
income as long-term capital gain their proportionate share of such amount so
designated by the Company. A domestic stockholder will be treated as having paid
his or her share of the tax paid by the Company in respect of the amount so
designated by the Company, for which such stockholder will be entitled to a
credit or refund. Additionally, each domestic stockholder's adjusted basis in
the Common Stock will be increased by the excess of the amount so includable in
income over the tax deemed paid on such amount. The Company must pay tax on its
designated long-term capital gain within 30 days of the close of any taxable
year in which it designates long-term capital gain pursuant to this rule, and it
must mail a written notice of its designation to its stockholders within 60 days
of the close of the taxable year.
Distributions received by domestic stockholders with respect to Common
Stock and gain arising from the sale or exchange by a domestic stockholder of
shares of Common Stock will not be treated as passive activity income, and, as a
result, domestic stockholders will not be able to apply any "passive activity
losses" against such income or gain. Distributions received by domestic
stockholder with respect to Common Stock (to the extent that they do not
constitute a return of capital) generally will be treated as investment income
for purposes of computing the investment interest limitation. Gain arising from
the sale or other disposition of Common Stock (and distributions treated as
such), however, will not be treated as investment income unless a domestic
stockholder so elects, in which case such capital gains will be taxed at
ordinary income rates.
Upon any sale or other disposition of shares, a domestic stockholder 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 a taxable disposition
of shares will be treated as long-term capital gain or loss if the shares have
been held for more than one year (and as mid-term capital gain if held for more
than one year and less than 18 months) and otherwise as short-term capital gain
or loss. However, any loss upon a sale or exchange of shares by a
26
<PAGE> 28
stockholder 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
stockholder as long-term capital gain.
The 1997 Act also created several new categories of capital gains
applicable to noncorporate taxpayers. Under prior law, noncorporate taxpayers
were generally taxed at a maximum rate of 28% on net capital gain (generally,
the excess of net long-term capital gain over net short-term capital loss).
Noncorporate taxpayers are now generally taxed at a maximum rate of 20% on net
capital gain attributable to gains realized on the sale of property held for
more than eighteen months, and a maximum rate of 28% on net capital gain
attributable to gain realized on the sale of property held for more than one
year and eighteen months or less. In addition, a maximum rate of 25% now applies
to noncorporate taxpayers on certain gains realized on the sale of real
property. The 1997 Act did not affect the treatment of short-term capital gain
or loss (generally, gain or loss attributable to capital assets held for one
year or less) and did not affect the taxation of capital gains in the hands of
corporate taxpayers. The 1997 Act authorizes the IRS to issue regulations
coordinating the capital gains provisions with other rules involving the
treatment of sales and exchanges by "pass-through" entities, such as REITs and
partnerships, and of sales and exchanges of interests therein. The IRS recently
issued Notice 97-64, which states generally that such regulations, when issued,
will permit (but not require) the Company to designate the portion of its
capital gain dividends, if any, to which the 28%, 25% and 20% rates apply, based
on the net amount of each class of capital gain recognized by the Company,
determined as if the Company were an individual subject to a marginal tax rate
on ordinary income of at least 28%.
INFORMATION REPORTING AND BACKUP WITHHOLDING
The Company reports to its domestic stockholders 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 stockholder
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 stockholder 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 stockholder's income tax liability. "In addition, the
Company may be required to withhold a portion of capital gain distributions made
to any stockholders who fail to certify to their nonforeign status to the
Company. See "-- Taxation of Non-U.S. Stockholders."
TAXATION OF TAX-EXEMPT STOCKHOLDERS
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 Stockholder") provided the
Tax-Exempt Stockholder 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 Stockholder. Similarly,
income from the sale of stock of the Company should not, subject to certain
exceptions described below, constitute UBTI unless the Tax-Exempt Stockholder
has held such stock as a dealer (under Section 512(b)(5)(b) of the Code) or as
"debt-financed property."
For Tax-Exempt Stockholders 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.
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<PAGE> 29
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" stockholder 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."
TAXATION OF NON-U.S. STOCKHOLDERS
The rules governing United States federal income taxation of the ownership
and disposition of stock by persons that are not domestic stockholders (as
defined above) (collectively, "Non-U.S. Stockholders") 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. Stockholder 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. Stockholders 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 Securities, including any
reporting requirements.
Distributions. Distributions by the Company to a Non-U.S. Stockholder 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 a withholding tax equal
to 30% of the gross amount of the distribution 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. Stockholder
(or, if an income tax treaty applies, are attributable to a permanent
establishment of the Non-U.S. Stockholder) will be subject to tax on a net basis
at graduated rates, in the same manner as domestic stockholders 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. Stockholder 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 Treasury Regulations currently in effect, 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
Treasury Regulations scheduled to take effect January 1, 1999, however, a
Non-U.S. Stockholder 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. Stockholder
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 or is attributable to a permanent establishment of such Non-U.S.
Stockholder in order to qualify for the exemption from withholding under the
effectively connected income or permanent establishment exemptions discussed
above.
If stock of the Company is not a USRPI (as defined 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
28
<PAGE> 30
the Company will not be taxable to a Non-U.S. Stockholder to the extent that
they do not exceed the adjusted basis of such stockholder's stock, but rather
will reduce the adjusted basis of such stock. If, however, the stock is treated
as a USRPI, then unless otherwise treated as a dividend for withholding purposes
as described below, any such distribution in excess of current or accumulated
earnings and profits will be subject to 10% withholding. 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. Stockholder's stock, they will
give rise to gain from the sale or exchange of the stock, the tax treatment of
which is described below. Under current Treasury Regulations, for purposes of
withholding U.S. income tax, 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. Amounts withheld are
generally refundable if it is subsequently determined that such amounts are, in
fact, in excess of the Non-U.S. Stockholder's U.S. income tax liability.
Distributions to a Non-U.S. Stockholder 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. Stockholder. Non-U.S. Stockholders would thus generally
be taxed on such distributions at the same rates applicable to domestic
stockholders (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. Stockholder 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. Stockholder's United States federal income tax liability
and refundable if it exceeds the United States tax liability of the Non-U.S.
Stockholder.
Sale of Stock. Gain recognized by a Non-U.S. Stockholder upon a sale or
other disposition of stock of the Company generally will not be subject to
United States federal income tax unless (i) the stock constitutes a "United
States real property interest" (a "USRPI"), or (ii) the investment in the stock
is effectively connected with the Non-U.S. Stockholder's United States trade or
business (or, if an income tax treaty applies, is attributable to a permanent
establishment of the Non-U.S. Stockholder) or (iii) in the case of a Non-U.S.
Stockholder 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. Stock of the Company generally will not
constitute a USRPI if the Company is a "domestically-controlled REIT" or if the
holder owned (during specified testing periods) 5% or less of the class of stock
sold and the stock sold was part of a class of stock regularly traded on an
established securities market. 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 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.
Stockholders will generally be subject to the same treatment as domestic
stockholders 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. Certain types of Securities 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
may 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. Stockholder 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.
29
<PAGE> 31
Stockholder resides under the provisions of an applicable income tax
treaty. U.S. backup withholding, which generally is imposed at the rate of 31%
on certain payments to persons that fail to furnish the information required
under the U.S. information reporting requirements, will generally not apply to
dividends (including any capital gain dividend) paid on stock of the Company to
a Non-U.S. Stockholder at an address outside the United States. However, the
payment of the proceeds from the disposition of stock of the Company to or
through a U.S. office of a broker will be subject to information reporting and
backup withholding unless the owner, under penalty of perjury, certifies, among
other things, its status as a Non-U.S. Stockholder, or otherwise establishes an
exemption. The payment of the proceeds from the disposition of stock to or
through a non-U.S. office of a non-U.S. broker generally will not be subject to
backup withholding and information reporting. Additional issues may arise
pertaining to information reporting and backup withholding for Non-U.S.
Stockholders. Non-U.S. Stockholders should consult their tax advisors with
regard to the application and effect of U.S. information reporting and backup
withholding to an investment in the Company.
Final regulations dealing with withholding tax on amounts paid to foreign
persons and related matters (the "New Withholding Regulations") were recently
promulgated. In general, the New Withholding Regulations do not significantly
alter the substantive withholding and information reporting requirements, but
unify current certification procedures and forms and clarify reliance standards.
For example, the New Withholding Regulations adopt a certification rule which
was in the proposed regulations, under which a foreign stockholder who wishes to
claim the benefit of an applicable treaty rate with respect to dividends
received from a United States corporation will be required to satisfy certain
certification and other requirements. The New Withholding Regulations will
generally be effective for payments made after December 31, 1998, subject to
certain transition rules. THE DISCUSSION SET FORTH ABOVE IN "TAXATION OF
NON-U.S. STOCKHOLDERS" GENERALLY DOES NOT TAKE THE NEW WITHHOLDING REGULATIONS
INTO ACCOUNT. PROSPECTIVE NON-U.S. STOCKHOLDERS ARE STRONGLY URGED TO CONSULT
THEIR OWN TAX ADVISORS WITH RESPECT TO THE APPLICATION AND EFFECT OF THE NEW
WITHHOLDING REGULATIONS TO AN INVESTMENT IN THE COMPANY.
OTHER TAX CONSEQUENCES
The Company and its investors 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 investors may not conform to the federal income tax consequences
discussed above. Consequently, prospective investors should consult their own
tax advisors regarding the effect of state and local tax laws on an investment
in the Company.
30
<PAGE> 32
SELLING STOCKHOLDERS
Those persons who hold Exchange Shares or who currently hold Units and may
in the future hold Exchange Shares and may, from time to time, offer and sell
such Exchange Shares are referred to herein as "Selling Stockholders."
The following table provides, as of May 1, 1998, the names of and maximum
number of Exchange Shares, or number of Units that are convertible into Exchange
Shares, owned by each Selling Stockholder. Because the Selling Stockholders may
sell all, or some or none of their Exchange Shares, no estimate can be made of
the aggregate number of such Exchange Shares that are to be offered hereby or
that will be owned by each Selling Stockholder upon completion of the offering
to which this Prospectus relates.
The Exchange Shares may be offered from time to time by the Selling
Stockholders named below:
<TABLE>
<CAPTION>
UNITS/EXCHANGE COMMON STOCK
SHARES BENEFICIALLY MAXIMUM NUMBER OF BENEFICIALLY OWNED
OWNED PRIOR EXCHANGE SHARES FOLLOWING THE
NAME TO THE OFFERING(1) OFFERED OFFERING(2)
---- ------------------- ----------------- ------------------
<S> <C> <C> <C>
Susanne Jaffe............................ 2,493 2,493 --
Marshall Hammond......................... 482 482 --
John Konwiser............................ 107,490 107,490 --
Leo I. Bromiley.......................... 375 375 --
Stanley & Suzyn Goldenberg............... 375 375 --
Charles Diamond.......................... 45,472 45,472 --
John Hazeltine and Barbara Hazeltine..... 2,003 2,003 --
Larry Lizole............................. 1,418 1,418 --
Dr. Richard Merkin....................... 125 125 --
Howard P. Rosenberg, M.D................. 125 125 --
John B. Sauer and Beverly Sauer.......... 250 250 --
The Stuard Family Trust.................. 499 499 --
Herbert D. Tobin and Libby Tobin......... 4,161 4,161 --
The Village at Canyon Crest.............. 5,380 5,380 --
Shirley Levy............................. 452 452 --
Mark Levy................................ 452 452 --
Cora Baldikoski.......................... 452 452 --
Edward Seinfeld.......................... 452 452 --
Ernest Morrison, Trustee................. 4,554 4,554 --
Mrs. Mary Lou Bell....................... 452 452 --
Mr. And Mrs. Jack Neelon................. 293 293 --
Mr. Richard B. Smith, Trustee............ 877 877 --
Lewis Development Co..................... 4,007 4,007 --
Leonard Pariser, Trustee................. 166 166 --
Mary Tully Bowers........................ 1,930 1,930 --
James Austin Bowers...................... 2,252 2,252 --
Mary Ann Bowers McDannel................. 1,287 1,287 --
Reynold Neufeld.......................... 1,437 1,437 --
Myrna Jane Bowers Pope................... 1,287 1,287 --
James Austin Bower, Trustee.............. 1,287 1,287 --
Merle Bernstein Bauser................... 253 253 --
Lyn Belasco.............................. 253 253 --
Fred Jamner.............................. 202 202 --
Ronald Levy and Bernice Levy............. 152 152 --
John McDannel and Mary McDannel.......... 328 328 --
</TABLE>
31
<PAGE> 33
<TABLE>
<CAPTION>
UNITS/EXCHANGE COMMON STOCK
SHARES BENEFICIALLY MAXIMUM NUMBER OF BENEFICIALLY OWNED
OWNED PRIOR EXCHANGE SHARES FOLLOWING THE
NAME TO THE OFFERING(1) OFFERED OFFERING(2)
---- ------------------- ----------------- ------------------
<S> <C> <C> <C>
Leonard and Sandra Pariser............... 385 385 --
Dale Stuard and Bernice Stuard,
Co-Trustees............................ 1,008 1,008 --
Lenore Yeamans Trust..................... 1,086 1,086 --
Jordan & Geraldine Kurnick Family
Trust.................................. 964 964 --
Alvin Kurnick............................ 49 49 --
The Allen Family Trust................... 2,195 2,195 --
Merle Bauser, Trustee.................... 1,279 1,279 --
Arnold Cunanan........................... 590 590 --
George Geyer III......................... 2,014 2,014 --
Helena & Johannes Gras................... 916 916 --
Leo Groenveld............................ 1,007 1,007 --
Harry & Marie Jansen..................... 2,014 2,014 --
Gerald & Marilyn McCloskey............... 916 916 --
Merton Schwartz & Jacqueline Schwartz,
Trust.................................. 2,746 2,746 --
Rae Williams, E.A........................ 458 458 --
Carolyn Noorlag Edwards.................. 141 141 --
Susan Morgan Tibbetts.................... 141 141 --
Ron Berger............................... 141 141 --
Gary Gowers.............................. 15 15 --
Eric and Connie Holtz.................... 88 88 --
Jordan Kurnick........................... 74 74 --
Leo Molek................................ 74 74 --
Bert and Elaine Roberts.................. 147 147 --
------- ------- --------
TOTAL.......................... 211,921 211,921
======= ======= ========
</TABLE>
- ---------------
(1) Figures include either Exchange Shares currently held by Selling
Stockholders or Units that may be converted into Exchange Shares.
(2) Assumes that all Exchange Shares are sold pursuant to this Prospectus. Also
assumes that no transactions with respect to the Common Stock occur other
than the transactions registered pursuant to the Registration Statement of
which this Prospectus is a part. Under the preceding assumptions, no Selling
Stockholder will own more than 1% of the outstanding Common Stock following
the Offering.
32
<PAGE> 34
PLAN OF DISTRIBUTION
This Prospectus relates to 211,921 Exchange Shares of Common Stock that may
be offered and sold from time to time by the Selling Stockholders. The Exchange
Shares were, or may be, issued by the Company to the Selling Stockholders in
exchange for ("Units") in the Inland Partnership, pursuant to the Company's
obligations under the Exchange Rights Agreement. The Company is registering the
offer and sale of the Exchange Shares by the Selling Stockholders pursuant to
its obligations under the Registration Rights Agreement, but the registration of
such shares does not necessarily mean that any of such shares will be offered or
sold by the holders thereof.
The Company will not receive any proceeds from the offering by the Selling
Stockholders. The Exchange Shares may be sold from time to time to purchasers
directly by any of the Selling Stockholders. Alternatively, the Selling
Stockholders may from time to time offer the Exchange Shares through dealers or
agents, who may receive compensation in the form of commissions from the Selling
Stockholders and/or the purchasers of Exchange Shares for whom they may act as
agent.
The Exchange Shares may be sold from time to time at varying prices
determined at the time of sale or at negotiated prices. In order to comply with
the securities laws of certain states, if applicable, the Exchange Shares may be
sold by the Selling Stockholders only through registered or licensed brokers or
dealers. In addition, in certain states, the Exchange Shares may not be sold
unless they have been registered or qualified for sale in such state or an
exemption from such registration or qualification requirement is available and
is complied with.
The securities may be sold in (a) a block trade in which the broker or
dealer so engaged will attempt to sell the securities as agent but may position
and resell a portion of the block as principal to facilitate the transaction,
(b) transactions in which a broker or dealer acts as principal and resells the
securities for its account pursuant to this Prospectus, (c) an exchange
distribution in accordance with the rules of such exchange, and (d) ordinary
brokerage transactions and transactions in which the broker solicits purchases.
In effecting sales, brokers or dealers engaged by the Selling Stockholders may
arrange for other brokers or dealers to participate. Certain Selling
Stockholders also may, from time to time, authorize underwriters acting as their
agents to offer and sell securities upon such terms and conditions as shall be
set forth in any prospectus supplement. Underwriters, brokers or dealers will
receive commissions or discounts from Selling Stockholders in amounts to be
negotiated immediately prior to sale.
There is no assurance that any of the Selling Stockholders will offer for
sale or sell any or all of the securities covered by this Prospectus.
LEGAL MATTERS
Certain legal matters will be passed upon for the Company by Gibson, Dunn &
Crutcher LLP, Los Angeles, California, and the legality of the Exchange Shares
will be passed upon for the Company by Piper & Marbury LLP, 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 for the year ended December 31, 1997, 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.
33
<PAGE> 35
======================================================
NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED HEREIN OR
INCORPORATED BY REFERENCE IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY OR ANY UNDERWRITER, AGENT, OR DEALER. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE
SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS
UNLAWFUL TO MAKE AN OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE OF SECURITIES BEING OFFERED PURSUANT TO THIS PROSPECTUS
OR ANY ACCOMPANYING PROSPECTUS SUPPLEMENT SHALL UNDER ANY CIRCUMSTANCES CREATE
AN IMPLICATION THAT THERE HAS NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS
PROSPECTUS OR IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THEREOF.
------------------------
TABLE OF CONTENTS
PROSPECTUS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
AVAILABLE INFORMATION................. 2
INCORPORATION OF CERTAIN DOCUMENTS BY
REFERENCE........................... 3
PROSPECTUS SUMMARY.................... 4
RISK FACTORS.......................... 6
DESCRIPTION OF CAPITAL STOCK.......... 12
CERTAIN PROVISIONS OF MARYLAND LAW AND
OF THE COMPANY'S ARTICLES OF
INCORPORATION AND BYLAWS............ 17
FEDERAL INCOME TAX CONSIDERATIONS..... 21
SELLING STOCKHOLDERS.................. 31
PLAN OF DISTRIBUTION.................. 33
LEGAL MATTERS......................... 33
EXPERTS............................... 33
</TABLE>
======================================================
======================================================
211,921 SHARES
PACIFIC GULF
PROPERTIES INC.
COMMON STOCK
------------------------
PROSPECTUS
------------------------
MAY , 1998
======================================================
<PAGE> 36
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the estimated fees and expenses payable by
the Company in connection with the issuance and distribution of the securities
registered hereby:
<TABLE>
<S> <C>
Registration fee............................................ $ 1,447
NYSE listing fee............................................
Printing, duplicating and engraving expenses................
Legal fees and expenses (other than Blue Sky)...............
Accounting fees and expenses................................
Blue sky fees and expenses..................................
Miscellaneous...............................................
--------
Total............................................. $
========
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company's Articles of Incorporation limit the liability of the
Company's directors and officers the Company and its stockholders 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
stockholders 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 proceeding. This provision
does not limit the ability of the Company or its stockholders 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 Articles of Incorporation also permit the Company to
indemnify employees, agents and other persons acting on behalf of or at the
request of the Company. 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 to the corporation. In addition, a director or
officer may not be indemnified with respect to any proceeding charging improper
personal benefit to the director or officer in which the director or officer was
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 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.
The Agreement of Limited Partnership of the Inland Partnership also
provides for indemnification of the Company, or any director or officer of the
Company, in its capacity as general partner of the Partnership, from
II-1
<PAGE> 37
and against all losses, claims, damages, liabilities, joint or several, expenses
(including legal fees), fines, settlements and other amounts incurred in
connection with any actions relating to the operations of the Inland Partnership
as set forth in the Inland Partnership Agreement.
The Company entered into indemnification agreements with each of its
executive officers and directors. The indemnification agreements require, among
other things, that the Company indemnify its officers and directors to the
fullest extent permitted by the MGCL, and advance to the officers and directors
all related expenses, subject to reimbursement if it is subsequently determined
that indemnification is not permitted. The Company must also indemnify and
advance all expenses incurred by officers and directors seeking to enforce their
rights under the indemnification agreements, and cover officers and directors
under the Company's directors and officers' liability insurance. Although the
form of indemnification agreement offers substantially the same scope of
coverage afforded by provisions in the Charter and the Bylaws, it provides
greater assurance to directors and officers that indemnification will be
available, because, as a contract, it cannot be modified unilaterally in the
future by the Board of Directors or by the stockholders to eliminate the rights
it provides.
ITEM 16. EXHIBITS
See Exhibit Index attached hereto and incorporated by reference.
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement;
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in this registration statement;
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the Registration Statement
or any material change in such information in the Registration
Statement;
provided, however, that paragraphs (i) and (ii) above do not apply if the
information required to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed with or furnished to the
Commission by the Registrant pursuant to Section 13 or Section 15(d) of the
Securities Exchange Act of 1934 that are incorporated by reference in the
Registration Statement.
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a
new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
The undersigned Registrant hereby further undertakes that, for purposes of
determining any liability under the Securities Act, each filing of the
Registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in this
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
II-2
<PAGE> 38
The undersigned Registrant hereby further undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions set forth or described in Item 15 of this
Registration Statement, or otherwise, the Registrant has been advised that in
the opinion of the Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person, in
connection with the securities registered hereby, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
II-3
<PAGE> 39
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Newport Beach, State of California, on this 13th day
of May, 1998.
PACIFIC GULF PROPERTIES INC.
By:
/s/ GLENN L. CARPENTER
------------------------------------
Glenn L. Carpenter
President and Chief Executive
Officer
POWERS OF ATTORNEY
KNOWN ALL PERSONS BY THESE PRESENT, that each person whose signature
appears below hereby constitutes and appoints Glenn L. Carpenter and Donald G.
Herrman, and each of them severally, as his true and lawful attorneys-in-fact
and agents with full power of substitution and resubstitution for him and him
and in his name, place, and stead in any and all capacities to sign any and all
amendments (including post-effective amendments and amendments filed pursuant to
462(b) under the Securities Act of 1933) to this Registration Statement, and to
file the name, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, full power and authority to do and perform each
and every act and thing requisite and necessary to be done in connection
therewith, as fully to all intents and purposes as he or she might or could do
in person, hereby ratifying and confirming all that said attorneys-in-facts and
agents or any of them, or of his or her substitute or substitutes, may lawfully
do to cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ GLENN L. CARPENTER Chairman of the Board of May 13, 1998
- ----------------------------------------------------- Directors, President and Chief
Glenn L. Carpenter Executive Officer (Principal
Executive Officer)
/s/ DONALD G. HERRMAN Executive Vice President, May 13, 1998
- ----------------------------------------------------- Secretary, and Chief Financial
Donald G. Herrman Officer (Principal Financial and
Accounting Officer)
/s/ ROYCE B. MCKINLEY Director May 13, 1998
- -----------------------------------------------------
Royce B. McKinley
/s/ CARL C. GREGORY, III Director May 13, 1998
- -----------------------------------------------------
Carl C. Gregory, III
/s/ PETER L. EPPINGA Director May 13, 1998
- -----------------------------------------------------
Peter L. Eppinga
Director
- -----------------------------------------------------
John F. Kooken
</TABLE>
II-4
<PAGE> 40
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ ROBERT E. MORGAN Director May 13, 1998
- -----------------------------------------------------
Robert E. Morgan
/s/ KEITH W. RENKEN Director May 13, 1998
- -----------------------------------------------------
Keith W. Renken
/s/ JAMES QUIGLEY 3RD Director May 13, 1998
- -----------------------------------------------------
James Quigley 3rd
</TABLE>
II-5
<PAGE> 41
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
------- ----------- ------------
<S> <C> <C>
*4.1 Articles of Amendment and Restatement of the Registrant
(previously filed as an Exhibit to Registrant's Registration
Statement on Form S-11 (Registration No. 33-69382) declared
effective on February 10, 1994 and incorporated herein by
reference). ................................................
*4.2 Amended and Restated Bylaws of the Registrant (previously
filed as an Exhibit to Registrant's Registration Statement
on Form S-11 (Registration No. 33-69382) declared effective
on February 10, 1994 and incorporated herein by
reference). ................................................
*4.3 Articles Supplementary related to the Class A Preferred
Stock (previously filed as an exhibit to the Registrant's
Current Report on Form 8-K/A filed January 17, 1997, and
incorporated herein by reference) ..........................
*4.4 Articles Supplementary related to the Class B Preferred
Stock (previously filed as an exhibit to the Registrant's
Current Report on Form 8-K/A filed June 26, 1997, and
incorporated herein by reference) ..........................
**5.1 Opinion of Piper & Marbury .................................
**8.1 Opinion of Gibson, Dunn & Crutcher LLP regarding certain tax
matters ....................................................
23.1 Consent of Ernst & Young LLP ...............................
**23.2 Consent of Piper & Marbury .................................
**23.3 Consent of Gibson, Dunn & Crutcher LLP .....................
24 Powers of Attorney (included on signature page) ............
</TABLE>
- ---------------
* Previously filed.
** To be filed by amendment.
<PAGE> 1
EXHIBIT 23.1
Consent of Independent Auditors
We consent to the reference to our firm under the caption "Experts" in the
Registration Statement (Form S-3) and related Prospectus of Pacific Gulf
Properties Inc. for the registration of 211,921 shares of Company's common
stock dated May 14, 1998. We also consent to the incorporation by reference
therein of our report dated February 13, 1998, with respect to the consolidated
financial statements and schedule of Pacific Gulf Properties Inc. included in
its Annual Report (Form 10-K) for the year December 31, 1997 filed with the
Securities and Exchange Commission.
ERNST & YOUNG LLP
Newport Beach, California
May 15, 1998
