SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Rule 13e-3 Transaction Statement
(Pursuant to Section 13(e) of the Securities Exchange
Act of 1934 and Rule 13e-3)
(SS 240.13e-3) thereunder)
AAA Net Realty Fund IX, Ltd., a Nebraska Limited Partnership and
AAA Net Realty Fund X, Ltd., a Nebraska Limited Partnership
.................................................................
(Name of the Issuer)
AmREIT, Inc.
.................................................................
(Name of Person(s) Filing Statement)
Units of Limited Partner Interest
.................................................................
(Title of Class of Securities)
Not Applicable
.................................................................
(CUSIP Number of Class of Securities)
H. Kerr Taylor, President
Eight Greenway Plaza, Suite 824
Houston, Texas 77046
(713) 850-1400
With Copy To:
Bruce J. Rushall, Esq.
RUSHALL & MC GEEVER
2111 Palomar Airport Road, Suite 200
Carlsbad, California 92008
..................................................................
(Name, Address and Telephone Number of Person
Authorized to Receive Notices and
Communications on Behalf of Person(s) Filing
Statement)
This statement is filed in connection with (check the appropriate box):
a. [ X ] The filing of solicitation materials or
an information statement subject to
Regulation 14A[17 CFR 240.14a-1 to 240.14b-1].
Regulation 14C[17 CFR 240.14c-1 to
240.14c-101] or Rule 13e-3(c) [SS 240.13e-3(c)] under the
Securities Exchange Act of 1934.
b. [ ] The filing of a registration statement
under the Securities Act of 1933.
c. [ ] A tender offer.
d. [ ] None of the above.
Check the following box if the soliciting materials or information
statement referred to in checking box (a) are preliminary copies: [ ]
Calculation of Filing Fee
Transaction Valuation* Amount of Filing Fee
AAA Net Realty Fund IX, Ltd. $4,928,062
AAA Net Realty Fund X, Ltd. $10,355,000
___________
TOTAL $15,283,062 $3,057
*Set forth the amount on which the filing fee is calculated and
state how it was determined.
[ X ] Check box if any part of the fee is offset as provided by Rule
0-11 (a)(2) and identify the filing with which the offsetting fee was
previously paid. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
Amount Previously Paid: $5,270
Form or Registration No.: Schedule 14-A (Jointly filed)
Filing Party: AmREIT, Inc., AAA Net Realty Fund IX, Ltd. And
AAA Net Realty Fund X, Ltd.
Date Filed: Oct. 30, 1998
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INTRODUCTION
This Rule 13e-3 Transaction statement on Schedule 13E-3 is being
filed with the Securities and Exchange Commission (the
"Commission") by AmREIT, Inc. ("AmREIT"), H. Kerr Taylor (the
"General Partner"), the individual general partner of each
Partnership, as hereinafter defined, American Asset Advisers
Management Corporation IX and American Asset Advisers Management
Corporation X, the corporate general partner of the respective
Partnerships and AAA Net Realty Fund IX, Ltd. ("FUND IX") and AAA
Net Realty Fund X, Ltd. ("FUND X"), (each a "Partnership") in
connection with a proposed statutory merger of the Partnerships
with and into AmREIT (collectively the "Merger"). The Merger will
occur pursuant to that certain Agreement and Plan of Merger dated
July 1, 1998 (the "Merger Agreement") between each Partnership, the
General Partner and AmREIT. Consummation of the Merger will result
in the transfer of all of the assets and liabilities of the
Partnership to AmREIT. As a result of the Merger, Limited Partners
of the Partnerships may receive, for their Limited Partner
interests ("Units"), AmREIT Common Stock, AmREIT's 6% Notes due
December 31, 2004, and/or cash payment under the ALV Payment
Election. This Schedule 13E-3 is being filed with the Commission
concurrently with the Joint Proxy and Consent Solicitation
Statement and Prospectus on Schedule 14A, filed by the Partnerships
and AmREIT (the "Solicitation Statement" or "Prospectus"). A copy
of the Solicitation Statement is attached hereto as Exhibit 17(d).
CROSS REFERENCE SHEET
The following cross reference sheet is being supplied pursuant
to General Instruction F to Schedule 13E-3 and shows the location
in the Solicitation Statement of the information required to be
included in response to the items of this statement. The
information contained in the Solicitation Statement, including all
appendixes thereto, is hereby expressly incorporated herein by
reference and the responses to each item are qualified in their
entirety by reference to the information contained in the
Solicitation Statement and the appendixes thereto.
Item in Schedule 13E-3 Where Located in Schedule 14A
______________________ _____________________________
Item 1(a)........................"SUMMARY," "THE PARTNERSHIPS"
Item 1(b)........................"SUMMARY," "THE PARTNERSHIPS"
Item 1(c)........................"THE MERGER-- Background of the Merger"
Item 1(d)........................ "SUMMARY," "THE PARTNERSHIPS--Partnership
Distributions"
Item 1(e)--(f)................... Not applicable
Item 2............................"SUMMARY," "THE PARTNERSHIPS," AMREIT AND ITS
BUSINESS--Management"
Item 3(a)(1),(a)(2), (b).........."SUMMARY," "AMREIT AND ITS BUSINESS--Certain
Relationships and Related Transactions,"
"--Adviser Acquisition," "THE PARTNERSHIPS--
Properties" and "--Management of the
Properties"
Item 4(a)........................."SUMMARY," "THE MERGER"
Item 4(b)........................."SUMMARY," "THE MERGER--The Merger
Consideration," "AMREIT AND ITS BUSINESS--
Certain Relationships and Related
Transactions," "--Adviser Acquisition,"
"CONFLICTS OF INTEREST"
Item 5(a), (b),(c), (d), (e),
(f),(g)..........................."SUMMARY," "THE MERGER--Management Operations
and Headquarters After the Merger," "AMREIT
AND ITS BUSINESS--AmREIT's Operating Strategy"
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Item 6(a)........................."SUMMARY," "THE MERGER--The Merger
Consideration," "AMREIT PRO FORMA FINANCIAL
INFORMATION"
Item 6(b)........................."SUMMARY," "THE MERGER--The Merger Expenses"
Item 6(c).........................Not applicable
Item 6(d).........................Not applicable
Item 7(a)........................."SUMMARY," "THE MERGER--Background of the
Merger"
Item 7(b)........................."SUMMARY," "THE MERGER," "SPECIAL FACTORS--
Background of the Merger," "--The General
Partner's Reasons and Recommendations for the
Merger""--Alternatives to the Merger," "--
Offers from Third Parties," "--Acquisition
Proposals."
Item 7(c)........................."THE MERGER--Background for the Merger,"
"--The General Partner's Reasons and
Recommendations for the Merger," "--The
Independent Directors' Reasons and
Recommendations for the Merger"
Item 7(d)........................."THE MERGER--Management Operations and
Headquarters After the Merger," "--The Merger
Consideration," "--Anticipated Accounting
Treatment," "MATERIAL FEDERAL INCOME TAX
ASPECTS," "INDEX TO FINANCIAL INFORMATION--
Pro Forma Financial Information (unaudited)"
Item 8(a), (b)...................."SUMMARY," "THE MERGER--The General Partner's
Reasons and Recommendations for the Merger,"
"--The Independent Directors' Reasons and
Recommendations for the Merger," "CONFLICTS
OF INTEREST"
Item 8(c)........................."SUMMARY," "VOTING PROCEDURES," "THE
PARTNERSHIPS"
Item 8(d)........................."SUMMARY," "FAIRNESS OPINIONS"
Item 8(e)........................."SUMMARY," "THE PARTNERSHIPS," "AMREIT AND
ITS BUSINESS--Management"
Item 8(f)........................."THE MERGER--Third Party Offers"
Item 9(a)........................."SUMMARY," "FAIRNESS OPINIONS," "ANNEX 4,"
"ANNEX 5"
Item 9(b)........................."FAIRNESS OPINIONS"
Item 9(c)........................."FAIRNESS OPINIONS," "ANNEX 4," "ANNEX 5"
Item 10(a)........................"SUMMARY," "AMREIT AND ITS BUSINESS--Security
Ownership of Certain Beneficial Owners and
Management"
Item 10(b)........................Not applicable
Item 11...........................Not applicable
Item 12(a), (b)...................Not applicable
Item 13(a)........................"SUMMARY--Dissenters' Rights," "THE MERGER--
Dissenting Partners and Shareholders," "--The
Appraised Liquidation Value Payment Election"
Item 13(b)........................"SUMMARY--The ALV Payment Election," "THE
MERGER--The Appraised Liquidation Value
Payment Election"
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Item 13(c)........................"SUMMARY," "THE MERGER--The Notes"
Item 14(a)(1), (a)(2)............."INDEX TO FINANCIAL STATEMENTS"
Item 14(a)(3).....................Not applicable
Item 14(a)(4)....................."INDEX TO FINANCIAL STATEMENTS"
Item 14(b)........................"AmREIT PRO FORMA FINANCIAL INFORMATION,"
"INDEX TO FINANCIAL STATEMENTS"
Item 15(a)........................"SUMMARY," "VOTING PROCEDURES"
Item 15(b).........................Not applicable
Item 16............................All information in the Solicitation Statement
ITEM 1. ISSUER AND CLASS OF SECURITY SUBJECT TO THE TRANSACTION
(a) This is a joint statement on Schedule 13E-3 by
affiliates covering a merger transaction with one or both of the
following two issuers: AAA Net Realty Fund IX, Ltd., a Nebraska
Limited Partnership and AAA Net Realty Fund X, Ltd., a Nebraska
Limited Partnership. The class of equity securities of each Issuer
involved in the Merger is Units of Limited Partner Interests
("Units"). The information set forth in "SUMMARY" and "THE MERGER"
in the Solicitation Statement is hereby incorporated by reference.
(b) All have the same address as H. Kerr Taylor, stated
on the first page hereof. The information set forth in "SUMMARY"
and "THE PARTNERSHIPS" in the Solicitation Statement is hereby
incorporated herein by reference.
(c) None. The information set forth in "THE MERGER--Background of the
Merger" in the Solicitation Statement is hereby incorporated herein by
reference.
(d) The information set forth in "SUMMARY" and "THE
PARTNERSHIPS--Partnership Distributions" in the Solicitation
Statement is hereby incorporated herein by reference.
(e)--(f) Not applicable.
ITEM 2. IDENTITY AND BACKGROUND
(a)--(b) This Schedule 13E-3 is being filed by AmREIT,
the General Partner and the corporate general partner of each
Issuer Partnership. The general partners are affiliates of the
Partnerships and AmREIT. The information set forth on the Facing
Page of the Solicitation Statement and in "THE PARTNERSHIPS" in the
Solicitation Statement is hereby incorporated herein by reference.
(c)--(d) American Asset Advisers Management Corporation
IX was incorporated in Nebraska in 1990. American Asset Advisers
Management Corporation X was incorporated in Nebraska in 1992.
AmREIT, Inc. was incorporated in Maryland in 1993.
H. Kerr Taylor is the individual general partner and Chief
Executive Officer, sole Director and 80% Shareholder of each of the
corporate General Partners. Mr. Taylor is also Chairman of the
Board, Chief Executive Officer, President and the largest
Shareholder of AmREIT. The information set forth in the
Solicitation Statement in "AMREIT AND ITS BUSINESS--Management" is
hereby incorporated herein by reference.
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(e)--(f) During the past five years, no person listed
above has been convicted in a criminal proceeding or has been party
to a civil proceeding of a judicial or administrative body of
competent jurisdiction and as a result of such proceedings was or
is subject to a judgment, decree or final order enjoining further
violations of, or prohibiting activities subject to, federal or
state securities laws or finding any violations of such laws.
(g) Mr. H. Kerr Taylor, a natural person, is a United
States citizen.
ITEM 3. PAST CONTACTS, TRANSACTIONS OR NEGOTIATIONS
(a) (1) The information set forth in the
Solicitation Statement in "SUMMARY," "AMREIT AND ITS BUSINESS--Certain
Relationships and Related Transactions," "--Adviser
Acquisition," "THE PARTNERSHIPS--Properties" and "--Management of
the Properties" is hereby incorporated herein by reference.
(a) (2) The information set forth in the
Solicitation Statement in "SUMMARY," "AMREIT AND ITS BUSINESS--Certain
Relationships and Related Transactions," "--Adviser
Acquisition," "THE PARTNERSHIPS--Properties" and "--Management of
the Properties" is hereby incorporated herein by reference.
(b) The information set forth in the Solicitation
Statement in "SUMMARY," "AMREIT AND ITS BUSINESS--Certain
Relationships and Related Transactions," "--Adviser Acquisition,"
"THE PARTNERSHIPS--Properties" and "--Management of the Properties"
is hereby incorporated herein by reference.
ITEM 4. TERMS OF THE TRANSACTION
(a) The information set forth in the Solicitation
Statement in "SUMMARY" and "THE MERGER" is hereby incorporated
herein by reference.
(b) The information set forth in the Solicitation
Statement in "SUMMARY," "THE MERGER--The Merger Consideration--Shares
Issuable to the General Partners," "AMREIT AND ITS BUSINESS--Certain
Relationships and Related Transactions," "--Adviser Acquisition," "THE
PARTNERSHIPS--Properties, " "--Management of the Properties," and
"CONFLICTS OF INTEREST" is hereby incorporated herein by reference.
ITEM 5. PLANS OR PROPOSALS OF THE ISSUER OR AFFILIATE
(a)--(g) The information set forth in the Solicitation
Statement in "SUMMARY," "THE MERGER--Management Operations and
Headquarters After the Merger," and "AMREIT AND ITS BUSINESS-AmREIT's
Operating Strategy" is hereby incorporated herein by reference.
ITEM 6. SOURCE AND AMOUNTS OF FUNDS OR OTHER CONSIDERATION
(a) The information set forth in the Solicitation
Statement in "SUMMARY," "THE MERGER--The Merger Consideration" and
"AMREIT PRO FORMA FINANCIAL INFORMATION" is hereby incorporated
herein by reference.
(b) The information set forth in the Solicitation
Statement in "SUMMARY" and "THE MERGER--The Merger Expenses" is
hereby incorporated herein by reference.
Schedule 13E-3 Statement
Estimated Expenses
__________________
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Legal Expenses $230,000
Accounting Expenses 30,000
Fairness Opinions and Valuations 122,500
Printing 50,000
State and Federal Filing Fees 7,500
Proxy Mailing and Solicitation Costs 5,000
Miscellaneous 15,000
________
TOTAL $460,000
(c) Not applicable.
(d) Not applicable.
ITEM 7. PURPOSE(S), ALTERNATIVES, REASONS AND EFFECTS
(a) The information set forth in the Solicitation
Statement in "SUMMARY" and "THE MERGER--Background of the Merger"
is hereby incorporated herein by reference.
(b) The information set forth in the Solicitation
Statement in "SUMMARY" "THE MERGER--The General Partner's Reasons
and Recommendations for the Merger--Alternatives to the Merger," "--Third
Party Offers" and "--Acquisition Proposals" is hereby incorporated herein
by reference.
(c) The information set forth in the Solicitation
Statement in "THE MERGER--Background for the Merger," "--The
General Partner's Reasons and Recommendations for the Merger" and
"--The Independent Directors' Reasons and Recommendations for the
Merger" is hereby incorporated herein by reference.
(d) The information set forth in the Solicitation
Statement in "THE MERGER--Management Operations and Headquarters
After the Merger," "--The Merger Consideration," "--Anticipated
Accounting Treatment," "MATERIAL FEDERAL INCOME TAX ASPECTS," and
"INDEX TO FINANCIAL INFORMATION--Pro forma Financial Information
(unaudited)" is hereby incorporated herein by reference.
ITEM 8. FAIRNESS OF THE TRANSACTION
(a) The General Partner, for himself and on behalf of
each Issuer Partnership, and the Independent Directors, on behalf
of the affiliate AmREIT, each reasonably believe that the Merger is
fair to unaffiliated Limited Partner security holders of each
Issuer. The information set forth in the Solicitation Statement in
"SUMMARY" and "THE MERGER--The Independent Directors' Reasons and
Recommendations for the Merger," "--The General Partner's Reasons
and Recommendations for the Merger" is hereby incorporated herein
by reference. No director of AmREIT or director of the corporate
general partner of either Partnership issuer has dissented or
abstained from voting on the Merger.
(b) The information set forth in the Solicitation
Statement in the "SUMMARY" and "THE MERGER--The Independent
Directors' Reasons and Recommendations for the Merger," "--The
General Partner's Reasons and Recommendations for the Merger," and
"CONFLICTS OF INTEREST" is hereby incorporated herein by reference.
As stated therein, no weight was assigned to any factors by the
respective persons in reaching their conclusions as to the fairness
of the Merger.
(c) The Merger must be approved by at least a majority
of the unaffiliated Limited Partners. This is because the merger
of either Issuer Partnership can be approved by the Limited
Partners owning a majority of the Limited Partner Units, regardless
of affiliation. However, no affiliate owns Limited Partner Units in
either Issuer Partnership.
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(d) Neither the General Partner on behalf of either
Issuer Partnership, nor the Independent Directors on behalf of the
affiliate AmREIT, has retained an unaffiliated representative to
act solely on behalf of the unaffiliated security holders for the
purposes of negotiating the terms of the Merger. The General
Partner has retained a financial expert to render certain valuation
and fairness opinions to the Partnership and the Limited Partners
in connection with the Merger, and the Independent Directors have
retained an independent expert to render an opinion regarding the
fairness of the Merger to the affiliate AmREIT and its
Shareholders. The information set forth in "SUMMARY" and "THE
FAIRNESS OPINIONS" is hereby incorporated herein by reference.
(e) Not applicable. There are no directors of either
Issuer Partnership or the corporate general partner of either
Issuer Partnership who are not employees of the Issuer or of the
affiliate AmREIT.
(f) The information in the Solicitation Statement in
"THE MERGER--Third Party Offers" is hereby incorporated herein by
reference.
ITEM 9. REPORTS, OPINIONS, APPRAISALS AND CERTAIN NEGOTIATIONS
(a) The Issuer has received the report and Fairness
Opinion of Houlihan Lokey Howard & Zukin Financial Advisors, Inc.
that the Merger is fair to the Partnerships and the Limited
Partners of each of the Partnerships. The affiliate AmREIT has
received the opinion of Bishop-Crown Investment Research, Inc. that
the Merger is fair to AmREIT and its shareholders.
(b) The information in the Solicitation Statement in
"THE FAIRNESS OPINIONS" is hereby incorporated herein by reference.
(c) The information set forth in Annex 4 (the form of
the Bishop-Crown Fairness Opinion) and Annex 5 (the form of the
Houlihan Fairness Opinion) to the Solicitation Statement are hereby
incorporated herein by reference.
ITEM 10. INTEREST IN SECURITIES OF THE ISSUER
(a) Interest in Securities of the Issuer.
(1) No securities of either Issuer Partnership is
owned beneficially or otherwise by the persons
filing this Schedule 13E-3, or by any pension,
profitsharing or similar plan of such person or
affiliate, or by any person enumerated in
Instruction C of this Schedule, or by any
associate or majority owned subsidiary of the
Issuer or affiliate of the Issuer.
(2) None with respect to Fund IX. None with
respect to Fund X.
ITEM 11. CONTRACTS, ARRANGEMENTS OR UNDERSTANDINGS WITH RESPECT
TO THE ISSUER'S SECURITIES
None.
ITEM 12. PRESENT INTENTION AND RECOMMENDATION OF CERTAIN PERSONS
WITH REGARD TO THE TRANSACTION
(a) None.
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(b) Not applicable.
ITEM 13. OTHER PROVISIONS OF THE TRANSACTION
(a) The information in the Solicitation Statement in
"SUMMARY--Dissenters' Rights," "THE MERGER--Dissenting Partners and
Shareholders" and "--Appraised Liquidation Value Payment Election"
is hereby incorporated herein by reference.
(b) The information in the Solicitation Statement in
"SUMMARY--The ALV Payment Election" and "THE MERGER--Appraised
Liquidation Value Payment Election" is hereby incorporated herein
by reference.
(c) Neither the Issuer nor the AmREIT affiliate would
take steps to provide or assure that the Notes issued in connection
with the Merger will be eligible for trading on any national
securities exchange or automated inter-dealer quotation system.
The information in the Solicitation Statement in "SUMMARY" and
"THE MERGER--The Notes") is hereby incorporated herein by
reference.
ITEM 14. FINANCIAL INFORMATION
(a) (1) and (2) The respective reports on Form
10-K and 10-KSB by AAA Net
Realty Fund IX, Ltd. and AAA
Net Realty Fund X, Ltd. for the
years ended December 31, 1997
and 1996, respectively, and the
reports on Reports 10-Q and 10-QSB for
the quarters ended June 30, 1998 and 1997,
respectively, by such issuers.
(a)(3) The ratio of earnings to fixed charges
for the years ended December 31, 1997 and
1996 and the six-month period ended June 30,
1998 for each of the Issuer Partnerships is
not a material item because neither
Partnership had debt or other items
requiring material fixed charges during
these periods.
(a)(4) The book value per Unit for the year ended
December 31, 1997 and as of June 30, 1998,
for the respective Issuer Partnership was
for AAA Net Realty Fund IX, Ltd., $757.38
and $753.01, respectively, and for AAA Net
Realty Fund X, Ltd. $847.02 and $840.09,
respectively. The original investment per
Unit in each Issuer Partnership was $1,000.
(b) The information set forth in the Solicitation
Statement in "'INDEX TO FINANCIAL INFORMATION--Pro Forma Financial
Information (Unaudited)" is hereby incorporated herein by reference
in response to Items (1) through (3).
ITEM 15. PERSONS AND ASSETS EMPLOYED, RETAINED OR UTILIZED
(a) Both of the Issuer Partnerships and the affiliates
intend to utilize certain of the officers and employees in
soliciting Consents from the Limited Partners of the Issuer
Partnerships for the Merger. Both the affiliate AmREIT and the
General Partner, on behalf of each Issuer Partnership, intend to
utilize such persons within the course of their normal employment
and have not agreed to pay any special compensation to such persons
based on the number of Limited Partner Consents obtained or
otherwise in excess of their compensation under their otherwise
existing employment arrangements. The information set forth in the
Solicitation Statement in "SUMMARY" and "VOTING PROCEDURES" is
hereby incorporated herein by reference.
(b) Not applicable.
ITEM 16. ADDITIONAL INFORMATION
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The information set forth in the Solicitation Statement,
including each Annex thereto, and the Partnership Supplements, is
hereby incorporated herein by reference.
ITEM 17. MATERIALS TO BE FILED AS EXHIBITS
(a) Not applicable.
(b) Each report referred to in Items A(d) and 9 of the
Schedule 13e-3 is included as a part of the submission under
subparagraph (d) below.
(c) None.
(d) Annexed hereto and incorporated herein is the
Solicitation Statement.
(e) None.
(f) Annexed hereto is the "Brochure" to be provided by
the affiliate AmREIT to the Limited Partners of each Issuer
Partnership and to be used as a basis for oral solicitation or
recommendation by the staff of the General Partner of each Issuer
Partnership and certain officers and employees of the affiliate
AmREIT.
SIGNATURE
After due inquiry and to the best of my knowledge and belief,
I certify that the information set forth in this statement is true,
complete and correct.
October 30, 1998
________________
Date
/s/ H. Kerr Taylor
_______________________________
Signature
H. Kerr Taylor, the Individual General Partner of Each Issuer Partnership
_________________________________________________________________________
Name and Title
October 30, 1998
________________
Date
/s/ H. Kerr Taylor
______________________________
Signature
H. Kerr Taylor, Chief Executive Officer and Chairman of AmREIT, Inc.
____________________________________________________________________
Name and Title
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JOINT PROXY AND CONSENT SOLICITATION STATEMENT
AND PROSPECTUS
AMREIT, INC.
This Joint Proxy and Consent Solicitation Statement and Prospectus (the
"Prospectus") is being provided by the Board of Directors of AmREIT, INC., a
Maryland corporation ("AmREIT") and H. Kerr Taylor (the "General Partner"), to
the limited partners (collectively, the "Limited Partners") of Taylor Income
Investors, Ltd. ("FUND III"), Taylor Income Investors IV, Ltd. ("FUND IV"),
Taylor Income Investors V, Ltd. ("FUND V"), Taylor Income Investors VI, Ltd.
("FUND VI"), AAA Net Realty Fund VII, Ltd. ("FUND VII"), AAA Net Realty Fund
VIII, Ltd. ("FUND VIII"), AAA Net Realty Fund Goodyear, Ltd. ("AAA GDYR"), AAA
Net Realty Fund IX, Ltd. ("FUND IX"), AAA Net Realty Fund X, Ltd. ("FUND X") and
AAA Net Realty Fund XI, Ltd. ("FUND XI") for the purpose of soliciting their
approval of the Merger and an amendment to the Agreement of Limited Partnership
of their Partnership (collectively the "Partnerships") authorizing the Merger
(the "Partnership Consents"). This Prospectus is also being provided by the
Board of Directors to the shareholders of AmREIT (the "Shareholders") for the
purpose of soliciting their consents approving the Merger (the "AmREIT
Proxies").
AmREIT and the General Partner are proposing a series of mergers whereby
AmREIT will acquire all of the assets and the liabilities of each Partnership
(collectively the "Merger") pursuant to an Agreement and Plan of Merger, dated
as of ___________, 1998 between AmREIT and each Partnership (collectively, the
"Merger Agreement"). In the Merger, AmREIT is offering to issue shares of its
$0.01 par value common stock (the "Shares") for each Partnership participating
in the Merger ("Participating Partnerships") in an amount equal to the
Partnership's Net Asset Value, as defined, divided by $9.34 per Share (the
"Exchange Price"). In lieu of Shares, AmREIT is offering up to $10.0 million in
principal amount of 6.0% Notes due in December 31, 2004 (the "Notes"). Limited
Partners may elect to receive Shares or Notes with respect to their Limited
Partner Interests (the "Units") in accordance with the Net Asset Value, as
defined, of their respective Partnership on the effective date of the Merger
(the "Effective Date"). The number of Shares and amount of Notes issued in the
Merger is subject to certain adjustments as of the Effective Date and AmREIT
will not issue Notes in an aggregate principal amount exceeding $10.0 million or
to any Partnership in the principal amount exceeding 35% of the Partnerships'
Net Asset Value (the "Note Restriction"). In lieu of either Shares or Notes,
Limited Partners may elect to receive a cash payment equal to the Appraised
Liquidation Value (the "ALV") of their Units if the Merger is consummated (the
"ALV Payment Election"). See "THE MERGER."
The Merger involves material risks to both the Limited Partners and the
Shareholders. See "RISK FACTORS" for certain factors relating to participation
in the Merger. The more significant risks are:
o The terms of the Merger were determined by the common management of
the Partnerships and AmREIT.
o The General Partner has significant conflicts of interest in the
Merger.
o The Limited Partners have not been represented by an unaffiliated
person in the Merger.
o The Net Asset Values of the Partnerships are not based on an
appraisal by an independent real estate appraiser.
o The Merger will be a taxable transaction for the Limited Partners.
o There is no assurance that the value of the consideration offered to
the Limited Partners is not less than the value of the Partnerships.
o There is no assurance that the value of the consideration paid by
AmREIT for the Partnerships does not exceed the value of the
Partnerships.
o No public market exists for the Shares and Notes offered in the
Merger, and there is no assurance that a public market for the
Shares will develop after the Merger.
o There is no assurance any of the benefits to the shareholders or
Limited Partners anticipated by AmREIT and Mr. Taylor from the
Merger will be realized.
The Independent Directors and the General Partner believe that the
benefits and advantages of the Merger far outweigh the risks and negative
factors. See "THE MERGER -- The Independent Directors' Reasons and
Recommendations for the Merger" and "-The General Partner's Reasons and
Recommendations for the Merger."
THE SECURITIES OFFERED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933 AND NEITHER SUCH SECURITIES OR THE MERGER HAVE BEEN
APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION. THE
COMMISSION HAS NOT PASSED ON THE FAIRNESS OR MERITS OF THE TRANSACTION, NOR HAS
THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THE PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
The date of this Joint Proxy and Consent Solicitation Statement and
Prospectus is _______________, 1998
(cover page continued)
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THESE SECURITIES OFFERED HEREBY HAVE NOT BEEN REGISTERED OR QUALIFIED
UNDER THE LAWS OF ANY STATE EXCEPT THE STATE OF CALIFORNIA. THE SHARES AND THE
NOTES ARE BEING ISSUED IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER
SUCH LAWS. THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA,
FOLLOWING A FAIRNESS HEARING HELD PURSUANT TO SECTION 25142 OF THE CALIFORNIA
CORPORATE SECURITIES LAW OF 1968, AS AMENDED, HAS ISSUED A PERMIT FOR THE SALE
OF THE SECURITIES DESCRIBED HEREIN. THE COMMISSIONER OF CORPORATIONS OF THE
STATE OF CALIFORNIA DOES NOT RECOMMEND OR ENDORSE THE PURCHASE OF THE
SECURITIES. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY AmREIT, THE GENERAL PARTNER OR THE PARTNERSHIPS. THIS PROSPECTUS
DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY
SECURITIES OTHER THAN THE SHARES AND THE NOTES OR AN OFFER TO OR SOLICITATION OF
ANY PERSON IN ANY JURISDICTION IN WHICH THE OFFER OR SOLICITATION WOULD BE
UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL UNDER ANY CIRCUMSTANCES IMPLY THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO THIS DATE.
Based upon the Net Asset Values of the Partnerships on June 30, 1998,
AmREIT would offer up to a total of 3,011,622 Shares in the Merger and subject
to the Note Restriction offer up to $10.0 million of Notes. The form of Merger
Agreement between the Partnerships and each Partnership is attached to this
Prospectus as Annex 1. Upon consummation of the Merger, substantially all of the
properties owned by the Participating Partnerships will be owned by AmREIT, and
such properties will continue to be managed and leased by AmREIT directly or
through one or more affiliates. The officers and directors of AmREIT prior to
the Merger will continue to serve after the Merger. Due to the Note Restriction,
AmREIT may not be in a position to honor the requests of all Limited Partners of
a Participating Partnership electing to receive Notes in the Merger. AmREIT will
issue Notes first to Partners voting against the Merger and then, subject to the
Note Restriction, to Limited Partners requesting Notes.
THE INDEPENDENT DIRECTORS OF AmREIT UNANIMOUSLY RECOMMEND THAT THE
SHAREHOLDERS OF AmREIT VOTE "YES" IN FAVOR OF THE MERGER. THE BOARD REQUESTS
THAT EACH SHAREHOLDER COMPLETE, SIGN AND RETURN THE ENCLOSED AMREIT PROXY AS
SOON AS POSSIBLE.
THE GENERAL PARTNER STRONGLY RECOMMENDS THAT ALL LIMITED PARTNERS VOTE
"YES" IN FAVOR OF THE MERGER. THE GENERAL PARTNER REQUESTS THAT EACH LIMITED
PARTNER COMPLETE, SIGN AND RETURN THE ENCLOSED CONSENT AS SOON AS POSSIBLE.
THIS SOLICITATION OF CONSENTS EXPIRES AT 5:00 P.M., CENTRAL STANDARD
TIME, ON _____________, 1998, UNLESS SOONER TERMINATED OR EXTENDED. ALL
QUESTIONS AND INQUIRIES SHOULD BE DIRECTED TO TIMOTHY W. KELLEY, VICE
PRESIDENT, BY TOLL-FREE TELEPHONE AT (800) 888-4400, EXTENSION 26.
(cover page continued)
-ii-
<PAGE>
Table of Contents
SUMMARY......................................................................-1-
Parties to the Merger...................................................-1-
Summary of Risk Factors.................................................-2-
Reasons For The Merger And Recommendations..............................-7-
Voting Procedures......................................................-11-
Description of The Merger..............................................-13-
Dissenters' Rights.....................................................-15-
Conflicts of Interest..................................................-16-
Organizational Diagram.................................................-16-
The Shares.............................................................-17-
The Notes..............................................................-17-
Fairness Opinions......................................................-18-
Material Federal Income Tax Aspects....................................-19-
Effective Time of the Merger...........................................-20-
Management, Operations and Headquarters after the Merger...............-20-
Conditions to Consummation of the Merger...............................-20-
Anticipated Accounting Treatment.......................................-21-
Conduct of Business Pending the Merger.................................-21-
Merger Expenses........................................................-21-
Termination Rights.....................................................-21-
Comparison of the Partnerships and AmREIT..............................-22-
AVAILABLE INFORMATION.......................................................-23-
RISK FACTORS................................................................-24-
Risks Associated With the Merger.......................................-25-
Possible Disagreement as to Partnership Valuations..................-25-
Conflicts of Interest of the General Partner........................-25-
Lack of Independent Representation for Each Partnership.............-25-
Value of Shares.....................................................-25-
Disproportionate Effect of Inaccurate Valuation.....................-25-
Potential Changes in Distribution Levels for Limited Partners.......-26-
Uncertainties at the Time of Voting as to Participation of
Partnerships........................................................-26-
Risks Associated with Fundamental Change in Nature of Investment....-27-
The Merger is a Taxable Event.......................................-29-
No Cash Distributions to Limited Partners...........................-29-
Possible Undisclosed Liabilities Assumed by AmREIT..................-29-
Expenses of the Merger..............................................-29-
Majority Vote Binds Each Partnership................................-30-
Participating Limited Partners Will Forego the Alternatives to
the Merger..........................................................-30-
Termination Payments if Merger Fails to Occur.......................-30-
-iii-
<PAGE>
Risks Associated With an Investment in AmREIT..........................-30-
Lack of Significant Operating History as Self-Managed REIT..........-30-
Distributions in Excess of Income and/or Funds From Operations......-30-
Limitations on Leverage.............................................-30-
Risks of Leverage...................................................-31-
Risk of Acceleration of Mortgage Financing..........................-32-
Distributions as Return of Capital..................................-32-
Unspecified Future Properties.......................................-32-
Fixed Expenses......................................................-33-
Anti-takeover Provisions............................................-33-
Limited Liability of Directors and Possible Inadequacy of Remedies..-33-
Conflicts of Interest with Management...............................-34-
Lack of Geographical Diversification................................-34-
Distributions Subordinate of Payments on Debt.......................-34-
Investment Company Act of 1940......................................-34-
General Risks of Real Estate Investments............................-34-
Risks Associated with an Investment in the Shares......................-35-
Exchange Price......................................................-35-
No Secondary Market for the Shares..................................-35-
Future Public Trading Prices Lower than Exchange Price..............-35-
Illiquidity of Shares...............................................-36-
Possible Future Dilution............................................-36-
Risk Considerations Associated with the Notes..........................-36-
Speculative Investment..............................................-36-
General Obligations.................................................-36-
Noteholders' lack of Right to participate in AmREIT's Profits.......-36-
The Loan Agreement..................................................-36-
Illiquidity of Notes................................................-37-
Lack of Sinking Fund for Notes......................................-37-
Risk of Bankruptcy; Claims of Other Creditors.......................-37-
Limited Recourse Notes..............................................-37-
Retirement/Replacement of Trustee...................................-37-
Usury Laws..........................................................-38-
Ability To Repay Notes..............................................-38-
Prior Claim of Noteholders..........................................-38-
-iv-
<PAGE>
Risks Associated with the ALV Payment Election.........................-39-
Risk of ALV Payment Election Obligations............................-39-
Risk of Unsecured Obligation........................................-39-
Risks of Appraisals to Limited Partners.............................-39-
Risks of Appraisals to AmREIT.......................................-39-
Risks Associated with an Investment in Real Estate.....................-39-
Effect of Economic and Market Conditions............................-39-
Renewal of Leases and Reletting of Space............................-40-
Investment Illiquidity..............................................-40-
Operating Risks.....................................................-40-
Competition.........................................................-40-
Risks in Construction on Properties.................................-40-
Risks of Property Leased to a Single Tenant.........................-41-
Risks of Net Leases.................................................-41-
Risks of Joint Ventures.............................................-42-
No Assurance of Property Appreciation, REIT Profit or Dividends.....-42-
Risks of Investing in Special Purpose properties....................-43-
Possible Environmental Liabilities..................................-43-
Risks of Cost in Complying with the Americans With Disabilities Act.-44-
Risks in Providing Financing to Purchasers of REIT Properties.......-44-
Risks of Leaseback Transactions.....................................-44-
Accounting for Net lease Transactions...............................-45-
Risks of Energy Shortages and Allocations...........................-45-
Competition for Investments.........................................-45-
Uninsured and Underinsured Losses Could Result in Loss of Value
of Property.........................................................-45-
Adjacent Properties.................................................-45-
Risks Associated With Federal Income Taxation of AmREIT...............-46-
Adverse Consequences of Failure to Qualify as a REIT................-46-
Risks of Excise Tax and/or Penalties................................-46-
Changes in Tax Laws.................................................-46-
Restrictions on Payment of Dividends................................-47-
Risks of Development and Acquisition Activities.....................-47-
-v-
<PAGE>
THE MERGER..................................................................-47-
Background of The Merger...............................................-48-
The Independent Directors' Reasons and Recommendations for the Merger..-49-
The General Partner's Reasons and Recommendations for the Merger.......-52-
Alternatives to the Merger.............................................-55-
Offers From Third Parties..............................................-63-
The Notes..............................................................-63-
Appraisal Liquidition Value Payment Election...........................-69-
The Merger Consideration...............................................-70-
Fiduciary Responsibility...............................................-76-
Share Market Prices and Distributions..................................-78-
Effective Time of the Merger...........................................-79-
Management, Operations and Headquarters after the Merger...............-79-
Conditions to Consummation of the Merger...............................-79-
Conduct of Business Pending the Merger.................................-80-
Acquisition Proposals..................................................-83-
Termination; Extension, Waiver and Amendment...........................-84-
Effect of Termination and Abandonment..................................-85-
Extension; Waiver......................................................-87-
Proposed Amendments to Partnership Agreements..........................-87-
Proposed AmREIT Bylaw Amendment........................................-88-
Dissenting Partners and Shareholders...................................-88-
The Merger Expenses....................................................-88-
Anticipated Accounting Treatment.......................................-89-
CONFLICTS OF INTEREST.......................................................-89-
Affiliated General Partner.............................................-89-
The Independent Directors..............................................-91-
Continuing Conflicts of Interest.......................................-91-
Features Discouraging Potential Takeovers..............................-92-
FAIRNESS OPINIONS...........................................................-92-
The Bishop-Crown Fairness Opinion......................................-92-
The Houlihan Fairness Opinions.........................................-99-
AMREIT PRO FORMA FINANCIAL INFORMATION.....................................-105-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF AMREIT...............-105-
Liquidity and Capital Resources.......................................-106-
Results of Operations.................................................-107-
Funds From Operations.................................................-108-
MATERIAL FEDERAL INCOME TAX ASPECTS........................................-109-
General...............................................................-109-
Requirements for Qualifications and Taxation as a REIT................-110-
Distribution Requirements.............................................-114-
Termination or Revocation of REIT Status..............................-115-
Taxation of AmREIT....................................................-116-
Taxation of Domestic Shareholders.....................................-117-
Foreign Shareholders..................................................-120-
Dividend Reinvestment Plan............................................-120-
United States Report Requirements.....................................-120-
State and Local Taxes.................................................-120-
-vi-
<PAGE>
AMREIT AND ITS BUSINESS....................................................-121-
Description of AmREIT.................................................-121-
AmREIT's Investment Objectives........................................-121-
AmREIT's Stated Investment Policies...................................-122-
AmREIT's Operating Strategy...........................................-126-
Dividend Reinvestment Plan............................................-130-
Employees.............................................................-130-
Competition...........................................................-131-
Properties............................................................-131-
Debt and Credit Facilities............................................-133-
Management............................................................-133-
Executive Compensation................................................-135-
Security Ownership of Certain Beneficial Owners and Management........-135-
Certain Relationships and Related Transactions........................-136-
Legal Proceedings.....................................................-136-
Adviser Acquisition...................................................-136-
AMREIT CHARTER AND BYLAWS..................................................-140-
Authorized Stock......................................................-140-
Directors.............................................................-140-
Shareholder Meetings and Special Voting Requirements..................-141-
Amendment of the Charter and Bylaws...................................-141-
Transactions With Interested Officers or Directors....................-141-
Rollup Transactions...................................................-142-
Limitations on Holdings and Transfer..................................-142-
Anti-takeover Effect of Authorized But Undesignated Preferred Stock...-142-
Liability for Monetary Damages........................................-143-
Indemnification And Advancement of Expenses...........................-143-
DESCRIPTION OF AMREIT'S CAPITAL STOCK......................................-144-
General...............................................................-144-
Common Stock..........................................................-144-
Preferred Stock.......................................................-145-
REPORTS TO SHAREHOLDERS....................................................-145-
THE PARTNERSHIPS...........................................................-146-
General...............................................................-146-
Properties............................................................-147-
Partnership Distributions.............................................-150-
Management of the Properties..........................................-152-
Employees.............................................................-152-
COMPARISON OF OWNERSHIP OF UNITS AND SHARES................................-152-
Form of Organization..................................................-153-
Length of Investment..................................................-153-
Properties and Diversification........................................-153-
Permitted Investments.................................................-154-
Additional Equity.....................................................-154-
Borrowing Policies....................................................-155-
Restrictions upon Related Party Transactions..........................-155-
Management Control and Responsibility.................................-156-
Management Liability and Indemnification..............................-157-
Anti-takeover Provisions..............................................-158-
Voting Rights.........................................................-159-
-vii-
<PAGE>
Limited Liability of Investors........................................-160-
Review of Investor Lists..............................................-160-
Taxation of Taxable Investors.........................................-161-
Taxation of Tax-exempt Investors......................................-161-
Distribution Policies.................................................-162-
Comparative Compensation, Fees and Distributions......................-163-
COMPARISON OF UNITS, SHARES AND NOTES......................................-164-
Legal Rights .........................................................-165-
Issuance of Additional Securities.....................................-166-
Liquidity.............................................................-167-
Taxation of Taxable Investors.........................................-168-
Taxation of Distributions/Dividends...................................-168-
Taxation of Tax-Exempt Investors......................................-169-
VOTING PROCEDURES..........................................................-169-
AmREIT Voting Procedures..............................................-169-
Partnership Consent Procedures........................................-172-
LEGAL OPINIONS.............................................................-175-
SHAREHOLDER PROPOSALS......................................................-175-
GLOSSARY...................................................................-176-
INDEX TO FINANCIAL INFORMATION...............................................F-1
Form of Agreement and Plan of Merger.....................................Annex 1
Form of Amendment to Partnership Agreement...............................Annex 2
Forms of the Note and Loan Agreement.....................................Annex 3
Form of Bishop-Crown Fairness Opinion....................................Annex 4
Form of Houlihan Fairness Opinions.......................................Annex 5
-viii-
<PAGE>
SUMMARY
The following summary is qualified in all respects by the information
appearing elsewhere in this Prospectus, the Annexes hereto and the documents
referred to herein. All initial capitalized terms shall have the meanings set
forth in the "GLOSSARY" section of this Prospectus.
Parties to the Merger
AmREIT
AmREIT is a self-managed REIT. AmREIT was organized on August 17, 1993,
as a Maryland business corporation and operates as a real estate investment
trust ("REIT") under the federal income tax laws. AmREIT became
self-managed upon its acquisition of its external adviser as of June 5,
1998. See "AmREIT AND ITS BUSINESS - Adviser Acquisition." AmREIT acquires,
develops, owns and manages a diversified portfolio of quality, frontage
retail properties leased to national and regional retail tenants. As of the
date of this Prospectus, AmREIT owned a total of 16 properties which
generate total annual rents of approximately $2,599,720. These properties
are leased to a total of 9 different tenants and are located in states and
contain an aggregate of approximately 193,920 square feet of gross
leaseable area. AmREIT's principal executive offices are located at Eight
Greenway Plaza, Suite 824, Houston, Texas 77046, and its telephone number
is (713) 850-1400. See "AMREIT AND ITS BUSINESS."
The General
Partner
The General Partner, Mr. H Kerr Taylor, sponsored and organized each of the
Partnerships. Mr. Taylor serves as the individual general partner of each
Partnership other than FUND III, FUND IV, FUND V, FUND VI and FUND VII,
each of which has only a corporate general partner. A different corporation
organized under the laws of the state of Texas serves as the corporate
general partner of each Partnership. Mr. Taylor is a director, chief
executive officer and the 80% or greater owner of each corporate general
partner. Mr. Taylor is also the Chairman, Chief Executive Officer and
largest shareholder of AmREIT. See "CONFLICTS OF INTEREST."
The
Partnerships
The Partnerships were organized to acquire real properties, primarily
frontal retail properties. FUND IX and FUND X were organized under the
laws of the state of Nebraska. Each of the other 8 Partnerships
is a limited partnership organized under the laws of the state of Texas.
Under long-term net leases and to hold such properties for capital
appreciation and sale after a 10 to 15 year period. None of the
Partnerships has or is permitted to incur long-term debt under its
respective Agreement of Limited Partnership of the Partnerships
(collectively, the "Partnership Agreements"). The Partnerships together
own, directly or through joint ventures with one or more other
Partnerships or AmREIT, interests in 32 properties comprising an
aggregate of 135,000 net rentable square feet. See "THE PARTNERSHIPS -
Properties."
The properties of the Partnerships are currently managed by AmREIT
Operating Corporation, a Texas corporation and AmREIT's wholly owned subsidiary.
The address of the principal executive offices of each of the Partnerships and
the General Partner is Eight Greenway Plaza, Suite 824, Houston, Texas
-1-
<PAGE>
The Partnerships
(cont'd.)
77046, telephone (713) 850-1400. For more information concerning the
Partnerships, see "THE PARTNERSHIPS."
Summary of Risk Factors
The Limited Partners and the Shareholders should carefully consider
the risks discussed under "Risk Factors" prior to voting on the matters
being submitted to them in connection with the Merger. Among the risks related
to the Merger are the following.
Risks Associated
with the Merger
The Merger involves various risks, including the following.
o Mr. Taylor, the General Partner, also serves as the Chairman, Chief
Executive Officer and the largest shareholder of AmREIT. Mr. Taylor
negotiated and agreed to the terms of the Merger on behalf of each
Partnership and thereby determined the consideration to be received
by the Limited Partners in the Merger. Mr. Taylor is thus subject to
significant conflicts of interest if the Merger is completed. For
example, he would be entitled to receive up to 349,333 Shares under
the terms of the recently completed Adviser Acquisition and up to an
additional 11,685 Shares from certain Partnerships as a result of the
payment to him of disposition fees and/or distributions in
connection with his unsubordinated general partner interest.
Also, if the Merger is consummated, Mr. Taylor would be relieved
of further duties and obligations as a general partner of each
Participating Partnership. See "THE MERGER - Conflicts of Interest."
The values of the Partnerships' properties were not determined by
means of independent appraisal, that is, an appraisal by an
independent real estate appraiser.
o The Negotiated Prices of the Partnership Properties were not
determined by independent appraisals and the Net Asset Values of
the Partnerships may not reflect the value of the Partnership's
Properties which would result from negotiations between unrelated
seller and buyer.
o The Partnerships were not represented, either individually or as a
group, by any person who was unaffiliated with the General Partner
or AmREIT. Had independent representation been arranged for each
Partnership, the value of the Partnerships for the purposes of the
Merger may have been more favorable to the Limited Partners.
o The General Partner will receive significant benefits if and to the
extent the Merger is consummated. He will receive Shares in the
Merger in connection with his general partner interests in
certain Partnerships and as a result of disposition fees paid by
others. As a result of the Merger, he will also receive additional
Shares under the terms of the Adviser Acquisition.
o The Negotiated Prices of the Partnerships' Properties and the
Exchange Price are fixed and will not be adjusted to reflect the
occurrence of events prior to the Effective Date which might
adversely or positively affect the value of properties or the
Shares, respectively. If the value of its properties increases or
the value of the shares
-2-
<PAGE>
Risks Associated with the Merger
(cont'd.)
decreases, a Participating Partnership will not receive the benefit of
receiving a greater number of Shares from AmREIT. Conversely, should
the value of the Properties decrease or the value of the Shares
increase, AmREIT will not receive the benefit of issuing fewer
Shares to the Limited Partners.
o The Exchange Price has been established for the purposes of the
Merger only. Neither management of AmREIT nor the General Partner
can assure or predict whether the Shares will trade at a price lower
than the Exchange Price or lower than the value of AmREIT's assets
after the Merger if and when a public trading market for the Shares
is established. The Shares may, if and when listed on an exchange or
otherwise traded, trade at prices substantially below the Exchange
Price. Consequently, a Limited Partner in a Participating
Partnership desiring to liquidate his investment after the Merger
may receive a price per Share that is lower than the Exchange Price.
o The Shares are not traded in a regular market and there is no
assurance that the fair value of the Shares is not less than (or
greater than) the Exchange Price.
o Taxable income or loss will be recognized by each taxable Limited
Partner participating in the Merger in an amount equal to the
Limited Partner's allocable share of the income or loss recognized
by his respective Partnership from the transfer of the Partnerships'
assets to AmREIT through the Merger and Limited Partners will
receive no cash from the Merger (other than cash received in lieu
of fractional Shares) to pay taxes arising from any taxable income
(see "The Merger -- Material Federal Income Tax Aspects").
o AmREIT has historically made smaller annual distributions as a
percentage of investment than many of the Partnerships. Participating
Limited Partners who become shareholders of AmREIT may not receive
the same level of distributions as previously received from the
applicable Partnership.
o The Merger will result in a change in the nature of each Limited
Partner's investment in a Participating Partnership from holding an
interest in a specific portfolio of properties in a finite life
entity to holding an interest in an ongoing REIT, whose real estate
portfolio may be changed from time to time by AmREIT's Board without
the approval of the shareholders and which does not plan to
liquidate such assets within a fixed period.
o Expenses of the Merger will be borne by AmREIT except for the costs of
the Houlihan Fairness Opinions, the Partnerships' accounting costs
(and any Partnership valuation or appraisal costs) and direct
Partnership expenses.
-3-
<PAGE>
Risks Associated with the Merger
(cont'd.)
o Limited Partners who became shareholders will have fundamentally
changed the nature of their initial investment from an entity that is
a traditional pass-through entity for federal income tax purposes to
an investment in a REIT, which in general is not a pass-through
entity for federal income tax purposes with the exception of certain
undistributed long-term capital gains. See "MATERIAL FEDERAL INCOME
TAX ASPECTS."
o The size and diversity of AmREIT's portfolio after the Merger is
dependent upon which Partnerships approve the Merger. Therefore, at
the time a Limited Partner votes, he will not know the ultimate
nature of the portfolio or the business and operations of AmREIT
following the Merger.
o The General Partner is prohibited by the Merger Agreement from
initiating, soliciting or encouraging competing proposals with the
Merger. This may result in discouraging third parties from making
such a competing proposal.
Risks Associated
with an Investment
in AmREIT
An Investment in the Shares or Notes involves certain risks, including
the following.
o Upon consummation of the Merger, AmREIT intends to increase its
leverage so that its total unsecured and secured borrowings equal
approximately 50% of the value of its combined real estate portfolio.
o AmREIT intends to acquire one or more as yet unidentified
properties with additional borrowed funds. Participating Partners will
not have the opportunity to review and analyze such property(ies)
prior to the Merger.
o AmREIT has only recently become self-managed as a result of the
Adviser Acquisition. There is no assurance that the expected benefits
of self-management will be fully realized.
o AmREIT will have potential liability for unknown, undisclosed or
contingent liabilities of the Participating Partnerships, including
claims against AmREIT for indemnification, environmental liabilities,
and title defects, which could adversely affect the cash liquidity
of AmREIT and its future ability to make distributions to
shareholders.
o Shareholders of AmREIT will experience dilution of their equity
interests if there is an issuance of additional equity securities at
what may be less than fair market value.
o Any declaration of distributions to shareholders is subordinate to the
payment of AmREIT's debts and obligations, which could adversely
affect the ability of AmREIT to make distributions to shareholders
in the future.
-4-
<PAGE>
Risks Associated with
an Investment in AmREIT
(cont'd.)
o The majority vote of the Limited Partners of a Partnership will
cause the Partnership to participate in the Merger. Limited Partners
who voted against the Merger will have their Units converted into Notes
unless they alternatively elect to receive Shares.
o Approval of the Merger will require the Limited Partners to forego
certain alternatives to the Merger, such as liquidating the
Partnerships or continuing to operate the Partnerships as limited
partnerships.
o AmREIT has different business objectives than the Partnerships,
including the intent to acquire new properties and, from time to time,
to dispose of existing properties and reinvest the proceeds therefrom,
to the extent a distribution is not required to maintain REIT status.
o Approval of the Merger by the Limited Partners will result in the loss
of their respective rights under the applicable Partnership Agreement
and the partnership law of the applicable jurisdiction of organization
of each Partnership.
o If the Merger Agreement is terminated prior to consummation, under
certain circumstances, each Partnership and AmREIT may have to pay
their Proportionate Share of a termination fee or of the expenses of
the Merger.
o AmREIT's organizational documents do not restrict AmREIT's ability to
incur additional indebtedness. As a result, AmREIT could increase its
debt service requirements to a level that may adversely affect its
ability to make future distributions and may increase the risk of
default.
o Subject to AmREIT's stated investment policies, the investment and
operating policies of AmREIT are determined by the Board and may be
changed or revised at any time without a vote of the shareholders of
AmREIT.
o Claims may be brought against AmREIT for the remediation of
environmental conditions, which could result in substantial
expenditures for remediation and in a loss of revenues during
remediation efforts.
o There are risks associated with the acquisition and development of
commercial and industrial properties, including lease-up and
financing risks and the risk that such properties may not perform as
expected. If such risks materialize, the ability of AmREIT to make
future distributions could be adversely impacted.
-5-
<PAGE>
Risks Associated
with an Investment
in AmREIT
(cont'd.)
o There are risks associated with increased portfolio size and
geographic diversification as a result of the Merger, including the
adequacy of the number of personnel and the available resources to
manage the new portfolio.
o AmREIT may experience occurrences of uninsured liability or casualty,
reducing AmREIT's capital and adversely affecting anticipated profits.
o The risks that AmREIT may not be able to timely pay interest and/or
principal due under the Notes.
o AmREIT may incur the expense of compliance with the Americans With
Disabilities Act, fire and safety, and other regulatory requirements
applicable to the operation of AmREIT's properties.
o AmREIT will be taxed as a corporation if it fails to qualify as a REIT
and AmREIT will be liable for increased federal, state and local income
taxes in such event.
o Certain provisions in AmREIT's governing documents, including the
right to redeem Shares from a shareholder if he owns, directly
or indirectly, more than 9.8% of AmREIT's outstanding Shares or to
restrict voting and distribution rights with respect to Shares owned
in excess of such limit, and the Board's right to issue other
classes of equity securities could delay or prevent changes in
control of AmREIT, even if such changes in control were in the
shareholders' best interest.
Risks Associated
with General Real
Estate Investment
An investment in real estate is subject to various risks related to the
investment in real estate, including the following.
o There are risks normally incidental to the ownership and operation
of commercial properties, including, among others, changes in
general national economic or local market conditions, competition
for tenants, changes in market rental rates, inability to collect
rents from tenants due to bankruptcy or insolvency of tenants or
otherwise, and the need to periodically make capital improvements.
o There are risks associated with leveraged real estate investments,
such as this inability to meet required principal and interest
payments, the risk that existing indebtedness will not be refinanced
or that the terms of such refinancing will not be favorable, and the
risk that necessary capital expenditures will not be able to be
financed on favorable terms or at all.
o The illiquidity of real estate investments will limit AmREIT's
ability to vary its portfolio in response to changes in economic or
other conditions.
o Competition from competing properties could inhibit AmREIT's ability
to release its properties and/or reduce rentals.
o AmREIT's assets are subject to general operating risks common to
all real estate developments, including increases in operating costs
not offset by rental increases. In addition, AmREIT's assets are
primarily commercial properties, making AmREIT's profitability
dependent upon general trends affecting that type of real estate
investment.
-6-
<PAGE>
Reasons For The Merger And Recommendations
The
Partnerships
The General Partner believes that the terms of the Merger Agreement,
including the consideration to be received by the Limited Partners in the
Merger, are fair to and in the best interests of the respective
Limited Partners. Accordingly, the General Partner approved and/or
caused the corporate general partner of each Partnership to approve
the Merger Agreement and recommends that the respective Limited
Partners vote for approval of the Merger Agreement and amendment of
their Partnership Agreement. The following are the principal
reasons why and how the General Partner made such determination (to
which relative weights were not assigned):
o The fairness opinions issued by Houlihan Lokey Howard & Zukin
Financial Advisors Inc. ("Houlihan")dated June 1, 1998(the
"Houlihan Fairness Opinions") concluding that the consideration to
be received by the Limited Partners in connection with the Merger is
fair to the Limited Partners from a financial point of view;
o The determination that a business strategy of seeking a strategic
combination with a publicly held REIT to take advantage of the growth
in the REIT industry and real estate markets is preferable to the
alternatives of complete liquidation of the Partnerships, continuation
of the Partnerships or reorganization of the Partnerships into one
REIT or up to 10 separate REITS;
o The economic terms of the Merger, including the General Partner's
belief that the Exchange Price is fair.
o The determination that the Net Asset Values represent fair estimates
of the value of the Partnerships' assets and provide a reasonable
basis for allocating Merger consideration among Participating
Partnerships;
o The potential benefits of liquidity from owning Shares in a publicly
held REIT;
o AmREIT's offer to pay Limited Partners a cash payment equal to the ALV
of their Units in the event the Merger is consummated.
o Organization as a single self-managed entity to pursue real estate
investment opportunities;
o The Partnerships are not authorized to raise additional capital and
are therefore unable to take advantage of attractive investment
opportunities in contrast to AmREIT, which has access to equity
and debt capital to pursue real estate investment opportunities;
-7-
<PAGE>
The
Partnerships
(cont'd.)
o Participation in larger and more diverse investment portfolio
resulting from the Merger;
o Simplified tax administration for Limited Partners through the
elimination of Schedule K-1 reporting;
o The terms and conditions of each Merger Agreement, including the
ability of the General Partner to, under certain circumstances,
respond to and engage in discussions and negotiations with persons
making unsolicited proposals or inquiries and approve or recommend
such a transaction;
In recommending the Merger, the General Partner also considered the
following potential negative aspects of the Merger:
o Because the Exchange Price is fixed, the occurrence of events
unfavorable to AmREIT prior to consummation of the Merger could
reduce the value of the consideration to be received by the
Limited Partners in the Merger;
o AmREIT's plan to increase its borrowings in order to fund additional
real estate investments upon completion of the Merger and the risks
of such increased leverage;
o The taxable nature of the Merger and the fact that the Limited
Partners will not receive cash from the Merger (other than cash in
lieu of fractional Shares) to pay any taxes due on any taxable
gain.
o The Partnerships' share of the expenses of the Merger, estimated to
total $150,000 which are allocated among the partnerships based
on their respective net Asset Values and that the General
Partner will pay or reimburse the share of such expenses of
Partnerships not electing to participate in the Merger.
o The uncertainties concerning AmREIT's unspecified future
real estate investments which will be funded from planned post-
Merger borrowings;
o The various conditions to AmREIT's obligation to consummate the
Merger;
o The differences in investment objectives and policies of AmREIT
and the Partnerships;
o The risk that the anticipated benefits of the Merger may not be
realized;
o The risk that the benefits of AmREIT's recently completed Adviser
Acquisition will not be fully realized;
-8-
<PAGE>
The
Partnerships
(cont'd.)
o The fact that under the terms of the Merger Agreements, the
general partners are prohibited from initiating, soliciting or
encouraging any inquires or the making of any proposal that
constitutes, or that may reasonably be expected to lead to, a
transaction which would compete with the Merger, except if the
General Partner determines in good faith after consultation with
outside legal counsel that it is required by its fiduciary
obligations to do so; and
o AmREIT's strategy of using borrowings to finance additional property
acquisitions is different from the no financing structure of the
Partnerships.
In the view of the General Partner, the potentially negative factors
considered were not sufficient, either individually or collectively,
to outweigh the possible benefits considered by the General Partner
in his deliberations relating to the Merger. If the Merger is not
consummated for any reason, the Partnerships will continue to pursue
their business objectives of maximizing the value of their properties
and liquidating such properties prior to the expiration of their
respective finite lives. In addition, the Partnerships may seek
another strategic combination or pursue other attractive alternatives
which may become available. See "THE MERGER - The General Partner's
Reasons and Recommendations for the Merger."
AmREIT
The Independent Directors have unanimously approved the Merger and
determined that the terms of the Merger Agreement are fair from a
financial point of view to the shareholders of AmREIT and in the
best interests of AmREIT and its shareholders. The Independent
Directors unanimously recommend the shareholders vote for approval
of the Merger Agreement and the issuance of Shares thereunder. The
determinations of the Independent Directors are directed only
to the Shareholders and not to the Limited Partners. The
following are the principal reasons why and how the Independent
Directors made such determinations (to which relative weights were
not assigned):
o The Merger is expected to improve AmREIT's operating performance and
profit margins as the Partnership's properties are located in
AmREIT's existing markets;
o A greater number of outstanding Shares will facilitate AmREIT's
ability to list its Shares on a national exchange and increase
opportunity to achieve liquidity for shareholders;
o AmREIT's becoming a self-managed REIT through the acquisition of its
former Adviser provides it the ability to more efficiently grow its
property portfolio and to achieve significant economies of scale
in its operations.
-9-
<PAGE>
AmREIT
(cont'd.)
o The Merger should help increase (be accretive to) AmREIT's cash flow
and funds from operations ("FFO") per share. An increase in cash
flow and FFO per Share as a result of the Merger or any other reason
may result in a greater likelihood that distributions will be made to
shareholders. FFO is a widely accepted measure of an equity REIT's
operating performance, but is not an alternative to net income or
other measurements under Generally Accepted Accounting Principles
("GAAP") and is not comparable to similar totaled items reported
by other REITs. Management considers FFO, as defined by the National
Association of Real Estate Investment Trusts ("NAREIT"), an
appropriate measure of an equity REIT's performance because it is
predicated on cash flow analysis.
o The written fairness opinion of Bishop-Crown Investment Research,
Inc. ("Bishop-Crown"); and
o The belief that AmREIT will have greater opportunities to grow and
achieve significant economies of scale in its opinions.
In recommending the Merger, the Independent Directors also
considered the following potentially negative aspects of the
Merger:
o A fixed Exchange Price which upon the occurrence of events
favorable to AmREIT prior to consummation of the Merger could
result in an increase in the value of the shares to be paid in the
Merger;
o Possible expansion into new regions and new markets with which
AmREIT has little prior experience;
o The significant cost involved in connection with consummating the
Merger;
o The amount to be paid for Units purchased pursuant to the ALV
Payment Election is not known and may be greater than the value
of such Units agreed to for the purposes of the Merger.
o The substantial time and effort of AmREIT's management required to
effectuate the Merger, integrate the business of the Partnerships
into AmREIT, and manage the increased and more diversified property
portfolio; and
o The risk that the anticipated benefits of the Merger might not be
fully realized.
The Independent Directors believe that the benefits and advantages of
the Merger far outweigh the negative factors and risks. See "THE MERGER --
The Independent Directors' Reasons and Recommendations for the Merger"
and "-The General Partner's Reasons and Recommendations for the Merger."
The Merger Agreement provides that if only one of the Partnerships approves
the Merger, AmREIT has the right but not the obligation to consummate
the Merger with the Partnerships approving the Merger. If more than
one Partnership approves the Merger, AmREIT must consummate the Merger with
such Partnership if all of the other conditions to the Merger have been
satisfied.
If the Merger is not consummated for any reason, AmREIT will continue to
execute its strategic objective of acquiring by development and/or
purchase, single and multiple tenant retail properties. AmREIT will also
continue to consider possible acquisitions of compatible properties in
commercial and frontage retail developments. See "THE MERGER - The
Independent Directors' Reasons and recommendations for the Merger."
-10-
<PAGE>
Voting Procedures
AmREIT Special
Shareholders Meeting
The special meeting of AmREIT's shareholders (the "AmREIT Special
Shareholders Meeting" or the "AmREIT Meeting") will be held on December
____ , 1998 at 10:00 a.m., Houston time at Eight Greenway Plaza, Suite
824, Houston, Texas 77046. The purpose of the AmREIT Meeting is to
consider and vote upon the proposal to approve the Merger Agreement and
the Amendment to AmREIT's Bylaws authorizing the Merger. Shareholders
may vote at the Special Shareholders Meeting by attending the meeting and
voting in person, by completing the enclosed proxy card (the "AmREIT
Proxy") and returning it in the enclosed envelope, or by faxing it to the
Transfer Agent as directed below. AmREIT Proxies will be received,
tabulated and certified as to time of receipt and vote by The Bank of New
York, AmREIT's Transfer Agent (the"Transfer Agent"). AmREIT Proxies must
be returned to the Transfer Agent at 101 Barclay Street, New York, NY
10286; Attention AmREIT Proxies, or faxed to _________________. Faxed
AmREIT Proxies will be accepted until 5:00 p.m., New York time, on
December ___, 1998. See "CONSENT AND PROXY PROCEDURES - The AmREIT
Special Shareholders Meeting."
The Partnership
Consents
The Limited Partners must vote on the Merger by completing and timely
submitting the Partnership Consent included with this Prospectus.
Partnership Consents will be received, tabulated and certified as to time
of receipt and voting by Service Data Corporation, who will act as
tabulation agent for the Partnerships (the "Partnership
Tabulation Agent"). Limited partners voting "no" to the Merger will receive
Notes in the event their Partnership participates in the Merger unless they
affirmatively elect to receive Shares. Partners voting for the Merger or
abstaining from voting will receive Shares in the event their Partnership
participates in the Merger, unless they affirmatively elect to receive
Notes, subject to the Note Restriction. In order to be counted, a
Partnership Consent must be received by the Partnership Tabulation Agent
prior to the period (the "Partnership Solicitation Period") commencing upon
the mailing of the Solicitation Materials and, unless sooner terminated,
ending on the date no later than (a) ______________, 1998 or (b) such later
date as may be selected by the General Partner (the "Partnership
-11-
<PAGE>
The Partnership
Consents (cont'd.)
Solicitation Period"). Consents will not be accepted or tabulated until
the 16th day following the date of this Prospectus. Consents received
prior to that time will, subject to prior withdrawal, be tabulated on
and after such date. To vote on the Merger a Partner must complete and
mail his or her Partnership Consent to Service Data Corporation at 2424
South 130th Circle, Omaha, Nebraska 68144-2596, Attention: AAA
Partnership Consents, or by faxing the enclosed Partnership Consent to
(___) ________. Faxed Partnership Consents will be accepted until 5:00
p.m. Central time, on __________, 1998 . See "VOTING PROCEDURES - The
Partnership Consents."
Record Date; Votes Required; Investor Lists
For AmREIT
Only holders of Shares of record at the close of business on ____________,
1998 (the "Record Date") will be entitled to notice of and to vote at the
AmREIT Meeting. The Merger Agreement and the Bylaw Amendment will be
approved if the proposal receives the affirmative vote, in person and by
Proxy, of a majority of the outstanding Shares entitled to vote at the
AmREIT Meeting. The holders of a majority of the Shares entitled to vote,
present in person or by Proxy, will constitute a quorum for purposes of the
AmREIT Special Shareholders Meeting. As of the Record Date, there were
2,374,306 Shares outstanding and entitled to vote. The members
of the Board and executive officers of AmREIT and their Affiliates
beneficially owned, as of the Record Date, 255,186 Shares, which is
approximately 10.75% of the outstanding Shares. Management has agreed
to vote their Shares in favor of the proposal. Abstentions and broker
non-votes (where a nominee holding Shares for a beneficial owner has not
received voting instructions from the beneficial owner with respect to a
particular matter and does not possess or choose to exercise the
discretionary authority with respect thereto) have the same effect as a
vote against the proposal. See "VOTING PROCEDURES - The AmREIT Special
Shareholders Meeting."
For The
Partnerships
Only Limited Partners of record at the close of business on the Record
Date will be entitled to notice of and to Vote on the Merger and the
amendment to the Partnership Agreement. The affirmative vote of (i) the
holders of a majority of the outstanding Units and (ii) the General
Partner are required to approve the Merger and the Partnership Agreement.
The General Partner intends to vote in favor of the Merger and the
Partnership Amendment. Abstentions and broker non-votes (where a nominee
holding Units for a beneficial owner has not received voting instructions
from the beneficial owner with respect to a particular matter and does not
possess or choose to exercise the discretionary authority with respect
thereto) will, for the purposes of the Merger Vote, have the same effect
as a vote against the Merger and the Partnership Amendment. Under federal,
Nebraska and Texas state law, and under the Partnership Agreements the
Limited Partners may obtain a list of Partners, subject to certain
conditions. See "VOTING PROCEDURES - The Partnership Consents."
-12-
<PAGE>
Description of The Merger
The Shares are being offered to each Partnership in an amount equal to its
Net Asset Value divided by the Exchange Price of $9.34 per Share. Calculated
as if the Effective Date were June 30, 1998, AmREIT would issue up to
3,011,622 Shares for the Partnerships of which up to 3,007,339 Shares would
be issued to the Limited Partners. Assuming all the Partnerships participate in
the Merger, based on 5,742,873 outstanding Shares upon consummation of the
Merger, approximately 52.37% of which would be held by the Limited Partners.
Based on the Exchange Price, if the Merger is approved and consummated, the
total market value of AmREIT, based on the Exchange Price, will be
approximately $53,636,183 and the maximum consideration of 3,007,339
Shares to be received collectively by the Limited Partners would have a
value of approximately $28,088,549 based on the Exchange Price. Upon
consummation of the Merger, the General Partner will own up to approximately
10.68% of AmREIT's outstanding Shares. For a description of the Merger
Agreement, see "THE MERGER."
Purpose
The purpose of the Merger for AmREIT is to strategically combine
AmREIT and the Partnerships, which have compatible properties in
complimentary markets, in order to become a part of a larger and more
diversified real estate investment trust (generally, a "REIT").
The General Partner and the Independent Directors believe this
combination will allow the Partnerships to take advantage of potential
leverage and the growth in the REIT industry and real estate markets
in general and the potential of growth of AmREIT and liquidity for
the Shares.
Net Asset
Values
A Partnership's Net Asset Value equals the Negotiated Price of its
properties plus its Net Cash on the Effective Date. The Net Asset
Value of each Partnership is subject to adjustment for its actual Net
Cash as of the Effective Date, provided however, that the Partnerships'
NAV may not be decreased below its Minimum Price, as defined.
Negotiated Price
of Properties
The Negotiated Prices of each Partnership's properties were
negotiated and agreed to by the General Partner on behalf of the
Partnerships and the Independent Directors on behalf of AmREIT.
The Negotiated Prices were not determined by an independent appraisal
of the properties. See "CONFLICTS OF INTEREST."
Net Cash
A partnership's Net Cash equals the excess, if any, of its cash and
accounts receivable over its debt.
Exchange Price
The Exchange Price of $9.34 per Share was determined and agreed to by
the General Partner on behalf of the Partnerships and the Independent
Directors on behalf of AmREIT based on the last public offering price
of AmREIT's common stock of $10.25 net of certain offering costs
incurred in that offering.
Consideration
Offered to
Partnerships
The following table sets forth the number of Shares which would be
issued to each Partnership in the Merger, calculated as if the
Effective Date were June 30, 1998. The table also sets forth the Net
Asset Value, Limited Partners' Adjusted Capital and number of Shares
offered to the Limited Partners per $1,000 of their Adjusted Capital at
June 30, 1998. A Limited Partner's Adjusted Capital as of the date
stated, equals his or her original investment, less distributions
constituting a return of capital under the respective Partnership
-13-
<PAGE>
Consideration Offered
to Partnerships (cont'd.)
Agreement. The General Partner believes that a Limited Partner's Adjusted
Capital is an accurate and convenient measure of his or her remaining
investment in the Partnership. See "THE PARTNERSHIPS Partnership
Distributions."
<TABLE>
Partnership Net Asset Values and Allocation of Shares
<CAPTION>
Partnership Shares Shares Per
Net Asset Value L.P.s' Adjusted Offered to $1,000 of
Allocated to L.P.s Capital at L.P.s in Adjusted Capital
Partnership at 6/30/1998 6/30/1998(1) Merger at 6/30/1998
----------- ------------ ------------ ------ ------------
<S> <C> <C> <C> <C>
FUND III $1,168,585 $934,814 125,116 133.84
FUND IV 523,358 615,000 56,034 91.11
FUND V 441,221 460,389 47,240 102.61
FUND VI 287,740 294,733 30,807 104.53
FUND VII 1,030,056 1,125,100 110,284 98.02
FUND VIII 1,830,391 1,853,980 195,973 105.70
FUND GDYR 1,099,387 1,229,090(2) 117,707 95.77
FUND IX 4,928,062 5,390,500 527,630 97.88
FUND X 10,355,000 11,453,610 1,108,672 96.80
FUND XI 6,424,748 7,061,209 687,875 97.42
__________ __________ _________
Total $28,088,548 $30,418,425 3,007,338
</TABLE>
(1) Adjusted Capital is calculated in accordance with the respective
Partnership Agreement and means the Limited Partner's aggregate
original capital less distributions constituting a return of
Capital or funded from net proceeds from sale or refinancing
of Partnership properties.
(2) Reflects distributions of uninvested original capital of
$105,910.
The following table sets forth the estimated number of shares to be
received by Participating Limited Partners for $1,000 of Adjusted Capital
calculated as if the Effective Date were June 30, 1998 based on the
Exchange Price of $9.34 and a price of $10.25 per Share which was the
public offering price of the Shares in AmREIT's most recent public
offering which terminated on May 31, 1998. The General Partner believes
Adjusted Capital represents an appropriate measure of a Limited Partner's
remaining investment in his or her Partnership.
-14-
<PAGE>
<TABLE>
Share Value Received In the Merger
Per $1,000 of Adjusted Capital
at June 30, 1998(1)
<CAPTION>
Value at Percent of Value at Percent of
No. of $9.34 Adjusted Share Adjusted
Shares Exchange Capital at Price of Capital at
Partnership Offered Price 6/30/1998 $10.25 6/30/1998
----------- ------- ----- --------- ------ ---------
<S> <C> <C> <C> <C> <C>
FUND III 133.84 $1,250 125.01% $1,372 137.19%
FUND IV 91.11 851 85.10% 934 93.39%
FUND V 102.61 958 95.84% 1,052 105.17%
FUND VI 104.53 976 97.63% 1,071 107.14%
FUND VII 98.02 916 91.55% 1,005 100.47%
FUND VIII 105.70 987 98.73% 1,083 108.35%
FUND GDYR 95.77 894 89.45% 982 98.16%
FUND IX 97.88 914 91.42% 1,003 100.33%
FUND X 96.80 904 90.41% 992 99.22%
FUND XI 97.42 910 90.99% 999 99.85%
</TABLE>
Amendments to
Partnership
Agreements
The general partners of the Partnerships are proposing an amendment to each
Partnership's agreement of Limited Partnership (the "Partnership
Amendments") which amend such respective agreements (the "Partnership
Agreements") to authorize: (i) the Merger of each Partnership with and into
AmREIT, whether or not AmREIT would be regarded as an Affiliate of the
General Partner; and (ii) such other actions as may be necessary under or
contemplated by the Merger Agreement or this Prospectus, irrespective of
any provision in the Partnership Agreement which might otherwise prohibit
such actions. Limited Partners voting in favor of the Merger will be deemed
to have voted in favor of each of these proposed amendments. See "THE
MERGER -- Proposed Amendments to Partnership Agreements."
Dissenters' Rights
AmREIT
Shareholders of AmREIT will not have dissenters' appraisal rights by
reason of the Merger. Any Shareholder may abstain from or vote against the
Merger. See "THE MERGER - Dissenting Partners and Shareholders."
The Partners
Limited Partners will not have dissenters' appraisal rights by reason of
the Merger. Limited Partners who vote against the Merger will receive
a Note for their Units unless they elect to receive Shares in lieu of
either Units or Shares, Limited Partners may elect to receive cash
payment for their Units if the Merger is consummated under the ALV
Payment Election. See "THE MERGER - Dissenting Partners, Shareholders",
"The Notes" and the "ALV Payment Election" below.
-15-
<PAGE>
Conflicts of Interest
A number of conflicts of interest are inherent in the relationships among
the Partnerships, the General Partner, and AmREIT. See "CONFLICTS OF INTEREST."
The relationships among the General Partner and AmREIT will result in specific
benefits to Mr. Taylor from the Merger and thus involve an inherent conflict
of interest in their structuring the terms and conditions of the Merger.
See "CONFLICTS OF INTEREST." The following are the significant benefits to
Mr. Taylor from the Merger.
o The General Partner, Mr. Taylor, serves as the individual general
partner and/or controls the corporate general partner of each
Partnership and is also Chairman of the Board and Chief Executive
Officer of AmREIT and largest shareholder of AmREIT.
o Mr. Taylor will be entitled to receive up to approximately 11,686
Shares in the Merger with respect to the general partner interests in
certain partnerships and as a result of disposition fees paid to him
by certain Partnerships if they participate in the Merger.
o Mr. Taylor will receive up to approximately 349,521 Shares upon
the consummation of the Merger under the terms of the recently
completed Adviser Acquisition.
o After the Merger, he will own up to approximately 10.68% of AmREIT's
outstanding Shares in the event all of the Partnerships participate.
o Since each Partnership effectively has the same general partners,
the General Partner is not in a position to independently view
the Merger proposal solely from the perspective of a single
Partnership, and may have advocated certain positions in connection
with the negotiation of the Merger Agreement, the effect of which
could have benefitted one of the Partnerships at the expense of
other Partnerships.
Organizational
Diagram
Set forth below is a diagram showing the relationships between the
parties to the Merger.
[INSERT ORGANIZATIONAL CHART HERE]
-16-
<PAGE>
(1) As of the date of this Prospectus, 1998, the General Partner, as a result
of the Adviser Acquisition, is entitled to receive up to an additional
686,740 Shares provided that, among other things, upon certain minimum
levels of the future issuances by AmREIT of common stock or its equity
equivalent. Upon consummation of the Merger and the issuance of all
3,011,622 Shares offered hereby, Mr. Taylor would own (including Shares he
currently owns) at least 613,457 Shares which could represent up to 10.68%
of AmREIT's then outstanding Shares. See "AmREIT - The Adviser Acquisition"
and " - Certain Relationships and Related Transactions."
(2) Represents the percentage ownership of Units in the Partnership by the
General Partner and his Affiliates.
The Shares
The Shares are part of up to 100,000,000 common shares of $0.01 par value,
AmREIT is authorized to issue (the "Common Shares"). As of the Record Date,
AmREIT has outstanding a total of 2,374,306 Common Shares. The Shares will be
freely transferable by the holders thereof except for those Shares held by
holders who may be deemed to be Affiliates of AmREIT (generally including
persons who are officers or directors of AmREIT or who hold more than 10% of
AmREIT's outstanding shares) under applicable federal securities laws. The
Shares will not be listed for trading on any securities exchange. If the
requisite number of Limited Partners of any of the Partnerships approves the
Merger, AmREIT has the right, but not the obligation, to consummate the Merger
with the one Participating Partnership. Upon the effective date of the Merger,
the Participating Partnerships will cease to exist. See "DESCRIPTION OF
AMREIT'S CAPITAL STOCK."
The Notes
The Limited Partners of each Partnership may elect to receive and
Dissenting Partners, unless they otherwise elect to receive Shares, will
receive Notes for their Units. The following table sets forth the principal
amount of Notes offered per Unit and per $1,000 original investment calculated
as if the Effective Date were June 30, 1998 and subject to the Note Restriction.
Principal Amount of Note
Offered per:
------------------------------
$1000 Original Percent of Orig.
Partnership L.P. Unit Investment $1000 Investment
----------- --------- ---------- ----------------
Fund III $37,098 $1,237 123.66%
Fund IV 25,530 851 85.10%
Fund V 27,576 919 91.92%
Fund VI 28,774 959 95.91%
Fund VII 27,743 925 92.48%
Fund VIII 29,821 994 99.40%
Fund GDYR 24,955 832 83.18%
Fund IX 914 914 91.42%
Fund X 904 904 90.41%
Fund XI 910 910 90.99%
The following is a summary of the terms and conditions of the Notes.
-17-
<PAGE>
AmREIT
(cont'd.)
Interest 6.0% per annum.
Rate:
Terms of Payable, interest only, quarterly until December 31, 2004, when
Payment: the unpaid balance of principal and interest on the Notes is due
and payable.
Prepayment AmREIT may prepay the Notes in full or in part at any time and
Rights: upon 30 days prior written notice without premium or penalty.
Nature of The Notes are general unsecured obligations of AmREIT.
Obligation:
AmREIT The Notes are subject to certain covenants by AmREIT, including
Covenants: the covenant to apply at least 80% of any net cash proceeds
received from its sale or other disposition of the properties
acquired from the Participating Partnerships to the repayment of
the Notes.
Loan The Notes will be issued subject to the Loan Agreement pursuant
Agreement: to which the holders of the Notes must appoint a Trustee to
exercise certain rights.
The impact of the issuance of the Notes on cash distributions under
various assumptions on a pro forma basis is set forth in "Pro Forma Financial
Information", included with the Prospectus. No secondary market for the Notes is
expected to exist upon consummation of the Merger. See "THE MERGER - The Merger
Consideration" and - "The Notes."
Fairness Opinions
AmREIT
Bishop-Crown Fairness Opinion. The Independent Directors received the
written opinion of Bishop-Crown Investment Research, Inc. to the effect
that, as of the date of such opinion, based on Bishop-Crown's review
and subject to certain limitations stated in the opinion, the
consideration to be paid by AmREIT pursuant to the Merger was fair to
AmREIT from a financial point of view. Bishop-Crown was retained to
render the fairness opinion based upon its reputation as a financial
advisory firm with experience in the valuation of businesses and their
securities in connection with mergers and acquisitions and for other
purposes, and has substantial experience with respect to REITs and other
real estate companies and in transactions similar to the Merger, and
because of Bishop-Crown's familiarity with AmREIT and its operations.
AmREIT has agreed to pay Bishop-Crown a fee of $37,500, which is payable
regardless of whether the Merger is consummated, and to indemnify Bishop-
Crown against certain liabilities, including liabilities under federal
securities laws. For additional information concerning Bishop-Crown and
its opinion, see "FAIRNESS OPINIONS -- Bishop-Crown Fairness Opinion"
and the form of Bishop-Crown's opinion attached hereto as Annex 4. The
opinion of Bishop-Crown should be read in its entirety with respect to the
assumptions made, matters considered and limits of the reviews undertaken
by Bishop-Crown in rendering its opinion.
-18-
<PAGE>
The
Partnerships
The Houlihan Fairness Opinions. The General Partner has received a Houlihan
Fairness Opinion for each Partnership to the effect that, as of the date of
such opinion, the consideration to be received by the Limited Partners of
the respective Partnership in connection with the Merger was fair to the
Limited Partners of each Partnership from a financial point of view. The
General Partner retained Houlihan because of Houlihan's experience in the
valuation of businesses and their securities in connection with mergers and
acquisitions, and valuations for corporate purposes especially with respect
to REITs and other real estate companies. The Partnerships have
collectively agreed to pay Houlihan $85,000 and to reimburse Houlihan for
certain of its out-of-pocket expenses, regardless of whether the Merger is
consummated and to indemnify Houlihan against certain liabilities,
including liabilities under the federal securities laws. For additional
information concerning Houlihan and its opinions, see the "FAIRNESS
OPINIONS," " - The Houlihan Fairness Opinions" and the form of Fairness
Opinions, dated June 1, 1998, attached hereto as Annex 5.
Material Federal Income Tax Aspects
The Merger involves numerous federal income tax consequences to the
Limited Partners and the shareholders of AmREIT. For a complete discussion
describing these consequences, see "Material Federal Income Tax Aspects." The
material federal income tax consequences of the Merger include the following:
o The taxable Limited Partners will realize taxable gain or loss in the
Merger (which may be ordinary or capital in nature), but will not receive
cash from the Merger (other than cash received in lieu of fractional
Shares) to pay any taxes due on any taxable gain. Any gain or loss will
be recognized in the year the Merger is consummated.
o The amount of gain or loss recognized by a Limited Partner will be based
upon the deemed sale of assets owned by the respective Partnership and,
as applicable, the extent to which the fair market value of the Shares
distributed to the Limited Partner exceeds the Limited Partner's adjusted
tax basis in his or her Units.
o As a REIT, AmREIT will be entitled to a tax deduction for distributions
made to its shareholders. To continue to qualify as a REIT, however,
AmREIT must satisfy income, asset and ownership tests imposed by the
Code. Failure to so qualify will result in the loss of such deduction for
distributions paid as well as additional tax on REIT income and reduced
or no distributions to shareholders.
o REIT distributions received by taxable shareholders should be treated as
portfolio income. Such distributions should not be treated as UBTI to
certain tax-exempt shareholders (subject to certain exceptions which may
be applicable to pension-trusts).
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<PAGE>
Deloitte & Touche LLP ("Deloitte") will deliver as of the Closing Date of
the Merger an opinion which is summarized as follows: (1) AmREIT met the
requirements for qualification and taxation as a REIT under the Code for its
taxable year ended December 31, 1997; (2) AmREIT's diversity of equity
ownership, operations through the date of closing of the Merger and proposed
method of operation for future periods should allow it to qualify as a REIT for
its taxable year ending December 31, 1998; and (3) the consummation of the
Merger will not result in AmREIT's failure to continue to satisfy the
requirements for qualification as a REIT for federal income tax purposes.
Rushall & McGeever, APC, special counsel to AmREIT, will deliver its opinion to
AmREIT that the discussion contained under the caption "Material Federal Income
Tax Consequences" accurately reflects existing law and fairly addresses the
material federal income tax issues described therein. See "MATERIAL FEDERAL
INCOME TAX ASPECTS."
Effective Time of the Merger
As soon as practicable after satisfaction of all conditions to
consummation of the Merger (see "THE MERGER -- Conditions to Consummation of the
Merger"), the parties will file articles of merger with the Secretary of State
of the states of Nebraska and Texas. The Merger of any Partnership will be
delayed to the extent deemed necessary or appropriate in order to comply with
such Partnerships' Partnership Agreement. For Nebraska and Texas state law
purposes, the Merger will become effective upon the later of the filing of
articles of merger described above, or at such later time which AmREIT and the
general partners shall have agreed upon and designated in such filings in
accordance with applicable law (the "Effective Time"). For all other purposes,
the Merger will be effective as soon as practical after it has been approved by
the shareholders of AmREIT and the Limited Partners of the respective
Partnership. AmREIT and the Partnerships each has the right, acting unilaterally
so long as it has not willfully and materially breached the Merger Agreement,
to terminate the Merger Agreement should the Merger not be consummated
by the close of business on March 31, 1999. See "THE MERGER -- Extension,
Waiver and Amendment; Termination."
Management, Operations and Headquarters after the Merger
Following the Merger, the Directors of AmREIT prior to the Merger will
continue to serve as Directors of AmREIT. The executive officers of AmREIT prior
to the Merger will continue to serve as the executive officers of AmREIT after
the Merger. Following the Merger, the headquarters of AmREIT will continue to be
located in Houston, Texas at the current headquarters of AmREIT. See "THE MERGER
- - Management, Operations and Headquarters After the Merger."
Conditions to Consummation of the Merger
The respective obligations of AmREIT and the Partnerships to effect the
Merger are subject to the satisfaction of certain conditions (none of which may
be waived), including the following: (i) the Merger Agreement shall have been
approved by the shareholders of AmREIT and the Limited Partners of the
Participating Partnerships; (ii) the California Commissioner of Corporations
shall have found the Merger to be fair, just and equitable after the fairness
hearing; (iii) all other approvals to carry out the transactions contemplated by
the Merger Agreement shall have been obtained; (iv) none of the parties shall be
subject to an order or injunction prohibiting the Merger; and (v) all material
actions by or in respect of or filings with any governmental entity required for
consummation of the Merger shall have been obtained or made.
Consummation of the Merger is also subject to the satisfaction or waiver
of certain other conditions, including, among others: (i) the representations
and warranties in the Merger Agreement of each of the parties shall be true
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<PAGE>
and correct as of the Closing Date; (ii) each party shall have performed its
obligations contained in the Merger Agreement; (iii) from and after the date of
the Merger Agreement there shall not have occurred any change in the financial
condition, business or operations of either party that would have or would be
reasonably likely to have a material adverse effect on the business, results
of operations or financial condition of such party; (iv) each party shall have
received an opinion of counsel; and (v) each party shall have obtained all
consents and waivers from third parties necessary to consummate the Merger.
If any material conditions to the Merger are waived by the parties, the
parties shall resolicit Consents from the waiving party's shareholders or
Limited Partners, as applicable.
If any one Partnership approves the Merger, AmREIT will, subject to the
terms and conditions of the Merger Agreement, consummate the Merger with the one
Participating Partnership. See "THE MERGER -- Conditions to Consummation of the
Merger."
Anticipated Accounting Treatment
The Merger will be accounted for by using the purchase method in
accordance with Accounting Principles Board Opinion No. 16. See "THE MERGER --
Anticipated Accounting Treatment."
Conduct of Business Pending the Merger
Each of AmREIT and the Partnerships has agreed in the Merger Agreement to
operate its business in the ordinary course and to refrain from taking certain
actions relating to the operation of its business pending consummation of the
Merger without the prior approval of the other party, except as otherwise
permitted by the Merger Agreement. See "THE MERGER -- Conduct of Business
Pending the Merger."
Merger Expenses
The Merger Expenses of the Merger, including legal and accounting fees,
and printing and solicitation costs are estimated to total $450,000. AmREIT's
share of the Merger Expenses is (estimated to total $300,000) (the "AmREIT
Expenses"). The AmREIT Expenses will include all Merger costs except the costs
of the Houlihan Fairness Opinions, the Partnerships' accounting costs (and any
valuation or appraisal costs) which will be allocated the Partnerships based on
their respective net Asset Values (the "Partnership Expenses"). In addition,
each Partnership will bear its own direct Partnership costs including Partner
communications. The General Partner must pay or reimburse each Partnership not
electing to participate in the Merger its allocated share of the Partnership
Expenses. See "THE MERGER - The Merger Expenses."
Termination Rights
The Merger Agreement provides that it may be terminated prior to the
Effective Time, for good reason, as defined. In the event a party so terminates
the Merger Agreement, it may be required to pay the non-terminating party
liquidated damages in a specified amount. In the case of AmREIT, such liquidated
damages are equal to 120% of the Partnerships' Proportionate Share of the Merger
Expenses. In the case of the Partnerships, the liquidated damages is the
Partnerships' Proportionate Share of $500,000. See "THE MERGER -- Effect of
Termination and Abandonment."
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<PAGE>
Comparison of the Partnerships and AmREIT
The information below highlights a number of significant differences
between the Partnerships and AmREIT relating, among other things, to form of
organization, investment objectives, policies and restrictions, asset
diversification, capitalization, management structure, compensation and investor
rights. These differences are discussed in detail under "COMPARISON OF OWNERSHIP
OF UNITS, SHARES AND NOTES." That section of the Prospectus also includes a
summary comparison of the legal rights associated with the ownership of Units,
Shares and Notes.
<TABLE>
<CAPTION>
LIMITED PARTNERSHIP AMREIT
CHARACTERISTIC (UNITS) (SHARES AND NOTES)
- -------------- ------- ------------------
<S> <C> <C>
General Business o Acquiring, owning, operating and o Acquiring, developing, owning,
managing single tenant, commercial operating and self-managing
real estate under long-term net lease. commercial real estate including
multi-tenant properties.
Liquidity and o No established market o Possible future market for shares; no
Transferability o Transfer of Units restricted likely market for Notes
o Shares freely transferable; Notes
freely transferable
Property Portfolio o Known investments o Specified present investments;
o Static investment unspecified future investments
o Limited diversification o Investment flexibility
o No reinvestment, no ability to grow o Greater diversification
o Reinvestment, ability to grow
Borrowing o No ability to borrow o Debt of approximately 50% of real
o Partnerships have no debt estate assets, may borrow funds as
determined by management;
Shareholders subject to the risks
associated with debt, including
increased debt service and
potential for default
Form of Organization o Fund IX and Fund X are Nebraska o Maryland corporation
limited partnerships
o Others are Texas limited partnerships
Duration o 7 to 10 years or more o Perpetual, subject to dissolution
by majority vote of Shareholders
Federal Taxation o Partnership is not subject to federal o As REIT, not subject to federal tax
tax; Partners subject to federal tax on on earnings; Shareholders subject to
allocated share of Partnership income federal income tax to extent of
dividends paid
State Tax o Some states require withholding on o No withholding
Withholding distributions
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
LIMITED PARTNERSHIP AMREIT
CHARACTERISTIC (UNITS) (SHARES AND NOTES)
- -------------- ------- ------------------
<S> <C> <C>
State Tax Filings by o Generally passive income o Generally not required in states
Investors in which properties are owned or
solely because of ownership of
Shares or Notes
Tax Characterization o Generally passive income o Portfolio income
of Income
Tax Reporting o Schedule K-1s o Form 1099-DIV for Shares andForm
1099-INT for Notes
Distributions o Quarterly distributions, subject o Regular quarterly dividends on Shares;
to Partnership capital needs and quarterly interest payments on Notes
contingencies.
Management o Vested in General Partner; Limited o Vested in Board of Directors elected
Partners may remove General Partner annually by Shareholders; no
but must purchase his Partnership requirement to purchase a removed or
interest. non-reelected Director's shares
Related Party o Permitted, subject to restrictions o Permitted, subject to restrictions in
Transactions in Partnership Agreements Governing Documents and review by
non-interested Directors; no
restriction in Notes
Voting o Limited voting rights; one vote o One vote per Share; Notes have no
per Unit; voting rights
Management o Property management fee based on o Salaries and/or other compensation
Compensation gross rental receipts from set by the Board of Directors
properties.
o Administrative fee and/or
reimbursements.
o Distributions based on gross
receipts from operations to General
Partner.
o Reimbursement of expenses to
General Partner
Expenses o All direct Partnership expenses o All direct REIT expenses paid by
paid by Partnership AmREIT
</TABLE>
AVAILABLE INFORMATION
AmREIT has filed with the California Department of Corporations
(the"Department") Applications for Qualification of Securities (together, the
"Application") under the California Corporate Securities Law of 1968, as
amended, with respect to the Shares and Notes to be issued in the Merger. This
Prospectus does not contain all the information set forth in the Application. In
particular, the Application contains certain exhibits which are not included
herein, including financial statements with respect to each of the Partnerships.
For further information regarding AmREIT and the Shares and Notes offered
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<PAGE>
hereby, reference is made to the Application and the exhibits and schedules
attached thereto. Copies of such materials may be examined at the
Department of Corporations, 1350 Front Street, San Diego, California.
AmREIT, Fund IX and Fund X are each subject to the informational
requirements of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and, in accordance therewith, file reports, proxy or consent solicitation
statements and other information with the Securities and Exchange Commission
(the "Commission"). Such reports, proxy or consent solicitation statements and
other information filed by AmREIT, Fund IX and Fund X with the Commission can be
inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at
its Regional Offices at Suite 1400, 500 West Madison Street, Chicago, Illinois
60661 and Suite 1300, 7 World Trade Center, New York, New York 10048. Copies of
such material can be obtained from the Public Reference Section of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, upon payment of
the prescribed fees. The Commission maintains a Web site that contains reports,
proxy or consent solicitation and information statements and other information
regarding AmREIT, Fund IX and Fund X and other registrants that have filed
electronically with the Commission. The address of such site is
http://www.sec.gov. AmREIT's reports, proxy or consent solicitation statements
and other information may and can also be inspected and copied at the offices of
the NYSE, 20 Broad Street, New York, New York 10005.
This Prospectus has been filed jointly by AmREIT, Fund IX and Fund XI
under Section 14(a) of the Exchange Act with the Commission.
Certain supplements to this Prospectus have been prepared for each
partnership to highlight the risks, effects and fairness of the Merger that are
particular to the respective Partnership. The Limited Partners of each such
Partnership will receive, with this Prospectus, the Supplement that corresponds
to their Partnership. The Limited Partners of a particular Partnership may also
receive copies of the supplements prepared for any or all of the Partnerships
and copies of such supplements will be provided promptly, without charge, to
each Limited Partner or his representative who has been so designated in writing
upon written request to the particular Partnership at Eight Greenway Plaza,
Suite 824, Houston, Texas 77046.
All information contained in this Prospectus with respect to AmREIT has
been supplied by AmREIT, and all information with respect to each Partnership
has been supplied by such Partnership.
No person has been authorized to give any information or to make any
representation other than as contained herein in connection with the offer
contained in this Prospectus, and if given or made, such information or
representation must not be relied upon. This Prospectus does not constitute an
offer to sell or a solicitation of an offer to buy any securities other than the
securities to which it relates, nor does it constitute an offer to or
solicitation of any person in any jurisdiction to whom it would be unlawful to
make such an offer or solicitation. The delivery of this Prospectus at any time
does not imply that the information herein is correct as of any time subsequent
to the date hereof.
RISK FACTORS
In considering whether to approve the Merger Agreement, AmREIT's
shareholders and the Limited Partners should carefully consider, in addition to
the information included elsewhere in this Prospectus, the following:
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<PAGE>
Risks Associated With the Merger
Possible Disagreement as to Partnership Valuations. The terms and
conditions of the Merger were determined and agreed to by the General Partner on
behalf of each Partnership. The Partnerships were not represented by an
unaffiliated, independent person either individually or as a group. Limited
Partners are subject to the risk that the Net Asset Values of the Partnerships
and/or the Exchange Price, which were negotiated by the common management of the
Partnerships and AmREIT, do not properly reflect the value of each Partnership's
assets or the Shares, respectively, and, accordingly, the Partnerships in the
aggregate may not have received sufficient Shares consistent with the actual
value of their assets. There is no assurance that the Negotiated Prices of the
properties will not exceed the actual price at which AmREIT could purchase the
property in a transaction between an unrelated seller and an unrelated buyer as
of the Effective Date or at any other time. To the extent the consideration paid
by AmREIT for the Partnership properties in the Merger exceeds such fair value,
the return on investment received by AmREIT as a result of the Merger would be
less than that it could receive from alternative investments.
Conflicts of Interest of the General Partner. The General Partner had
significant conflicts of interest in determining the terms of the Merger on
behalf of the Partnerships. The General Partner is entitled to receive up to
11,609 shares in connection with part of the Merger, 4,282 shares in general
partner interests and 7,404 shares in payment of disposition compensation. The
General Partner is an officer, director and the largest shareholder of AmREIT.
In addition, as a result of the Merger, the General Partner will receive up to
349,521 shares of the Share Balance payable to him in connection with the
Adviser Acquisition. Thus, upon completion of the Merger the General Partner
could own up to approximately 10.68% of AmREIT's outstanding Shares. The General
Partner believes the terms of the Merger are fair to the Limited Partners, and
that the ownership and management relationships did not influence the General
Partner in recommending that the Limited Partners approve the Merger. See
"CONFLICTS OF INTEREST."
Lack of Independent Representation for Each Partnership. The terms of the
Merger have been negotiated and agreed to by the General Partner (who is also an
Affiliate of AmREIT) on behalf of the Partnerships and by the Independent
Directors on behalf of AmREIT. Thus, the Partnerships were not individually or
as a group separately represented by parties independent of the General Partner
or AmREIT in structuring and negotiating the terms of the Merger. See "CONFLICTS
OF INTEREST." If the Partnerships had had such independent representation, the
terms of the Merger may have been more favorable to the Limited Partners. In
addition, if separate representation had been arranged for each Partnership, any
issues unique to the value of a given Partnership might have received greater
attention during the structuring of the Merger, thereby increasing or decreasing
the number of Shares allocable to such Partnership.
Value of Shares. The Shares are not publically traded and there is
uncertainty as to the value of the Shares and the prices at which AmREIT's
Shares may trade in the event a regular secondary market for the Shares is
established. There is no assurance that such Shares would not trade below the
Exchange Price. In such event, the value realized from the sale of the shares
would be less than the portion of the Partnerships' Net Asset Value represented
by the Shares. See "THE MERGER."
Disproportionate Effect of Inaccurate Valuation. The estimated Net Asset
Values are one of a number of possible reasonable estimates of the fair value of
AmREIT and the Partnerships. Therefore, it is possible that these estimated
values would differ from the actual value which could be realized by the
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<PAGE>
Limited Partners from a sale of their Partnership's net assets to an unrelated
party in a transaction negotiated at arm's length. In the event these estimated
values of the Partnerships are less than such actual fair value, the
undervaluation would favor AmREIT. Conversely, to the extent the estimated
values are overvaluations of the Partnerships, the Merger would favor the
Partnerships in general and among the Partnerships, those having the longer real
property portfolios.
Potential Changes in Distribution Levels for Limited Partners. Limited
Partners becoming shareholders of AmREIT may not continue to receive cash
distributions at the same levels that distributions were received from the
Partnerships. AmREIT, in order to qualify as a REIT, is required to distribute
with respect to each taxable year distributions (other than capital gain
distributions) to its shareholders in an aggregate amount at least equal to (i)
the sum of (A) 95% of its "REIT taxable income" (computed without regard to the
dividends paid deduction and its net capital gain) and (B) 95% of the net income
(after tax), if any, from foreclosure property, if any, minus (ii) the sum of
certain items of non-cash income. Such distributions must be paid in the taxable
year to which they relate, or in the following taxable year if declared before
AmREIT timely files its federal income tax return for such year and if paid on
or before the first regular distribution payment date after such declaration. To
the extent that AmREIT 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.
Furthermore, if AmREIT 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 income for such year and (iii) any undistributed taxable
income from prior periods, it would be subject to a 4% nondeductible excise tax
on the excess of such required distribution over the amounts actually
distributed. Although AmREIT intends to continue paying quarterly cash
distributions at current levels in the future, there is no assurance it will be
able to do so. Also, given the uncertainties related to the Merger and AmREIT's
business, it is impossible to predict with certainty the impact of the Merger
upon the distributions to Limited Partners who receive Shares in the Merger.
Uncertainties at the Time of Voting as to Participation of Partnerships.
Consummation of the Merger is subject to the satisfaction or waiver of certain
conditions, including, among other things, obtaining the requisite approval of
the Limited Partners. If the Limited Partners of more than one of the
Partnerships approve the Merger, AmREIT has the obligation (assuming all other
conditions to consummation of the Merger are satisfied or waived) to consummate
the Merger with each Participating Partnership. If the Limited Partners of only
one of the Partnerships approve the Merger, AmREIT has the right, but not the
obligation, to consummate the Merger with the one Participating Partnership. The
extent to which some of the potential advantages of the Merger will be realized
depends in part upon the size of AmREIT's portfolio and the amount of its
leverage.
Because the identity of the Participating Partnerships cannot be known
prior to the end of the Consent Solicitations,the resulting portfolio, business,
operations and leverage, among other things, of AmREIT cannot be determined
until such time. Limited Partners, therefore, cannot know at the time of voting
precisely the extent to which the actual level of participation may affect
AmREIT's business and operations. The greater the number of Participating
Partnerships, the more assets AmREIT will acquire, resulting in a larger and
more diversified portfolio, with a greater diversification of operating risks.
Conversely, the fewer the number of Participating Partnerships, the fewer assets
AmREIT will acquire, resulting in a smaller and less diversified portfolio with
less diversification of operating risks. This uncertainty makes it difficult for
the Limited Partners to make an informed decision regarding the ultimate nature
of AmREIT's portfolio and the financial and operating risks to which its
business will be subject.
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<PAGE>
The following four of the many possible combinations (scenarios) are
presented in order to illustrate the differing levels of assets and leverage
which would result assuming the levels of Partnership participation stated. The
amounts are based upon assumptions in the Pro Forma Financial Information as of
June 30, 1998 included in this Prospectus.
<TABLE>
<CAPTION>
100% Acceptance 100% Acceptance 50% Acceptance 50% Acceptance
(No Notes) (Maximum Notes) (No Notes) (Maximum Notes)
---------- --------------- ---------- ---------------
<S> <C> <C> <C> <C>
Total Assets $55,197,137 $55,197,137 $43,532,239 $43,532,239
Total Debt 9,234,034 19,065,025 9,061,627 13,977,122
Shares Outstanding 5,742,873 4,575,946 4,069,355 3,485,062
Leverage Ratio 16.73% 34.54% 20.82% 32.11%
(Debt to Assets)
</TABLE>
As illustrated above, the leverage ratios range from 16.73% in the event
of 100% participation, no Notes issued to 34.54% in the event of 100%
participation and the Maximum Notes issued. Total assets range from $43,532,239
in the event of 50% participation to $55,197,137 in the event of 100%
participation. As total assets increase, operating risk should decrease due to
the larger and more diversified portfolio.
Risks Associated with Fundamental Change in Nature of Investment. Limited
Partners who receive Shares in the Merger will have fundamentally changed the
nature of their investment. These changes include the following:
Infinite Life REIT. Each of the Partnerships was formed as a
finite-life investment, with Limited Partners to receive regular cash
distributions from the Partnership's net operating income and special
distributions upon liquidation of the Partnership's real estate investments,
AmREIT intends to operate for an indefinite period of time and has no specific
plans for the sale of its investments. Further, AmREIT is not expected to make
any special distributions of liquidation proceeds, unless it is required to make
such a distribution to maintain its REIT status. Instead of having investments
liquidated through the liquidation of AmREIT's assets, shareholders should
expect to be able to liquidate their investment in AmREIT only through the sale
in the public market of the Shares, and the amount realized through the sale of
the Shares may not be equal to the amount that would have been realized by the
shareholders through the sale of AmREIT's assets. Shareholders will thus be
subject to the market risks of all public companies, particularly in that the
value of their equity securities may fluctuate from time to time depending upon
general market conditions and AmREIT's future performance.
Fundamental Change in Nature of Investment from Pass-through to
REIT. Limited Partners who become traditional shareholders will have
fundamentally changed the nature of their initial investment from an entity that
is a pass-through entity for federal income tax purposes to an investment in a
REIT, which in general is not a pass-through entity for federal income tax
purposes, with the exception of certain undistributed long-term gains. Such
Limited Partners, as shareholders of AmREIT, will be unable to deduct any losses
realized by AmREIT on their individual federal income tax returns.
AmREIT's Business Objectives Differ from Partnership Business
Objectives. AmREIT has different business objectives than the Partnerships in
that AmREIT intends to grow not only through capital
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<PAGE>
appreciation, but also through a continuous program of owning and operating real
properties, which may include the selling of existing properties and the
acquisition of additional properties. Also, AmREIT intends to acquire additional
properties by raising additional capital, borrowing and reinvesting sales
proceeds. Raising additional capital involves the risk of diluting the existing
shareholders' percentage interest in AmREIT, while borrowing involves the risks
associated with leverage. AmREIT plans to increase its leverage up to
approximately 50% of the value of the real property acquired in the Merger and
acquire new property(ies) using such borrowed funds.
Changes in Investment Objectives and Policies. The investment and
financing policies of AmREIT and its policies with respect to all other
activities, including its growth, debt, capitalization, distribution and
operating policies, will be determined, from time to time subject to the Stated
Investment Policies, by AmREIT's Board of Directors. These policies may be
amended or revised at any time and from time to time at the discretion of the
Board without a vote of the shareholders. See "AmREIT AND ITS BUSINESS--AmREIT's
Investment Objectives." A change in these operating policies could adversely
affect AmREIT's financial condition or results of operations or the market price
of its Shares.
Loss of Rights by Limited Partners. The rights of the Limited
Partners are presently governed by either Nebraska or Texas law and the
Partnership Agreement of each respective Partnership. After consummation of the
Merger, the rights of the holders of Units that are converted into Shares will
be governed by Maryland law, AmREIT's Articles of Incorporation and Bylaws.
Certain differences may reduce certain existing rights of Limited Partners.
Examples of these differences include: (i) the Partnership Agreements of the
Partnerships require the distribution of net cash from operations and the net
proceeds from refinancing of properties, unlike the governing documents of
AmREIT which do not require distributions under similar circumstances, with the
payment of such distribution being subject to the discretion of Independent
Directors and the distribution requirements of the Code relating to maintaining
REIT status; (ii) unlike the Partnership Agreement of each Partnership, which
requires that each Partnership must distribute net proceeds from the sale or
refinancing of properties, AmREIT's governing documents do not contain a similar
requirement and AmREIT currently does not intend to distribute the net proceeds
resulting from the sale or refinancing of properties, but rather to use such
proceeds to acquire additional properties or for working capital purposes; (iii)
Limited Partners expect liquidation of their investment when the assets of the
Partnership are liquidated, unlike shareholders who may liquidate their
investment by trading Shares in the open market rather than through the
liquidation of AmREIT's assets; and (iv) whereas the Partnerships are not
authorized to issue equity securities other than the Units, AmREIT has
substantial flexibility to issue additional equity securities and shareholders,
unlike Limited Partners, face the risk of dilution by the issuance of such
securities. See "COMPARISON OF OWNERSHIP OF UNITS, SHARES AND NOTES."
Less Limitations on Management of AmREIT. Currently, the fees and
other compensation which may be paid by a Partnership to the General Partner and
his Affiliates is limited by its Partnership Agreement. As members of management
of AmREIT, there is no limitation on the salaries or other compensation which
AmREIT may pay these persons so long as such compensation is fair and reasonable
and in the best interests of AmREIT as determined by its board of directors.
Accordingly, the General Partner and his Affiliates may receive greater
compensation over the term of their service to AmREIT than they would if the
Merger were not consummated. See "COMPARISON OF OWNERSHIP OF UNITS, SHARES AND
NOTES" and "AMREIT AND ITS BUSINESS -- Management."
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<PAGE>
The Merger is a Taxable Event. All taxable Limited Partners who
participate in the Merger will be involved in a taxable transaction resulting in
either taxable income or loss for each Limited Partner. However, no gain or loss
should be currently recognized by tax exempt Partners. The Merger will result in
realization of gain or loss to the Partnership based on the difference between
(i) the sum of the fair market value of Shares deemed received by the
Partnership and the Partnership liabilities assumed by AmREIT, and (ii) the
Partnership's adjusted tax basis in its assets. Each Limited Partner (except, as
discussed below, certain tax-exempt Limited Partners) generally will recognize
his/her allocable share of such gain or loss based upon his/her respective
interest in the Partnership. Additionally, each such Limited Partner will
recognize taxable gain to the extent that the fair market value of the Shares
received by such Limited Partner exceeds such Limited Partner's adjusted tax
basis in his/her Units. Gain or loss recognized by the Limited Partners will be
treated as passive income or loss. Although Limited Partners should be treated
as having disposed of their entire interest in the Partnership's activity for
purposes of "freeing up" suspended passive losses from such activity, such
results are uncertain. See "MATERIAL FEDERAL INCOME TAX ASPECTS."
Based on AmREIT's representation that the Partnerships do not hold their
properties for resale in the ordinary course of business, the Merger should not
result in recognition of UBTI by certain tax-exempt Limited Partners that do not
hold their Units as a "dealer" or acquired such interests with debt-financed
proceeds. Certain tax-exempt organizations, however, do not qualify for such
treatment. See "MATERIAL FEDERAL INCOME TAX ASPECTS."
No Cash Distributions to Limited Partners. The Merger will result in
taxable income or loss to each Limited Partner. Because the Merger will result
in an exchange of Units for Shares, no Limited Partner will receive cash (other
than cash received in lieu of fractional Shares) in the Merger to pay any taxes
due on any taxable income arising as a result of the Merger. Thus, a Limited
Partner may be required to sell Shares or liquidate other investments in order
to pay the taxes arising from such taxable income.
Possible Undisclosed Liabilities Assumed by AmREIT. At closing, AmREIT
will assume the liabilities of the Participating Partnerships. Any liabilities
of the Partnerships are to be disclosed in the balance sheets prepared prior to
closing and used by the Partnerships to determine the Partnerships' Net Cash as
of the Effective Time. Such balance sheets may, however, not disclose all
liabilities of the Partnerships and, in the case of known but contingent
liabilities, not provide for adequate reserves to satisfy such obligations when
fixed in amount. Undisclosed and/or contingent liabilities might include, among
others, claims for cleanup or remediation of unknown environmental conditions,
tenant or vendor claims for pre-Merger activities, unpaid liabilities
unintentionally omitted from the closing balance sheets, claims for
indemnification by the General Partners and other indemnified parties for
pre-Merger events, and claims for undisclosed title defects.
Expenses of the Merger. Expenses associated with a successful Merger are
expected to total approximately $450,000 for all parties. Except for the costs
of the Houlihan Fairness Opinions, the Partnerships' accounting costs and any
valuation or appraisal costs for valuing the Partnerships' properties. The total
of these costs to be borne by the Partnerships is estimated to be $150,000.
These costs will be allocated among the Partnerships based on their relative Net
Asset Values. In addition to each Partnership's allocable share of these
Partnership expenses (a Partnership's "Proportionate Share") each Partnership
will bear its own direct expenses for Partner communications and correspondence.
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If a Partnership does not elect to participate in the Merger Agreement, the
General Partner must pay or reimburse that Partnership's Proportionate Share.
Majority Vote Binds Each Partnership. All Partnerships must approve the
Merger by a vote of the holders of a majority of the Units of each Partnership.
If the Merger is approved, Limited Partners who do not properly deliver their
Partnership Consent and/or voted against the Merger, will have their Units
converted into Shares.
Participating Limited Partners Will Forego the Alternatives to the
Merger. There are alternatives to the Merger, such as continuing the
Partnerships as they are, liquidating the Partnerships or merging them into a
newly-formed entity. The benefits of these alternatives are avoiding certain of
the expenses of the Merger and avoiding the risks associated with the Merger of
the Partnerships. Retaining the finite-life feature of the Partnerships would
allow investors to eventually receive liquidation proceeds from the sale of the
Partnerships' properties, and a Limited Partner's share of these sale proceeds
could be higher than the amount realized from a sale of an equivalent number of
the Shares.
Termination Payments if Merger Fails to Occur. No assurance can be given
that the Merger will be consummated. The Merger Agreement provides for the
payment by a Partnership or by AmREIT of liquidated damages in a specified
amount in the event such party terminates the Merger Agreement under certain
circumstances. The liquidated damages amount in the event a Partnership
terminates the Merger Agreement under such circumstances is its Proportionate
Share of $500,000. The obligation to make such payment may adversely affect the
ability of any of the Partnerships or AmREIT to engage in another transaction in
the event the Merger is not consummated and may have an adverse impact on the
financial condition of AmREIT or the Partnerships incurring such obligation.
Risks Associated With an Investment in AmREIT
Lack of Significant Operating History as Self-managed REIT. While AmREIT
was formed on August 17, 1993 and commenced business in May 1994, it has been
operating as a self-managed REIT only since June 5, 1998. Its operating history
under self-management is, therefore, limited. Executive officers and the
majority of the Directors of AmREIT have had experience in acquiring,
developing, leasing and managing properties, but have only approximately 4 years
experience in managing and operating a real estate investment trust.
Distributions in Excess of Income and/or Funds From Operations. Although
AmREIT anticipates that it will continue to generate income from operations in
the future based on current growth plans, there can be no assurance to the
Limited Partners that it will be able to do so. Furthermore, in the past, AmREIT
has made distributions to its shareholders in amounts exceeding its Funds From
Operations and net income for the periods to which such distributions relate.
Limitations on Leverage. AmREIT's organizational documents do not
quantitatively limit the amount or percentage of indebtedness AmREIT can incur.
AmREIT could become more highly leveraged, resulting in an increase in debt
service that could adversely affect AmREIT's ability to make distributions to
its shareholders and would result in an increased risk of default on its
obligations. Subject to other existing loan documents, AmREIT may and intends to
borrow funds in the future, through secured and/or unsecured credit facilities,
to finance its property investments. In the event such borrowings require
balloon payments, the ability of AmREIT to make such payments will depend upon
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its ability to sell or refinance its properties for amounts sufficient to repay
such loans. In addition, the payment of debt service in connection with any
borrowings may adversely affect cash flow and the value of the Shares. Also,
AmREIT has agreed as a condition for registering the sale of its shares under
certain state securities laws, not to incur indebtedness, if after doing so,
AmREIT's total indebtedness would exceed three hundred percent (300%) of
AmREIT's Net Assets. The use of borrowed funds in the purchase of properties
is referred to as "Leverage."
At June 30, 1998, AmREIT had a total of $8,904,270 of debt outstanding,
all of which was unsecured. This debt represented approximately 27.94% of
AmREIT's total assets. At June 30, 1998, none of the Partnerships had any
material debt outstanding. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF AMREIT."
On a post-Merger pro forma basis, AmREIT would have outstanding up to
approximately $19 million of unsecured and/or secured debt which could equal as
much as approximately 34% of AmREIT's total assets, assuming all of the
Partnerships participate and the maximum amount of Notes are issued. The debt in
general contains cross default and cross collateralization provisions, whereby
default on one would constitute an event of default on the other loans.
Most of AmREIT's current debt is pursuant to a $15,000,000 line of credit
with Compass Bank of Houston, Texas. The terms of this line include a variable
interest rate based on the 30-day LIBOR rate plus 200 basis points. According to
the terms of the line, borrowings mature in one year and, if not repaid, allow
the lender to move such borrowings into a securitized mortgage pool. AmREIT
intends to refinance this borrowing prior to maturity with proceeds from future
permanent financings or equity offerings.
The issuance of debt securities or additional equity interests by AmREIT
will be made at such times and under such terms as the Board determines to be in
the best interests of AmREIT. It is possible that any such issuance may result
in dilution of the equity of the Shareholders. AmREIT will not, however, issue
any debt securities or additional mortgage debt which would increase the
Leverage of AmREIT above specified limits on REIT indebtedness, and in any event
will not issue such securities unless the historical or substantiated future
cash flow of AmREIT, excluding extraordinary items, is sufficient to cover the
interest on the debt securities.
Risks of Leverage. Following an acquisition, AmREIT intends to increase
its borrowings by amounts up to approximately 50% of the value of the properties
acquired in the Merger.
The effects of utilizing leverage are to increase the number of
properties that may be acquired with funds available for investment, to increase
the potential for gain, to increase the aggregate amount of depreciation
available to AmREIT and to increase the risk of loss. Also, while higher
leverage should enable AmREIT to acquire a greater number of investments, AmREIT
would need to utilize greater funds to make debt service payments resulting from
such higher leverage, which could result in less funds available for
distributions to the Shareholders. To the extent that AmREIT uses leverage or
increased amounts of leverage in the purchase of its properties, the potential
for gain and risk of loss will be increased accordingly. If AmREIT defaults on
secured indebtedness, the lender may foreclose, and AmREIT could lose its
investment in the property. Mortgage market conditions and the policies of the
Federal Reserve Board may in the future make it difficult to obtain mortgages on
acceptable terms.
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Risk of Acceleration of Mortgage Financing. In purchasing properties
subject to financing, AmREIT may obtain financing with "due-on-sale" and/or
"due-on-encumbrance" clauses which, upon future refinancing or sale of the
properties, may cause the maturity date of such mortgage loans to be accelerated
and such financing to become due. In such event, AmREIT may be required to sell
its properties on an all-cash basis, to acquire new financing in connection with
the sale, or to provide seller financing. It is not the intent of AmREIT to
provide seller financing, although it may be necessary or advisable in certain
instances. It is unknown whether the holders of mortgages encumbering AmREIT's
investment properties will require such acceleration or whether other mortgage
financing will be available. Such factors will depend on the mortgage market and
on financial and economic conditions existing at the time of such sale or
refinancing.
Risks of Balloon Payment Obligations. AmREIT may seek to acquire
properties which are subject to mortgage loans which have a term of not less
than five (5) years, which provide for the amortization of the entire loan
principal, or a substantial portion thereof, prior to maturity, or which do not
require a balloon payment (i.e., a substantial lump sum principal payment) to be
paid within the anticipated holding period for the property. Nevertheless,
AmREIT may incur borrowing not meeting the foregoing standards if a majority of
the Independent and Disinterested Directors deem it to be in the best interests
of AmREIT. Such mortgages involve greater risks than mortgages whose principal
amount is amortized over the term of the loan, since the ability of AmREIT to
repay the outstanding principal amount at maturity may be dependent upon
AmREIT's ability to obtain adequate refinancing or to sell the property, which
will in turn be dependent upon economic conditions in general and the value of
the underlying properties in particular. There is no assurance that AmREIT will
be able to refinance any such balloon payment mortgages at maturity. Further, a
significant shrinkage in the value of the underlying property could result in a
loss of the property by AmREIT through foreclosure.
If AmREIT is unable to refinance a balloon loan at maturity, it may be
forced to sell the Property securing repayment of the balloon loan (or another
Property), which sale would be affected by economic conditions in general and
possibly by the availability of financing to the purchaser. There is no
assurance that the proceeds of such sale would be sufficient to repay fully the
balloon loan. Any such refinancing or sale may affect the rate of return to
Shareholders and such sale may affect the projected time of disposition of
AmREIT's assets. To the extent that Properties are subject to balloon mortgages,
AmREIT's objective of increasing equity through the reduction of mortgage debt
on such Properties may be more difficult to achieve.
Distributions as Return of Capital. If AmREIT generates cash from its
operations and thereafter distributes the cash to its shareholders in the form
of distributions, a portion of those distributions will be deemed to be a return
of capital to the extent the distribution exceeds net income as defined by
generally accepted accounting principles. The return of capital on a GAAP basis
is calculated based on distributions to shareholders in excess of net income of
AmREIT allocated to the shareholders. Non-cash deductions such as depreciation
and amortization generally reduce net income of a REIT below distributions
creating a return of capital. A return of capital will also have the effect of
reducing an investor's tax basis in the investor's Shares.
Unspecified Future Properties. AmREIT presently owns interests in 16
properties and has contracted to acquire one additional property under
construction. Upon completion of the Merger, to the extent consummated, AmREIT
intends to finance the acquisition by development and/or purchase additional
properties. Although AmREIT has established certain criteria for evaluating
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particular properties to be acquired by AmREIT, as well as the tenants of such
properties, the specific properties in which the proceeds of this offering are
to be invested have not been identified as of the date of this Prospectus.
Therefore, prospective Shareholders may have no information as to the
identification or location of specific properties, financing terms or other
relevant economic and financial data affecting the properties AmREIT may
acquire from such borrowings and little information with respect to the
financial performance of the existing properties, which information, if
possessed by the prospective Shareholder, would assist such person in
evaluating AmREIT.
Fixed Expenses. Interest and required amortization payments on any
outstanding debt of AmREIT as well as certain of AmREIT's operating expenses
must be paid without regard to AmREIT's profitability. In the event AmREIT does
not operate profitably and exhausts its reserves, it may be required to
liquidate certain of its investments to pay its fixed expenses, which could have
an adverse effect on AmREIT's operation.
Anti-takeover Provisions. The Articles of Incorporation and Bylaws of
AmREIT, as well as Maryland Corporate Law, contain a number of provisions that
might have the effect of entrenching current management or delaying or
discouraging an unsolicited takeover of AmREIT. These provisions include, among
others, the following: (a) the power of the Board to issue 10,000,000 Preferred
Shares, with such rights and preferences as determined by Independent Directors;
(b) the power of Independent Directors to stop transfers and/or redeem Shares
under the following conditions: from any shareholder who owns, directly or
indirectly, 9.8% or more of the outstanding Shares, from any five or fewer
shareholders who own, directly or indirectly, more than 50% of the outstanding
Shares and from any other shareholder if Independent Directors otherwise
determine in good faith that ownership of the outstanding Shares has or may
become concentrated to an extent that may prevent AmREIT from qualifying as a
REIT under the Code; and (c) Directors remain in office unless removed by the
shareholders or if another nominee for Director receives the vote of a majority
of the outstanding Shares, regardless of whether they receive a vote of the
majority of the outstanding Shares at AmREIT's annual meeting. Any Shares
transferred in violation of the restrictions set forth in clause (b) of the
preceding sentence become "Excess Shares," with no voting or distribution
rights. AmREIT has the power to purchase or direct the sale of such Excess
Shares, with the sale proceeds being paid to the former owner.
Limited Liability of Directors and Possible Inadequacy of Remedies. The
Directors are directors of a Maryland corporation and as such are required to
perform their duties in a manner believed by the Directors to be in the best
interests of AmREIT and with such care, including reasonable inquiry, as an
ordinary prudent person in a like position would use under similar
circumstances. A Director who performs his duties in accordance with the
foregoing standards shall not be liable to AmREIT or any other person for
failure to discharge his obligations as a director. Notwithstanding the
additional responsibilities of Independent Directors, an Independent Director
will not have any greater liability than that of a Director who is not
independent.
Under its Bylaws, AmREIT is required to, under specified conditions,
indemnify its Directors, officers and employees against all liabilities to the
full extent permitted by Maryland law. "AmREIT and Its Business - Security
Ownership of Certain Beneficial Owners and Management." AmREIT may in the future
obtain insurance on behalf of any director or officer in reasonable amounts
against losses arising from tort claims which may be made against them.
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Conflicts of Interest with Management. AmREIT, the Directors, and
Affiliates of the General Partner presently own Shares and may purchase
additional Shares. Accordingly, following completion of the offering, management
and its Affiliates may own a substantial percentage of the total Shares
outstanding. As Shareholders, these persons can be expected to vote their Shares
in a manner intended to benefit themselves. Circumstances may arise where the
interests of these persons as Shareholders may be different from those of the
other Shareholders.
Lack of Geographical Diversification. As of the date of this Prospectus,
AmREIT and the Partnerships own properties located in 12 southwest states, and
concentrated in the Dallas and Houston metropolitan areas. AmREIT intends to
make future investments in other geographical areas but there is no assurance it
will do so. If AmREIT's concentration of investments continue to be in a limited
number of states or general geographical areas, it will continue to have high
sensitivity to the substantial risks of adverse changes in the economic
conditions and real estate markets within such states or general geographical
areas. Adverse trends in these economic factors could adversely affect rental
income and appreciation in value of these Properties, which in turn would
materially affect the continued viability and profit potential of AmREIT.
Distributions Subordinate to Payments on Debt. AmREIT has paid regular
quarterly distributions since its organization. Distributions to shareholders of
AmREIT will be subordinate to the prior payment of AmREIT's current debts and
obligations. If AmREIT makes distributions in the future and, for any reason,
AmREIT did not have sufficient funds to pay its current debts and obligations,
distributions to shareholders would be suspended pending the payment of such
debts and obligations.
Investment Company Act of 1940. The Directors intend to conduct the
operation of AmREIT so that it will not be subject to regulation under the
Investment Company Act of 1940. AmREIT may therefore have to forego certain
investments which could produce a more favorable return. Should AmREIT fail to
qualify for an exemption from registration under the Investment Company Act of
1940, it would be subject to numerous restrictions under this Act. A failure to
qualify for an exemption under this Act could have a material adverse affect on
the Shareholders.
General Risks of Real Estate Investments. Equity real estate investments
are expected to limit the ability of AmREIT to vary its portfolio promptly in
response to changing economic, financial and investment conditions. Such
investments will be subject to risks such as adverse changes in general economic
conditions or local conditions (for example, excessive building resulting in an
oversupply of existing space or a decrease in employment, reducing the demand
for real estate in the area), as well as other factors affecting real estate
values (i.e., rent controls, increasing labor, materials and energy costs, the
attractiveness of the neighborhood, etc.). Equity investments will also be
subject to such risks as adverse changes in interest rates, the availability of
long-term mortgage funds and additional debt financing, and the ability of
AmREIT to provide for adequate maintenance of its Properties. To the extent that
AmREIT utilizes less amounts of debt to acquire its Properties, the risks
relating to interest rates and long-term financing will be reduced. AmREIT's
investments will be in frontage retail properties and, like all real estate
equity investments, will be subject to the risk of inability to attract or
retain tenants and to the risk of a decline in rental income as a result of
adverse changes in the economic conditions, local real estate markets and other
factors. To the extent that AmREIT's rental income is based on a percentage of
gross receipts of retail tenants, its cash flow is dependent on the retail
success achieved by such tenants. Also, certain expenditures associated with
equity investments (principally mortgage payments, real estate taxes,
maintenance and utility costs) are not necessarily decreased by events adversely
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affecting AmREIT's income from such investments. Should such events occur,
AmREIT's equity investments could become a burden, and distributions to
Shareholders may be impaired. In the event that mortgage payments are not met
with respect to a Property, AmREIT could sustain a loss on its equity
investment as a result of a foreclosure of mortgages secured by such Property.
Risks Associated with an Investment in the Shares
Exchange Price. The value of the Shares at the Effective Time of the
Merger may vary significantly from the Exchange Price, the value of the Shares
estimated for the purposes of the Merger as of the date of execution of the
Merger Agreement, the date hereof or the date on which shareholders vote on the
Merger Agreement, due to changes in the business, operations and prospects of
AmREIT, market assessments of the likelihood that the Merger will be consummated
and the timing thereof, general market and economic conditions and other
factors. Also, because the Common Shares are not traded in an established
securities market, the Exchange Price is not based on the value for the Common
Shares established by transactions between willing unrelated buyers and sellers
in a regular secondary market. Neither the Independent Directors nor the General
Partner can predict whether the Shares will trade at a price lower than the
Exchange Price or lower than the value of AmREIT's assets after the Merger.
Because the Exchange Price is fixed at $9.34 per Share, no provision has
been made to pay additional Shares to Participating Limited Partners if the
value of the Shares on the Effective Date of the Merger is lower than the
Exchange Price or to decrease the number of Shares to be received by
Participating Limited Partners if the value of the Shares is greater than the
Exchange Price on the Effective Date.
No Secondary Market for the Shares. There is currently no public market
for the Shares and if and when AmREIT seeks to list the Shares in the future, it
intends to list only the Shares and not the Notes. Therefore, it is not expected
that a regular secondary market for the Notes will exist in the future. One or
more broker-dealer firms may make a market in the Notes or endeavor to match
persons desiring to sell the Notes with persons desiring to purchase them;
however, there is no assurance that one or more broker-dealers will do so. Any
commissions or other compensation paid by buyers or sellers in connection with
such transactions must be negotiated on an individual basis by the buyer or the
seller and the broker-dealer firm. To the extent one or more broker-dealer firms
advise AmREIT of the availability of their services in connection with any of
the foregoing, AmREIT will provide such information to Noteholders upon request.
AmREIT will not otherwise provide any services in this connection with any
resale of the Notes. See "THE MERGER - Description of Notes."
Future Public Trading Prices Lower than Exchange Price. Further, even if
a secondary market for the Shares is established, there can be no assurance as
to the trading volume or price of the Shares after the Merger. Events outside
the control of AmREIT which would adversely affect the market value of AmREIT's
assets, as well as the market value of the Shares, may occur during the period
from the date of this Prospectus to the date the Merger is consummated or
thereafter. All of the Shares to be issued to Limited Partners other than
certain Affiliates (Limited Partners holding more than 10% of the Units in the
Partnership) in connection with the Merger will be freely tradeable. Sales of a
substantial number of the Shares by Limited Partners following the consummation
of the Merger, or the perception that such sales could occur, could adversely
affect the market price for the Shares after the Merger.
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Illiquidity of Shares. The Shares currently are illiquid because no
regular public market exists in which they may be readily sold. Thus, investors
may not be able to sell the Shares in the future, or may only be able to do so
at a substantial discount from the Offering Price.
Possible Future Dilution. The value of the Shares can be diluted by
reason of poor future acquisitions by AmREIT, devaluation of existing properties
of AmREIT, or the subsequent issuance of more Shares in this and other or
subsequent offerings. Shareholders will be subject to the risk that their equity
interests may be diluted through issuance of additional equity securities if
such securities are issued for less than fair market value. AmREIT has the right
to issue, at the discretion of the Board, Shares other than those to be issued
in the Merger, upon such terms and conditions and at such prices as the Board
may establish. In addition, AmREIT may in the future issue Preferred Shares that
might have priority over the Shares as to distributions and liquidation
proceeds.
Effect of Market Interest Rates on Price of the Shares. An increase in
market interest rates may lead prospective purchasers of the Shares to demand a
higher anticipated annual yield from future dividends. Such an increase in the
required anticipated dividend yield may adversely affect the market price of the
Shares.
Risk Considerations Associated with the Notes
An investment in the Notes involves substantial risk factors. Prospective
investors are advised to consult their own advisors to review and evaluate the
economic, tax and other consequences of ownership of the Notes. Such Persons are
not to construe the contents of this Prospectus as investment, legal, accounting
or tax advice. See "THE MERGER - Description of the Notes." Before electing to
receive Notes, prospective investors and their advisors should carefully
consider, among other things, the following risk considerations:
Speculative Investment. The Notes should be considered a speculative
investment in that AmREIT's ability to make timely principal and interest
payments thereon will depend on AmREIT's future success.
General Obligations. The Notes will be general obligations of AmREIT. The
Notes will be unsecured obligations, and their payment will not be guaranteed by
any person or entity. There is no limitation on the additional secured debt
which AmREIT may issue in the future. There is no assurance that the value of
AmREIT's assets will be sufficient to provide required payments of principal and
interest on the Notes. The Noteholders would be general creditors of AmREIT and,
as such, their claims against the other assets of AmREIT would be pari passu
with AmREIT's other general creditors.
Noteholders' Lack of Right to Participate in AmREIT's Profits.
Participating Limited Partners who elect to receive Notes will not hold an
equity interest in AmREIT and therefore will not be able to participate in
earnings or benefit from increases in the value of the Shares, if any, except by
converting their Notes to Shares.
The Loan Agreement. Each Noteholder will be required to enter into the
Loan Agreement, whereby the Noteholders may take actions under the Note or the
Loan Agreement only by a Majority Vote, or through the Trustee, if one is
appointed. Accordingly, the persons holding a simple majority of the Notes may
bind all of the Noteholders with respect to certain matters concerning the
Notes, including the waiver of certain defaults under the Notes and the Security
Agreement. Also, the responsibility and authority of the Trustee to act on
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behalf of the Noteholders is largely ministerial in nature and is greatly
limited by the Loan Agreement. The Loan Agreement has not been registered under
the Trust Indenture Act of 1939 and holders of the Notes will not have the
protections provided under that Act. AmREIT has not qualified the Loan
Agreement under the Trust Indenture Act of 1939 in reliance on an exemption from
such qualification set forth in the Act.
Illiquidity of Notes. It is not anticipated that a regular secondary
market for the Notes will develop, thereby making it difficult for Noteholders
to sell their Notes prior to maturity, or subjecting them to the risk of selling
the Notes at substantial discounts from their outstanding principal balance to
facilitate their sale. Thus, a Noteholder will likely not be able to liquidate
his investment in the event of an emergency, and the Notes may not be readily
acceptable as collateral for loans. Accordingly, purchase of the Notes must be
considered a long-term, illiquid investment. Participating Limited Partners are
likely to receive the full face amount of their Notes only if they hold the
obligations to maturity, which is approximately seven (7) years after the
Closing Date of the Merger. See "THE MERGER - Description of the Notes."
Lack of Sinking Fund for Notes. The Notes will not be subject to a
sinking fund. AmREIT will not be required to set aside funds for the retirement
of or to retire the Notes at any time prior to their due date.
Risk of Bankruptcy; Claims of Other Creditors. Should AmREIT be in
default under the Notes, it is possible that AmREIT may seek the protection of
the Federal Bankruptcy Courts or protection under state law debtor protection
statutes. Such proceedings would delay and possibly reduce the Noteholders'
return of interest and/or principal on the Notes. In such event, AmREIT's
secured creditors would claim a prior right to AmREIT's assets (securing their
obligations), thus leaving fewer assets to satisfy the claims of the
Noteholders.
Limited Recourse Notes. Under the terms of the Notes, the Noteholders
have no right of personal recourse against the officers, directors,
shareholders, employees or agents of AmREIT for payment of principal or
interest, or for attorneys' fees and costs which they, as prevailing parties,
may be entitled to recover.
Limited Liability/Indemnification of Trustee. Under the terms of
the Loan Agreement, the Trustee will not be liable to the Noteholders for
actions taken in good faith and not involving its willful misconduct in
connection with its authority under the Loan Agreement. Moreover, the Loan
Agreement provides that the Noteholders will jointly and severally indemnify the
Trustee against any loss it may incur as a result of its exercise of its duties
and obligations under the Loan Agreement. See "THE MERGER -- The Notes
- - Loan Agreement."
Costs of Trustee Representation. The Loan Agreement provides that
AmREIT will be responsible for the payment of the Trustee's fees and expenses
resulting from a default by AmREIT. Nevertheless, in the event that AmREIT is in
default, it is likely that AmREIT will be either unwilling or unable to pay such
costs. Under such circumstances, the Trustee is likely to require that the
Noteholders advance its fees and costs before the Trustee will take any action
requested by the Noteholders. Any such payments advanced by the Noteholders will
be added to the principal amount of the Notes. However, there is no assurance
that the Noteholders will be able to recover any such payments from AmREIT. See
"THE MERGER -- The Loan Agreement" below.
Retirement/Replacement of Trustee. The Loan Agreement provides that the
Trustee, if appointed, may resign or be replaced at any time upon thirty (30)
days' prior notice. In the event the Trustee resigns and/or is replaced, the
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Noteholders will be required to find and, by a Majority Vote, appoint a
successor or replacement Trustee. Because the Loan Agreement provides that
the Trustee is the exclusive representative of the Noteholders with respect
to the matters set forth therein, the inability of the Noteholders to appoint
a successor or replacement Trustee could severely limit their ability to pursue
their rights in connection with the Notes. Moreover, while the Loan
Agreement requires AmREIT to pay certain costs and expenses of the Trustee, it
is possible that in the event the Trustee resigns or is replaced by the
Noteholders AmREIT will either be unwilling or unable to satisfy these
obligations. In such event, the successor or replacement Trustee would likely
require the Noteholders to advance such amounts as a condition to its becoming
Trustee. See "THE MERGER -- The Notes - The Loan Agreement."
Usury Laws. The payment of interest on the Notes will be subject to
applicable usury law. The General Partner believes the interest on the Notes is
not a usurious rate of interest. However, some uncertainty exists as to the
application of the appropriate usury law to any interest paid under the Notes.
Which state's usury law will be applied will generally depend on a number of
factors, including where the Notes were sold. AmREIT believes the interest on
the Notes will not exceed the applicable usury limitations, and, although usury
laws usually exempt certain types of transactions, there is no assurance that
applicable state usury laws will provide an exemption applicable to the Notes.
Also, transactions which have connections with a number of states, such as may
be the situation with the sale of the Notes, may raise an issue of which state's
usury laws correctly apply. In the event the Notes were determined to pay a
usurious rate of interest, under applicable usury law, the lenders (Noteholders)
would not be entitled to receive interest to the extent of such usurious rate
and may be liable for damages.
Ability To Repay Notes. AmREIT will rely substantially on the success of
its future business operations to generate sufficient funds to timely service
the Notes. While management believes AmREIT's ability to achieve these future
operating results is good, there is no assurance that AmREIT will be able to do
so. AmREIT's future operations budgets are based on a number of assumptions,
both about the economy in general and AmREIT's specific business operations. In
general, budgets assume certain economic projections as to future inflation and
interest rates and revenues from AmREIT's various businesses, all of which will
depend substantially on factors beyond AmREIT's control. Interest rates and
levels of economic activity have been particularly volatile in recent years, and
any significant increase in interest rates or downturn in the level of economic
activity, particularly those relating to the real estate industry, would
materially impair AmREIT's ability to achieve its budgeted levels of operating
income. See "AMREIT PRO FORMA FINANCIAL STATEMENTS."
Prior Claim of Noteholders. The holders of the Notes will have the right
to receive the payment of interest and principal on their Notes prior to the
Shareholders' receiving distributions with respect to their Shares. Accordingly,
should AmREIT dissolve and liquidate, it is possible that the Noteholders may
receive a return of the whole of their investment, while the Shareholders
receive either none or a small portion of their original investment.
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Risks Associated with the ALV Payment Election
Risk of ALV Payment Election Obligations. If the Partners
holding 25% of all Partnership Units outstanding choose the ALV
Payment Election, AmREIT could be obligated to pay such persons
$7.5 million or more within twelve months of the Effective Date.
This obligation could be greater because AmREIT can choose to
proceed with the Merger of a Partnership even if Limited Partners
holding more than 25% of its outstanding Units make the ALV Payment
Election. Management believes that it will be able to satisfy its
obligations under the ALV Payment Election from available cash
resources, including cash reserves, operating revenues, and
borrowing under existing and/or proposed credit facilities.
However, if AmREIT does not have sufficient funds to timely pay
such obligations, it would need to find sufficient funds from other
sources and may be required to sell one or more of its properties
on unattractive terms in order to do so.
Risk of Unsecured Obligation. AmREIT's obligation under the
ALV Payment Election is unsecured, and Limited Partners making the
ALV Payment Election will become general creditors of the
Partnership. In the event AmREIT fails to timely pay this
obligation, such electing Limited Partners would not have a secured
interest in any of AmREIT's properties and would be required to
pursue their claims as general creditors.
Risks of Appraisals to Limited Partners. Under the ALV
Payment Election, Partners making the Election will not know the
identity of the Appraiser until after the Effective Date of the
Merger. Accordingly, Limited Partners will not have the
opportunity to review and consider the qualifications and
experience of the Appraiser. Moreover, an appraisal is merely
the appraiser's estimate of the fair value of the property
appraised under the conditions and circumstances set forth in the
appraisal. In practice, reasonable appraisers can differ
substantially in their opinions of the fair value of a given
property under the same set of conditions and circumstances.
Accordingly, there is no assurance that the Appraised Value of
the property will not be higher or lower than the value of the
property which would be determined through arm's length
negotiations by an unrelated buyer and unrelated seller.
Also, the Appraiser will be appointed by the Board of
Directors of AmREIT. The AmREIT Board of Directors does not owe a
fiduciary obligation to the Limited Partners and has a conflict of
interest with the Limited Partners, as a lower Appraised Value
would benefit AmREIT and its shareholders (including those Limited
Partners electing to receive Shares and Notes in the Merger) at the
expense of the Limited Partners making the ALV Payment Election.
Risks of Appraisals to AmREIT. The Appraised Value of a
Partnership's properties, upon which the amount to be paid to
Limited Partners choosing the ALV Payment Election will be based,
will not be known until after the Effective Date. There is a
possibility that the Appraised Value for one or more Partnerships
could exceed the Negotiated Price of such Partnership's properties.
Thus, AmREIT could be obligated to purchase Units under the ALV
Payment Election at a cash price which exceeds the value of the
Units agreed to for the purposes of the Merger.
Risks Associated with an Investment in Real Estate
Effect of Economic and Market Conditions. Investments in real estate may
involve a high level of risk. One of the risks of investing in real estate is
the possibility that it will not generate income sufficient to meet operating
expenses or will generate income and capital appreciation, if any, at rates
lower than those anticipated or available through investment in comparable real
estate or other investments. Income from properties and yields from investments
in properties may be affected by many factors, including the type of property
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involved, the form of investment, conditions in financial markets, over-
building, a reduction in rental income as the result of the
inability to maintain occupancy levels, adverse changes in applicable tax laws,
changes in general economic conditions, adverse local conditions (such as
changes in real estate zoning laws that may reduce the desirability of real
estate in the area) and acts of God, such as earthquakes or floods. Some or all
of the foregoing conditions may affect the properties.
Renewal of Leases and Reletting of Space. AmREIT will be subject to the
risks that, upon expiration, the leases on its properties may not be renewed,
the space may not be relet or the terms of renewal or reletting (including the
costs of required renovation or concessions to tenants) may be less favorable
than current lease terms. If it is unable to promptly relet or renew the leases
for all or a substantial portion of the space, if the rental rate upon such
renewal or reletting were significantly lower than expected or if its reserves
proved inadequate, then AmREIT's cashflow, FFO and ability to make expected
distributions to its shareholders may be adversely affected.
Investment Illiquidity. Real estate investments are relatively illiquid.
Such illiquidity tends to limit the owner's ability to vary its portfolio
promptly in response to changes in economic or other conditions. In addition,
federal income tax provisions applicable to REITs limit a REIT's ability to sell
properties held for fewer than four years, which may affect AmREIT's ability to
sell properties at a time which would be in the best interest of its
Shareholders.
Operating Risks. Properties may be subject to all operating risks common
to real estate developments in general, any or all of which might adversely
affect occupancy or rental rates. In addition, increases in operating costs due
to inflation and other factors may not necessarily be offset by increased rents.
If operating expenses increase, the local rental market for properties similar
to AmREIT may limit the extent to which rents may be increased to meet increased
expenses without decreasing occupancy rates. If any of the above occur, AmREIT's
ability to make distributions to shareholders could be adversely affected.
Competition. AmREIT's properties are predominantly located in the South
and Southwest. All of AmREIT's properties are located in areas that include
competing properties. The number of competitive properties in a particular area
could have a material adverse effect on both AmREIT's ability to lease space at
any of its properties or at any newly developed or acquired properties and the
rents charged. AmREIT may be competing with owners, including, but not limited
to, other REITs, insurance companies and pension funds that have greater
resources than AmREIT. There is no dominant competitor in any of AmREIT's
markets.
Risks in Construction on Properties. AmREIT may on occasion acquire
properties and construct improvement thereon or acquire Property under contract
for development. Investment in such properties to be developed or constructed is
subject to more risks than are investments in fully developed and constructed
properties with operating histories. In connection with the acquisition of such
properties, AmREIT may advance on an unsecured basis, a portion of the purchase
price, either in the form of cash, a conditional letter of credit or promissory
note, or some combination thereof. In the case of any Property which is not yet
completed at the time of purchase, AmREIT will be dependent upon the seller or
lessee to fulfill its obligations, including the return of advances and the
completion of construction. Such party's ability to carry out its obligations
may be affected by financial and other conditions which are beyond the control
of AmREIT.
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If AmREIT acquires properties on which improvements are to be constructed
or completed, it will be subject to risks in connection with the ability of the
general contractors and the subcontractors to control the construction costs or
to build in conformity with plans, specifications and timetables. The failure of
a contractor to perform may necessitate legal action by AmREIT to rescind its
construction contract or to compel performance or, under certain circumstances,
to rescind its purchase contract. There can be no assurance that a rescission of
AmREIT's purchase contract will be granted. In the event it is granted, AmREIT
may be compelled to sue for damages. Such legal actions may result in increased
costs to AmREIT. Additionally, the failure of a contractor to perform may result
in increased costs to AmREIT as a result of foreclosure by the construction
lender, or due to the need for AmREIT to complete the project. Performance may
also be affected or delayed by conditions beyond the contractor's control, such
as building restrictions, clearances and environmental impact studies imposed or
caused by governmental bodies, labor strikes, adverse weather, unavailability of
materials or skilled labor and by financial insolvency of the general contractor
or any subcontractors prior to completion of construction. Such factors can
result in increased costs of a project and corresponding depletion of AmREIT's
working capital and reserves, and in loss of permanent mortgage loan commitments
relied upon as a primary source for repayment of construction costs.
AmREIT may make periodic progress payments to the general contractors of
properties prior to the completion of construction. By making such payments,
AmREIT may incur substantial additional risks, including the possibility that
the developer or contractor receiving such payments may not fully perform the
construction obligations in accordance with the terms of his agreement with
AmREIT and that AmREIT may be unable to enforce the contract or to recover the
progress payments. AmREIT may require a labor and material bond, a completion
bond or performance bond or more than one of the foregoing in order to insure
performance and reduce risk of loss associated with construction. While AmREIT
intends to use such controls and make disbursements to the builder only as it
deems necessary, there can be no assurance as to whether AmREIT will be able to
implement a particular control in any given transaction and whether any control
adopted will, in fact, limit risk.
Risks of Property Leased to a Single Tenant. In leases with single
tenants, the continued viability of the lease will depend directly on the
continued financial viability of one tenant. If the tenant fails and the lease
is terminated, AmREIT would incur a reduction in cash flow from the property and
the value of the property would be decreased. Also, where two or more properties
have the same tenant, or related tenants, the continued viability of each
property would depend directly on the financial viability of a single tenant. To
help mitigate these risks, AmREIT will continue to consider the creditworthiness
and financial strength of the tenants of its properties at the time they are
acquired.
Risks of Net Leases. Net leases frequently provide the tenant greater
discretion in using the leased property than ordinary property leases, such as
the right to freely sublease the property, to make alterations in the leased
premises, and to early termination of the lease under specified circumstances.
Further, net leases are typically for longer lease terms and, thus, there is an
increased risk that any rental increase clauses in future years will fail to
result in fair market rental rates during those years. The original leases on
AmREIT's existing properties are for original terms ranging from 10 to 20 years.
In the event a lease is terminated, there can be no assurance that AmREIT
will be able to lease the property for the rent previously received or would be
able to sell the property without incurring a loss. AmREIT could also experience
delays in enforcing its rights against defaulting tenants. For example, in the
event a defaulting tenant declared bankruptcy, AmREIT would likely be unable to
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promptly recover the property from the tenant under the bankruptcy proceedings
and there is no assurance that AmREIT would receive rent in such proceedings
sufficient to cover its expenses with respect to the property. Moreover, the
provisions applicable to real estate investment trusts in the Internal Revenue
Code may restrict AmREIT's ability to deal with a new tenant after termination
of the lease. In the event a tenant does not pay rent, it is likely AmREIT
would not only lose the net cash flow from the property but also might
need to use cash flow generated by other properties to meet mortgage
payments on the defaulted property in order to prevent foreclosure. Certain
prior Programs of Affiliates of AmREIT have experienced adverse business
developments, including the filing by tenants for protection from creditors
under Chapter 11 of the Bankruptcy Code and involvement in litigation, as a
result of which AmREIT has released the properties formerly occupied by such
tenants.
In evaluating a possible investment by AmREIT, the creditworthiness, or
financial strength, of a tenant generally will continue to be a more significant
factor than the value of the Property without a lease with the tenant and the
appraised value of a Property will probably reflect the value of the tenant's
ongoing lease of such Property.
Risks of Joint Ventures. AmREIT may participate in joint ventures. It
presently is involved in four such joint ventures with certain of the
Partnerships in which it holds a 51%, 54.84%, 51.9% and 51% interest,
respectively. Investments in joint ventures may involve risks which may not
otherwise be present where investments are made directly by AmREIT in real
property. These risks include those associated with the ability of AmREIT's
joint venture partner to perform, risks that the joint venture partner may from
time to time have economic or business interests or goals which are inconsistent
with or adverse to those of AmREIT and risks where the joint venture partner may
take actions contrary to the requests or instructions of AmREIT or contrary to
AmREIT's objectives or policies. For instance, actions by one joint venturer may
result in the Property being subjected to liabilities in excess of those
contemplated by the terms of the joint venture agreement, thereby exposing
AmREIT to liabilities of the joint venture in excess of its proportionate share
of such liabilities or may have other adverse consequences to AmREIT. Moreover,
there is the additional risk that the joint venturers may not be able to agree
on matters relating to the Property they jointly own. Although each joint owner
will have a right of first refusal to purchase the other owner's interest, in
the event a sale is desired, the joint owner may not have sufficient resources
to exercise such right of first refusal.
AmREIT also may from time to time participate jointly with other
investors, including, possibly investment programs or other entities affiliated
with management, in investments as tenants-in-common or in some other joint
venture arrangement. The risks of such joint ownership may be similar to those
mentioned above for joint ventures and, in the case of a tenancy-in-common, each
co-tenant normally has the right, if an unresolvable dispute arises, to seek
partition of the Property, which partition might decrease the value of each
portion of the divided Property.
No Assurance of Property Appreciation, REIT Profit or Dividends. While
AmREIT will attempt to buy leased, income-producing properties at a price at or
below the appraised value of such properties, there is no assurance that any
properties acquired by AmREIT will operate at a profit, will appreciate in value
or will ever be sold at a profit, or that dividends will be paid by AmREIT. The
marketability and value of any such properties will be dependent upon many
factors beyond the control of AmREIT. There is no assurance that there will be a
ready market for AmREIT's properties.
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Risks of Investing in Special Purpose properties. AmREIT may acquire
properties which are specifically suited to the needs of particular tenants,
including retail or commercial facilities. For example, AmREIT already owns
interest in a medical clinic building, two branch bank buildings, a Property on
which a fast-food restaurant is situated, two properties on each of which music
retail stores are operated, and three properties on which large retail shoe
stores are operated. The value of these properties would be adversely affected
by the failure of the specific tenant for which they are suited to renew or
honor its lease. Such properties would typically require extensive renovations
to adapt them for new uses by new tenants. Also, it may be difficult for AmREIT
to sell special purpose properties to persons other than the tenant.
Possible Environmental Liabilities. Under various federal, state and
local environmental laws, ordinances and regulations, an owner or operator of
real estate may become liable for the costs of removal or remediation of certain
hazardous substances released on or in its property. Such laws typically impose
cleanup responsibility and liability without regard to whether the owner knew of
or was responsible for the presence of the contaminants. The costs of
investigation, remediation or removal of such substances may be substantial, and
the presence of such substances, or the failure to properly remediate such
property, may adversely affect the owner'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 also may be liable for
the costs of removal or remediation of such substances at the disposal or
treatment facility, whether or not such facility is owned or operated by such
person. Finally, the owner of a site may be subject to common law claims by
third parties based on damages and costs resulting from environmental
contamination emanating from a site.
Certain federal, state and local laws, regulation and ordinances govern
the removal, encapsulation or disturbance of asbestos-containing materials
("ACMs") when such materials are in poor condition or in the event of building
remodeling, renovation or demolition. Such laws may impose liability for release
of ACMs and may provide for third parties to seek recovery from owners or
operators of real estate for personal injuries associated with ACMs. In
connection with its ownership, management and operation of its properties,
AmREIT may be potentially liable for such costs. Neither AmREIT nor any
Partnership has been notified by any governmental authority or any other third
party of any noncompliance, liability or other claim in connection with any of
its properties.
AmREIT may not always obtain its own environmental inspection of the
Partnerships' properties. Based on management's previous inspections, general
familiarity with the Partnerships' properties and its knowledge of the area,
management believes that the properties are in compliance in all material
respects with all applicable federal, state and local ordinances and regulations
regarding hazardous or toxic substances. Nevertheless, there is no assurance or
guarantee that hazardous or toxic substances will not later be found on a
property or that a property will not subsequently be found in violation of any
federal, state or local environmental law or regulation. AmREIT may find it
difficult or impossible to sell a property prior to or following any such
cleanup. If such substances are discovered after AmREIT sells a property, AmREIT
could be liable to the purchaser thereof if AmREIT knew or had reason to know
that such substances or sources existed. In such case, AmREIT could also be
subject to the costs described above.
AmREIT's management believes that its properties are in compliance in all
material respects with all federal, state and local laws, ordinances and
regulations regarding hazardous or toxic substances or petroleum products.
AmREIT has not been notified and is not otherwise aware of any material
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noncompliance, liability or claim relating to hazardous or toxic substances in
connection with any of its properties.
Risks of Cost in Complying with the Americans With Disabilities Act.
Title III of the Americans with Disabilities Act of 1990 ("ADA"), 42 U.S.C.
Sect. 12101, et seq., prohibits discrimination in the private ownership and
operation of real estate. Title III addresses the design, construction, and use
of places of public accommodation and commercial facilities by private entities.
In general, Title III provides that private entities who own, operate, lease, or
lease to a place of public accommodation cannot discriminate against persons
with disabilities in the facility itself or the activities and operations
conducted within the facility. Title III mandates that persons with disabilities
be provided accommodations and access equal to, or similar to, that available to
the general public. In order to ensure that AmREIT's properties comply with the
ADA, AmREIT may incur costs necessary to remove "architectural barriers," that
is, everything that prevents a person with a disability from enjoying full and
equal use of a facility. These costs may be prohibitive in certain situations
and thereby prevent AmREIT from acquiring a Property that would otherwise
qualify for acquisition. In addition, the costs of compliance with the ADA may
have a significant adverse impact on AmREIT's profits.
Additional and future legislation may impose other burdens or
restrictions on owners with respect to access by disabled persons. The ultimate
costs of complying with the ADA and other similar legislation are not currently
ascertainable and, while such costs are not expected to have a material adverse
effect on AmREIT, such costs could be substantial. Limitations or restrictions
on the completion of certain renovations may limit application of AmREIT's
investment strategy in certain instances or reduce overall returns on AmREIT's
investments.
Risks in Providing Financing to Purchasers of REIT Properties. AmREIT may
provide financing to purchasers of its properties in order to effect their sale.
This financing would result in a delay of AmREIT's receipt of the proceeds from
the sale of the Property and in essence would result in AmREIT's investing in a
loan to such person. AmREIT may provide such financing in circumstances where
lenders are not willing to make loans secured by commercial real estate or may
find it desirable where a purchaser is willing to pay a higher price for the
property than it would without such financing.
Risks of Leaseback Transactions. AmREIT, on occasion, may lease an
investment Property back to the seller for a certain period of time or until
stated rental income objectives are obtained. When the seller/lessee leases
space to tenants, the seller/lessee's ability to meet its mortgage payments and
its rental obligations to AmREIT would be subject to the risk that the tenants
may be unable to meet their lease payments to the seller/lessee. A default by
the seller/lessee or other premature termination of the leaseback agreement
could, depending on the size of the Property and AmREIT's ability to manage and
release it successfully, have an adverse effect on the financial position of
AmREIT, since AmREIT may suffer a loss from operation of such Property. In the
event of such a default or termination, there is no assurance that AmREIT would
be able to find new tenants for the Property without incurring a loss.
Also, a seller, in negotiating the terms of an acquisition which will
require the seller to lease the Property back for some period of time, may
attempt to include in the acquisition price all or some portion of the lease
payments required to be made under the lease. If the seller is successful in
such attempt, AmREIT may pay an increased price upon acquisition where a
leaseback is involved. Further, leaseback revenues from properties leased back
to sellers may be deemed to be a return of capital rather than investment
income.
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Accounting for Net Lease Transactions. Certain accounting standards
require leases to be classified for financial reporting purposes as either
capital leases or operating leases. Capital leases are required to appear as
assets and liabilities on the lessee's balance sheet. Transactions in which
AmREIT acquires a deed to a Property may or may not be recognized as a sale for
financial reporting purposes due to the inclusion of certain provisions in the
lease of the property. These accounting standards might make sale-leaseback
transactions less desirable for the seller-tenant that wants to treat the
sale-leaseback with AmREIT as an operating lease and, therefore, might reduce
the prospective number of properties available for net lease investment.
Risks of Energy Shortages and Allocations. There may be shortages or
increased costs of fuel, natural gas, water, or electric power or allocations
thereof by suppliers or governmental regulatory bodies in the areas where AmREIT
purchases properties, in which event the operation of properties to be acquired
by AmREIT may be adversely affected. AmREIT will endeavor, where feasible, to
provide for the pass-through of any such increases to tenants of the properties
through lease provisions to that effect.
Competition for Investments. The results of REIT operations will depend
upon the availability of suitable opportunities for investment, which in turn
depends to a large extent on the type of investment involved, the condition of
the money market, the nature and geographical location of the property,
competition and other factors, none of which can be predicted with certainty.
AmREIT will continue to compete for acceptable investments with other financial
institutions, including insurance companies, pension funds and other
institutions, real estate investment trusts and limited partnerships which have
investment objectives similar to those of AmREIT. Many of these competitors have
greater resources than AmREIT and have greater experience than the Directors and
AmREIT.
Uninsured and Underinsured Losses Could Result in Loss of Value of
Property. AmREIT carries comprehensive liability, fire, flood, extended coverage
and rental loss insurance with respect to its properties and its management
believes such coverage is of the type and amount customarily obtained for or by
an owner of real property assets similar to AmREIT's real property assets.
Similar coverage will be obtained for properties acquired in the future.
However, there are certain types of losses, generally of a catastrophic nature,
such as losses from floods or earthquakes, that may be uninsurable or not
economically insurable. AmREIT's management exercises its discretion in
determining amounts, coverage limits and deductibility provisions of insurance,
with a view to maintaining appropriate insurance on AmREIT's investments at a
reasonable cost and on suitable terms. This may result in insurance coverage
that in the event of a substantial loss would not be sufficient to pay the full
current market value or current replacement cost of AmREIT's lost investment.
Inflation, changes in building codes and ordinances, environmental
considerations and other factors also might make it infeasible to use insurance
proceeds to replace the property after such property has been damaged or
destroyed.
Adjacent Properties. Although it is not expected to occur, if AmREIT or
its Affiliates acquire properties that are adjacent to other of AmREIT's
properties, the value of such properties acquired by AmREIT or its Affiliates
may be enhanced by the adjacent interests of AmREIT. It is also possible that
such newly acquired properties would be in competition with AmREIT's adjacent
properties for prospective tenants.
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Risks Associated With Federal Income Taxation of AmREIT
Adverse Consequences of Failure to Qualify as a REIT. AmREIT believes
that it has operated so as to qualify as a REIT under the Code since its
formation. Although management of AmREIT believes that it is organized and is
operating in such a manner, no assurance can be given that AmREIT will be able
to continue to operate in a manner so as to qualify or remain so qualified.
Qualification as a REIT involves the application of highly technical and complex
provisions of the Code and the Regulations promulgated thereunder relating to
REITs (the "REIT Provisions") for which there are only limited judicial or
administrative interpretations and the determination of various factual matters
and circumstances not entirely within AmREIT's control. For example, in order to
qualify as a REIT, at least 95% of AmREIT's gross income in any year must be
derived from qualifying sources and AmREIT must make distributions to
shareholders aggregating annually at least 95% of its REIT taxable income
(excluding net capital gains). In addition, no assurance can be given that new
legislation, regulations, administrative interpretations or court decisions will
not change the tax laws with respect to qualification as a REIT or the federal
income tax consequences of such qualification. AmREIT is not aware, however, of
any currently pending tax legislation that would adversely affect its ability to
continue to qualify as a REIT.
For any taxable year that AmREIT fails to qualify as a REIT, it will be
subject to federal income tax (including any applicable alternative minimum tax)
on its taxable income at corporate rates. In addition, unless entitled to relief
under certain statutory provisions, AmREIT also will be disqualified from
treatment as a REIT for the four taxable years following the year during which
qualification is lost. This treatment would reduce the net earnings available
for investment or distribution to shareholders because of the additional tax
liability to AmREIT for the year or years involved. In addition, distributions
no longer would qualify for the dividends paid deduction nor would there by any
requirement that such distributions be made. To the extent that distributions to
shareholders would have been made in anticipation of AmREIT's qualifying as a
REIT, AmREIT might be required to borrow funds or to liquidate certain of its
investments to pay the applicable tax.
Risks of Excise Tax and/or Penalties. A violation of the REIT Provisions,
even where it does not cause failure to qualify as a REIT, may result in the
imposition on AmREIT of substantial excise taxes, such as where AmREIT engages
in a prohibited transaction where it is determined to be a dealer in real
property. Because the question of whether such a violation occurs may depend on
the facts and circumstances underlying a given transaction, it is possible that
such violations could inadvertently occur. To reduce the possibility of an
inadvertent violation, the Directors intend to rely on the advice of legal
counsel in situations where they perceive REIT Provisions to be inconclusive or
ambiguous.
Changes in Tax Laws. The discussions of the federal income tax
considerations of this offering are based on current law, including the Code,
the Regulations, certain administrative interpretations thereof and court
decisions. Future events, such as court decisions, administrative rulings and
interpretations and changes in the tax laws or Regulations, that change or
modify these provisions could result in treatment under the federal income tax
laws for AmREIT and/or the Shareholders that differs materially and adversely
from that described in this Prospectus, both for taxable years arising after and
before such event. There is no assurance that future legislation, administrative
interpretations or court decisions will not be retroactive in effect.
Risks for IRAs and Investors Subject to ERISA. Fiduciaries of a pension,
profit sharing or other employee benefit plan subject to ERISA should consider
whether the investment in Securities of AmREIT satisfies the diversification
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requirements of ERISA, whether the investment is prudent in light of possible
limitations on the marketability of the Securities, whether the investment
would be an improper delegation of control over or responsibility for plan
assets and whether such fiduciaries have authority to acquire such Securities
under the appropriate governing instrument and Title I of ERISA. Also,
fiduciaries of an Individual Retirement Account ("IRA") should
consider that an IRA may only make investments that are authorized by the
appropriate governing instrument.
Restrictions on Payment of Dividends. The terms of the Notes and present
institutional credit arrangements may, in certain circumstances, restrict AmREIT
from paying dividends on its capital stock, to some degree. Moreover, AmREIT
may, in the future, enter into credit arrangements which restrict its ability to
pay dividends on its equity securities. In general, these credit agreements
provide that for as long as there is no default in the payment of principal or
interest or any other default causing the acceleration of indebtedness, AmREIT
will be permitted to pay dividends on its equity securities. The restrictions on
payment of dividends could prevent payment of dividends on AmREIT's equity
securities in the event it were unable to make the payment of principal or
interest as required by such agreements.
See "THE MERGER - Description of The Notes."
Risks of Development and Acquisition Activities. AmREIT will incur risks
associated with any development activities it undertakes, including the risks
that (i) occupancy rates and rents at a newly completed project may not be
sufficient to make the project profitable; (ii) financing may not be available
on favorable terms for the project; (iii) construction and lease-up may not be
completed on schedule, resulting in increased debt service expense and
construction costs; (iv) construction costs of a project may exceed original
estimates, possibly making the project uneconomical; (v) zoning, occupancy and
other required governmental approvals or authorizations may not be granted and
development costs associated therewith may not be recovered; and (vi)
development opportunities explored by AmREIT may be abandoned. Acquisitions of
properties entail risks that investments will fail to perform in accordance with
expectations and that judgments with respect to the costs of improvements to
bring an acquired property up to standards established for the market position
intended for that property will prove inaccurate, as well as general investment
risks associated with any new real estate investment.
AmREIT anticipates that its new developments and acquisitions will be
financed under lines of credit or other interim forms of secured or unsecured
financing. There is no assurance that permanent financing for such newly
developed or acquired projects will be available or might be available only on
disadvantageous terms. In addition, the fact that AmREIT must distribute 95% of
its taxable income in order to maintain its qualification as a REIT will limit
the ability of AmREIT to rely upon income from operations or cash flow from
operations to finance new developments or acquisitions. As a result, if
permanent debt or equity financing is not available on acceptable terms to
refinance new developments or acquisitions undertaken without permanent
financing, further development activities or acquisitions might be curtailed or
cash available for distribution might be adversely affected. In the case of an
unsuccessful development or acquisition, AmREIT's loss could exceed its
investment in the project.
THE MERGER
The following discussion describes the material aspects of the Merger and
the terms of the Merger Agreement. The detailed terms of the Merger are
contained in the form of Merger Agreement attached as Annex 1 to this
Prospectus. The following description is qualified in its entirety by reference
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to the Merger Agreement, which is incorporated by reference herein. AmREIT's
shareholders and the Limited Partners are urged to read carefully.
Background of The Merger
In late 1996, the General Partner began to consider equitable and
material circumstances under which one or more of the Partnerships could be
combined with AmREIT. The General Partner believed a combination of the
Partnerships with AmREIT could, if structured in an equitable and efficient
manner benefit the Limited Partners both by providing them an opportunity to
expand and by diversifying their investment with an opportunity for liquidity.
The General Partner believed such a combination would also benefit AmREIT's
Shareholders by allowing an incremental expansion opportunity to acquire
unleveraged assets for its equity and debt securities and to further increase
its investment portfolio by leveraging those assets.
In early 1997, the General Partner informally discussed AmREIT's possible
acquisition of one or more of the Partnerships with the Independent Directors.
While they generally felt such a transaction would be mutually favorable, they
agreed that the General Partner's position as the controlling person of both the
Partnerships and AmREIT's Adviser created a number of conflicts in structuring
such a transaction. The Independent Directors were particularly concerned about
the General Partner's service contracts with the Partnerships which would, as a
practical matter, continue after their acquisition by AmREIT. The Independent
Directors believed it to be in the best interests of the AmREIT Shareholders to
negotiate the acquisition of the Partnerships only if AmREIT were self-managed.
The Independent Directors informed the General Partner that for this and other
considerations they would entertain a proposal to acquire the Adviser. In
response, the General Partner informed the Independent Directors that AmREIT's
acquisition of the Adviser would need to be independent of and in no manner
conditioned upon any transactions between AmREIT and the Partnerships. These
conditions being acceptable, negotiations for the Adviser Acquisition commenced
in July 1997 and continued through December 31, 1997, when the Independent
Directors approved the final terms of the Adviser Acquisition. During January
and February 1998, the General Partner began structuring an offer to the
Independent Directors. On February 10, 1998, the General Partner engaged
Houlihan on behalf of the Limited Partners to render to each Partnership an
opinion as to the fairness, from a financial point of view, of the consideration
to be received by the Limited Partners in connection with the Merger, if and
when approved by the parties. In late February, in anticipation of the General
Partner's offer, the Independent Directors engaged Broocks, Baker & Lange, as
special counsel, and Bishop-Crown as their principal advisers.
On April 10, 1998, the General Partner presented his offer of Merger to
the Independent Directors. The Independent Directors reviewed the proposal with
AmREIT management (other than the General Partner), their financial adviser,
Bishop-Crown and Broocks, Baker & Lange. During the remainder of March through
early April, the Independent Directors further considered the offer and reviewed
information regarding the Partnerships, much of which had been previously
reviewed in connection with the Adviser Acquisition.
In early April, the Independent Directors made a counter proposal to the
General Partner. After further negotiations, the parties agreed in principal to
the Merger terms, receiving final agreement as to price based on their review
of, among other things, the 1997 year end financial statements of the
Partnerships and AmREIT.
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Based on this agreement in principal, the Independent Directors and the
General Partner instructed legal counsel to file an application for permit and
request for a fairness hearing under the California Securities Law of 1968 (the
"California Application"), which counsel filed with the California Department of
Corporations on April 8, 1998.
During the remainder of April and continuing through May 1998, the
Independent Directors received and reviewed financial information regarding the
Partnerships and advice from Bishop-Crown regarding likely value of the
Partnerships to AmREIT in a controlled acquisition structure. The Independent
Directors and the General Partner considered pro forma financial data based on
various merger scenarios. During meetings on May 21, 22 and 23, 1998, the
Independent Directors and the General Partner reached agreement on the price and
terms of the Partnership Mergers. At a meeting held on May 23, 1998 the
Independent Directors, acting as a majority of the Board of Directors, approved
the Agreement of Merger between AmREIT and the Partnerships, directed counsel to
amend the California Application to reflect the final terms of the Merger Offer
and to prepare and file preliminary merger material for the Merger, as required
under the Securities and Exchange Act of 1934 and directed Bishop-Crown to
prepare its opinion on behalf of AmREIT that the Merger is fair, from a
financial point of view, to AmREIT and its Shareholders.
The Independent Directors' Reasons and Recommendations for the Merger
The Independent Directors, each of whom is unaffiliated with the General
Partner and the Partnerships, believe that the terms of the Merger Agreement are
fair from a financial point of view to the Shareholders and in the best
interests of AmREIT and the Shareholders. Accordingly, the Independent Directors
have unanimously approved the Merger Agreement and such issuance of Shares
thereunder, and recommend that the Shareholders vote for approval of the Merger
Agreement and such issuance of Shares. As the Independent Directors determined
that it would be in the best interests of the shareholders to acquire all or any
one of the Partnerships, the Independent Directors did not condition the
consummation of each of the Mergers on the consummation of any other Merger.
Nevertheless, the Merger Agreement gives AmREIT the option of not consummating
the Merger if only one of the Partnerships approves the Merger.
In negotiating and agreeing to the terms and conditions of the Merger and
the Negotiated Prices of the properties, the Independent Directors have acted
solely on behalf of AmREIT. The Independent Directors are not affiliated with
the general partners or the Partnerships and therefore owe no fiduciary duty to
the Limited Partners in connection with such negotiations. In conducting their
negotiations in connection with the Merger, the Independent Directors owe a
fiduciary duty only to the shareholders of AmREIT, whose interests in connection
with the Merger conflict with those of the Limited Partners.
The Independent Directors' determinations as to the fairness of the
Merger are directed only to the AmREIT shareholders and not to the Limited
Partners, whose interests in connection with the Merger conflict with those of
the AmREIT shareholders. In reaching their decision, the Independent Directors
considered several factors, and consulted with AmREIT's management and
Bishop-Crown. Set forth below the principal reasons, to which relative weights
were not assigned, of why and how the Independent Directors made such
determinations.
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(1) The Independent Directors have concluded that the
Merger will increase (be accretive to) AmREIT's FFO and cashflow
based on their analysis of the pro forma historical financial
statements included in this Prospectus, forecasts and projections
based on various assumptions and their analysis of the operating
history and potential of AmREIT and the Partnerships. Based on
their analysis, the Independent Directors believe the Merger will
be accretive to AmREIT FFO and cashflow primarily because of three
operational advantages AmREIT has over each of the Partnerships.
First, because of AmREIT's self-management structure, its costs for
operating and administering the properties will be less than those
incurred historically by the Partnerships. Based on historical
experience in pro forma forecasts, AmREIT's costs are approximately
6% to 7% of gross rents compared to 9% or more for the
Partnerships. Moreover, the Independent Directors believe AmREIT's
administrative and management costs, as a percentage of total
assets, should decrease in the future because of efficiencies of
scale realized as its investment portfolio increases in size.
Secondly, AmREIT's current rate of distributions (approximately
$0.72 per share per annum) is less than the annual rate of
distributions paid by the Partnerships (other than Fund III and
Fund IV) to the Limited Partners on their investment. Thus,
AmREIT's cost of equity capital is generally less than that of the
Partnerships. Thirdly, unlike the Partnerships, which may not
leverage their investments, AmREIT will be able to take advantage
of positive leverage by the borrowing of additional funds and
investing of those funds in additional properties. The Independent
Directors noted that AmREIT's borrowing costs on current and
proposed credit facilities are currently 7.5% per annum and that,
based on recently closed and contractually committed property
acquisitions, the return currently available to AmREIT from
property investments is 9.5% or more. Thus, in current financial
and real estate markets, the revenues from available property
investments exceeds the costs of acquisition financing, resulting
in positive leverage. The Independent Directors also noted that
the amount of accretion to AmREIT's cashflow resulting from the
Merger will depend, upon other things, current borrowing rates, the
returns available to AmREIT from the purchase of additional
properties, and AmREIT's ability to maintain general administrative
costs at prudent levels. The Independent Directors noted that the
Merger is expected to be accretive to AmREIT's FFO and AmREIT's
ability to pay distributions to Shareholders, even after dilution
by reason of the issuance of the additional Shares to Mr. Taylor
resulting from the Merger by reason of the Adviser Acquisition. Of
course, in the event financial conditions and/or economic
conditions change so that positive leverage is no longer available
to AmREIT, the accretive effects of such positive leverage would be
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diminished or delayed. FFO is a widely accepted measure of an equity
REIT's operating performance. An increase in cash flow and FFO per Share as a
result of the Merger or any other reason may result in a greater likelihood that
distributions will be made to shareholders. FFO is calculated as net income,
excluding gains or losses from sales of property, depreciation and amortization
of real estate assets and recurring items of income or expense. The Independent
Directors consider FFO an appropriate measure of performance of an equity REIT
because it is predicated on cash flow analysis. However, FFO is not an
alternative to measurements under GAAP and is not comparable to similar titled
items recorded by other REITs.
(2) The Independent Directors have concluded that the Exchange Price is a
fair price for the Shares for the purposes of the Merger from the view point of
AmREIT and the Shareholders. In concluding that the Exchange Price is fair to
AmREIT and its Shareholders, the Independent Directors noted that the net
price received by AmREIT in the most recent public offering was approximately
$8.71 per Share ($10.25 per Share less offering expenses of 15% per Share).
Conversely, in the Merger, AmREIT expects to realize a net value for its Shares
equal to approximately $9.18 per Share (i.e., $9.34 per Share less estimated
Merger expenses of approximately $.15 per Share). The Independent Directors
noted that such analysis ignores the effect on the value of the AmREIT Shares
of the recently completed Adviser Acquisition but that, based on the pro forma
balance sheet, as of June 30, 1998, after giving effect to the additional Shares
issuable to Mr. Taylor as a result of the Adviser Acquisition upon consummation
of the Merger, the book value per Share of the AmREIT Shares will be increased
from $7.47 to approximately $8.00 per Share.
(3) The Merger will substantially increase AmREIT's total capitalization
and increase its assets from approximately $27.2 million to approximately $55.0
million. This increased size affords several benefits. First, the Merger will
increase the number of Shares outstanding, which should allow AmREIT to sooner
establish a regular secondary market for the shares and result in greater
liquidity for holders of the Shares if and when such a market exists. The
Independent Directors believe that institutional investors prefer larger
capitalization companies when making investment decisions due to greater
liquidity, which allows the purchase and sale of larger volumes of Shares
without disrupting the market for such Shares. The Independent Directors also
believe that the credit rating agencies generally favor larger capitalization
companies and view them as being more stable for unsecured debt investors.
Management believes all of these factors increase the attractiveness of AmREIT
to potential investors, and that the Merger should ultimately result in an
improved ability to access favorably priced equity and debt capital.
(4) The Independent Directors believe that the Merger will allow AmREIT
to realize economies of scale by spreading costs over a larger number of
properties located in AmREIT's existing markets, thereby improving AmREIT's
profit margin.
(5) As a result of the Merger, AmREIT will acquire the Partnerships'
properties, most of which are located in AmREIT's existing market. The
Independent Directors believe that this should provide for easier assimilation
of these new properties into AmREIT's existing portfolio because AmREIT
currently has the resources to provide the leasing and management services for
the properties formerly owned by the Participating Partnerships.
(6) Following the Merger, AmREIT will be in the financial position to
improve its access to attractively priced alternative sources of capital by
expanding its geographic diversification and thereby reducing its vulnerability
to recessions in any particular region. The last recession was a "rolling
recession," because it affected the economies of different regions at different
times. For example, the Southwestern United States went into and emerged from
the recession earlier than the Southeast. The Independent Directors believe that
the expansion into new areas should reduce the risk that a regional economic
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downturn will affect all of AmREIT's properties simultaneously, thus
smoothing AmREIT's performance through the economic cycles.
(7) The Independent Directors received and specifically adopted the
Bishop-Crown Fairness Opinion that the consideration to be paid by AmREIT
pursuant to the Merger is fair, from a financial point of view, to AmREIT as of
the date of such opinion, based upon and subject to certain matters stated
therein.
(8) The Independent Directors received and reviewed presentations from,
and discussions with, certain executive officers of AmREIT and Bishop-Crown
regarding the business, real estate assets, financial, accounting and due
diligence with respect to the Partnerships and the terms and conditions of the
Merger Agreement, all of which supported the Merger.
The Independent Directors and management also discussed certain potential
negative factors and risks that could arise or do arise from the Merger. These
potential negative factors and risks include the following:
(a) The Exchange Price is fixed. Therefore, if the fair value of
the Shares is higher on the Effective Date of the Merger than the amount of the
Exchange Price, the number of Shares to be received by the Limited Partners in
the Participating Partnerships will not be reduced, thereby increasing the value
of the consideration to be received by the Limited Partners in the Merger. The
Independent Directors believe this fact was mitigated by the fact that the
number of Shares to be received by the Limited Partners in the Participating
Partnerships will not be increased if the value of the Shares is lower on the
Effective Date of the Merger.
(b) Costs related to the Merger (including legal and accounting
fees, financial advisory fees, printing and other costs) are expected to be
significant.
(c) AmREIT's management will have to devote a great deal of time
and effort to effectuate the Merger.
(d) The Merger will not initially result in a significant increase
in the size and diversification of AmREIT's property portfolio, but will, to the
contrary, further concentrate AmREIT's property investments in the state of
Texas. AmREIT currently has properties in Arizona, Texas, Georgia, Kansas,
Louisiana, Missouri, Delaware and Mississippi. The Merger adds four additional
states: Oklahoma, Colorado, Minnesota and Tennessee. Management considers each
of these to be attractive markets. Based on internally generated estimates of
value, approximately 50% of AmREIT's investment in properties is currently in
Texas. Following the Merger, AmREIT's investment in properties will continue to
be concentrated in the state of Texas; approximately 50% of AmREIT's property
will be outside the state of Texas. The Independent Directors believe that
geographic diversification is necessary in order to improve AmREIT's access to
attractively priced alternative sources of capital.
(e) The Independent Directors also considered the possibility that
the amount AmREIT pays for Units to Limited Partners making the ALV Payment
Election could exceed the value of such Units agreed to for the purposes of the
Merger. This would occur if the Appraised Value of a Partnership's properties,
which will not be determined until after the Effective Date, is greater than the
Negotiated Price of the property. While possible, the Independent Directors
believe such a result is unlikely because of the Bishop-Crown Fairness Opinion,
the Houlihan Fairness Opinion, comparable pricing information regarding sales
and offers of similar properties in the areas the Partnership Properties are
located, AmREIT's experience (including purchases and sales) with similar
properties in such locations and the transaction costs of 5% of the Appraised
Value of the properties to be taken into account in calculating the ALV of each
Partnership.
The General Partner's Reasons and Recommendations for the Merger
The General Partner has determined that the terms of the Merger
Agreement, including the consideration to be received by the Limited Partners in
the Merger, are fair to and in the best interests of the respective Limited
Partners. Accordingly, the General Partner and the board of directors of each
corporate general partner has approved the Merger Agreement and recommend that
the respective Limited Partners vote for approval of the Merger Agreement and
amendment of the respective Partnership Agreements.
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The General Partner's fairness determination in the case of each
Partnership was based upon the transaction as a whole, as well as the
combination of less than all Partnerships, because each Partnership's value for
the purposes of the Merger is its Net Asset Value. The General Partner believes
that Net Asset Value is a reasonable estimate of the value of each Partnership
for the Merger as it is directly derived from the value of the Partnerships' net
assets at the Effective Date.
The Net Asset Value of each Partnership was determined independently of
those of the other Partnerships, except in those instances where a Partnership
jointly owns an investment with one or more other Partnerships. In each such
case, the Negotiated Price of the property was determined assuming a 100%
ownership and control of the property. The Negotiated Price so determined was
then allocated to the co-owners in accordance with the percentage of ownership.
No premium was allocated for a majority or controlling interest in these jointly
owned properties and no discount was made with respect to a minority ownership
interest in such properties. The General Partner believes that the Net Asset
Value methodology was consistently applied to each Partnership will not result
in valuations more favorable to some Partnerships over others. The General
Partner determined that the fairness to Limited Partners of each Partnership,
considered separately, of the Merger Agreement and the transactions contemplated
thereby will therefore not be materially affected as to any Partnership in the
event the Merger is completed in any combination with fewer than all
Partnerships.
The General Partner has concluded that the Exchange Price is a fair
valuation of the AmREIT Shares for the purposes of the Merger from the view
point of the Limited Partners. The General Partner bases his belief on, among
other analyses, his conclusion that, in the absence of current trading
information, the Shares can be fairly valued by reference to recent cash prices
paid for them by public investors. AmREIT last sold its common stock to public
investors at a price of $10.25 in May 1998. The General Partner also considered
possible enhancement to the value of the Shares due to AmREIT's attractive
property investments since that offering and its subsequent transformation to a
self-managed REIT through the Adviser Acquisition. The General Partner noted
that most of the costs from the Merger will be born by AmREIT, if it is
consummated, and that the Partnerships (with the exception of disposition fees
paid by Fund III, Fund IV, Fund V and Fund VI) will not incur sales and/or
liquidation expenses which they would expect to incur if their properties were
liquidated. In circumstances where the Partnerships sold their properties and
liquidated, they would expect to incur liquidation costs of 5% or more of the
price of the properties and, thus, distribute to their Partners 95% or less of
the net proceeds from the sale of their properties. Also, Limited Partners
seeking to reinvest their distributions would expect to pay transaction costs
(including securities commissions) of 5% or more.
The General Partner also considered that, immediately after the Merger
is consummated, the Limited Partners' return on the Shares received in the
Merger as a percentage of their original investment in their Partnership will
be less than they currently receive from their Partnership (except in the case
of Fund III and Fund IV). However, the General Partner believes that this
reduction will be temporary and that the future return realized by Limited
Partners from their AmREIT Shares will be greater, on a cumulative basis, than
that which they would realize if they remained in their Partnership. This is
because the revenues of the Partnerships, to varying degrees, are derived from
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aging leases on depreciated properties. The General Partner anticipates that
Partnership distributions will decrease at varying rates in the future, as the
leases near expiration and the Partnership incurs costs in connection with lease
renewals and/or replacements and with the costs of property rehabilitation
and/or tenant improvements. Thus, while the current Partnership distributions
exceed dividends paid on the Shares, the General Partner believes that the
return from the Shares will be greater than that which could be received from
the Partnership over the next 3 to 5 years. Conversely, the General Partner
believes that AmREIT, as a result of the Merger and its expanded growth financed
thereby, will grow its asset base and FFO. Based on an analysis similar to that
of the Independent Directors, the General Partner concluded that an investment
in AmREIT will be accretive to AmREIT's Shares, including Shares issued to the
Limited Partners in the Merger. Also, the General Partner believes that, at
least qualitatively, an investment in AmREIT Shares will have greater value
than a like investment in Partnership interests because of the added liquidity
of an investment in the Shares. In agreeing to the Exchange Price, the
General Partner also considered his conclusion that the Negotiated Prices of
the properties fairly represent the current value of the properties of each
Partnership.
The General Partner has also concluded that the ALV Payment Election
provides those Limited Partners who do not desire to continue their investment
through the receipt of either Shares or Notes the opportunity to receive a fair
cash payment for their Partnership investment. The General Partner noted that
the determination of the payment amount will be determined on the basis of the
Appraised Value, as determined by a qualified, independent appraiser. The
General Partner also noted that the Appraised Value would be determined on the
basis of an orderly liquidation of the Partnership's properties over a 12-month
period. AmREIT is required to determine and make the ALV payment within the
first anniversary of the Effective Date, which payment will include an
additional amount equal to 6% per annum of the ALV of the Units from the
Effective Date.
The General Partner, however, did not retain an unaffiliated
representative to act on behalf of the Limited Partners. Also, the Negotiated
Prices of the Partnerships' properties are not based on an appraisal of the
properties by an independent real estate appraiser. In determining not to
engage an unaffiliated representative or an independent appraiser, the General
Partner had the conflicts of interest with the Partnerships and Limited
Partners. See "CONFLICTS OF INTEREST" and "RISK FACTORS." The General
Partner believes that the absence of independent representation and appraisals
by independent real estate appraisers is mitigated by the similarity of the
Partnerships, their investments and financial condition and his longstanding
relationship and his familiarity with each Partnership. The Partnerships have
the same investment objectives and restrictions as their properties
are generally located in the same markets and are of similar size and quality.
Of the 32 properties owned by the Partnerships, 14 are jointly owned by two or
more Partnerships. The General Partner was responsible for acquiring each
Partnership's properties and is familiar with each property, its condition and
its local market. The General Partner also conferred with Houlihan and,
informally with other, unaffiliated real estate professionals regarding local
real estate market conditions and similar factors which could influence the
value of the properties. The financial status of each Partnership is
substantially the same as each typically maintains a
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positive net cash and none has significant debt. The properties of each
Partnership are under net lease to the same tenants with similar credit
risks. The General Partner believes all of these factors enable him to
adequately evaluate, negotiate and determine a fair value of each Partnership
property in a manner consistent with his fiduciary duty to the Limited Partners.
The General Partner and the general partner(s) of each of the
Partnerships have adopted Houlihan's Fairness Opinion to the Partnership. The
General Partner also noted that Houlihan determined that the consideration to
be received by the Limited Partners of each Partnership in connection with the
Merger is fair from a financial point of view to the Partnerships'
Limited Partners. Houlihan was engaged to represent each Partnership and the
interests of its Limited Partners, as a group in connection with its
determination as to the fairness of the consideration to be received by the
Limited Partners from a financial point of view without taking into account
the specific financial interest of any person or group of investors.
Alternatives to the Merger
The General Partner's assessment of the fairness of the proposed Merger
was also based on the review of different alternatives that were available. The
evaluations of the different alternatives included, but were not limited to
liquidation of the Partnerships, continuation of the Partnerships through an
orderly liquidation period (estimated at up to six years) and reorganization of
the Partnerships into one REIT or up to ten separate REITs. In order to
determine whether the Merger or one of its alternatives would be more attractive
to the Limited Partners, the General Partner compared the potential benefits and
detriments of the Merger with the potential benefits and detriments of the
alternatives. The General Partner believes that each of the Merger and its
alternatives offers potential benefits and suffers from potential detriments not
possessed by the other alternatives. Set forth below are the conclusions of the
General Partner and the boards of directors of the corporate general partners
regarding the comparisons of the Merger to its alternatives and a detailed
discussion of the potential benefits and detriments of each of these
alternatives.
Liquidation. An alternative to the Merger would be liquidating each
Partnerships' assets, distributing the net liquidation proceeds to the general
partners and the Limited Partners in accordance with the Partnership Agreements,
and thereafter dissolving the Partnerships. Through such liquidations, the
General Partner would provide for a final disposition of the investors' interest
in the Partnerships.
Benefits of Liquidation. Any net proceeds realized upon the
liquidation of a Partnership would be utilized by Limited Partners for
investment, business, personal or other purposes. If the Partnerships liquidated
their assets, such assets would be valued through arm's length negotiations
between the Partnerships and the prospective purchasers. Except as described
under "Offers from Third Parties" below, none of the Partnerships has to date
received any unsolicited offers to purchase their properties.
Disadvantages of Liquidation. Since the Partnerships were
organized, significant changes have taken place in the financial and real estate
markets that have had a material adverse impact upon the value of commercial
real estate. In the 1980s and early 1990s, the United States real estate market
experienced one of the worst real estate cycles in recent history. Also, the
savings and loan industry, one of the largest sources of real estate investment
financing, experienced a crisis which sharply curtailed lending as well as
prompted a large number of property sales, contributing to the oversupply. In
addition, a significant change in tax laws made investment in real estate less
attractive and reduced the pool of prospective real estate buyers. Other sources
of capital such as life insurance companies and pension funds reduced their
investment in real estate as the market became less favorable. All of these
factors, as well as other less apparent ones, contributed to reductions in the
revenue streams and a loss in value in all types of real estate located across
the nation. Most real estate markets have become stronger over the past 12 to 18
months, and most value has been regained. However, even in improving markets,
liquidation of an entire portfolio within a short period of time typically
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produces substandard valuations and may prevent all Partnerships from
maximizing the net proceeds from a sale of a property which may otherwise be
achievable. The General Partner favors the Merger as a means for permitting
Limited Partners to take advantage of the currently favorable market valuations
of publicly traded REITs relative to the private market valuations of the
underlying real estate assets.
Liquidation Procedures. The process for liquidating the
Partnerships' assets is in large measure within the control of the Limited
Partners. The General Partner is not authorized, without notice to or the
approval of the Limited Partners, to sell, refinance or otherwise dispose of all
or substantially all of the Partnerships' assets. Liquidation may be
accomplished through a series of separate transactions with the same or
different purchasers or as a part of a multi-property transaction that might
also involve properties owned by other Partnerships. The General Partner will
need to engage real estate brokers and possibly other professionals to assist
with the disposition of the Partnerships' properties. These persons may assist
with the identification of prospective purchasers, arrangements for asset
financing, and assistance with the structure of the transaction. The General
Partner, as a fiduciary to the Limited Partners, remains responsible for
determining the terms and conditions of the transaction. Each partnership can
expect to incur costs for these professional and closing costs which, in the
aggregate, will range from 3.5% to 5% of the sales prices of their properties.
These amounts would be in addition to any disposition fees or other compensation
payable to the General Partners by reason of the Partnership's liquidation.
Another significant consideration for the General Partner would be the
decision whether to insist upon payment in full upon sale of a property or to
accept a portion of the sale price at closing and the balance through
installment payments. Acceptance of a sale proposal providing for deferred
payments would extend the life of a Partnership until receipt of those amounts
by the Partnership and their distribution in accordance with the Partnership
Agreement. Such arrangements would also expose a Partnership to the risk that
deferred payments might not be collected in full and that the Partnership might
be forced to foreclose on any collateral given to secure payment of the deferred
obligations.
General Partner's Recommendation and Comparison With Merger. The
General Partner favors the Merger over liquidation of the Partnerships' assets
based upon the General Partner's conclusion that the Merger permits Limited
Partners the opportunity to take advantage of the currently favorable market
valuations of publicly traded REITs relative to the private market valuations of
the underlying real estate assets. It is the General Partner's belief that
publicly traded REITs are favorably viewed in the public market in comparison to
private valuations of the underlying real estate assets. The value derived in a
publicly traded REIT is based on the continued growth ability of AmREIT, which
is intended to generate a constant source of cash flow in order to provide
distributions to shareholders. The value of a publicly-traded REIT is measured
on a daily basis as the stock is traded on the stock exchange and is generally
priced at a premium over underlying asset values. The dividend yields of stocks
of REITs with investment objectives comparable to those of AmREIT currently
range from approximately 6% to 9%. Comparable real estate assets in the areas
where the properties are located are currently valued between 9.5% to 11.0%
capitalization rates. A publicly-traded REIT allows investors to invest in real
estate with the greater degree of liquidity afforded by an exchange-listed
security. Further, the General Partner believes that the value to each Limited
Partner in an immediate liquidation of each Partnership would be less than the
consideration to be received under the Merger. This is due in part to the fact
that each Partnership would incur selling costs for each individual property or
the portfolio as a whole and the General Partner believes the sale of multiple
assets in a short defined period would likely result in a discount of the
property values from fair market value. An immediate liquidation would also
require legal, accounting and printing costs to prepare a proxy or
consent solicitation statement requesting an approval from all Unit holders to
approve the liquidation values.
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Continuation of Partnerships. A second alternative to the Merger would be
to continue each of the Partnerships in accordance with its existing business
plan, with the Partnership remaining as a separate legal entity, with its own
assets and liabilities, and continuing to be governed by its existing
Partnership Agreement. Nothing in the Partnerships' organizational documents
requires the General Partner to proceed with liquidating the Partnership's
assets in today's real estate markets. While the disclosure documents, pursuant
to which the Units were offered to the public, disclosed the intentions of the
Partnerships to liquidate their assets after a maximum of ten to twelve years
from acquisition, depending upon the program, the General Partner is not under a
legal obligation to liquidate assets within that time frame. To the contrary,
each of the Partnerships has an original intended operating life of ten or more
years, and the Limited Partners were advised that the liquidation of the
Partnerships would be in the control of the General Partner.
Benefits of Continuation. A number of advantages would be
expected to arise from the continued operation of the Partnerships. Limited
Partners should continue to receive regular quarterly distributions of net cash
flow, arising from operations and the eventual sale of the partnership
properties. Since the Partnerships are not obligated to dispose of their assets
at any particular point in time, continuing the Partnerships allows the General
Partner to select the most opportune time for disposing of the Partnerships'
assets, irrespective of the expected holding period set forth in the original
disclosure documents. In addition, the decision to continue the Partnerships,
if selected, would mean that there would be no change in the nature of the
Limited Partners' investment. Continuation of the Partnerships avoids most
disadvantages that might be deemed inherent in the Merger.
Disadvantages of Continuation. The primary disadvantage with
continuing the Partnerships is the failure of that strategy to secure the
benefits that the General Partner expects to result from merging the
Partnerships' assets into AmREIT. These benefits are highlighted under
"Background and Reasons for Merger." The Limited Partners of a Partnership which
does not participate in the Merger should be prepared to continue holding their
investments in such Partnerships for the foreseeable future. For at least some
of the Partnerships, Limited Partners' investments could be held beyond the time
period originally contemplated for the length of those investments. Limited
Partners also will not have the opportunity for liquidity that will be afforded
through the establishment of a secondary market for the Shares. By not
participating in the Merger, Limited Partners could miss the opportunity of
taking advantage of the currently favorable markets for the equity securities of
REITs, which markets today may value real estate assets more favorably than such
assets are valued in the real estate markets themselves. There is no established
public trading market for the Units. The General Partner has not historically
assisted Limited Partners desiring to transfer Units. The purchase price for the
Units in the secondary market is subject to negotiation between the buyer and
seller. Another disadvantage of continuation as a limited partnership is that
Limited Partners would continue to be burdened by the more complicated Schedule
K-1 for the reporting of the financial results of the Partnerships.
General Partner's Recommendation and Comparison With Merger. The General
Partner has concluded that continuation of the Partnerships is not as attractive
an alternative as the Merger based on the benefits of the Merger which Limited
Partners would forgo in the event of continuation of the Partnerships.
Specifically, the Limited Partners would not realize the liquidity or
diversification afforded by the Merger, would not benefit from the currently
favorable markets for the equity securities of REITs, which markets today may
value real estate assets more favorably than such assets are valued in the real
estate markets, and would not be able to participate in new real estate
investment opportunities.
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Continuing each Partnership in accordance with an orderly liquidation
plan would enable the Partnerships to sell each property at a different time to
maximize price. The downside to this option is that the estimated projected time
frame for a complete liquidation of the Partnerships ranges from an additional
one to six years. This additional time frame would place the Partnerships in a
position that exceeds the originally anticipated holding period for these real
estate investments. During this extended time frame, each individual investor
would remain in an illiquid investment vehicle without the ability to reasonably
exit the investment. Because of the relatively small total size of each
Partnership, the advantages of diversification and liquidity would not be
available. Given the size and number of properties held by each of the
Partnerships, the sale of each individual property would cause each Partnership
to continue to cover fixed administrative charges with the remaining properties,
resulting in future reductions in partnership distributions. In addition, the
Partnership Unit holders would continue to have the burden of incorporating
yearly K-1s with their personal tax returns. Conversely, AmREIT is expected to
have a substantially larger, more diversified, investment portfolio than any
particular Partnership, which reduces the risks associated with any particular
assets or group of assets, increases AmREIT's ability to access capital markets
for new capital investments and eliminates duplication in administrative
services, reporting and filing.
Reorganization of Partnerships as One REIT or as Separate REITs. The
General Partner considered the advisability of reorganizing the Partnerships
into one or more separate corporations taxed as a REIT. If approved, such action
would have provided some of the advantages contemplated by the Merger.
Benefits of Reorganization. Such reorganization would be expected
to (i) provide investors in the reorganized entities with some liquidity; (ii)
permit distribution to investors of a simpler federal income tax Form 1099-DIV
(compared to the Schedule K-1); and (iii) potentially be formed tax-free to the
Limited Partners.
Disadvantages of Reorganization. The General Partner believes that
the reorganization of the Partnerships into separate REITs has a number of
significant disadvantages. Substantial costs and expenses would be incurred by a
Partnership were it to separately pursue reorganization into a separate REIT.
The General Partner estimates that such costs in the aggregate would
significantly exceed the expected costs for the Merger. Because of the size of
the Partnerships, the General Partner believes such reorganization would result
in a limited market for the shares of the newly formed REITs. While the size of
the combined Partnerships would exceed the size of the current REIT, the
combined Partnerships would be significantly smaller than a post-Merger combined
Partnerships and REIT. Also, a REIT created by combining the Partnerships would
be externally managed unless significant additional expense (and likely dilution
in ownership of the Limited Partners) was incurred by the Partnerships. For
these reasons, the General Partner also believes that reorganization of all the
Partnerships into one REIT would not provide the portfolio size or
diversification or the structure of internal management necessary to attract
growth capital to the new entity. It is unlikely that the Partnerships, if
organized into one or separate REITs, would in the near future permit a market
as broad based and as active as the market that should develop from the merger
of the Partnerships into AmREIT.
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General Partner's Recommendation and Comparison With Merger. The
General Partner believes that the reorganization of the Partnerships into one
REIT or as separate REITs would present the potential detriments of the Merger
without providing many of its potential benefits, such as the likelihood of the
sooner creation of an active and broad-based market for the REIT's securities,
elimination of conflicts of interest among the various Partnerships, increased
diversification, access to an existing publicly-traded vehicle such as AmREIT
and more immediate growth potential and improved access to the capital markets.
In addition, the General Partner believes that the cost of pursuing the
reorganization would be significantly greater than each Partnership's pro rata
share of the Merger expenses, which expenses will be paid by AmREIT if the
Merger is approved or, in certain circumstances, paid in substantial part by the
General Partner if the Merger is not approved.
The consideration of rolling up the Partnerships into a single REIT was
not attractive as an alternative due to the small size of the ultimate
portfolio. Also, the transaction and REIT formation costs in reorganizing the
Partnerships into one REIT would be significant for each Partnership. The
consideration to have individual REITs was not achievable due to similar reasons
stated for rolling up the ten Partnerships into a single REIT. The General
Partner concluded that the size of the individual REITs would be too small in
the public market to be an attractive investment, therefore making it a
difficult vehicle to generate long-term value and liquidity for the Limited
Partners.
Summary of Positive and Negative Factors Considered by the General
Partner. Following is a summary of the positive and negative factors considered
by the General Partner in recommending the Merger to the Limited Partners of
each Partnership. After considering each of these factors individually and in
the aggregate, the General Partner strongly recommends that the Limited Partners
vote for the Merger. The General Partner did not assign a relative weight to
these factors.
o The General Partner believes that the economic terms of the Merger
Agreement, including the Exchange Price for each Partnership and
the 55.1% equity interest in the combined AmREIT entity to be
received by the Limited Partners, assuming all Partnerships
participate in the Merger, are favorable to the Limited Partners.
o The General Partner believes that the Net Asset Values of the
Partnerships represent fair estimates of the value of the
Partnership assets, net of liabilities, as of December 31, 1997,
and constitute a reasonable basis for allocating the consideration
offered by AmREIT among all Partnerships that may be combined
through the Merger.
o The General Partner believes that in the future, the combined
entity will have improved access to capital markets for future
growth and Limited Partners will have enhanced liquidity as a
result of the larger total equity market capitalization of the
combined entity.
o As separate legal entities with different investors, each of the
Partnerships must segregate its assets and liabilities (to avoid
commingling assets), conduct operations independently, and
maintain separate books and records for the preparation of
financial statements, tax returns, investor information and, as
required, reports and filings to be made to various governmental
regulatory agencies. The assets of one Partnership cannot be
employed for the benefit of one or more of the other Partnerships
and the general partners' fiduciary duties prevent them from
pursuing activities favoring some Partnerships to the disadvantage
of other Partnerships. Due to the separate nature of the
Partnerships, with their different groups of investors,the general
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partners must always be mindful of the separate programs, and
treat them separately, even if other courses of action would
benefit most if not all of the Partnerships. Potential conflicts
of interest arise in the allocation of management resources and
efforts to refinance or dispose of properties. In contrast, the
Merger places substantially all of the assets of the Participating
Partnerships into AmREIT, and allows such assets to be used to
achieve a common set of investment objectives without taking into
account the differences among the Partnerships. The General
Partner therefore concluded that, through the Merger, AmREIT could
secure advantages that cannot be fully pursued by the Partnerships
acting on their own. Such advantages include, but are not limited
to, the opportunity of making new investments, the availability of
financing and taking advantage of certain business opportunities
(which may not be profitably pursued by any of the Partnerships).
o The General Partner reviewed the terms of the Merger Agreement,
including the mutuality of the representations, warranties and
covenants, the requirement that each party consult with the other
on significant business and financial matters prior to
consummation of the Merger, and the ability of the General Partner
to pursue an unsolicited superior competing transaction should its
fiduciary duties so require, and believes that they were fair to
the Limited Partners.
o The General Partner believes that the Merger will result in
simplified tax administration for most Limited Partners.
Shareholders will receive Form 1099-DIV to report their
distributions from AmREIT. Forms 1099-DIV are substantially easier
to understand than the more complicated Schedule K-1 prepared for
the reporting of the financial results of the Partnerships.
o Each year the Partnerships must prepare up to ten separate sets of
financial statements, annual and quarterly filings for the
Commission, tax returns and investor communications. The
accurate preparation of this material requires substantial
management time and effort. Furthermore, to the extent other
service providers, such as legal counsel, accountants, appraisers
land use consultants and other professionals, render services
benefitting two or more of the Partnerships, relative to the
benefits afforded the Partnerships, costs and expenses associated
with and services must be fairly and equitably allocated among the
Partnerships. The General Partner therefore believes that, by
combining the Participating Partnerships into a single ownership
entity, the Merger should eliminate much of the duplication in
reporting, filing, and other administrative services, simplifying
administration of the consolidated entities including tax
administration as described below. The General Partner found it
difficult to quantify to what extent, if any, this merger of
functions would reduce the overall cost of administrative services
For example, while the Merger reduces the number of entities for
which administrative services are required, the Merger will not
reduce the number of investors or the assets under management. The
General Partner concluded that whether or not the Merger reduces
the overall costs, it should eliminate the risk of misallocating
expenses benefitting one or more of the programs, and the problems
of determining a fair method of allocating common costs and
expenses, and simplify the preparation of financial statements,
tax returns, investor information and reports and filings
otherwise required.
o The General Partner has seen in recent years a number of
significant changes take place in the financial and real estate
markets. These same factors created attractive investment
opportunities for investors which have access to capital. The
General Partner also concluded that the Partnerships are not
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in a position to take advantage of these opportunities since
they have already committed their capital and are not
authorized to reinvest proceeds from the sale of their properties
or to raise additional funds. The General Partner believes that,
in contrast, AmREIT can take advantage of investment
opportunities that may be available in current real estate
markets because it has both the right to reinvest net sale or
refinancing proceeds and the authority to raise additional
capital, through the sale of debt and/or equity securities, to
finance investments. This ability will allow those Limited
Partners who become shareholders in AmREIT to participate in
investment opportunities in the current real estate market.
o Moreover, the General Partner further believes that even if the
Partnerships were able to raise additional funds through debt or
equity offerings, AmREIT, as a combined entity, could more easily
issue additional debt and equity securities on more attractive
terms than would be available to any of the Partnerships due to
its larger base of assets and shareholders' equity. If all of the
Partnerships participate in the Merger, AmREIT will control assets
having a value of approximately $55.2 million. The General
Partner believes that AmREIT's capital base may make it a more
attractive candidate for the services of investment banking firms,
financial institutions, institutional lenders and others
interested in placing large amounts of capital. Generally
speaking, all other conditions being equal, the cost of money
for large borrowers is less than the cost of money for borrowers
having a smaller capital base.
o By combining the Partnerships with AmREIT, the Merger will create
an investment portfolio substantially larger and more
geographically diversified than the portfolio of any of the
Partnerships. The General Partner therefore concluded that this
increased size and the resulting consolidation of operations would
spread the risk of an investment in AmREIT over a broader group of
assets and reduce the dependence of the investment upon the
performance of any particular asset or group of assets, such as
assets in the same geographical area.
In recommending that the Limited Partners vote for the Merger, the
General Partner considered the following potentially negative factors in his
deliberations concerning the Merger:
o The General Partner did not retain an unaffiliated representative
to act on behalf of the Partnerships, either individually or as a
group, or on behalf of the Limited Partners in the Merger, and the
Negotiated Prices of the Partnership properties were not
determined by an independent real estate appraiser.
o Because the Exchange Price is fixed, a decline in the value of the
Shares would reduce the value of the consideration to be received
by Limited Partners in the Merger. This factor was mitigated, in
the General Partner's view, by the fact that because of the fixed
Exchange Price Limited Partners would benefit from any
appreciation in the price of the Shares.
o AmREIT intends to maintain distributions at current levels
following the Merger, if consummated; however, there is no
assurance it will be able to do so or, if made, such distributions
will not exceed AmREIT's net income and/or FFO for the periods to
which they relate.
o There are numerous conditions to AmREIT's obligation to
consummate the Merger.
o The anticipated benefits of the Merger may not be realized.
o Under the terms of the Merger Agreement, each of the general
partners is prohibited from initiating, soliciting or encouraging
any inquiries or the making of any proposal that constitutes, or
may reasonably be expected to lead to, a transaction which would
compete with the Merger except that, if the general partner
determines in good faith after consultation with outside legal
counsel that it is required by its fiduciary obligations to do
so, the general partner may, among other things, respond to and
engage in discussions and negotiations with persons making
unsolicited proposals or inquiries and may approve or recommend
such a transaction.
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o The Partnerships currently have no leverage (borrowings). Upon
completion of the Merger, AmREIT intends to immediately increase
its leverage to levels up to approximately 50% of its total
post-Merger real estate value.
o AmREIT has only recently completed the Adviser Acquisition and the
anticipated benefits therefrom may not be fully realized.
o Each Partnership electing to participate in the Merger is required
to pay its Proportionate Share of the Partnership Expenses
estimated to total $150,000. Also, if a Partnership terminates the
Merger Agreement without good reason, as defined, or under certain
other circumstances, it would be required to pay to AmREIT its
Proportionate Share of liquidated damages of up to $500,000.
o The Merger will result in taxable income or loss to each Limited
Partner. Because the Merger will result in an exchange of Units
for Shares, no Limited Partner will receive cash (other than cash
in lieu of fractional Shares) in the Merger to pay any taxes due
on any taxable income arising as a result of the Merger.
o AmREIT intends to acquire by development and/or purchase one or
more properties with post-Merger financing proceeds, which
property(ies) are currently unidentified.
In light of the wide variety of factors, both positive and negative,
considered by the General Partner, the General Partner found it impracticable to
quantify or otherwise assign relative weights to the specific factors considered
in making its determination. However, in the General Partner's view, the
potentially negative factors considered by it were not sufficient, either
individually or collectively, to outweigh the positive factors considered by the
General Partner in his deliberations relating to the Merger. In addition, except
as detailed above, no analysis or attempt to quantify any financial or
operational benefits or detriments was made.
THE GENERAL PARTNER BELIEVES THAT THE TERMS OF THE MERGER AGREEMENT, INCLUDING
THE CONSIDERATION TO BE RECEIVED BY THE LIMITED PARTNERS IN CONNECTION WITH THE
MERGER, ARE FAIR TO AND IN THE BEST INTERESTS OF THE RESPECTIVE LIMITED PARTNERS
AND HAS APPROVED THE MERGER AGREEMENT AND RECOMMENDS THAT THE RESPECTIVE LIMITED
PARTNERS VOTE FOR APPROVAL OF THE MERGER AGREEMENT AND AMENDMENT TO THE
PARTNERSHIP AGREEMENTS AND FOR APPROVAL OF THE APPLICABLE RELATED TRANSACTION.
In the event the Merger is not consummated for any reason, each
Partnership will continue to pursue its business objectives of maximizing the
value of its properties.
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Offers From Third Parties
The General Partner has not received any offers to purchase any
Partnership properties from unaffiliated third parties during the past twelve
months.
The Notes
General. The Notes are part of a series of up to $10,000,000 in principal
amount of 6.0% Notes due December 31, 2004, which may be issued pursuant to the
terms of the Loan Agreement. The Notes will be issued as of the Closing Date and
will bear interest from the date of issuance. Elections to receive Notes in lieu
of Shares in the Merger will be accepted on the basis described elsewhere in
this Prospectus. The material terms of the Loan Agreement are described below,
and a copy of the Loan Agreement may be obtained upon request from AmREIT.
Registered Form. The Notes will be issued in registered form, without
coupons, in denominations of the exact amount of the investment. Ownership of
the Notes will be documented only on the records of AmREIT, and such
documentation will constitute the sole evidence of ownership. The copies of the
Notes issued to the Noteholders will be facsimiles and will not be negotiable.
Transfers of the Notes will be effective only when evidenced on the records of
AmREIT.
Transfers Of Record. The Notes may be transferred only on the records of
AmREIT upon written request to transfer in a form specified by AmREIT, and
delivered to AmREIT at its principal business offices together with the
Noteholder's facsimile copy of the Note. No service charge will be made for the
registration of transfer or exchange of the Note, but AmREIT may require payment
of a sum sufficient to pay any transfer tax or similar governmental charge
payable in connection with a transfer of the Note.
Interest and Principal Payments. Interest will be paid at the rate of
6.0% per annum, uncompounded, from the date of issuance. The Loan Agreement
provides for AmREIT to make payments to the holders of the Notes as follows:
(1) quarterly installments of accrued interest on the
fifth day of the first calendar quarter following the
Closing Date and on the fifth day of each calendar
quarter period thereafter with respect to interest
accrued during the immediately preceding calendar
quarter until the Maturity Date (interest will be
computed on a 365-day year for actual days elapsed);
and
(2) the unpaid balance of principal and accrued interest
on the Maturity Date.
AmREIT will pay principal and interest by check, and will mail such
checks to the Noteholder's address of record as of the last day of the calendar
quarter for which interest is paid. The names and addresses of registered
holders of the Notes (the "Noteholders") will be maintained by AmREIT at its
principal business offices. A Noteholder's "address of record" will be the
address specified in the subscription documents, or such other address of which
the Noteholder advises AmREIT by written notice. The Notes will not be subject
to a sinking fund.
Maturity. Unless sooner redeemed or called as described below, all Notes
will mature on December 31, 2004 (the "Maturity Date"), at which time the entire
unpaid balance of principal and accrued interest will be due and payable.
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Redemption by AmREIT. The Notes may be called for prepayment by AmREIT,
in whole or in part, at any time, or from time to time, by delivering to the
Noteholders' address of record a written notice of such redemption. Such notice
shall be made not less than 30 days nor more than 60 days prior to the
Redemption Date. The Redemption Price of the Notes will be their unpaid
principal balance plus accrued interest to the date called for prepayment (the
"Call Date"). To the extent that less than all of the Notes are called for
redemption, the Notes may be redeemed either pro rata or by lot in the sole
discretion of AmREIT.
Satisfaction and Discharge. Upon maturity, AmREIT will make payment to
the Registered Noteholder at his or her address shown on the records of AmREIT
on the date of payment. Upon such final required payment, the Notes will be paid
in full and cease to be outstanding. The Noteholder's copy of the Note, which is
a facsimile, need not be presented to AmREIT for payment. The Company's
obligation to pay interest on the Notes will end on the Maturity Date.
Nature of Obligation. The Notes constitute general obligations of AmREIT.
In the event AmREIT should default on the Notes, the Company's obligation for
payment would be in pari passu to the Company's obligations to its other general
creditors. Noteholders are entitled to have recourse only against AmREIT for
payment of any principal and interest on the Notes and for any recovery of
attorneys' fees and/or costs, or for any other claim based hereon, and
Noteholders may not seek to impose any personal liability for any such
indebtedness on the Trustee, if appointed. Moreover, no director, officer,
employee, stockholder or agent of AmREIT, in his or her capacity as such, shall
have any liability whatsoever for any obligations of AmREIT under the Notes, or
for any claim based on, in respect of, or by reason of, such obligations or
their creation. Each Noteholder, as a condition to receiving a Note, waives and
releases all such liability. The waiver and release are part of the
consideration for the issuance of the Notes.
Reports/Noteholder Lists. AmREIT is required to deliver to the
Noteholders (or the Trustee, if one is then appointed) an annual statement
regarding compliance with the terms and conditions of the Notes. In addition,
AmREIT will provide to any Noteholder, upon written request, a list of the names
and addresses of the Noteholders.
The Loan Agreement. As a condition to the purchase of the Notes, each
Noteholder is required to execute the Loan Agreement whereby the Noteholder
appoints the Trustee to act as the Noteholders' exclusive Trustee to take
certain administrative and ministerial acts on their behalf and exercise certain
remedies in the event of a default under the Note. Noteholders may not enforce
the terms of the Notes except as provided in the Loan Agreement. Subject to
certain limitations, the Noteholders may authorize the Trustee to exercise its
powers only by the written direction signed or adopted by the Noteholders
holding a majority of the unpaid principal amount of the Notes then outstanding
(a "Majority Vote"). The Trustee may be appointed by the Noteholders at any time
by a Majority Vote.
Certain Covenants. The Loan Agreement contains, among other things, the
following covenants:
No Default On Other Debt. AmREIT shall not be in default with
respect to any other of its debt, including any payment of principal or interest
thereon. For the purposes hereof, "default" means the Company's failure to cure
any default under the terms of any debt obligation within thirty (30) days of
written notice of such default by a creditor under the respective debt
obligations.
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For the purposes of the foregoing, "debt" means any unsecured
indebtedness, contingent or otherwise, with respect to borrowed money (whether
or not the recourse of the lender is to the whole of the assets of AmREIT or
only to a portion thereof), or evidenced by bonds, notes, debentures or similar
instruments or letters of credit, except any such balance that constitutes a
trade payable, if and to the extent such indebtedness would appear as a
liability upon the balance sheet of AmREIT in accordance with generally accepted
accounting principles.
Limitation On Merger, Consolidation Or Sale Of Assets. During the
time any principal or interest is owing on the Notes, AmREIT may not merge,
consolidate with or transfer all or substantially all of its assets to another
person or entity, unless (i) the successor assumes all obligations of AmREIT
with respect to the Notes, and (ii) after such transaction, no event of default
under the Notes exists.
Prepayment of Notes. During the time any Principal is due and
owing on the Notes, AmREIT shall apply an amount equal to eighty percent (80%)
of the net proceeds from the sale or refinancing of the real properties acquired
from the Participating Partnerships pursuant to the Merger as described in the
Prospectus to prepay (call) the Notes as provided above. Such prepayment may, in
the sole discretion of AmREIT, be either pro rata as to the outstanding
principal amount of all of the Notes or be used to prepay less than all of the
outstanding Notes in full where the Notes to be prepaid are determined by lot.
For the purposes of this covenant (the "Prepayment Requirement"), "net proceeds
from sale or refinancing" shall mean any cash proceeds received from the sale or
financing of such real property remaining after the payment of the costs of such
transaction, the payment of all encumbrances or obligations relating to the real
property and the payment of any other debt obligations of AmREIT then due and
payable or which AmREIT's Board of Directors determines to be in the best
interests of AmREIT to prepay.
Books and Records. AmREIT shall keep proper books of record and
account, in which full and correct entries shall be made of all dealings or
transactions of or in relation to the Notes and the business and affairs of
AmREIT in accordance with generally accepted accounting principles. AmREIT shall
furnish to the Trustee any and all information related to the Notes as the
Trustee may reasonably request and which is in AmREIT's possession.
Events of Default. An event of default, under the terms of the Loan
Agreement, is any one of the following:
a. A default of 30 days in the payment of interest on the Notes;
b. A default of 30 days in payment, when due, of principal on the Notes;
c. AmREIT's failure to comply with any of its covenants or other
obligations under the terms of the Notes, including its obligation to maintain
current the Company's other debt, to redeem the Notes as required, or keep
and/or maintain aggregate unsecured indebtedness on the required maximum
amounts, if not cured in a timely manner;
d. If not cured in a timely manner, default under the instruments
governing any other indebtedness or any mortgage, indenture or instrument under
which there may be issued or by which there may be secured or evidenced any
other indebtedness for money borrowed by AmREIT, whether such other indebtedness
or guarantee now exists or is hereafter created, which default (a) is caused by
a failure to pay when due principal or interest on such other indebtedness
within the grace period provided and which continues beyond any applicable grace
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period (a "Payment default") or (b) results in the acceleration of such other
indebtedness prior to its express maturity, provided in each case the principal
amount of any such other indebtedness, together with the principal amount of any
other such other indebtedness under which there has been a Payment default or
the maturity of which has been so accelerated, aggregates $250,000 or more; or
e. AmREIT's bankruptcy or insolvency.
Under the terms of the Notes, "bankruptcy" or "insolvency" means (a) the
filing by AmREIT in any court, pursuant to any statute of the United States or
of any state, a petition in bankruptcy or insolvency; (b) the filing for
reorganization or for the appointment of a receiver or trustee of all or a
material portion of AmREIT's assets; (c) an assignment for the benefit of
creditors, if AmREIT admits in writing its inability to pay its debts as they
fall due; or (d) the seeking, consenting to, or acquiescing in the appointment
of a trustee, receiver or liquidator of any material portion of its property.
Bankruptcy or insolvency shall also include the filing against AmREIT, in any
court, pursuant to any statute of the United States or of any state, a petition
in bankruptcy or insolvency, or for reorganization, or for appointment of a
receiver or trustee of all or a substantial portion of AmREIT's property, if
within 90 days after such commencement of any such proceeding against AmREIT
such petition shall not have been dismissed.
Cure of Default. In order to cure payment Default, AmREIT must mail to
the Noteholders the amount of the nonpayment plus a late payment penalty equal
to simple interest on the amount unpaid at the rate of 10% per annum, measured
from the date the payment should have been mailed, deposited or credited
pursuant to the terms of the Notes until the date it actually is mailed,
deposited or credited.
Trustee in the Event of an Uncured Default. If an Event of Default occurs
and is continuing, then the Noteholders of a Majority in Interest of the
Outstanding Notes (a "Majority in Interest") may, within thirty (30) days of
such Event of Default, appoint a Trustee to represent the interests of all the
Holders pursuant to the Loan Agreement and may instruct the Trustee to declare
all the Notes to be due and payable immediately and take any action allowed by
law to collect such amounts. Upon acceptance of such appointment by the Trustee,
the operation of the trust shall commence and the power and rights of the
Trustee thereunder shall begin. If a Majority in Interest of the Noteholders
cannot agree on a Trustee, the trust will not be instituted.
AmREIT has committed to engage and pay a fee to an appropriate
unaffiliated entity, such as an accounting firm, for organizing a vote of the
Noteholders as soon as practicable upon the occurrence of an Event of Default
for the purpose of appointing a Trustee in accordance to the terms of the Loan
Agreement. The entity is not required to act as a Trustee. AmREIT must supply
such entity with the names, addresses and occurrence of any Event of Default.
AmREIT agreed to pay the reasonable expenses of any Trustee duly appointed by a
Majority in Interest of the Noteholders pursuant to the Loan Agreement.
BY EXECUTING THE SUBSCRIPTION DOCUMENT, EACH NOTEHOLDER IS AGREEING TO BE
BOUND BY THE TERMS OF THE LOAN AGREEMENT SHOULD IT COME INTO FORCE BY THE
APPOINTMENT OF A TRUSTEE PURSUANT TO ITS TERMS. EACH PROSPECTIVE INVESTOR SHOULD
CAREFULLY REVIEW THE LOAN AGREEMENT (ATTACHED AS ANNEX 3). THE FOREGOING IS ONLY
A SUMMARY OF THE PROVISIONS OF THE LOAN AGREEMENT.
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<PAGE>
Remedies in Event of Default. If any Event of Default occurs and is
continuing, a Majority in Interest may appoint a Trustee under the Loan
Agreement and may instruct the Trustee to declare all Notes to be due and
payable immediately and take any action allowed by law to collect such amounts.
Notwithstanding the foregoing, in the case of an Event of Default arising from
events of bankruptcy or insolvency, all outstanding Notes will become due and
payable without further action or notice. If an Event of Default has occurred
and is continuing, AmREIT must, upon written request of the Trustee, cure such
default and pay for the benefit of the Noteholders the whole amount then due,
any penalties which may be due and such further amount as shall be sufficient to
cover the costs and expenses of collection, including the reasonable
compensation, expenses, disbursements and advances of the Trustee, its agents
and counsel and all other amounts due to the Trustee hereunder. If AmREIT fails
to cure such defaults and pay such amounts forthwith upon such demand, the
Trustee, in its own name and as Trustee of an express trust, shall be entitled
to sue for and recover judgment against AmREIT and any other obligor on the
Notes for the amount so due and unpaid pursuant to the terms of the Notes.
A Trustee appointed under the terms of the Loan Agreement may not make
any settlement or compromise concerning the rights of the Noteholders, in regard
to payments of principal or interest, unless it is approved in a separate vote
by a Majority in Interest of the Noteholders. Any settlement or compromise so
approved would be binding upon all the Noteholders. The Trustee may withhold
from the Noteholders notice of any Default or Event of Default if it believes
that withholding notice is in their interest except a Default or Event of
Default relating to the payment of principal or interest or penalties.
NO NOTEHOLDER SHALL HAVE THE RIGHT TO INSTITUTE OR CONTINUE ANY PROCEEDING,
JUDICIAL OR OTHERWISE, WITH RESPECT TO THE LOAN AGREEMENT, THE NOTES, OR FOR THE
APPOINTMENT OF A RECEIVER OR TRUSTEE OR FOR ANY OTHER REMEDY HEREUNDER, DURING
THE PERIOD OF THE OPERATION OF THE LOAN AGREEMENT, UNLESS CERTAIN CONDITIONS, AS
SET FORTH IN THE LOAN AGREEMENT, ARE SATISFIED. The Loan Agreement requires
Noteholders who suffer an actual default on their notes to obtain the consent of
a majority of all Noteholders to appoint a Trustee and take action against
AmREIT. THIS REQUIREMENT, IN EFFECT, MAY LEAVE MANY NOTEHOLDERS WITHOUT
PRACTICAL RECOURSE.
Authority of Trustee. Under the Loan Agreement, the Trustee would be the
exclusive Trustee of the Noteholders to act for them in the event of an action
authorized by them upon the default by AmREIT. In general, the Trustee may only
act upon express written instructions by a Majority Vote of the Noteholders. The
Trustee is the sole agent authorized to present AmREIT with notices of default,
demands or requests for information on behalf of the Noteholders. The Trustee
will notify all Noteholders of any actions requested or taken by it upon the
written instructions received after a Majority Vote of the Noteholders, and any
reports or information received by it from AmREIT on behalf of the Noteholders.
The Noteholders of not less than a Majority in Interest may, on behalf of all
Noteholders, waive any past default under the Loan Agreement and settle or
compromise any claim related to the payment of principal and interest on the
outstanding Notes; provided the terms of such settlement or compromise have been
made known to all Noteholders. The rights of the Noteholders upon the occurrence
of a default, as well as a description of those actions constituting a default
under the Notes, are summarized above.
The Trustee is authorized to engage legal counsel, accountants or other
experts who are, in its judgment, reasonably required to effect the course of
action authorized. The Trustee may undertake the action directed by a Majority
Vote only if it is adequately indemnified against its costs and expense for such
action. Such indemnification would likely require the prepayment of any fees or
expenses, including legal fees, accounting fees or other professional or third
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<PAGE>
party fees reasonably required to effect the action by the Noteholders. The
Trustee is not required to advance any funds for the payment of expenses,
including attorneys' fees, on behalf of the Noteholders or to expend or risk its
own funds or otherwise incur any financial liability in the performance of any
of its duties hereunder or in the exercise of any of its rights or powers.
The Trustee has the right to be compensated in a reasonable and timely
amount for its services in connection with its actions as the Trustee, including
prior reimbursement for any costs or expenses incurred by it. The Trustee is
entitled to receive reimbursement for fees and costs incurred by it in taking
any action on behalf of the Noteholders from any proceeds realized by it in
enforcing the terms of the Notes. The Trustee's compensation for any additional
acts authorized by the Noteholders will be paid by the Noteholders in the
amounts and on the terms prescribed by the Trustee. To the extent any of these
fees or costs are incurred as the result of a default by AmREIT, AmREIT must
reimburse such amounts to the Noteholders.
The Trustee is charged to perform such duties, and only such duties, as
are specifically set forth in the Loan Agreement. The Trustee is not liable to
the Noteholders for any act taken in good faith and not involving its willful
misconduct, and the Noteholders jointly and severally agree to indemnify Trustee
and to hold it harmless against, any loss, liability or expense, incurred
without negligence or bad faith on its part, arising out of or in connection
with the acceptance or administration of the Loan Agreement. The Loan Agreement
authorizes the Trustee to act on the part of the Noteholders only to the extent
provided in the Loan Agreement. The Trustee is not empowered to, nor will it,
keep the Note registration ownership records, hold the Notes on behalf of the
Noteholders, or collect or disburse funds with respect to the Notes on behalf of
the Noteholders.
Removal, Replacement and Resignation of Trustee. The Loan Agreement
provides that the Noteholders, by a Majority Vote, may appoint and thereafter
remove and replace the Trustee upon prior written notice. The Trustee may
resign, at any time, upon prior written notice to the Noteholders and AmREIT. No
resignation or removal of the Trustee or appointment of a successor Trustee
shall become effective until the acceptance of appointment by the successor
Trustee.
Amendment of Loan Agreement and Note. The terms and conditions of the
Loan Agreement and the Notes, which constitute contractual agreements between
AmREIT and the Noteholders, may be amended or supplemented by a Majority Vote of
the Noteholders. The foregoing notwithstanding, AmREIT may, without the consent
of any Noteholder, amend or supplement the Note terms to cure any ambiguity,
defect or inconsistency, to provide for the assumption of its obligations to the
Noteholders in the case of merger or acquisition, or to make any change that
does not materially, adversely affect the rights of any Registered Noteholder.
However, without the consent of each Registered Noteholder affected, AmREIT may
not: (i) reduce the principal amount of the Notes; (ii) reduce the number of
Noteholders who must consent to an amendment of any of the Note terms; (iii)
reduce the interest rate or change the interest payment date for any Note; (iv)
reduce the principal of, or change the fixed maturity date of, any Note; or
(v) make any change in the provisions concerning waiver of a default or Event of
Default by the Noteholders or the rights of the Noteholders to receive payment
of principal or interest.
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Appraised Liquidation Value Payment Election
Any Limited Partner submitting a Partnership Consent may, on their
Partnership Consent, make the ALV Payment Election and thereby receive the
Appraised Liquidation Value for their Units if the Merger is approved and
consummated. Under this election, Limited Partners will receive, in place of
Notes or Shares, cash payment for their Units equal to their proportionate share
of their respective Partnership's ALV. Each Partnership's ALV will equal the
Appraised Value of its real property assets, adjusted for the Partnerships'
other assets, liabilities and sale and liquidation expenses of 5% of the
Appraised Value (or in the case of Funds III, IV, V and VI, the excess, if any,
of 5% of the Appraised Value over the disposition fee paid to the General
Partner in connection with the Merger).
The Appraised Value will be determined by the Appraiser, who must be an
independent real estate appraisal firm chosen by AmREIT, if and when the Merger
of the Partnership is consummated. The Appraised Value will be determined as
of July 1, 1998, the date the Merger Agreement was finalized and executed. The
Appraiser will be appointed and the Appraisal will be prepared after the
Partnership Solicitation Period Expiration Date. AmREIT will appoint an
Appraiser who is an independent expert having experience in appraising
properties similar to those of the Partnerships in the general areas where the
Partnership properties are located. AmREIT will instruct the Appraiser to
prepare the Appraisal for the benefit of the Limited Partners based on such
information deemed relevant by the Appraiser assuming an orderly liquidation
of the Partnership's assets over a 12-month period.
Promptly upon determination of the Appraised Value, the Partnership's
ALV will be determined, and the electing Limited Partners will be paid their
proportionate share of the ALV determined by the number of Units they own as
of the Effective Date, together with an additional payment equal to 6% per
annum on the ALV of their Units from the Effective Date through the date of
payment. Payment must be made prior to the first anniversary of the Effective
Date. As a condition to the Merger, AmREIT has the right to terminate the
Merger with any Partnership in which the Limited Partners holding more than
25% of the outstanding Units make the ALV Payment Election. AmREIT would, in
general, consider waiving this 25% limitation with respect to any Partnership
if the aggregate ALV Payment Elections in all Partnerships are for less than
25% of the total Units of all Participating Partnerships and management
determines AmREIT has sufficient resources to pay its obligations with
respect thereto on a timely basis.
The obligation to pay electing Limited Partners the ALV of their Units
will be an unsecured obligation of AmREIT, which will in general be pari passu
with its obligations to other unsecured creditors. Under the terms of the
Merger, AmREIT could be obligated to pay $7.5 million or more to Limited
Partners making the ALV Payment Election. AmREIT intends to pay any such
obligations from its capital reserves, operating revenues and/or proceeds
from additional financing. Management believes AmREIT will have sufficient
cash resources to pay such obligations as they are due. However, there is no
assurance it will be able to do so.
The ALV Payment Election will constitute a binding contractual agreement
whereby AmREIT agrees to pay the electing Limited Partner, and the electing
Limited Partner agrees to accept, his or her share of the respective
Partnership's ALV as full payment for his or her Units, and that he or she
will have no further right to payment or remedy in connection with the Merger.
In order to receive payment under the ALV Payment Election, a Limited Partner
must affirmatively mark the ALV Payment Election on his or her Partnership
Consent Form prior to the Partnership Solicitation Period Expiration Date.
Thus, a Limited Partner who fails to timely submit a Partnership Consent Form
will not be entitled to make the ALV Payment Election. Limited Partners will
not have the right to change their ALV Payment Election after the Partnership
Solicitation Period Expiration Date.
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<PAGE>
The Merger Consideration
Methodology. AmREIT is offering to issue Shares, or subject to the terms
and limitations described below, Notes to the Participating Partnerships based
on their respective Net Asset Value ("NAV"). The number of Shares offered to
each Partnership equals the Partnership's NAV, as adjusted on the Effective
Date, divided by the Exchange Price. Cash will be issued in lieu of fractional
Shares based on the Exchange Price.
Net Asset Values. The Net Asset Value of each Partnership equals (i) the
negotiated price of the Partnership's real estate assets (properties), plus (ii)
the Partnership's Net Cash (i.e. the excess, if any, of its cash and cash
equivalent assets over its debt) as of the Effective Date. The only material
assets of each Partnership are its properties and cash. None of the Partnerships
are expected to have any material debt at the Effective Date. The Net Asset
Values of Fund IV and Fund V will be adjusted at the closing of the Merger in an
amount equal to the reduction of the unpaid balance of the Atlas Note from June
30, 1998.
The methodology of determining the Net Asset Values of the Partnerships
were determined and agreed to by the General Partner on behalf of the
Partnerships and the Independent Directors on behalf of AmREIT. The General
Partner and the Independent Directors believe that Net Asset Value is a fair
measure of the value of the Partnerships to AmREIT in the Merger because each
Partnership's Net asset Value is directly derived from a valuation of each
Partnership's assets, which consist only of property investments, cash and
accounts receivable. Also, none of the Partnerships has significant debt and
each Partnership is anticipated to have cash and accounts receivable in excess
of its debt at the Effective Date.
The following table sets forth the real property and Net Cash components
of NAV of each Partnership calculated as if the Effective Date was June 30,
1998.
Negotiated Partnership
Price of Net Cash at Net Asset
Partnership Properties 6/30/1998 Value (NAV)
----------- ---------- --------- -----------
FUND III $1,100,000 $68,585 $1,168,585
FUND IV 500,000 23,358 523,358
FUND V 420,000 21,221 441,221
FUND VI 285,000 2,740 287,740
FUND VII 1,010,000(1) 30,461 1,040,461
FUND VIII 1,800,000(1) 48,880 1,848,880
FUND GDYR 1,090,000(1) 20,492 1,110,492
FUND IX 4,850,000 78,062 4,928,062
FUND X 10,355,000 0 10,355,000
FUND XI 6,350,000 74,748 6,424,748
--------- ------ ---------
Total $27,760,000 $368,547 $28,128,547
Other methodologies for valuing the Partnerships were not seriously
considered by the General Partner or the Independent Directors. Neither the
General Partner nor the Independent Directors could identify other acceptable
methodologies for valuation of the Partnerships for the purposes of the Merger.
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<PAGE>
Negotiated Prices. The Negotiated Prices of each Partnership's properties
were negotiated and agreed to by the General Partner on behalf of the
Partnerships and the Independent Directors on behalf of AmREIT. The Negotiated
Prices were not determined by an independent real estate appraiser. See
"RISK FACTORS" and "CONFLICTS OF INTEREST." In determining the Negotiated
Prices, the General Partner and the Independent Directors considered several
factors, including the current and projected net operating income and cash flow,
capitalization rate, market rental rates, lease expirations, and anticipated
capital expenditures for leasing and tenant improvements for each property.
In his negotiations on behalf of the Partnerships, Mr. Taylor considered
the analysis and conclusions in the Houlihan Fairness Opinions. Houlihan
calculated a range of values of each Partnership's properties, in reaching its
conclusion that the consideration to be received by the Limited Partners in
connection with the Merger is fair to the aggregate Limited Partners from a
financial point of view. With respect to Fund III, Fund IV, Fund V, Fund VI,
Fund VII and Fund GDYR, the Negotiated Price for the respective Partnership was
within the range of value derived by Houlihan in rendering its Fairness
Opinions. With respect to Fund VII, Fund IX, Fund X and Fund XI, the Negotiated
Price of each respective Partnership was above the range of value derived by
Houlihan in rendering its Fairness Opinions. The analysis and underlying
assumptions used by the General Partner in determining the price of the
Partnership was substantially the same as that used by Houlihan in rendering its
Fairness Opinions. Houlihan's Opinions are subject to certain qualifications and
limitations. See "FAIRNESS OPINIONS - The Houlihan Fairness Opinions" below. In
their negotiations on behalf of AmREIT, the Independent Directors conferred with
and considered the analysis of Bishop-Crown. See "FAIRNESS OPINIONS - the
Bishop-Crown Opinion" below.
Net Cash. A Partnership's Net Cash equals the excess, if any, of its cash
and accounts receivable over its debt as of the Effective Date. Under the Merger
Agreement, a Partnership's Net Cash cannot be negative for the purposes of the
Merger. Each of the Partnerships is anticipated to have a positive Net Cash
Balance at the Effective Date.
The Exchange Price. The Exchange Price of $9.34 per Share was determined
and agreed to by the General Partner and the Independent Directors based on the
last public offering price of $10.25 for AmREIT's common stock net of retail
commissions and certain related costs. AmREIT's last public offering ended in
May 1998. See "RISK FACTORS" and "CONFLICTS OF INTEREST."
Minimum Price. The Net Asset Value of each Partnership is subject to
adjustment for the Participating Partnerships actual Net Cash at the Effective
Date and, in the case of Fund IV and Fund V, the unpaid balance of the Atlas
Note, as of the Effective Date; provided, however, that in no event will a
Participating Partnership's NAV be adjusted to an amount less than its Minimum
Price. For the purposes of the foregoing, a Partnership's Minimum Price is the
amount set forth in the following table.
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Partnership Minimum Price
----------- -------------
FUND III $1,000,000
FUND IV 475,000
FUND V 425,000
FUND VI 275,000
FUND VII 935,000
FUND VIII 1,793,000
FUND GDYR 1,011,000
FUND IX 4,500,000
FUND X 9,600,000
FUND XI 5,500,000
The Minimum Price of each Partnership was negotiated by the General
Partner as a condition to the Merger of each Partnership. In determining the
Minimum Prices, the General Partner considered, among other things, the range of
values of the Limited Partners' interests in each Partnership in connection with
the Houlihan Fairness Opinions. See "FAIRNESS OPINIONS - The Houlihan Fairness
Opinions.
Shares Offered to the Partnerships. The following table shows the Merger
consideration in Shares offered to each Partnership in comparison to the others.
The table includes the following, calculated as if the Effective Date were June
30, 1998: (a) the NAV assigned to each of the Partnerships; (b) the percentage
of the NAV of each Partnership against the aggregate NAV of all Partnerships;
(c) the number of Shares to be allocable to each of the Partnerships based upon
its NAV and (d) the percentage of the total amount of all such Shares offered by
AmREIT.
<TABLE>
Allocation of Shares
<CAPTION>
Partnership Percentage of Total No. of Shares As Percentage
NAV at Aggregate NAV of Offered to the of Aggregate
Partnership 6/30/1998 Partnerships Partnership Shares
----------- --------- ------------ ----------- ------
<S> <C> <C> <C> <C>
FUND III $1,168,585 4.15% 125,116 4.15%
FUND IV(1) 523,358 1.86% 56,034 1.86%
FUND V(2) 441,221 1.57% 47,240 1.57%
FUND VI 287,740 1.02% 30,807 1.02%
FUND VII 1,040,461 3.70% 111,398 3.70%
FUND VIII 1,848,880 6.57% 197,953 6.57%
FUND GDYR 1,110,492 3.95% 118,896 3.95%
FUND IX 4,928,062 17.52% 527,630 17.52%
FUND X 10,355,000 36.81% 1,108,672 36.81%
FUND XI 6,424,748 22.85% 687,875 22.85%
--------- ------ ------- ------
Total $28,128,547 100.00% 3,011,621 100.00%
(1) Includes interest in Atlas Note of $105,209 at June 30, 1998.
(2) Includes interest in Atlas Note of $99,837 at June 30, 1998.
</TABLE>
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<PAGE>
A Limited Partner's Adjusted Capital as of the date stated, equals his or
her original investment, less distributions constituting a return of capital
under the respective Partnership Agreement. The General Partner believes that a
Limited Partner's Adjusted Capital is an accurate and convenient measure of his
or her remaining investment in the Partnership. See "THE PARTNERSHIPS -
Partnership Distributions."
Return to Limited Partners From the Merger. The following table sets
forth the anticipated return to the Limited Partners as a result of the Merger
based on the Exchange Price of $9.34 per Share. The Table sets forth the return
from the Merger based on the Exchange Price to the Limited Partners per $1,000
of Adjusted Capital and from the Merger plus cumulative distributions through
June 30, 1998. The returns are calculated as if the Effective Date were June 30,
1998. See "THE PARTNERSHIPS --Partnership Distributions."
<TABLE>
<CAPTION>
Return from Merger
Return from Merger as a Percentage of Cumulative Return
per $1,000 of Adjusted L.P.s Adjusted Capital Total Cumulative as a Percentage of
Partnership Capital at 6/30/1998(1) as of 6/30/1998(1) Return(1) Adjusted Capital
- ----------- ----------------------- ------------------ --------- ----------------
<S> <C> <C> <C> <C>
FUND III $1,250 125.01% $2,221,019 244.87%
FUND IV 851 85.10% 966,144 160.87%
FUND V 958 95.84% 838,146 188.69%
FUND VI 976 97.63% 523,486 180.61%
FUND VII 916 91.55% 1,900,569 171.09%
FUND VIII 987 98.73% 3,133,424 172.47%
FUND GDYR 894 89.45% 1,795,467 149.54%
FUND IX 914 91.42% 7,845,378 147.53%
FUND X 904 90.41% 14,252,494 125.60%
FUND XI 910 90.99% 7,509,261 108.08%
--- ------ --------- -------
Total $40,985,388
(1) For the purposes of calculating the return from the Merger, the Shares
are valued at the Exchange Price.
</TABLE>
The following table sets forth the return to the Limited Partners from
the Merger and from the Merger plus the cumulative return from distributions
through June 30, 1998 based on a share price of $10.25. A price of $10.25 per
share is the last price at which AmREIT offered the Shares to the public.
Returns are expressed in amounts per $1,000 of Adjusted Capital and are
calculated as if the Effective Date were June 30, 1998.
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<PAGE>
<TABLE>
<CAPTION>
Return from Merger Return from Merger Total Cumulative per
per $1,000 Adjusted as a Percentage of $1,000 of Adjusted Cumulative Return as
Capital at Share Price L.P.s Adjusted Capital Return Based on a Percentage of
Partnership of $10.25(1) Capital(1) Share Price of $10.25 Adjusted Capital
- ----------- ------------ ---------- --------------------- ----------------
<S> <C> <C> <C> <C>
FUND III $1,372 137.19% $2,581.40 258.14%
FUND IV 934 93.39% 1,691.60 169.16%
FUND V 1,052 105.17% 2,022.90 202.29%
FUND VI 1,071 107.14% 1,919.10 191.91%
FUND VII 1,005 100.47% 1,800.10 180.01%
FUND VIII 1,083 108.35% 1,824.10 182.41%
FUND GDYR 982 98.16% 1,668.80 166.88%
FUND IX 1,003 100.33% 1,564.40 156.44%
FUND X 992 99.22% 1,344.10 134.41%
FUND XI 999 99.85% 1,169.40 116.94%
---- ------ -------- -------
(1) For the purposes of calculating the return from the Merger, the Shares are valued at the Exchange
Price.
</TABLE>
Distribution Comparison. The following table sets forth the distributions
paid by each Partnership to its Limited Partners during the year ended December
31, 1997 with respect to a $1,000 original investment in the Partnership and the
dividends which would have been paid by AmREIT during the year ended December
31, 1997 had the Shares to be received by the Limited Partner in the Merger for
such $1,000 original investment been owned during that period.
Partnership Distributions Dividends Declared During
Declared During Year Ended Year Ended 12/31/1997 on
12/31/1997 Shares Received in Merger Per
Partnership Per $1,000 Investment $1,000 of Adjusted Capital
- ----------- --------------------- --------------------------
FUND III $96.53 $91.37
FUND IV 62.00 63.02
FUND V 83.00 69.47
FUND VI 80.00 73.51
FUND VII 83.00 69.54
FUND VIII 86.00 74.08
FUND GDYR 81.67 66.93
FUND IX 85.55 69.62
FUND X 81.73 69.28
FUND XI 69.14 69.31
Allocation of the Notes. Subject to the Note Restriction, the Limited
Partners may elect to receive Notes in place of Shares in the Merger and
Dissenting Limited Partners will receive Notes in the Merger unless they elect
to receive Shares. The principal amount of Notes are offered to the Limited
Partners based on their Partnership's NAV on the Effective Date, subject to the
Note Restriction. The following table sets forth the calculation of the maximum
principal amount of Notes offered to the Limited partners of each Partnership
calculated as if the Effective Date were June 30, 1998.
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<PAGE>
Net Asset Value Max. Principal Amount
Partnership at 6/30/1998 of Notes Offered (2)
- ----------- ------------- --------------------
FUND III $1,168,585 $409,005
FUND IV 523,358 183,175
FUND V 441,221 154,427
FUND VI 287,740 100,709
FUND VII (1) 1,040,461 364,161
FUND VIII (1) 1,848,880 647,108
FUND GDYR (1) 1,110,492 388,672
FUND IX 4,928,062 1,724,822
FUND X 10,355,000 3,624,250
FUND XI 6,424,748 2,248,662
--------- ---------
Total $28,128,547 $9,844,991
(1) Net Cash is net of 3.0% Disposition fee.
(2) Equals 35% of Partnerships' NAV.
The following table sets forth the principle amount of the Notes offered
to the Limited Partners of each Partnership per Unit and per $1,000 of their
original investment calculated as if the Effective Date were June 30, 1998.
Principal Amount of Note
Offered per:
------------------------------
Maximum Principal Percent of
Amount of Notes $1,000 Orig. Orig. $1000
Partnership Offered L.P. Unit Investment Investment
- ----------- ------- --------- ---------- ----------
FUND III $409,005 $37,098 $1,237 123.66%
FUND IV 183,175 25,530 851 85.10%
FUND V 154,427 27,576 919 91.92%
FUND VI 100,709 28,774 959 95.91%
FUND VII 364,161 27,743 925 92.48%
FUND VIII 647,108 29,821 994 99.40%
FUND GDYR 388,672 24,955 832 83.18%
FUND IX 1,724,822 914 914 91.42%
FUND X 3,624,250 904 904 90.41%
FUND XI 2,248,662 910 910 90.99%
--------- --- --- ------
Total $9,844,991
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Shares Issuable to the General Partners. The General Partner will also
receive Shares in exchange for his general partnership interests in the
following Partnerships:
Consideration Allocation
Paid of Shares
---- ---------
FUND VII $10,405 1,114
FUND VIII 18,489 1,980
FUND GDYR 11,105 1,189
------ -----
Total $39,999 4,282
In addition to the foregoing shares, the general partners have agreed to
purchase shares at the Exchange Price with the proceeds received from any
disposition fees otherwise payable to them by certain Partnerships as a result
of the Merger. The following table sets forth the amounts of disposition fees
and the number of shares the General Partner will purchase under this agreeemnt.
Amount of No. of Shares
Partnership Disposition Fee Received
- ----------- --------------- --------
FUND III $33,000 3,533
FUND IV 15,000 1,606
FUND V 12,600 1,349
FUND VI 8,550 915
----- ---
Total $69,150 7,403
For each Partnership, the disposition fee equals 3.0% of the Negotiated ]
Price of the Partnerships' properties.
Fiduciary Responsibility
Officers and Directors of AmREIT. The Directors are accountable to AmREIT
and its shareholders as fiduciaries and must perform their duties in good faith,
in a manner believed to be in the best interests of AmREIT and its shareholders
and with such care, including reasonable inquiry, as an ordinarily prudent
person in a like position would use under similar circumstances. AmREIT's
Charter provides that no Manager or officer of AmREIT shall be liable to AmREIT
for any act, omission, loss, damage, or expense arising from the performance of
his or her duties under AmREIT save only for his or her own willful misfeasance
or malfeasance or negligence. In discharging their duties to AmREIT, Directors
and officers of AmREIT shall be entitled to rely upon experts and other matters
as provided in the Maryland General Corporation Law (the "MGCL") and AmREIT's
Bylaws. The Charter provides that AmREIT will indemnify its Directors and
officers to the fullest extent permitted under the MGCL. Pursuant to the Charter
and the MGCL, AmREIT will indemnify each Manager and officer against any
liability and related expenses (including attorneys' fees) incurred in
connection with any proceeding in which he or she may be involved by reason of
serving in such capacity so long as he or she acted in good faith and in a
manner he or she reasonably believed to be in or not opposed to the best
interest of AmREIT, and, with respect to any criminal action or proceeding, had
no reasonable cause to believe his or her conduct was unlawful. A Manager and
officer is also entitled to indemnification against expenses incurred in any
action or suit by or in the right of AmREIT to procure a judgment in its favor
by reason of serving in such capacity if he or she acted in good faith and in a
manner reasonably believed to be in or not opposed to the best interests of
AmREIT, except that no such indemnification will be made if he or she is judged
to be liable to AmREIT, unless the applicable court of law determines that
despite the adjudication of liability the Manager or officer is reasonably
entitled to indemnification for such expenses.
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The Charter authorizes AmREIT to advance reasonable funds to a Manager or
officer for costs and expenses (including attorneys' fees) incurred in a suit or
proceeding upon receipt of an undertaking by such Manager or officer to repay
such amounts if it is ultimately determined that he or she is not entitled to be
indemnified. AmREIT has entered into agreements with its Directors and executive
officers, indemnifying them to the fullest extent permitted by the MGCL.
Shareholders may have more limited recourse against such persons than would
apply absent these provisions and agreements. To the extent that the foregoing
provisions concerning indemnification apply to actions arising under the
Securities Act, AmREIT has been advised that, in the opinion of the Commission,
such provisions are contrary to public policy and therefore are not enforceable.
AmREIT intends to obtain and maintain insurance indemnifying the Directors and
officers against certain civil liabilities, including liabilities under the
federal securities laws, which might be incurred by them in such capacity.
General Partners of the Partnerships. Under both Nebraska and Texas and
partnership law, the general partners are accountable to the Partnerships as
fiduciaries and are required to exercise good faith and integrity in all their
dealings in the Partnership's affairs. The Partnership Agreements generally
provide that neither the general partners nor any of their Affiliates performing
services on behalf of the Partnerships will be liable to the Partnership or any
of the Limited Partners for any act or omission by any such person performed in
good faith pursuant to authority granted to such person by the Partnership
Agreements, or in accordance with its provisions, and any manner reasonably
believed by such person to be within the scope of authority granted to such
person and in the best interests of the Partnership provided that such act or
omission did not constitute fraud, misconduct, bad faith or negligence. As a
result, Limited Partners might have a more limited right of action in certain
circumstances than they would have in the absence of such a provision in the
Partnership Agreements.
The Partnership Agreements also generally provide that the general
partners and certain related parties are indemnified from losses relating to
acts performed or failures to act in connection with the business of the
Partnerships (except to the extent indemnification is prohibited by law)
provided that such person determined in good faith that the course of conduct
did not constitute fraud, negligence or misconduct. Notwithstanding the
foregoing, none of the above-mentioned persons is to be indemnified by the
Partnerships from liability, loss, damage, cost or expense incurred in
connection with any claim involving allegations that such person violated
federal or state securities laws unless (a) there has been a successful
adjudication on the merits of the claims of each count involving alleged
securities law violations as to the person seeking indemnification and the court
approves indemnification of the litigation costs, (b) such claims have been
dismissed with prejudice on the merits by a court of competent jurisdiction and
the court approves indemnification of the litigation costs, or (c) a court of
competent jurisdiction has approved a settlement of the claims against the
person seeking indemnification and finds that indemnification of the settlement
and related costs should be made. In each of the foregoing situations, the court
of law considering the request for indemnification must be advised as to the
position of the Commission, and any other applicable regulatory authority
regarding indemnification for violations of securities laws. Indemnification may
not be enforceable as to certain liabilities arising from claims under the
Securities Act and state securities laws; and, in the opinion of the Commission,
such indemnification is contrary to public policy and is therefore
unenforceable. For purposes of the foregoing, the affiliates of the general
partners will be indemnified only when operating within the scope of the general
partners' authority. Any claim for indemnification under the Partnership
Agreement will be satisfied only out of the assets of the Partnership and no
Limited Partner will have any personal liability to satisfy an indemnification
claim made against the Partnership.
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The Partnerships may also advance funds to a person indemnified under the
Partnership Agreements for legal expenses incurred as a result of legal action
brought against such person if such person undertakes to repay the advanced
funds to the Partnership if it is subsequently determined that such person is
not entitled to indemnification. The Partnerships do not pay for any insurance
covering liability of the general partners or any other indemnified person for
acts or omissions for which indemnification is not permitted by the Partnership
Agreements, although the general partners may be named as additional insured
parties on policies obtained for the benefit of the Partnership if there is no
additional cost to such Partnership. As part of its assumption of liabilities in
the Merger, AmREIT will indemnify the general partners and their affiliates for
periods prior to and following the Merger to the extent of the indemnity under
the terms of the Partnership Agreements and applicable law.
Share Market Prices and Distributions
The Market Price of the Shares. The Shares are not listed or traded on
any national securities exchange or quoted on Nasdaq, nor will the Shares be
traded in any such secondary market upon consummation of the Merger. Secondary
sales of the Shares have been limited and sporadic and management is unaware of
the price and terms of any such sales to the extent they have occurred. In
general, management monitors such transfers only with respect to their volume.
The offering price of the common stock in AmREIT's most recent public offering
was $10.25 per share.
AmREIT Distributions. The following table sets forth the amount and dates
of the distributions made by AmREIT through June 30, 1998.
Amount Payment Date Amount Payment Date
- ------ ------------ ------ ------------
$0.0950 June 30, 1994 $0.1800 March 31, 1997
$0.10245 September 30, 1994 $0.18025 June 30, 1997
$0.15305 December 31, 1994 $0.18051 September 30, 1997
$0.15625 March 31,1995 $0.1807 December 31, 1997
$0.15783 June 30, 1995 $0.1809 March 31, 1998
$0.15795 September 30, 1995 $0.1809 June 30, 1998
$0.1690 December 31, 1995
$0.17524 March 31, 1996
$0.17615 June 30, 1996
$0.1770 September 30, 1996
$0.17938 December 31, 1996
AmREIT intends to evaluate future distributions on a quarterly basis.
Market Price of the Limited Partner Units. The Units are not listed on
any national securities exchange or quoted on Nasdaq, and there is no
established public trading market for the Units. Secondary sales activity for
the Units has been limited and sporadic. Also, a number of these transfers were
between the same beneficial owner(s), family members or related persons and
cannot be considered sales at prevailing market prices. The General Partner
monitors transfers of the Units (i) because the admission of the transferee as a
substitute Limited Partner requires the consent of the general partners under
each Partnership Agreement; and/or (ii) in order to track compliance with safe
harbor provisions to avoid treatment as a "publicly traded partnership" for tax
purposes. It should be noted that some transactions may not be reflected on the
records of the Partnerships. Based upon the transfer records of the
Partnerships, the General Partner is not aware of the price or terms of such
transfers.
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Effective Time of the Merger
As soon as practicable after satisfaction of all conditions to
consummation of the Merger (see "THE MERGER -- Conditions to Consummation of the
Merger"), the parties will file articles of merger with the Clerk of Harris
County and articles of merger with the respective secretaries of state of Texas
and of the states of organization of the respective Partnerships. The foregoing,
not withstanding, The Merger Effective Date will be delayed to the extent
required or deemed advisable under any Partnerships' Partnership Agreement. For
Texas state law purposes, the Merger will become effective upon the later of
the filing of the articles of merger described above, or at such later time
which AmREIT and the General Partner shall have agreed upon and designated in
such filings in accordance with applicable law. For accounting purposes, the
parties may agree to make the Merger effective as of a date prior to such
effective date (the'Effective Time"). AmREIT has the right, acting unilaterally
so long as it has not willfully and materially breached the Merger
Agreement, to terminate the Merger Agreement should the Merger not be
consummated by the close of business on March 31, 1999. Until the Effective
Time of the Merger, the Limited Partners will retain their rights as
Limited Partners of their respective Partnerships to vote on matters submitted
to them. See "THE MERGER--Termination; Extension, Waiver and Amendment."
Management, Operations and Headquarters after the Merger
Following the Merger, the Directors of AmREIT prior to the Merger will
continue to serve as Directors of AmREIT. The executive officers of AmREIT prior
to the Merger will continue to serve as the executive officers of AmREIT after
the Merger.
Following the Merger, the headquarters of AmREIT will continue to be
located at 8 Greenway Plaza, Suite 824, Houston, Texas 77046.
Conditions to Consummation of the Merger
The respective obligations of AmREIT and the Partnerships to effect the
Merger are subject to the satisfaction of certain conditions (none of which may
be waived), including the following: (i) the Merger Agreement and the
transactions contemplated thereby shall have been approved by the shareholders
of AmREIT and the Limited Partners of the Participating Partnerships; (ii) the
California Commissioner of Corporations shall have issued a permit for the
issuance of the Shares and the Notes based on his determination following the
California fairness hearing that such issuance is fair, just and equitable;
(iii) the Definitive Joint Proxy and Consent Solicitation Statement and
Prospectus shall have been timely filed with the Commission and all necessary
state securities laws or "Blue Sky" permits or approvals required to carry out
the transactions contemplated by the Merger Agreement shall have been
obtained and no stop order with respect to any of the foregoing shall be in
effect; (iv) none of the parties shall be subject to an order or injunction of
a court of competent jurisdiction or other legal prohibition which prohibits
the consummation of the transactions contemplated by the Merger Agreement; and
(v) all material actions by or in respect of or filings with any governmental
entity required for consummation of the Merger and related transactions shall
have been obtained or made.
Consummation of the Merger is also subject to the satisfaction or waiver
of certain other conditions specified in the Merger Agreement, including, among
others: (i) the representations and warranties in the Merger Agreement of each
of the parties shall be true and correct as of the Closing Date; (ii) each party
shall have performed its obligations contained in the Merger Agreement at or
prior to the Effective Time; (iii) from and after the date of the Merger
Agreement there shall not have occurred any change in the financial condition,
business or operations of either party that would have or would be reasonably
likely to have a material adverse effect on the business, results of operations
or financial condition of such party; (iv) each party shall have received an
opinion of counsel; and (v) each party shall have obtained all consents and
waivers from third parties necessary to consummate the Merger and related
transactions.
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The parties may waive one or more of the foregoing conditions to the
Merger except that if such waiver involves a material change to the terms of the
Merger, the parties shall resolicit Consents from the waiving party's
shareholders or Limited Partners, as applicable.
If nine of the ten Partnerships do not approve the Merger, AmREIT has the
right, but not the obligation, to consummate the Merger with the one
Participating Partnership. See "THE MERGER --Conditions to Consummation of the
Merger."
Conduct of Business Pending the Merger
During the period from the date of the Merger Agreement to its effective
date, the parties have agreed to carry on their respective business in the
usual, regular and ordinary course in substantially the same manner as
previously conducted and, to the extent consistent therewith, use commercially
reasonable efforts to preserve in tact their respective current business
organizations, goodwill and ongoing business. The parties also agreed, except as
disclosed to the other party or in certain limited circumstances specified
therein, that they shall:
(1) Use their reasonable efforts, and shall cause each of their
respective subsidiaries to use their reasonable efforts, to
preserve intact their business organizations and goodwill and keep
available the services of their respective officers and employees.
(2) Except for the continuing payment of quarterly distributions at a
rate not exceeding its respective current annual rate, no party to
the Merger shall make any distributions or dividends payable with
respect to the Shares and Units.
(3) Confer on a regular basis with one or more representatives of the
other to report operational matters of materiality and any
proposals to engage in material transactions.
(4) Promptly deliver to the other true and correct copies of any
report, statement or schedule filed with the Commission.
(5) Promptly notify the other of any material emergency or other
material change in the condition (financial or otherwise) of the
business, properties, assets or liabilities, or any material
governmental complaints, investigations or hearings (or
communications indicating that the same may be contemplated), or
the breach in any material respect of any representation,
warranty, covenant or agreement contained therein.
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Prior to the Effective Time, except as otherwise disclosed pursuant to
the Merger Agreement, unless AmREIT has consented (such consent not to be
unreasonably withheld or delayed) in writing thereto, each Partnership:
(1) Shall conduct its operations according to its usual, regular and
ordinary course in substantially the same manner as conducted.
(2) Shall not amend its Partnership Agreement.
(3) Shall not (i) except pursuant to the exercise of options,
warrants, conversion rights and other contractual rights existing
on the date of the Merger Agreement hereof and disclosed pursuant
to the Merger Agreement, issue any Units, make any distribution,
effect any recapitalization or other similar transaction; (ii)
grant, confer or award any option, warrant, conversion right or
other right not existing on the date of the Merger Agreement to
acquire any Units; (iii) increase any compensation or enter into
or amend any employment agreement with the General Partner or his
Affiliates; or (iv) adopt any new employee benefit plan or amend
any existing employee benefit plan in any material respect, except
for changes which are less favorable to participants in such
plans.
(4) Shall not directly or indirectly redeem, purchase or otherwise
acquire any Units or make any commitment for any such action.
(5) Shall not sell or otherwise dispose of (i) any Partnership
properties; or (ii) except in the ordinary course of business, any
of its other assets which are material, individually or in the
aggregate.
(6) Shall not make any loans, advances or capital contributions to, or
investments in, any other person.
(7) Shall not pay, discharge or satisfy any claims, liabilities or
obligations (absolute, accrued, asserted or unasserted, contingent
or otherwise), other than the payment, discharge or satisfaction
in the ordinary course of business consistent with past practice
or in accordance with their terms, of liabilities reflected or
reserved against in, or contemplated by, the most recent
consolidated financial statements (or the notes thereto) of each
Partnership included in the Partnership's filings with the
Commission or incurred in the ordinary course of business
consistent with past practice.
(8) Shall not enter into any commitment which individually may result
in total payments or liability by or to it in excess of $10,000
(or 5% of its Net Asset Value, if less) in the case of any one
commitment or in excess of $20,000 (or 10% of its Net Asset Value,
if less) for all commitments.
(9) Shall not, and shall not permit any of its subsidiaries to, enter
into any commitment with any officer, director or affiliate of the
Partnership or the General Partner or his affiliates except to the
extent the same occur in the ordinary course of business
consistent with past practice and would not have a Partnership
Material Adverse Effect (as defined in the Merger Agreement).
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(10) Shall not enter into or terminate any lease representing annual
revenues of $100,000 or more (or 5% of its Net Asset Value, if
less).
Prior to the Effective Time, except as may be otherwise disclosed
pursuant to the Merger Agreement, unless each Partnership has consented (such
consent not to be unreasonably withheld or delayed) in writing thereto, AmREIT:
(1) Shall, and shall cause each of its subsidiaries to, conduct its
operations according to their usual, regular and ordinary course
in substantially the same manner as heretofore conducted.
(2) Shall not amend its Articles of Incorporation or Bylaws.
(3) Shall not (i) except pursuant to the exercise of options,
warrants, conversion rights and other contractual rights
(including AmREIT's existing dividend reinvestment plan) existing
on the date of the Merger Agreement and disclosed pursuant to the
Merger Agreement, issue any shares of its capital stock, effect
any share split, reverse share split, share dividend,
recapitalization or other similar transaction; (ii) grant, confer
or award any option, warrant, conversion right or other right not
existing on the date hereof to acquire any shares of its capital
shares (except pursuant to any employee incentive plan approved by
shareholders); (iii) amend any employment agreement with any of
its present or future officers or Independent Directors; or (iv)
adopt any new employee benefit plan (including any share option,
share benefit or share purchase plan).
(4) Shall not declare, except as provided above for the continuing
payment of quarterly dividends, set aside or pay any dividend or
make any other distribution or payment with respect to any Shares
or directly or indirectly redeem, purchase or otherwise acquire
any Shares or capital stock of any of its subsidiaries, or make
any commitment for any such action.
(5) Shall not, and shall not permit any of its subsidiaries to, sell
or otherwise dispose of (i) any properties or any of its capital
stock of or other interests in subsidiaries or (ii) except in the
ordinary course of business, any of its other assets which are
material, individually or in the aggregate.
(6) Shall not, and shall not permit any of its subsidiaries to, except
in the ordinary course of business, make any loans, advances or
capital contributions to, or investments in, any other person
other than in connection with the sale of properties.
(7) Shall not, and shall not permit any of its subsidiaries to pay,
discharge or satisfy any claims, liabilities or obligations
(absolute, accrued, asserted or unasserted, contingent or
otherwise), other than the payment, discharge or satisfaction in
the ordinary course of business consistent with past practice or
in accordance with their terms, of liabilities reflected or
reserved against in, or contemplated by, the most recent
consolidated financial statements (or the notes thereto) of AmREIT
included in its reports filed with the Commission or incurred in
the ordinary course of business consistent with past practice.
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(8) Shall not, and shall not permit any of its subsidiaries to, enter
into any commitment which individually may result in total
payments or liability by or to it in excess of $50,000 in the case
of any one commitment or in excess of $250,000 for all
commitments, except for those commitments in connection with the
acquisition and/or development of property disclosed in the AmREIT
Disclosure Letter (as defined in the Merger Agreement); and
(9) Shall not, and shall not permit any of its subsidiaries to, enter
into any commitment with any officer, Independent Director or
Affiliate of AmREIT or any of its subsidiaries, except as provided
in the Merger Agreement or except in the ordinary course of
business.
For purposes of the Merger Agreement, any consent shall be deemed to be
unreasonably delayed if notice of consent or withholding of consent is not
received within three days of request. For the purposes of the foregoing,
consents on behalf of the Partnership may be given by the General Partner and
consents on behalf of AmREIT must be given by the AmREIT Board with Mr. Taylor
abstaining.
Acquisition Proposals
Prior to the Effective Time, each Partnership and AmREIT agreed (i) that
neither of them nor any of their subsidiaries shall, and each of them shall
direct and use its best efforts to cause its respective officers, general
partners, Limited Partners, Independent Directors, employees, agents, affiliates
and representative (including, without limitation, any investment banker,
attorney or accountant retained by it or any of its subsidiaries), as
applicable, not to initiate, solicit or encourage directly or indirectly any
inquiries or the making or implementation of any proposal or offer (including,
without limitation any proposal or offer to its shareholders or limited
partners) with respect to a merger, acquisition, tender offer, exchange offer,
consolidation or similar transaction involving, or any purchase of all or any
significant portion of the assets or any equity securities (or any debt
securities convertible into equity securities) of such party or any of its
subsidiaries, other than the transactions contemplated by the Merger Agreement
(any such proposal or offer being hereinafter referred to as an "Acquisition
Proposal"), or engage in any negotiations concerning, provide any confidential
information or data to, or have any discussions with, any person relating to an
Acquisition Proposal, or otherwise facilitate any effort or attempt to make or
implement an Acquisition Proposal; (ii) that it will immediately cease and cause
to be terminated any existing activities, discussions or negotiations with any
parties conducted heretofore with respect to any of the foregoing and each will
take the necessary steps to inform the individuals or entities referred to above
of the undertaken obligations; and (iii) that it will notify the other party
immediately if any such inquiries or proposals are received by, any such
information is requested from, or any such negotiations or discussions are
sought to be initiated or continued with, it. However, nothing contained in the
Merger Agreement prohibits the General Partner or AmREIT Board from (x)
furnishing information to or entering into discussions or negotiations with any
person or entity that makes an unsolicited bona fide Acquisition Proposal, if,
and only to the extent that (A) the General Partner or AmREIT Board, as
applicable, determines in good faith that such action is required for it to
comply with his or its fiduciary duties to Limited Partners or shareholders,
respectively, imposed by law as advised by counsel, (B) prior to furnishing such
information to or entering into discussions or negotiations with, such person or
entity, such party provides written notice to the other party to the Merger
Agreement to the effect that it is furnishing information to, or entering into
discussions with, such person or entity, and (C) subject to any confidentiality
agreement with such person or entity (which such party determined in good faith
was required to be executed in order for the General Partner or AmREIT Board, as
applicable, to comply with his or its fiduciary duties to the Limited Partners
or shareholders, respectively, imposed by law as advised by counsel), such party
keeps the other party to the Merger Agreement informed of the status (but not
the terms) of any such discussions or negotiations; and (y) to the extent
applicable, complying with Rule 14e-2 promulgated under the Exchange Act with
regard to an Acquisition Proposal.
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Termination; Extension, Waiver and Amendment
Termination by Mutual Consent. The Merger Agreement may be terminated and
the Merger may be abandoned at any time prior to the Effective Time, before or
after the approval of this Agreement by the Limited Partners of a Partnership or
the shareholders of AmREIT by the mutual written consent of AmREIT and the
Partnership.
Termination by Either AmREIT or a Partnership. The Merger Agreement may
be terminated and the Merger may be abandoned by action of the General Partner
for any Partnership or the Independent Directors for AmREIT only for good
reason. Under the Merger Agreement, only the following constitutes "good
reason":
(i) By either AmREIT or the Partnership if the Merger shall not
have been consummated by December 31, 1998;
(ii) By AmREIT if the approval of the Limited Partners of a
Partnership shall not have been obtained as required under
the Merger Agreement;
(iii) By the Partnership if the approval of the shareholders of
AmREIT shall not have been obtained as required under the
Merger Agreement;
(iv) By either AmREIT or the Partnership upon a Change In
Control, as defined below, of the other;
(v) By either AmREIT or the Partnership if there has been a
breach by the other of any representation or warranty
contained in the Merger Agreement, or if either determines
in good faith that facts or circumstances of which it had no
previous knowledge, which would have or would be reasonably
likely to have AmREIT Material Adverse Effect or a
Partnership Material Adverse Effect, as the case may be,
which breach is not cured within 30 days after written
notice of such breach is given to the breaching party by the
non-breaching party;
(vi) By either AmREIT or the Partnership if there has been a
material breach of any of the covenants or agreements set
forth in the Merger Agreement by the other, which breach is
not curable or, if curable, is not cured within 30 days
after written notice of such breach is given to the
breaching party by the non breaching party;
(vii) By the Partnership if in the exercise of his good faith
judgment as to his fiduciary duties as imposed by law, and
as advised by counsel, the General Partner determines that
such termination is required by reason of a Partnership
Acquisition Proposal being made;
(viii) By AmREIT if, in the exercise of its good faith judgment as
to its fiduciary duties as imposed by law, and as advised by
counsel, the Independent Directors determine that such
termination is required by reason of an AmREIT Acquisition
Proposal being made; or
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(ix) By either AmREIT or the Partnership if a United States
federal or state court of competent jurisdiction or United
States federal or state governmental, regulatory or
administrative agency or commission shall have issued an
order, decree or ruling or taken any other action
permanently restraining, enjoining or otherwise prohibiting
the transactions contemplated by the Merger Agreement and
such order, decree, ruling or other action shall have become
final and non-appealable, provided that the party seeking
to terminate the Merger Agreement shall have used all
reasonable efforts to remove such order, decree, ruling or
injunction.
Effect of Termination and Abandonment
If an election to terminate the Merger Agreement is made by the
Partnership (i) other than for "good reason" or (ii) for good reason pursuant to
paragraph (vii) above, and a Partnership Acquisition Proposal shall have been
made and, within one year from the date of such termination, the Partnership
consummates a Partnership Acquisition Proposal or enters into an agreement to
consummate a Partnership Acquisition Proposal to be subsequently consummated,
the Partnership shall pay as liquidated damages (not as a penalty or forfeiture)
to AmREIT, provided that AmREIT was not in material breach of its obligations at
the time of such termination, an amount equal to the lesser of (x) the
Partnership's Proportionate Share of $500,000 (The "AmREIT Liquidated Damages
Amount") and (y) the sum of (1) the maximum amount that can be paid to AmREIT
without causing AmREIT to fail to meet the requirements of Sections 856(c)(2)
and (3) of the Code determined as if the payment of such amount did not
constitute income described in Sections 856(c)(2)(A)-(H) and 856(c)(3)(A)-(I) of
the Code ("Qualifying Income"), as determined by AmREIT's certified public
accountants plus (2) an amount equal to the AmREIT' Liquidated Damages Amount
less the amount payable under clause (1) above in the event the REIT receives a
letter from its counsel indicating that it has received a ruling from the IRS to
the effect that the AmREIT Liquidated Damages Amount payment constitutes
Qualifying Income. In addition to the AmREIT Liquidated Damages Amount, AmREIT
shall be entitled to receive from the Partnership (or its successor in interest)
all documented out-of-pocket costs and expenses incurred by it, up to a maximum
of the Partnership's Proportionate Share of Expenses of AmREIT Expenses. The
payments to which AmREIT is entitled as described above shall be its sole remedy
with respect to the termination of the Merger Agreement under the circumstances
contemplated above.
If an election to terminate the Merger Agreement is made because of a
Partnership Material Adverse Effect under paragraph (v) above, the Partnership
shall, provided that AmREIT was not in material breach of its obligations at the
time of such termination, pay AmREIT for the AmREIT Expenses, up to a maximum of
the Partnership's Proportionate Share thereof (although it shall not be required
to pay AmREIT Liquidated Damages Amount), which payment of the AmREIT Expenses
shall be AmREIT's sole remedy for termination of the Merger Agreement in such
circumstances.
If an election to terminate the Merger Agreement is made by the REIT (i)
other than for good reason or (ii) for good reason pursuant to paragraph (viii)
above and, within one year from the date of such termination, AmREIT consummates
an AmREIT Acquisition Proposal or enters into an agreement to consummate an
AmREIT Acquisition Proposal to be subsequently consummated; AmREIT shall pay
liquidated damages (not as a penalty or forfeiture) to the Partnership, provided
that the Partnership was not in material breach of its obligations at the time
of such termination. Such liquidated damages shall be in an amount equal to 120%
of the Partnership's Proportionate Share of the Partnership Merger Expenses (the
"Partnership Liquidated Damages Amount"). The payments to which the Partnership
is entitled as described above shall be its sole remedy with respect to the
termination of the Merger Agreement under the circumstances contemplated above.
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If an election to terminate the Merger Agreement is made by the
Partnership pursuant to paragraph (v) above because of an AmREIT Material
Adverse Effect, AmREIT shall, provided that the Partnership was not in material
breach of its obligations at the time of such termination, pay the Partnership
for the Proportionate Share of the Partnership Expenses, up to a maximum amount
equal to the amount of the Partnership's Proportionate Share of the Partnership
Merger Expenses and (although it shall not be required to pay the
Partnership Liquidated Damages Amount), which payment shall be the Partnership's
sole remedy for termination of the Merger Agreement in such circumstances.
If the Merger Agreement is terminated by either party pursuant to
paragraph (iv) or paragraph (vi) above, the non-terminating party shall,
provided that the terminating party was not in material breach of its
obligations at the time of such termination, pay the terminating party (x) in
the case of termination by the Partnership the Partnership Liquidated Damages
Amount, and in the case of termination by AmREIT, the AmREIT Liquidated Damages
Amount, plus (y) an amount equal to the terminating parties' Proportionate Share
of the Merger Expenses and (z) the non-terminating party shall remain liable to
the terminating party for its breach.
If this Agreement is terminated pursuant to paragraph (i) or paragraph
(ix) above, AmREIT shall, provided that the Partnership was not in material
breach of its obligations hereunder at the time of such termination, pay the
Partnership an amount equal to the Partnership's Proportionate Share of the
Partnership Expenses, which payment shall be the Partnership's sole remedy for
termination of the Agreement in such circumstances.
If an election to terminate this Agreement is made pursuant to paragraphs
(i), (ii) or (iii) above, and a Partnership Acquisition Proposal or an AmREIT
Acquisition Proposal shall have been made and, within one year from the date of
such termination, the non-nominating party consummates such Acquisition Proposal
or enters into an agreement to consummate such Acquisition Proposal which is
subsequently consummated, the non-terminating party shall pay to the terminating
party, provided that the terminating party was not in material breach of its
obligations hereunder at the time of such termination, as liquidated damages and
not as a penalty or forfeiture, an amount equal to (x) in the case of
termination by the Partnership, the Partnership Liquidated Damages Amount, and
in the case of termination by AmREIT, the AmREIT Liquidated Damages Amount, plus
(y) its Proportionate Share of the Merger Expenses. In addition to such amount,
the terminating party shall be entitled to receive from the non-terminating
party (or its successor in interest) all of its documented out-of-pocket costs
and expenses in connection with this Agreement and the transactions contemplated
thereby. Such payments to which the terminating party shall be its sole remedy
with respect to the termination of the Agreement.
The Partnership agrees to amend the Merger Agreement at the request of
AmREIT in order to (x) maximize the portion of the AmREIT Liquidated Damages
Amount that may be distributed to AmREIT without causing AmREIT to fail to meet
the requirements of Sections 856(c)(2) and (3) of the Code or (y) improve
AmREIT's chances of securing a favorable ruling described in this Section 9.3,
provided that no such amendment may result in any additional cost or expense to
such other party.
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If either party willfully fails to perform its duties and obligations
under this Agreement, the non-breaching party is additionally entitled to all
remedies available to it at law or in equity and to recover its expenses from
the breaching party. In the event the REIT or the Partnership is required to
file suit to seek all or a portion of such Liquidated Damages Amount, and it
ultimately succeeds, it shall be entitled to all expenses, including attorney's
fees and expenses, which it has incurred in enforcing its right hereunder.
Extension; Waiver
At any time prior to the Effective Time, either party, by action taken by
the AmREIT Board or the General Partner, as applicable, may, to the extent
legally allowed, (i) extend the time for the performance of any of the
obligations or other acts of the other parties hereto; (ii) waive any
inaccuracies in the representations and warranties made to such party contained
in the Merger Agreement or in any document delivered pursuant hereto; and (iii)
waive compliance with any of the agreements or conditions for the benefit of
such party contained herein. Any agreement on the part of a party hereto to any
such extension or waiver shall be valid only if set forth in an instrument in
writing signed on behalf of such party.
Proposed Amendments to Partnership Agreements
The Limited Partners of each Partnership are being asked to consider and
vote upon the Partnership Amendments which authorize the following: (i) the
Merger of each Partnership with and into AmREIT, whether or not AmREIT would be
regarded as a Affiliate of the general partners; and (ii) such other actions as
may be necessary under or contemplated by the Merger Agreement or this
Prospectus, irrespective of any provisions in the Partnership Agreements which
might otherwise prohibit such actions. Limited Partners voting in favor of the
Merger will be deemed to have voted in favor of their respective Partnership
Amendments. Since a majority vote of the Limited Partners is required to approve
the Partnership Amendments, a majority vote is required to approve the Merger.
The amendments will not be effective as to any Partnership that does not
participate in the Merger.
The Partnership Agreements of the Partnerships do not explicitly provide
that the Partnerships can merge with and into another entity. Also, the
Partnership Agreements each place certain prohibitions on the general partners
from entering into various agreements, contracts or arrangements for and on
behalf of the Partnerships with the general partners, their Affiliates or
otherwise. The respective general partners are proposing the Partnership
Amendments to empower and expressly permit them, for the benefit and on behalf
of each respective Partnership, to consummate the Merger. The Merger Agreement
cannot be effected unless and until such proposed amendments are adopted.
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Proposed AmREIT Bylaw Amendment
At the AmREIT Meeting, the AmREIT Shareholders will be asked to consider
and vote on a Merger proposal which would allow the Board of Directors to:
(i) effect the Merger with each Partnership, the Limited Partners of whom
approve the Merger with AmREIT, and subject to the terms and conditions of the
Merger Agreement; and (ii) approve the Bylaw Amendment which would, upon the
Effective Date of the Merger, amend the Bylaws of AmREIT to specifically
authorize the Merger on the terms and conditions set forth in the Merger
Agreement, notwithstanding any other provision, restriction or limitation in
AmREIT's Bylaws.
The text of the Bylaw Amendment is as follows:
"The following paragraph shall be added as a new Section to the Bylaws:
"Section 3.21. Approved Merger. Any other provision of
these Bylaws notwithstanding, the Company is expressly
authorized to effect the Merger transactions as set forth
in each of those certain Agreements and Plans of Merger
dated as of __________, 1998, as may, pursuant to their
terms, be amended, by and between the Company and each of
the following Partnerships: Taylor Income Investors,
Ltd. ("FUND III"), Taylor Income Investors IV, Ltd.
("FUND IV"), Taylor Income Investors V, Ltd. ("FUND V"),
Taylor Income Investors VI, Ltd. ("FUND VI"), AAA Net
Realty Fund VII, Ltd. ("FUND VII"), AAA Net Realty Fund
VIII, Ltd. ("FUND VIII"), AAA Net Realty Fund Goodyear,
Ltd. ("AAA GDYR"), AAA Net Realty Fund IX, Ltd. ("FUND
IX"), AAA Net Realty Fund X, Ltd. ("FUND X"), and AAA Net
Realty Fund XI, Ltd. ("FUND XI")."
Dissenting Partners and Shareholders
Neither the Limited Partners of any Partnership nor the AmREIT
Shareholders are entitled to dissenters' appraisal rights with respect to the
Merger under applicable state law. The Limited Partners will not be entitled to
such rights pursuant to the Partnership Agreement of any Partnership, as amended
by the Partnership Amendment. Limited Partners who vote against the Merger and
do not otherwise elect to receive Shares will receive Notes in the event their
Partnership participates in the Merger. Limited Partners may elect to receive
cash payment for their Units if the Merger is consummated by making the ALV
Payment Election. See "THE MERGER - Appraised Liquidition Value Payment
Election."
The Merger Expenses
All transaction costs and expenses of the Merger which are estimated to
be $450,000 shall be paid by AmREIT except the Partnerships shall pay the costs
of the Houlihan Fairness Opinions, the costs of accountants for the Partnerships
(and any costs in connection with the valuation or appraisal of the Partnership
properties) and the costs of Partner communications (the "Partnership Merger
Expenses"). The Partnership Merger Expenses are estimated to total $150,000. In
addition, each Partnership will bear its own direct costs of due diligence,
partner communications and administration. Each Partnership will bear its
Proportionate Share of the Partnership Merger Expenses, which is equal to the
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Partnerships relative NAV. In the event the Limited Partners of the Partnership
do not approve the Merger, the General Partner will pay or reimburse the
Partnership's Proportionate Share of the Partnership Merger Expenses. AmREIT's
share of the Merger Expenses includes, but is not be limited to, costs of
Bishop-Crown's fairness opinion, title policies, its accounting fees and
the legal fees, printing and mailing costs of this Prospectus.
Anticipated Accounting Treatment
AmREIT will account for the Merger as a purchase in accordance with
Accounting Principles Board Opinion No. 16. The fair market value of the
consideration given by AmREIT in the Merger and the market value of liabilities
assumed will be used as the basis of the purchase price. The purchase price will
be allocated to the assets and liabilities of the Participating Partnership
based upon their respective fair market values at the Effective Time of the
Merger. The financial statements of AmREIT will reflect the combined operations
of AmREIT and the Participating Partnerships from the Effective Time of the
Merger.
CONFLICTS OF INTEREST
A number of conflicts of interest are inherent in the relationships among
the General Partner, the Partnerships and AmREIT.
Affiliated General Partner
The General Partner, Mr. Taylor, is and/or controls the general partners
of each Partnership. He is also the Chairman, Chief Executive Officer and the
largest shareholder of AmREIT. Upon consummation of the Merger, Mr. Taylor will
still own up to approximately 10.68% of the outstanding Shares. In determining
the terms and conditions of the Merger on behalf of the Partnerships, these
relationships caused Mr. Taylor significant and varying conflicts of interest.
Also, Mr. Taylor has an inherent financial interest in consummating the
Merger. The terms and conditions of the Merger might have been structured
differently by persons not having a financial interest in the Merger or the
Merger may not have proceeded at all. If the Effective Date were June 30, 1998,
Mr. Taylor would realize the following financial benefits from the Merger:
(a) Mr. Taylor would be entitled to payment of up to 349,333 Shares upon
consummation of the Merger as a result of the terms of payments of the Share
Balance payable to him pursuant to the recently completed Adviser Acquisition.
The amount of the Share Balance to which Mr. Taylor is entitled increases
directly with the number of Shares issued in the Merger. The Adviser Acquisition
was approved by AmREIT's shareholders and consummated and, thus, the Limited
Partners did not have the opportunity to vote on the Adviser Acquisition.
(b) Should the Merger be consummated, Mr. Taylor and his Affiliates would
receive 1,114 Shares, 1,980 Shares, and 1,189 Shares, respectively, as general
partners of FUND VII, FUND VIII and FUND GDYR. The number of Shares to be
received in the Merger by Mr. Taylor with respect to the general partners'
interests increases directly with the respective Partnership's Net Asset Value.
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(c) Mr. Taylor and/or his Affiliates will receive 3,533 Shares, 1,606
Shares, 1,349 Shares and 915 Shares, respectively, from FUND III, FUND IV, FUND
V and FUND VI in payment of disposition fees for the transfer of the properties
of these Partnerships in the Merger. The number of Shares received by Mr. Taylor
in connection with such disposition fees increases directly with the Negotiated
Prices of the properties to which they relate.
(d) If a Partnership elects to participate in the Merger, Mr.Taylor would
be relieved of his continuing duties and responsibilities as General Partner.
Limited Partners should consider these conflicting interests of Mr.
Taylor in the Merger in negotiating and agreeing to the terms and conditions on
behalf of the Partnerships. For instance, except for Fund IX, Fund X or Fund XI,
where he has no direct interest in the consideration received by these
Partnerships in the Merger, Mr. Taylor will receive a benefit directly related
to consideration received by the Partnerships in the Merger. In the case of Fund
III, Fund IV, Fund V and Fund VI, Mr. Taylor will receive a disposition fee
equal to 3% of the Negotiated Price of the Partnerships' properties. In Fund
VII, Fund VIII and Fund Gdyr, the general partners are entitled to receive 1% of
the consideration received by the Partnerships in the Merger. Also, the number
of shares of the Share Balance payable to Mr. Taylor as a result of the Merger
is directly related to the number of shares issued by AmREIT in the Merger.
Based on these interests, Mr. Taylor has a financial incentive to assure the
Partnerships receive the greatest consideration possible.
Conversely, as an officer and the principal shareholder of AmREIT, Mr.
Taylor would benefit along with the other AmREIT shareholders and the
Independent Directors to the extent AmREIT issues a lesser amount of Shares in
the Merger. Mr. Taylor would also expect to benefit indirectly from the
continuation of AmREIT's management of such Partnership management and
administrative fees and reimbursements to AmREIT therefor. He would also expect
to eventually participate in the proceeds of the sale or other disposition of
such Partnership's properties by reason of his general partner interest and/or
right to disposition fees. Also, other factors being equal, Mr. Taylor's
proportionate ownership of AmREIT will be diluted by an amount directly related
to the number of Shares issued in the Merger and to the extent the Exchange
Price is less than the value of the Shares on the Effective Date, the value of
Mr. Taylor's Shares will be diluted.
No Partnership was separately represented by parties independent of
AmREIT or Mr. Taylor in structuring and negotiating the terms of the Merger.
Also, no formal procedures were put in place to minimize the potential conflicts
of interest between Mr. Taylor and the Partnerships or as between individual
Partnerships. Mr. Taylor has sought to discharge faithfully his fiduciary duty
to each of the Partnerships even though he has a material interest as an
officer, director and principal shareholder of AmREIT and anticipates receiving
a portion of the Share Balance as a result of the Merger. Mr. Taylor believes
that the Houlihan Fairness Opinions, the right to receive Notes in lieu of
Shares granted to Limited Partners who believe that the Exchange Price does not
provide such Limited Partners a number of Shares equal to the fair market value
of their Units and other aspects of procedural fairness that have been
incorporated into the structure of the Merger, and the expected benefits to
Limited Partners from the Merger offset any detriment arising from such
conflicts of interest or the absence of an independent representative. Had
separate representation been arranged for each Partnership, the terms of the
Merger might have been different and possibly more favorable to the Limited
Partners. In addition, if separate representation had been arranged for each
Partnership, issues unique to the value of a given Partnership might have
received greater attention during the structuring of the Merger, and there might
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have been adjustments in the Net Asset Values allocated among the Partnerships,
thereby increasing or decreasing the number of Shares allocable to such
Partnership. See "RISK FACTORS -- Lack of Independent Representation" and "--
Conflicts of Interest."
The Independent Directors
The Independent Directors have sought to discharge faithfully their
fiduciary duties to AmREIT and the Shareholders. Neither of the Independent
Directors has any financial interest in any Partnership or the general partner
of any Partnership, and neither of the Independent Directors owes a fiduciary
duty to the Limited Partners.
The General Partner and the Independent Directors have endeavored to
ameliorate conflicts of interest between Mr. Taylor and AmREIT by requiring that
the Independent Directors determine and agree to the terms of the Merger on
behalf of AmREIT and the Shareholders in consultation with Bishop-Crown and
their own advisors. However, because neither of them devote a major portion of
their time to AmREIT's affairs, the Independent Directors have had to rely on
the management and staff of AmREIT for information, data and analysis of AmREIT
and the Partnerships. Because the management and staff of AmREIT are under the
control of Mr. Taylor, in his capacity of AmREIT's chief executive officer, it
is likely that the views and considerations of Mr. Taylor, to some extent,
influenced the information and analysis of AmREIT's management and staff, and
thus, indirectly, the Independent Directors. The Independent Directors have
sought to minimize any such influence by, and the conflicts of interest with,
Mr. Taylor through their engagement of Bishop-Crown and independent legal
counsel to review and advise them regarding the Merger and the Merger Agreement.
The Independent Directors believe that the Fairness Opinion of
Bishop-Crown, and the terms and conditions of the Merger, the amount of Shares
and Notes to be offered to each Partnership in the Merger, and the expected
benefits to AmREIT and the Shareholders from the Merger offset any detriment
arising from the influence on them by the conflicts of interest of Mr. Taylor.
Continuing Conflicts of Interest
After the Merger, Mr. Taylor will continue to have business and financial
interests, some of which may conflict with the interests of AmREIT. The
Independent Directors and Mr. Taylor will endeavor to resolve any conflicts of
interest arising by reason of Mr. Taylor's other business interests as the
General Partner with respect to any Partnership not electing to participate in
the Merger in a fair and reasonable manner with a view towards Mr. Taylor's
fiduciary obligations to AmREIT and any other parties in interest to the
transaction. Also, under the terms of his employment agreement with AmREIT and
pursuant to the Adviser Acquisition, Mr. Taylor is contractually restricted, so
long as he serves as an officer or director of AmREIT, from engaging in any
Competitive Real Estate Venture without the prior consent of AmREIT and must
cause any Competitive Real Estate Venture over which he exerts control to, at
the election of AmREIT, contract with AmREIT for the use of certain personnel
and/or facilities. See "AmREIT AND ITS BUSINESS - Adviser Acquisition." Pursuant
to the Adviser Acquisition, AmREIT succeeded to the Adviser's contracts to
provide administrative and management services to the Partnerships. While Mr.
Taylor no longer participates in payments for these services, he may eventually
participate in the proceeds and/or disposition fees from the sale or disposition
of the Partnerships' properties by reason of his interest as or in the general
partner(s) of the Partnerships.
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Features Discouraging Potential Takeovers
Certain provisions in the Articles of Incorporation and Bylaws, as well
as statutory rights under Maryland law, could be used by AmREIT's management,
including the General Partner, to delay, discourage, or thwart efforts of third
parties to acquire control of, or a significant equity interest in, AmREIT. See
"COMPARISON OF OWNERSHIP OF UNITS AND SHARES" and "RISK FACTORS --Anti-Takeover
Provisions."
FAIRNESS OPINIONS
The Bishop-Crown Fairness Opinion
Background and Qualifications. AmREIT retained Bishop-Crown Investment
Research, Inc., on February 11, 1998 to render an opinion as to whether the
consideration to be paid by AmREIT pursuant to the Merger was fair from a
financial point of view to AmREIT. A copy of Bishop-Crown's opinion is included
as Annex 4 to this Prospectus. Bishop-Crown was not requested to, and did not
make, any recommendation to the Independent Directors as to the Exchange Price
to be provided for in the Merger, which Exchange Price was determined through
negotiations between AmREIT and the General Partner.
AmREIT selected Bishop-Crown to provide a fairness opinion because it is
a financial advisor and investment valuation firm with national experience in
the investment analysis, due diligence research, including the valuation of
businesses and their securities in connection with mergers and acquisitions and
for other purposes and has substantial experience with respect to REITs and
other real estate companies and in transactions similar to the Merger.
Bishop-Crown rendered its Fairness Opinion to the Independent Directors in
connection with the Adviser Acquisition, for which it received a fee of $37,500.
Bishop-Crown is a nationally recognized investment due diligence and
financial advisory firm among member firms of the National Association of
Securities Dealers, Inc. (the "NASD"). Over the past ten years Bishop-Crown has
provided due diligence underwriting and valuation services to individual member
firms and industry groups. The Independent Directors selected Bishop-Crown to
act as their financial adviser based on its experience with and expertise in
small and emerging companies, including real-estate investment companies and
REITs, its experience in evaluating the fairness of acquisitions of asset groups
by their sponsors and/or affiliated managers, its experience and expertise in
the due diligence examination and analysis of both private and public companies
and its recognition among NASD member firms.
Bishop-Crown has delivered its written opinion dated June 5, 1998 to the
Board (the "Bishop-Crown Opinion"), to the effect that, as of the date of such
opinion, based on Bishop-Crown's review and subject to the limitations described
below, the consideration to be paid by AmREIT pursuant to the Merger was fair
from a financial point of view to AmREIT and its shareholders. The Bishop-Crown
Opinion does not constitute a recommendation to any shareholder of AmREIT as to
how any such shareholder should vote on the Merger. Bishop-Crown has no existing
contractual obligation to update its fairness opinion.
THE FULL TEXT OF THE BISHOP-CROWN OPINION, WHICH SETS FORTH, AMONG OTHER THINGS,
ASSUMPTIONS MADE, MATTERS CONSIDERED AND LIMITATIONS ON ITS REVIEW UNDERTAKEN,
IS ATTACHED AS ANNEX 4 TO THIS PROSPECTUS. AMREIT'S SHAREHOLDERS ARE URGED TO
READ THE OPINION IN ITS ENTIRETY.
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Bishop-Crown made a presentation of the Bishop-Crown Opinion and the
underlying financial analysis to the Independent Directors prior to the meeting.
This analysis, as presented to the Independent Directors, is summarized herein.
Independent Directors present at the meeting (either in person or via
teleconference) had an opportunity to ask questions of Bishop-Crown.
Bishop-Crown discussed the information in the report, and the financial data and
other factors considered by Bishop-Crown in conducting its analysis, all of
which are summarized herein.
Bishop-Crown had no restrictions or limitations imposed by either AmREIT
or the Partnerships with respect to its investigation or the procedures followed
in rendering its opinion. In requesting the Bishop-Crown Opinion, the
Independent Directors did not give any special instructions to Bishop-Crown or
impose any limitations upon the scope of the investigation that Bishop-Crown
deemed necessary to enable it to deliver its opinion. Nor did Bishop-Crown
receive any instructions from either AmREIT, the General Partner or his
affiliates in connection with its engagement and analyses. Bishop-Crown is not
affiliated with AmREIT, the General Partner, or Houlihan. A copy of the
Bishop-Crown Opinion, which sets forth the assumptions made, matters considered
and limits on the review undertaken, is attached hereto as Annex 4 and is
incorporated herein by reference. The summary of the opinion set forth below is
qualified in its entirety by reference to the full text of the Bishop-Crown
Opinion. Shareholders are urged to read the opinion in its entirety. The opinion
is directed only to the fairness of the consideration to be paid by AmREIT from
a financial point of view and does not constitute a recommendation to any
shareholder as to how such shareholder should vote at the Special Shareholder
Meeting.
Management of AmREIT solicited proposals from two firms for the
preparation of the fairness opinion. Bishop-Crown was formally engaged to render
its opinion to the Independent Directors pursuant to a letter of engagement
dated February 19, 1998 (the "Engagement Letter"). The engagement letter
requires AmREIT to pay Bishop-Crown a fee equal to $37,500, all of which was
paid upon delivery of the written opinion as of the date of this Prospectus. In
addition, the engagement letter with Bishop-Crown provides that AmREIT will
reimburse Bishop-Crown for its reasonable out-of-pocket expenses and will
indemnify Bishop-Crown and certain related persons against certain liabilities,
including liabilities under securities laws, arising out of the Merger or its
engagement. The fee was payable to Bishop-Crown regardless of whether or not its
opinion was favorable as to the fairness of the Merger.
In conducting its analysis and arriving at the opinion, Bishop-Crown
reviewed such information and considered such financial data and other factors
as Bishop-Crown deemed relevant under the circumstances, including:
(i) a draft of the Merger Agreement;
(ii) AmREIT's Annual Report on Forms 10-KSB and 10-K
and the related financial information for the
fiscal years ended December 31, 1997 and 1996,
respectively, and AmREIT's Quarterly Report on
Form 10-QSB for the quarterly period ended
March 31, 1998;
(iii) for each of Fund IX and Fund X, the
Partnership's Annual Report on Forms 10-KSB and
10-K and the related financial information for
the fiscal years ended December 31, 1997 and
1996, respectively, and each such Partnership's
Quarterly Report on Form 10-QSB and the related
unaudited financial information for the
quarterly period ended March 31, 1998;
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(iv) for each of FUND III, FUND IV, FUND V, FUND VI,
FUND VII, FUND VIII, FUND GDYR, and FUND XI
financial statements for the years ended
December 31, 1997 and 1996, which, except in
the case of Fund XI, were unaudited, and
unaudited financial statements for each
Partnership for the quarterly period ended
March 31, 1998;
(v) certain information, including financial
forecasts, relating to AmREIT's business,
earnings, cash flow, assets and prospects
furnished to Bishop-Crown by AmREIT's
management;
(vi) certain information, including financial
forecasts, earnings and cash flow of the
properties of each Partnership furnished to
Bishop-Crown by the General Partner;
(vii) certain information provided by AmREIT's
management relating to the properties of the
Partnerships including projections of net
operating income for the year 1998 based on
AmREIT management's review of the properties
and lease terms and credit worthiness of the
tenants of the Partnerships;
(viii) the historical and projected results of
operations of AmREIT and historical and certain
future earnings estimate of selected companies
which Bishop-Crown deemed to be reasonably
similar to AmREIT;
(ix) the historical offering prices for the Common
Shares and the historical public trading prices
of the Common Shares of certain publicly traded
companies and publicly available financial,
operating and stock market data concerning
certain companies engaged in businesses
Bishop-Crown deemed comparable to AmREIT or
otherwise relevant to its inquiry;
(x) the financial terms of certain recent
transactions Bishop-Crown deemed relevant; and
(xi) such other financial information, analyses and
investigations as Bishop-Crown deemed relevant.
The financial forecasts provided to Bishop-Crown were the Partnerships'
property-by-property cash budget for 1998 and forecast of net operating income
and net cash flow for the five-year period 1998 to 2002, a pro forma combined
balance sheet for the Partnerships and AmREIT at December 31, 1997 and a pro
forma combined net operating income model for the Partnerships and AmREIT for
1998. Bishop-Crown discussed with senior management of AmREIT: (a) the prospects
for AmREIT's prospective financing, development and acquisition activities in
1998 and 1999; (b) management's estimate of such business' future financial
performance; (c) the anticipated financial impact on AmREIT's financial
performance of the Merger and AmREIT's transition to a self-management
structure; (d) the potential financial impact of the Merger on AmREIT, including
management's estimate of AmREIT's expenses related to the Merger; and (e) such
other matters as Bishop-Crown deemed relevant. Bishop-Crown also visited
selected properties owned by the Partnerships.
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Bishop-Crown is not required to update its opinion. Management is not
aware of any event which has occurred after the date of Bishop-Crown's opinion
or of any significant changes to the information upon which it relied in giving
its opinion which would cause Bishop-Crown to alter its opinion regarding the
fairness of the Merger from a financial point of view.
Bishop-Crown assumed, and did not necessarily verify, that all financial
information provided by Mr. Taylor, management of the Partnerships and AmREIT,
including financial forecasts and projections, upon which it relied in providing
its opinion, was reasonably prepared and reflects the best current available
estimates or future financial results and the condition of AmREIT and the
Partnerships; and that there has been no material change to the assets,
financial conditions, business or prospects of AmREIT or any of the Partnerships
since the date of the most recent financial statements made available to it.
Included in this financial information were projected operating results of the
combined Company and the Partnerships based on various financial models assuming
various rates of asset growth ranging from 10% to 50% over various periods
extending up to and including 2004. These financial models incorporated numerous
assumptions with respect to the real estate industry performance, general
business and economic conditions, future conditions of the financial markets and
the continuation of certain current trends within the real estate industry. Most
of these assumptions are beyond the control of the Partnerships and AmREIT, and
as predictions, no matter how reasonable, are subject to the impact and
influence of future events. Primary among the assumptions made were that
interest rates, rates of inflation, and yields on leased properties would
continue, overall, to compare with rates currently available. The financial
models also assumed that under current and future AmREIT and Partnership
investment lease provisions, same store net operating income would increase at
the average rate of 1.0% per annum, as adjusted after the end of each fifth year
of the lease. Bishop-Crown was not engaged to opine and does not express any
opinion as to any other aspect of the Merger other than the fairness of the
consideration to be paid by AmREIT and to be received by AmREIT and its
Shareholders from a financial point of view.
Share Consideration Analysis. For purposes of its analysis of the
fairness of the transaction, Bishop-Crown implied a value range for the AmREIT
Shares based on common stock multiples of annual dividends and annual FFO. The
appropriate range of multiples was determined by reference to the reported
multiples of publicly traded share prices to dividends and FFO per share
reported for the following REITs which Bishop-Crown deemed to be comparable to
AmREIT in terms of investment objectives and/or real estate investments. These
REITs (the "Comparable REITs") included Alexander Haagon REIT, TriNet REIT,
Boddie-Noell Properties, Inc., Burnham Pacific Properties, Commercial Net Lease
Realty, Franchise Finance Corp. of America, New Plan REIT, Realty Income
Corporation, Glimcher Realty Trust, Price REIT, Saul Center, Excel Realty Trust,
Inc., National Golf Properties, Macerich Company, Golf Trust of America,
Alexandria Real Estate Equities and Western Investment R.E. Trust. Based on
information for the quarter ended March 31, 1998, this analysis resulted in
multiples of dividends per share ranging from 11.53x to 19.53x, with a mean of
14.65x and a median of 14.33x, and multiples of FFO per share ranging from 9.8x
to 17.91x, with a mean of 13.29x and a median of 12.89x. For the purposes of its
analysis, Bishop-Crown focused on the median dividend and FFO multiples which
resulted in share/price multiples of 14.33x dividends per share and 12.89x FFO
per share. Bishop-Crown noted that AmREIT has, through 1997, paid dividends in
excess of FFO per share. Bishop-Crown noted that the dividends per share paid by
these REITs was less than AmREIT's FFO per share except for Alexander Haagon
(dividend equaled 105% of FFO), National Golf Properties (dividend equaled 101%
of FFO) and Saul Centers (dividend equaled 102% of FFO). Bishop-Crown also noted
that AmREIT currently pays dividends at the rate of 113% of FFO. Bishop-Crown
therefore determined, for the purposes of comparison, to adjust AmREIT's
dividend per share to 100% of FFO or $0.69 per share as annualized at December
31, 1997. Based on this analysis, Bishop-Crown determined, for the purposes of
the Merger, that the implied value of the Shares ranged from $8.89 to $9.89 per
share based on FFO per share of $0.69. Based on this implied range of Share
values, Bishop-Crown concluded that the Exchange Price is a fair value for
AmREIT's Shares for the purposes of the Merger.
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Bishop-Crown also noted that, as there is currently no regular public
market for the Shares, such valuations may differ significantly, and without
limitation as to such higher or lower value as of the Closing Date. Thus,
Bishop-Crown did not recommend to AmREIT that any specific consideration would
constitute the appropriate amount or form of payment by AmREIT for the
Partnerships' properties, nor did Bishop-Crown recommend to AmREIT that any
specific consideration received by it or its shareholders would constitute
appropriate consideration to be received in the transaction.
Bishop-Crown analyzed the fairness of the Merger based on the value of
the Partnership net assets being acquired by AmREIT in the Merger pursuant to
a discounted cashflow analysis (i) portfolio price rental multiples, (ii) a
comparable Company analysis and (iii) a comparable transaction analysis.
Property Valuations. Under this approach, Bishop-Crown analyzed the
expected range of current prices for the properties of each Partnership based on
current sale information for properties in the same or proximate local areas
under lease to the same tenant and/or tenants with the same general credit
ratings. Because of the current levels of commercial real estate activity and
the active market for net leased properties, particularly by publically traded
REITs, publically available information regarding the sales of such properties
is readily available through large commercial real estate brokerage firms and
others. Based on recent sales information regarding properties it judged to be
relevant by reason of location, tenant, lease terms and age, Bishop-Crown
determined appropriate range for the likely current market price for each
Partnership's properties as a multiple of current annual rent. In general, these
multiples ranged from 10.40x to 10.85 for recently constructed and newer
properties to 7.2x to 8.3x for older properties nearing lease term expiration
and/or structural obsolescence. Where it deemed it appropriate, Bishop-Crown
chose a range of multiples reflecting known significant property related
circumstances, such as a high probability on tenant non-renewal or significantly
undervalued lease of shorter duration in comparison to residual value of the
property. Based on this analysis, Bishop-Crown determined the following range of
property values: Fund III, $1.102 million to $1.117 million; Fund IV, $0.500
million to $0.520 million; Fund V, $0.420 million to $0.424 million; Fund VI,
$0.300 million to $0.303 million; Fund VII, $1.035 million to $1.074 million;
Fund VIII, $1.801 million to $1.884 million; Fund Gdyr, $1.102 million to $1.126
million; Fund IX, $4.880 million to $5.267 million; Fund X, $10.501 million to
$10.816 million, Fund XI, $6.355 million to $6.571 million. Pursuant to the
Mergers, AmREIT is in essence purchasing each Partnership's properties without
regard to any enhancement or reduction in value attributable to the Partnership
entity. Bishop-Crown therefor gave greatest weight to valuation approaches based
on analysis of property valuation as opposed to Partnership entity valuations.
Comparable Company Analysis. Bishop-Crown analyzed the Partnerships to
establish an implied range of equity market values based on multiples of
publically available historic information regarding companies Bishop-Crown
considered reasonably similar to the Partnerships in terms of real estate
investments. Because of similar Partnership property portfolios to those of
AmREIT, Bishop-Crown considered the same comparable companies as those used in
the AmREIT analysis above. Information analyzed included market capitalization
as a multiple of FFO. As noted above, mean and median multiples of FFO were
13.29x and 12.89x, respectively. Applying these multiples to each Partnership's
projected
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FFO for 1998 resulted in implied market equity valuations equal to or exceeding
those values implied under the Property Valuation Analysis. However,
Bishop-Crown determined this analysis least appropriate because each of the
comparable companies is significantly larger than most of the Partnerships, the
comparable companies were infinite life entities and in general are
self-managed. Also, none of the Partnerships has or anticipates establishing a
liquid secondary market for its securities.
Discounted Cashflow Analysis. Under its discounted cashflow
analysis, Bishop-Crown valued the future stream of net cashflow (debt-free
earnings) that the Partnerships would realize if the Merger does not occur for
each of the years ended December 31, 1998, 1999 and 2000. Bishop-Crown then
assumed a sale of the Partnerships at the end of 2000. After analyzing operating
projections provided by management and the General Partner, Bishop-Crown
determined representative projected cashflow for the Partnerships for the years
1998, 1999 and 2000, based on forecasted 1998, assuming timely lease extensions
in accordance with their terms. Bishop-Crown determined representative projected
net cashflow by taking into account the Partnerships' historical and projected
operating expenses for each year, which included the Partnerships' general
administrative expenses, including executive salaries. Bishop-Crown assumed a
combined income tax rate for the Partnerships of 40%. Based on this analysis,
Bishop-Crown calculated a range of equity values for the Partnerships based
upon:
( i ) the present value of the net cashflows for each
Partnership for 1998, 1999 and 2000; and
(ii) the present value of the estimated terminal
value of the Partnership properties, assuming
that they were sold at the end of the year
2000, based on annualized cashflow in 2001.
In applying its discounted cashflow analysis, Bishop-Crown assumed, among other
things, discount rates ranging from 9% to 12% (depending on the predictability
of the lease income and the time of receipt). Bishop-Crown also noted that such
discount rates are consistent with those used in cashflow analysis of
Partnerships in the comparable transactions section discussed below. For
valuation of the Partnership properties at the time of sale, Bishop-Crown used
terminal multiples of 7.0x to 11.0x, where the smaller end of the range is more
reflective of a greater discount rate range by reason of the more speculative
future sale prediction. Bishop-Crown assumed a Net Cash Balance of zero for each
Partnership. Based on Bishop-Crown's quantitative judgments concerning the
specific risks associated with an investment and the properties, the historical
and projected operating performance of the properties, and the increased
speculative value of projections of future performance, the relatively low
average growth rate of 1.0% under the leases on the properties and the
relatively short 36 month projection period, Bishop-Crown focused on a range of
multiples from 10.0x to 11x. This analysis resulted in a range of implied
Partnership L.P. Values as follows: Fund III: $1.04 million to $1.14 million,
Fund IV: $0.365 million to $0.505 million, Fund V: $0.317 million to $0.480
million, Fund VI: $0.212 million to $0.232 million, Fund VII: $0.852 million to
$0.935 million, Fund VIII: $1.512 million to $1.66 million, Fund GDYR: $1.22
million to $1.31 million, Fund IX: $4.66 million to $5.11 million, Fund X: $9.03
million to $9.93 million, and Fund XI: $4.90 million to $5.37 million.
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Bishop-Crown considered this approach to be the most conservative as it
valued each Partnership's assets within the fixed context of the illiquid,
finite life, externally managed partnership structure, which attributes, in
general, are expected to depress the value of the property assets. This
analysis resulted in property valuations for each Partnership which overlapped
the range of values for the Shares paid for the properties.
Conclusions. Based on the foregoing, Bishop-Crown determined that in the
case of each Partnership, Bishop-Crown concluded that the aggregate Negotiated
Prices of the properties of each Partnership was at least equal to the value of
the Shares paid therefor by AmREIT. Bishop-Crown's Fairness Opinion addresses
the fairness of the Merger as a whole and with respect to the Merger of each
possible combination of Partnerships from a financial point of view.
Bishop-Crown therefore concludes that the Merger of each or any combination of
the Partnerships with AmREIT for the consideration offered and received is fair
to AmREIT and its Shareholders from a financial point of view.
In considering the fairness of the Merger, Bishop-Crown also considered
the significant benefits to AmREIT which would result from the increased equity
and asset base which could result from the Merger. Bishop-Crown believes that a
large incremental increase in AmREIT's asset size and equity base resulting from
the Merger will significantly facilitate additional growth by enhancing AmREIT's
ability to attract underwriters capable of placing significant public offerings
of AmREIT's Shares and the establishment of a secondary market for the Shares.
In arriving at its opinion, Bishop-Crown did not attribute any particular
weight to any analysis or factor considered by it, but rather made the
qualitative judgments as to the significance and relevance of each analysis and
factor, including its consideration and analyses of the projections. No factor
considered by Bishop-Crown failed to support Bishop-Crown's conclusions.
Bishop-Crown believes that all of its analyses must be considered as a whole
and that selecting portions of its analyses, without considering all analyses,
could create an incomplete view of the processes underlying the analyses
undertaken by it in connection with its opinion. Furthermore, in its analyses,
Bishop-Crown made numerous assumptions with respect to the Partnerships, AmREIT,
general real estate industry performance, general business, economic, market
and financial conditions and other matters, many of which are beyond the
control of the Partnerships and AmREIT. The estimates contained in such
analyses are not necessarily indicative of actual values or predictive of
future results or values, which may be more or less favorable than suggested
by such analyses. Additionally, analyses relating to the value of businesses
or securities are not real estate appraisals. Accordingly, such analyses and
estimates are inherently
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subject to substantial uncertainty. Bishop-Crown's opinion and the analyses and
findings in connection therewith are not readily susceptible to summary
description. Therefore, Bishop-Crown believes its analyses must be considered
as a whole, and that considering any portion of its analyses or any one or
selected number of its conclusions, without considering its analyses and
conclusions in total, could create a misleading or incomplete view of the
process underlying its opinion.
Bishop-Crown's analyses were prepared solely for the purposes of
providing its opinion to the Independent Director as to the fairness of the
consideration to be paid by AmREIT and to be received by AmREIT and its
Shareholders (other than Mr. Taylor) in the Merger, from a financial point of
view, and do not purport to be real estate appraisals or to reflect the prices
at which the subject businesses or assets may be bought or sold.
Bishop-Crown's fairness opinion was one of many factors taken into
consideration by the Independent Directors in determining to approve the Merger
and to recommend approval of the Merger to the shareholders of AmREIT. The
foregoing summary does not purport to be a complete description of the analyses
performed by Bishop-Crown and is qualified by reference to its written opinion.
The preparation of its fairness opinion involves Bishop-Crown's determinations
as to the most appropriate and relevant quantitative and qualitative methods of
financial analysis and the application of those methods to the particular
circumstances resulting from the Merger given the existence of facts and
conditions assumed.
Mr. Heilbron, founder and President of Bishop-Crown and a significant
Shareholder of Bishop-Crown's parent corporation, has personally known the
General Partner since 1987. During this time, an affiliate of Bishop-Crown, PIM
Financial Services, Inc., a registered broker-dealer, has provided securities
distribution services to AmREIT and other affiliates of the General Partner. In
November 1997, the Independent Directors engaged Bishop-Crown as a financial
adviser regarding AmREIT's acquisition of the Adviser and in connection
therewith, on January 15, 1998 rendered its opinion to the Independent Directors
that the recently completed Merger was fair to AmREIT and its shareholders
(other than the General Partner) from a financial point of view. Bishop-Crown's
engagement was not contingent upon its issuance of a favorable opinion in
connection with the Merger.
The Houlihan Fairness Opinions
General. The General Partner retained Houlihan on behalf of each
Partnership to render the Houlihan Fairness Opinions to each Participating
Partnership regarding the fairness, from a financial point of view, of the
consideration to be received by the Limited Partners of the Participating
Partnership in connection with the Merger. Houlihan was not requested to, and
did not make, any recommendation to the Partnerships as to the form or amount of
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consideration to be received by the Limited Partners in connection with the
Merger, which consideration was determined through negotiations between
AmREIT and the General Partner. The General Partner retained Houlihan to
render its Fairness Opinions based upon Houlihan's experience in the valuation
of businesses and their securities in connection with mergers and acquisitions,
and valuation for corporate purposes especially with respect to REITs and other
real estate companies. Houlihan is a nationally recognized investment banking
firm that is continually engaged in providing financial advisory services
in connection with mergers and acquisitions, leveraged buyouts, business
valuations for a variety of regulatory and planning purposes, recapitalizations,
financial restructuring, and private placements of debt and equity securities.
The General Partner engaged Houlihan on February 10, 1998. The General
Partner had, on behalf of each Participating Partnership, solicited proposals
from one other firm for the preparation of fairness opinions. The consideration
to be paid by AmREIT in the Merger consists solely of Shares or, at the election
of the individual Limited Partners, Notes. Houlihan rendered an opinion as to
the valuation of the Adviser in connection with the Adviser Acquisition for
which opinion it received a fee of $40,000. Houlihan has no material prior
relationship with the General Partner or his Affiliates. As compensation to
Houlihan for its services in connection with the Merger, the General Partner has
agreed to pay Houlihan an aggregate fee of $85,000. No portion of Houlihan's fee
is contingent upon the successful completion of the Merger. The General Partner
and each Partnership have also agreed to indemnify Houlihan and related persons
against certain liabilities, including liabilities under federal securities
laws, arising out of the engagement of Houlihan, and to reimburse Houlihan for
certain expenses.
Houlihan delivered its written Fairness Opinions to the General Partner
to the effect that, as of June 1, 1998 on the basis of its analysis summarized
below and subject to the limitations described below, the consideration to be
received by the Limited Partners of each Participating Partnership in connection
with the Merger was fair, from a financial point of view, to such Limited
Partners. The Fairness Opinions do not constitute a recommendation to any
Limited Partner as to how any such Limited Partner should vote on the Merger.
Houlihan has no existing contractual obligation to update its Fairness Opinions.
THE FULL TEXT OF THE HOULIHAN FAIRNESS OPINIONS, WHICH SET FORTH, AMONG OTHER
THINGS, ASSUMPTIONS MADE, MATTERS CONSIDERED AND LIMITATIONS ON THE REVIEW
UNDERTAKEN, IS ATTACHED AS ANNEX 5. TO THIS PROSPECTUS. THE LIMITED PARTNERS ARE
URGED TO READ THE OPINION IN ITS ENTIRETY.
In arriving at its Fairness Opinions, Houlihan: (i) reviewed the annual
reports to partners for the Partnerships for each of the five fiscal years (or
since inception) to December 31, 1996; (ii) reviewed AmREIT's annual reports to
shareholders on Form 10-KSB and Form 10-K for the fiscal years ended December
31, 1997 and 1996, respectively; (iii) reviewed the draft Merger Agreement,
dated June 1, 1998 and a draft of this Prospectus; (iv) met with certain members
of the senior management of AmREIT and the General Partner to discuss the
Partnerships and AmREIT's operations, financial condition, future prospects, and
projected operations and held discussions with representatives of the
Partnerships and AmREIT with respect to certain matters; (v) reviewed the
unaudited balance sheet dated December 31, 1997 and the rental income statements
for the combined Partnerships for the years ended December 31, 1997 and 1996;
(vi) visited certain facilities and business offices of AmREIT and the
Partnerships, and certain real property owned by the Partnerships; (vii)
reviewed forecasts and projections prepared by management of the General
Partner and AmREIT with respect to the Partnerships' properties for the years
ended 1997 through 2007; (viii) reviewed the historical offering prices for
AmREIT's securities; (ix) reviewed certain other publicly available
financial data for certain companies that Houlihan deemed comparable to the
Partnerships and AmREIT and publicly available prices and premiums paid in
other transactions that it considered similar to the Merger; and (x)
conducted such other studies, analyses and inquiries as it deemed appropriate.
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Houlihan did not, and was not requested by the General Partner, to make
any recommendations as to the form or amount of consideration to be paid to the
Limited Partners in connection with the Merger. Houlihan was not asked to opine
on and did not express any opinion as to (i) legal or tax consequences of the
Merger, including but not limited to tax consequences to the Limited Partners;
(ii) whether any Limited Partner should elect to receive Notes rather than
Shares in the Merger; (iii) the public market values or realizable value of the
Shares or the prices at which the Shares may trade in the future following the
Merger if and when a public trading market is established for the Common Shares;
(iv) the fairness, advisability or desirability of alternatives to the Merger;
(v) the potential capital structure of AmREIT or its impact on the financial
performance of the Shares or Notes; or (vi) the fairness of any aspect of the
Merger not expressly addressed in the Houlihan Fairness Opinions, including the
fairness of the Merger as a whole. Houlihan's opinion relates to fairness from a
financial point of view of the consideration to be received by each Limited
Partner. Houlihan's opinion does not address the fairness of the Merger as a
whole. Houlihan's opinion as to each Partnership does not depend on the
participation of any one or a combination of other Partnerships. Houlihan did
not perform an independent appraisal of the assets and liabilities of the
Partnerships.
Although the General Partner and AmREIT advised Houlihan that certain
assumptions were appropriate in their view, no restrictions or limitations were
imposed by the General Partner upon Houlihan with respect to its investigation
or the procedures followed by Houlihan in rendering its fairness opinion.
Houlihan's Fairness Opinions are not intended to be and do not constitute a
recommendation to any Limited Partner as to whether to accept the consideration
to be received by such Limited Partner in connection with the Merger (whether in
the form of Shares or Notes) or to vote in favor of the Merger. It should be
noted that the aggregate value of the consideration that may be received by each
Limited Partner in connection with the Merger (including any cash consideration
in lieu of fractional shares to be received by the Limited Partners) is fixed.
The ultimate value actually received by each Limited Partner at the time of
consummation of the Merger will vary depending on the market price of the Shares
at such time.
Houlihan relied upon and assumed, without independent verification, that
the financial forecasts and projections provided to it have been reasonably
prepared and reflect the best currently available estimates of the future
financial results and condition of the Partnerships and that there has been no
material change in the assets, financial condition, business or prospects of
each Partnership since the date of the most recent financial statements made
available to it.
Houlihan did not independently verify the accuracy and completeness of
the information supplied to it with respect to the Partnerships and did not
assume any responsibility with respect to such information. Houlihan has not
made any physical inspection or independent appraisal of any of the properties
or assets of the Partnerships.
Partnership Valuation Analysis. In rendering its Fairness Opinions,
Houlihan calculated a range of the value of each Partnership on a controlling
interest basis. Houlihan's analysis of the fair market value of each Partnership
took into consideration the income- and cash-generating capability of that
Partnership. Typically, an investor contemplating an investment in an enterprise
with income- and cash-generating capability similar to the Partnerships will
evaluate the risks and returns of its investment on a going concern basis.
Accordingly, after due consideration of other appropriate and generally accepted
valuation methodologies, the value of each Partnership has been developed
primarily on the basis of capitalization of net operating cash flow and
discounted cash flow approaches.
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All valuation methodologies that estimate the worth of an enterprise as a
going-concern are predicated on numerous assumptions pertaining to prospective
economic and operating conditions. Houlihan's Opinions are necessarily based on
business, economic, market and other conditions as they exist and can be
evaluated by it at the valuation date. Unanticipated events and circumstances
may occur and actual results may vary from those assumed. Any such variations
may be material.
Houlihan used several methodologies in arriving at its Fairness Opinions.
Each methodology provided an estimate as to the L.P. Value for each Partnership.
The L.P. Value is the value of the limited partnership interest in each
Partnership and this provides a basis of comparison to the consideration offered
in the Merger. Several of the analyses conducted by Houlihan also provided an
estimate as to the value of the general partners' interests in the Partnership
(the "General Partner Value"). In valuing the Partnerships, Houlihan performed
the following analyses with respect to each Partnership.
(i) Pursuant to the Net Sale Approach which Houlihan analyzed the
value of the properties of each Partnership (and any subject liabilities) under
an orderly sale/liquidation scenario. This approach allowed Houlihan to
determine the net equity value of each Partnership by first determining the
value of such Partnership's assets and then subtracting the value of the
Partnership's liabilities. In order to arrive at the value of the Partnership's
assets, Houlihan utilized capitalization rates of Net Operating Income ("NOI")
of the properties of each Partnership as well as multiples of the square footage
of each partnership to arrive at a value for each Partnership's real property.
Houlihan then aggregated the resulting property values for each Partnership to
arrive at an aggregate value of such Partnership.
Capitalization rates utilized in the Net Sale Approach were
determined based upon (i) comparable sales data provided by the General Partner;
(ii) statistics from the National Real Estate Index, an independent organization
that compiles pricing data from real estate transactions; and (iii) certain
publicly available information on assets similar to the Partnerships'
properties. Additionally, on a property-by-property basis, a number of
characteristics and financial statistics were considered, including property
classification, NOI and revenue growth, total revenues, profitability, and
property's relative size. Moreover, the market and location of the property were
considered. In sum, Houlihan selected capitalization rates and applied what it
believes to be the appropriate capitalization rate to each property's NOI. The
Net Sale Approach generally utilized the higher of each property's actual or
projected NOI for the annual periods selected. The NOI for certain properties
were adjusted to reflect normal income streams for such properties which were
newly constructed or had recently experienced material change of circumstances
such as the addition or departure of a major tenant or a significant renovation.
Applying those selected capitalization rates to each property's
normalized NOI resulted in an aggregate value for each property. Property values
were then adjusted for reasonable real estate transaction costs (i.e., assumed
brokerage fees and commissions) and any contractual fees due to the General
Partner in the event of a property sale. The net result for each property owned
by each Partnership was then aggregated to arrive at an aggregate property value
for each Partnership based upon the Net Sale Approach. Each Partnership's
aggregate property value was adjusted to reflect the capital structure of the
relevant assets, the working capital assets and liabilities of the Partnership,
and any excess cash or other liabilities. The General Partner then divided the
resulting value among the Limited Partners and General Partner of each
Partnership based upon the rights and privileges of the Partnership Agreement.
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(ii) An alternative methodology was an Income Approach Analysis
which, like the Net Sale Approach, considered the capitalization rates and
multiples of square footage to arrive at the estimated value of each
Partnership's underlying real properties. However, rather than assuming a sale
of such real properties, the Income Approach Analysis did not include a
reduction in relative values for the transaction costs associated with the sale
of the properties. Thus, the Income Approach Analysis utilized the aggregate NOI
and square footage for each property, as determined in the property sale
analysis, and appropriate capitalization rates and square foot multiples to
determine the aggregate value of each Partnership. The resulting value was then
divided among the Limited Partners and General Partner of each Partnership based
upon the rights and privileges of the Partnership Agreement.
(iii) Another methodology applied was the Unit Yield Approach,
pursuant to which the L.P. Value was estimated by calculating capitalization
rates for alternative investments such as publicly traded real estate investment
trusts and privately held real estate companies whose securities sales are
periodically monitored in a publication entitled the "Partnership Spectrum." The
capitalization rates for the indicated alternative investments ranged between
approximately 5.0% to 10.0%. Utilizing these capitalization rates as a proxy for
the required return on the Partnerships' securities and then applying the range
of required returns to the Partnerships' Limited Partner distributions as a
perpetual flow resulted in an indication of the value of the Limited Partners'
aggregate interests in each Partnership.
The aforementioned Approaches provided Houlihan with a range of values
for the aggregate limited partner interests of each Partnership. Houlihan then
considered, among other things i) the premiums paid in transactions involving
entities such as the Partnerships and the Merger as proposed; and ii) the
premiums above net asset value exhibited in secondary market trades of
partnership interests (as reported in such publications as the "Partnership
Spectrum") for control block acquisitions and partnerships with similar assets.
After due consideration of other appropriate and generally accepted valuation
methodologies, Houlihan developed the value of each Partnership primarily on the
basis of capitalization of net operating cash flow and discounted cash flow
approaches under the Income Analysis Approach.
Based on all of the aforementioned analyses, Houlihan derived the
following ranges of values of the Partnerships: Fund III, $0.945 million to $1.1
million; Fund IV, $0.42 million to $0.55 million; Fund V, $0.399 million to
$0.473 million; Fund VI, $0.2415 million to $0.33 million; Fund VII, $0.84
million to $0.99 million; Fund VIII, $1.575 million to $1.98 million; Fund Gd
Yr, $0.945 million to $1.21 million; Fund IX, $3.99 million to $4.84 million;
Fund X, $9.135 million to $10.01 million; Fund XI, $4.83 million to $6.05
million.
With respect to arriving at the value of the consideration to be received
by the Limited Partners, Houlihan then considered the value of the Shares and/or
Notes to be received by the Limited Partners in connection with the Merger.
Houlihan considered AmREIT's pro forma net operating income and, in a manner
similar to the aforementioned sale and income approach, Houlihan capitalized
such net operating income to arrive at a pro forma net asset value for AmREIT.
(Houlihan did not assume any liquidation costs in its pro forma valuation.)
Houlihan then added the value of AmREIT's advisory business, based upon AmREIT's
purchase price for the Adviser in the Adviser Acquisition, to AmREIT's net asset
value. Houlihan then multiplied the number of Shares to be received by each
Partnership by the estimated valuation of the Shares to arrive at the valuation
of the consideration to be received by the Limited Partners of each Partnership.
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The foregoing summaries describe the material points of more detailed
analyses performed by Houlihan in connection with rendering the Houlihan
Fairness Opinions. The preparation of a fairness opinion is a complex analytical
process involving various determinations as to the most appropriate and relevant
methods of financial analysis and application of those methods to the particular
circumstances and is, therefore, not readily susceptible to summary description.
In rendering its Fairness Opinions, Houlihan did not attribute any particular
weight to any analysis or factor considered by it but rather made the available
judgments as to the significance and relevance of each analysis and factor.
While there were no material factors that did not support Houlihan's Fairness
Opinions, Houlihan believes that its analyses and the summary set forth herein
must be considered as a whole and that selecting portions of its analyses,
without considering all analyses and factors, or portions of this summary, could
create an incomplete view of the processes underlying the analyses set forth in
the Houlihan Fairness Opinions. In its analysis, Houlihan made numerous
assumptions with respect to the Partnerships, general real estate industry
performance, general business, economic, market and financial conditions and
other matters, many of which are beyond its control and beyond the control of
the Partnerships. The estimates contained in such analyses are not necessarily
indicative of actual values or predictive of future results or values, which may
be more or less favorable than suggested by such analyses.
Conditions and Limitations. The conclusions resulting from the
above-described analyses lead Houlihan to conclude that the consideration to be
received by the Limited Partners of each Partnership in connection with the
Merger is fair to the aggregate Limited Partners of each Partnership from a
financial point of view.
The foregoing analyses required studies of the overall market, economic
and industry conditions in which the Partnerships and AmREIT operate, the
Partnerships' and AmREIT's operating results, and the Partnerships'
distributions to the Limited Partners. Research into, and consideration of,
these conditions were incorporated into the analyses.
Houlihan's Fairness Opinions are based on the business, economic, market
and other conditions as they existed as of December 31, 1997. In rendering its
opinion, Houlihan relied upon and assumed, without independent verification, the
accuracy and completeness of the financial and other information provided to
Houlihan by the General Partner and AmREIT was reasonably prepared and reflect
the best current available estimates of the financial results and condition of
the Partnerships and AmREIT.
Houlihan relied on the assurance of the General Partner that any financial
projections or pro forma statements or adjustments provided to Houlihan were in
the judgment of the General Partners and AmREIT reasonably prepared or adjusted
on bases consistent with actual historical experience or reflecting the best
currently available estimates and good faith adjustments; that no material
changes have occurred in the information reviewed between the date the
information was provided and the date of the Houlihan Fairness Opinions; and
that the General Partners and AmREIT are not aware of any information or facts
regarding the General Partners and AmREIT or the Partnerships that would cause
the information supplied to Houlihan to be incomplete or misleading in any
material respect. Houlihan did not independently verify the accuracy or
completeness of the information supplied to it with respect to the Partnerships
or AmREIT and does not assume responsibility for the accuracy or completeness of
such information. Except as set forth above, Houlihan did not make any physical
inspection or independent appraisals of the properties or assets of the
Partnerships or AmREIT.
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AMREIT PRO FORMA FINANCIAL INFORMATION
The Pro Forma Financial Information of AmREIT for the year ended December
31, 1997 and the six months ended June 30, 1998 are included in this Prospectus
starting at page F-2. The Pro Forma Financial Information has been prepared as
if each of the transactions had occurred as of June 30, 1998: (i) the issuance
of 213,260 Initial Shares pursuant to the Adviser Acquisition; (ii) the Merger
and the Related Transactions. The following Pro Forma Statements of Operations
of AmREIT for the year ended December 31, 1997 and for the three months ended
June 30, 1998 have been prepared as if each of the transactions had occurred as
of January 1, 1997. The Pro Forma Financial Information has been prepared using
the purchase method of accounting whereby the assets and liabilities of the
Partnerships are allocated based upon estimated fair market value, based upon
preliminary estimates, which are subject to change as additional information is
obtained. The allocations of purchase costs are subject to final determination
based upon estimates and other evaluations of fair market value. Therefore, the
allocations reflected in the following Pro Forma Financial Information may
differ from the amounts ultimately determined.
The Pro Forma Financial Information is presented for informational
purposes only and is not necessarily indicative of the financial position or
results of operations of AmREIT that would have occurred if such transactions
had been completed on the dates indicated, nor does it purport to be indicative
of future financial position or results of operations. In the opinion of the
AmREIT management, all material adjustments necessary to reflect the effect of
these transactions have been made. The Pro Forma Statements of Operations for
the year ended December 31, 1997 and for the six months ended June 30, 1998 are
not necessarily indicative of the results of operations to be expected for the
year ending December 31, 1998.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF AMREIT
The Company is a fully integrated, self-administered real estate
investment trust. The Company was organized on August 17, 1993 to acquire,
either directly or through joint venture arrangements, undeveloped, newly
constructed and existing net- lease real estate that is located primarily on
corner or out- parcel locations in strong commercial corridors, to lease on a
net-lease basis to major retail businesses and to hold the properties with the
expectation of equity appreciation producing a steadily rising income stream for
its shareholders.
The Company is conducting a comprehensive review of its computer systems
to identify the systems that could be affected by the Year 2000 issue. The Year
2000 issue is the result of computer programs being written using two digits
rather than four to define the applicable year. Any programs that have
time-sensitive software may recognize a date using "00" as the year 1900 rather
than the Year 2000. The Company believes that the cost of remediation associated
with its computer systems will be minimal and the remediation is anticipated to
be completed in the third quarter of 1999. The other essential component of the
Year 2000 issue is to ensure that the Company's significant tenants are assessed
for Year 2000 compliance. The Company has initiated discussions with its
significant tenants in order to assess their readiness for the year 2000 issue.
Due to the nature of the tenants' businesses, the Company does not believe the
Year 2000 issue will materially impact the tenants' ability to pay rent.
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However, the failure of one or more tenants as a result of the Year 2000 issue
could have a material adverse effect on the Company's results of operation or
financial position. Upon completion of its assessment program, the Company will
consider the necessity of implementing a contingency plan to mitigate any
adverse effects associated with the Year 2000 issue. Though the Company does not
expect the Year 2000 issue to have a material adverse effect on its results of
operation or financial position there can be no assurances of that position.
In June 1998, the Company changed transfer agents from Service Data
Corporation to The Bank of New York.
Liquidity and Capital Resources
Cash flow from operations has been the principal source of capital to
fund the Company's ongoing operations. The Company's issuance of common stock
and the use of the Company's credit facility have been the principal sources of
capital required to fund its growth.
In order to continue to expand and develop its portfolio of properties
and other investments, the Company intends to finance future acquisitions and
growth through the most advantageous sources of capital available to the Company
at the time. Such capital sources may include proceeds from public or private
offerings of the Company's debt or equity securities, secured or unsecured
borrowings from banks or other lenders, or the disposition of assets, as well as
undistributed funds from operations.
The Company's leases typically provide that the tenant bears
responsibility for substantially all property costs and expenses associated with
ongoing maintenance and operation, including utilities, property taxes and
insurance. In addition, the Company's leases generally provide that the tenant
is responsible for roof and structural repairs. Certain of the Company's
properties are subject to leases under which the Company retains responsibility
for certain costs and expenses associated with the property. Because many of the
properties which are subject to leases that place these responsibilities on the
Company are recently constructed, management anticipates that capital demands to
meet obligations with respect to these properties will be minimal for the
foreseeable future and can be met with funds from operations and working
capital. The Company may be required to use bank borrowing or other sources of
capital in the event of unforeseen significant capital expenditures.
The initial issuance of 20,001 shares of stock for $200,010 was to AAA.
On March 17, 1994, the Company commenced an offering of 2,000,000 Shares of
Common Stock, together with 1,000,000 Warrants (collectively "Securities").
Until the completion of the offering in March 1996, the Securities were offered
on the basis of two (2) Shares of Common Stock and one (1) Warrant for a total
purchase price of $20.00. The Shares and Warrants are separately transferable by
an investor. Each Warrant entitled the holder to purchase one Share for $9.00
until March 15, 1998. The offering period for the initial public offering
terminated on March 15, 1996 with gross proceeds totaling $10,082,520 (1,008,252
shares). In addition, $515,844 (57,316) was received from the exercise of the
Warrants. On June 18, 1996, the Company commenced a follow- on offering of up to
$29,250,000 (2,853,659 shares) of additional shares of its common stock. The
offering terminated on May 22, 1998 with gross proceeds totaling $10,827,300
(1,056,946 shares).
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In December 1997, the Company entered into an amended and restated
unsecured revolving credit agreement (the "Amended Credit Agreement") with a
borrowing capacity up to $15,000,000 through February 1999. The actual amount
available to the Company is dependent on certain covenants such as the value of
unencumbered assets. The Amended Credit Agreement bears interest at 2.00% over
varying London Interbank Offered Rates and it is being used to acquire
additional properties. As of June 30, 1998, $8,568,884 was outstanding under the
Amended Credit Agreement. These funds were used to acquire properties.
As of June 30, 1998, the Company had acquired eight properties directly
and six properties through joint ventures with entities with common management
and had invested $21,275,145, exclusive of any minority interests, including
certain acquisition expenses related to the Company's investment in these
properties. These expenditures resulted in a corresponding decrease in the
Company's liquidity.
On June 5, 1998, the Company's shareholders voted to approve an agreement
and plan of merger with AAA, whereby the stockholder of AAA agreed to exchange
100% of the outstanding shares of common stock of AAA for up to 900,000 shares
(the "Share Consideration") of the Company's common stock (the "Merger"). The
common stock of AAA was wholly owned by the president and director of the
Company. As a result of the Merger, the Company became a fully integrated,
self-administered real estate investment trust ("REIT") effective June 5, 1998.
Effective June 5, 1998, 213,260 shares will be paid and the balance (the "Share
Balance") of the Share Consideration is to be paid over time to the extent
certain goals are achieved after the Merger. The market value of the common
shares to be issued effective June 5, 1998 was $2,185,915 of which $58,465 was
allocated to the net tangible assets acquired and the difference of $2,127,450
was accounted for as expenses incurred in acquiring AAA from a related party. In
addition, in connection with the Merger, the Company incurred costs during the
three and six months ended June 30, 1998 of $212,185 and $262,468, respectively,
consisting primarily of legal and accounting fees, valuation opinions and
fairness opinions. For accounting purposes, AAA was not considered a "business"
for purposes of applying APB Opinion No. 16, "Business Combinations," and
therefore, the market value of the common shares issued in excess of the fair
value of the net tangible assets acquired was charged to expense rather than
capitalized as goodwill. To the extent the Share Balance is paid over time, the
market value of the common shares issued will also be charged to expense. Upon
consummation of the Merger on June 5, 1998, certain employees of AAA became
employees of the Company, and any obligation to pay fees under the advisor
agreement between the Company and AAA was terminated.
Until the Company acquires properties, proceeds are held in short-term,
highly liquid investments that the Company believes to have appropriate safety
of principal. This investment strategy has allowed, and continues to allow, high
liquidity to facilitate the Company's use of these funds to acquire properties
at such time as properties suitable for acquisition are located. At June 30,
1998, the Company's cash and cash equivalents totaled $1,377,760.
Inflation has had very little effect on income from operations.
Management expects that increases in store sales volumes due to inflation as
well as increases in the Consumer Price Index (C.P.I.), may contribute to
capital appreciation of the Company properties. These factors, however, also may
have an adverse impact on the operating margins of the tenants of the
properties.
Results of Operations
Comparison of the Six Months Ended June 30, 1998 to June 30, 1997. During
the six months ended June 30, 1998 and June 30, 1997, the Company owned and
leased 14 and 9 properties, respectively. During the six months ended June 30,
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1998 and June 30, 1997, the Company earned $1,133,460 and $693,312,
respectively, in rental income from operating leases and earned income from
direct financing leases. This 63 percent increase in rental income and earned
income is primarily attributable to rental income earned on the five additional
properties owned during 1998.
During the six months ended June 30, 1998 and June 30, 1997, the
Company's expenses were $2,991,757 and $189,245, respectively. The $2,802,512
increase in expenses is primarily attributable to $2,389,918 of merger costs
incurred during the first six months of 1998 related to the acquisition of the
Company's adviser, AAA, on June 5, 1998. The increase is also attributable to
(i) $182,741 of costs incurred during the first six months of 1998 related to
potential acquisition costs related to the proposed acquisition of properties,
(ii) a $70,825 increase in depreciation as a result of the depreciation of the
additional properties owned during 1998, (iii) a $31,831 increase in interest
expense as a result of higher average borrowing levels, and (iv) a $30,800
increase in reimbursements and fees paid to AAA due to the additional properties
acquired during 1998. In addition, the increase in expenses is attributable to a
$96,397 increase in general operating and administrative expenses. Pursuant to
the Merger, the Company acquired AAA and became internally managed. Effective
June 5, 1998, the reimbursements and fees paid to AAA were replaced with the
actual personnel and other operating costs associated with being internally
managed.
Years Ended December 31, 1997 and 1996. During the years ended December
31, 1997 and 1996, AmREIT owned and leased 11 and 8 properties, respectively.
During the years ended December 31, 1997 and 1996, AmREIT earned $1,556,815 and
$924,788, respectively, in rental income from operating leases and earned income
from direct financing leases. The 68 percent increase in rental income and
earned income during 1997, as compared to 1996, is primarily attributable to
rental income earned on the three properties acquired during 1997. In addition,
rental and earned income increased during 1997 as a result of the fact that the
three properties acquired during 1996 were operational for a full fiscal year in
1997. Rental and earned income is expected to increase in 1998 as AmREIT
acquires additional properties and due to the fact that the three properties
acquired during 1997 will contribute to AmREIT's income for a full fiscal year
in 1998.
During the years ended December 31, 1997 and 1996, AmREIT's expenses were
$716,627 and $302,857, respectively. The $413,770 increase in expenses is
primarily attributable to $282,890 of costs incurred during 1997 in relation to
potential acquisition costs related to the proposed acquisition of AmREIT's
Adviser. On June 5, 1998, the Company acquired its former external Adviser. The
increase is also attributable to (i) a $68,594 increase in reimbursements and
fees to a related party as a result of increased rental income for the year
ended December 31, 1997, (ii) a $28,050 increase in general operating and
administrative expenses primarily attributable to an increase in legal fees and
director fees since more director meetings were held during 1997, and (iii) a
$32,271 increase in depreciation as a result of the depreciation of the
additional properties acquired during 1997 and a full year of depreciation on
the properties acquired during 1996.
Funds From Operations
FFO increased $192,824 or 44% to $635,692 for the six months ended June
30, 1998 from $442,868 for the six months ended June 30, 1997. The Company has
adopted the National Association of Real Estate Investment Trusts (NAREIT)
definition of FFO. FFO is calculated as net income (computed in accordance with
generally accepted accounting principles) excluding gains or losses from sales
of property, depreciation and amortization of real estate assets, and
nonrecurring items of income or expense. For purposes of the table below, FFO
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excludes nonrecurring merger costs and potential acquisition costs. Management
considers FFO an appropriate measure of performance of an equity REIT because it
is predicated on cash flow analysis and does not necessarily represent cash
provided by operating activities in accordance with generally accepted
accounting principles and is not necessarily indicative of cash available to
meet cash needs. The Company's computation of FFO may differ from the
methodology for calculating FFO utilized by other equity REIT's and, therefore,
may not be comparable to such other REIT's. FFO is not defined by generally
accepted accounting principles and should not be considered an alternative to
net income as an indication of the Company's performance.
Below is the reconciliation of net income to funds from operations for
the six months ended June 30 and the years ended December 31, 1997 and 1996:
<TABLE>
Six Months Ended June 30, Year Ended December 31,
1998 1997 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Income (Loss) $(2,067,712) 382,948 $538,857 $542,807
Plus Depreciation 130,745 59,920 146,015 113,744
Plus Merger Costs 2,389,918 --- --- ---
Plus Potential Acquisition Costs 182,741 --- 282,890 ---
------- ------- ------- --------
Total Funds from Operations 635,692 442,868 $967,762 $656,551
======= ======= ======== ========
Cash Distributions Paid $729,599 $486,038 $1,093,439 $737,277
Distributions in Excess of FFO 93,907 43,170 125,677 80,726
</TABLE>
Cash flows from operating activities, investing activities, and financing
activities for the six months ended June 30 and the years ended December 31,
1997 and 1996 are presented below:
<TABLE>
<CAPTION>
Six Months Ended Year Ended December 31,
1998 1997 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Operating Activities $597,935 $619,648 $1,080,157 $810,614
Investing Activities $(4,737,503) $(1,674,704) $(11,708,075) $(3,034,526)
Financing Activities $4,115,588 $2,459,008 $10,413,347 $2,275,262
</TABLE>
MATERIAL FEDERAL INCOME TAX ASPECTS
General
The following discussion summarizes the material provisions of the
federal income tax treatment applicable to AmREIT and to the Shareholders in
connection with their ownership of securities of AmREIT. Rushall & McGeever,
APC, has acted as special counsel to AmREIT in connection with the preparation
of this Prospectus. The discussion relates only to the federal income tax
treatment of AmREIT and its Shareholders and is generally directed to the
federal income tax treatment of an individual who is a United States resident
and subject to regular federal income tax. The following discussion does not
include the possible application of the federal income tax law to individual
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Shareholders. The discussion does not address all aspects of federal income
taxation that may be relevant to particular investors in light of their personal
investment or tax circumstances, or to investors who are subject to special
treatment under federal income tax laws.
AmREIT intends to continue to conduct its operations in a manner that
will permit it to qualify to be treated as a REIT for federal income tax
purposes after giving effect to the Merger. AmREIT has not requested a ruling
from the IRS as to the qualification of AmREIT as a REIT. AmREIT, however, will
receive, as of the Closing Date of the Merger, an opinion from Deloitte & Touche
LLP ("Deloitte") that, for federal income tax purposes, based on current law or
interpretations thereof, after giving effect to the Merger, AmREIT's proposed
method of operation will enable it to continue to meet the requirements for
qualification and taxation as a REIT under the Internal Revenue Code. Deloitte
will not render an opinion, except as specifically referenced, on the other
issues discussed under this section of the Prospectus because of the prospective
or hypothetical nature of the facts and circumstances associated with such an
opinion as, for example, the tax treatment of distributions to specific
shareholders. Deloitte's opinion will represent only its best professional
judgment as to the most likely outcome of an issue if the matter were litigated
and has no binding effect on the IRS or the courts. There is, therefore, no
assurance that the conclusions expressed below would be sustained by a court if
contested, or that future legislative or administrative changes or court
decisions may not significantly modify the statements and opinions expressed
herein. Any such future changes could be retroactive with respect to any
transactions effective prior to the time they are made.
The Code provides tax treatment for organizations that principally invest
in real estate or real estate assets (including mortgages secured by real
property) which meet certain conditions imposed by Code Sections 856-860 and
elect to be taxed as a REIT. In general, a REIT will not be taxed at the
corporate level on its net income which is currently distributed to its
Shareholders. Thus, taxation as a REIT will substantially eliminate the
"double taxation" (tax at both the corporate and shareholder levels) typically
associated with corporations. If AmREIT fails to continue to qualify as a
REIT in any year, it would likely be taxed as a domestic corporation and
would not receive a deduction for dividends paid to the Shareholders. In such
event, the Shareholders would be taxed in the same manner as shareholders of
ordinary domestic corporations, and AmREIT may be subject to significant tax
liabilities, which would reduce the amount of cash available for dividends to
the Shareholders.
Requirements for Qualifications and Taxation as a REIT
AmREIT presently qualifies as a REIT. Deloitte will render its opinion
that, assuming that AmREIT operates in accordance with the method of operation
described herein, including the representations of the directors that they
intend to continue to comply with the requirements of Code Sections 856-860, as
amended, AmREIT will continue to qualify for taxation as a REIT. However, no
opinion can be given that AmREIT will actually satisfy REIT requirements in the
future since they will depend substantially on future events. Further, AmREIT
has not, and does not intend to, request a ruling from the IRS as to its tax
status.
To continue to qualify as a REIT, AmREIT must, among other things, meet
each of the requirements discussed below.
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Ownership of Shares. A REIT's Shares must be held by a minimum of 100
persons for at least 335 days in each of its 12-month taxable years. At all
times during the last half of each of its taxable years, no more than 50% in
value of the Shares may be owned, directly or indirectly, actually or
constructively, by five or fewer individuals. To aid in meeting these
requirements, AmREIT is given the power in its Bylaws to prohibit a transfer of
Shares which would produce a violation of these requirements. In determining
Share ownership, the attribution rules provided in the Code will, in general,
apply. In applying the attribution rules to determine indirect ownership of a
REIT's Shares, attribution to an individual of Shares owned by or for the
individual's partner is ignored.
Nature of Assets; Diversification. AmREIT must meet two tests designed to
insure that its investments are primarily in real estate assets (including
mortgages secured by real estate), cash, or government securities and that its
other assets are diversified. In general, at the end of each fiscal quarter, at
least 75% of the value of a REIT's total assets must be real estate assets, cash
and cash items (including receivables), and government securities. AmREIT
generally may not own securities of any one non-governmental issuer which, in
the aggregate, exceed 5% of the value of AmREIT's total assets. Also, AmREIT may
not own more than 10% of the outstanding voting securities of any one issuer.
For the purposes of so evaluating AmREIT's assets, any AmREIT investments in a
partnership or joint venture will be deemed to be a proportionate investment in
the assets of such partnership or joint venture. Stock or debt instruments
purchased with new equity capital are treated as real estate assets for the
purposes of the 75% Assets Test. See the discussion under "New Equity Capital"
below.
AmREIT will own 9% of the voting stock and 100% of the non-voting stock
of a non-REIT subsidiary. AmREIT believes its pro rata share of the value of the
securities of the non-REIT subsidiary do not exceed 5% of the total value of its
assets. There can be no assurance, however, that the IRS will not contend either
that the value of the securities of the non-REIT subsidiary held by AmREIT
exceeds the 5% value limitation or that non-voting stock of the non-REIT
subsidiary should be considered "voting stock" for this purpose.
Sources of Income. To qualify as a REIT, AmREIT must, effective January
1, 1998, meet the two separate income tests described below. These tests are
designed to ensure that a REIT's income is derived principally from passive real
estate investments. In evaluating a REIT's income, investments in a partnership
or joint venture will be treated as though the REIT is receiving its
proportionate share of the income earned by such partnership or joint venture
and, in the REIT's hands, any such income will retain the character that it
would have in the hands of the partnership or joint venture.
The 75% Source of Income Test. Under this requirement, at least
75% of the Company's income must be derived from the following sources:
o Interest on monetary obligations secured by real property,
including any income derived from a shared appreciation
provision which is treated as gain recognized on the sale
of the secured property. A "shared appreciation provision"
is any interest that is in connection with an obligation
that is held by AmREIT and secured by an interest in real
property, which provision entitles AmREIT to receive a
specified portion of any gain realized on the sale or
exchange of such property (or any gain that would be
realized if the property were sold on a specified date).
For the purpose of meeting the income requirements,
AmREIT will be treated as holding the secured property
for the period during which it held the shared
appreciation provision (or, if shorter, the period during
which secured property was held by the person holding
such property). AmREIT does not intend to make
substantial investments in such mortgages.
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o Rents from real property, except for (a) rent based on the
income or profits derived from the property, (b) rent paid
by a person or corporation in which AmREIT owns a 10% or
greater interest, and (c) amounts received with respect to
real or personal property if AmREIT furnishes services to
tenants, or manages or operates the property, other than
through an "independent contractor" from whom AmREIT does
not derive any income. Substantially all of the income
received by AmREIT is expected to be derived from rents from
real property.
o Gain from the sale or other disposition of real property
(including interests in mortgages) which is not property
described in Code Section 1221(1). Section 1221(1) property
("dealer property") is stock in trade, inventory, and
property held primarily for sale to customers in the
ordinary course of the company's trade or business. In
general, income from the sale of dealer property does not
qualify under this source of income test because it is
active income. AmREIT does not expect to have significant
amounts of such gain.
o Dividends or other distributions on shares in other REITs
(except a qualified REIT subsidiary), as well as gain from
the sale of such shares.
o Abatements and refunds of real property taxes.
o Income and gain derived from "foreclosure property."
"Foreclosure property" includes real property and related
personal property that AmREIT elects to treat as foreclosure
property under prescribed procedures. See "GLOSSARY`." Under
this category, a REIT may receive, for a limited period,
income from a property that it acquired involuntarily that
otherwise would not qualify because it is active income.
o Commitment fees received in consideration for AmREIT's
agreement to make secured loans or purchase or lease real
property.
For the purposes of the foregoing, an "independent contractor" is
any person who does not own, directly or indirectly, 35% of AmREIT's Shares,
and, in general, which is not 35% or more owned, directly or indirectly, by any
person or persons owning 35% or more of AmREIT's Shares. Attribution rules apply
for such determination so that the Shares of two or more persons may be
aggregated in making the determination. The contractor must be adequately
compensated for any services performed for AmREIT. Compensation determined by
reference to an unadjusted percentage of gross rents will generally be
considered to be adequate where the percentage is reasonable, taking into
account the going rate of compensation for managing similar property in the same
locality, the services rendered and other relevant factors. An independent
contractor may not be an employee of AmREIT (i.e., the manner in which the
contractor carries out its duties as independent contractor must not be subject
to the control of AmREIT).
To the extent that services (other than those customarily
furnished or rendered in connection with the rental of real property) are
rendered to the tenants of the property, they must, in general, be provided by
an independent contractor and the cost of the services must be borne by the
independent contractor or a separate charge on the tenants must be made for such
services. The amount of the separate charge must be received and retained by the
independent contractor and the independent contractor must be adequately
compensated for its services. However, REITs may perform for themselves those
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services that would not result in the receipt of "unrelated business income" if
performed by certain tax exempted entities, without using an independent
contractor. For its 1998 taxable year and thereafter, under the 1997 Act, AmREIT
is permitted to receive up to 1% of the gross income from each property from the
provision of non customary services and still treat all other amounts received
from such property as "rents from real property." AmREIT believes that all
services provided to tenants by AmREIT will be considered "usually or
customarily rendered" in connection with the rental of retail space for
occupancy, although there can be no assurance that the IRS will not contend
otherwise.
A REIT receiving new capital and investing it in stock or bonds,
may treat interest, dividends or gains from the sale of such investments as
income for the purpose of the 75% source of income test. "New capital" is any
amount received by a REIT in exchange for its stock (other than pursuant to a
dividend reinvestment plan) or in a public offering of debt obligations of
AmREIT with maturities of at least five years. However, this provision is
applicable only to income received for the one year period beginning on the date
that AmREIT received such capital. In addition, during that period, stocks or
bonds bought with new capital will be treated as "real estate assets" for the
purposes of the 75% test (as explained, the 75% test requires that 75% or more
of the value of a REIT's total assets must be real estate assets, cash, cash
items and government securities).
The 95% Source of Income Test. Under this requirement, AmREIT must
derive at least 95% of its gross income from the sources listed under the 75%
source of income test and from dividends from companies other than REITs,
interest on obligations that are not secured by real property or gains from the
sale or disposition of stock or securities (other than interest in qualified
REITs), which is not Code Section 1221(1) property ("dealer property").
For the purposes of determining whether AmREIT complies with the
75% and 95% source of income tests detailed above, "gross income" does not
include gross income from prohibited transactions.
See "GLOSSARY" and the discussion of prohibited transactions below.
The Code provides certain relief from this requirement when a REIT
has certain types of income that are not accompanied by the receipt of cash.
However, AmREIT must pay tax on the amounts not distributed (Code Sections
857(a) and (e)).
Should AmREIT fail to satisfy either of the 75% or the 95% source
of income tests for any taxable year, it will be subject to a 100% excise tax on
the greater of the amount by which it fails either test notwithstanding whether
AmREIT qualifies under the relief provision described below. However, it may
still qualify as a REIT if (i) its failure to comply was due to reasonable cause
and not to willful neglect; (ii) AmREIT reports the name and amount of each item
of its income included in the tests on a schedule attached to its tax return;
and (iii) any incorrect information is not due to fraud with intent to evade
tax.
For tax years commencing prior to January 1, 1998, AmREIT was also
required to satisfy the 30% source of income test. Under this requirement,
AmREIT was required to derive less than 30% of its gross income from the sale or
other disposition of (i) real property held less than four years, other than
foreclosure property or property involuntarily or compulsorily converted within
the meaning of Code Section 1033, (ii) stock or securities held less than one
year, and (iii) property sold in a prohibited transaction.
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Prohibited Transactions. A "prohibited transaction" is one involving a
sale of dealer property, other than foreclosure property. See "GLOSSARY." The
Code provides a safe harbor whereby the sale of a property is not a prohibited
transaction if: (i) AmREIT held the property for not less than four years; (ii)
AmREIT made no more than seven property sales (other than "foreclosure
property") during such taxable year, or the adjusted basis of all such sales is
not more than 10% of the adjusted basis of all of AmREIT's assets as of the
beginning of such year; (iii) the aggregate expenditures made by AmREIT (or any
partner or joint venture of AmREIT) during the four-year period preceding the
date of the sale which are includable in the basis of the property do not exceed
30% of the net selling price of such property; and (iv) in the case of land or
improvements not acquired through foreclosure or lease termination, AmREIT held
the property for at least four years for the production of rental income. Losses
from prohibited transactions may not be taken into account in determining the
amount of net income from prohibited transactions. However, any net loss from
prohibited transactions may be taken into account in computing REIT taxable
income.
In the event the IRS were successful in characterizing AmREIT as a dealer
in connection with any sale of a property, AmREIT could be subject to the 100%
Excise Tax. In addition, capital gain treatment and any otherwise applicable
capital gain tax rate with respect to the sale of the property could be
unavailable. Under such circumstances, AmREIT could be unable to satisfy the
75% and 95% source of income tests. Likewise, there is no assurance that
improvements made by AmREIT to any property will not exceed 30% of the net
selling price of such properties or that AmREIT will not make more than seven
sales of properties in any one year.
AmREIT does not intend to hold any property primarily for sale to
customers in the ordinary course of its trade or business ("dealer property").
However, the determination of whether properties are held by AmREIT as "dealer
property" depends on the facts and circumstances relating to the particular
property at the time of sale. Also, the Company's purposes for holding property
may change during the course of its investments. Accordingly, there can be no
assurance that AmREIT will avoid "dealer status" with respect to each of its
properties.
Additional Requirements. In addition to the foregoing, AmREIT must:
o Except for the application of Code Section 856-860, be
taxable as a "domestic corporation";
o Use the calendar year as its annual accounting period
for federal income tax purposes; and
o Conduct is affairs, with certain limitations, and
manage and dispose of its properties under the
continuing exclusive authority and management of
its directors.
Distribution Requirements
Distributions During the Taxable Year. In addition to satisfying the
requirements discussed above, in order to qualify for taxation as a REIT, AmREIT
must distribute to the Shareholders in each taxable year an amount at least
equal to the sum of:
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o 95% of its REIT Taxable Income (as defined below), before
the deduction for dividends paid and excluding any net
capital gain; and
o 95% of the net income from foreclosure property minus the
tax imposed on that income; minus
o Excess non-cash income.
"REIT Taxable Income" is defined under Code and Regulations as AmREIT's
taxable income computed as if AmREIT were an ordinary corporation with certain
adjustments. See "GLOSSARY" for a detailed definition of REIT Taxable Income.
In some situations, AmREIT may produce taxable income in excess of the
cash available for distribution by AmREIT. As a result, from time to time,
AmREIT might have to attempt to borrow, use cash reserves or sell properties to
meet the 95% distribution test.
Distributions After the Taxable Year. Under certain circumstances, AmREIT
can rectify its failure to meet the 95% distribution test by paying dividends
after the close of the taxable year.
Dividends Paid in the Following Year. For purposes of the 95%
distribution test, AmREIT is permitted to treat as distributed in a particular
taxable year, certain dividends that it pays to the Shareholders in the
following taxable year. To qualify for this treatment, the dividends must be
declared before the date on which AmREIT's tax return filings are due (including
extension periods), and the dividend must be paid within twelve months of the
end of the taxable year and no later than the next regular dividend payment
after the declaration.
Deficiency Dividends. Although AmREIT may meet the 95%
distribution test based upon the figures reflected in its tax returns, the IRS
might successfully dispute those figures. If an adjustment is made that causes
the dividends paid by AmREIT to be insufficient to have met the 95% distribution
test, it may pay a deficiency dividend that will be permitted as a deduction in
the taxable year to which the adjustment is made, so that AmREIT will
retroactively be deemed in compliance with the 95% distribution test. To qualify
as a deficiency dividend, AmREIT must make this dividend within a specified
period. No deficiency dividend deduction is allowed if the deficiency is due and
there exists fraud with intent to evade tax or willful failure to file a timely
tax return.
Termination or Revocation of REIT Status
The Company's election to be treated as a REIT will be terminated
automatically if it fails to meet one of the various requirements described
above. AmREIT may voluntarily revoke its election within the first 90 days of
any taxable year after the first taxable year for which such election is
effective in the manner prescribed in the Treasury Regulations. If a termination
or revocation occurs, AmREIT (and its successor) will not be eligible to elect
REIT status for any taxable year prior to the fifth taxable year that begins
after the taxable year for which the termination or revocation is first
effective. However, this five-year ineligibility rule will not apply in the case
of terminations by failure to satisfy the qualification requirements if: (i)
AmREIT does not willfully fail to timely file an income tax return for the
taxable year of the termination, (ii) any incorrect information in such return
is not due to fraud with intent to evade tax, and (iii) AmREIT's failure to
qualify as a REIT is due to reasonable cause and not due to willful neglect.
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Taxation of AmREIT
If Qualified REIT. The following discussion generally describes the
various tax rules applicable to AmREIT for years in which it qualifies as a
REIT.
Loss Carry Forward. AmREIT generally cannot carry its net
operating or net capital losses back to prior years, but it may carry forward
net operating loss for 15 years and net capital loss for 5 years.
Income Taxable if Not Distributed. AmREIT is taxed on its REIT
taxable income which is not timely distributed to the Shareholders and on its
undistributed capital gain, as if it were an ordinary domestic corporation. As
explained above, this income is essentially AmREIT's undistributed net income
and, in certain circumstances, dividends paid after the end of each taxable year
may also be deducted in determining the income subject to tax. However, to
discourage a REIT from delaying distributions until the year after the income
earned, the Code imposes a nondeductible excise tax on undistributed income of
4% of the amount by which the required distribution exceeds the amount
distributed in the taxable year. The required distribution is the sum of 85% of
AmREIT's ordinary income, plus 95% of its capital gain net income, plus the
excess, if any, of the "grossed up required distribution" for the preceding
calendar year over the distributed amount for such year. The "grossed up
required distribution" for the proceeding calendar year is the sum of AmREIT's
taxable income for that year (without regard to deductions for REIT
distributions) and amounts from earlier years that are not treated as having
been distributed.
If AmREIT has undistributed net capital gain for a taxable year,
it must pay tax on such amounts. Currently, corporate long-term capital gains
are taxed as ordinary income, but will be subject to a maximum rate of 35%. The
alterative tax rate for corporate net capital gains does not apply.
Income Taxable Whether or Not Distributed. The following forms of
income are subject to taxation at the corporate level, whether or not they are
distributed to the Shareholders:
o Income Violating the 75% or 95% Source of Income Tests.
If AmREIT fails to meet either the 75% or 95% source of
income tests described above, but still qualifies for
taxation as a REIT under the reasonable cause exception to
those tests, a 100% tax is imposed on an amount equal to
the result obtained by multiplying (i) the greater of (A)
the amount by which AmREIT failed to meet the 75% test or
(B) the amount by which it failed to meet the 95% test,
by (ii) a fraction, the numerator of which is the
Company's taxable income (with certain adjustments) and
the denominator of which is the Company's gross income
(with certain adjustments).
o Net Income From Foreclosure Property. The Company's net
income from foreclosure property would be taxed at the
highest corporate rate, which is presently 35%.
o Income From Prohibited Transactions. The Company's net
income from prohibited transactions will be taxed at a
rate of 100% whether or not such income is distributed
to the Shareholders.
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o Minimum Tax on Items of Tax Preference. AmREIT may be
subject to the corporate Alternative Minimum Tax ("AMT"),
which is similar to the individual AMT. The corporate AMT
rate is 20% with a $40,000 exemption amount (phased out at
the rate of $.25 on each dollar for AMT income in excess of
$150,000) on items of tax preference allocable to it. The
1997 Act provides an exception to the AMT for a small
corporation. A corporation qualifies as a "small
corporation" if it had average gross receipts of $5,000,000
or less for its past three years.
Like Kind Distributions. AmREIT's Bylaws do not permit it to make
any in-kind distributions to the Shareholders.
Qualified REIT Subsidiaries. A REIT owning a "qualified REIT
subsidiary" may treat all of the assets, liabilities and items of income,
deduction, and credit of the subsidiary as though they were those of the REIT.
To be a qualified REIT subsidiary, 100% of the subsidiary must be owned by the
REIT.
If Not Qualified as a REIT. For any taxable year in which AmREIT fails to
qualify as a REIT, it will be taxed at a maximum corporate rate (currently 35%)
on its taxable income, whether or not the income is distributed to the
Shareholders. In any taxable year for which AmREIT qualifies as a REIT, it will
be taxed as an ordinary corporation only on its undistributed income, except
that certain types of income will be taxable at the corporate level whether or
not they are distributed to the Shareholders.
Taxation of Domestic Shareholders
For any taxable year in which AmREIT fails to qualify as a REIT,
distributions to the Shareholders would be taxed as ordinary dividends to the
extent of AmREIT's current and accumulated earnings and profits. Such dividends
would be eligible for the dividend exclusion for individuals or the 70%
dividends received deduction for corporations.
Taxation of Distributions. For any taxable year in which AmREIT qualifies
as a REIT, the amounts it distributes to the Shareholders will be taxed as
follows:
Distributions From Current and Accumulated Earnings and Profits.
Distributions from AmREIT will be taxable to Shareholders who are not tax-exempt
entities as ordinary income to the extent of the earnings and profits of AmREIT.
Any dividend declared by AmREIT in October, November, or December of any year
payable to Shareholders of record on a specified date in such a month shall be
deemed to have been received by each Shareholder on December 31st of such year
and to have been paid by AmREIT on December 31st of such year, provided such
divided actually is paid by January 31st of the following year. Consequently,
any such dividend will be taxable to a Shareholder in such Shareholder's taxable
year including December 31st. (It is possible that any portion of a dividend
made to a Shareholder after December 31st not from current or accumulated
earnings and profits would be treated as a distribution by AmREIT in the year it
is actually made. Accordingly, if AmREIT has sufficient earnings and profits in
the year in which such dividend actually is paid, no portion of such dividend
would be a return of capital distribution.) Dividends paid to such Shareholders
will not constitute passive activity income (such income, therefor, will not be
subject to reduction by losses from passive activities of a Shareholder who is
subject to the passive activity loss rules). Such distributions, however, will
be considered investment income, which may be offset by investment deductions.
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Capital Gain Distributions. Dividends that are designated as
capital gains dividends by AmREIT will be taxed as long-term capital gain to
taxable Shareholders to the extent that they do not exceed AmREIT's actual net
capital gain for the taxable year. A Shareholder that is a corporation may be
required to treat up to 20% of any such capital gains dividend as ordinary
income. Such distributions, whether characterized as ordinary income or as
capital gains, are not eligible for the 70% dividends received deduction for
corporations. Shareholders are not permitted to deduct any net losses of AmREIT.
The maximum federal income tax rate applicable to net capital gains (the excess
of net long-term capital gains over net short-term capital losses) recognized by
an individual is 20% as compared to a maximum rate of 39.6% for ordinary income.
To the extent that AmREIT designates a portion of a dividend as an
"unrecaptured Section 1250 gain distribution" such amount will be subject to
a maximum tax rate of 25%.
The 1997 Act also permits AmREIT, for its taxable year beginning
January 1, 1998, to elect to retain, rather than distribute, its net long-term
capital gains and pay the tax on such gains. Correspondingly, its Shareholders
would include their proportionate share of the undistributed long-term capital
gains in income and receive a credit for their share of the tax paid by AmREIT.
Return of Capital. To the extent any distributions made by AmREIT
to the Shareholders exceed the current and accumulated earnings and profits of
AmREIT, such distributions will constitute a non-taxable return of capital to
the Shareholder to the extent of the Shareholder's adjusted tax basis in his or
her Shares. A Shareholder's adjusted tax basis in his or her Shares will be
reduced (but not below zero) by the amount of such excess. The proportion of the
distributions that exceed such adjusted tax basis will be taxable to the
Shareholder as gain from the sale or exchange of his or her Shares.
Notification. AmREIT will promptly, as required, notify Shareholders of
the amount of any items of tax preference and the portion of distributions made
during each taxable year that constitute return of invested capital.
Backup Withholding. AmREIT will be required to withhold tax from
dividends paid to a Shareholder under certain circumstances as specified in the
"backup" withholding provisions. These provisions only apply to a Shareholder
who (i) fails to furnish his or her taxpayer identification number ("TIN") to
AmREIT as required; (ii) who has, according to the IRS, furnished an incorrect
TIN to AmREIT; (iii) who has, according to the IRS, under-reported interest,
dividends or patronage dividend income in the past; or (iv) who has failed to
satisfy the payee's certification requirements of Code Section 3406. With
respect to such a Shareholder, AmREIT will impose backup withholding on
dividends paid by AmREIT at the required rate of 31%. Foreign investors are
subject to different withholding rules.
Alternative Minimum Tax. Individual and other non-corporate Shareholders
may, as a result of their investment in AmREIT, be subject to AMT, but only to
the extent it exceeds their regular tax liability. Effective beginning in 1993,
a two-tiered, graduated rate schedule for AMT is applicable. The lower tier
consists of a 26% rate, applicable to the first $175,000 of a taxpayer's
alternative minimum taxable income (AMTI) in excess of the exemption amount. The
upper tier consists of a 28% rate, applicable to AMTI that is greater than
$175,000 above the exemption amount. For married individuals filing separately,
the 28% rate applies to AMTI that is greater than $87,500 above the exemption
amount. The exemption amounts are $45,000 for married individuals filing joint
returns, $33,750 for unmarried individuals, and $22,500 for married individuals
filing separately, estates and trusts. The 1997 Act lowered the maximum capital
gains tax rate to 20% (10% for individuals in the 15% tax bracket) for both the
regular and the alternative minimum tax.
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AMTI is calculated by adding the taxpayer's items of tax preference to
his or her adjusted gross income (computed without regard to any deduction for
net operating loss carry-overs) and subtracting certain itemized deductions (to
the extent they do not create a net operating loss, which can be carried to
another year for purposes of the regular tax), the taxpayer's AMT on net
operating loss carry-overs and the applicable exemption amount. Under the 1986
Act, REITs are subject to AMT to the extent items of tax preference and other
items are treated differently for regular tax and AMT purposes. Code Section
59(d) authorizes the IRS to issue regulations concerning the apportionment of
differently treated items between a REIT and its shareholders. These
regulations, when issued, could result in shareholders being allocated such
differently treated item for inclusion in their own tax returns.
Statement of Share Ownership. Each year AmREIT must demand from the
record holders of designated percentages of its Shares written statements
disclosing the actual owners of the Shares. AmREIT must also maintain permanent
records showing the information it has received from the shareholders on this
subject, and a list of those persons failing or refusing to comply with its
request for that information. The 1997 Act requires a REIT which fails to comply
with the regulatory rules on determining its ownership for a tax year to pay a
$25,000 penalty upon receiving notice and demand from the IRS.
Taxation of Tax-exempt Entities. In general, a shareholder that is a
tax-exempt entity not subject to tax on its investment income will not be
subject to tax on distributions from AmREIT. The IRS has ruled that regardless
of whether AmREIT incurs indebtedness in connection with the acquisition of
properties, distributions paid by AmREIT to a shareholder that is a tax-exempt
entity will not be treated as UBTI, provided that (i) the tax-exempt entity has
not financed the acquisition of its Shares with "acquisition indebtedness"
within the meaning of the Code and the Shares otherwise are not used in an
unrelated trade or business of the tax exempt entity and (ii) AmREIT is not a
pension-held REIT. This opinion applies to a shareholder that is an organization
that qualifies under Code Section 401(a), an IRA or any other tax-exempt
organization that would compute UBTI, if any, in accordance with Code Section
512(a)(1). However, pursuant to changes that are part of the 1993 Tax Act, if
AmREIT is a pension-held REIT and a tax-exempt shareholder owns more than 10
percent of AmREIT, such shareholder will be required to recognize as UBTI that
percentage of the dividends that it receives from AmREIT as is equal to the
percentage of AmREIT's gross income that would be UBTI to AmREIT if AmREIT were
a tax-exempt entity required to recognize UBTI. A REIT is a pension-held REIT if
at least one qualified trust holds more than 25 percent of the value of the
REIT's shares or one or more qualified trusts, each of whom own more than 10
percent of the REIT's shares, hold more than 50 percent of the value of the
REIT's shares.
For social clubs, voluntary employee benefit associations, supplemental
unemployment benefit trusts and qualified group legal services plans exempt from
federal income taxation under Code Sections 501(c)(7), (c)(9), (c)(17) and
(c)(20), respectively, income from an investment in AmREIT will constitute UBTI
unless the organization is able to deduct amounts set aside or placed in reserve
for certain purposes so as to offset the UBTI generated by its investment in
AmREIT. Such prospective shareholders should consult their own tax advisors
concerning these "set aside" and reserve requirements.
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Foreign Shareholders
Nonresident alien individuals, foreign corporations, foreign partnerships
and other foreign Shareholders are subject to United States federal income tax
under rules which are complex and the application of which will vary depending
on the individual foreign Shareholder's circumstances. Accordingly, no attempt
is made to summarize these rules and prospective foreign Shareholders should
consult their own tax advisors concerning those provisions of the Code which
deal with the taxation of foreign taxpayers.
Dividend Reinvestment Plan
Shareholders who elect to participate in AmREIT's Dividend Reinvestment
Plan will be deemed to have received the gross amount of dividends distributed
on their behalf to the Plan's Trustee or agent as agent for the participants in
the Plan. Such deemed dividends will be treated as actual dividends to such
shareholders by AmREIT and will retain their character and have the tax effects
described above. Participants that are subject to federal income tax will thus
be taxed as if they received such dividends despite the fact that their
distributions have been reinvested and, as a result, they will not receive any
cash with which to pay the resulting tax liability. The IRS has ruled that a
maximum 5% discount (i.e., dividends reinvested in newly issued Shares at a
price equal to 95% of the Shares' fair market value on the distribution date)
representing the underwriting and other costs that AmREIT otherwise would expect
to incur to issue new stock is permitted without causing AmREIT to lose its
dividends paid deduction. The IRS might assert that Shares issued for a fixed
price under the Dividend Reinvestment Plan would violate the 5% discount cap if
AmREIT's assets have appreciated. However, based on the availability of updated
appraisals, AmREIT will adjust the Plan's Share purchase price to take into
account asset value changes between distribution dates to strive to preserve its
dividends paid deduction. Shares received pursuant to the Dividend Reinvestment
Plan will have a holding period which begins on the day after purchase by the
Plan's Trustee or agent. The tax basis of the Shares acquired through the
Dividend Reinvestment Plan will generally be the gross amount of the deemed
dividends invested in such Shares.
United States Report Requirements
Subject to regulations, the IRS may impose annual reporting requirements
of certain United State and foreign persons directly holding United States Real
Property Interests ("USRPIs"). The required reports are in addition to any
necessary income tax returns. Furthermore, because Shares in a domestically
controlled REIT do not constitute USRPIs, such reporting requirements will not
apply to a foreign Shareholder in AmREIT (assuming that AmREIT will be
domestically controlled) if such Shareholder does not otherwise own USRPIs.
However, AmREIT is required to file an information return with the IRS setting
forth the name, address and taxpayer identification number of the payee of
dividends from AmREIT, whether the payee is a nominee or is the actual
beneficial owner of the Shares.
State and Local Taxes
Treatment of AmREIT and the Shareholders under state and local tax laws
may differ substantiallyfrom the federal income tax treatment described above.
CONSEQUENTLY, EACH PROSPECTIVE INVESTOR SHOULD CONSULT HIS OR HER OWN TAX
ADVISOR WITH REGARD TO THE STATE AND LOCAL TAX CONSEQUENCES OF AN INVESTMENT IN
AMREIT.
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AMREIT AND ITS BUSINESS
Description of AmREIT
AmREIT was organized on August 17, 1993, as a Maryland business
corporation and operates as a real estate investment trust ("REIT") under the
federal income tax laws. AmREIT acquires, owns and manages a diversified
portfolio of quality, frontage retail properties leased to national and regional
retail tenants. Each of AmREIT's properties is initially leased under a
full-credit, long-term net lease, under which the tenant is responsible for the
operation costs of the property, including taxes, insurance and maintenance
costs. As of the date of this Prospectus, AmREIT owned a total of 16
properties. The aggregate purchase prices of these 16 properties are
approximately $24,251,000 and total annualized rents are approximately
$2,599,720, with an annual capitalization rate of approximately 10.7%
based on purchase price. These 16 properties are leased to a total of 9
different tenants and are located in 8 states. AmREIT's properties contain
an aggregate of approximately 193,920 square feet of gross leaseable area.
AmREIT's principal executive offices are located at Eight Greenway Plaza,
Suite 824, Houston, Texas 77046, and its telephone number is (713) 850-1400.
The property under development is being developed by AmREIT through a
joint venture with an unrelated party. AmREIT intends to continue its focus on
acquiring frontage retail properties and may acquire one or more multi-structure
properties leased to two or more unrelated tenants.
Formerly, substantially all aspects of AmREIT's business and affairs were
administered, under the direction of AmREIT's Board of Directors, by the
Adviser, American Assets Advisers Realty Corporation. The Adviser provided
administrative, acquisition, development, management and operational services to
AmREIT pursuant to an Omnibus Services Agreement. The terms and conditions of
the Omnibus Services Agreement are described under "Adviser Acquisition" below.
AmREIT had only one part-time employee, Mr. H. Kerr Taylor, AmREIT's Chairman
and Chief Executive Officer. Mr. Taylor also served in similar capacities to the
Adviser and each of its affiliates. Mr. Taylor was the sole shareholder, the
principal officer and a director of the Adviser. AmREIT's objective is to be an
efficient and competitive real estate operating company focusing on a
diversified portfolio of frontage retail properties located throughout the
United States.
AmREIT's Investment Objectives
AmREIT's principal investment objectives are:
o To provide regular dividends to Shareholders.
o To provide dividends that are partially free from current
taxation. So long as AmREIT qualifies as a REIT, it will generally
not be taxed on taxable income to the extent it pays dividends to
the Shareholders.
o To provide Shareholders with long-term appreciation on their
investment.
o To provide investors with an inflation hedge.
o To conserve Shareholders' capital through a diversified
portfolio of quality real estate.
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There can be no assurance that any or all of the foregoing objectives
will be achieved as each, to some extent, is dependent upon factors and
conditions which are beyond the control of AmREIT.
AmREIT may commit to purchase properties prior to, during or upon their
physical completion at agreed prices or pursuant to pricing formulas. To the
extent possible, AmREIT intends to diversify the type and location of its
properties.
AmREIT's Stated Investment Policies
AmREIT's Stated Investment Policies are investment policies and
restrictions set forth in its Bylaws pursuant to which AmREIT must conduct its
affairs. The Board may not make any material change in a Stated Investment
Policy without first obtaining the approval of Shareholders owning a majority of
the then outstanding Shares. Set forth below is a summary of AmREIT's Stated
Investment Policies.
Investments in Properties. AmREIT must:
(1) invest only in interests (including mortgage loan
interests secured by) income-producing, undeveloped, development stage and
improved real estate Properties using borrowed capital only where prudent as
determined by the Board;
(2) invest only in properties subject to leases with lessees
who have demonstrated (or together with a guarantor has demonstrated) to
management the financial capability to perform under their lease;
(3) not invest more than 10% of its total assets in
unimproved real property or mortgage loans on unimproved real property;
(4) not engage in the purchase and sale of investments,
other than real property interests which satisfy AmREIT's investment objectives
or for the purpose of investing on a short-term basis reserves and funds
available for the purchase of properties; and
(5) pay consideration for a property which is based on its
fair market value as determined by the Independent Directors. In cases where the
majority of the Independent Directors determine, and in all acquisitions from
Interested Persons, as defined below, such fair market value shall be determined
by an independent expert selected by the Independent Directors.
Policy Restrictions. AmREIT may not engage in any of the following
financial or investment activities.
Loan Investments: AmREIT may not:
(1) invest more than ten percent (10%) of its total assets
in second mortgages, excluding wrap-around type second mortgage loans;
(2) make or invest in mortgage loans, including construction
loans, on any one property if the aggregate amount of all mortgage loans
outstanding on the property, including AmREIT's loan(s), would exceed an amount
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equal to eighty-five percent (85%) of the appraised value of the property as
determined by appraisal unless substantial justification exists because of the
presence of other underwriting criteria. For purposes of this subsection, the
"aggregate amount of all mortgage loans outstanding on the property" shall
include all interest (excluding contingent participation in income and/or
appreciation in value of the mortgaged property), the current payment of which
may be deferred pursuant to the terms of such loans, to the extent that
deferred interest on each loan exceeds five percent (5%) per annum of the
principal balance of the loan;
(3) make or invest in any mortgage loans that are
subordinate to any mortgage or equity interest of an Advisor, directors or any
affiliate of AmREIT; or
(4) invest in any mortgage loans that are subordinate to any
liens or other indebtedness on a property if the effect of such mortgage loans
would be to cause the aggregate value of all such subordinated indebtedness to
exceed twenty-five percent (25%) of AmREIT's tangible assets.
Restrictions on Leverage. AmREIT may not borrow funds in order to
distribute the proceeds to the Shareholders and thereby offset under-performance
by the properties, unless it is required to do so for REIT qualification
purposes.
The directors must review AmREIT's borrowings at least quarterly
for reasonableness in relation to its Net Assets. AmREIT may not incur
indebtedness if, after giving effect to the incurrence thereof, aggregate
indebtedness, secured and unsecured, would exceed three hundred percent (300%)
of its net assets on a consolidated basis. For this purpose, the term "Net
Assets" means AmREIT's total assets (less intangibles) at cost, before deducting
depreciation or other non-cash reserves, less total liabilities, as calculated
at the end of each quarter on a basis consistently applied.
Investment Limitations. AmREIT may not:
(1) invest in equity securities of other issuers unless a
majority of the directors, including a majority of the Independent Directors,
not otherwise interested in the transaction approve the transaction as being
fair, competitive and commercially reasonable;
(2) invest in the equity securities of any non-governmental
issue, including other real estate investment trusts or limited partnerships for
a period in excess of eighteen (18) months, unless approved by a majority of the
directors, including a majority of the Independent Directors;
(3) engage in underwriting or the agency distribution of
securities issued by others;
(4) invest in commodities or commodity futures contracts,
other than solely for hedging purposes;
(5) engage in short sales of securities or trading, as
distinguished from investment activities; or
(6) invest in real estate contracts of sale, otherwise known
as land sale contracts, unless such contracts are in recordable form and
appropriately recorded in the chain of title.
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AmREIT Securities. AmREIT may not issue:
(i) equity securities which are redeemable at the
election of the holder of such securities;
(ii) debt securities unless the historical debt
service coverage (in the most recently
completed fiscal year) as adjusted for known
changes is sufficient to properly service that
higher level of debt;
(iii) warrants, options or similar evidences of a
right to buy its securities, unless (i) issued
to all of its security holders ratably, (ii) as
part of a financing arrangement, or (iii) as
part of a stock option plan to directors,
officers or employees of AmREIT (together
referred to herein as "Interested Persons")
which meets the conditions of Section
260.140.41, Title 10, California Code of
Regulations; or
(iv) shares on a deferred payment basis or other
similar arrangement.
Transactions with Adviser, Sponsor, Director or Their Affiliates. The
Bylaws restrict dealings between AmREIT and its officers, directors, sponsors
and any Adviser. AmREIT's sponsors are Mr. Taylor and his Affiliates. In the
Bylaws, an Adviser is defined as "the Person responsible for directing or
performing the day-to-day business affairs of AmREIT, including a Person to
which an Adviser subcontracts substantially all such functions. AmREIT is
self-managed and does not have an external Adviser. The following restrictions
apply to sponsors, Advisers, directors and/or interested persons and their
respective Affiliates ("Interested Persons").
Sales To Interested Persons. An Adviser, officer or director may
not acquire assets from AmREIT except as approved by a majority of directors
(including a majority of Independent Directors), not otherwise interested in
such transaction, as being fair and reasonable to AmREIT.
Acquisitions From Interested Persons. Any transaction with a
director, officer or Affiliate that involves the acquisition of a property from
an Interested Person must be approved by a majority of the Independent Directors
as being fair and reasonable to AmREIT and at a price not greater than the cost
of the property to such seller, or if at a greater price only if substantial
justification exists and such excess is reasonable and not in excess of the
properties' current appraised value.
Leases to Interested Persons. AmREIT may lease assets to an
Adviser, or a director only if such transaction is approved by a majority of
directors (including a majority of Independent Directors), not otherwise
interested in such transaction, as being fair and reasonable to AmREIT.
Loans From Interested Persons. AmREIT may not borrow money from an
Adviser or a director unless a majority of the directors, including a majority
of the Independent Directors, not otherwise interested in such transaction
approve the transaction as being fair, competitive, and commercially reasonable
and no less favorable to the Company than loans between unaffiliated parties
under the same circumstances.
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Loans To Interested Persons. AmREIT may not make or invest in
loans to a Sponsor, Adviser or director, which includes any Affiliate thereof,
except for mortgage loans for the construction of improvements on Properties to
be acquired by AmREIT that are under lease or binding contract to be leased to
qualifying tenants and those loans insured or guaranteed by a government or
government agency or unless an appraisal is obtained on the underlying property.
An appraisal of the underlying property shall be obtained in connection with any
loan to an Adviser, director or their Affiliate;
Other Transactions With Interested Persons. All other transactions
between AmREIT and the Sponsor, Adviser, or a director shall require approval by
a majority of the directors (including a majority of the Independent Directors)
not otherwise interested in such transactions as being fair and reasonable to
AmREIT and on terms and conditions not less favorable to AmREIT than those
available from unaffiliated third parties.
Joint Venture Investments. AmREIT may enter into joint ventures with
unaffiliated third parties. AmREIT may also invest jointly with another
publicly-registered entity sponsored by a Sponsor, Adviser or director that has
investment objectives and management compensation provisions substantially
identical to those of AmREIT, provided that the following conditions must be
satisfied.
(1) the joint venture must have investment objectives
comparable to AmREIT;
(2) the investment by each party to the joint venture
must be on substantially the same terms and
conditions; provided, however, AmREIT shall own
more than fifty percent (50%) of any joint venture
between it and its sponsor or Affiliate;
(3) in making any such joint venture investment, AmREIT
may not pay more than once, directly or indirectly,
for the same services and may not act indirectly
through any such joint venture if AmREIT would be
prohibited from doing so directly because of
restrictions contained in the Bylaws; and
(4) in the event of a proposed sale of the Property
initiated by the other joint venture partner,
AmREIT must have a right of first refusal to
purchase the other party's interest.
Operating Expenses. Under AmREIT's Bylaws, its Total Operating Expenses,
including, but not limited to certain administration items such as personnel
salaries and the salary of Taylor, are (in the absence of a satisfactory showing
to the contrary) deemed excessive if they exceed in any fiscal year the greater
of 2.0% of its Average Invested Assets or 25% of its net income for such year.
The Independent Directors have the responsibility of limiting such expenses to
amounts that do not exceed such limitations unless they determine that, based on
such unusual and non-recurring factors which they deem sufficient, a higher
level of expenses is justified for such year. Any such finding and the reasons
in support thereof shall be reflected in the minutes of the meeting of the Board
of Directors.
Real Estate Commissions on Resale of Property. If an Adviser, officer or
director provides a substantial amount of the services in the effort to sell an
AmREIT property, that such Person may receive up to one-half of the brokerage
commission paid but in no event to exceed an amount equal to 3% of the Contract
Price for the Property. In addition, the amount paid when added to the sums paid
to unaffiliated
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parties in such a capacity shall not exceed the lesser of the Competitive Real
Estate Commission or an amount equal to 6% of the Contract Price for the
Property. The "Competitive Real Estate Commission" is the real estate or
brokerage commission paid for the purchase or sale of a property which is
reasonable, customary and competitive in light of the size, type and location of
such property. The "Contract Price" is the amount actually paid or allocated to
the purchase, development, or construction or improvement of a property
exclusive of the Acquisition Fees and Acquisition Expenses.
Acquisition Fees and Acquisition Expenses. AmREIT may not pay Acquisition
Fees and Acquisition Expenses which are unreasonable. The total amount of such
fees may not exceed 6% of the Contract Price of the Property, or in the case of
a mortgage loan, 6% of the funds advanced. Notwithstanding the foregoing, a
majority of the directors, including a majority of the Independent Directors,
not otherwise interested in the transaction may approve fees in excess of these
limits if they determine the transaction to be commercially competitive, fair
and reasonable to AmREIT.
AmREIT's Operating Strategy
AmREIT's policies with respect to the following activities have been
determined by the Board within the restrictions of AmREIT's Stated Investment
Policies and, in general, may be amended or revised, from time to time, subject
to the stated objections and policies, by the Board without a vote of the
shareholders. See "RISK FACTORS -- Changes in Policies."
Growth Strategy. AmREIT intends to pursue a growth strategy which will
maximize the total return to its shareholders. AmREIT intends to continue to
focus on the frontage retail sector of the real estate market, believing that
this sector is capable of providing appealing returns at more attractive risk
levels than other sectors of the retail/commercial real estate market. AmREIT's
growth strategy will focus on major markets in the Southwest region of the
United States, with the goal of achieving a significant presence in major retail
corridor markets of targeted cities. In pursuing its growth strategy, AmREIT
intends to utilize research-driven investment analysis, disciplined buy/sell
decisions and up-to-date operating systems.
AmREIT presently intends to raise public and private equity capital and
institutional and investor debt capital to fund its growth strategy through
unsecured credit facilities, traditional mortgage debt transactions, and private
equity placements and/or public securities offerings.
Investment Strategy. AmREIT will continue to invest in existing,
newly-developed, development stage or undeveloped retail properties subject to
leases under which the tenant is responsible for all operating costs (i.e., the
tenant pays non-capital costs associated with operating the leased premises),
frequently referred to as a net lease. AmREIT will continue to seek to lease its
properties to single tenants, but may acquire multiple tenant properties. AmREIT
intends to continue to concentrate its investments in the southwest United
States, but may invest in properties anywhere in the continental United States.
In determining whether a property is a suitable for investment,
management considers the following factors, among others:
(a) the safety of the investment;
(b) the location, condition, use and design of the property and
its suitability for a long-term net lease or a lease that
otherwise limits the amount of expenses to be incurred by
AmREIT;
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(c) the cashflow expected to be generated by the property;
(d) the terms of the proposed lease (including, specifically,
provisions relating to rent increases or percentage rent and
provisions relating to passing on operating expenses to
tenants);
(e) the creditworthiness of the lessee (based on the lessee's
most recent audited financial statement or other similar
evidence establishing net worth) and the cash flow expected
to be generated by the property;
(f) the prospects for long-term appreciation of the property;
(g) the prospects for long-range liquidity of the investment;
and
(h) the stability and potential growth of the community.
AmREIT invests in properties which are either under current lease or are
to be leased upon completion of development to a national or regional
corporation. However, in circumstances deemed appropriate, leases may be with a
sole proprietor or franchisee operating the businesses on the property. AmREIT
has no minimum financial requirements for its tenants, which will vary depending
on individual circumstances of the property and the lease. With respect to the
credit of a prospective tenant, AmREIT will evaluate the party's
creditworthiness in terms of its most recent audited financial statements, its
general credit history, any trends exhibited by its credit rating, appropriate
references, if available, the type of business in which it engages, the size and
scope of its business, the length of its operating history, the background and
experience of its management and similar types of factors.
Management also considers a property's prospects for long-term
appreciation and the prospects for long-range liquidity of the investment. Other
considerations of AmREIT affecting appreciation of the properties and liquidity
of the investment include: inclusion of lease clauses providing for increased
rents based on a tenant's increased revenues, lease clauses providing for
periodic inflation adjustments to the base rent, minimizing deferred maintenance
by prompt attention to repair and replacement needs at the properties and by
including common area maintenance clauses in the leases.
AmREIT's procedures with respect to environmental due diligence are to
require, prior to the purchase of a property, that all conditions imposed by a
lender loaning funds towards the acquisition of the property, if applicable,
have been satisfied and that all conditions imposed by the title insurer which
exclude coverage due to environmental conditions are either removed, waived or
found acceptable by a majority of AmREIT's directors. Where neither lender nor
title insurer conditions raise issues regarding environmental due diligence,
AmREIT may nevertheless require certain protective representations from the
seller of a property, including a satisfactory level one environmental study of
the property site.
AmREIT competes for both investment opportunities and the operation of
its properties with other real estate investors (both domestic and foreign),
including other real estate investment trusts and limited partnerships which
have investment objectives similar to those of AmREIT and which are likely to
have resources greater than those of AmREIT. Management continually monitors the
real estate market in order to identify potential desirable property
acquisitions and advantageous disposition opportunities for its properties.
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AmREIT plans to explore possible acquisitions of properties in whole or
partial exchange for its equity securities. AmREIT has authority to issue
additional Shares or other securities in exchange for property and other valid
consideration, and to repurchase or otherwise reacquire its shares or any other
securities and may engage in such activities in the future. AmREIT has
authorized Preferred Stock, but has not issued such senior securities.
Management of Properties. AmREIT internally manages each of its
properties. Such management includes providing leasing services in connection
with identifying and qualifying prospective tenants, assisting in the
negotiation of the leases, providing statements as to the income and expense
applicable to each property, receiving and depositing monthly lease payments,
periodic verification of tenant payment of real estate taxes and insurance
coverage, and periodic inspection of properties and tenants' sales records where
applicable. AmREIT pays no property management fees or advisory fees. The
tenants will be responsible, at their expense, for day-to-day oversight and
maintenance of the properties.
In general, AmREIT's purchase price of each property is supported by an
independent appraisal of the fair market value of the property. The directors
will rely on their own analyses and not solely on appraisals in determining
whether to acquire a particular property, as appraisals cannot be relied upon
exclusively as measures of true worth or realizable value. Copies of such
appraisals are retained by AmREIT at its offices for at least five years and are
available for inspection.
AmREIT acquires marketable title to each of its properties, subject only
to such liens and encumbrances as are acceptable to management. Evidence of
title includes a policy of title insurance, an opinion of counsel or such other
evidence as is customary in the locality in which the property is situated.
Development of Properties. AmREIT intends to continue to increase its own
development of properties. Under AmREIT's Bylaws not more than 10% of the total
assets of AmREIT may be invested in unimproved real property and AmREIT does not
intend to seek shareholder approval to exceed such percentage. Depending upon
the circumstances, improvements will be developed and/or constructed either
through joint ventures with third party development companies from whom AmREIT
purchases the Properties, by the tenants to whom such properties are leased, or
by development companies other than the sellers of the Properties. AmREIT
finances the construction or completion of improvements on particular Properties
through borrowing under its current credit facilities, which it intends to
increase should the Merger be consummated.
To the extent AmREIT acquires Property on which improvements are to be
constructed or completed, AmREIT is subject to risk in connection with the
builder's ability to control construction costs or to build in conformity with
plans, specifications and timetables and to make the Property available to the
lessee within the time projected. Performance may be affected or delayed by
conditions beyond the builder's control such as building restrictions,
clearances and environmental impact studies imposed or caused by governmental
bodies, labor strikes, adverse weather, unavailability of materials or of
skilled labor, and by the financial insolvency of the builder or any
subcontractors prior to completion of construction. Such factors can result
in increased costs of a project, corresponding depletion of AmREIT's offering
proceeds, working capital reserves and/or cash from operations and could
possibly result in the loss of permanent mortgage loan commitments relied
upon as a primary source for repayment of construction loans.
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AmREIT may use one or more of the following techniques to reduce the risk
of any non-performance by the builder and to assure compliance with approved
plans and specifications: (1) a labor and material bond, a completion bond or a
performance bond, or more than one of the foregoing, may be required; (2) if in
management's opinion, the financial position of the builder so represents, a
personal guaranty or pledge of other assets may be accepted in lieu of, or
required in addition to, a bond; (3) in some cases, the builder of the Property
will be required to leaseback the Property from AmREIT until construction is
completed with lease payments designed to return to AmREIT a portion of its
funds paid to the builder during construction and to require the builder to bear
the risk of construction; (4) where possible, AmREIT will purchase Property
subject to the construction loan and the directors will endeavor not to have
AmREIT be liable on such loan; and (5) depending on the financial condition of
the builder, the contract may provide that portions of the purchase price
payments to the former owners will be withheld until a notice of completion of
construction is obtained.
Property Sale and Disposition Strategy. AmREIT intends to sell some
Properties over time. The determination of whether a particular Property should
be sold or otherwise disposed of will be made after consideration of performance
of the Property and market conditions and will depend, in part, on the economic
benefits of continued ownership. In deciding whether to sell Properties,
management will consider factors such as potential capital appreciation,
cashflow and federal income tax consequences. Affiliates of AmREIT or of one or
more of its directors may be selected to perform various substantial real estate
brokerage functions in connection with the sale of Properties by AmREIT. AmREIT
will not sell or lease any Property to the directors or their Affiliates.
Management will periodically review the assets comprising AmREIT's
portfolio. AmREIT has no current intention to dispose of any of its properties
or other properties acquired in the Merger unless the sale of properties is
necessary or appropriate because of liquidity problems. AmREIT reserves the
right to dispose of any of the properties or any property that may be acquired
in the future if the directors, based in part upon management's periodic
reviews, determines that the disposition of such property is in the best
interests of AmREIT.
Any net proceeds from the sale of any Property may, at the election of
the directors, based upon their then current evaluation of the real estate
market conditions, either be distributed to the Shareholders or be reinvested in
other Properties. A reinvestment in other Properties would be feasible only if
it could be accomplished so that the status of AmREIT as a REIT would not be
adversely affected. Any Properties in which net proceeds from a sale are
reinvested will be subject to the same acquisition guidelines as Properties
initially acquired by AmREIT. See "Properties below."
In connection with the sale of a Property owned by AmREIT, purchase money
obligations secured by mortgages may be taken as partial payment. The terms of
payment to AmREIT will be affected by custom in the area in which the Property
being sold is located and the then prevailing economic conditions. To the extent
AmREIT receives notes and property other than cash on sales, such proceeds will
not be included in net proceeds of sale until and to the extent the notes or
other property are actually collected, sold, refinanced or otherwise liquidated.
Therefore, dividends to Shareholders of the proceeds of a sale may be delayed
until the notes or other property are collected at maturity, sold, refinanced or
otherwise converted to cash. AmREIT may receive payments (cash and other
property) in the year of sale in an amount less than the full sales price and
subsequent payments may be spread over several years. The entire balance of the
principal may be a balloon payment due at maturity. For federal income tax
purposes, unless AmREIT elects otherwise it will report the gain on such sale
ratably as principal payments are received under the installment method of
accounting.
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Borrowing Policies. In the exercise of their duties, the directors may
elect to borrow funds on behalf of AmREIT in order to take advantage of
particular acquisition opportunities, cover the cost of improving a Property,
cover costs not met by insurance or cover operating costs. The amount of
borrowings will be determined from time to time based on a number of factors,
including the use of the proceeds, the lender's restrictions, the likelihood
that the loan can be readily serviced from rents at the Property where the
proceeds are applied and similar considerations. The directors will not borrow
funds in order to use the proceeds from the borrowing to pay dividends to
AmREIT's Shareholders, unless such borrowings are necessary for REIT
qualification purposes.
AmREIT may not borrow from a director, officer or any Affiliate thereof,
unless a majority of directors, including a majority of Independent Directors,
not otherwise interested in such transaction approve the transaction as being
fair, competitive, and commercially reasonable and no less favorable to AmREIT
than loans between unaffiliated parties under the same circumstances.
AmREIT will not issue any senior securities nor will it invest in junior
mortgages, junior deeds of trust or similar obligations.
Conflict of Interest and Affiliate Transaction Policy. Mr. Taylor is
prohibited from engaging in competitive real estate activities, including any
real estate acquisitions, development or management activities in connection
therewith, during his employment with AmREIT, except as may be approved by the
Independent Directors.
AmREIT will not enter into any transactions, including, without
limitation, loans, acquisitions or sales of property, joint ventures and
partnerships, in which AmREIT or a subsidiary is a party and in which any
officer, director, principal security holder or Affiliate has any direct or
indirect pecuniary interest, unless such transaction is approved by a majority
of the Independent Directors after full disclosure of such interests. In
determining whether to approve the transaction, the Independent Directors will
condition such approval on the transaction being fair and reasonable to AmREIT
and, to the extent deemed relevant by such Independent Directors, on terms no
less favorable to AmREIT than prevailing market terms and conditions for
comparable transactions. Independent Directors will be considered to be
disinterested for this purpose provided they have no direct or indirect
pecuniary interest in the transaction.
Dividend Reinvestment Plan
AmREIT intends to institute a dividend reinvestment program, and may from
time to time repurchase Shares in the open market for the purposes of fulfilling
its obligations under the program or may elect to issue additional Shares.
Employees
AmREIT currently has 8 full-time employees, one full-time consultant and
4 independent contractor consultants. AmREIT considers its relations with its
employees to be good.
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Competition
AmREIT's properties are predominantly located in the Southwest and, in
particular, the Houston and Dallas metropolitan areas. All of AmREIT's
properties are located in areas that include competing properties. The number of
competitive properties in a particular area could have a material adverse effect
on both AmREIT's ability to lease space at any of its properties or at any newly
developed or acquired properties and the rents charged. AmREIT may be competing
with owners, including, but not limited to, other REITs, insurance companies and
pension funds that have greater resources than AmREIT. There is no dominant
competitor in any of AmREIT's markets.
Properties
Description. AmREIT currently owns 16 properties consisting of single
structure, single tenant retail properties. Each of the properties is subject to
general competitive conditions in the area of its location, including
competition for replacement tenants with new and sometimes better located
properties at prevailing rental rates which are dependent on local economic and
financial conditions. To date, AmREIT has not sold any of its properties.
Information concerning the properties owned by AmREIT as of August 31, 1998, is
presented in the following tables.
<TABLE>
AmREIT Property Information
<CAPTION>
Current Lease
Date Purchase Percent Leasable Annual
Expiration
Property (Location) Acquired Price Owned(1) Area Rent Date
- ------------------- -------- ----- -------- ---- ---- ---------
<S> <C> <C> <C> <C> <C> <C>
Radio Shack (Dallas, TX.) 06/15/94 $1,062,000 100% 5,200 $108,900 11/30/06
Church's (Atl.,GA) 07/22/94 790,000 100% 2,200 90,792 07/22/14
Blockbuster (Ind., MO) 11/14/94 850,000 54.84% (2) 14,047 93,516 04/30/04
OneCare (Houston.,TX) 07/01/95 1,680,000 100% 14,000 180,600 09/30/05
Blockbuster (Wichita.,KS) 09/12/95 867,000 51% (3) 15,158 95,868 12/31/04
Just For Feet, (Tuc.,AZ) 09/11/96 1,739,000 51.9% (4) 19,550 197,720 09/30/16
Bank United - (Wdlds.,TX) 09/23/96 255,000 51% (3) 3,685 27,568 09/30/11
Bank United - (West.,TX) 12/11/96 828,000 100% 3,685 88,964 12/31/11
</TABLE>
<TABLE>
<CAPTION>
Current Lease
Date Purchase Percent Leasable Annual Expiration
Property (Location) Acquired Price Owned(1) Area Rent Date
- ------------------- -------- ----- -------- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Just For Feet (BtnRg.,LA) 06/09/97 1,431,000 51% (3) 20,575 153,275 05/15/12
Hollywood Video (Laft., LA) 10/31/97 838,000 74.58% (3) 7,488 100,466 09/24/12
Hollywood Video (Ridgld,MS) 12/30/97 1,208,000 100% 7,488 138,453 12/22/12
OfficeMax (Lake Jksn.,TX) 02/20/98 2,240,000 100% 23,500 230,300 04/01/13
OfficeMax (Dover, DE) 04/14/98 2,548,000 100% 23,500 264,679 04/30/13
Just For Feet (Wdlds.,TX) 06/03/98 3,542,000 100% 16,922 371,914 05/01/13
Just For Feet (Sgrlnd.,TX) 07/01/98 3,635,000 100% 16,922 381,705 07/01/13
Don Pablos (Atlanta, GA) 08/20/98 738,000 100% Land Lease 75,000 08/20/08
-------- ----------- ---- ---------- --------
TOTAL $24,251,000 193,920 $2,599,720
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(1) Amounts reflect percentage of property owned.
(2) Owned in joint venture with FUND X.
(3) Owned in joint venture with FUND XI.
(4) Owned in joint venture with FUND X and FUND XI.
</TABLE>
Leases. Each Partnership property is under lease to a regional or
national tenant. When entered into, each lease was long-term. Each lease is a
net lease requiring the tenant to pay all or substantially all expenses related
to operation of the property. The following table sets forth information
concerning AmREIT's 5 largest tenants.
Current Percent of Total
Scheduled Scheduled
Annual Rent Annual Rents
----------- ------------
Just For Feet, Inc. $1,104,614 42.49%
Office Max, Inc. 494,979 19.04%
Hollywood Entertainment Corp 238,919 9.19%
OneCare Health Industries, Inc. 180,600 6.95%
Blockbuster Music Retail, Inc. 189,384 7.28%
Other Tenants 391,224 15.05%
------- ------
TOTAL $2,599,720 100.00%
The following table summarizes the minimum future rentals, exclusive of
any renewals, under AmREIT's leases in existence at December 31, 1997.
1998 $1,840,891
1999 1,870,044
2000 1,898,297
2001 1,913,995
2002 1,968,960
2003-2016 $16,859,889
Just For Feet, Inc. ("JFFI") operates a Just For Feet discount shoe store
on its leased properties as part of its national chain of retail stores which
sell athletic footwear, athletic apparel and related items. JFFI reported
consolidated revenues in excess of $478 million and $256 million for the years
ended January 31, 1998 and 1997, respectively. JFFI had consolidated net
earnings of $21.4 million and $13.9 million, respectively, for these periods.
JFFI's current assets exceeded its current liabilities at January 31, 1998 by
$155 million and its total assets exceeded its total liabilities on such date by
more than $268 million.
Office Max, Inc. operates an Office Max discount office supply store on
each of its leased properties as part of its nationwide network of Office Max
stores. Office Max, Inc. had total consolidated revenues of more than $3.7
billion and $3.1 billion for the years ended January 25, 1998 and 1997,
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respectively. Office Max, Inc. had consolidated net earnings of in excess of $89
million and $68 million for the years ended January 25, 1998 and 1997,
respectively. Office Max, Inc.'s current assets exceed its current liabilities
at January 25, 1998 by more than $561 million and total assets on that date
exceeded total liabilities by more than $1.1 billion.
Debt and Credit Facilities
At June 30, 1998, AmREIT had approximately $8,732,150 of indebtedness,
all of which was unsecured. Approximately $8,568,884 of such borrowings are
pursuant to a credit facility of up to $15,000,000 with Compass Bank, Houston,
Texas. The actual amount available under the credit facility is dependent on
certain covenants such as the value of AmREIT's unencumbered assets. The credit
facility bears interest at 200 basis points over the varying London Interbank
Offered Rates ("LIBOR").
Management
The directors and executive officers of AmREIT are as follows:
<TABLE>
<CAPTION>
Director or
Name Age Position Held Officer Since
- ---- --- ------------- -------------
<S> <C> <C> <C>
H. Kerr Taylor 47 President 1993
Chief Executive Officer Director
Robert S. Cartwright, Jr. 48 Director 1993
George A. McCanse, Jr. 44 Director 1993
Timothy Kelley 50 Vice President of Operations 1996
L. Larry Mangum 33 Vice Present, Treasurer 1996
Randal Garbs 44 Vice President of Acquisitions 1994
</TABLE>
H. Kerr Taylor serves as the President and Chairman of the Board of
Directors of AmREIT. Mr. Taylor has served in this capacity since AmREIT's
formation. Mr. Taylor is a graduate of Trinity University. Mr. Taylor also
received a Masters of Business Degree from Southern Methodist University and a
Doctor of Jurisprudence from South Texas College of Law. Mr. Taylor has over
twenty years experience and has participated in over 300 real estate
transactions. Mr. Taylor has served on a board and governing bodies of a bank,
numerous private and public corporations and charitable institutions. Mr. Taylor
was the president, the sole director and sole shareholder of American Asset
Advisers Realty Corporation (the "Adviser"), a real estate operating company he
founded in 1988, prior to its acquisition by AmREIT. Mr. Taylor is currently a
general partner or principal of a general partner of eleven affiliated limited
partnerships. Mr. Taylor is a member of the National Board of Realtors, Texas
Association of Realtors and Texas Bar Association.
Robert S. Cartwright, Jr. is currently a Professor of Computer Science at
Rice University. He earned a bachelor's degree magna cum laude in Applied
Mathematics from Harvard College in 1971 and a doctoral degree in Computer
Science from Stanford University in 1977. From September 1976 until June 1980,
he was Assistant Professor of Computer Science at Cornell University. In July
1980, he joined the faculty of Rice University as Associate Professor of
Computer Science. He was promoted to the rank of Professor in July 1986. During
his eighteen years as a faculty member at Rice University, he has twice served
as department Chair.
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Professor Cartwright has compiled an extensive record of professional
service. He is a Fellow of the Association for Computing Machinery (ACM) and a
member of the ACM Education Board, chairing the ACM Pre-College Education
Committee. He is also a member of the Board of Directors of the Computing
Research Association, an umbrella organization representing academic and
industrial computing researchers. Professor Cartwright has served as a charter
member of the editorial boards of two professional journals and has chaired
several major ACM conferences. From 1991-1996, he was a member of the ACM
Turning Award Committee, which selects the annual recipient of the most
prestigious international prize for computer science research.
George A. McCanse, Jr. is the President of Valuation OnLine, Inc., an
online computer communications and data access service for the commercial real
estate valuation industry. Mr. McCanse is a member of the Appraisal Institute
(MAI designation) and the International Council of Shopping Centers. He was
formally a member of the Valuation Committee of the National Council of Real
Estate Investment Fiduciaries. Mr. McCanse resides in New Canaan, Connecticut.
He holds a BBA degree from the University of Texas and has pursued graduate
level study in real estate, architecture and finance. He has also been
involved in real estate investing and development, including the
acquisition and sale of over $150,000,000 of real estate during the 1970s and
1980s.
L. Larry Mangum serves as Vice President and Treasurer of AmREIT. Mr.
Mangum served as Vice President of Finance of the Adviser. Mr. Mangum was
responsible for the financial accounting and reporting relating to the
Adviser-sponsored partnerships and their properties. He has over ten years of
accounting experience, including four years with a public accounting firm. He
previously worked for American General Corporation, a national insurance
company, from 1991-1996 as part of a team responsible for supervising their
reporting activities. Mr. Mangum received a B.B.A. degree in accounting from
Stephen F. Austin State University and subsequently earned the CPA designation.
Tim Kelley served as Vice President of Operations of the Adviser, and
currently he serves as Vice President of Operations of AmREIT. Mr. Kelley's
career spans over twenty years of debt and equity industry experience.
Mr. Kelley has held senior management, compliance and sales responsibilities
in Broker/Dealers and in investment banking firms including Lehman Brothers
Kuhn Loeb, Oppenheimer and Co., Inc., and McKenna and Company. Mr. Kelley
holds the series 24, 27, 7, 3, 15, and 63 NASD licenses. He received his
B.S. degree from Kent State University.
Randal Garbs served as Vice President of Acquisitions of the Adviser,
and currently he serves as Vice President of Acquisitions of AmREIT.
Mr. Garbs is responsible for property acquisitions as well as marketing
services to its tenants and developers. Mr. Garbs has over twenty years
experience in marketing, including acting as CEO of a Houston based service
company. Mr. Garbs has earned the series 7 and 63 NASD licenses, the Texas
Real Estate license and is a candidate for the CCIM designation. Mr. Garbs
received his B.S. and M.B.A. from Houston Baptist University.
Other individuals who are specialists in their respective fields
will be periodically employed by AmREIT and engaged on an as-needed
basis to perform services on behalf of AmREIT. These individuals are not
employees of AmREIT nor are they employees of other Adviser-sponsored
partnerships, although they do perform various services and activities
for those partnerships. These individuals are:
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Don Grieb serves as the Director of Development and Acquisitions of
AmREIT and previously served in the same capacity with the Adviser.
Mr. Grieb has over twenty years experience within the real estate industry
including development, investment analysis and administration. Mr. Grieb
has served within management of such real estate firms as Hines Interests
and AEW. Mr. Grieb received his B.S. and M.B.A. from the University of
Illinois and is a registered architect.
Jane Costello is a certified public accountant and special consultant
to AmREIT regarding tax accounting issues. She previously served in the same
capacity for the Adviser. Ms. Costello has over eighteen years experience as
an accountant including over 4 years with a national public accounting firm
and the last eight years with her own accounting practice. Ms. Costello
received a B.B.A. degree in accounting from the University of Texas.
Executive Compensation
No executive officer of AmREIT received any salary or bonus from AmREIT
during the year ended December 31, 1997. See Note 8 in the accompanying
financial statements for a description of related party transactions. The
overall management decisions for the day-to-day business affairs of AmREIT are
made by AAA under the direction of the Board of Directors.
AmREIT paid each director a fee ranging from $500 to $750 for meetings
in which they participated and, where applicable, reimbursed directors for
travel expenses. In addition, AmREIT paid each Independent Director an
additional $1,000 per meeting attended in 1997 in recognition of the additional
time and effort expended in consideration of certain potential acquisitions.
There is no other basis of compensation for the directors. During 1997, a total
of $19,250 was paid as Directors' Fees.
Security Ownership of Certain Beneficial Owners and Management
The following table sets forth, as of June 30, 1998, the beneficial
ownership interest of the Executive Officers and directors of AmREIT:
<TABLE>
<CAPTION>
Name and Address Amount and Nature of Percentage
Title of Class of Beneficial Owner Beneficial Ownership of Class(1)
- -------------- ------------------- -------------------- -----------
<S> <C> <C> <C>
Common Stock H. Kerr Taylor 252,250 Shares 10.62%
5300 Mercer
Houston, TX 77005
Common Stock George McCanse, Jr. 770 Shares Less than 1%
128 Orchard Street
New Canaan, CT 06840
Common Stock Robert S. Cartwright, Jr. 2,166 Shares Less than 1%
3310 Underwood
Houston, TX 77025
Officers and Directors 255,186 Shares 11.28%
(1) Based on 2,374,306 Shares outstanding as of June 30, 1998.
</TABLE>
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As of June 30, 1998, no other person was known by AmREIT to be the
beneficial owner of more than 5% of the Shares of AmREIT.
Certain Relationships and Related Transactions
Effective June 5, 1998, AmREIT issued to Mr. Taylor 213,260 Shares and
the right to receive up to an additional 686,740 Shares, subject to certain
conditions, in connection with the Adviser Acquisition.
See "Adviser Acquisition" below.
On May 10, 1998, Mr. Taylor agreed to accept 18,789 Shares of AmREIT's
common stock in payment in full of a Note payable to him by AmREIT with the
unpaid balance of approximately $171,500.
On August 8, 1997, AmREIT entered into a loan agreement as the lender
with AmREIT Development Corp., an entity with common management, in the amount
of $2,247,254 for the purpose of developing a property in Lake Jackson, Texas
that was acquired by AmREIT upon completion. As of December 31, 1997, $1,928,974
was outstanding on the loan. The loan bears interest at the prime lending rate
and was repaid on February 20, 1998.
On September 18, 1997, AmREIT had entered into a loan agreement as the
lender with Centurion Video, Ltd. in the amount of $1,153,794 for the purpose of
developing a property in Ridgeland, Mississippi that was acquired by AmREIT upon
completion of development. The loan bore interest at the prime lending rate plus
.5%. AAA Net Developers, Ltd., an entity with common management, was the limited
partner in Centurion Video, Ltd. The loan was repaid in full as of December 31,
1997.
For further information see Notes 4, 8 and 9 to the financial statements
and see the MANAGEMENT AND AFFILIATE COMPENSATION section of AmREIT's Prospectus
dated June 18, 1996.
Legal Proceedings
Neither AmREIT nor any of its properties is subject to any claim or legal
proceeding, nor to management's best knowledge, is any such claim or legal
proceeding threatened.
Adviser Acquisition
Terms of the Acquisition. As of June 5, 1998, AmREIT became a
self-managed REIT by acquiring its former Adviser, American Asset Advisers
Realty Corporation ("AAARC") in the Adviser Acquisition. As a self-managed REIT,
AmREIT acquires, develops and manages its own real property investments and
internally administers its affairs and activities.
AmREIT acquired the Adviser pursuant to a merger of, AAARC, the Adviser,
into AmREIT's newly formed wholly-owned subsidiary corporation, AmREIT Operating
Corporation, which is the surviving corporation. Pursuant to the Acquisition,
Mr. H. Kerr Taylor, the sole shareholder of AAARC, will receive up to 900,000
shares of AmREIT's Common Stock (the "Share Consideration"), of which 213,260
Initial Shares will be issued upon consummation of the Adviser Acquisition (the
"Closing Date"). Up to an additional 686,740 shares would be issuable over the
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24 calendar quarters immediately following the Closing Date, subject to the
satisfaction of certain conditions. The Adviser Acquisition was approved by
AmREIT's Shareholders on June 5, 1998.
AAARC had served as adviser to AmREIT since AmREIT's organization in May
1994. Under the direction of the Board, AAARC has the responsibility for the
day-to-day operations of AmREIT, including raising capital, the investigation
and identification of investment acquisitions, the negotiation of acquisitions,
due diligence in investment research, property management and administrative and
accounting services.
AAARC was organized on April 4, 1989 and since that time has been
acquiring, developing, operating and managing real property for its own account
and for the account of managed real estate investment programs, including
AmREIT. In addition to AmREIT, AAARC co-sponsored with Mr. Taylor each of the
Partnerships. In addition to services for AmREIT, the Adviser provided
acquisition, management and administrative services to the Partnerships and
development and management services to AmREIT Development Corp, a Texas
corporation owned by Mr. Taylor and to AAA Net Developers, Ltd., a privately
held Texas limited partnership for which Mr. Taylor and AmREIT Development Corp,
serve as general partners. AAA Net Developers, Ltd. is in the business of
developing for resale, frontage retail properties under net lease to retail
tenants.
For the period from January 1, 1998 to June 5, 1998, and the year ended
December 31, 1997, revenues to AAARC from all sources aggregated $562,465, and
$1,602,580, respectively. These amounts included payments from AmREIT of
$181,189 and $1,166,309 during the period from January 1, 1998 to June 5, 1998,
and the year ended December 31, 1997, respectively. For the same periods, AAARC
incurred total expenses of $683,633, and $1,473,676, respectively. These
expenses are not allocated between services provided by AAARC under the services
agreements with AmREIT and the Partnerships vs. the AAARC's other activities.
Also, AAARC incurred certain costs in connection with the organization
and syndication of AmREIT. Reimbursement of these costs become obligations of
AmREIT in accordance with the terms of the offering. Costs of $164,985 and
$98,494 were incurred by AAARC in 1997 and 1996, respectively, in connection
with the issuance and marketing of AmREIT's stock.
Consequences of Acquisition. As a self-managed REIT, AmREIT no
longer pays any of the Adviser Fees and pays directly for the overhead necessary
to provide the services that AAARC provided under the Omnibus Services
Agreement. By acquiring the AAARC's staff and facilities, AmREIT now has
personnel with substantial experience and long-term relationships in the
commercial net leased property industry, including but not limited to
relationships with both AmREIT's significant tenants and those of the
Partnerships. Management believes these capabilities provide AmREIT with a
competitive advantage over many larger and more established REITs in the
management and operation of properties and in the identification and acquisition
of attractive investments.
Following the Adviser Acquisition, AmREIT, through AmREIT Operating
Corporation, continues to provide these services, including administrative and
management services to the Partnerships and administrative and development
services, facilities and personnel to AmREIT Development Corp. However, its
ability to do so may be significantly limited under current and possible future
changes to the REIT Rules.
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AmREIT, through AmREIT Operating Corporation, and/or other Affiliates,
also conducts various real estate development activities both for its account
and for the accounts of others, including AmREIT Development Corp. Through the
Adviser Acquisition, AmREIT acquired expertise and ability to develop properties
for tenants in order to be more competitive in obtaining attractive acquisitions
for itself and the AAARC's other affiliates. Management believes that its
ability to competitively construct and deliver completed properties on a timely
basis will continue to be an important consideration for many actively growing
and expanding retail and commercial tenants.
Terms of the Acquisition. The Adviser Acquisition was approved and
recommended to AmREIT's shareholders by the Independent Directors. AmREIT's
shareholders approved the Adviser Acquisition on June 5, 1998. In finding that
the Adviser Acquisition was fair to AmREIT and its shareholders, the Independent
Directors engaged Bishop-Crown as their financial adviser to advise them in
analyzing and evaluating, and to provide a written opinion with respect to, the
fairness of the Acquisition to AmREIT and to the shareholders of AmREIT (other
than Mr. Taylor). The Independent Directors also engaged Houlihan to opine as to
the likely range of strategic values of AAARC for the purposes of the
Acquisition. The Independent Directors obtained a fairness opinion from
Bishop-Crown that the Adviser Acquisition was fair from a financial point of
view, to AmREIT and its Shareholders (other than Mr. Taylor), and obtained the
opinion of Houlihan regarding the valuation of AAARC. The Independent Directors
engaged Broocks, Baker & Lange, LLP ("Broocks Baker") to advise them regarding,
but not to negotiate, the terms of the Adviser Acquisition.
Under the Acquisition Agreement, AmREIT has agreed to issue up to 900,000
Common Shares as the Share Consideration for the Adviser Acquisition. AmREIT
issued the 213,260 Initial Shares on the Closing Date and will issue up to the
Share Balance of 686,740 shares, subject to adjustment as described below, as
follows: No later than thirty (30) days after the end of the calendar quarter in
which the Closing Date occurred, and within thirty (30) days after the end of
each calendar quarter thereafter until the twenty-fourth (24th) consecutive
calendar quarter following the Closing Date, or, if sooner, until the entire
Share Balance has been issued. AmREIT will issue a portion of the then unissued
Share Balance (the "Remaining Share Balance") equal to, when added to the
aggregate shares of the Share Consideration theretofore issued, 9.8% of the
total number of Common Shares outstanding at the end of the respective calendar
quarter after giving effect to the issuance of such additional shares.
At the Closing Date of the Acquisition, Mr. Taylor owned 252,250 shares
of AmREIT's common stock which represents approximately 10.62% of AmREIT's total
outstanding shares. For the 24 calendar quarters following the Closing Date, Mr.
Taylor's additional share ownership by reason of his receipt of the Share
Consideration cannot exceed the number of shares which represent 9.8% of
AmREIT's total outstanding shares.
The Acquisition Agreement requires that, in the event of Mr. Taylor's
death, AmREIT must promptly purchase from his estate his right, title and
interest in the Remaining Share Balance at a price determined on a value of
$10.25 per share or, if AmREIT's Common Shares are then traded in a national
securities market, the average closing price of AmREIT's Common Shares on the
ten (10) consecutive trading days preceding the date of death, whichever is
greater. To fund this obligation, AmREIT must maintain one or more insurance
policies, payable to AmREIT, insuring Mr. Taylor's life in the amount necessary
to purchase the Remaining Share Balance.
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The foregoing notwithstanding, the Remaining Share Balance is immediately
issuable in the event any of the following should occur:
(i) An event which results in or is likely to result in a Change
in Control of AmREIT;
(ii) The failure by AmREIT to timely issue the Share Balance, or
any portion thereof as required above;
(iii) In the event Mr. Taylor's employment by AmREIT is terminated
without cause as defined in his employment agreement with
AmREIT then in effect; or
(iv) AmREIT's failure to purchase, upon the death of Mr. Taylor,
all of his right, title and interest in the Remaining Share
Balance, which interest will be valued as of the date of
death at the greater of $10.25 per share or, if the common
shares are traded in a national securities market, the
average closing price of such shares during the ten (10)
consecutive trading days immediately preceding the date of
death. Under the Acquisition Agreement, AmREIT is required
to maintain insurance on the life of Mr.
Taylor to fund this obligation.
For the purposes of the foregoing, a "Change in Control" means (i) the
sale or transfer of substantially all of the assets of AmREIT, whether in one
transaction or a series of transactions, except a sale to a successor
corporation in which the stockholders immediately prior to the transaction hold,
directly or indirectly, at least 50% of the total voting power of the successor
corporation immediately after the transaction, (ii) any merger or consolidation
between AmREIT and another corporation immediately after which the stockholders
hold, directly or indirectly, less than 50% of the total voting power of the
surviving corporation, (iii) the dissolution or liquidation of AmREIT, (iv) the
acquisition by any person or group of persons of direct or indirect beneficial
ownership of AmREIT's common shares representing more than 50% of AmREIT's
common shares, or (v) the date the Board Changes. For the purposes of the
foregoing, a "Board Change" means the date that a majority of the Board is
comprised of persons other than persons (i) whose election Consents shall have
been solicited by management, or (ii) who are serving as directors appointed by
the Board to fill vacancies caused by death or resignation (but not by removal)
or to fill newly created directorships.
Under the Acquisition Agreement, so long as Mr. Taylor serves as an
officer or director of AmREIT he may not, without AmREIT's express
authorization, engage or participate directly or indirectly as a principal,
agent, or owner (including serving as a partner of or owning any stock or other
equity investment or debt of) any Competitive Real Estate Venture, as defined.
Excluded from the foregoing are Competitive Real Estate Ventures in which Mr.
Taylor is currently interested, including AAA Net Developers, Ltd. and the AAA
Partnerships and their respective general partners. Also excluded from the
foregoing restriction is the present or future ownership of not more than one
percent (1%) of the total outstanding class of equity or debt securities of any
Competitive Real Estate Venture whose equity or debt securities are publicly
traded.
"Competitive Real Estate Venture" is defined as any enterprise entered
into for profit whose activities in at least material part consist of the
acquisition, development, ownership and/or management of real estate leased or
intended to be leased to commercial or retail tenants.
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Under the Acquisition Agreement, Mr. Taylor entered into full-time
employment by AmREIT. His annual base salary for 1998 and 1999 is $25,000 and
$30,000, respectively. Mr. Taylor may not receive any compensation from any
Competitive Real Estate Venture under his control except as may, from time to
time, be approved by the Board. It is the Board's intent to use this restriction
to limit the aggregate compensation received by Mr. Taylor from AmREIT and his
other controlled Competitive Real Estate Ventures,if any. Expressly excluded
from the foregoing agreement would be any compensation in connection with
Mr. Taylor's ownership of the general partnersof the Partnerships.
In an effort to eliminate existing and potential conflicts of interest
between Mr. Taylor and AmREIT, Mr. Taylor agreed to cause any Competitive Real
Estate Venture (as defined) over which he has control, including the general
partners of the Partnerships and AmREIT Development Corp, to, at the election of
the Board, contract for acquisition and management services and/or the use of
facilities and personnel with AmREIT or such affiliated provider as may be
designated by the Board. Any such contracts are subject to the requirements and
restrictions on such contracts as may be provided in each entities
organizational documents. AmREIT, through AmREIT Operating Corporation,
currently provides property management, general administration and acquisition
services, real estate brokerage services and support personnel and/or facilities
to these entities. However, its ability to do so may be significantly limited
under current and possible future changes to the REIT Rules. Under this
requirement, Mr. Taylor must cause such Competitive Real Estate Venture to first
satisfy its requirements for personnel and/or facilities by the use of
available, qualified facilities and personnel of AmREIT or its Affiliates on a
reimbursement for use basis.
Also, Mr. Taylor must cause such Competitive Real Estate Venture to offer
to AmREIT the right to purchase any property which the Competitive Real Estate
Venture acquires or contracts to acquire, subject to its then-existing fiduciary
obligations to any other persons at a price equal to the cost of the property to
the Competitive Real Estate Venture.
AMREIT CHARTER AND BYLAWS
The following is a summary of AmREIT's Amended and Restated Certificate
of Incorporation or Charter and the Bylaws and is qualified in its entirety by
reference to the complete text of the Charter and the Bylaws.
Authorized Stock
The Charter provides that AmREIT is authorized to issue 110,000,000
shares, consisting of 100,000,000 shares of $0.01 par value Common Stock and
10,000,000 shares of preferred stock, par value $.01 per share ("Company
Preferred Stock"). Shares of Preferred Stock may be issued from time to time, in
one or more series, each of which series shall have such voting powers,
designations, preferences and rights, and the qualifications, limitations or
restrictions relating thereto, as shall be authorized by the Board of Directors.
See "DESCRIPTION OF AMREIT'S CAPITAL STOCK."
Directors
The Bylaws provide that the number of directors shall consist of not less
than three or more than nine members, the exact number of which shall be fixed
by the Board from time to time. The Bylaws provide that, except as otherwise
provided by law or the Charter, a quorum of the Board for the transaction of
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business shall consist of a majority of the entire Board. The act of a majority
of the directors present at any meeting at which there is a quorum shall be the
act of the Board. The Charter and the Bylaws do not provide for a classified
board or for cumulative voting in the election of directors to the Board. The
Bylaws provide that vacancies and any newly-created directorships resulting
from an increase in the authorized number of directors may be filled by a
majority of the directors then in office, though less than a quorum, or by
a sole remaining director.
Shareholder Meetings and Special Voting Requirements
The Annual Meetings of Shareholders are held on such date as shall be
fixed by the Board. The Bylaws specify such date to be not fewer than 30 days
nor more than 61 days after delivery of AmREIT's annual report to Shareholders.
Special meetings of Shareholders may be called only upon the request of a
majority of the directors, a majority of the Independent Directors, the
President, or upon the written request of Shareholders entitled to cast at least
10% of all of the votes entitled to be cast at such meeting. In general, the
presence in person or by proxy of Shareholders entitled to cast a majority of
votes shall constitute a quorum at any Shareholders' meeting. The Charter and
the Bylaws may in general be amended by a Majority Vote of the Shareholders.
However, an amendment of any provision of the Charter or Bylaws which requires a
greater than majority vote must itself be approved by a vote of the Shareholders
holding shares representing at least 66-2/3% of the votes entitled to be cast
thereon.
Other matters on which the Shareholders are entitled to vote include: (i)
the election and removal of directors; (ii) a voluntary change in AmREIT's
status as a REIT; and/or (iii) the dissolution of AmREIT.
A majority of the directors (including a majority of the Independent
Directors) may in their discretion, from time to time, amend, without a
Shareholder vote, certain portions of the Bylaws, but not a Stated Investment
Policy. The Shareholders may amend the Bylaws by a Majority Vote.
Amendment of the Charter and Bylaws
The MGCL and the Charter provide that approval of a majority of the
shareholders entitled to vote thereon is required to amend the Charter. A bylaw
may be amended or repealed, or a new bylaw adopted, by (i) the affirmative vote
of the holders of a majority of the stock entitled to vote thereon, or (ii) a
majority of the Board.
Transactions With Interested Officers or Directors
The Bylaws will provide, in accordance with the MGCL, that contracts or
transactions between AmREIT and a director or officer of AmREIT or a corporation
or entity in which such officer or director is also an officer or director or
has a financial interest, are not void or voidable solely for such reason or
solely because the officer or director is present at or participates in any
meeting of the Board which authorizes the transaction or contract, or solely
because such officer's or director's vote is counted for such purpose, if the
Bylaw restrictions regarding such transactions are satisfied (see discussion
under Stated Investment Policies above) and (i) the material facts as to his
relationship or interest are disclosed or are known to the Board or a committee
and the Board or a committee in good faith authorizes such contract or
transaction; (ii) the material facts as to his relationship or interest are
disclosed or are known to the shareholders entitled to vote thereon and the
shareholders in good faith specifically approve such contract or transact; or
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(iii) the contract or transaction is fair to AmREIT at the time it is
authorized, approved or ratified by the Board, a committee or the shareholders.
In addition, the Bylaws will provide that any transactions with interested
directors or officers or their affiliates shall be made on commercially
reasonable terms substantially equivalent to terms available from third parties
in an arm's-length transaction in the competitive marketplace.
Rollup Transactions
AmREIT's Bylaws contain certain restrictions and requirements on AmREIT's
ability to participate in "Rollup" transactions which include any transaction
involving the acquisition of the Company. The Merger as structured and proposed
constitutes a "Rollup" transaction under these provisions. However, as a
condition to their approval of the Merger, the Shareholders will expressly
approve the exclusion of the Merger from the requirements of the Rollup
Provisions of the Bylaws to the extent they could apply to the Merger.
Limitations on Holdings and Transfer
For AmREIT to continue to qualify as a "REIT" under the Code, not more
than 50 percent of its outstanding Shares may be owned by five or fewer
individuals during the last half of each year and outstanding Shares must be
owned by 100 or more persons during at least 335 days of a taxable year of 12
months or during a proportionate part of a shorter taxable year except with
respect to the first taxable year for which an election to be treated as a REIT
is made. The Charter restricts the accumulation or transfer of Shares if any
accumulation or transfer could result in any person beneficially owning, in
accordance with the Code, in excess of 9.8% of the then outstanding Shares, or
could result in AmREIT being disqualified as a "REIT" under the Code. Such
restrictions authorize the Board to refuse to give effect to such transfer on
AmREIT's books as to Shares accumulated in excess of the 9.8% ownership limit.
Although the intent of these restrictions is to preclude transfers which would
violate the ownership limit or protect the AmREIT's status as a REIT under the
Code, there can be no assurance that such restrictions will achieve their
intent.
A transferee who acquires Shares in a restricted transfer is required to
indemnify, defend, and hold AmREIT and its other Shareholders harmless from and
against all damages, losses, costs, and expenses, including, without limitation,
reasonable attorneys' fees, incurred or suffered by AmREIT or such Shareholders
by virtue of AmREIT's loss of its qualification as a REIT if such loss is a
result of the transferee's acquisition. See "MATERIAL FEDERAL INCOME TAX
ASPECTS".
Anti-takeover Effect of Authorized But Undesignated Preferred Stock
As described above, the Board is authorized to provide for the issuance
of shares of Preferred Stock, in one or more series, and to fix by resolution of
the Board and to the extent permitted by the MGCL, the terms and conditions of
each such series. Management believes that the availability of Preferred Stock
will provide AmREIT with increased flexibility in structuring possible future
financings and acquisitions and in meeting other corporate needs which might
arise from time to time. Authorized but unissued shares of Preferred Stock, as
well as authorized but unissued shares of Common Stock, will be available for
issuance without further action by shareholders, unless such action is required
by applicable law or the rules of any stock exchange or automated quotation
system on which any class of stock may then be listed for trading.
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Although the Board has no present intention of doing so, it will be able
to issue a series of Preferred Stock that could, depending on its terms, either
impede or facilitate the completion of a merger, tender offer or other takeover
attempt. For instance, such new shares might impede a business combination by
including class voting rights which would enable the holder to block such
transaction or facilitate a business combination by including voting rights
which would provide a required percentage vote of shareholders. The Board will
make any determination to issue such shares based on its judgment as to the best
interests of AmREIT and its then existing shareholders. The Board, in so acting,
will be able to issue Preferred Stock having terms which would discourage an
acquisition attempt or other transaction that some or a majority of the
shareholders might believe to be in their best interests or in which
shareholders might receive a premium for their stock over the then market price
of such stock.
Liability for Monetary Damages
The Charter provides that no director will be personally liable to AmREIT
or its shareholders for monetary damages for breach of fiduciary duty as a
director, other than liability for breach of the duty of loyalty to AmREIT or
its stockholders, acts or omissions not in good faith, intentional misconduct, a
knowing violation of law, certain unlawful dividends, stock repurchases or
redemptions or any transaction from which the director derived an improper
personal benefit. Any repeal or modification of such provision by the
stockholders of AmREIT will not adversely affect any right or protection of a
director existing at the time of such repeal or modification with respect to
acts or omissions occurring prior to such repeal or modification.
Indemnification And Advancement of Expenses
The Charter provides for the indemnification of present and former
directors and officers of AmREIT and persons serving as directors, officers,
employees or agents of another corporation or entity at the request of AmREIT
(each, an "Indemnified Party") to the fullest extent permitted by the MGCL.
Indemnified Parties are specifically indemnified in the Charter and the Bylaws
(the "Indemnification Provisions") for expenses, including attorneys' fees,
judgments, fines and amounts paid in settlement actually and reasonably incurred
by an Indemnified Party (i) in connection with a threatened, pending or
completed action, suit or proceeding (whether civil, criminal, administrative or
investigative) by reason of the fact that he is or was a director or officer of
AmREIT or is or was serving as a director, officer, employee or agent of another
corporation or entity at the request of AmREIT, or (ii) in connection with the
defense or settlement of a threatened, pending or completed action or suit by or
in the right of AmREIT, provided that such indemnification is permitted only
with judicial approval if the Indemnified Party is adjudged to be liable to
AmREIT. Such Indemnified Party must have acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the subject
corporation and, with respect to any criminal action or proceeding, must have
had no reasonable cause to believe his conduct was unlawful. Any indemnification
under the Indemnification Provisions must be authorized based on a determination
that the indemnification is proper if the applicable standard of conduct has
been met by the Indemnified Party, provided that no such authorization is
required, and indemnification is mandatory, where a director or officer of
AmREIT is successful in the defense of such action, suit or proceeding or any
claim or matter therein. Otherwise, such determination will be made by a
majority vote of a quorum of the Board consisting of directors not a party to
the suit, action or proceeding, by a written opinion of independent legal
counsel or by the shareholders. In the event that a determination is made
that a director or officer is not entitled to indemnification under the
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<PAGE>
Indemnification Provisions, the Indemnification Provisions provide that the
Indemnified Party may seek a judicial determination of his right to
indemnification. The Indemnification Provisions further provide that the
Indemnified Party is entitled to indemnification for all expenses (including
attorneys' fees) incurred in any proceeding seeking to collect from AmREIT an
indemnity claim under the Indemnification Provisions if such Indemnified Party
is successful. Other than proceedings to enforce rights to indemnification,
AmREIT is not obligated to indemnify any person in connection with a proceeding
initiated by such person, unless authorized by the Board.
AmREIT will pay expenses incurred by a director or officer of AmREIT, or
a former director or officer, in advance of the final disposition of an action,
suit or proceeding, if he undertakes to repay amounts advanced if it is
ultimately determined that he is not entitled to be indemnified by AmREIT.
The Indemnification Provisions and provisions for advancing expenses in
the Charter will be expressly not exclusive of any other rights of
indemnification or advancement of expenses pursuant to the Bylaws. The
Indemnification Provisions and provisions for advancing expenses in the Bylaws
and the Charter will be expressly not exclusive of any other rights of
indemnification or advancement of expenses pursuant to any agreement, vote of
the shareholders or disinterested directors or pursuant to judicial direction.
AmREIT will be authorized to purchase insurance on behalf of an Indemnified
Party for liabilities incurred, whether or not AmREIT would have the power or
obligation to indemnify him pursuant to the Charter, the Bylaws or the MGCL.
In addition, AmREIT will enter into indemnification agreements with its
directors and certain of its executive officers pursuant to which such persons
are indemnified for costs and expenses actually and reasonably incurred by such
persons in connection with a threatened, pending or completed claim arising out
of service as a director, officer, employee, trustee and/or agent of AmREIT or
another entity at the request of AmREIT.
DESCRIPTION OF AMREIT'S CAPITAL STOCK
General
AmREIT's authorized capital stock consists of 100,000,000 shares of
Common Stock, $0.01 par value and 10,000,000 shares of Preferred Stock. As of
June 30, 1998, AmREIT had outstanding 2,374,306 shares of Common Stock and no
shares of Preferred Stock.
Common Stock
Voting Rights. Each holder of Common Stock will be entitled to one vote
for each share registered in his name on the books of AmREIT on all matters
submitted to a vote of shareholders. Except as otherwise provided by law, the
holders of Common Stock will vote as one class. The shares of Common Stock will
not have cumulative voting rights. As a result, subject to the voting rights, if
any, of the holders of any shares of Preferred Stock which may at the time
be outstanding, the holders of Common Stock entitled to exercise more than 50%
of the voting rights in an election of directors will be able to elect 100%
of the directors to be elected if they choose to do so. In such event, the
holders of the remaining shares of Common Stock voting for the election of
directors will not be able to elect any persons to the Board. The Charter
and the Bylaws contain certain provisions that could have an anti-takeover
effect. See "AMREIT CHARTER AND BYLAWS."
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Dividend Rights. Subject to the rights of the holders of any shares of
Preferred Stock which may at the time be outstanding, holders of AmREIT Stock
will be entitled to such dividends as the Board may declare out of funds legally
available therefor. Because portions of the operations of AmREIT may be
conducted through wholly-owned subsidiaries, AmREIT's cash flow and consequent
ability to pay dividends on Common Stock may be dependent to some degree upon
the earnings of such subsidiaries and on dividends and other payments therefrom.
Liquidation Rights and Other Provisions. Subject to the prior rights of
creditors and the holders of any Preferred Stock which may be outstanding from
time to time, the holders of Common Stock are entitled in the event of
liquidation, dissolution or winding up to share pro rata in the distribution of
all remaining assets.
The Common Stock is not liable for any calls or assessments and is not
convertible into any other securities. In addition, there are no redemption or
sinking fund provisions applicable to the Common Stock.
Transfer Agent. The transfer agent and registrar for AmREIT Common Stock
is The Bank of New York, 101 Barclay Street, New York, NY 10286.
Preferred Stock
The Charter provides that the Board is authorized to provide for the
issuance of shares of Preferred Stock, from time to time, in one or more series.
Prior to the issuance of shares in each series, the Board is required by the
Charter and the MGCL to adopt resolutions and file a Certificate of
Designations, Preferences and Relative, Participating, Optional and Other
Special Rights of Preferred Stock and Qualifications, Limitations and
Restrictions Thereof (the "Certificate of Designation") with the Secretary of
State of Maryland, fixing for each such series the designations, preferences and
relative, participating, optional or other special rights applicable to the
shares to be included in any such series and any qualifications, limitations or
restrictions thereon, including, but not limited to, dividend rights, dividend
rate or rates, conversion rights, voting rights, rights and terms of redemption
(including sinking fund provisions), the redemption price or prices, and the
liquidation preferences as are permitted by Maryland law.
REPORTS TO SHAREHOLDERS
AmREIT provides periodic reports to the Shareholders regarding its
operations over the course of the year. Financial information contained in all
reports to Shareholders will be prepared on an accrual basis of accounting in
accordance with generally accepted accounting principles. Tax information will
be mailed to Shareholders within 30 days following the close of each fiscal
year. AmREIT's annual report, which will include financial statements audited
and reported upon by independent public accountants, will be furnished within
120 days following the close of each fiscal year. The annual financial
statements will contain or be accompanied by a complete statement of any
transactions with any Affiliates, and of compensation and fees paid or payable
by AmREIT to the management and its Affiliates. The information required by Form
10-Q will be made available to Shareholders within 45 days of the close of each
of the first 3 fiscal quarters of each year.
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AmREIT provides the Shareholders that are qualified retirement plans with
an annual statement of value in order to permit them to comply with ERISA annual
reporting requirements. The statement will report the net asset value of
Securities based upon the amount Shareholders would receive if Properties were
sold at their appraised values as of the close of AmREIT's fiscal year and if
such proceeds, together with the other AmREIT funds, were distributed in
liquidation. Until 1999, AmREIT is permitted to value all Properties at cost,
although it is not required to do so. Thereafter, whenever AmREIT is not
offering shares of its Common Stock, it will perform a valuation update based on
capitalization of income for each of its properties unless it previously
obtained an appraisal for such property dated within nine months prior to the
end of the relevant fiscal year. After the first three annual reports, the Board
may elect to deliver such reports to all Shareholders. Shareholders will not be
forwarded copies of appraisals or updates. In providing such reports to the
Shareholders, neither AmREIT nor its Affiliates thereby make any warranty,
guarantee or representation that (1) the Shareholders or AmREIT, upon
liquidation, will actually realize the estimated value per Share, or (2) the
Shareholders will realize the estimated net asset value if they attempt to sell
their Shares.
Shareholders have the right under applicable federal and Maryland law to
obtain certain information about AmREIT and, at their expense, may obtain a list
of names and addresses of the Shareholders. Shareholders have the right to
inspect and duplicate AmREIT's appraisal records. In the event that the SEC
promulgates rules and/or in the event that applicable State securities laws or
the North American Securities Administrators Association ("NASAA") Guidelines
are amended so that, taking such changes into account, AmREIT's reporting
requirements are reduced, AmREIT may cease preparing and filing certain of the
aforementioned reports if the directors determine such action to be in AmREIT's
best interests and if such cessation is in compliance with the rules and
regulations of the SEC and applicable State and NASAA Guidelines, one or more of
which may then be amended.
THE PARTNERSHIPS
General
Each of the Partnerships was sponsored and organized by the General
Partner for the purpose of one or more retail properties under long-term net
lease to creditworthy tenants. Each of the Partnerships is restricted from using
leverage to finance its investments and thus, none of the Partnerships has any
significant debt. Each of the Partnerships was formed for long-term investment,
intending to hold its properties for resale over a 10 to 15 year period,
although each Partnership Agreement provides for a longer term. Each of the
Partnerships was organized under Texas limited partnership law except for Fund
IX and Fund X which were organized under Nebraska limited partnership law. The
Partnerships share executive offices with the General Partner and his
Affiliates, including AmREIT. The following tables provide selected information
regarding the Partnerships.
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<PAGE>
<TABLE>
Partnership Organization and Capitalization
<CAPTION>
Name of No. of Date of Original Limited Price No. of
Partnership Partners Organization Partner Capital per Unit Units Sold
- ----------- -------- ------------ --------------- -------- ----------
<S> <C> <C> <C> <C> <C>
FUND III 43 2/1986 $945,000 $30,000 31.500
FUND IV 31 10/1986 615,000 30,000 20.500
FUND V 21 2/1987 480,000 30,000 16.000
FUND VI 13 8/1987 300,000 30,000 10.000
FUND VII 40 3/1988 1,125,100 30,000 37.503
FUND VIII 55 4/1990 1,860,000 30,000 62.000
FUND GDYR 37 10/1990 1,335,000 30,000 44.500
FUND IX 326 6/1990 5,390,500 1,000 5,390.500
FUND X 727 9/1992 11,453,610 1,000 11,453.610
FUND XI 269 5/1994 7,061,209 1,000 7,061.210
</TABLE>
Properties
Description. The Partnerships own alone or jointly a total of 32
properties and one mortgage note. The property interests of the Partnerships
consist of fee simple interests owned directly or through joint ventures with
one or more other Partnerships, or in the case of Fund IX, Fund X and Fund XI,
AmREIT. Fund IV and V are the only exceptions to the foregoing to the extent
they jointly own interests in the Atlas Note, a secured note.
The following tables set forth information regarding the properties of
each of the Partnerships as of August 21, 1998.
<TABLE>
Partnership Property Information
<CAPTION>
Percentage Purchase Negotiated Price of
Partnership Tenant/User (Location) Owned Price Properties
- ----------- ----------- --------- ----- ----- ----------
<S> <C> <C> <C> <C>
FUND III Steak & Ale (Houston, TX) 44% $277,200
Bank of America (Houston, TX) 100% 315,000
Taco Bell (Houston, TX) 100% 136,324
-------
TOTAL $728,524 $1,100,000
======== ==========
FUND IV Steak & Ale (Houston, TX) 56% $352,800
Atlas Note 51.3% 105,209*
-------
TOTAL $458,009 $500,000
======== ========
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<PAGE>
Percentage Purchase Negotiated Price of
Partnership Tenant/User (Location) Owned Price Properties
- ----------- ----------- --------- ----- ----- ----------
FUND V Pizza Inn (Clute, TX) 50% $74,809
Whataburger (Clute, TX) 50% 128,899
La Petite Academy (Houston, TX) 6.02% 32,494
Atlas Note 48.7% 99,837*
-------
TOTAL $336,039 $420,000
======== ========
FUND VI Pizza Inn (Clute, TX) 50% $74,809
Whataburger (Clute, TX) 50% 128,899
La Petite Academy (Houston, TX) 2.74% 14,771
------
TOTAL $218,479 $285,000
======== ========
FUND VII La Petite Academy (Houston, TX) 91.25% $492,734
Whataburger (Dallas, TX) 54.88% 299,095
Sup.Sound (Houston, TX) 27.28% 67,649
AFC, Inc./Church's (Houston, TX) 27.28% 57,283
Gannett/Billboard (Houston, TX) 27.28% ---
---------
TOTAL $916,761 $1,010,000
======== ==========
FUND VIII Whataburger (Dallas, TX) 45.12% $245,905
Sup.Sound (Houston, TX) 72.72% 180,351
AFC, Inc./Church's (Houston, TX) 72.72% 152,717
Gannett/Billboard (Houston, TX) 72.72% ---
Discount Tire (Fort Worth, TX) 100% 358,000
La Petite Academy (Houston, TX) 100% 457,000
Goodyear Tire-Marsh Lane (Dallas, TX) 25.28% 150,149
-------
TOTAL $1,544,122 $1,800,000
========== ==========
AAA GDYR Goodyear Tire-Marsh Lane (Dallas, TX) 74.72% $443,851
Goodyear Tire-Hillcrest (Dallas, TX) 100% 555,000
-------
TOTAL $998,851 $1,090,000
======== ==========
FUND IX Foodmaker/Jack-in-the-Box (Dallas, TX) 100% $565,000
Baptist Health Services (Memphis, TN) 100% 1,540,000
Waldenbooks/Payless (Austin, TX) 100% 535,000
Golden Corral - I-45 (Houston, TX) 100% 1,575,456
Golden Corral - Hwy 1960 (Houston, TX) 4.80% 74,894
------
TOTAL $4,290,350 $4,850,000
========== ==========
FUND X Golden Corral-Hwy 1960 (Houston, TX) 95.20% $1,485,106
TGI Friday's (Houston, TX) 100% 1,473,461
Goodyear Tire (Houston, TX) 100% 510,000
Computer City (Minneapolis, MN) 100% 2,407,317
AFC, Inc./Popeye's (Atlanta, GA) 100% 834,500
Blockbuster Music (Independence, MO) 45.16% 699,000
OneCare (Sugarland, TX) 100% 1,405,006
Just for Feet (Tucson, AZ) 18.25% 611,394
-------
TOTAL $9,425,784 $10,355,000
========== ===========
FUND XI Blockbuster Video (Wichita, KS) 49% $833,000
Blockbuster Video (Oklahoma City, OK) 100% 752,663
Just for Feet (Tucson, AZ) 29.85% 1,000,007
Bank United (The Woodlands, TX) 49% 245,000
Just For Feet (Baton Rouge, LA) 49% 1,375,014
Hollywood Video (Lafayette, LA) 25.42% 285,624
Pier One (Longmont, CO) 100% 1,195,741
---------
TOTAL $5,687,049 $6,350,000
========== ==========
* Unpaid balance of Atlas Note on June 30, 1998.
</TABLE>
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<PAGE>
Leases. Leases on the properties provide that the tenant bears
responsibility for substantially all property costs and expenses associated with
ongoing maintenance and operation, including utilities, property taxes and
insurance. In general, these leases also provide that the tenant is responsible
for roof and structural repairs. Certain of the properties are subject to leases
under which the landlord retains responsibility for certain costs and expenses
associated with the property. Because many of the properties which are subject
to leases that place these responsibilities on the landlord are recently
constructed, management anticipates that capital demands to meet obligations
with respect to these properties will be minimal for the foreseeable future and
can be met with funds from operations and working capital.
None of the properties of any Partnership, if the Partnership is acquired
by AmREIT, would represent 10% or more of AmREIT's currently scheduled annual
rental income, the cost basis of AmREIT's properties or AmREIT's net rental
income. However, the acquisition of certain Partnerships would, in the absence
of the acquisition of the remaining Partnerships, result in an increase in the
portion of the Company's properties under lease to Just For Feet, Blockbuster
Music and Blockbuster Video and Hollywood Video. Even so, AmREIT's dependence on
these tenants would not materially increase over current levels unless certain
Partnerships are acquired and others are not. Further tenant concentration would
be most severe in the event the Partnership were to acquire only Fund XI, in
which event Just For Feet and Blockbuster would account for up to 42.4% and
11.2%, respectively, of the Company's scheduled annual rentals. Currently, Just
For Feet and Blockbuster account for approximately 42.5% and 7.3%, respectively,
of AmREIT's current scheduled annual rentals.
The following table sets forth certain information regarding the leases
on the properties of each of the Partnerships.
<TABLE>
Lease Information
<CAPTION>
Lease
Percentage Square Annual Termination
Partnership Tenant/User (Location) Owned Footage(1) Rent(1) Date
- ----------- ----------- --------- ----- ---------- ------- ----
<S> <C> <C> <C> <C> <C>
FUND III Steak & Ale (Houston, TX) 44% Land Lease $19,800 03/22/02
Bank of America (Houston, TX) 100% 2,815 62,370 05/11/00
Taco Bell (Houston, TX) 100% 1,500 38,844 02/28/03
----- ------
TOTAL 4,315 $121,014
===== ========
FUND IV Steak & Ale (Houston, TX) 56% Land Lease $25,200 03/22/02
---------- -------
TOTAL Land Lease $25,200
===== =======
FUND V Pizza Inn (Clute, TX) 50% 1,495 $12,120 07/31/03
Whataburger (Clute, TX) 50% 1,400 14,543 01/19/00
La Petite Academy (Houston, TX) 6.02% 407 3,493 03/29/04
--- -----
TOTAL 3,302 $30,156
===== =======
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<PAGE>
Lease
Percentage Square Annual Termination
Partnership Tenant/User (Location) Owned Footage(1) Rent(1) Date
- ----------- ----------- --------- ----- ---------- ------- ----
FUND VI Pizza Inn (Clute, TX) 50% 1,495 $12,120 07/31/03
Whataburger (Clute, TX) 50% 1,400 14,543 01/19/00
La Petite Academy (Houston, TX) 2.74% 185 1,588 03/29/04
--- -----
TOTAL 3,080 $28,251
===== =======
FUND VII La Petite Academy (Houston, TX) 91.25% 6,178 $52,969 03/29/04
Whataburger (Dallas, TX) 54.88% 1,212 32,879 09/30/06
Sup.Sound (Houston, TX) 27.28% 453 8,183 08/31/01
AFC, Inc./Church's (Houston, TX) 27.28% 360 4,092 05/14/00
Gannett/Billboard (Houston, TX) 27.28% Land Lease 4,066 11/30/98
---------- -----
TOTAL 8,203 102,189
===== =======
FUND VIII Whataburger (Dallas, TX) 45.12% 996 $27,032 09/30/06
Sup.Sound (Houston, TX) 72.72% 1,208 21,817 08/31/01
AFC, Inc./Church's (Houston, TX) 72.72% 960 10,908 05/14/00
Gannett/Billboard (Houston, TX) 72.72% LandLease 10,840 11/30/98
Discount Tire (Fort Worth, TX) 100% 4,147 44,400 06/01/05
La Petite Academy (Houston, TX) 100% 5,998 49,128 03/31/05
Goodyear Tire-Marsh Ln (Dallas, TX) 25.28% 1,472 16,080 05/31/05
----- ------
TOTAL 14,781 $180,205
====== ========
AAA Goodyear Tire-Marsh Ln (Dallas, TX) 74.72% 4,352 $47,520 05/31/05
GDYR Goodyear Tire-Hillcrest (Dallas, TX) 100% 5,772 59,400 02/29/00
----- ------
TOTAL 10,124 $106,920
====== ========
FUND IX Foodmaker-Jack/Box (Dallas, TX) 100% 2,238 68,998 07/11/09
Baptist Heath Services (Memphis, TN) 100% 15,000 187,500 08/31/07
Waldenbooks/Payless (Austin, TX) 100% 4,000 82,000 01/30/03
Golden Corral/I-45 (Houston, TX) 100% 12,000 182,994 11/29/07
Golden Corral/Hwy 1960 (Houston, TX) 4.80% 576 8,723 03/14/08
--- -----
TOTAL 33,814 $530,215
====== ========
FUND X Golden Corral/Hwy 1960 (Houston, TX) 95.20% 11,424 $172,965 03/14/08
TGI Friday's (Houston, TX) 100% 8,500 180,500 01/31/03
Goodyear Tire (Houston, TX) 100% 5,209 51,756 03/31/09
Computer City (Minneapolis, MN) 100% 15,000 246,750 08/31/09
AFC, Inc./Popeye's (Atlanta, GA) 100% 2,583 95,867 07/19/14
Blockbuster Music (Independence, MO) 45.16% 6,774 77,010 04/30/04
OneCare (Sugarland, TX) 100% 15,000 157,200 01/30/05
Just for Feet (Tucson, AZ) 18.25% 2,801 69,526 09/30/16
----- ------
TOTAL 67,291 $1,051,574
====== ==========
FUND XI Blockbuster Video (Wichita, KS) 49% 6,860 $92,104 12/31/04
Blockbuster Video (Oklahoma City, OK) 100% 6,500 80,523 08/31/05
Just for Feet (Tucson, AZ) 29.85% 4,582 113,717 09/30/16
Bank United (The Woodlands, TX) 49% Land Lease 26,488 09/30/11
Just For Feet (Baton Rouge, LA) 49% 7,838 147,264 05/15/12
Hollywood Video (Lafayette, LA) 25.42% 1,904 34,243 09/24/12
Pier One (Longmont, CO) 100% 8,014 127,502 02/29/08
----- -------
TOTAL 35,698 $621,841
====== ========
(1) Reflects ownership percentages.
</TABLE>
Partnership Distributions
The following table sets forth the distributions paid per Unit per
Partnership from the Partnerships' inception through June 30, 1998. Amounts paid
in the indicated quarter were determined based upon Partnership operations
during the preceding quarter. The original cost per Unit was $30,000 for each of
the Partnerships, except Fund GDYR, Fund IX, Fund X and Fund XI whose original
Units cost $1,000 each. All distributions were made from cash flow from
operations except as otherwise noted.
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<PAGE>
The tables below set forth information for each Partnership regarding its
cash distributions from inception through June 30, 1998.
<TABLE>
Cumulative Cash Distributions Since Formation Through 6/30/1998
<CAPTION>
Year of Cumulative Distributions Cumulative Distributions of
Partnership First of Operational Cashflow Operational Cashflow As Percent
Name Investment Through 6/30/1998 of Original Invested Capital
---- ---------- ----------------- ----------------------------
<S> <C> <C> <C>
FUND III 1986 $1,120,472 118.6%
FUND IV 1986 465,993 75.8%
FUND V 1987 427,507 89.1%
FUND VI 1987 244,576 81.5%
FUND VII 1988 894,863 79.5%
FUND VIII 1990 1,367,081 73.5%
FUND GDYR 1990 738,651 55.3%
FUND IX 1990 3,024,598 56.1%
FUND X 1992 4,030,581 35.2%
FUND XI 1994 1,206,860 17.1%
</TABLE>
Distributions in Adjusted
Return of L.P. L.P. Capital
Original Capital Through Through
Partnership L.P. Capital 6/30/1998 6/30/1998
- ----------- ------------ --------- ---------
FUND III $945,000 $10,186 $934,814
FUND IV 615,000 -0- 615,000
FUND V 480,000 19,611 460,389
FUND VI 300,000 5,267 294,733
FUND VII 1,125,100 -0- 1,125,100
FUND VIII 1,860,000 6,020 1,853,980
FUND GDYR 1,335,000 105,910 1,229,090
FUND IX 5,390,500 -0- 5,390,500
FUND X 11,453,610 -0- 11,453,610
FUND XI 7,061,209 -0- 7,061,209
--------- --- ---------
Total $30,565,419 $146,994 $30,418,425
Distributions in Return of Capital are distributions constituting a
return of a Partner's capital under the respective Partnership Agreement. In
general, Distributions in Return of Capital are distributions paid in excess of
current or cumulative income or paid from proceeds from the sale of property.
Operational Cashflow is distributions which do not constitute Distributions in
Return of Capital.
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<PAGE>
A Limited Partner's Adjusted Capital as of the date stated, equals his or
her original investment, less distributions constituting a return of capital. In
the case of each Partnership, Adjusted Capital has been calculated by deducting
from the Limited Partner's original capital contribution all distributions
constituting a return of capital under the Partnerships' Partnership Agreement.
The Limited Partners in 7 of the 10 Partnerships have not heretofore received
distributions in return of capital and, thus, their Adjusted Capital is equal to
their original invested capital. In the case of three Partnerships receiving
distributions in return of capital, such distributions represent distributions
in excess of earnings, except in the case of Fund GDYR, where $105,910 of such
distributions represent net proceeds from the sale of real property.
Management of the Properties
Since their inception, each Partnership was administered and managed by
the Adviser, until its acquisition by AmREIT on June 5, 1998. After that time,
these functions have been continued under the same contractual terms by AmREIT
Operating Corporation and/or other affiliates of AmREIT.
Employees
The partnerships do not employ their own personnel. The Partnerships'
business activities are conducted by AmREIT Operating Corporation and/or other
affiliates of AmREIT pursuant to management agreements. Under these agreements,
AmREIT Operating Corporation and/or other affiliates of AmREIT are reimbursed by
the Partnerships for the actual cost of the employees providing services to the
Partnerships.
COMPARISON OF OWNERSHIP OF UNITS AND SHARES
The Partnerships and AmREIT are each vehicles recognized as appropriate
for the holding of real estate investments and afford passive investors, such as
Limited Partners and shareholders, certain benefits, including limited
liability, a professionally managed portfolio and the avoidance of double-level
taxation on distributed income. The information below highlights a number of the
significant differences between the Partnerships and AmREIT relating to, among
other things, form of organization, investment objectives, policies and
restrictions, asset diversification, capitalization, management structure,
compensation and fees, and investor rights, and compares certain of the
respective legal rights associated with the ownership of Units and Shares. These
comparisons are intended to assist Limited Partners in understanding how their
investments will be changed if, as a result of the Merger, their Units are
exchanged for Shares. In addition, there are significant differences in the tax
treatment of the Partnerships and REITs, and some of the material tax
differences are summarized below under the captions "Taxation of Taxable
Investors" and "Taxation of Tax-Exempt Investors." This discussion is summary in
nature and does not constitute a complete discussion of these matters, and
Limited Partners should carefully review the balance of this Prospectus for
additional discussions.
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<PAGE>
<TABLE>
<CAPTION>
___________________________________________________________________________________________________________
THE PARTNERSHIPS AmREIT
___________________________________________________________________________________________________________
<S> <C>
Form of Organization
Each of the Partnerships is a limited AmREIT is a Maryland corporation formed
partnership organized under Nebraska or Texas for the purpose of investing in real estate
law formed for the purpose of investing, without properties. As a corporation, AmREIT may
the use of leverage, in a real estate portfolio remain in existence in perpetuity. AmREIT
consisting of income producing retail real intends to continue to qualify as a REIT for
property under long-term net lease. Each federal income tax purposes. Unlike the
Partnership has been treated as a partnership for Partnerships, AmREIT may, in the discretion of
federal income tax purposes. The Partnerships its Board of Directors, use leverage to acquire its
are under the control of their general partners. investments. AmREIT is governed by its directors.
Length of Investment
An investment in each of the Partnerships Unlike the Partnerships, AmREIT intends
was presented to Limited Partners as a finite life to continue its operations for an indefinite time
investment, with the Limited Partners to receive period and has no specific plans for disposition
regular cash distributions out of the Partnership's of the assets acquired through the Merger
net operating income and special distributions of or subsequent acquisitions. AmREIT intends to
net sale proceeds through the liquidation of the distribute at least 95% of its REIT taxable
Partnership's real estate investments. Under each income, but expects to retain net sale or
of the Partnership Agreements, the Partnership's refinancing proceeds for new investments, capital
stated term of existence was for a substantial expenditures, working capital reserves or other
period (from 30 to 45 years from inception, appropriate purposes. In contrast to the
depending upon the Partnership), but the general Partnerships, AmREIT will constitute a vehicle
partners stated their general intention of selling for taking advantage of future investment
the Partnership's properties within a period of 10 opportunities that may be available in the real
to 15 years after acquisition or development of estate markets. See "THE MERGER --
the properties. Limited Partners were advised Background of and Reasons for Merger."
that sale of the Partnership's assets would,
however, be dependent upon market conditions
and as such, might vary from time to time.
</TABLE>
Limited Partners in each of the Partnerships expect liquidation of their
investment when the assets of the Partnership are liquidated. In contrast,
AmREIT does not expect to dispose of its investments within any prescribed
periods and, in any event, plans to retain the net sale proceeds for future
investments unless distributions are required to retain REIT status.
Shareholders are expected to achieve liquidity for their investments by trading
the Shares in the market should one develop after the Merger, and not through
the liquidation of AmREIT's assets. The Shares may ultimately trade, when and if
a public market for the shares is established, at a discount from, or premium
to, their pro rata interest in the liquidation value of AmREIT's properties.
<TABLE>
<CAPTION>
Properties and Diversification
<S> <C>
The investment portfolio of each of the As a result of the Merger, AmREIT will
Partnerships is limited to the assets acquired with acquire substantially all of the properties of the
the initial equity raised from the General and Participating Partnerships. In addition, AmREIT
Limited Partners. The Partnerships may not use may issue debt and/or equity securities in the
debt financing to acquire investments. future, and retain all, or substantially all,of the
net liquidation proceeds from the sale of
AmREIT's assets to finance expansion of
AmREIT's investment portfolio.
</TABLE>
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Through the Merger, AmREIT's current portfolio and additional investments
that may be made from time to time, AmREIT will have an investment portfolio
substantially larger and more diversified than the portfolio of any of the
Partnerships. An investment in AmREIT is subject to the risks normally attendant
to ongoing real estate ownership and, if AmREIT develops property, to the risks
related to property development.
<TABLE>
<CAPTION>
Permitted Investments
<S> <C>
Each of the Partnerships was generally Under its Bylaws, AmREIT may purchase
authorized toinvest only in income-producing for investment, lease, manage, sell, develop,
single tenant retail properties. The Partnerships subdivide and improve a wider range of retail
have concentrated their investment in single real property and interests therein, including
tenant retail buildings. In general, the mortgage loans secured thereby. See "AMREIT
Partnerships are not permitted to invest in AND ITS BUSINESS."
mortgage loans.
Like the Partnerships, AmREIT has
concentrated its investments in single tenant
retail properties. AmREIT's Bylaws, however,
authorizes it to make other real estate
investments. Consequently, after the Merger,
AmREIT's investments will be more diversified
than the investments of the Partnerships. Such
diversification, if it occurs, may serve as a
hedge against the risk of having all of AmREIT's
investments limited to a single asset group but
will also expose AmREIT to the risk of owning and
operating assets not directly related to its
primary property type.
Additional Equity
The Partnerships are authorized to issue AmREIT may, in the discretion of its
only their respective Units. None of the directors, issue additional equity securities
Partnerships is authorized to issue additional consisting of Common Shares or Preferred
equity securities. Shares, provided that the total number of Shares
issued does not exceed the authorized number of
Shares or Preferred Shares set forth in its
Charter. AmREIT expects to raise additional
equity from time to time to increase its available
capital for investment.
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<PAGE>
Unlike the Partnerships, AmREIT has
substantial flexibility to raise equity, through
the sale of Shares or Preferred Shares, to finance
its business and affairs. AmREIT, through the
issuance of new equity securities, may
substantially expand its capital base to make new
real estate investments.
</TABLE>
An investment in AmREIT should not be viewed as an investment in a
specified pool of assets, but instead as an investment in an ongoing real estate
investment business, subject to the risks associated with a real estate
portfolio that is expected to change from time to time. The issuance of
additional equity securities by AmREIT will dilute the interests of shareholders
if sold at prices below their fair market value.
<TABLE>
<CAPTION>
Borrowing Policies
<S> <C>
None of the Partnerships were authorized AmREIT is permitted to borrow, on a
to borrow funds for the acquisition of their secured or unsecured basis, funds to finance its
portfolio. business.
In conducting its business, AmREIT may borrow funds to the extent
believed appropriate. It is expected that AmREIT will be more leveraged than the
Partnerships, some of which have not incurred significant borrowings in
comparison to the overall value of their assets. Borrowing funds may allow
AmREIT to substantially expand its asset base, but likewise will increase
AmREIT's risks due to its leveraged investments.
Restrictions upon Related Party Transactions
In varying degrees, each of the Partnership Maryland law allows AmREIT to engage
Agreements restricts the applicable Partnership in transactions with directors, or other persons a
from entering into a variety of business director is directly or indirectly interested in or
transactions with the general partners and their connected with, as a trustee, partner, trust
Affiliates. Since each of the Partnership manager, shareholder, member, employee,
Agreements may be amended by a majority vote officer or agent of such other persons. Its
of Limited Partners, it is possible to amend the Bylaws prohibit AmREIT from entering into a
Partnership Agreement to authorize any transaction with any of the interested parties
transaction with the general partners and unless the terms and conditions of such
affiliates. transaction have been disclosed to AmREIT
directors and approved by a majority of directors
not otherwise interested in the matter (including
a majority of Independent Directors) or has been
disclosed in reasonable detail to the shareholders,
and approved by holders of a majority of Shares
then outstanding or entitled to vote thereon.
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<PAGE>
Except for transactions specifically Maryland law allows AmREIT to enter into
approved in the Partnership Agreements, the transactions with interested parties, such as
Partnerships are, to varying degrees, not directors, officers, significant shareholders and
authorized to enter into transactions with the Affiliates thereof, but such transactions must be
general partners and their affiliates without approved by a majority of AmREIT directors not
Limited Partner approval. interested in the matter provided that they have
determined the transaction to be fair, competitive
and commercially reasonable. Since neither the
Bylaws nor the Charter require the approval of
shareholders for entering into transactions with
interested parties, it may be easier for AmREIT
to enter into such transactions than it would be
for the Partnerships, where Limited Partner
approval for such transactions is mandated.
Management Control and Responsibility
Under each of the Partnership Agreements, The Board of Directors will have exclusive
the general partners are,subject to certain control over AmREIT's business and affairs
narrow limitations, vested with all management subject only to the restrictions in its Charger and
authority to conduct the business of the the Bylaws. Shareholders have the right to elect
Partnership, including authority and members of the Board of Directors. AmREIT
responsibility for overseeing all executive, directors are required to act in good faith and
supervisory and administrative services rendered exercise care in conducting AmREIT's affairs.
to the Partnership. The general partners have the See "FIDUCIARY RESPONSIBILITY --
right to continue to serve in such capacities Directors and Officers of AmREIT."
unless removed by a majority vote of Limited
Partners. Limited Partners have no right to
participate in the management and control of the
Partnership and have no voice in its affairs
except for certain limited matters that must be
submitted to a vote of the Limited Partners under
the terms of the Partnership Agreements or as
required by law. See "VOTING RIGHTS"
below. The general partners are accountable as
fiduciaries to the Partnerships and are required to
exercise good faith and integrity in their dealings
in conducting the Partnership's affairs. See
"FIDUCIARY RESPONSIBILITY -- general
partners of the Partnerships."
</TABLE>
Shareholders will have greater control over management of AmREIT than the
Limited Partners have over the Partnerships because AmREIT Board is elected by
the Shareholders. The general partners do not need to seek re-election annually,
but instead serve unless removed by an affirmative vote of the Limited Partners,
which is generally regarded as an extraordinary event only appropriate in cases
of mismanagement and changes in control due to shifts in the ownership of Units.
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<PAGE>
<TABLE>
<CAPTION>
Management Liability and Indemnification
<S> <C>
As a matter of state law, the general AmREIT's Charter and Maryland state law
partners have liability for the payment of provide broad indemnification rights to directors
Partnership obligations and debts unless and officers who act in good faith, and in a
limitations upon such liability are expressly stated manner reasonably believed to be in or not
in the obligation. Each of the Partnership opposed to the best interests of AmREIT and,
Agreements provides generally that neither with respect to criminal actions or proceedings,
general partners nor any of their affiliates without reasonable cause to believe their conduct
performing services on behalf of the Partnership was unlawful. In addition, the Charter
will be liable to the Partnership or its Limited indemnifies directors and officers against
Partners for any act or omission performed in amounts paid in settlement, authorizes AmREIT
good faith pursuant to authority granted by the to advance expenses incurred in defense upon
Partnership Agreement, and in a manner AmREIT's receipt of an appropriate undertaking
reasonably believed to be within the scope of the to repay such amounts if appropriate, and
authority granted and in the best interest of the authorizes AmREIT to carry insurance for the
Partnerships, provided that such act or omission benefit of its offices and trust managers even for
did not constitute fraud, misconduct, bad faith or matters as to which such persons are not entitled
negligence. In addition, the Partnership to indemnification. See "FIDUCIARY
Agreements indemnify the general partners and RESPONSIBILITY." Through the Merger,
their affiliates for liability, loss, damage, cost AmREIT will be assuming all existing and
and expenses, including attorneys' fees, incurred contingent liabilities of the Participating
by them in conducting the Partnerships' business, Partnerships, including their obligations to
except in events such as fraud, misconduct, bad indemnify the general partners and others for
faith or negligence. To varying degrees, the litigation expenses that might be incurred by
general partners of each of the Partnerships have them for serving as general partners of the
limited liability to the Partnership for acts of Partnerships or for sponsoring the Merger.
omissions undertaken by them when performed Although the standards are expressed somewhat
in good faith, in a manner reasonably believed to differently, there are limitations similar to those
be within the scope of their authority and in the on the general partners of the Partnerships upon
best interests of the Partnership. The general the liability and indemnification of the directors
partners also have, under specified and officers of AmREIT.
circumstances, a right to be reimbursed for
liability, loss, damage, costs and expenses
incurred by them by virtue of serving as general
partners.
</TABLE>
AmREIT believes that the scope of the liability and indemnification
provisions in AmREIT's governing documents provides protection against claims
for personal liability against AmREIT's directors and officers which is
comparable to, though not identical with, the protections afforded to the
general partners and their affiliates under the Partnership Agreements. Through
the Merger, AmREIT will be assuming all of the existing and contingent
liabilities of the Participating Partnerships, including their obligations to
indemnify the general partners and other persons.
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<PAGE>
<TABLE>
<CAPTION>
Anti-takeover Provisions
<S> <C>
Changes in management can be effected The Charter and Bylaws contain a number
only by removal of the general partners, which of provisions that might have the effect of
action requires a majority vote of Limited entrenching current management and delaying or
Partners. Due to transfer restrictions in the discouraging a hostile takeover of AmREIT.
Partnership Agreements, the general partners These provisions include, among others, the
may restrict transfers of the Units and, in following:
particular, affect whether the transferees have
voting rights. Of particular significance is that
an assignee of a Unit may not become a (a) the power of AmREIT's directors to
substitute Limited Partner, entitling him to ve issue 10,000,000 Preferred Shares, with such
on matters that may be submitted to the Limited rights and preferences as determined by AmREIT
Partners for approval, unless such substitutions directors;
consented to by the general partners, which
consent, in the general partners' absolute (b) the power of AmREIT's directors to
discretion, may be withheld. The general stop transfers and/or redeem Shares under the
partners may exercise this right of approval to following conditions: from any shareholder who
deter, delay or hamper attempts by persons to owns, directly or indirectly, 9.8% or more of the
acquire a majority interest of the Limited outstanding Shares, from any five or fewer
Partners. shareholders who own, directly or indirectly,
more than 50% of the outstanding Shares, or
from any other Shareholder if AmREIT's
directors otherwise determine in good faith that
ownership of the outstanding Shares has or may
become concentrated to an extent that may
prevent AmREIT from qualifying as a REIT
under the Code. Any Shares transferred in
violation of this restriction become "Excess
Shares," with no voting or distribution rights.
AmREIT has the power to purchase or direct the
sale of such Excess Shares, with the sale
proceeds being paid to the former owner;
(c) directors remain in office unless
removed by the shareholders or if another
nominee for director receives the vote of a
majority of the outstanding Shares. Directors
remain on the Board regardless of whether they
receive a vote of the majority of the outstanding
Shares at AmREIT's annual meeting; and
(d) the requirement that, except in certain
circumstances, certain "business combinations"
(as defined therein) between AmREIT and a
"related person" (as also defined therein,
generally a person or entity which owns more
than 50% of the outstanding shares of AmREIT)
be approved by the affirmative vote of the
holders of 80% of the outstanding Shares and
Preferred Shares, including the vote of the
holders of not less than 50% of the Shares and
Preferred Shares not owned by the related
person. The Charter is designed to prevent a
purchaser from utilizing two-tier pricing and
similar tactics in an attempted takeover of
AmREIT, and it may have the overall effect of
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<PAGE>
making it more difficult to acquire and exercise
control of AmREIT. In very general terms, the
fair price provision requires that unless a
potential purchaser were willing to purchase 80%
of the outstanding shares of AmREIT as the first
step in a business combination (or unless a
potential purchaser were assured of obtaining
the affirmative votes of at least 80% of AmREIT's
outstanding shares), the purchaser would be
required either to negotiate with AmREIT
directors and offer terms acceptable to them or to
abandon the proposed business combination. The
Charter may provide AmREIT directors with
enhanced ability to block any proposed
acquisition of AmREIT and to retain their
positions in the event of a takeover bid and may
require a related person to pay a higher price for
shares or structure his, her or its transaction
differently than would be the case in the absence
of the Fair Price provision. Although it may,
under certain circumstances, have the effect of
discouraging unilateral tender offers or other
takeover proposals and enhance the ability of
AmREIT directors to retain their positions in the
event of a takeover bid, the business combination
provision in the Charter assures, to some degree,
fair treatment of all shareholders in the event of
a two-step takeover attempt.
</TABLE>
Certain provisions of the governing documents of the Partnerships and
AmREIT could be used to deter attempts to obtain control of the Partnerships and
AmREIT in transactions not approved by the general partners and AmREIT
directors, respectively. When and if the Shares are traded on a national
securities system there will be a greater likelihood of changes in control in
the case of AmREIT, notwithstanding those provisions that might be employed by
the AmREIT Board to resist efforts to change control.
<TABLE>
<CAPTION>
Voting Rights
<S> <C>
Limited Partners by a majority vote may, Shareholders are entitled to elect the
without the concurrence of the general partners, AmREIT Board at each annual meeting.
amend the Partnership Agreement, dissolve the However, directors remain in office even if they
Partnership, remove and/or elect a general do not receive the vote of the holders of a
partner, and approve or disapprove the sale of all majority of the outstanding Shares unless another
or substantially all of the Partnership's assets. nominee for his seat receives such a vote.
Limited Partners may not exercise these rights in
any way to extend the term of the Partnership, The Charter grants Shareholders the non-
change the Partnership to a general partnership, exclusive right, with approval of the directors,
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<PAGE>
change the limited liability to the Limited to amend the Charter or without Board approval, to
Partners or affect the status of the Partnership for amend the Bylaws, dissolve AmREIT, vote to
federal income tax purposes. Furthermore, the remove members of the Board of Directors, and
Partnerships cannot change the allocations of approve or disapprove the sale of substantially
income, losses and cash distributions or the all of AmREIT's assets. In addition, certain other
powers, rights and duties of the general partners actions may not be taken by the directors
without the consent of the general partners. without the approval of Shareholders, such as,in
general, any merger or consolidation of
AmREIT with or into a corporation, limited
partnership, limited liability company or
participation in a share exchange transaction; or
any business combination, as defined, with an
interested stockholder, as defined. The Charter
requires any such actions to be approved by a
Majority Vote of the Shareholders.
</TABLE>
Shareholders have broader voting rights (i.e., the right to elect AmREIT
directors at each annual meeting) than those currently afforded to Limited
Partners.
<TABLE>
<CAPTION>
Limited Liability of Investors
<S> <C>
Under each of the Partnership Agreements Under Maryland law, shareholders will not
and applicable state law, the liability of Limited be liable for AmREIT's debts or obligations.
Partners for the Partnership's debts and The Shares, upon issuance, will be fully paid and
obligations is generally limited to the amount of nonassessable.
their investment in the Partnership, together with
an interest in undistributed income, if any. The
Units are fully paid and nonassessable.
</TABLE>
The limitation on personal liability of Shareholders is substantially the
same as that of Limited Partners in the Partnerships.
<TABLE>
<CAPTION>
Review of Investor Lists
<S> <C>
Generally speaking, Limited Partners of A Shareholder is entitled, upon written
each of the Partnerships are entitled to request demand, to inspect and copy the share records of
copies of investor lists showing the names and AmREIT, at any time during usual business
addresses of all General and Limited Partners. hours, for a purpose reasonably related to his
The right to receive such investor lists may be interest as a Shareholder.
conditioned upon the Limited Partners' payment
of the cost of duplication and a showing that the
request is for a reasonable purpose. Reasonable
requests would include requests for investor lists
for the purpose of opposing the Merger.
</TABLE>
The right of Shareholders to review investor lists is substantially the
same as the right afforded Limited Partners.
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<PAGE>
<TABLE>
<CAPTION>
Taxation of Taxable Investors
<S> <C>
Income or loss earned by each of the If AmREIT qualifies as a REIT (and
Partnerships, is not taxed at the partnership level. AmREIT intends to conduct its business to so
Limited Partners are required to report their qualify), AmREIT generally is permitted to
allocable share of Partnership income and loss on deduct distributions to its Shareholders, which
their respective tax returns. Income and loss from effectively reduces or eliminates the "double
a Partnership generally constitute "passive" taxation" (at the corporate and Shareholder
income and loss, which can generally offset levels) that typically results when a
"passive" income and loss from other corporation earns income and distributes that
investments. Due to depreciation and other income to Shareholders in the form of dividends.
noncash items, cash distributions are not Shareholders will only recognize income on
generally equivalent to the income and loss amounts actually distributed by AmREIT.
allocated to Limited Partners. During operations, Dividends received by Shareholders from
such cash distributions are partially sheltered but, AmREIT generally will constitute portfolio
if the properties retain their value or appreciate, income; which cannot offset "passive" income
gain upon liquidation of the asset will exceed the and loss from other investments. Losses and
cash distributions available to Limited Partners. credits generated within AmREIT, however, do
After the end of each fiscal year, Limited not pass through to the Shareholders. Because
Partners receive annual Schedule K-1 forms the amount of distributions required to be made
showing their allocable share of Partnership by the Company for purposes of maintaining its
income and loss for inclusion on their federal REIT characterization is determined based on a
income tax returns. percentage of taxable income (calculated with
depreciation deductions, excluding any net
capital gains and prior to payment of any
dividends) the amount of distributions required
to be made by AmREIT may be less than the
distributions made by the Partnerships. After
the end of the Company's calendar year,
Shareholders should receive a Form 1099-DIV used
by corporations to report their dividend income.
</TABLE>
Each of the Partnerships is a pass-through entity, whose income and loss
is not taxed at the entity level but instead allocated directly to the general
partners and Limited Partners. Limited Partners are taxed on income or loss
allocated to them, whether or not cash distributions are made to the Limited
Partners. In contrast, AmREIT intends to qualify as a REIT, allowing it to
deduct dividends paid to its Shareholders. To the extent AmREIT has net income
(after taking into account the dividends paid deduction), such income will be
taxed at AmREIT's level at the standard corporate tax rates. Dividends
paid to Shareholders will constitute portfolio income and not passive income.
<TABLE>
<CAPTION>
Taxation of Tax-exempt Investors
<S> <C>
Income or loss earned by each of the The IRS has ruled that income attributable
Partnerships is generally treated as UBTI unless to an investment in a REIT will not constitute
the type of income generated by the Partnership UBTI to certain tax-exempt investors as long as
would constitute qualified rental income or other such investor does not hold its shares subject to
specifically excluded types of income. For acquisition indebtedness. Accordingly, dividends
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<PAGE>
Partnership income to be characterized as rental received from AmREIT by tax-exempt
income, the Partnership could not provide Shareholders should not constitute UBTI if such
services to tenants that are considered other than Shareholders did not finance the acquisition of
those usually or customarily rendered in their Shares. The amount of dividends paid to
connection with the rental of rooms for tax-exempt Shareholders may be less than the
occupancy only. Because of the inherently factual distributions made to such entities from their
nature of this issue, it is uncertain whether the respective Partnership because of the REIT
income received by the Partnerships in requirement that distributions be based on a
connection with the leasing of its Properties of REIT taxable income.
constitutes rental income for these UBTI
purposes. Accordingly, there is risk that the
Partnership's income could be treated as UBTI
for tax-exempt Limited Partners.
A tax-exempt entity is treated as owning
and carrying on the business activity conducted
by a partnership in which such entity owns an
interest. Accordingly, to the extent a tax-exempt
Limited Partner owns an interest in a
Partnership, the income received by such
Partnership must not constitute UBTI in order for
the tax-exempt Limited Partner to avoid taxation.
Distribution Policies
The Partnership Agreement of each None of AmREIT's governing documents
Partnership requires that net cash from operations mandate the payment of distributions to
must be distributed quarterly to partners. Shareholders. Distributions by AmREIT will be
Further, each Partnership Agreement would determined by AmREIT directors and will be
require that net proceeds obtained from the sale dependent upon a number of factors, including
or refinancing of properties be distributed to the federal income tax requirement that a REIT
partners, rather than being retained by the must distribute annually at least 95% of its
applicable Partnership for reinvestment or taxable income. Although AmREIT has not made
working capital. See "MARKET PRICES AND distributions to Shareholders for some time, it
DISTRIBUTIONS -- Partnership Distributions" intends to make regular quarterly distributions in
for a more detailed history of the distributions the future when it has sufficient cash from
paid by the Partnerships to their respective operations. See "MARKET PRICES AND
partners. DISTRIBUTIONS -- Distribution" for a more
detailed discussion of AmREIT's distribution
history. It is the policy of AmREIT to retain
proceeds from the sale, financing or refinancing
of properties for reinvestment in new properties
or for working capital purposes.
</TABLE>
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<PAGE>
Limited Partners participating in the Merger will experience substantial
differences in the payment of distributions as Shareholders of AmREIT in
comparison to owning Units in the Partnerships. Rather than owning equity
interests in an entity whose governing instruments require the distribution of
net cash from operations and the net proceeds or refinancing of properties, they
will own Shares in an entity whose governing documents do not require
distributions under similar circumstances, with the payment of such distribution
being subject to the discretion of AmREIT's Board of Directors. Further, unlike
the Partnerships, which must distribute net proceeds from the sale or
refinancing of properties, AmREIT currently does not intend to distribute the
net proceeds resulting from the sale or refinancing of properties, but rather to
use such proceeds to acquire additional properties or for working capital
purposes. See "RISK FACTORS -- Potential Changes in Distribution Levels for
Limited Partners."
<TABLE>
<CAPTION>
Comparative Compensation, Fees and Distributions
<S> <C>
The Partnerships pay or may be required The right to compensation for services
to pay the following compensation to the General performed as an employee of AmREIT. See
Partner or his Affiliates: "AMREIT AND ITS BUSINESS -- Executive
Compensation."
Property management fees of up to 3% of
revenues per annum. Distributions with respect to AmREIT
shares owned by the General Partner or his
Management and administrative Affiliates (including shares received in the
reimbursements which have historically Merger) on the same basis as the other
equaled 3% to 6% of rental revenues per shareholders.
annum.
Acquisition Fees and Expenses upon the
acquisition of properties not to exceed
6.5% of the contract price of the property.
Leasing fees at competitive rates if and
when properties areleased or released.
Disposition fee of 3% of the disposition
price of the property or, if less, one-half
of the Competitive Real Estate Commission,
the payment of which, except in the case
of Fund XII, Fund VIII and Fund Gdyr, is
conditioned upon Limited Partners first
receiving a specified minimum cumulative
return, which condition will not be
satisfied for any Partnerships by the
Merger.
A promotional interest from 10% to 25%
of the net proceeds from the sale of
Partnership property, the payment of
which, in the case of each Partnership, is
conditioned upon the Limited Partners first
receiving a specified minimum cumulative
return, which condition will not be
satisfied for any Partnership by the
Merger.
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The right to receive distributions equal to
1% of cashflow from operations and 1% of
net proceeds from the sale or disposition of
Partnership property, the payment of
which with respect to net proceeds from
the sale of property is (except in Fund III,
Fund IV, Fund V and Fund VI),
conditioned upon the Limited Partners first
receiving a specified minimum cumulative
return, which condition will not be
satisfied for any Partnership by the
Merger.
</TABLE>
The foregoing is intended to provide Limited Partners with a comparison
of the compensation, fees and distributions currently payable by the
Partnerships to the General Partner and AmREIT and the compensation payable by
AmREIT to the General Partner and his Affiliates after the Merger. If the Merger
is consummated, the General Partner and his Affiliates will receive
distributions on Shares they receive in exchange for their General Partner
interests (in the case of Fund III, Fund IV, Fund V and Fund VI).
The General Partner believes that any conflicts that may have arisen
between his interests and those of his Affiliates and the interests of the
Limited Partners in connection with the Merger in regard to the compensation and
fees the general partners, and payable to him by AmREIT after the Merger are
insignificant because such compensation in connection with the management,
administration and operation of the Partnerships is currently payable to AmREIT
or its Affiliates. Moreover, the General Partner's interest in Partnership
cashflow from operations and property dispositions, which will be lost in the
Merger, is a negative factor of the Merger from the General Partner's
standpoint.
COMPARISON OF UNITS, SHARES AND NOTES
The following compares certain of the investment attributes and legal
status rights associated with the ownership of Units, the Shares comprising the
Units and Notes.
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<PAGE>
<TABLE>
<CAPTION>
Legal Rights
UNITS SHARES NOTES
=================================== ================================== ================================
<S> <C> <C>
The Units of each Partnership The Shares constitute equity The Notes will be unsecured
constitute equity interests interest in AmREIT. Each debt obligations of AmREIT,
entitling each Limited Partner to Shareholder will be entitled to issued pursuant to the Loan
his pro rata share of cash his pro rata share of the Agreement. The Notes willbear
distributions. Each of the dividends made with respect to interest at a fixed rate of 6.0%
Partnership Agreements specifies the Common Stock. The per annum and will mature
how the cash available for dividends payable to the approximately seven years after
distribution, whether arising Shareholders are not fixed in the Closing Date. Prior to
from operations, sales or amount and are only paid if, as maturity, quarterly installments
refinancings, is to be shared and when declared by of accrued interest will be paid
among the General Partner and AmREIT's Board of Directors. to Noteholders on the first day
Limited Partners. The AmREIT's Board of Directors of each January, April, July and
distributions payable to the adopted a policy of reinvesting October, continuing until the
Limited Partners are not fixed in available cash flow and does not entire interest and principal of
amount and depend upon the intend to pay dividends with each Note is paid in full. The
operating results and net sale or respect to the Shares. unpaid principal balance and all
refinancing proceeds available accrued but unpaid interest shall
from the disposition of the be paid to Noteholders upon the
Partnership's assets. date of maturity of the Notes.
AmREIT reserves the right to
redeem the Notes at any time, in
whole or in part, without a
premium. A failure to make
principal and (subject to a
30-day grace period) interest
payments when due constitutes an
event of default under the Notes,
allowing the Noteholders of more
than 50% in principal amount of
the Notes then outstanding to
declare the outstanding principal
amount of the Notes, plus accrued
but unpaid interest, to be
immediately due and payable.
</TABLE>
Both the Units and Shares represent equity interests entitling the
holders thereof to participate in the earnings of the Partnerships and AmREIT,
respectively. Distributions and dividends payable with respect to the Units and
Shares depend upon the performance of the Partnerships and AmREIT, respectively.
In contrast, the Notes constitute unsecured debt obligations providing for
variable payments of interest and a lump sum payment at maturity.
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<TABLE>
<CAPTION>
Issuance of Additional Securities
UNITS SHARES NOTES
================================= ================================== ================================
<S> <C> <C>
Since the Partnerships are not The Board of Directors may, in Since the Notes are debt
authorized to issue additional its discretion, issue additional obligations of AmREIT, their
equity securities, there can be no shares of Common Stock or payment has priority over
dilution of the distributive share Preferred Stock with such powers, dividends or distributions
of the Limited Partners of cash preferences and rights as the payable to the Shareholders or
available for distribution. Board of Directors may at the holders of AmREIT's common
time designate. The issuance of or preferred stock. As
additional shares of Common unsecured obligations of
Stock or Preferred Stock, beyond AmREIT, the Notes have no
the Shares to be issued in the priority over other
Merger, may result in the dilution unsubordinated and unsecured
of the interests of the AmREIT debt as to the net
Shareholders. In addition, Shares liquidation proceeds of any of
of Preferred Stock could be issued AmREIT's assets. There are
with powers, preferences and no restrictions upon AmREIT's
rights adversely affecting the authority to grant mortgages,
holders of Common Stock. liens or other security interests
in AmREIT's real and personal
property contained in the
Notes; and such security
interests, if granted, would
permit the holders thereof to
have a priority claim against
such collateral in the event
the secured obligations were
in default, or upon the
bankruptcy or insolvency of
AmREIT.
</TABLE>
The Units are not subject to dilution, since the Partnerships are not
authorized to issue additional equity securities. AmREIT may issue additional
shares of Common Stock and shares of Preferred Stock with priorities or
preferences with respect to dividends and liquidation proceeds. Payment of the
Notes will have priority over distributions to the Shares of any class of equity
securities that might be issued by AmREIT. Since the Notes are, however,
unsecured obligations, any senior secured obligations issued by AmREIT would
have prior claims against the collateral given for security in the event AmREIT
defaults in the payments of those secured obligations, or upon the bankruptcy or
insolvency of AmREIT.
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<PAGE>
<TABLE>
<CAPTION>
Liquidity
UNITS SHARES NOTES
================================= ================================== ==============================
<S> <C> <C>
The transfer of the Units is The Shares will be freely The Notes will be freely
subject to a number of transferable. AmREIT does not transferable. AmREIT will not
restrictions imposed by the intend to apply to list the Shares seek to list the Notes on a
Partnership Agreements, which immediately upon consummation national securities exchange.
are designed primarily to of the Merger. There is no There will not be a regular
preserve the tax status of the assurance as to when and if secondary market for the Notes.
Partnership as a "partnership" AmREIT will list the Common See "THE MERGER -
under the Code. No transferee Shares on any other national Background on The Merger."
of a Unit has the right to become exchange or be able to establish
a substitute Limited Partner a secondary market for the
(entitling such person to vote on Common Shares. Moreover, the
matters submitted to a vote of breadth and strength of this
the Limited Partners) unless, market will depend upon, among
among other things, such other things, the number of
substitution is approved by the Shares outstanding, AmREIT's
General Partner. In view of the financial results and prospects,
foregoing, no secondary market the general investment interest in
for the Units is available. See companies like AmREIT and the
"THE MERGER - Background relative attractiveness of
on the Merger." AmREIT's yields compared to
those of alternative investments.
See "THE MERGER -
Background on the Merger."
</TABLE>
One of the primary objectives of the Merger is to provide increased
liquidity to the Limited Partners. The Shares, while freely transferable, will
not initially be listed on a national securities exchange. The breadth of this
market cannot yet be determined. There will be no market for the Notes. There is
no secondary market for the Units.
<TABLE>
<CAPTION>
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<PAGE>
Taxation of Taxable Investors
UNITS SHARES NOTES
================================== ==================================== ================================
<S> <C> <C>
Income or loss earned by each As a corporation, AmREIT is Interest payments made on the
Partnership is not taxed at the not permitted to deduct Notes will constitute portfolio
Partnership level. Limited distributions (dividends) to its income, which cannot offset
Partners must report their Shareholders, which effectively passive loss from other
allocable share of Partnership equals "double taxation" (at the investments. After the end of
income and loss on their corporate and shareholder levels) each fiscal year, Noteholders
respective tax returns. of income it earns and distributes will receive from AmREIT IRS
Partnership income and loss to its Shareholders in the form of Form 1099-INT to show the
generally constitute "passive" dividends. Shareholders would Noteholders interest payments
income and loss, which can recognize income on any amount during the prior calendar
generally offset passive income actually distributed by AmREIT. year. See "MATERIAL FEDERAL
and loss from other investments. Any dividends received by INCOME TAX ASPECTS."
For a definition of "passive" Shareholders from AmREIT
income and loss, see "Material generally will constitute portfolio
Federal Income Tax Aspects." income, which cannot offset
Due to depreciation and other passive income and loss from
noncash items, cash distributions other investments. Losses and
are not generally equivalent to credits generated within
the income and loss allocated to AmREIT do not pass through the
Limited Partners. During Shareholders. After the end of
operations, such cash AmREIT's calendar year,
distributions to Limited Partners Shareholders will receive IRS
may be partially sheltered from Form 1099-DIV used by
taxes, but tax on future gain corporations to report any
resulting from the disposition of dividend income. See
property will offset any taxes "MATERIAL FEDERAL INCOME
previously sheltered. After the TAX ASPECTS."
end of each fiscal year, Limited
Partners receive annual Schedule
K-1 forms showing their
allocable share of Partnership
income and loss for inclusion on
their federal income tax returns.
</TABLE>
Taxation of Distributions/Dividends
Each of the Partnerships is a pass-through entity, whose income and loss
are not taxed at the entity level but instead are allocated directly to the
Partners. Limited Partners are taxed on income or loss allocated to them,
whether or not cash distributions are made to the Limited Partners. In contrast,
AmREIT, as a corporation, is not allowed to deduct dividends paid to its
Shareholders. To the extent AmREIT has net income, such income will be taxed at
the standard corporate tax rates. Any dividends paid to Shareholders would
constitute portfolio income and not passive income. Noteholders will recognize
portfolio income on the interest payments received on the Notes.
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<PAGE>
<TABLE>
<CAPTION>
Taxation of Tax-Exempt Investors
UNITS SHARES NOTES
================================= =================================== =================================
<S> <C> <C>
Income or loss earned by each of Dividends received from Interest income received by
the Partnerships is generally AmREIT by Tax-Exempt certain tax-exempt investors
treated as UBTI. Shareholders should not receiving Notes in the Merger
constitute UBTI if such will not be characterized as
Shareholders are not dealers and UBTI so long as the tax-exempt
did not debt-finance the investor does not hold its Notes
acquisition of their Shares. See as a dealer under Code Section
"MATERIAL FEDERAL 512(b)(5)(B) or subject to
INCOME TAX ASPECTS." acquisition indebtedness. See
"MATERIAL FEDERAL INCOME TAX
ASPECTS."
</TABLE>
A tax-exempt entity is treated as owning and carrying on the business
activity conducted by a partnership in which such entity owns an interest.
Accordingly, to the extent a Tax-Exempt Limited Partner owns an interest in a
Partnership, the income received by such Partnership would constitute UBTI and
would generally be taxable to the Tax-Exempt Limited Partner. Income
attributable to the Shares is not UBTI, subject to the conditions discussed
above. Similarly, interest income and principal payments treated as taxable
income received under the Notes are not UBTI, subject to the conditions
discussed above.
VOTING PROCEDURES
AmREIT Special Shareholders Meeting
General. Each copy of this Prospectus mailed to holders of
Shares is accompanied by a form of Proxy furnished in connection
with the solicitation of Proxies by the Board for use at the AmREIT
Special Shareholders Meeting and any adjournments or postponements
thereof. The AmREIT Meeting is scheduled to be held on December
___, 1998 at 10:00 a.m., Houston time, at Eight Greenway Plaza,
Suite 824, Houston, Texas 77046. Only holders of record of Shares
on the Record Date are entitled to receive notice of and to vote at
the AmREIT Meeting. At the AmREIT Meeting, shareholders will
consider and vote upon a proposal to approve the Merger Agreement
and the Bylaw Amendment. See "The Merger."
EACH HOLDER OF SHARES IS REQUESTED TO COMPLETE, DATE AND SIGN
THE ACCOMPANYING AMREIT PROXY AND RETURN IT PROMPTLY TO AMREIT IN
THE ENCLOSED, POSTAGE-PAID ENVELOPE OR BY FACSIMILE. THE MERGER
AND THE BYLAW AMENDMENT WILL BE APPROVED IF THE MERGER RECEIVES THE
AFFIRMATIVE VOTE OF A MAJORITY OF THE SHARES ENTITLED TO VOTE AT
THE AMREIT SPECIAL MEETING.
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<PAGE>
Voting and Revocation of Proxies. Any holder of Shares who
has executed and delivered a Proxy may revoke it at any time before
it is voted by attending and voting in person at the AmREIT
Meeting, or by giving written notice of revocation or submitting a
signed Proxy bearing a later date, provided such notice or Proxy is
actually received by AmREIT prior to the vote. Shareholders may
vote via facsimile by delivering the enclosed AmREIT Proxy. AmREIT
Proxies must be returned to the Transfer Agent at 101 Barclay
Street, New York, NY 10286; Attention AmREIT Proxies, or by faxing
their AmREIT Proxy to ___________. Faxed AmREIT Proxies will be
accepted until 5:00 p.m., New York time, on December ___, 1998 .
See "CONSENT AND PROXY PROCEDURES - The AmREIT Special Shareholders
Meeting." A Proxy will not be revoked by the death or incapacity
of the shareholder executing it unless, before the Shares are
voted, notice of such death or supervening incapacity is filed with
the Secretary or other person authorized to tabulate the votes on
behalf of AmREIT. The Shares represented by properly executed
Proxies received at or before the AmREIT Meeting and not
subsequently revoked will be voted as directed by the shareholders
submitting such Proxies. IF INSTRUCTIONS ARE NOT GIVEN, AMREIT
PROXIES WILL BE VOTED FOR APPROVAL OF THE MERGER AGREEMENT AND THE
BYLAW AMENDMENT AND WILL BE VOTED IN THE DISCRETION OF THE PROXY
HOLDERS ON ANY OTHER MATTERS PROPERLY PRESENTED FOR CONSIDERATION
AT THE AMREIT MEETING OR ANY ADJOURNMENT THEREOF. AmREIT's Bylaws
permit the holders of a majority of the Shares represented at the
AmREIT Meeting, whether or not constituting a quorum, to adjourn
the AmREIT Meeting or any adjournment thereof. If necessary,
unless authority to do so is withheld, the Proxy holders also may
vote in favor of a proposal to adjourn the AmREIT Meeting for any
reason, including to permit further solicitation of Proxies in
order to obtain sufficient votes to approve any of the matters
being considered at the AmREIT Meeting. The persons named as
Proxies will not vote Proxies which are voted against the Merger in
favor of adjourning the AmREIT Meeting.
Solicitation of Proxies. AmREIT will bear the costs of
soliciting Proxies from its shareholders. In addition to use of
the mails, AmREIT Proxies may be solicited personally or by
telephone or facsimile by Directors, officers and other employees
of AmREIT, who will not be specially compensated for such
solicitation activities. Arrangements will also be made with
brokerage firms and other custodians, nominees and fiduciaries for
the forwarding of solicitation materials to the beneficial owners
of Shares held of record by such persons, and such persons will be
reimbursed by AmREIT for their reasonable expenses incurred in that
effort.
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<PAGE>
Vote Required. The Merger will be approved if it receives the
affirmative vote of a majority of the Shares entitled to vote at
the AmREIT Meeting. The holders of a majority of the Shares
entitled to vote, present in person or by Proxy, constitute a
quorum for purposes of the AmREIT Meeting. A holder of a Share
will be treated as being present at the AmREIT Meeting if the
holder of such Share is (i) present in person at the meeting, or
(ii) represented at the meeting by a valid Proxy, whether the
instrument granting such Proxy is marked as casting a vote or
abstaining, is left blank or does not empower such Proxy to vote
with respect to some or all matters to be voted upon at the AmREIT
Meeting. The proposal allowing AmREIT to postpone or adjourn the
AmREIT Meeting to solicit additional votes will be approved if it
receives the affirmative vote of a majority of the votes cast at
the AmREIT Meeting, whether or not a quorum is present.
Abstentions and "broker non-votes" (where a nominee holding Shares
for a beneficial owner has not received voting instructions from
the beneficial owner with respect to a particular matter and such
nominee does not possess or choose to exercise discretionary
authority with respect thereto) will be included in the
determination of the number of Shares present at the AmREIT Meeting
for quorum purposes. Abstentions and broker non-votes will have
the same effect as a vote against the Merger proposal. Failure to
return the Proxy or failure to vote at the AmREIT Meeting will have
the same effect as a vote against the Merger proposal.
Recommendation. For the reasons described herein, the
Independent Directors approved the Merger Agreement and the Bylaw
Amendment thereunder. THE INDEPENDENT DIRECTORS BELIEVE THE TERMS
OF THE MERGER AGREEMENT ARE FAIR FROM A FINANCIAL POINT OF VIEW TO
THE SHAREHOLDERS OF AMREIT AND IN THE BEST INTEREST OF AMREIT AND
ITS SHAREHOLDERS, AND UNANIMOUSLY RECOMMEND THAT THE SHAREHOLDERS
VOTE FOR APPROVAL OF THE MERGER AGREEMENT AND THE ISSUANCE OF
SHARES PURSUANT THERETO. In making their recommendation, the
Independent Directors considered, among other things, the opinion
of Bishop-Crown that the consideration to be paid by AmREIT
pursuant to the Merger is fair to AmREIT and its Shareholders from
a financial point of view. See "THE MERGER -- Background on the
Merger," "--Independent Directors' Reasons and Recommendations for
the Merger" and "-- Fairness Opinions."
Other Matters. AmREIT is unaware of any matter to be
presented at the Special Shareholders Meeting other than the
proposal to approve the Merger Agreement and the Bylaw Amendment
and the issuance of Shares thereunder and the proposal to permit
the postponement or adjournment of the AmREIT Meeting for any
reason, including to solicit additional votes.
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<PAGE>
Partnership Consent Procedures
Tabulation of Partnership Consents. Limited Partners of record, as of the
close of business on the Record Date, are entitled to submit their vote on the
Merger and the Partnership Amendment by timely submitting their Partnership
Consent. Partnership Consents submitted by the Limited Partners will be
received, tabulated and certified as to time of delivery and vote by Service
Data Corporation, the Partnership Tabulation Agent. The Partnership Tabulation
Agent is independent of and unaffiliated with the Partnerships and Partnership.
Partnership Consent Solicitation Periods. This Prospectus, together with
the Letter of Instructions, the Partnership Consent and any other solicitation
materials which may be distributed to Limited Partners by the General Partner,
constitute the Solicitation Materials distributed to the Limited Partners to
obtain their votes (consents) for their Partnership's participation in the
Merger, in which the Limited Partners may elect to receive Shares and/or Notes
with respect to their investments. The Solicitation Period is the time frame
during which the Limited Partners may vote for or against the Merger and, as
applicable, elect to receive Shares or Notes should their Partnership
participate in the Merger.
The Partnership Solicitation Period will commence upon mailing of the
Solicitation Materials (of which the Prospectus is a part) to the Limited
Partners (which mailing is expected to be on or about _____________, 1998) and
will continue, unless sooner terminated, to the later of (a) ______________,
1998 or (b) such later date as may be selected by the General Partner (the
"Partnership Solicitation Period Expiration Date"). At his discretion, the
General Partner may elect to extend the Partnership Solicitation Period from
time to time. Any Consents delivered to the Partnership Tabulation Agent prior
to 5:00 p.m., ___________ Standard Time, on the last date of the Partnership
Solicitation Period will be effective, provided that such Partnership Consents
have been properly completed, signed and delivered.
Before the Partnership Solicitation Expiration Date, the Partnership
Tabulation Agent will give notice to the General Partner at such time, if any,
it receives Consents voting in favor of the Merger from shareholders holding a
majority of the Units eligible to vote on the Merger. Thereafter, subject to
prior revocation or disqualification, the General Partner may, in its sole
discretion, provided that he has been advised by Partnership that its
Shareholders have consented to the Merger as of such date, terminate the
Partnership Solicitation Period.
None of the Partnerships has scheduled a special meeting of the Limited
Partners to discuss the Solicitation Materials or the terms of the Merger. The
General Partner intends to actively solicit the support of the Limited Partners
for the Merger and may, subject to applicable federal and state securities laws,
hold informal meetings with individual or groups of Limited Partners, answer
questions about the Merger and the Solicitation Materials, and explain the
General Partner's reasons for recommending the approval of the Merger.
Required Partner Vote. No Partnership will participate in the Merger
unless its participation is approved by a Majority Vote of its Limited Partners.
See "THE MERGER" for discussion of other conditions precedent to the
Partnership's proceeding with the Merger.
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<PAGE>
Upon expiration of the Partnership Solicitation Period, the General
Partner will promptly:
(a) Determine from the Partnership Tabulation Agent which
Partnerships have, by a Majority Vote of the Limited Partners, approved
participation in the Merger and the concurrent amendment of their Partnership
Agreement (see "The Merger" for a discussion of the proposed amendments to the
Partnership Agreements);
(b) Determine whether the conditions to the consummation of the
Merger or, to the extent allowed and deemed appropriate, said conditions waived
by the General Partner on behalf of the Partnerships;
(c) Subject to satisfaction of (a) and (b) above, proceed with
consummation of the Merger as soon as reasonably practicable following the
completion of the Partnership Solicitation Period.
Limited Partner Voting Procedures. The Partnership Consent constitutes
the ballot to be used by a Limited Partner in casting his or her votes for or
against the Merger. By marking this ballot, the Limited Partner may either vote
"yes," "no" or "abstain" as to his or her Partnership's participation in the
Merger, and may elect to receive Shares or Notes with respect to his or her
Units. A "yes" vote will also constitute a vote in favor of any related
Amendment to his or her particular Partnership Agreement. If a Limited Partner
owns Units in more than one Partnership, he or she can vote his or her Units in
one Partnership differently from his or her Units in another Partnership. Any
Limited Partner who completes his or her ballot in an unintelligible manner will
be deemed to have abstained from voting; and, if in such event, the election for
Notes is not clearly made on such Partnership Consent it will be deemed not to
have been made and he or she will receive Shares if his or her Partnership
participates in the Merger. Any Limited Partner who submits a signed but
unmarked ballot will be deemed to have voted "yes" for the Merger and the
Amendments; and if, in such event, the election for Notes is not clearly made on
such Partnership Consent, it will be deemed not to have been made, and he or she
will receive Shares if his or her Partnership participates in the Merger.
Any Limited Partner who submits a Partnership Consent marked "No" to the
Merger will receive Notes should his or her Partnership participate in the
Merger unless he or she has marked his or her Partnership Consent to elect to
receive Shares. Such Limited Partner will be deemed a Dissenting Partner.
Dissenting Partners have no right to receive cash in exchange for their Units,
but may elect to receive Shares rather than Notes. Limited Partners who submit
Partnership Consents, but mark that they "abstain" from voting as to the Merger
will, if their Partnership chooses to participate in the Merger, receive Shares
unless they elect to receive Notes. Any Limited Partner who does not submit a
Partnership Consent will be deemed to have abstained from voting.
Federal income tax law requires that a Participating Limited Partner must
provide Partnership with his or her correct taxpayer identification number, in
the case of a Limited Partner who is an individual, his or her social security
number, or otherwise establish a basis for exemption from backup withholding.
Exempt holders (including, among others, all corporations and certain foreign
individuals) are not subject to these backup withholding and reporting
requirements. The General Partner currently has the correct taxpayer
identification numbers of each Participating Limited Partner and will deliver
these to Partnership upon the consummation of the Merger. However, Partnership
may request a Participating Limited Partner to provide and/or confirm his or her
taxpayer identification number. If Partnership is not provided with the correct
taxpayer identification number, or an adequate basis for exemption, upon such
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<PAGE>
request, the Participating Limited Partner may be subject to a $50 penalty
imposed by the IRS and interest and dividends paid may be subjected to backup
withholding. If withholding results in an overpayment of taxes, a refund may be
obtained.
The Partnership Tabulation Agent will tabulate and certify the timely
receipt and vote of the Partnership Consents. Determinations by the Partnership
Tabulation Agent as to time of receipt and vote of the Partnership Consents will
be determinative and final. Other than questions as to timely receipt and vote,
all questions as to the validity, form, eligibility (including time of receipt),
acceptance and withdrawal of the Partnership Consents will be determined by the
General Partner, whose determination will be final and binding. The Partnership
Tabulation Agent reserves the absolute right to reject any or all Partnership
Consents that are not in proper form or the acceptance of which, in its opinion,
would be improper. The General partner reserves the right to waive any
irregularities or conditions of the Partnership Consent as to the particular
Units. Unless waived, any irregularities in connection with the Partnership
Consents must be cured within such time as the Partnership Tabulation Agent
shall determine. The Partnership Tabulation Agent is under no duty to give
notification of defects in such Partnership Consents, and shall not incur
liabilities for failure to give such notification. The delivery of the
Partnership Consents will not be deemed to have been made until such
irregularities have been cured or waived.
For his or her Partnership Consent to be effective, it must be delivered
to the Partnership Tabulation Agent prior to the expiration of the Solicitation
Period at: Service Data Corporation, 2424 South 130th Circle, Omaha, Nebraska
68144-2596, Attention AAA Partnership Consents.
A self-addressed, stamped envelope for return of the Partnership Consent
has been included with the Solicitation Materials. Completed Partnership
Consents should be delivered only to the Partnership Tabulation Agent. The
Partnership Consents will be effective upon actual receipt by the Partnership
Tabulation Agent. The method of delivery of the Partnership Consent is at the
election and risk of the Limited Partner, but if such delivery is by mail it is
suggested that the mailing be made sufficiently in advance of _____________,
1998, to permit delivery to the Partnership Tabulation Agent on or before
_____________, 1998, the last day of the Solicitation Period (unless extended).
Each Limited Partner is strongly urged to complete and execute the
Partnership Consent in accordance with the instructions contained therein.
If a Limited Partner has any questions regarding the completion of his or
her Partnership Consent or the options available to him or her, he or she should
call the General Partner toll-free at 800-888-4400, ext. 26, or by FAX to
713-850-0498.
Withdrawal Rights; Change of Vote. Partnership Consents may be withdrawn
at any time prior to the end of the Partnership Solicitation Period. For a
withdrawal to be effective, a written or facsimile transmission notice of
withdrawal must be timely received by the Partnership Tabulation Agent at its
address, set forth above, and must specify the name of the person having
executed the Partnership Consent to be withdrawn, the name of the registered
holder, if different from that of the person who executed the Partnership
Consent, and the Partnership to which such withdrawal relates.
A Limited Partner may submit a second Partnership Consent after
withdrawal of his or her first Partnership Consent as aforesaid, provided the
second Partnership Consent is submitted prior to the end of the Partnership
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<PAGE>
Solicitation Period. Additional Partnership Consents may be obtained upon oral
or written request, without charge, from the General Partner. Subsequent to
submission of his or her Partnership Consent, but prior to the end of the
Partnership Solicitation Period with respect to his or her Partnership, a
Limited Partner may change his or her vote in favor of or against, or to abstain
with respect to, the Merger, or change his or her election to receive Notes or
Shares. To change any information on a completed Partnership Consent, a Limited
Partner must withdraw the Partnership Consent as aforesaid and submit a second
Partnership Consent in accordance with the instructions set forth above prior to
the end of the Solicitation Period.
Limited Partner Information. Pursuant to the Partnership Agreements of
each of Fund III, Fund IV, Fund V and Fund VI, each Limited Partner has the
right to at all times upon reasonable request, free access to inspect and copy
the records of the Partnership and the right to obtain by mail a list of the
names, addresses and interests owned by the Limited Partners of the
Partnerships. The Limited Partners of each of Fund VII, Fund VIII, Fund GDYR,
and Fund IX have the right at all times to obtain from the managing general
partner, upon payment of a fee to cover the costs of reproduction and mailing, a
current list of the names, addresses and number of Units owned by each Limited
Partner. Under the Partnership Agreement of both Fund X and Fund XI, Limited
Partners may obtain a current list of the names, addresses and number of Units
owned by each Limited Partner upon written request delivered to the general
partners and the payment of a reasonable charge for copying and mailing. To
satisfy the requirements of each partnership, the General Partner will provide a
list of the names, addresses and number of Units owned by the Limited Partners
of their Partnership to any Limited Partner who delivers a written request
therefor to the General Partner and pays a reproduction and mailing charge of
$10.00.
Recommendation. For the reasons described herein, the General Partner
approved the MergerAgreement for each Partnership. THE GENERAL PARTNER BELIEVES
THAT THE TERMS OF THE MERGER AGREEMENT, INCLUDING THE CONSIDERATION TO BE
RECEIVED BY THE LIMITED PARTNERS IN THE MERGER, ARE FAIR TO AND IN THE BEST
INTERESTS OF THE RESPECTIVE LIMITED PARTNERS AND RECOMMENDS THAT THE LIMITED
PARTNERS VOTE FOR APPROVAL OF THE MERGER AGREEMENT AND THE PARTNERSHIP
AMENDMENT. In making his recommendation, the General Partner considered, among
other things, the Houlihan Fairness Opinion that the consideration to be
received by the Limited Partners in connection with the Merger is fair to the
Limited Partners from a financial point of view. See "FAIRNESS OPINIONS -- The
Houlihan Fairness Opinions."
LEGAL OPINIONS
The legality of the Shares to be issued in the Merger will be passed on
for AmREIT by Rushall & McGeever, APC, Carlsbad, California, counsel to AmREIT
and to each Partnership, which will deliver opinions to AmREIT and each
Partnership respectively, concerning federal income tax consequences of the
Merger.
SHAREHOLDER PROPOSALS
A proper proposal submitted by a shareholder for presentation at AmREIT's
annual meeting relating to fiscal year 1999 and received at AmREIT's principal
executive office no later than December 8, 1998 will be included in the Consent
Solicitation Statement and Consent related to such annual meeting.
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<PAGE>
GLOSSARY
"ACQUISITION PROPOSAL" shall have the meaning set forth in the Merger
Agreement.
"ACMS" means asbestos-containing materials.
"ADA" means Americans with Disabilities Act of 1990.
"ADJUSTED CAPITAL" means as of the date determined, the aggregate
Original Investment (Original Capital as defined under the Agreement of Limited
Partnership of the Partnership) of the Limited Partners of a Partnership, less
cumulative distributions constituting a return of capital and less cumulative
distributions funded from net proceeds from the sale or refinancing of the
Partnerships' properties, determined pursuant to the Agreement of Limited
Partnership of the Partnership.
"ADVISER" means AmREIT's former external Adviser, American Asset Advisers
Realty Corporation, a Texas Corporation ("AAARC").
"ADVISER ACQUISITION" means the acquisition by AmREIT of its former
external adviser, American Asset Advisers Realty Corporation, which was
completed effective June 5, 1998.
"ADVISER ACQUISITION AGREEMENT" means the agreement dated June 5, 1998 by
and between the Adviser, AmREIT, AmREIT Operating Corporation and Mr. H. Kerr
Taylor.
"AFFILIATE" means with respect to a specified person, a person that
directly, or indirectly through one or more intermediaries, controls or is
controlled by, or is under common control with, the person specified.
"ALV" means Appraised Liquidation Value of a Partnership's Units based on
the Appraised Value determined by the Appraiser appointed by AmREIT if and when
the Merger is consummated.
"AmREIT" means American Asset Advisers Trust, Inc.
"AMREIT BYLAW AMENDMENT" means the proposed amendment to AmREIT's Bylaws
which will be voted upon by the AmREIT Shareholders at the AmREIT Meeting as
part of the Merger proposal. The Bylaw Amendment amends the Bylaws of AmREIT
to authorize the Merger between AmREIT and one or more of the Partnerships on
the terms and conditions stated in the Merger Agreement, any other provision of
AmREIT's Bylaws notwithstanding.
"AmREIT EXPENSES" means all documented out-of-pocket costs and expenses
(up to a maximum of a Partnership's Proportionate Share of $150,000) incurred by
AmREIT in connection with the Merger Agreement and the transactions contemplated
thereby.
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<PAGE>
"AMREIT MEETING" means the Special Meeting of Shareholders of AmREIT
noticed for December ___, 1998 in order to vote on the proposal for the Merger
and the Bylaw Amendment.
"AmREIT OPERATING CORPORATION" means AmREIT Operating Corporation, a
Texas corporation, and the wholly owned subsidiary of AmREIT.
"APPLICABLE COURT" means the court in which a petition demanding a
determination of the fair value of the Dissenting Units may be filed.
"APPRAISED VALUE" means, for the purposes of the ALV, the Appraised
Value of the Partnership's properties to be determined by the Appraiser in
the event the Merger is consummated.
"APPRAISER" means the independent real estate appraiser appointed by
AmREIT in the event the Merger is consummated to determine the Appraised
Value of a Partnership's properties.
"ARTICLES OF INCORPORATION" means AmREIT's Articles of Incorporation, as
Amended.
"BISHOP-CROWN" means Bishop-Crown Investment Research, Inc.
"BISHOP-CROWN FAIRNESS OPINION" means the fairness opinion of
Bishop-Crown delivered to the Independent Directors of AmREIT on June 5, 1998.
"BOARD CHANGE" means the date that a majority of the Board is comprised
of persons other than persons (i) whose election or appointment shall not have
been solicited by the General Partner or (ii) who are serving as directors
appointed by the Board to fill vacancies caused by death or resignation (but not
removal) or to fill newly created directorships.
"BOARD OF DIRECTORS" or the "BOARD" means collectively the Board of
Directors of AmREIT.
"BUSINESS COMBINATION" means (A) any merger or consolidation, if and to
the extent permitted by law, of AmREIT or a subsidiary, with or into a Related
Person, (B) any sale, lease, exchange, mortgage, pledge, transfer or other
disposition, of all or any Substantial Part (as hereinafter defined) of the
assets of AmREIT and its subsidiaries (taken as a whole) (including, without
limitation, any voting securities of a subsidiary) to or with a Related Person,
(C) the issuance or transfer by AmREIT or a subsidiary (other than by way of a
pro rata distribution to all shareholders) of any securities of AmREIT or a
subsidiary of AmREIT to a Related Person, (D) any reclassification of securities
(including any reverse Share split) or recapitalization by AmREIT, the effect of
which would be to increase the voting power (whether or not currently
exercisable) of the Related Person, (E) the adoption of any plan or proposal for
the liquidation or dissolution of AmREIT proposed by or on behalf of a Related
Person which involves any transfer of assets, or any other transaction, in which
the Related Person has any direct or indirect interest (except proportionately
as a shareholder), (F) any series or combination of transactions having,
directly or indirectly, the same or substantially the same effect as any of the
foregoing, and (G) any agreement, contract or other arrangement providing,
directly or indirectly, for any of the foregoing.
"BYLAWS" means AmREIT's Amended and Restated Bylaws.
"CHANGE IN CONTROL" means (i) the sale or transfer of substantially all
of the assets of AmREIT or the Partnership, as the case may be, whether in one
transaction or a series of transactions, except a sale to a successor Person in
which the stockholders or Partners, as the case may be, immediately prior to the
transaction hold, directly or indirectly, at least 50% of the Total Voting Power
of the successor Person immediately after the transaction, (ii) any merger or
consolidation between AmREIT or the partnership, as the case may be, and another
Person immediately after which the stockholders hold, directly or indirectly,
less than 50% of the Total Voting Power of the surviving Person, (iii) the
dissolution or liquidation of AmREIT or the Partnership, as the case may be,
(iv) the acquisition by any Person acting in concert (and excluding Persons or a
group of Persons affiliated with the General Partner) or group of Persons of
direct or indirect beneficial ownership of securities representing at least 50%
of the Total Voting Power of AmREIT or the Partnership, as the case may be, or
(v) the date the Board changes.
-177-
<PAGE>
"CHANGE IN MANAGEMENT" means the date that a majority of the Board of
Directors of AmREIT or one or more of the general partners of the Partnership,
as the case may be, shall be persons other than persons (i) whose election
proxies or Consents shall have been solicited by the General Partner, or (ii)
who are serving as directors of AmREIT appointed by the Board of Directors to
fill vacancies caused by death or resignation (but not by removal) or to fill
newly created directorships.
"CHARTER" means AmREIT's Articles of Incorporation, as amended.
"CODE" means the Internal Revenue Code of 1986, as amended.
"COMMON SHARES" means shares of the REIT's common stock, $0.01 par value.
"CORPORATE SUBSIDIARIES" means AmREIT's wholly-owned corporate
subsidiaries.
"DISSENTERS' RIGHTS" means the right voluntarily granted by AmREIT to the
Limited Partners, respectively, to dissent with respect to the Merger and,
subject to certain conditions, receive payment in cash, in the case of AmREIT
shareholders, and Notes in the case of the Limited Partners, equal to the "fair
value" of his or her Dissenting Shares or Units.
"DISSENTING SHARES" means the Units held by Shareholders that exercise
Dissenters' Rights.
"DISSENTING UNITS" means the Units held by Limited Partners that exercise
Dissenters' Rights.
"EBITDA" means earnings before interest, taxes, depreciation and
amortization.
"EFFECTIVE TIME" means the effective time of the Merger.
"EXCHANGE PRICE" means $9.34 per Share.
"EXEMPT ORGANIZATIONS" means the tax exempt entities, including qualified
employee pension and profit sharing trusts and individual retirement accounts.
"EXPENSES" means collectively AmREIT Expenses and the Partnership
Expenses.
"FAD" means funds available for distribution.
"FFO" means funds from operations.
"FIRPTA" means the Foreign Investment in Real Property Tax Act of 1980,
as amended.
"FUND III" means Taylor Income Investors III, Ltd., a Texas Limited
Partnership.
"FUND III" means Taylor Income Investors III, Ltd., a Texas Limited
Partnership.
"FUND IV" means Taylor Income Investors IV, Ltd., a Texas Limited
Partnership.
-178-
<PAGE>
"FUND V" means Taylor Income Investors V, Ltd., a Texas Limited
Partnership.
"FUND VI" means Taylor Income Investors VI, Ltd., a Texas Limited
Partnership.
"FUND VII" means AAA Net Realty Fund VII, Ltd., a Texas Limited
Partnership.
"FUND VIII" means AAA Net Realty Fund VIII, Ltd., a Texas Limited
Partnership.
"FUND GDYR" means AAA Net Realty Fund - Goodyear, Ltd., a Texas Limited
Partnership.
"FUND IX" means AAA Net Realty Fund IX, Ltd., a Nebraska Limited
Partnership.
"FUND X" means AAA Net Realty Fund X, Ltd., a Nebraska Limited
Partnership.
"FUND XI" means AAA Net Realty Fund XI, Ltd., a Texas Limited
Partnership.
"GENERAL PARTNER" means Mr. H. Kerr Taylor.
"HOULIHAN" means Houlihan Lokey Howard & Zukin Financial Advisors, Inc.
"HOULIHAN FAIRNESS OPINIONS" means the fairness opinions of Houlihan
delivered to the General Partner on behalf of the Partnerships dated June 1,
1998.
"INDEPENDENT DIRECTORS" means all of the directors of AmREIT who are not
Affiliates of the General Partner. As of the date of this Prospectus, AmREIT's
two Independent Directors are Robert S. Cartwright, Jr. and George A. McCanse,
Jr.
"KNOWLEDGE" means the knowledge of the General Partner or the collective
knowledge of the Officers of AmREIT, or a corporate general partner of the
Partnership after reasonable investigation. For the purposes of this Prospectus
the knowledge of one Officer shall be attributed to the other Officer.
"LIMITED PARTNERS" means, collectively, the holders of Units in the
Partnerships.
"L.P. VALUE" means the estimated value of the aggregate Limited
Partners' interest in each Partnership.
"MATERIAL ADVERSE EFFECT" means a material adverse effect on the
business, properties, operations, condition or future prospects (financial or
otherwise) of AmREIT or the Partnership, as the case may be.
"MERGER" means the merging of the Partnerships with and into AmREIT.
"MERGER AGREEMENT" means, collectively, the Agreements and Plans of
Merger dated as of ___________, 1998 by and between AmREIT and each of the
Partnerships.
"MERGER CONSIDERATION" means the Shares and/or Notes to be received by
Limited Partners in connection with the Merger.
-179-
<PAGE>
"MERGER EXPENSES" means the aggregate costs and expenses of the Merger,
including but not limited to, legal and accounting fees in connection with the
preparation of this Prospectus and the preparation of the Merger documentation,
printing costs and the costs of obtaining required governmental approval or
review of the Merger. Merger Expenses do not include a participant's direct
costs for investor communications.
"NET ASSET VALUE" or "NAV" means, as of the Valuation Date, the sum of
the Negotiated Prices of a Partnership's properties plus its Net Cash as of the
Effective Date.
"NET CASH" means, as of the date of determination, (i) the sum of a
Partnership's cash and cash equivalents, less (ii) the Partnership's debt
determined on an accrual accounting basis.
"NON-U.S. SHAREHOLDERS" means nonresident alien individuals, foreign
corporations, foreign partnerships and other foreign holders of Shares.
"NOTES" means AmREIT's 6.0% unsecured notes due December 31, 2004 offered
in the Merger.
"ORIGINAL INVESTMENT" means the Limited Partners' aggregate
contributions to the capital of a Partnership.
"PARTNERSHIP AMENDMENT" means the proposed amendments to the respective
Agreement of Limited Partnership of each Partnership authorizing the
Partnership to participate in the Merger on the terms and conditions stated
in the Merger Agreement, notwithstanding any other provision, restriction or
limitation currently set forth in the respective Partnership Agreement.
"PARTNERSHIP EXPENSES" means all documented out-of-pocket costs and
expenses (up to a maximum of a Partnership's Proportionate Share of $150,000)
incurred by the Partnership in connection with the Merger Agreement and the
transactions contemplated thereby.
"PARTNERSHIP MATERIAL ADVERSE EFFECT" shall have the meaning set forth in
the Merger Agreement.
"PARTNERSHIPS" means: FUND III, FUND IV, FUND V, FUND VI, FUND VII,
FUND VIII, FUND GDYR, FUND IX, FUND X, and FUND XI.
"PERSON" means an individual, a partnership, a corporation, a limited
liability company, an association, a joint stock company, a trust, a joint
venture, an unincorporated organization, or a governmental entity (or any
department, agency, or political subdivision thereof).
"QUALIFYING INCOME" means income described in Section 856(c)(2)(A)-(H)
and 856(c)(3)(A)- (I) of the Code.
"R&D" means research and development.
"REIT" means a real estate investment trust.
-180-
<PAGE>
"REIT ACQUISITION PROPOSAL" shall have the meaning set forth in the
Merger Agreement.
"SHARES" means AmREIT's Common Shares Offered in the Merger.
"STATED INVESTMENT POLICIES" means the investment policies and
restrictions regarding AmREIT's investments and operations set forth in the
Bylaws.
"SUBSTANTIAL PART" means more than 35% of the book value of the total
assets of AmREIT and its subsidiaries (taken as a whole) as of the end of the
fiscal year ending prior to the time the determination is made.
"TOTAL VOTING POWER" means the total number of votes which may be case in
the election of directors of AmREIT to remove and replace a general partner of
the Partnership, as the case may be, by all stockholders or partners entitled to
vote in such an election.
"UBTI" means unrelated business taxable income.
"UNITS" means Units of Limited Partner interests in any of the
Partnerships.
-181-
<PAGE>
INDEX TO FINANCIAL INFORMATION
AmREIT:
Pro Forma Financial Information (unaudited)..................................F-2
Assumption 1 - 100% participation, no Notes issued:
Pro Forma Balance Sheet as of June 30, 1998 (unaudited)................F-3
Notes to Pro Forma Balance Sheet (unaudited)...........................F-4
Pro Forma Statement of Operations for the Year Ended
December 31, 1997 (unaudited)..........................................F-6
Notes to Pro Forma Statement of Operations (unaudited)................F-7
Pro Forma Statement of Operations for the Six Months Ended
June 30, 1998 (unaudited)..............................................F-8
Notes to Pro Forma Statement of Operations (unaudited)................F-9
Assumption 2 - 100% participation, 20% Notes issued:
Pro Forma Balance Sheet as of June 30, 1998 (unaudited)...............F-10
Notes to Pro Forma Balance Sheet (unaudited)..........................F-11
Pro Forma Statement of Operations for the Year Ended
December 31, 1997 (unaudited).........................................F-13
Notes to Pro Forma Statement of Operations (unaudited)................F-14
Pro Forma Statement of Operations for the Six Months Ended
June 30, 1998 (unaudited).............................................F-15
Notes to Pro Forma Statement of Operations (unaudited)................F-16
Assumption 3 - 100% participation, 35% Notes issued:
Pro Forma Balance Sheet as of June 30, 1998 (unaudited)...............F-17
Notes to Pro Forma Balance Sheet (unaudited)..........................F-18
Pro Forma Statement of Operations for the Year Ended
December 31, 1997 (unaudited).........................................F-20
Notes to Pro Forma Statement of Operations (unaudited)................F-21
Pro Forma Statement of Operations for the Six Months Ended
June 30, 1998 (unaudited).............................................F-22
Notes to Pro Forma Statement of Operations (unaudited)................F-23
Assumption 4 - 50% participation, no Notes issued:
Pro Forma Balance Sheet as of June 30, 1998 (unaudited)...............F-24
Notes to Pro Forma Balance Sheet (unaudited)..........................F-25
Pro Forma Statement of Operations for the Year Ended
December 31, 1997 (unaudited).........................................F-27
Notes to Pro Forma Statement of Operations (unaudited)................F-28
Pro Forma Statement of Operations for the Six Months Ended
June 30, 1998 (unaudited).............................................F-29
Notes to Pro Forma Statement of Operations (unaudited)................F-30
Assumption 5 - 50% participation, 20% Notes issued:
Pro Forma Balance Sheet as of June 30, 1998 (unaudited)...............F-31
Notes to Pro Forma Balance Sheet (unaudited)..........................F-32
Pro Forma Statement of Operations for the Year Ended
December 31, 1997 (unaudited).........................................F-34
Notes to Pro Forma Statement of Operations (unaudited)................F-35
Pro Forma Statement of Operations for the Six Months Ended
June 30, 1998 (unaudited).............................................F-36
Notes to Pro Forma Statement of Operations (unaudited)................F-37
F-1
<PAGE>
Assumption 6 - 50% participation, 35% Notes issued:
Pro Forma Balance Sheet as of June 30, 1998 (unaudited)...............F-38
Notes to Pro Forma Balance Sheet (unaudited)..........................F-39
Pro Forma Statement of Operations for the Year Ended
December 31, 1997 (unaudited).........................................F-41
Notes to Pro Forma Statement of Operations (unaudited)................F-42
Pro Forma Statement of Operations for the Six Months Ended
June 30, 1998 (unaudited).............................................F-43
Notes to Pro Forma Statement of Operations (unaudited)................F-44
Historical Financial Information
Financial Statements for the Six Months Ended June 30, 1998 and
1997 (unaudited)
Consolidated Balance Sheet as of June 30, 1998 (unaudited)............F-45
Consolidated Statement of Income for the Six Months Ended
June 30, 1998 and 1997 (unaudited)....................................F-46
Consolidated Statements of Cash Flows for the Six Months Ended
June 30, 1998 and 1997 (unaudited)....................................F-47
Notes to Consolidated Financial Statements for Six Months Ended
June 30, 1998 and 1997 (unaudited)....................................F-48
Financial Statements for the Years Ended December 31, 1997 and 1996
Independent Auditors' Report..........................................F-53
Consolidated Balance Sheet, December 31, 1997.........................F-54
Consolidated Statements of Income for the Years Ended
December 31, 1997 and 1996............................................F-55
Consolidated Statements of Shareholders' Equity for the Years
Ended December 31, 1997 and 1996......................................F-56
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1997 and 1996............................................F-57
Notes to Consolidated Financial Statements for the Years
Ended December 31, 1997 and 1996......................................F-58
Partnership Properties:
Combined Statements of Revenues and Certain Expenses of the Real Estate
Properties Anticipated to be Acquired:
Independent Auditors Report...............................................F-66
Combined Statements of Revenue and Certain Expenses of Real
Estate Properties Anticipated to be Acquired for the years ended
December 31, 1997 and 1996 and the six months ended June 30, 1998
and 1997..................................................................F-67
Notes to Combined Statements of Revenue and Certain Expenses
of Real Estate Properties Anticipated to be Acquired......................F-68
F-1 (Cont'd.)
<PAGE>
AMERICAN ASSET ADVISERS TRUST, INC.
PRO FORMA FINANCIAL INFORMATION (UNAUDITED)
The following selected unaudited pro forma financial information for American
Asset Advisers Trust, Inc. (the "Company") gives effect to the merger as defined
elsewhere herein and is based on estimates and assumptions set forth in the
notes to the financial statements which include pro forma adjustments. The
unaudited pro forma financial information also gives effect to the recently
completed merger between the Company and American Asset Advisers (the
"Adviser"). This unaudited pro forma financial information has been prepared
from the historical financial statements of the Company, the Adviser and the
Partnerships that currently own the properties (the "Partnerships"). The pro
forma balance sheet assumes that the merger occurred on June 30, 1998. The pro
forma statements of operations assumes that both mergers occurred on January 1,
1997. The pro forma adjustments do not reflect the final amounts which will be
determined at closing. Management does not anticipate that final amounts will be
materially different.
There are a large number of combinations of Partnership participation in the
merger. The actual combination that will result cannot possibly be known or
predicted until the votes of the partners of the Partnerships have been
determined.
The unaudited pro forma financial information does not purport to be indicative
of the results which actually would have been obtained if the merger had been
effected on the dates indicated or of the results which may be obtained in the
future and should be read in conjunction with the annual financial statements
and notes thereto of the Partnerships and the Company.
F-2
<TABLE>
AMERICAN ASSET ADVISERS TRUST, INC.
PRO FORMA BALANCE SHEET (1)
JUNE 30, 1998
(UNAUDITED)
<CAPTION>
Pro Forma Pro Forma
Historical Adviser and Properties and Pro Forma
Company Adjustments Adjustments Total
ASSETS
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 1,377,760 $ - $ 415,147 (3 $1,862,057
69,150 (6)
Accounts receivable 170,055 - 10,913 (3) 180,968
Property, net 26,464,197 - 22,318,941 (3) 49,093,738
310,600 (5)
Net investment in direct financing
leases 3,166,333 - 3,166,333
Note receivable - - 205,046 (3) 205,046
Other assets 688,995 - - 688,995
Total assets $31,867,340 $ - $23,329,797 $55,197,137
LIABILITIES & SHAREHOLDERS'
& PARTNERS' EQUITY
LIABILITIES
Notes payable $ 8,732,150 $ - $ - 8,732,150
Accounts payable 157,070 - 310,600 (5) 501,884
34,214 (3)
Security deposit 15,050 - 23,300 (3) 38,350
Total liabilities 8,904,270 - 368,114 9,272,384
MINORITY INTEREST 5,236,013 - (5,236,013) (3) -
SHAREHOLDERS' AND PARTNERS' EQUITY
Preferred stock, $.01 par value, 10,000,000
shares authorized, none issued
Common Stock, $.01 par value, 100,000,000
shares authorized, 2,374,306 and 5,742,873
shares issued and outstanding on 23,743 (2) 3,495 (2) 74 (6) 57,428
historical pro-forma basis, respectively 30,116 (3),(4)
Capital in excess of par value 21,554,401 (2) 3,579,300 (2) 28,098,430 (3),(4) 53,301,207
69,076 (6)
Accumulated distributions in excess of
earnings (3,851,087)(2) (3,582,795)(2) - (7,433,882)
Total shareholders' and partners' equity 17,727,057 - 28,197,696 45,924,753
Total liabilities and shareholders' and
partners' equity $31,867,340 $ - $23,329,797 $55,197,137
See Notes to Pro Forma Balance Sheet.
</TABLE>
F-3
AMERICAN ASSET ADVISERS TRUST, INC.
NOTES TO PRO FORMA BALANCE SHEET
(UNAUDITED)
(1)Adjustments are reflected as if the acquisition of the Partnership
properties was completed on June 30, 1998. The Partnership properties include
the acquisition of a minority interest in several joint ventures with the
Company. Pro forma adjustments from the acquisition of the Partnership
properties are based on the assumption that the acquisitions are approved by
100% of the limited partners and that none of the partners elect to take a
note in lieu of Company stock.
(2)On June 5, 1998, the Company's shareholders voted to approve an agreement
and plan of merger with the Adviser whereby the stockholder of the Adviser
agreed to exchange 100% of the outstanding shares of common stock of the
Adviser for up to 900,000 shares of the Company's stock. According to the
Agreement and Plan of Merger between the Company and the Adviser, 213,260
shares of common stock are issuable effective June 5, 1998. The issuance of
these shares is reflected in the historical financial information of the
Company included with the Pro Forma Balance Sheet.
In addition, up to 686,740 shares of stock valued at $7,039,085 are
contingently issuable for a period of up to 24 calendar quarters following
the closing of the transaction. Within 30 days after the end of each calendar
quarter, shares will be issued up to the level where total shares issued to
the shareholder of the Adviser pursuant to the acquisition of the Adviser
does not exceed 9.8% of the Company's total shares then issued and
outstanding. The issuance of these additional shares will be expensed as they
are issued. Accordingly, the Pro Forma Balance Sheet includes an adjustment
to reflect the issuance of 349,541 additional shares of common stock, leaving
a balance of 337,199 shares.
(3)Represents adjustments for the purchase method of accounting whereby the
net assets owned by the Partnerships are recorded based on the estimated
fair market value of the properties acquired, cash, receivables,
payables and security deposits of the Partnerships as follows:
<TABLE>
<CAPTION>
Real Estate Other Total Purchase Price
___________ _____ ____________________
<S> <C> <C> <C>
Taylor Income Investors III, Ltd. $ 1,100,000 $ 68,585 $ 1,168,585
Taylor Income Investors IV, Ltd. 394,791 128,567 523,358
Taylor Income Investors V, Ltd. 320,163 121,058 441,221
Taylor Income Investors VI, Ltd. 285,000 2,740 287,740
AAA Net Realty Fund VII, Ltd. 1,010,000 30,460 1,040,460
AAA Net Realty Fund VIII, Ltd. 1,800,000 48,880 1,848,880
AAA Net Realty Fund Goodyear, Ltd. 1,090,000 20,492 1,110,492
AAA Net Realty Fund IX, Ltd. 4,850,000 78,062 4,928,062
AAA Net Realty Fund X, Ltd. 10,355,000 0 10,355,000
AAA Net Realty Fund XI, Ltd. 6,350,000 74,748 6,424,748
__________ _______ __________
27,554,954 573,592 28,128,546
Less: Minority Interest 5,236,013 - 5,236,013
____________ __________ ____________
Net Adjustment $ 22,318,941 $ 573,592 $ 22,892,533
</TABLE>
F-4
(4)Represents the issuance of 3,011,622 shares of Company stock valued at
$28,128,546 based upon a per share price of $9.34 as follows:
<TABLE>
<CAPTION>
Exchange L.P. Units Trust Shares
Ratio Outstanding Issued Value
_______ ___________ ____________ ______
<S> <C> <C> <C> <C>
Taylor Income Investors III, Ltd. 132.40 945.00 125,117 $ 1,168,585
Taylor Income Investors IV, Ltd. 91.11 615.00 56,034 523,358
Taylor Income Investors V, Ltd. 98.42 480.00 47,240 441,221
Taylor Income Investors VI, Ltd. 102.69 300.00 30,807 287,740
AAA Net Realty Fund VII, Ltd. 98.03 1125.00 110,284 1,030,056
AAA Net Realty Fund VIII, Ltd. 105.36 1860.00 195,973 1,830,391
AAA Net Realty Fund Goodyear, Ltd. 88.17 1335.00 117,707 1,099,387
AAA Net Realty Fund IX, Ltd. 97.88 5390.50 527,630 4,928,062
AAA Net Realty Fund X, Ltd. 96.80 11453.60 1,108,672 10,355,000
AAA Net Realty Fund XI, Ltd. 97.42 7061.21 687,875 6,424,749
_________ __________
Total Limited Partners 3,007,339 28,088,549
General Partners 4,283 39,997
_________ ___________
Total 3,011,622 $28,128,546
</TABLE>
The share price was agreed to by the General Partner of each of the Partnerships
and the Independent Directors of the Company based upon the price of the
Company's shares in its last public offering reduced by selling commissions and
related expenses.
(5)Represents estimated legal and professional fees, which will be capitalized
as acquisition costs.
(6)Represents the issuance of 7,404 shares of the Company's stock based upon a
per share price of $9.34. The shares will be acquired with cash by a
shareholder of the Corporate General Partner of each Partnership (who is also
the Company's president) under a contractual obligation whereby the shares
will be purchased by the shareholder with proceeds he will receive from the
disposition fees paid to him in connection with the Merger. The issuance of
these shares will occur on the effective date of the Merger.
F-5
<TABLE>
AMERICAN ASSET ADVISERS TRUST, INC.
PRO FORMA STATEMENT OF OPERATIONS (1)
FOR THE YEAR ENDED DECEMBER 31, 1997
(UNAUDITED)
<CAPTION>
Pro Forma Pro Forma
Historical Adviser and Properties and Pro Forma
Company Adjustment (2) Adjustments (4) Total
REVENUES
<S> <C> <C> <C> <C>
Rental income from operating leases $1,217,187 - $ 2,159,984 $3,377,171
Earned income from direct financing leases 339,628 - - 339,628
Service fee income - 167,435 - 167,435
Commission income, net - 141,813 - 141,813
Interest income 153,895 - 3,573 157,468
TOTAL REVENUES 1,710,710 309,248 2,163,557 4,183,515
EXPENSES
General operating and administrative 112,464 76,913 53,711 243,088
Reimbursements and fees to related party 106,504 - - 106,504
Amortization 62,754 32 - 62,786
Depreciation 146,015 15,431 545,236 706,682
Interest 6,000 18,202 - 24,202
Acquisition costs (3) 282,890 (282,890) - -
TOTAL EXPENSES 716,627 (172,312) 598,947 1,143,262
PRO FORMA INCOME BEFORE MINORITY
INTEREST IN NET INCOME OF
CONSOLIDATED JOINT VENTURES 994,083 481,560 1,564,610 3,040,253
MINORITY INTEREST IN NET INCOME OF
CONSOLIDATED JOINT VENTURES (455,226) - 455,226 -
PRO FORMA NET INCOME $ 538,857 $ 481,560 $ 2,019,836 $3,040,253
PRO FORMA EARNINGS PER SHARE:
Basic $ 0.34 $ 0.62
Diluted $ 0.33 $ 0.62
WEIGHTED AVERAGE COMMON AND
COMMON EQUIVALENT SHARES
OUTSTANDING:
Basic 1,563,048 4,874,766
Diluted 1,624,217 4,935,935
See Notes to Pro Forma Statement of Operations.
</TABLE>
F-6
AMERICAN ASSET ADVISERS TRUST, INC.
NOTES TO PRO FORMA STATEMENT OF OPERATIONS
(UNAUDITED)
(1) Adjustments are reflected as if the acquisition of the Partnership
properties and the Adviser was effective as of January 1, 1997. The
Partnership properties include the acquisition of a minority interest in
several joint ventures with the Company. Pro forma adjustments from the
acquisition of Partnership properties are based on the assumption that the
acquisitions are approved by 100% of the limited partners and that none of
the partners elect to take a note in lieu of Company stock.
(2) Includes pro forma adjustments as follows:
o Commission income, amortization expense, depreciation expense and interest
expense are recorded at historical amounts.
o Service fee income is recorded for administrative, acquisition and manage-
ment services provided to entities other than the Company. Service fee
income of $1,370,032 for services provided to the Company have been
excluded as those fees were either capitalized or expensed by the Company
as incurred.
o General and administrative expenses include costs incurred in providing
various administrative, acquisition and management services to entities
other than the Company. Of the Adviser's historical general and
administrative expenses for the period, $1,507,429 which have been
allocated to the Company or have been capitalized by the Company have
been excluded from the pro-forma totals.
(3) To the extent that the consideration paid for the Adviser exceeds the fair
market value of the net tangible assets received, an expense will be
recorded as an operating expense on the Company's Statement of Operations.
Because the purpose of the pro forma statement of operations is to reflect
the expected continuing impact of the merger on the Company, this
adjustment has not been included. At the closing of the merger, this
expense will be recorded as an operating expense. For the year ended
December 31, 1997, this pro forma expense would have been $5,442,606 based
on the issuance of 213,260 shares at closing on January 1, 1997 and 317,726
additional shares issued during the year in accordance with the partial
satisfaction of the share balance issuance criteria described in the
Agreement and Plan of Merger. Up to 686,740 shares of stock are
contingently issuable for a period of up to 24 calendar quarters following
the closing of the transaction. Within 30 days after the end of each
calendar quarter, shares will be issued up to the level where total shares
issued to the shareholder of the Adviser pursuant to the acquisition of the
Adviser does not exceed 9.8% of the Company's total shares then issued and
outstanding. Based on the pro forma financial statement 369,014 of these
shares remain at December 31, 1997. The issuance of these additional shares
will be expensed as they are issued.
Pro forma weighted average shares outstanding consists of the historical
weighted average shares outstanding of the Company, the shares issued for
both mergers on January 1, 1997 and 25% of the additional shares issued for
the Adviser during 1997.
(4) Includes pro forma adjustments as follows:
o Rental income, which reflects historical rental income of the operating
properties, is included from Partnership properties which have not been
consolidated by the Company. Six of the Partnerships' properties which
are majority owned by the Company are included in the historical
financial information of the Company. These properties were acquired
through joint ventures with AAA Net Realty Funds X and XI, Ltd.
o Interest income is included from a note receivable acquired along with the
Partnership properties.
o Depreciation is included based upon the purchase price which represents
the fair market value of the buildings over 33 years. The purchase price
of the properties has been allocated 70% to buildings and 30% to land.
o General and administrative expenses are included primarily for legal and
professional fees.
o The Partnership interest in certain properties which are majority owned
by the Company is eliminated as the historical financial statements of
the Company are reflected on a consolidated basis.
F-7
<TABLE>
AMERICAN ASSET ADVISERS TRUST, INC.
PRO FORMA STATEMENT OF OPERATIONS (1)
FOR THE SIX MONTHS ENDED JUNE 30, 1998
(UNAUDITED)
<CAPTION>
Pro Forma Pro Forma
Historical Adviser and Properties and ProForma
Company Adjustment (2) Adjustments (3) Total
REVENUES
<S> <C> <C> <C> <C>
Rental income from operating leases $ 963,206 - $1,143,545 $2,106,751
Earned income from direct financing leases 170,254 - - 170,254
Service fee income 12,931 130,870 - 143,801
Interest income 40,722 - 10,473 51,195
TOTAL REVENUES 1,187,113 130,870 1,154,018 2,472,001
EXPENSES
General operating and administrative 161,345 92,819 33,975 288,139
Reimbursements and fees to related party 57,800 - - 57,800
Amortization 31,377 177 - 31,554
Depreciation 130,745 8,644 265,189 404,578
Interest 37,831 3,896 - 41,727
Merger costs 2,389,918 (2,389,918) - -
Potential acquisition costs 182,741 (182,741) - -
TOTAL EXPENSES 2,991,757 (2,467,123) 299,164 823,798
PRO FORMA INCOME BEFORE MINORITY
INTEREST IN NET INCOME OF
CONSOLIDATED JOINT VENTURES (1,804,644) 2,597,993 854,854 1,648,203
MINORITY INTEREST IN NET INCOME OF
CONSOLIDATED JOINT VENTURES (263,068) - 263,068 -
PRO FORMA NET INCOME (LOSS) $(2,067,712) $2,597,993 $1,117,922 $1,648,203
PRO FORMA EARNINGS (LOSS) PER SHARE:
Basic $ (1.00) $ 0.29
Diluted $ (1.00) $ 0.29
WEIGHTED AVERAGE COMMON AND
COMMON EQUIVALENT SHARES
OUTSTANDING:
Basic 2,075,216 5,589,881
Diluted 2,075,216 5,589,881
See Notes to Pro Forma Statement of Operations.
</TABLE>
F-8
AMERICAN ASSET ADVISERS TRUST, INC.
NOTES TO PRO FORMA STATEMENT OF OPERATIONS
(UNAUDITED)
(1) Adjustments are reflected as if the acquisition of the Partnership
properties and the Adviser was effective as of January 1, 1997. The
Partnership properties include the acquisition of a minority interest in
several joint ventures with the Company. Pro forma adjustments from the
acquisition of Partnership properties are based on the assumption that the
acquisitions are approved by 100% of the limited partners and that none of
the partners elect to take a note in lieu of Company stock.
(2) Includes pro forma adjustments as follows:
o Commission income, amortization expense, depreciation expense and interest
expense are recorded at historical amounts.
o Service fee income is recorded for administrative, acquisition and manage-
ment services provided to entities other than the Company. Service fee
income of $459,472 for services provided to the Company have been excluded
as those fees were either capitalized or expensed by the Company as
incurred.
o General and administrative expenses include costs incurred in providing
various administrative, acquisition and management services to entities
other than the Company. Of the Adviser's historical general and
administrative expenses for the period, $585,164 which have been
allocated to the Company or have been capitalized by the Company have
been excluded from the pro-forma totals.
(3) Includes pro forma adjustments as follows:
o Rental income, which reflects historical rental income of the operating
properties, is included from Partnership properties which have not been
consolidated by the Company. Six of the Partnerships' properties which
are majority owned by the Company are included in the historical
financial information of the Company. These properties were acquired
through joint ventures with AAA Net Realty Funds X and XI, Ltd.
o Interest income is included from a note receivable acquired along with the
Partnership properties.
o Depreciation is included based upon the purchase price which represents
the fair market value of the buildings over 33 years. The purchase price
of the properties has been allocated 70% to buildings and 30% to land.
o General and administrative expenses are included primarily for legal
and professional fees.
o The Partnership interest in certain properties which are majority owned
by the Company is eliminated as the historical financial statements of
the Company are reflected on a consolidated basis.
F-9
<TABLE>
AMERICAN ASSET ADVISERS TRUST, INC.
PRO FORMA BALANCE SHEET (1)
JUNE 30, 1998
(UNAUDITED)
<CAPTION>
Pro Forma Pro Forma
Historical Adviser and Properties and Pro Forma
Company Adjustments Adjustments Total
ASSETS
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 1,377,760 $ - 415,147 (3) $ 1,862,057
69,150 (7)
Accounts receivable 170,055 - 10,913 (3) 180,968
Property, net 26,464,197 - 22,318,941 (3) 49,093,738
310,600 (5)
Net investment in direct financing leases 3,166,333 - - 3,166,333
Note receivable - - 205,046 (3) 205,046
Other assets 688,995 - - 688,995
Total assets $31,867,340 $ - $23,329,797 $55,197,137
LIABILITIES & SHAREHOLDERS'
& PARTNERS' EQUITY
LIABILITIES
Notes payable $ 8,732,150 $ - $ 5,617,709 (6) $14,349,859
Accounts payable 157,070 - 310,600 (5) 501,884
34,214 (3)
Security deposit 15,050 - 23,300 (3) 38,350
Total liabilities 8,904,270 - 5,985,823 14,890,093
MINORITY INTEREST 5,236,013 - (5,236,013)(3) -
SHAREHOLDERS' AND PARTNERS' EQUITY
Preferred stock, $.01 par value, 10,000,000
shares authorized, none issued
Common Stock, $.01 par value, 100,000,000
shares authorized, 2,374,306 and 5,076,058
shares issued and outstanding on historical 23,743 (2) 2,842 (2) 74 (7) 50,761
and pro-forma basis, respectively 24,102 (3),(4)
Capital in excess of par value 21,554,401 (2) 2,910,146 (2) 22,486,735 (3),(4) 47,020,358
69,076 (7)
Accumulated distributions in excess of
earnings (3,851,087)(2) (2,912,988)(2) - (6,764,075)
Total shareholders' and partners' equity 17,727,057 - 22,579,987 40,307,044
Total liabilities and shareholders'
and partners' equity $31,867,340 $ - $23,329,797 $55,197,137
See Notes to Pro Forma Balance Sheet.
</TABLE>
F-10
AMERICAN ASSET ADVISERS TRUST, INC.
NOTES TO PRO FORMA BALANCE SHEET
(UNAUDITED)
(1)Adjustments are reflected as if the acquisition of the Partnership
properties was completed on June 30, 1998. The Partnership properties include
the acquisition of a minority interest in several joint ventures with the
Company. Pro forma adjustments from the acquisition of the Partnership
properties are based on the assumption that the acquisitions are approved by
100% of the limited partners and that 20% of the partners elect to take notes
in lieu of Company stock.
(2)On June 5, 1998, the Company's shareholders noted to approve an agreement
and plan of merger with the Adviser whereby the stockholder of the Adviser
agreed to exchange 100% of the outstanding shares of common stock of the
Adviser for up to 900,000 shares of the Company's stock. According to the
Agreement and Plan of Merger between the Company and the Adviser, 213,260
shares of common stock are issuable effective June 5, 1998. The issuance of
these shares is reflected in the historical financial information of the
Company included with the Pro Forma Balance Sheet.
In addition, up to 686,740 shares of stock valued at $7,039,085 are
contingently issuable for a period of up to 24 calendar quarters following
June 5, 1998, the closing date of the transaction. Within 30 days after the
end of each calendar quarter, shares will be issued up to the level where
total shares issued to the shareholder of the Adviser pursuant to the
acquisition of the Adviser does not exceed 9.8% of the Company's total shares
then issued and outstanding. The issuance of these additional shares will be
expensed as they are issued. Accordingly, the Pro Forma Balance Sheet
includes an adjustment to reflect the issuance of 284,194 additional shares
of common stock, leaving a balance of 402,546 shares.
(3)Represents adjustments for the purchase method of accounting whereby the
net assets owned by the Partnerships are recorded based on the estimated
fair market value of the properties acquired, cash, receivables,
payables and security deposits of the Partnerships as follows:
<TABLE>
<CAPTION>
Real Estate Other Total Purchase Price
----------- ----- --------------------
<S> <C> <C> <C>
Taylor Income Investors III, Ltd. $ 1,100,000 $ 68,585 $ 1,168,585
Taylor Income Investors IV, Ltd. 394,791 128,567 523,358
Taylor Income Investors V, Ltd. 320,163 121,058 441,221
Taylor Income Investors VI, Ltd. 285,000 2,740 287,740
AAA Net Realty Fund VII, Ltd. 1,010,000 30,460 1,040,460
AAA Net Realty Fund VIII, Ltd. 1,800,000 48,880 1,848,880
AAA Net Realty Fund Goodyear, Ltd. 1,090,000 20,492 1,110,492
AAA Net Realty Fund IX, Ltd. 4,850,000 78,062 4,928,062
AAA Net Realty Fund X, Ltd. 10,355,000 0 10,355,000
AAA Net Realty Fund XI, Ltd. 6,350,000 74,748 6,424,748
--------- ------ ---------
27,554,954 573,592 28,128,546
Less: Minority Interest 5,236,013 - 5,236,013
--------- ------ ---------
Net Adjustment $ 22,318,941 $ 573,592 $ 22,892,533
</TABLE>
F-11
(4)Represents the issuance of 2,410,154 shares of Company stock valued at
$22,510,837 based upon a per share price of $9.34 as follows:
<TABLE>
<CAPTION>
Exchange L.P. Units Trust Shares
Ratio Outstanding Issued Value
----- ----------- ------ -----
<S> <C> <C> <C> <C>
Taylor Income Investors III, Ltd. 132.40 756.00 100,093 $ 934,869
Taylor Income Investors IV, Ltd. 91.11 492.00 44,827 418,684
Taylor Income Investors V, Ltd. 98.42 384.00 37,792 352,978
Taylor Income Investors VI, Ltd. 102.69 240.00 24,646 230,194
AAA Net Realty Fund VII, Ltd. 98.03 900.00 88,227 824,040
AAA Net Realty Fund VIII, Ltd. 105.36 1488.00 156,778 1,464,307
AAA Net Realty Fund Goodyear, Ltd. 88.17 1068.00 94,166 879,511
AAA Net Realty Fund IX, Ltd. 97.88 4312.40 422,104 3,942,452
AAA Net Realty Fund X, Ltd. 96.80 9162.90 886,938 8,284,001
AAA Net Realty Fund XI, Ltd. 97.42 5649.00 550,300 5,139,802
------- ---------
Total Limited Partners 2,405,871 22,470,838
General Partners 4,283 39,999
----- ------
Total 2,410,154 $22,510,837
</TABLE>
The share price was agreed to by the General Partner of each of the Partnerships
and the Independent Directors of the Company based upon the price of the
Company's shares in its last public offering reduced by selling commissions and
related expenses.
(5)Represents estimated legal and professional fees, which will be capitalized
as acquisition costs.
(6)Represents notes to 20% of the limited partners in lieu of Company
stock.
(7)Represents the issuance of 7,404 shares of the Company's stock based upon a
per share price of $9.34. The shares will be acquired with cash by a
shareholder of the Corporate General Partner of each Partnership (who is also
the Company's president) under a contractual obligation whereby the shares
will be purchased by the shareholder with proceeds he will receive from the
disposition fees paid to him in connection with the Merger. The issuance of
these shares will occur on the effective date of the Merger.
F-12
<TABLE>
AMERICAN ASSET ADVISERS TRUST, INC.
PRO FORMA STATEMENT OF OPERATIONS (1)
FOR THE YEAR ENDED DECEMBER 31, 1997
(UNAUDITED)
<CAPTION>
Pro Forma Pro Forma
Historical Adviser and Properties and Pro Forma
Company Adjustment (2) Adjustments (4) Total
REVENUES
<S> <C> <C> <C> <C>
Rental income from operating leases $1,217,187 - $ 2,159,984 $3,377,171
Earned income from direct financing leases 339,628 - - 339,628
Service fee income - 167,435 - 167,435
Commission income, net - 141,813 - 141,813
Interest income 153,895 - 3,573 157,468
TOTAL REVENUES 1,710,710 309,248 2,163,557 4,183,515
EXPENSES
General operating and administrative 112,464 76,913 53,711 243,088
Reimbursements and fees to related party 106,504 - - 106,504
Amortization 62,754 32 - 62,786
Depreciation 146,015 15,431 545,236 706,682
Interest 6,000 18,202 337,063 361,265
Acquisition costs (3) 282,890 (282,890) - -
TOTAL EXPENSES 716,627 (172,312) 936,010 1,480,325
PRO FORMA INCOME BEFORE MINORITY
INTEREST IN NET INCOME OF
CONSOLIDATED JOINT VENTURES 994,083 481,560 1,227,547 2,703,190
MINORITY INTEREST IN NET INCOME OF
CONSOLIDATED JOINT VENTURES (455,226) - 455,226 -
PRO FORMA NET INCOME $ 538,857 $ 481,560 $ 1,682,773 $2,703,190
PRO FORMA EARNINGS PER SHARE:
Basic $ 0.34 $ 0.64
Diluted $ 0.33 $ 0.63
WEIGHTED AVERAGE COMMON AND
COMMON EQUIVALENT SHARES
OUTSTANDING:
Basic 1,563,048 4,256,960
Diluted 1,624,217 4,318,129
See Notes to Pro Forma Statement of Operations.
</TABLE>
F-13
AMERICAN ASSET ADVISERS TRUST, INC.
NOTES TO PRO FORMA STATEMENT OF OPERATIONS
(UNAUDITED)
(1)Adjustments are reflected as if the acquisition of the Partnership
properties and the Adviser was effective as of January 1, 1997. The
Partnership properties include the acquisition of a minority interest in
several joint ventures with the Company. Pro forma adjustments from the
acquisition of Partnership properties are based on the assumption that the
acquisitions are approved by 100% of the limited partners and that 20% of
the partners elect to take a note in lieu of Company stock.
(2)Includes pro forma adjustments as follows:
o Commission income, amortization expense, depreciation expense and interest
expense are recorded at historical amounts.
o Service fee income is recorded for administrative, acquisition and manage-
ment services provided to entities other than the Company. Service fee
income of $1,370,032 for services provided to the Company have been
excluded as those fees were either capitalized or expensed by the Company
as incurred.
o General and administrative expenses include costs incurred in providing
various administrative, acquisition and management services to entities
other than the Company. Of the Adviser's historical general and
administrative expenses for the period, $1,507,429 which have been
allocated to the Company or have been capitalized by the Company have
been excluded from the pro-forma totals.
(3)To the extent that the consideration paid for the Adviser exceeds the fair
market value of the net tangible assets received, an expense will be
recorded as an operating expense on the Company's Statement of Operations.
Because the purpose of the pro forma statement of operations is to reflect
the expected continuing impact of the merger on the Company, this
adjustment has not been included. At the closing of the merger, this
expense will be recorded as an operating expense. For the year ended
December 31, 1997, this pro forma expense would have been $4,772,790 based
on the issuance of 213,260 shares at closing on January 1, 1997 and 252,378
additional shares issued during the year in accordance with the partial
satisfaction of the share balance issuance criteria described in the
Agreement and Plan of Merger. Up to 686,740 shares of stock are
contingently issuable for a period of up to 24 calendar quarters following
the closing of the transaction. Within 30 days after the end of each
calendar quarter, shares will be issued up to the level where total shares
issued to the shareholder of the Adviser pursuant to the acquisition of the
Adviser does not exceed 9.8% of the Company's total shares then issued and
outstanding. Based on the pro forma financial statement 434,362 of these
shares remain at December 31, 1997. The issuance of these additional shares
will be expensed as they are issued.
Pro forma weighted average shares outstanding consists of the historical
weighted average shares outstanding of the Company, the shares issued for
both mergers on January 1, 1997 and 25% of the additional shares issued for
the Adviser during 1997.
(4)Includes pro forma adjustments as follows:
o Rental income, which reflects historical rental income of the operating
properties, is included from Partnership properties which have not been
consolidated by the Company. Six of the Partnerships' properties which
are majority owned by the Company are included in the historical
financial information of the Company. These properties were acquired
through joint ventures with AAA Net Realty Funds X and XI, Ltd.
o Interest income is included from a note receivable acquired along with the
Partnership properties.
o Depreciation is included based upon the purchase price which represents
the fair market value of the buildings over 33 years. The purchase price
of the properties has been allocated 70% to buildings and 30% to land.
o Interest expense on notes payable to certain limited partners computed at
6% of the outstanding balance.
o General and administrative expenses are included primarily for legal and
professional fees.
o The Partnership interest in certain properties which are majority owned
by the Company is eliminated as the historical financial statements of
the Company are reflected on a consolidated basis.
F-14
<TABLE>
AMERICAN ASSET ADVISERS TRUST, INC.
PRO FORMA STATEMENT OF OPERATIONS (1)
FOR THE SIX MONTHS ENDED JUNE 30, 1998
(UNAUDITED)
<CAPTION>
Pro Forma Pro Forma
Historical Adviser and Properties and Pro Forma
Company Adjustment (2) Adjustments (3) Total
REVENUES
<S> <C> <C> <C> <C>
Rental income from operating leases $ 963,206 - $1,143,545 $2,106,751
Earned income from direct financing leases 170,254 - - 170,254
Service fee income 12,931 130,870 - 143,801
Interest income 40,722 - 10,473 51,195
TOTAL REVENUES 1,187,113 130,870 1,154,018 2,472,001
EXPENSES
General operating and administrative 161,345 92,819 33,975 288,139
Reimbursements and fees to related party 57,800 - - 57,800
Amortization 31,377 177 - 31,554
Depreciation 130,745 8,644 265,189 404,578
Interest 37,831 3,896 168,531 210,258
Merger costs 2,389,918 (2,389,918) - -
Potential acquisition costs 182,741 (182,741) - -
TOTAL EXPENSES 2,991,757 (2,467,123) 467,695 992,329
PRO FORMA INCOME BEFORE MINORITY
INTEREST IN NET INCOME OF
CONSOLIDATED JOINT VENTURES (1,804,644) 2,597,993 686,323 1,479,672
MINORITY INTEREST IN NET INCOME OF
CONSOLIDATED JOINT VENTURES (263,068) - 263,068 -
PRO FORMA NET INCOME (LOSS) $(2,067,712) $2,597,993 $ 949,391 $1,479,672
PRO FORMA EARNINGS (LOSS) PER SHARE:
Basic $ (1.00) $ 0.30
Diluted $ (1.00) $ 0.30
WEIGHTED AVERAGE COMMON AND
COMMON EQUIVALENT SHARES
OUTSTANDING:
Basic 2,075,216 4,923,065
Diluted 2,075,216 4,923,065
See Notes to Pro Forma Statement of Operations.
</TABLE>
F-15
AMERICAN ASSET ADVISERS TRUST, INC.
NOTES TO PRO FORMA STATEMENT OF OPERATIONS
(UNAUDITED)
(1) Adjustments are reflected as if the acquisition of the Partnership
properties and the Adviser was effective as of January 1, 1997. The
Partnership properties include the acquisition of a minority interest in
several joint ventures with the Company. Pro forma adjustments from the
acquisition of Partnership properties are based on the assumption that the
acquisitions are approved by 100% of the limited partners and that 20% of
the partners elect to take a note in lieu of Company stock.
(2) Includes pro forma adjustments as follows:
o Commission income, amortization expense, depreciation expense and interest
expense are recorded at historical amounts.
o Service fee income is recorded for administrative, acquisition and manage-
ment services provided to entities other than the Company. Service fee
income of $459,472 for services provided to the Company have been excluded
as those fees were either capitalized or expensed by the Company as
incurred.
o General and administrative expenses include costs incurred in providing
various administrative, acquisition and management services to entities
other than the Company. Of the Adviser's historical general and
administrative expenses for the period, $585,164 which have been
allocated to the Company or have been capitalized by the Company have
been excluded from the pro-forma totals.
(3) Includes pro forma adjustments as follows:
o Rental income, which reflects historical rental income of the operating
properties, is included from Partnership properties which have not been
consolidated by the Company. Six of the Partnerships' properties which
are majority owned by the Company are included in the historical
financial information of the Company. These properties were acquired
through joint ventures with AAA Net Realty Funds X and XI, Ltd.
o Interest income is included from a note receivable acquired along with the
Partnership properties.
o Depreciation is included based upon the purchase price which represents
the fair market value of the buildings over 33 years. The purchase price
of the properties has been allocated 70% to buildings and 30% to land.
o Interest expense on notes payable to certain limited partners computed at
6% of the outstanding balance.
o General and administrative expenses are included primarily for legal
and professional fees.
o The Partnership interest in certain properties which are majority owned
by the Company is eliminated as the historical financial statements of
the Company are reflected on a consolidated basis.
F-16
<TABLE>
AMERICAN ASSET ADVISERS TRUST, INC.
PRO FORMA BALANCE SHEET (1)
JUNE 30, 1998
(UNAUDITED)
<CAPTION>
Pro Forma Pro Forma
Historical Adviser and Properties and Pro Forma
Company Adjustments Adjustments Total
ASSETS
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 1,377,760 $ - $ 415,147 (3) $1,862,057
69,150 (3)
Accounts receivable 170,055 - 10,913 (7) 180,968
Property, net 26,464,197 - 22,318,941 (7) 49,093,738
310,600 (5)
Net investment in direct financing leases 3,166,333 - - 3,166,333
Note receivable - - 205,046 (7) 205,046
Other assets 688,995 - - 688,995
Total assets $31,867,340 $ - $23,329,797 $55,197,137
LIABILITIES & SHAREHOLDERS'
& PARTNERS' EQUITY
LIABILITIES
Notes payable $ 8,732,150 $ - $ 9,830,991 (6) $18,563,141
Accounts payable 157,070 - 310,600 (5) 501,884
34,214 (3)
Security deposit 15,050 - 23,300 (3) 38,350
Total liabilities 8,904,270 - 10,199,105 19,103,375
MINORITY INTEREST 5,236,013 - (5,236,013)(3) -
SHAREHOLDERS' AND PARTNERS' EQUITY
Preferred stock, $.01 par value, 10,000,000
shares authorized, none issued
Common Stock, $.01 par value, 100,000,000
shares authorized, 2,374,306 and 4,575,946
shares issued and outstanding on historical 23,743 (2) 2,352 (2) 74 (7) 45,760
and pro-forma basis, respectively 19,591 (3),(4)
Capital in excess of par value 21,554,401 (2) 2,408,274 (2) 18,277,964 (3),(4) 42,309,715
69,076 (7)
Accumulated distributions in excess of
earnings (3,851,087)(2) (2,410,626)(2) - (6,261,713)
Total shareholders' and partners' equity 17,727,057 - 18,366,705 36,093,762
Total liabilities and shareholders' and
partners' equity $31,867,340 $ - $23,329,797 $55,197,137
See Notes to Pro Forma Balance Sheet.
</TABLE>
F-17
AMERICAN ASSET ADVISERS TRUST, INC.
NOTES TO PRO FORMA BALANCE SHEET
(UNAUDITED)
(1)Adjustments are reflected as if the acquisition of the Partnership properties
was completed on June 30, 1998. The Partnership properties include the
acquisition of a minority interest in several joint ventures with the
Company. Pro forma adjustments from the acquisition of the Partnership
properties are based on the assumption that the acquisitions are approved by
100% of the limited partners and that 35% of the partners elect to take notes
in lieu of Company stock.
(2)On June 5, 1998, the Company's shareholders voted to approve an agreement
and plan of merger with the Adviser whereby the stockholder of the Adviser
agreed to exchange 100% of the outstanding shares of common stock of the
Adviser for up to 900,000 shares of the Company's stock. According to the
Agreement and Plan of Merger between the Company and the Adviser, 213,260
shares of common stock are issuable effective June 5, 1998. The issuance of
these shares is reflected in the historical financial information of the
Company included with the Pro Forma Balance Sheet.
In addition, up to 686,740 shares of stock valued at $7,039,085 are
contingently issuable for a period of up to 24 calendar quarters following
the closing of the transaction. Within 30 days after the end of each calendar
quarter, shares will be issued up to the level where total shares issued to
the shareholder of the Adviser pursuant to the acquisition of the Adviser
does not exceed 9.8% of the Company's total shares then issued and
outstanding. The issuance of these additional shares will be expensed as they
are issued. Accordingly, the Pro Forma Balance Sheet includes an adjustment
to reflect the issuance of 235,183 additional shares of common stock, leaving
a balance of 451,557 shares.
(3)Represents adjustments for the purchase method of accounting whereby the
net assets owned by the Partnerships are recorded based on the estimated
fair market value of the properties acquired, cash, receivables,
payables and security deposits of the Partnerships as follows:
<TABLE>
<CAPTION>
Real Estate Other Total Purchase Price
----------- ----- --------------------
<S> <C> <C> <C>
Taylor Income Investors III, Ltd. $ 1,100,000 $ 68,585 $ 1,168,585
Taylor Income Investors IV, Ltd. 394,791 128,567 523,358
Taylor Income Investors V, Ltd. 320,163 121,058 441,221
Taylor Income Investors VI, Ltd. 285,000 2,740 287,740
AAA Net Realty Fund VII, Ltd. 1,010,000 30,460 1,040,460
AAA Net Realty Fund VIII, Ltd. 1,800,000 48,880 1,848,880
AAA Net Realty Fund Goodyear, Ltd. 1,090,000 20,492 1,110,492
AAA Net Realty Fund IX, Ltd. 4,850,000 78,062 4,928,062
AAA Net Realty Fund X, Ltd. 10,355,000 0 10,355,000
AAA Net Realty Fund XI, Ltd. 6,350,000 74,748 6,424,748
--------- ------ ---------
27,554,954 573,592 28,128,546
Less: Minority Interest 5,236,013 - 5,236,013
--------- ---------
Net Adjustment $ 22,318,941 $ 573,592 $ 22,892,533
</TABLE>
F-18
(4)Represents the issuance of 1,959,053 shares of Company stock valued at
$18,297,555 based upon a per share price of $9.34 as follows:
<TABLE>
<CAPTION>
Exchange L.P. Units Trust Shares
Ratio Outstanding Issued Value
----- ----------- ------ -----
<S> <C> <C> <C> <C>
Taylor Income Investors III, Ltd. 132.40 614.25 81,326 $ 759,586
Taylor Income Investors IV, Ltd. 91.11 399.75 36,422 340,182
Taylor Income Investors V, Ltd. 98.42 312.00 30,706 286,794
Taylor Income Investors VI, Ltd. 102.69 195.00 20,024 187,024
AAA Net Realty Fund VII, Ltd. 98.03 731.25 71,685 669,539
AAA Net Realty Fund VIII, Ltd. 105.36 1209.00 127,382 1,189,748
AAA Net Realty Fund Goodyear, Ltd. 88.17 867.75 76,510 714,604
AAA Net Realty Fund IX, Ltd. 97.88 3503.83 342,959 3,203,237
AAA Net Realty Fund X, Ltd. 96.80 7444.84 720,637 6,730,750
AAA Net Realty Fund XI, Ltd. 97.42 4589.79 447,119 4,176,092
------- ---------
Total Limited Partners 1,954,770 18,257,556
General Partners 4,283 39,999
----- ------
Total 1,959,053 $18,297,555
</TABLE>
The share price was agreed to by the General Partner of each of the Partnerships
and the Independent Directors of the Company based upon the price of the
Company's shares in its last public offering reduced by selling commissions and
related expenses.
(5)Represents estimated legal and professional fees, which will be capitalized
as acquisition costs.
(6)Represents notes to 35% of the limited partners in lieu of Company stock.
(7)Represents the issuance of 7,404 shares of the Company's stock based upon a
per share price of $9.34. The shares will be acquired with cash by a
shareholder of the Corporate General Partner of each Partnership (who is also
the Company's president) under a contractual obligation whereby the shares
will be purchased by the shareholder with proceeds he will receive from the
disposition fees paid to him in connection with the Merger. The issuance of
these shares will occur on the effective date of the Merger.
F-19
<TABLE>
AMERICAN ASSET ADVISERS TRUST, INC.
PRO FORMA STATEMENT OF OPERATIONS (1)
FOR THE YEAR ENDED DECEMBER 31, 1997
(UNAUDITED)
<CAPTION>
Pro Forma Pro Forma
Historical Adviser and Properties and Pro Forma
Company Adjustments (2) Adjustments (4) Total
REVENUES
<S> <C>
Rental income from operating leases $1,217,187 - $ 2,159,984 $3,377,171
Earned income from direct financing leases 339,628 - - 339,628
Service fee income - 167,435 - 167,435
Commission income, net - 141,813 - 141,813
Interest income 153,895 - 3,573 157,468
TOTAL REVENUES 1,710,710 309,248 2,163,557 4,183,515
EXPENSES
General operating and administrative 112,464 76,913 53,711 243,088
Reimbursements and fees to related party 106,504 - - 106,504
Amortization 62,754 32 - 62,786
Depreciation 146,015 15,431 545,236 706,682
Interest 6,000 18,202 589,859 614,061
Acquisition costs (3) 282,890 (282,890) - -
TOTAL EXPENSES 716,627 (172,312) 1,188,806 1,733,121
PRO FORMA INCOME BEFORE MINORITY
INTEREST IN NET INCOME OF
CONSOLIDATED JOINT VENTURES 994,083 481,560 974,751 2,450,394
MINORITY INTEREST IN NET INCOME OF
CONSOLIDATED JOINT VENTURES (455,226) - 455,226 -
PRO FORMA NET INCOME $ 538,857 $ 481,560 $ 1,429,977 $2,450,394
PRO FORMA EARNINGS PER SHARE:
Basic $ 0.34 $ 0.65
Diluted $ 0.33 $ 0.64
WEIGHTED AVERAGE COMMON AND
COMMON EQUIVALENT SHARES
OUTSTANDING:
Basic 1,563,048 3,793,607
Diluted 1,624,217 3,854,776
See Notes to Pro Forma Statement of Operations.
</TABLE>
F-20
AMERICAN ASSET ADVISERS TRUST, INC.
NOTES TO PRO FORMA STATEMENT OF OPERATIONS
(UNAUDITED)
(1) Adjustments are reflected as if the acquisition of the Partnership
properties and the Adviser was effective as of January 1, 1997. The
Partnership properties include the acquisition of a minority interest in
several joint ventures with the Company. Pro forma adjustments from the
acquisition of Partnership properties are based on the assumption that the
acquisitions are approved by 100% of the limited partners and that 35% of
the partners elect to take a note in lieu of Company stock.
(2) Includes pro forma adjustments as follows:
o Commission income, amortization expense, depreciation expense and interest
expense are recorded at historical amounts.
o Service fee income is recorded for administrative, acquisition and manage-
ment services provided to entities other than the Company. Service fee
income of $1,370,032 for services provided to the Company have been
excluded as those fees were either capitalized or expensed by the Company
as incurred.
o General and administrative expenses include costs incurred in providing
various administrative, acquisition and management services to entities
other than the Company. Of the Adviser's historical general and
administrative expenses for the period, $1,507,429 which have been
allocated to the Company or have been capitalized by the Company have
been excluded from the pro-forma totals.
(3) To the extent that the consideration paid for the Adviser exceeds the fair
market value of the net tangible assets received, an expense will be
recorded as an operating expense on the Company's Statement of Operations.
Because the purpose of the pro forma statement of operations is to reflect
the expected continuing impact of the merger on the Company, this
adjustment has not been included. At the closing of the merger, this
expense will be recorded as an operating expense. For the year ended
December 31, 1997, this pro forma expense would have been $4,270,427 based
on the issuance of 213,260 shares at closing on January 1, 1997 and 203,367
additional shares issued during the year in accordance with the partial
satisfaction of the share balance issuance criteria described in the
Agreement and Plan of Merger. Up to 686,740 shares of stock are
contingently issuable for a period of up to 24 calendar quarters following
the closing of the transaction. Within 30 days after the end of each
calendar quarter, shares will be issued up to the level where total shares
issued to the shareholder of the Adviser pursuant to the acquisition of the
Adviser does not exceed 9.8% of the Company's total shares then issued and
outstanding. Based on the pro forma financial statement 483,373 of these
shares remain at December 31, 1997. The issuance of these additional shares
will be expensed as they are issued.
Pro forma weighted average shares outstanding consists of the historical
weighted average shares outstanding of the Company, the shares issued for
both mergers on January 1, 1997 and 25% of the additional shares issued for
the Adviser during 1997.
(4) Includes pro forma adjustments as follows:
o Rental income, which reflects historical rental income of the operating
properties, is included from Partnership properties which have not been
consolidated by the Company. Six of the Partnerships' properties which
are majority owned by the Company are included in the historical
financial information of the Company. These properties were acquired
through joint ventures with AAA Net Realty Funds X and XI, Ltd.
o Interest income is included from a note receivable acquired along with the
Partnership properties.
o Depreciation is included based upon the purchase price which represents
the fair market value of the buildings over 33 years. The purchase price
of the properties has been allocated 70% to buildings and 30% to land.
o General and administrative expenses are included primarily for legal and
professional fees.
o The Partnership interest in certain properties which are majority owned
by the Company is eliminated as the historical financial statements of
the Company are reflected on a consolidated basis.
F-21
<TABLE>
AMERICAN ASSET ADVISERS TRUST, INC.
PRO FORMA STATEMENT OF OPERATIONS (1)
FOR THE SIX MONTHS ENDED JUNE 30, 1998
(UNAUDITED)
<CAPTION>
Pro Forma Pro Forma
Historical Adviser and Properties and Pro
Forma
Company Adjustment (2) Adjustments (3) Total
REVENUES
<S> <C> <C> <C> <C>
Rental income from operating leases $ 963,206 - $1,143,545 $2,106,751
Earned income from direct financing leases 170,254 - - 170,254
Service fee income 12,931 130,870 - 143,801
Interest income 40,722 - 10,473 51,195
TOTAL REVENUES 1,187,113 130,870 1,154,018 2,472,001
EXPENSES
General operating and administrative 161,345 92,819 33,975 288,139
Reimbursements and fees to related party 57,800 - - 57,800
Amortization 31,377 177 - 31,554
Depreciation 130,745 8,644 265,189 404,578
Interest 37,831 3,896 294,930 336,657
Merger costs 2,389,918 (2,389,918) - -
Potential acquisition costs 182,741 (182,741) - -
TOTAL EXPENSES 2,991,757 (2,467,123) 594,094 1,118,728
PRO FORMA INCOME BEFORE MINORITY
INTEREST IN NET INCOME OF
CONSOLIDATED JOINT VENTURES (1,804,644) 2,597,993 559,924 1,353,273
MINORITY INTEREST IN NET INCOME OF
CONSOLIDATED JOINT VENTURES (263,068) - 263,068 -
PRO FORMA NET INCOME (LOSS) $(2,067,712) $ 2,597,993 $ 822,992 $1,353,273
PRO FORMA EARNINGS (LOSS) PER SHARE:
Basic $ (1.00) $ 0.31
Diluted $ (1.00) $ 0.31
WEIGHTED AVERAGE COMMON AND
COMMON EQUIVALENT SHARES
OUTSTANDING:
Basic 2,075,216 4,422,953
Diluted 2,075,216 4,422,953
See Notes to Pro Forma Statement of Operations.
</TABLE>
F-22
AMERICAN ASSET ADVISERS TRUST, INC.
NOTES TO PRO FORMA STATEMENT OF OPERATIONS
(UNAUDITED)
(1) Adjustments are reflected as if the acquisition of the Partnership
properties and the Adviser was effective as of January 1, 1997. The
Partnership properties include the acquisition of a minority interest in
several joint ventures with the Company. Pro forma adjustments from the
acquisition of Partnership properties are based on the assumption that the
acquisitions are approved by 100% of the limited partners and that 35% of
the partners elect to take a note in lieu of Company stock.
(2) Includes pro forma adjustments as follows:
o Commission income, amortization expense, depreciation expense and interest
expense are recorded at historical amounts.
o Service fee income is recorded for administrative, acquisition and manage-
ment services provided to entities other than the Company. Service fee
income of $459,472 for services provided to the Company have been excluded
as those fees were either capitalized or expensed by the Company as
incurred.
o General and administrative expenses include costs incurred in providing
various administrative, acquisition and management services to entities
other than the Company. Of the Adviser's historical general and
administrative expenses for the period, $585,164 which have been
allocated to the Company or have been capitalized by the Company have
been excluded from the pro-forma totals.
(3) Includes pro forma adjustments as follows:
o Rental income, which reflects historical rental income of the operating
properties, is included from Partnership properties which have not been
consolidated by the Company. Six of the Partnerships' properties which
are majority owned by the Company are included in the historical
financial information of the Company. These properties were acquired
through joint ventures with AAA Net Realty Funds X and XI, Ltd.
o Interest income is included from a note receivable acquired along with the
Partnership properties.
o Depreciation is included based upon the purchase price which represents
the fair market value of the buildings over 33 years. The purchase price
of the properties has been allocated 70% to buildings and 30% to land.
o General and administrative expenses are included primarily for legal
and professional fees.
o The Partnership interest in certain properties which are majority owned
by the Company is eliminated as the historical financial statements of
the Company are reflected on a consolidated basis.
F-23
<TABLE>
AMERICAN ASSET ADVISERS TRUST, INC.
PRO FORMA BALANCE SHEET (1)
JUNE 30, 1998
(UNAUDITED)
<CAPTION>
Pro Forma Pro Forma
Historical Adviser and Properties and Pro Forma
Company Adjustments Adjustments Total
ASSETS
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 1,377,760 $ - $ 207,573 (3) $ 1,619,908
34,575 (6)
Accounts receivable 170,055 - 5,456 (3) 175,511
Property, net 26,464,197 - 11,159,472 (3) 37,778,969
155,300 (5)
Net investment in direct financing leases 3,166,333 - - 3,166,333
Note receivable - - 102,523 (3) 102,523
Other assets 688,995 - - 688,995
Total assets $31,867,340 $ - $11,664,899 $43,532,239
LIABILITIES & SHAREHOLDERS'
& PARTNERS' EQUITY
LIABILITIES
Notes payable $ 8,732,150 $ - - $ 8,732,150
Accounts payable 157,070 - 155,300 (5) 329,477
17,107 (3)
Security deposit 15,050 - 11,650 (3) 26,700
Total liabilities 8,904,270 - 184,057 9,088,327
MINORITY INTEREST 5,236,013 - (2,618,006)(3) 2,618,007
SHAREHOLDERS' AND PARTNERS' EQUITY
Preferred stock, $.01 par value, 10,000,000
shares authorized, none issued
Common Stock, $.01 par value, 100,000,000
shares authorized, 2,374,306 and 4,069,355
shares issued and outstanding on historical 23,743 (2) 1,855 (2) 37 (6) 40,693
and pro-forma basis, respectively 15,058 (3),(4)
Capital in excess of par value 21,554,401 (2) 1,899,889 (2) 14,049,215 (3),(4) 37,538,043
34,538 (6)
Accumulated distributions in excess of
earnings (3,851,087)(2) (1,901,744)(2) - (5,752,831)
Total shareholders' and partners' equity 17,727,057 - 14,098,848 31,825,905
Total liabilities and shareholders'
and partners' equity $31,867,340 $ - $11,664,899 $43,532,239
See Notes to Pro Forma Balance Sheet.
</TABLE>
F-24
AMERICAN ASSET ADVISERS TRUST, INC.
NOTES TO PRO FORMA BALANCE SHEET
(UNAUDITED)
(1)Adjustments are reflected as if the acquisition of the Partnership properties
was completed on June 30, 1998. The Partnership properties include the
acquisition of a minority interest in several joint ventures with the
Company. Pro forma adjustments from the acquisition of the Partnership
properties are based on the assumption that the acquisitions are approved by
50% of the limited partners and that none of the partners elect to take notes
in lieu of Company stock. All of the Partnership properties have the same
characteristics and, therefore, the 50% assumption is provided to assist the
reader in evaluating various scenarios. The pro forma entries assume that the
Company will maintain control over the properties to be acquired.
(2)On June 5, 1998, the Company's shareholders voted to approve an agreement
and plan of merger with the Adviser whereby the stockholder of the Adviser
agreed to exchange 100% of the outstanding shares of common stock of the
Adviser for up to 900,000 shares of the Company's stock. According to the
Agreement and Plan of Merger between the Company and the Adviser, 213,260
shares of common stock are issuable effective June 5, 1998. The issuance of
these shares is reflected in the historical financial information of the
Company included with the Pro Forma Balance Sheet.
In addition, up to 686,740 shares of stock valued at $7,039,085 are
contingently issuable for a period of up to 24 calendar quarters following
the closing of the transaction. Within 30 days after the end of each calendar
quarter, shares will be issued up to the level where total shares issued to
the shareholder of the Adviser pursuant to the acquisition of the Adviser
does not exceed 9.8% of the Company's total shares then issued and
outstanding. The issuance of these additional shares will be expensed as they
are issued. Accordingly the Pro Forma Balance Sheet includes an adjustment to
reflect the issuance of 185,536 additional shares of common stock, leaving a
balance of 501,204 shares.
(3)Represents adjustments for the purchase method of accounting whereby the
net assets owned by the Partnerships are recorded based on the estimated
fair market value of the properties acquired, cash, receivables,
payables and security deposits of the Partnerships as follows:
<TABLE>
<CAPTION>
Real Estate Other Total Purchase Price
----------- ----- --------------------
<S> <C> <C> <C>
Taylor Income Investors III, Ltd. $ 550,000 $ 34,293 $ 584,293
Taylor Income Investors IV, Ltd. 197,396 64,284 261,680
Taylor Income Investors V, Ltd. 160,082 60,529 220,611
Taylor Income Investors VI, Ltd. 142,500 1,370 143,870
AAA Net Realty Fund VII, Ltd. 505,000 15,230 520,230
AAA Net Realty Fund VIII, Ltd. 900,000 24,440 924,440
AAA Net Realty Fund Goodyear, Ltd. 545,000 10,246 555,246
AAA Net Realty Fund IX, Ltd. 2,425,000 39,031 2,464,031
AAA Net Realty Fund X, Ltd. 5,177,500 0 5,177,500
AAA Net Realty Fund XI, Ltd. 3,175,000 37,374 3,212,374
--------- ------ ---------
13,777,478 286,797 14,064,275
Less: Minority Interest 2,618,006 - 2,618,006
--------- ------- ---------
Net Adjustment $ 11,159,472 $ 286,797 $ 11,446,269
</TABLE>
F-25
(4)Represents the issuance of 1,505,811 shares of Company stock valued at
$14,064,275 based upon a per share price of $9.34 as follows:
<TABLE>
<CAPTION>
Exchange L.P. Units Trust Shares
Ratio Outstanding Issued Value
----- ----------- ------ -----
<S> <C> <C> <C> <C>
Taylor Income Investors III, Ltd. 132.40 472.50 62,559 $ 584,301
Taylor Income Investors IV, Ltd. 91.11 307.50 28,017 261,679
Taylor Income Investors V, Ltd. 98.42 240.00 23,620 220,611
Taylor Income Investors VI, Ltd. 102.69 150.00 15,404 143,873
AAA Net Realty Fund VII, Ltd. 98.03 562.50 55,142 515,026
AAA Net Realty Fund VIII, Ltd. 105.36 930.00 97,987 915,199
AAA Net Realty Fund Goodyear, Ltd. 88.17 667.50 58,853 549,687
AAA Net Realty Fund IX, Ltd. 97.88 2695.25 263,815 2,464,032
AAA Net Realty Fund X, Ltd. 96.80 5726.80 554,336 5,177,498
AAA Net Realty Fund XI, Ltd. 97.42 3530.61 343,937 3,212,372
------- ---------
Total Limited Partners 1,503,670 14,044,278
General Partners 2,141 19,997
----- ------
Total 1,505,811 $14,064,275
</TABLE>
The share price was agreed to by the General Partner of each of the Partnerships
and the Independent Directors of the Company based upon the price of the
Company's shares in its last public offering reduced by selling commissions and
related expenses.
(5)Represents estimated legal and professional fees, which will be capitalized
as acquisition costs.
(6)Represents the issuance of 3,702 shares of the Company's stock based upon a
per share price of $9.34. The shares will be acquired with cash by a
shareholder of the Corporate General Partner of each Partnership (who is also
the Company's president) under a contractual obligation whereby the shares
will be purchased by the shareholder with proceeds he will receive from the
disposition fees paid to him in connection with the Merger. The issuance of
these shares will occur on the effective date of the Merger.
F-26
<TABLE>
AMERICAN ASSET ADVISERS TRUST, INC.
PRO FORMA STATEMENT OF OPERATIONS (1)
FOR THE YEAR ENDED DECEMBER 31, 1997
(UNAUDITED)
<CAPTION>
Pro Forma Pro Forma
Historical Adviser and Properties and Pro Forma
Company Adjustment (2) Adjustments (4) Total
REVENUES
<S> <C> <C> <C> <C>
Rental income from operating leases $1,217,187 - $ 1,079,992 $2,297,179
Earned income from direct financing leases 339,628 - - 339,628
Service fee income - 167,435 - 167,435
Commission income, net - 141,813 - 141,813
Interest income 153,895 - 1,787 155,682
TOTAL REVENUES 1,710,710 309,248 1,081,779 3,101,737
EXPENSES
General operating and administrative 112,464 76,913 26,855 216,232
Reimbursements and fees to related party 106,504 - - 106,504
Amortization 62,754 32 - 62,786
Depreciation 146,015 15,431 272,618 434,064
Interest 6,000 18,202 - 24,202
Acquisition costs (3) 282,890 (282,890) - -
TOTAL EXPENSES 716,627 (172,312) 299,473 843,788
PRO FORMA INCOME BEFORE MINORITY
INTEREST IN NET INCOME OF
CONSOLIDATED JOINT VENTURES 994,083 481,560 782,306 2,257,949
MINORITY INTEREST IN NET INCOME OF
CONSOLIDATED JOINT VENTURES (455,226) - 227,613 (227,613)
PRO FORMA NET INCOME $ 538,857 $481,560 $ 1,009,919 $2,030,336
PRO FORMA EARNINGS PER SHARE:
Basic $ 0.34 $ 0.61
Diluted $ 0.33 $ 0.60
WEIGHTED AVERAGE COMMON AND
COMMON EQUIVALENT SHARES
OUTSTANDING:
Basic 1,563,048 3,324,251
Diluted 1,624,217 3,385,420
See Notes to Pro Forma Statement of Operations.
</TABLE>
F-27
AMERICAN ASSET ADVISERS TRUST, INC.
NOTES TO PRO FORMA STATEMENT OF OPERATIONS
(UNAUDITED)
(1)Adjustments are reflected as if the acquisition of the Partnership
properties and the Adviser was effective as of January 1, 1997. The
Partnership properties include the acquisition of a minority interest in
several joint ventures with the Company. Pro forma adjustments from the
acquisition of Partnership properties are based on the assumption that the
acquisitions are approved by 50% of the limited partners and that none of
the partners elect to take a note in lieu of Company stock. The pro forma
entries assume that the Company will maintain control over the properties
to be acquired.
(2)Includes pro forma adjustments as follows:
o Commission income, amortization expense, depreciation expense and interest
expense are recorded at historical amounts.
o Service fee income is recorded for administrative, acquisition and manage-
ment services provided to entities other than the Company. Service fee
income of $1,370,032 for services provided to the Company have been
excluded as those fees were either capitalized or expensed by the Company
as incurred.
o General and administrative expenses include costs incurred in providing
various administrative, acquisition and management services to entities
other than the Company. Of the Adviser's historical general and
administrative expenses for the period, $1,507,429 which have been
allocated to the Company or have been capitalized by the Company have
been excluded from the pro-forma totals.
(3) To the extent that the consideration paid for the Adviser exceeds the fair
market value of the net tangible assets received, an expense will be
recorded as an operating expense on the Company's Statement of Operations.
Because the purpose of the pro forma statement of operations is to reflect
the expected continuing impact of the merger on the Company, this
adjustment has not been included. At the closing of the merger, this
expense will be recorded as an operating expense. For the year ended
December 31, 1997, this pro forma expense would have been $3,761,555 based
on the issuance of 213,260 shares at closing on January 1, 1997 and 153,721
additional shares issued during the year in accordance with the partial
satisfaction of the share balance issuance criteria described in the
Agreement and Plan of Merger. Up to 686,740 shares of stock are
contingently issuable for a period of up to 24 calendar quarters following
the closing of the transaction. Within 30 days after the end of each
calendar quarter, shares will be issued up to the level where total shares
issued to the shareholder of the Adviser pursuant to the acquisition of the
Adviser does not exceed 9.8% of the Company's total shares then issued and
outstanding. Based on the pro forma financial statement 533,019 of these
shares remain at December 31, 1997. The issuance of these additional shares
will be expensed as they are issued.
Pro forma weighted average shares outstanding consists of the historical
weighted average shares outstanding of the Company, the shares issued for
both mergers on January 1, 1997 and 25% of the additional shares issued for
the Adviser during 1997.
(4) Includes pro forma adjustments as follows:
o Rental income, which reflects historical rental income of the operating
properties, is included from Partnership properties which have not been
consolidated by the Company. Six of the Partnerships' properties which
are majority owned by the Company are included in the historical
financial information of the Company. These properties were acquired
through joint ventures with AAA Net Realty Funds X and XI, Ltd.
o Interest income is included from a note receivable acquired along with the
Partnership properties.
o Depreciation is included based upon the purchase price which represents
the fair market value of the buildings over 33 years. The purchase price
of the properties has been allocated 70% to buildings and 30% to land.
o General and administrative expenses are included primarily for legal and
professional fees.
o The Partnership interest in certain properties which are majority owned
by the Company is eliminated as the historical financial statements of
the Company are reflected on a consolidated basis.
F-28
<TABLE>
AMERICAN ASSET ADVISERS TRUST, INC.
PRO FORMA STATEMENT OF OPERATIONS (1)
FOR THE SIX MONTHS ENDED JUNE 30, 1998
(UNAUDITED)
<CAPTION>
Pro Forma Pro Forma
Historical Adviser and Properties and Pro Forma
Company Adjustment (2) Adjustments (3) Total
REVENUES
<S> <C> <C> <C> <C>
Rental income from operating leases $ 963,206 - $ 571,772 $1,534,978
Earned income from direct financing leases 170,254 - - 170,254
Service fee income 12,931 130,870 - 143,801
Interest income 40,722 - 5,237 45,959
TOTAL REVENUES 1,187,113 130,870 577,009 1,894,992
EXPENSES
General operating and administrative 161,345 92,819 16,987 271,151
Reimbursements and fees to related party 57,800 - - 57,800
Amortization 31,377 177 - 31,554
Depreciation 130,745 8,644 132,595 271,984
Interest 37,831 3,896 - 41,727
Merger costs 2,389,918 (2,389,918) - -
Potential acquisition costs 182,741 (182,741) - -
TOTAL EXPENSES 2,991,757 (2,467,123) 149,582 674,216
PRO FORMA INCOME BEFORE MINORITY
INTEREST IN NET INCOME OF
CONSOLIDATED JOINT VENTURES (1,804,644) 2,597,993 427,427 1,220,776
MINORITY INTEREST IN NET INCOME OF
CONSOLIDATED JOINT VENTURES (263,068) - 131,534 (131,534)
PRO FORMA NET INCOME (LOSS) $(2,067,712) $2,597,993 $ 558,961 $1,089,242
PRO FORMA EARNINGS (LOSS) PER SHARE:
Basic $ (1.00) $ 0.28
Diluted $ (1.00) $ 0.28
WEIGHTED AVERAGE COMMON AND
COMMON EQUIVALENT SHARES
OUTSTANDING:
Basic 2,075,216 3,916,363
Diluted 2,075,216 3,916,363
See Notes to Pro Forma Statement of Operations.
</TABLE>
F-29
AMERICAN ASSET ADVISERS TRUST, INC.
NOTES TO PRO FORMA STATEMENT OF OPERATIONS
(UNAUDITED)
(1) Adjustments are reflected as if the acquisition of the Partnership
properties and the Adviser was effective as of January 1, 1997. The
Partnership properties include the acquisition of a minority interest in
several joint ventures with the Company. Pro forma adjustments from the
acquisition of Partnership properties are based on the assumption that the
acquisitions are approved by 50% of the limited partners and that none of
the partners elect to take a note in lieu of Company stock. The pro forma
entries assume that the Company will maintain control over the properties
to be acquired.
(2) Includes pro forma adjustments as follows:
o Commission income, amortization expense, depreciation expense and interest
expense are recorded at historical amounts.
o Service fee income is recorded for administrative, acquisition and manage-
ment services provided to entities other than the Company. Service fee
income of $459,472 for services provided to the Company have been excluded
as those fees were either capitalized or expensed by the Company as
incurred.
o General and administrative expenses include costs incurred in providing
various administrative, acquisition and management services to entities
other than the Company. Of the Adviser's historical general and
administrative expenses for the period, $585,164 which have been
allocated to the Company or have been capitalized by the Company have
been excluded from the pro-forma totals.
(3) Includes pro forma adjustments as follows:
o Rental income, which reflects historical rental income of the operating
properties, is included from Partnership properties which have not been
consolidated by the Company. Six of the Partnerships' properties which
are majority owned by the Company are included in the historical
financial information of the Company. These properties were acquired
through joint ventures with AAA Net Realty Funds X and XI, Ltd.
o Interest income is included from a note receivable acquired along with the
Partnership properties.
o Depreciation is included based upon the purchase price which represents
the fair market value of the buildings over 33 years. The purchase price
of the properties has been allocated 70% to buildings and 30% to land.
o General and administrative expenses are included primarily for legal
and professional fees.
o The Partnership interest in certain properties which are majority owned
by the Company is eliminated as the historical financial statements of
the Company are reflected on a consolidated basis.
F-30
AMERICAN ASSET ADVISERS TRUST, INC.
PRO FORMA BALANCE SHEET (1)
JUNE 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
Pro Forma Pro Forma
Historical Adviser and Properties and Pro Forma
Company Adjustments Adjustments Total
ASSETS
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 1,377,760 $ - $ 207,573 (3) $1,619,908
34,575 (7)
Accounts receivable 170,055 - 5,456 (3) 175,511
Property, net 26,464,197 - 11,159,472 (3) 37,778,969
155,300 (5)
Net investment in direct financing leases 3,166,333 - - 3,166,333
Note receivable - - 102,523 (3) 102,523
Other assets 688,995 - - 688,995
Total assets $31,867,340 $ - $11,664,899 $43,532,239
LIABILITIES & SHAREHOLDERS'
& PARTNERS' EQUITY
LIABILITIES
Notes payable $ 8,732,150 $ - $ 2,808,856 (6) $11,541,006
Accounts payable 157,070 - 155,300 (5) 329,477
17,107 (3)
Security deposit 15,050 - 11,650 (3) 26,700
Total liabilities 8,904,270 - 2,992,913 11,897,183
MINORITY INTEREST 5,236,013 - (2,618,006)(3) 2,618,007
SHAREHOLDERS' AND PARTNERS' EQUITY
Preferred stock, $.01 par value, 10,000,000
shares authorized, none issued
Common Stock, $.01 par value, 100,000,000
shares authorized, 2,374,306 and 3,735,948
shares issued and outstanding on historical 23,743 (2) 1,529 (2) 37 (7) 37,360
and pro-forma basis, respectively 12,051 (3),(4)
Capital in excess of par value 21,554,401 (2) 1,565,317 (2) 11,243,366 (3),(4)34,397,622
34,538 (7)
Accumulated distributions in excess of
earnings (3,851,087)(2) (1,566,846)(2) - (5,417,933)
Total shareholders' and partners' equity 17,727,057 - 11,289,992 29,017,049
Total liabilities and shareholders'
and partners' equity $31,867,340 $ - $11,664,899 $43,532,239
See Notes to Pro Forma Balance Sheet.
</TABLE>
F-31
AMERICAN ASSET ADVISERS TRUST, INC.
NOTES TO PRO FORMA BALANCE SHEET
(UNAUDITED)
(1)Adjustments are reflected as if the acquisition of the Partnership properties
was completed on June 30, 1998. The Partnership properties include the
acquisition of a minority interest in several joint ventures with the
Company. Pro forma adjustments from the acquisition of the Partnership
properties are based on the assumption that the acquisitions are approved by
50% of the limited partners and that 20% of these partners elect to take a
note in lieu of Company stock. All of the Partnership properties have the
same characteristics and, therefore, the 50% assumption is provided to assist
the reader in evaluating various scenarios. The pro forma entries assume that
the Company will maintain control over the properties to be acquired.
(2)On June 5, 1998, the Company's shareholders voted to approve an agreement
and plan of merger with the Adviser whereby the stockholder of the Adviser
agreed to exchange 100% of the outstanding shares of common stock of the
Adviser for up to 900,000 shares of the Company's stock. According to the
Agreement and Plan of Merger between the Company and the Adviser, 213,260
shares of common stock are issuable effective June 5, 1998. The issuance of
these shares is reflected in the historical financial information of the
Company included with the Pro Forma Balance Sheet.
In addition, up to 686,740 shares of stock valued at $7,039,085 are
contingently issuable for a period of up to 24 calendar quarters following
the closing of the transaction. Within 30 days after the end of each calendar
quarter, shares will be issued up to the level where total shares issued to
the shareholder of the Adviser pursuant to the acquisition of the Adviser
does not exceed 9.8% of the Company's total shares then issued and
outstanding. The issuance of these additional shares will be expensed as they
are issued. Accordingly, the Pro Forma Balance Sheet includes an adjustment
to reflect the issuance of 152,863 additional shares of common stock, leaving
a balance of 533,877 shares.
(3)Represents adjustments for the purchase method of accounting whereby the net
assets owned by the Partnerships are recorded based on the estimated fair
market value of the properties acquired, cash, receivables, payables
and security deposits of the Partnerships as follows:
<TABLE>
<CAPTION>
Real Estate Other Total Purchase Price
----------- ----- --------------------
<S> <C> <C> <C>
Taylor Income Investors III, Ltd. $ 550,000 $ 34,293 $ 584,293
Taylor Income Investors IV, Ltd. 197,396 64,284 261,680
Taylor Income Investors V, Ltd. 160,082 60,529 220,611
Taylor Income Investors VI, Ltd. 142,500 1,370 143,870
AAA Net Realty Fund VII, Ltd. 505,000 15,230 520,230
AAA Net Realty Fund VIII, Ltd. 900,000 24,440 924,440
AAA Net Realty Fund Goodyear, Ltd. 545,000 10,246 555,246
AAA Net Realty Fund IX, Ltd. 2,425,000 39,031 2,464,031
AAA Net Realty Fund X, Ltd. 5,177,500 0 5,177,500
AAA Net Realty Fund XI, Ltd. 3,175,000 37,374 3,212,374
--------- ------ ---------
13,777,478 286,797 14,064,275
Less: Minority Interest 2,618,006 - 2,618,006
--------- ---------
Net Adjustment $ 11,159,472 $ 286,797 $ 11,446,269
</TABLE>
F-32
(4)Represents the issuance of 1,205,077 shares of Company stock valued at
$11,255,417 based upon a per share price of $9.34 as follows:
<TABLE>
<CAPTION>
Exchange L.P. Units Trust Shares
Ratio Outstanding Issued Value
----- ----------- ------ -----
<S> <C> <C> <C> <C>
Taylor Income Investors III, Ltd. 132.40 378.00 50,047 $ 467,439
Taylor Income Investors IV, Ltd. 91.11 246.00 22,414 209,346
Taylor Income Investors V, Ltd. 98.42 192.00 18,896 176,488
Taylor Income Investors VI, Ltd. 102.69 120.00 12,323 115,097
AAA Net Realty Fund VII, Ltd. 98.03 450.00 44,114 412,025
AAA Net Realty Fund VIII, Ltd. 105.36 744.00 78,389 732,153
AAA Net Realty Fund Goodyear, Ltd. 88.17 534.00 47,082 439,746
AAA Net Realty Fund IX, Ltd. 97.88 2156.20 211,052 1,971,225
AAA Net Realty Fund X, Ltd. 96.80 4581.45 443,469 4,142,000
AAA Net Realty Fund XI, Ltd. 97.42 2824.49 275,150 2,569,901
------- ---------
Total Limited Partners 1,202,936 11,235,420
General Partners 2,141 19,997
----- ------
Total 1,205,077 $11,255,417
</TABLE>
The share price was agreed to by the General Partner of each of the Partnerships
and the Independent Directors of the Company based upon the price of the
Company's shares in its last public offering reduced by selling commissions and
related expenses.
(5)Represents estimated legal and professional fees, which will be capitalized
as acquisition costs.
(6)Represents notes to 20% of the limited partners in lieu of Company
stock.
(7)Represents the issuance of 3,702 shares of the Company's stock based upon a
per share price of $9.34. The shares will be acquired with cash by a
shareholder of the Corporate General Partner of each Partnership (who is also
the Company's president) under a contractual obligation whereby the shares
will be purchased by the shareholder with proceeds he will receive from the
disposition fees paid to him in connection with the Merger. The issuance of
these shares will occur on the effective date of the Merger.
F-33
<TABLE>
AMERICAN ASSET ADVISERS TRUST, INC.
PRO FORMA STATEMENT OF OPERATIONS (1)
FOR THE YEAR ENDED DECEMBER 31, 1997
(UNAUDITED)
<CAPTION>
Pro Forma Pro Forma
Historical Adviser and Properties and Pro Forma
Company Adjustment (2) Adjustments (4) Total
REVENUES
<S> <C> <C> <C> <C>
Rental income from operating leases $1,217,187 - $ 1,079,992 $2,297,179
Earned income from direct financing leases 339,628 - - 339,628
Service fee income - 167,435 - 167,435
Commission income, net - 141,813 - 141,813
Interest income 153,895 - 1,787 155,682
TOTAL REVENUES 1,710,710 309,248 1,081,779 3,101,737
EXPENSES
General operating and administrative 112,464 76,913 26,855 216,232
Reimbursements and fees to related party 106,504 - - 106,504
Amortization 62,754 32 - 62,786
Depreciation 146,015 15,431 272,618 434,064
Interest 6,000 18,202 168,531 192,733
Acquisition costs (3) 282,890 (282,890) - -
TOTAL EXPENSES 716,627 (172,312) 468,004 1,012,319
PRO FORMA INCOME BEFORE MINORITY
INTEREST IN NET INCOME OF
CONSOLIDATED JOINT VENTURES 994,083 481,560 613,775 2,089,418
MINORITY INTEREST IN NET INCOME OF
CONSOLIDATED JOINT VENTURES (455,226) - 227,613 (227,613)
PRO FORMA NET INCOME $ 538,857 $ 481,560 $ 841,388 $1,861,805
PRO FORMA EARNINGS PER SHARE:
Basic $ 0.34 $ 0.62
Diluted $ 0.33 $ 0.61
WEIGHTED AVERAGE COMMON AND
COMMON EQUIVALENT SHARES
OUTSTANDING:
Basic 1,563,048 3,015,349
Diluted 1,624,217 3,076,518
See Notes to Pro Forma Statement of Operations.
</TABLE>
F-34
AMERICAN ASSET ADVISERS TRUST, INC.
NOTES TO PRO FORMA STATEMENT OF OPERATIONS
(UNAUDITED)
(1)Adjustments are reflected as if the acquisition of the Partnership
properties and the Adviser was effective as of January 1, 1997. The
Partnership properties include the acquisition of a minority interest in
several joint ventures with the Company. Pro forma adjustments from the
acquisition of Partnership properties are based on the assumption that the
acquisitions are approved by 50% of the limited partners and that 20% of the
partners elect to take a note in lieu of Company stock. The pro forma entries
assume that the Company will maintain control over the properties to be
acquired.
(2)Includes pro forma adjustments as follows:
o Commission income, amortization expense, depreciation expense and interest
expense are recorded at historical amounts.
o Service fee income is recorded for administrative, acquisition and manage-
ment services provided to entities other than the Company. Service fee
income of $1,370,032 for services provided to the Company have been
excluded as those fees were either capitalized or expensed by the Company
as incurred.
o General and administrative expenses include costs incurred in providing
various administrative, acquisition and management services to entities
other than the Company. Of the Adviser's historical general and
administrative expenses for the period, $1,507,429 which have been
allocated to the Company or have been capitalized by the Company have
been excluded from the pro-forma totals.
(3)To the extent that the consideration paid for the Adviser exceeds the fair
market value of the net tangible assets received, an expense will be recorded
as an operating expense on the Company's Statement of Operations. Because the
purpose of the pro forma statement of operations is to reflect the expected
continuing impact of the merger on the Company, this adjustment has not been
included. At the closing of the merger, this expense will be recorded as an
operating expense. For the year ended December 31, 1997, this pro forma
expense would have been $3,426,647 based on the issuance of 213,260 shares at
closing on January 1, 1997 and 121,047 additional shares issued during the
year in accordance with the partial satisfaction of the share balance
issuance criteria described in the Agreement and Plan of Merger. Up to
686,740 shares of stock are contingently issuable for a period of up to 24
calendar quarters following the closing of the transaction. Within 30 days
after the end of each calendar quarter, shares will be issued up to the level
where total shares issued to the shareholder of the Adviser pursuant to the
acquisition of the Adviser does not exceed 9.8% of the Company's total shares
then issued and outstanding. Based on the pro forma financial statement
565,693 of the shares remain at December 31, 1997. The issuance of these
additional shares will be expensed as they are issued.
Pro forma weighted average shares outstanding consists of the historical
weighted average shares outstanding of the Company, the shares issued for
both mergers on January 1, 1997 and 25% of the additional shares issued for
the Adviser during 1997.
(4)Includes pro forma adjustments as follows:
o Rental income, which reflects historical rental income of the operating
properties, is included from Partnership properties which have not been
consolidated by the Company. Six of the Partnerships' properties which are
majority owned by the Company are included in the historical financial
information of the Company. These properties were acquired through joint
ventures with AAA Net Realty Funds X and XI, Ltd.
o Interest income is included from a note receivable acquired along with the
Partnership properties.
o Depreciation is included based upon the purchase price which represents
the fair market value of the buildings over 33 years. The purchase price
of the properties has been allocated 70% to buildings and 30% to land.
o Interest expense on notes payable to certain limited partners computed
at 6% of the outstanding balance.
o General and administrative expenses are included primarily for legal and
professional fees.
o The Partnership interest in certain properties which are majority owned by
the Company is eliminated as the historical financial statements of the
Company are reflected on a consolidated basis.
F-35
<TABLE>
AMERICAN ASSET ADVISERS TRUST, INC.
PRO FORMA STATEMENT OF OPERATIONS (1)
FOR THE SIX MONTHS ENDED JUNE 30, 1998
(UNAUDITED)
<CAPTION>
Pro Forma Pro Forma
Historical Adviser and Properties and Pro Forma
Company Adjustments (2) Adjustments (3) Total
REVENUES
<S> <C> <C> <C> <C>
Rental income from operating leases $ 963,206 - $ 571,772 $1,534,978
Earned income from direct financing leases 170,254 - - 170,254
Service fee income 12,931 130,870 - 143,801
Interest income 40,722 - 5,237 45,959
TOTAL REVENUES 1,187,113 130,870 577,009 1,894,992
EXPENSES
General operating and administrative 161,345 92,819 16,987 271,151
Reimbursements and fees to related party 57,800 - - 57,800
Amortization 31,377 177 - 31,554
Depreciation 130,745 8,644 132,595 271,984
Interest 37,831 3,896 84,266 125,993
Merger costs 2,389,918 (2,389,918) - -
Potential acquisition costs 182,741 (182,741) - -
TOTAL EXPENSES 2,991,757 (2,467,123) 233,848 758,482
PRO FORMA INCOME BEFORE MINORITY
INTEREST IN NET INCOME OF
CONSOLIDATED JOINT VENTURES (1,804,644) 2,597,993 343,161 1,136,510
MINORITY INTEREST IN NET INCOME OF
CONSOLIDATED JOINT VENTURES (263,068) - 131,534 (131,534)
PRO FORMA NET INCOME (LOSS) $(2,067,712) $ 2,597,993 $ 474,695 $1,004,976
PRO FORMA EARNINGS (LOSS) PER SHARE:
Basic $ (1.00) $ 0.28
Diluted $ (1.00) $ 0.28
WEIGHTED AVERAGE COMMON AND
COMMON EQUIVALENT SHARES
OUTSTANDING:
Basic 2,075,216 3,582,955
Diluted 2,075,216 3,582,955
See Notes to Pro Forma Statement of Operations.
</TABLE>
F-36
AMERICAN ASSET ADVISERS TRUST, INC.
NOTES TO PRO FORMA STATEMENT OF OPERATIONS
(UNAUDITED)
(1)Adjustments are reflected as if the acquisition of the Partner ship
properties and the Adviser was effective as of January 1, 1997. The
Partnership properties include the acquisition of a minority interest in
several joint ventures with the Company. Pro forma adjustments from the
acquisition of Partnership properties are based on the assumption that the
acquisitions are approved by 50% of the limited partners and that 20% of
the partners elect to take a note in lieu of Company stock. The pro forma
entries assume that the Company will maintain control over the properties
to be acquired.
(2)Includes pro forma adjustments as follows:
o Commission income, amortization expense, depreciation expense and interest
expense are recorded at historical amounts.
o Service fee income is recorded for administrative, acquisition and manage-
ment services provided to entities other than the Company. Service fee
income of $459,472 for services provided to the Company have been excluded
as those fees were either capitalized or expensed by the Company as
incurred.
o General and administrative expenses include costs incurred in providing
various administrative, acquisition and management services to entities
other than the Company. Of the Adviser's historical general and
administrative expenses for the period, $585,164 which have been
allocated to the Company or have been capitalized by the Company have
been excluded from the pro-forma totals.
(3)Includes pro forma adjustments as follows:
o Rental income, which reflects historical rental income of the operating
properties, is included from Partnership properties which have not been
consolidated by the Company. Six of the Partnerships' properties which
are majority owned by the Company are included in the historical
financial information of the Company. These properties were acquired
through joint ventures with AAA Net Realty Funds X and XI, Ltd.
o Interest income is included from a note receivable acquired along with the
Partnership properties.
o Depreciation is included based upon the purchase price which represents
the fair market value of the buildings over 33 years. The purchase price
of the properties has been allocated 70% to buildings and 30% to land.
o Interest expense on notes payable to certain limited partners computed at
6% of the outstanding balance.
o General and administrative expenses are included primarily for legal
and professional fees.
o The Partnership interest in certain properties which are majority owned
by the Company is eliminated as the historical financial statements of
the Company are reflected on a consolidated basis.
F-37
<TABLE>
AMERICAN ASSET ADVISERS TRUST, INC.
PRO FORMA BALANCE SHEET (1)
JUNE 30, 1998
(UNAUDITED)
<CAPTION>
Pro Forma Pro Forma
Historical Adviser and Properties and Pro Forma
Company Adjustments Adjustments Total
ASSETS
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 1,377,760 $ - $ 207,573 (3) $1,619,908
34,575 (7)
Accounts receivable 170,055 - 5,456 (3) 175,511
Property, net 26,464,197 - 11,159,472 (3) 37,778,969
155,300 (5)
Net investment in direct financing leases 3,166,333 - - 3,166,333
Note receivable - - 102,523 (3) 102,523
Other assets 688,995 - - 688,995
Total assets $31,867,340 $ - $11,664,899 $43,532,239
LIABILITIES & SHAREHOLDERS'
& PARTNERS' EQUITY
LIABILITIES
Notes payable $ 8,732,150 $ - $ 4,915,495 (6) $13,647,645
Accounts payable 157,070 - 155,300 (5) 329,477
17,107 (3)
Security deposit 15,050 - 11,650 (3) 26,700
Total liabilities 8,904,270 - 5,099,552 14,003,822
MINORITY INTEREST 5,236,013 - (2,618,006)(5) 2,618,007
SHAREHOLDERS' AND PARTNERS' EQUITY
Preferred stock, $.01 par value, 10,000,000
shares authorized, none issued
Common Stock, $.01 par value, 100,000,000
shares authorized, 2,374,306 and 3,485,891
shares issued and outstanding on historical 23,743 (2) 1,284 (2) 37 (7) 34,859
and pro-forma basis, respectively 9,795 (3),(4)
Capital in excess of par value 21,554,401 (2) 1,314,375 (2) 9,138,983 (3),(4)32,042,297
34,538 (7)
Accumulated distributions in excess of
earnings (3,851,087)(2) (1,315,659)(2) - (5,166,746)
Total shareholders' and partners' equity 17,727,057 - 9,183,353 26,910,410
Total liabilities and shareholders'
and partners' equity $31,867,340 $ - $11,664,899 $43,532,239
See Notes to Pro Forma Balance Sheet.
</TABLE>
F-38
AMERICAN ASSET ADVISERS TRUST, INC.
NOTES TO PRO FORMA BALANCE SHEET
(UNAUDITED)
(1)Adjustments are reflected as if the acquisition of the Partnership properties
was completed on June 30, 1998. The Partnership properties include the
acquisition of a minority interest in several joint ventures with the
Company. Pro forma adjustments from the acquisition of the Partnership
properties are based on the assumption that the acquisitions are approved by
50% of the limited partners and that 35% of these partners elect to take a
note in lieu of Company stock. All of the Partnership properties have the
same characteristics and, therefore, the 50% assumption is provided to assist
the reader in evaluating various scenarios. The pro forma entries assume that
the Company will maintain control over the properties to be acquired.
(2)On June 5, 1998, the Company's shareholders voted to approve an agreement
and plan of merger with the Adviser whereby the stockholder of the Adviser
agreed to exchange 100% of the outstanding shares of common stock of the
Adviser for up to 900,000 shares of the Company's stock. According to the
Agreement and Plan of Merger between the Company and the Adviser, 213,260
shares of common stock are issuable effective June 5, 1998. The issuance of
these shares is reflected in the historical financial information of the
Company included with the Pro Forma Balance Sheet.
In addition, up to 686,740 shares of stock valued at $7,039,085 are
contingently issuable for a period of up to 24 calendar quarters following
the closing of the transaction. Within 30 days after the end of each calendar
quarter, shares will be issued up to the level where total shares issued to
the shareholder of the Adviser pursuant to the acquisition of the Adviser
does not exceed 9.8% of the Company's total shares then issued and
outstanding. The issuance of these additional shares will be expensed as they
are issued. Accordingly, the Pro Forma Balance Sheet includes an adjustment
to reflect the issuance of 128,357 additional shares of common stock, leaving
a balance of 558,383 shares.
(3)Represents adjustments for the purchase method of accounting whereby the net
assets owned by the Partnerships are recorded based on the estimated fair
market value of the properties acquired, cash, receivables, payables
and security deposits of the Partnerships as follows:
<TABLE>
<CAPTION>
Real Estate Other Total Purchase Price
<S> <C> <C> <C>
Taylor Income Investors III, Ltd. $ 550,000 $ 34,293 $ 584,293
Taylor Income Investors IV, Ltd. 197,396 64,284 261,680
Taylor Income Investors V, Ltd. 160,082 60,529 220,611
Taylor Income Investors VI, Ltd. 142,500 1,370 143,870
AAA Net Realty Fund VII, Ltd. 505,000 15,230 520,230
AAA Net Realty Fund VIII, Ltd. 900,000 24,440 924,440
AAA Net Realty Fund Goodyear, Ltd. 545,000 10,246 555,246
AAA Net Realty Fund IX, Ltd. 2,425,000 39,031 2,464,031
AAA Net Realty Fund X, Ltd. 5,177,500 0 5,177,500
AAA Net Realty Fund XI, Ltd. 3,175,000 37,374 3,212,374
13,777,478 286,797 14,064,275
---------- ------- ----------
Less: Minority Interest 2,618,006 - 2,618,006
Net Adjustment $ 11,159,472 $ 286,797 $11,446,269
</TABLE>
F-39
(4)Represents the issuance of 979,526 shares of Company stock valued at
$9,148,778 based upon a per share price of $9.34 as follows:
<TABLE>
<CAPTION>
Exchange L.P. Units Trust Shares
Ratio Outstanding Issued Value
<S> <C> <C> <C> <C>
Taylor Income Investors III, Ltd. 132.40 307.12 40,663 $ 379,793
Taylor Income Investors IV, Ltd. 91.11 199.88 18,211 170,091
Taylor Income Investors V, Ltd. 98.42 156.00 15,353 143,397
Taylor Income Investors VI, Ltd. 102.69 97.50 10,012 93,513
AAA Net Realty Fund VII, Ltd. 98.03 365.63 35,842 334,765
AAA Net Realty Fund VIII, Ltd. 105.36 604.50 63,691 594,874
AAA Net Realty Fund Goodyear, Ltd. 88.17 433.88 38,255 357,302
AAA Net Realty Fund IX, Ltd. 97.88 1751.92 171,480 1,601,624
AAA Net Realty Fund X, Ltd. 96.80 3722.42 360,318 3,365,371
AAA Net Realty Fund XI, Ltd. 97.42 2294.90 223,560 2,088,051
------- ---------
Total Limited Partners 977,385 9,128,781
General Partners 2,141 19,997
------- --------
Total 979,526 $ 9,148,778
The share price was agreed to by the General Partner of each of the Partnerships
and the Independent Directors of the Company based upon the price of the
Company's shares in its last public offering reduced by selling commissions and
related expenses.
(5)Represents estimated legal and professional fees, which will be capitalized
as acquisition costs.
(6)Represents notes to 35% of the limited partners in lieu of Company
stock.
(7)Represents the issuance of 3,702 shares of the Company's stock based upon a
per share price of $9.34. The shares will be acquired with cash by a
shareholder of the Corporate General Partner of each Partnership (who is also
the Company's president) under a contractual obligation whereby the shares
will be purchased by the shareholder with proceeds he will receive from the
disposition fees paid to him in connection with the Merger. The issuance of
these shares will occur on the effective date of the Merger.
F-40
</TABLE>
<TABLE>
AMERICAN ASSET ADVISERS TRUST, INC.
PRO FORMA STATEMENT OF OPERATIONS (1)
FOR THE YEAR ENDED DECEMBER 31, 1997
(UNAUDITED)
<CAPTION>
Pro Forma Pro Forma
Historical Adviser and Properties and ProForma
Company Adjustment (2) Adjustments (4) Total
REVENUES
<S> <C> <C> <C> <C>
Rental income from operating leases $1,217,187 - $1,079,992 $2,297,179
Earned income from direct financing leases 339,628 - - 339,628
Service fee income - 167,435 - 167,435
Commission income, net - 141,813 - 141,813
Interest income 153,895 - 1,787 155,682
TOTAL REVENUES 1,710,710 309,248 1,081,779 3,101,737
EXPENSES
General operating and administrative 112,464 76,913 26,855 216,232
Reimbursements and fees to related party 106,504 - - 106,504
Amortization 62,754 32 - 62,786
Depreciation 146,015 15,431 272,618 434,064
Interest 6,000 18,202 294,930 319,132
Acquisition costs (3) 282,890 (282,890) - -
TOTAL EXPENSES 716,627 (172,312) 594,403 1,138,718
PRO FORMA INCOME BEFORE MINORITY
INTEREST IN NET INCOME OF
CONSOLIDATED JOINT VENTURES 994,083 481,560 487,376 1,963,019
MINORITY INTEREST IN NET INCOME OF
CONSOLIDATED JOINT VENTURES (455,226) - 227,613 (227,613)
PRO FORMA NET INCOME $ 538,857 $481,560 $ 714,989 $1,735,406
PRO FORMA EARNINGS PER SHARE:
Basic $ 0.34 $ 0.62
Diluted $ 0.33 $ 0.61
WEIGHTED AVERAGE COMMON AND
COMMON EQUIVALENT SHARES
OUTSTANDING:
Basic 1,563,048 2,783,672
Diluted 1,624,217 2,844,841
See Notes to Pro Forma Statement of Operations.
</TABLE>
F-41
AMERICAN ASSET ADVISERS TRUST, INC.
NOTES TO PRO FORMA STATEMENT OF OPERATIONS
(UNAUDITED)
(1)Adjustments are reflected as if the acquisition of the Partnership
properties and the Adviser was effective as of January 1, 1997. The
Partnership properties include the acquisition of a minority interest in
several joint ventures with the Company. Pro forma adjustments from the
acquisition of Partnership properties are based on the assumption that the
acquisitions are approved by 50% of the limited partners and that 35% of the
partners elect to take a note in lieu of Company stock. The pro forma entries
assume that the Company will maintain control over the properties to be
acquired.
(2) Includes pro forma adjustments as follows:
o Commission income, amortization expense, depreciation expense and interest
expense are recorded at historical amounts.
o Service fee income is recorded for administrative, acquisition and manage-
ment services provided to entities other than the Company. Service fee
income of $1,370,032 for services provided to the Company have been
excluded as those fees were either capitalized or expensed by the Company
as incurred.
o General and administrative expenses include costs incurred in providing
various administrative, acquisition and management services to entities
other than the Company. Of the Adviser's historical general and
administrative expenses for the period, $1,507,429 which have been
allocated to the Company or have been capitalized by the Company have
been excluded from the pro-forma totals.
(3) To the extent that the consideration paid for the Adviser exceeds the
fair market value of the net tangible assets received, an expense will be
recorded as an operating expense on the Company's Statement of Operations.
Because the purpose of the pro forma statement of operations is to reflect
the expected continuing impact of the merger on the Company, this adjustment
has not been included. At the closing of the merger, this expense will be
recorded as an operating expense. For the year ended December 31, 1997,
this pro forma expense would have been $3,175,471 based on the issuance of
213,260 shares at closing on January 1, 1997 and 96,542 additional shares
issued during the year in accordance with the partial satisfaction
of the share balance issuance criteria described in the Agreement and Plan
of Merger. Up to 686,740 shares of stock are contingently issuable for
a period of up to 24 calendar quarters following the closing of the
transaction. Within 30 days after the end of each calendar quarter, shares
will be issued up to the level where total shares issued to the shareholder
of the Adviser pursuant to the acquisition of the Adviser does not exceed
9.8% of the Company's total shares then issued and outstanding. Based
on the pro forma financial statement 590,198 of the shares remain at
December 31, 1997. The issuance of these additional shares will be
expensed as they are issued.
Pro forma weighted average shares outstanding consists of the historical
weighted average shares outstanding of the Company, the shares issued for
both mergers on January 1, 1997 and 25% of the additional shares issued for
the Adviser during 1997.
(4) Includes pro forma adjustments as follows:
o Rental income, which reflects historical rental income of the operating
properties, is included from Partnership properties which have not been
consolidated by the Company. Six of the Partnerships' properties which are
majority owned by the Company are included in the historical financial
information of the Company. These properties were acquired through joint
ventures with AAA Net Realty Funds X and XI, Ltd.
o Interest income is included from a note receivable acquired along with the
Partnership properties.
o Depreciation is included based upon the purchase price which represents
the fair market value of the buildings over 33 years. The purchase price
of the properties has been allocated 70% to buildings and 30% to land.
o Interest expense on notes payable to certain limited partners computed
at 6% of the outstanding balance.
o General and administrative expenses are included primarily for legal and
professional fees.
o The Partnership interest in certain properties which are majority owned by
the Company is eliminated as the historical financial statements of the
Company are reflected on a consolidated basis.
F-42
<TABLE>
AMERICAN ASSET ADVISERS TRUST, INC.
PRO FORMA STATEMENT OF OPERATIONS (1)
FOR THE SIX MONTHS ENDED JUNE 30, 1998
(UNAUDITED)
<CAPTION>
Pro Forma Pro Forma
Historical Adviser and Properties and ProForma
Company Adjustments (2) Adjustments (3) Total
REVENUES
<S> <C> <C> <C> <C>
Rental income from operating leases $ 963,206 - $ 571,772 $1,534,978
Earned income from direct financing leases 170,254 - - 170,254
Service fee income 12,931 130,870 - 143,801
Interest income 40,722 - 5,237 45,959
TOTAL REVENUES 1,187,113 130,870 577,009 1,894,992
EXPENSES
General operating and administrative 161,345 92,819 16,987 271,151
Reimbursements and fees to related party 57,800 - - 57,800
Amortization 31,377 177 - 31,554
Depreciation 130,745 8,644 132,595 271,984
Interest 37,831 3,896 147,465 189,192
Merger costs 2,389,918 (2,389,918) - -
Potential acquisition costs 182,741 (182,741) - -
TOTAL EXPENSES 2,991,757 (2,467,123) 297,047 821,681
PRO FORMA INCOME BEFORE MINORITY
INTEREST IN NET INCOME OF
CONSOLIDATED JOINT VENTURES (1,804,644) 2,597,993 279,962 1,073,311
MINORITY INTEREST IN NET INCOME OF
CONSOLIDATED JOINT VENTURES (263,068) - 131,534 (131,534)
PRO FORMA NET INCOME (LOSS) $(2,067,712) $2,597,993 $ 411,496 $941,777
PRO FORMA EARNINGS (LOSS) PER SHARE:
Basic $ (1.00) $ 0.28
Diluted $ (1.00) $ 0.28
WEIGHTED AVERAGE COMMON AND
COMMON EQUIVALENT SHARES
OUTSTANDING:
Basic 2,075,216 3,332,899
Diluted 2,075,216 3,332,899
See Notes to Pro Forma Statement of Operations.
</TABLE>
F-43
AMERICAN ASSET ADVISERS TRUST, INC.
NOTES TO PRO FORMA STATEMENT OF OPERATIONS
(UNAUDITED)
(1) Adjustments are reflected as if the acquisition of the Partnership
properties and the Adviser was effective as of January 1, 1997. The
Partnership properties include the acquisition of a minority interest in
several joint ventures with the Company. Pro forma adjustments from the
acquisition of Partnership properties are based on the assumption that the
acquisitions are approved by 50% of the limited partners and that 35% of
the partners elect to take a note in lieu of Company stock. The pro forma
entries assume that the Company will maintain control over the properties
to be acquired.
(2) Includes pro forma adjustments as follows:
o Commission income, amortization expense, depreciation expense and interest
expense are recorded at historical amounts.
o Service fee income is recorded for administrative, acquisition and manage-
ment services provided to entities other than the Company. Service fee
income of $459,472 for services provided to the Company have been excluded
as those fees were either capitalized or expensed by the Company as
incurred.
o General and administrative expenses include costs incurred in providing
various administrative, acquisition and management services to entities
other than the Company. Of the Adviser's historical general and
administrative expenses for the period, $585,164 which have been
allocated to the Company or have been capitalized by the Company have
been excluded from the pro-forma totals.
(3) Includes pro forma adjustments as follows:
o Rental income, which reflects historical rental income of the operating
properties, is included from Partnership properties which have not been
consolidated by the Company. Six of the Partnerships' properties which
are majority owned by the Company are included in the historical
financial information of the Company. These properties were acquired
through joint ventures with AAA Net Realty Funds X and XI, Ltd.
o Interest income is included from a note receivable acquired along with the
Partnership properties.
o Depreciation is included based upon the purchase price which represents
the fair market value of the buildings over 33 years. The purchase price
of the properties has been allocated 70% to buildings and 30% to land.
o Interest expense on notes payable to certain limited partners computed at
6% of the outstanding balance.
o General and administrative expenses are included primarily for legal
and professional fees.
o The Partnership interest in certain properties which are majority owned
by the Company is eliminated as the historical financial statements of
the Company are reflected on a consolidated basis.
F-44
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
AMREIT, INC.
CONSOLIDATED BALANCE SHEET
JUNE 30, 1998
(Unaudited)
<CAPTION>
<S> <C>
ASSETS
Cash and cash equivalents $ 1,377,760
Accounts receivable 170,055
Property:
Escrow deposits 35,000
Land 9,106,583
Buildings 14,314,991
Construction in progress 3,415,681
Furniture, fixture and equipment 63,960
26,936,215
Accumulated depreciation (472,018)
Total property 26,464,197
Net investment in direct financing leases 3,166,333
Other assets:
Preacquisition costs 430,972
Accrued rental income 199,304
Organization costs, net of accumulated amortization of $255,049 58,719
Total other assets 688,995
TOTAL ASSETS $31,867,340
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Notes payable $ 8,732,150
Accounts payable 157,070
Security deposit 15,050
TOTAL LIABILITIES 8,904,270
Minority interest 5,236,013
Commitments (Note 7)
Shareholders' equity:
Preferred stock, $.01 par value, 10,000,000 shares authorized,
none issued
Common stock, $.01 par value, 100,000,000 shares authorized,
2,374,306 shares issued and outstanding 23,743
Capital in excess of par value 21,554,401
Accumulated distributions in excess of earnings (3,851,087)
TOTAL SHAREHOLDERS' EQUITY 17,727,057
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $31,867,340
See Notes to Consolidated Financial Statements.
</TABLE>
F-45
<TABLE>
AMREIT, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1998 AND JUNE 30, 1997
(Unaudited)
<CAPTION>
Quarter Year to Date
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Revenues:
Rental income from operating leases $ 527,197 $ 270,976 $ 963,206 $ 523,586
Earned income from direct financing leases 85,151 84,885 170,254 169,726
Advisory fee income 12,931 - 12,931 -
Interest income 20,940 43,819 40,722 73,347
Total revenues 646,219 399,680 1,187,113 766,659
Expenses:
General operating and administrative 92,552 33,404 161,345 64,948
Reimbursements and fees to related party 40,140 13,308 57,800 27,000
Interest 10,936 3,000 37,831 6,000
Depreciation 73,796 31,483 130,745 59,920
Amortization 15,689 15,689 31,377 31,377
Merger costs (Note 5) 2,339,635 - 2,389,918 -
Potential acquisition costs 50,702 - 182,741 -
Total expenses 2,623,450 96,884 2,991,757 189,245
Income (loss) before minority interest in
net income of consolidated joint ventures (1,977,231) 302,796 (1,804,644) 577,414
Minority interest in net income of consolidated
joint ventures (127,709) (101,015) (263,068) (194,466)
Net income (loss) $(2,104,940) $ 201,781 $(2,067,712) $ 382,948
Basic earnings (loss) per share $ (0.95) $ 0.14 $ (1.00) $ 0.28
Diluted earnings (loss) per share $ (0.95) $ 0.13 $ (1.00) $ 0.26
Weighted average number of common shares
outstanding 2,222,662 1,478,854 2,075,216 1,392,503
Weighted average number of common shares
outstanding plus dilutive potential
common shares 2,222,662 1,540,333 2,075,216 1,453,982
See Notes to Consolidated Financial Statements.
</TABLE>
F-46
<TABLE>
AMREIT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1998 AND JUNE 30, 1997
(Unaudited)
<CAPTION>
Quarter Year to Date
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $(2,104,940) $ 201,781 $(2,067,712) 382,948
Adjustments to reconcile net income (loss) to net cash
flows from operating activities:
Amortization 15,689 15,689 31,377 31,377
Depreciation 73,796 31,483 130,745 59,920
Merger costs 2,283,322 - 2,283,322 -
Decrease (increase) in accounts receivable (132,009) - (45,455) 5,119
Increase (decrease) in accounts payable 155,528 (5,200) 62,752 (1,791)
Cash receipts from direct financing leases
less than income recognized (2,593) (2,328) (5,137) (4,612)
Decrease (increase) in escrow deposits, net of
minority interest partners (24,000) 38,250 (23,900) 38,250
Increase in accrued rental income (883) (19,473) (31,125) (38,946)
Increase in other assets - (47,083) - (47,083)
Increase in minority interest 127,709 101,015 263,068 194,466
Net cash provided by operating activities 391,619 314,134 597,935 619,648
Cash flows from investing activities:
Acquisition of real estate (947,694) (1,517,005) (4,679,217)(1,519,004)
Change in preacquisition costs (29,210) (75,256) (58,286) (155,700)
Net cash used in investing activities (976,904) (1,592,261) (4,737,503)(1,674,704)
Cash flows from financing activities:
Proceeds from issuance of stock, net 1,337,108 1,769,564 2,479,782 3,143,471
Proceeds from (reduction of) notes payable (134,141) - 2,653,254 -
Distributions paid to shareholders (387,634) (258,652) (729,599) (486,038)
Distributions to minority interest partners (147,761) (103,712) (287,849) (198,425)
Net cash provided by financing activities 667,572 1,407,200 4,115,588 2,459,008
Net increase (decrease) in cash and cash equivalents 82,287 129,073 (23,980) 1,403,952
Cash and cash equivalents at beginning of period 1,295,473 2,891,190 1,401,740 1,616,311
Cash and cash equivalents at end of period $ 1,377,760 $3,020,263 $ 1,377,760 $3,020,263
Supplemental disclosure of non-cash financing activities:
Real estate contributed by partners of the
consolidated joint ventures $ - $1,392,780 $ - $1,392,780
Issuance of stock in lieu of note payment $ 170,000 $ - $ 170,000 $ -
Issuance of stock in connection with Merger $ 2,244,380 $ - $ 2,244,380 $ -
See Notes to Consolidated Financial Statements.
</TABLE>
F-47
AMREIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1998 AND JUNE 30, 1997
(Unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
AmREIT, Inc. ("the Company"), formerly American Asset Advisers
Trust, Inc., was incorporated on August 17, 1993 as a Maryland
corporation. The initial issuance of 20,001 shares of stock
for $200,010 was to American Asset Advisers Realty Corporation
("AAA"). Commencing March 17, 1994, the Company offered up to
2,000,000 additional shares of common stock together with
1,000,000 warrants. The warrants were exercisable at $9 per
share until March 15, 1998. The offering period of the
initial public offering terminated on March 15, 1996 with
1,008,252 shares being issued. In addition, 57,316 shares
were issued from the exercise of the Warrants. On June 18,
1996, the Company commenced a follow-on offering of up to
2,853,659 additional shares of its common stock. The offering
was terminated on May 22, 1998 with 1,056,946 shares being
issued.
The Company was formed with the intention to qualify and to
operate as a real estate investment trust under federal tax
laws. The Company will acquire commercial and industrial
properties using invested and borrowed funds.
The consolidated financial statements include the accounts of
AmREIT, Inc., its wholly-owned subsidiaries and its six joint
ventures with related parties. All significant intercompany
accounts and transactions have been eliminated in
consolidation. The Company owns greater than 50% of these
joint ventures and exercises control over operations.
The financial records of the Company are maintained on the
accrual basis of accounting whereby revenues are recognized
when earned and expenses are reflected when incurred.
For purposes of the statement of cash flows, the Company
considers all highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents.
There has been no cash paid for income taxes during 1998 or
1997. For the three and six months ended June 30, 1998, the
Company paid interest of $163,015 and $316,518, respectively,
of which $152,079 and $278,687 were capitalized on properties
under construction. There was no other cash paid for interest
during the first six months of 1998 or 1997.
Real estate is leased to others on a net lease basis whereby
all operating expenses related to the properties including
property taxes, insurance and common area maintenance are the
responsibility of the tenant. The leases are accounted for
under the operating method or the direct financing method.
Under the operating lease method, the properties are recorded
at cost. Rental income is recognized ratably over the life of
the lease and depreciation is charged based upon the estimated
useful life of the property.
Under the direct financing lease method, properties are
recorded at their net investment. Unearned income is deferred
and amortized to income over the life of the lease so as to
produce a constant periodic rate of return.
F-48
Expenditures related to the development of real estate are
carried at cost plus capitalized carrying charges, acquisition
costs and development costs. Carrying charges, primarily
interest and loan acquisition costs, and direct and indirect
development costs related to buildings under construction are
capitalized as part of construction in progress. The Company
capitalizes acquisition costs once the acquisition of the
property becomes probable.
Management reviews its properties for impairment whenever
events or changes in circumstances indicate that the carrying
amount of the assets, including accrued rental income, may not
be recoverable through operations. Management determines
whether an impairment in value occurred by comparing the
estimated future cash flows (undiscounted and without interest
charges), including the residual value of the property, with
the carrying cost of the individual property. If an
impairment is indicated, a loss will be recorded for the
amount by which the carrying value of the asset exceeds its
fair value.
Buildings are depreciated using the straight-line method over
an estimated useful life of 39 years.
Organization costs incurred in the formation of the Company
are amortized on a straight-line basis over five years.
Issuance costs incurred in the raising of capital through the
sale of common stock are treated as a reduction of
shareholders' equity.
The Company is qualified as a real estate investment trust
("REIT") under the Internal Revenue Code of 1986, and is,
therefore, not subject to Federal income taxes provided it
meets all conditions specified by the Internal Revenue Code
for retaining its REIT status, including the requirement that
at least 95% of its real estate investment trust taxable
income is distributed by March 15 of the following year.
The preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those
estimates.
The Company believes the carrying value of financial
instruments consisting of cash, cash equivalents, accounts
receivable and accounts and notes payable approximate their
fair value.
The accompanying unaudited financial statements have been
prepared in accordance with the instructions to Form 10-QSB
and do not include all of the disclosures required by
generally accepted accounting principles. The financial
statements reflect all normal and recurring adjustments which
are, in the opinion of management, necessary to present a fair
statement of results for the three and six month periods ended
June 30, 1998 and June 30, 1997.
The financial statements of AmREIT, Inc. contained herein
should be read in conjunction with the financial statements
included in the Company's annual report on Form 10-KSB for the
year ended December 31, 1997.
F-49
2. NOTES PAYABLE
In December 1997, the Company entered into an amended and
restated unsecured revolving credit agreement (the "Amended
Credit Agreement") with a borrowing capacity up to $15,000,000
through February 1999. The actual amount available to the
Company is dependent on certain covenants such as the value of
unencumbered assets. The Amended Credit Agreement bears
interest at 2.00% over varying London Interbank Offered Rates
and it is being used to acquire additional properties. As of
June 30, 1998, $8,568,884 was outstanding under the Amended
Credit Agreement.
In addition, the Company has a note payable to its president
in the amount of $163,266 plus accrued interest totaling $925
as of June 30, 1998. This note is unsecured, payable upon
demand and bears interest at 8%. Interest incurred on this
note was $925 in the second quarter of 1998.
3. MAJOR TENANTS
The following schedule summarizes rental income by lessee for
the three and six months ended June 30, 1998 and June 30, 1997:
Quarter Year to Date
1998 1997 1998 1997
Tandy Corporation $27,225 $27,225 $54,450 $54,450
America's Favorite Chicken Co. 24,566 24,482 49,132 48,964
Blockbuster Music Retail, Inc. 94,476 94,476 188,952 188,952
One Care Health Industries, Inc. 50,409 50,409 100,818 100,818
Just For Feet, Inc. 188,847 119,820 373,399 221,230
Bank United 39,449 39,449 78,898 78,898
Hollywood Entertainment Corp. 68,290 - 140,427 -
OfficeMax, Inc. 119,086 - 147,384 -
612,348 355,861 1,133,460 693,312
4. EARNINGS PER SHARE
Basic earnings per share has been computed by dividing net
income by the weighted average number of common shares
outstanding. Diluted earnings per share has been computed by
dividing net income (as adjusted) by the weighted average
number of common shares outstanding plus dilutive potential
common shares.
5. MERGER TRANSACTION
On June 5, 1998, the Company's shareholders voted to approve
an agreement and plan of merger with AAA, whereby the
stockholder of AAA agreed to exchange 100% of the outstanding
shares of common stock of AAA for up to 900,000 shares (the
"Share Consideration") of the Company's common stock (the
"Merger"). The common stock of AAA was wholly owned by the
president and director of the Company. As a result of the
Merger, the Company became a fully integrated, self-
administered real estate investment trust ("REIT") effective
June 5, 1998. Effective June 5, 1998, 213,260 shares will be
paid and the balance (the "Share Balance") of the Share
Consideration is to be paid over time to the extent certain
goals are achieved after the Merger. The market value of the
common shares to be issued effective June 5, 1998 was
$2,185,915 of which $58,465 was allocated to the net tangible
assets acquired and the difference of $2,127,450 was accounted
F-50
for as expenses incurred in acquiring AAA from a related
party. In addition, in connection with the Merger, the
Company incurred costs during the three and six months ended
June 30, 1998 of $212,185 and $262,468, respectively,
consisting primarily of legal and accounting fees, valuation
opinions and fairness opinions. For accounting purposes, AAA
was not considered a "business" for purposes of applying APB
Opinion No. 16, "Business Combinations," and therefore, the
market value of the common shares issued in excess of the fair
value of the net tangible assets acquired was charged to
expense rather than capitalized as goodwill. To the extent
the Share Balance is paid over time, the market value of the
common shares issued will also be charged to expense. Upon
consummation of the Merger on June 5, 1998, certain employees
of AAA became employees of the Company, and any obligation to
pay fees under the advisor agreement between the Company and
AAA was terminated.
6. RELATED PARTY TRANSACTIONS
See Note 5 regarding the Merger.
Related Party Transactions Subsequent to the Merger:
Beginning June 5, 1998, the Company provides property
acquisition, leasing, administrative and management services
for eleven affiliated real estate limited partnerships (the
"Partnerships"). The president and director of the Company
owns between 80% and 100% of the stock of the companies that
serve as the general partner of the Partnerships.
Reimbursements and fees of $12,931 were paid by the
Partnerships to the Company for the three and six months ended
June 30, 1998.
Related Party Transactions Prior to the Merger:
The Company had entered into an Omnibus Services Agreement
with AAA whereby AAA provided property acquisition, leasing,
administrative and management services for the Company.
Reimbursements and fees of $40,140 and $57,800 were incurred
and charged to expense for the three and six months ended June
30, 1998, respectively. Reimbursements and fees of $13,308
and $27,000 were incurred and charged to expense for the three
and six months ended June 30, 1997, respectively.
AAA had incurred certain costs in connection with the
organization and syndication of the Company. Reimbursement of
these costs become obligations of the Company in accordance
with the terms of the offering. Costs of $37,190 and $56,164
were incurred by AAA for the three and six months ended June
30, 1998, respectively, in connection with the issuance and
marketing of the Company's stock. Costs of $48,848 and $86,840
were incurred by AAA for the three and six months ended June
30, 1997, respectively, in connection with the issuance and
marketing of the Company's stock. These costs are reflected
as issuance costs and are recorded as a reduction to capital
in excess of par value.
Acquisition fees, including real estate commissions, finders
fees, consulting fees and any other non-recurring fees
incurred in connection with locating, evaluating and selecting
properties and structuring and negotiating the acquisition of
properties are included in the basis of the properties.
Acquisition fees of $67,961 and $123,389 were incurred and
paid to AAA for the three and six months ended June 30, 1998,
respectively. Acquisition fees of $156,712 and $236,775 were
incurred and paid to AAA for the three and six months ended
June 30, 1997, respectively. Acquisition fees paid to AAA
included $430,972 that was earned prior to purchasing certain
properties.
F-51
On October 16, 1997, the Company entered into a joint venture
with AAA Net Realty XI, Ltd., an entity with common
management. The joint venture was formed to purchase a
property, which is being operated as a Hollywood Video store
in Lafayette, Louisiana. The property was purchased on October
31, 1997 after the construction was completed. The Company's
interest in the joint venture is 74.58%.
On February 11, 1997, the Company entered into a joint venture
with AAA Net Realty XI, Ltd. The joint venture was formed to
purchase a property, which is being operated as a Just For
Feet retail store in Baton Rouge, Louisiana. The property was
purchased on June 9, 1997 after the construction was
completed. The Company's interest in the joint venture is 51%.
On September 23, 1996, the Company entered into a joint
venture with AAA Net Realty XI, Ltd. The joint venture was
formed to purchase a parcel of land in The Woodlands, Texas
upon which the tenant, Bank United, constructed a branch bank
building at its cost. At the termination of the lease the
improvements will be owned by the joint venture. The
Company's interest in the joint venture is 51%.
On April 5, 1996, the Company entered into a joint venture
with AAA Net Realty Fund XI, Ltd. and AAA Net Realty Fund X,
Ltd., entities with common management, to purchase a property
which is being operated as a Just For Feet retail store in
Tucson, Arizona. The property was purchased on September 11,
1996 after the construction was completed. The Company's
interest in the joint venture is 51.9%.
On September 12, 1995, the Company entered into a joint
venture agreement with AAA Net Realty Fund XI, Ltd. to
purchase a property, which is being operated as a Blockbuster
Music Store in Wichita, Kansas. The Company's interest in the
joint venture is 51%.
On October 27, 1994, the Company entered into a joint venture
agreement with AAA Net Realty Fund X, Ltd., an entity with
common management. The joint venture was formed to purchase a
property, which is being operated as a Blockbuster Music Store
in Independence, Missouri. The Company's interest in the joint
venture is 54.84%.
7. COMMITMENTS
At June 30, 1998, the Company is committed to incur additional
costs of approximately $475,000 in connection with a property
under development.
F-52
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
American Asset Advisers Trust, Inc.
We have audited the accompanying consolidated balance sheet of
American Asset Advisers Trust, Inc. (the "Company") as of
December 31, 1997, and the related consolidated statements of
income, shareholders' equity and cash flows for each of the two
years in the period ended December 31, 1997. Our audits also
included the financial statement schedule listed in the Index.
These financial statements and the financial statement schedule
are the responsibility of the Company's management. Our
responsibility is to express an opinion on the financial
statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present
fairly, in all material respects, the financial position of the
Company as of December 31, 1997, and the results of their
operations and their cash flows for each of the two years in the
period ended December 31, 1997 in conformity with generally
accepted accounting principles. Also, in our opinion, such
financial statement schedule, when considered in relation to the
basic financial statements taken as a whole, presents fairly in
all material respects the information set forth therein.
DELOITTE & TOUCHE LLP
Houston, Texas
March 10, 1998
F-53
AMERICAN ASSET ADVISERS TRUST, INC.
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1997
ASSETS
Cash and cash equivalents $ 1,401,740
Accounts receivable 124,600
Property:
Escrow deposits 11,100
Land 6,379,675
Land under development 750,000
Buildings 8,037,003
Construction in progress 6,991,360
22,169,138
Accumulated depreciation (341,272)
Total property 21,827,866
Net investment in direct financing leases 3,161,196
Other assets:
Prepaid acquisition costs 372,686
Accrued rental income 168,179
Organization costs, net of accumulated amortization
OF $223,672 90,096
Total other assets 630,961
TOTAL ASSETS $27,146,363
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Notes payable $ 6,131,489
Accounts payable 108,823
Security deposit 15,050
TOTAL LIABILITIES 6,255,362
Minority interest 5,260,795
Commitments (Note 10)
Shareholders' equity:
Preferred stock, $.01 par value, 10,000,000 shares
authorized, none issued
Common stock, $.01 par value, 100,000,000 shares
authorized, 1,868,213 shares issued and outstanding 18,682
Capital in excess of par value 16,665,300
Accumulated distributions in excess of earnings (1,053,776)
TOTAL SHAREHOLDERS' EQUITY 15,630,206
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $27,146,363
See Notes to Consolidated Financial Statements.
F-54
AMERICAN ASSET ADVISERS TRUST, INC.
CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended December 31,
1997 1996
Revenues:
Rental income from operating leases $1,217,187 $ 780,768
Earned income from direct financing leases 339,628 144,020
Interest income 153,895 137,528
Total revenues 1,710,710 1,062,316
Expenses:
General operating and administrative 112,464 84,414
Reimbursements and fees to related party 106,504 37,910
Interest 6,000 5,000
Depreciation and amortization 208,769 175,533
Potential acquisition costs 282,890 -
Total expenses 716,627 302,857
Income before minority interest in net income of
consolidated joint ventures 994,083 759,459
Minority interest in net income of consolidated
joint ventures (455,226) (216,652)
Net income to common shareholders $ 538,857 $ 542,807
Basic earnings per share $ 0.34 $ 0.51
Diluted earnings per share $ 0.33 $ 0.48
Weighted average number of common shares outstanding 1,563,048 1,066,353
Weighted average number of common shares outstanding
plus dilutive potential common shares 1,624,217 1,127,832
See Notes to Consolidated Financial Statements.
F-55
<TABLE>
AMERICAN ASSET ADVISERS TRUST, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
<CAPTION>
Accumulated
Capital in distributions
Common Stock excess of in excess of
Number Amount par value earnings Total
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1995 827,876 $ 8,279 $ 7,438,368 $ (304,724) $ 7,141,923
Net income - - - 542,807 542,807
Distributions ($.71 per share) - - - (737,277) (737,277)
Issuance of common stock 377,049 3,770 3,810,883 - 3,814,653
Stock issuance costs - - (468,404) - (468,404)
Balance at December 31, 1996 1,204,925 12,049 10,780,847 (499,194) 10,293,702
Net income - - - 538,857 538,857
Distributions ($.72 per share) - - - (1,093,439) (1,093,439)
Issuance of common stock 663,288 6,633 6,783,642 - 6,790,275
Stock issuance costs - - (899,189) - (899,189)
Balance at December 31, 1997 1,868,213 $18,682 $16,665,300 $ (1,053,776) $15,630,206
See Notes to Consolidated Financial Statements.
</TABLE>
F-56
AMERICAN ASSET ADVISERS TRUST, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31,
1997 1996
Cash flows from operating activities:
Net income $ 538,857 $ 542,807
Adjustments to reconcile net income to net cash
flows from operating activities:
Amortization 62,754 61,789
Depreciation 146,015 113,744
Increase in accounts receivable (119,481) (5,119)
Increase (decrease) in accounts payable 72,588 (31,246)
Cash receipts from direct financing leases
greater (less) than income recognized (9,398) 1,017
Decrease (increase) in escrow deposits, net of
minority interest partners 27,150 (38,250)
Increase in accrued rental income (93,554) (50,780)
Increase in minority interest 455,226 216,652
Net cash provided by operating activities 1,080,157 810,614
Cash flows from investing activities:
Acquisition of real estate:
Accounted for under the operating lease method (3,668,365) (1,695,146)
Accounted for under the direct financing lease - (1,342,805)
Land under development (750,000) -
Construction in progress (6,991,360) -
Change in prepaid acquisition costs (298,350) 3,425
Net cash used in investing activities (11,708,075) (3,034,526)
Cash flows from financing activities:
Proceeds from issuance of stock, net 5,891,086 3,346,249
Prepaid issuance costs 101,399 (101,399)
Proceeds from note payable 5,981,489 -
Distributions paid to shareholders (1,093,439) (737,277)
Distributions to minority interest partners (467,188) (232,311)
Net cash provided by financing activities 10,413,347 2,275,262
Net (decrease) increase in cash and cash
equivalents (214,571) 51,350
Cash and cash equivalents at beginning of year 1,616,311 1,564,961
Cash and cash equivalents at end of year $ 1,401,740 $1,616,311
Supplemental disclosure of non-cash financing
activities:
Real estate and escrow deposit contributed by
partners of the consolidated joint ventures
(minority interest) $ 1,677,659 $2,051,337
See Notes to Consolidated Financial Statements.
F-57
AMERICAN ASSET ADVISERS TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS AND NATURE OF OPERATIONS
American Asset Advisers Trust, Inc. ("the Company") was
incorporated on August 17, 1993 as a Maryland corporation. The
initial issuance of 20,001 shares of stock for $200,010 was to
American Asset Advisers Realty Corporation ("AAA"). Commencing
March 17, 1994, the Company offered up to 2,000,000 additional
shares of common stock together with 1,000,000 warrants. The
warrants were exercisable at $9 per share between March 17,
1997 and March 15, 1998. As of December 31, 1997, 501,583
warrants were outstanding. The offering period of the initial
public offering terminated on March 15, 1996 with 1,008,252
shares being issued. On June 18, 1996, the Company commenced a
follow-on offering of up to 2,853,659 additional shares of its
common stock. The offering will terminate June 17, 1998 unless
terminated earlier. As of December 31, 1997, 839,960 shares in
this second offering were issued, bringing the total shares
issued and outstanding to 1,868,213 shares.
The Company was formed to acquire commercial and industrial
real estate properties using invested and borrowed funds. The
selection, acquisition and supervision of the operation of the
properties are managed by AAA, a related party.
BASIS OF CONSOLIDATION
The consolidated financial statements include the accounts of
American Asset Advisers Trust, Inc. and its six joint ventures
with related parties. The Company owns greater than 50% of
these joint ventures and exercises control over operations.
BASIS OF ACCOUNTING
The financial records of the Company are maintained on the
accrual basis of accounting whereby revenues are recognized
when earned and expenses are recorded when incurred.
CASH AND CASH EQUIVALENTS
For purposes of the statement of cash flows, the Company
considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash
equivalents. Cash and cash equivalents consist of demand
deposits at commercial banks and money market funds.
REAL ESTATE
Real estate is leased to others on a net lease basis whereby
all operating expenses related to the properties, including
property taxes, insurance and common area maintenance are the
responsibility of the tenant. The leases are accounted for
under the operating lease method or the direct financing lease
method.
F-58
Under the operating lease method, the properties are recorded
at cost. Rental income is recognized ratably over the life of
the lease and depreciation is charged based upon the estimated
useful life of the property. Under the direct financing lease
method, properties are recorded at their net investment (see
Note 3). Unearned income is deferred and amortized to income
over the life of the lease so as to produce a constant periodic
rate of return.
Expenditures related to the development of real estate are
carried at cost plus capitalized carrying charges, acquisition
costs and development costs. Carrying charges, primarily
interest and loan acquisition costs, and direct and indirect
development costs related to buildings under construction are
capitalized as part of construction in progress. Interest of
$132,950 was capitalized on properties under construction
during 1997.
The Company obtains an appraisal on each property prior to a
property's acquisition and also performs an annual valuation
update to evaluate potential impairment for each property for
which an appraisal is older than twelve months. This valuation
is based on capitalization of income for each property, a
review of current market conditions and any significant events
or factors which would indicate a potential impairment to the
value of a property.
DEPRECIATION
Buildings are depreciated using the straight-line method over
an estimated useful life of 39 years.
ORGANIZATION COSTS
Organization costs incurred in the formation of the Company are
amortized on a straight-line basis over five years.
STOCK ISSUANCE COSTS
Issuance costs incurred in the raising of capital through the
sale of common stock are treated as a reduction of
shareholders' equity.
STATEMENT OF CASH FLOWS - SUPPLEMENTAL INFORMATION
No cash was paid for interest during 1997 or 1996.
FEDERAL INCOME TAXES
The Company is qualified as a real estate investment trust
("REIT") under the Internal Revenue Code of 1986, and is,
therefore, not subject to Federal income taxes provided it
meets all conditions specified by the Internal Revenue Code for
retaining its REIT status, including the requirement that at
least 95% of its real estate investment trust taxable income is
distributed by March 15 of the following year.
F-59
EARNINGS PER SHARE
Basic earnings per share has been computed by dividing net
income to common shareholders by the weighted average number of
common shares outstanding. Diluted earnings per share has been
computed by dividing net income to common shareholders (as
adjusted) by the weighted average number of common shares
outstanding plus dilutive potential common shares.
The following table presents information necessary to calculate
basic and diluted earnings per share for the periods indicated,
with 1996 being restated to conform with the requirements of
the Statement of Financial Accounting Standards No. 128,
Earnings Per Share, described below:
<TABLE>
<CAPTION>
For the Year Ended December 31,
1997 1996
<S> <C> <C>
BASIC EARNINGS PER SHARE
Weighted average common shares outstanding 1,563,048 1,066,353
Basic earnings per share $ .34 $ .51
DILUTED EARNINGS PER SHARE
Weighted average common shares outstanding 1,563,048 1,066,353
Shares issuable from assumed conversion of warrants 61,169 61,479
Weighted average common shares outstanding, as adjusted 1,624,217 1,127,832
Diluted earnings per share $ .33 $ .48
EARNINGS FOR BASIC AND DILUTED COMPUTATION
Net income to common shareholders (basic and diluted
earnings per share computation) $ 538,857 $ 542,807
</TABLE>
USE OF ESTIMATES
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company believes the carrying value of financial
instruments consisting of cash, cash equivalents, accounts
receivable and accounts and notes payable approximate their
fair value.
NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards
("SFAS") No. 128, Earnings Per Share. SFAS No. 128, which was
effective for periods ending after December 15, 1997, specifies
the computation, presentation and disclosure requirements of
earnings per share and supercedes Accounting Principles Board
Opinion No. 15. SFAS No. 128 requires a dual presentation of
basic and diluted earnings per share. Basic earnings per share,
which excludes the impact of common share equivalents, replaces
primary earnings per share. Diluted earnings per share, which
utilizes the average market price per share as opposed to the
F-60
greater of the average market price per share or ending market
price per share when applying the treasury stock method in
determining common share equivalents, replaces fully diluted
earnings per share.
In February 1997, the FASB also issued SFAS No. 129, Disclosure
of Information about Capital Structure, which establishes
standards for disclosing information about an entity's capital
structure. SFAS No. 129 was effective for periods ending after
December 15, 1997. The adoption of SFAS No. 129 did not impact
the Company's capital structure disclosures as the Company was
already in compliance with this SFAS.
In June 1997, the FASB issued SFAS No. 130, Reporting
Comprehensive Income, and SFAS No. 131, Disclosures About
Segments of an Enterprise and Related Information. SFAS No. 130
establishes standards for reporting and displaying
comprehensive income and its components. SFAS No. 131
establishes standards for the way that public business
enterprises report information about operating segments and
related information in interim and annual financial statements.
SFAS No. 131 will not impact the Company's financial statements
as it reports as a single segment. SFAS Nos. 130 and 131 are
effective for periods beginning after December 15, 1997.
Management is evaluating what, if any, additional disclosures
or reporting may be required upon the implementation of SFAS
No. 130.
2. OPERATING LEASES
A summary of minimum future rentals, exclusive of any renewals,
under noncancellable operating leases in existence at December
31, 1997 is as follows:
1998 $ 1,510,662
1999 $ 1,536,879
2000 $ 1,561,707
2001 $ 1,570,744
2002 $ 1,605,727
2003-2016 $ 11,005,543
3. NET INVESTMENT IN DIRECT FINANCING LEASES
The Company's net investment in its direct financing leases at
December 31, 1997 included:
Minimum lease payments receivable $ 7,110,814
Unguaranteed residual value 1,557,904
Less: Unearned income 5,507,522
$ 3,161,196
A summary of minimum future rentals, exclusive of any renewals,
under the noncancellable direct financing leases are summarized
as follows:
1998 $ 330,229
1999 $ 333,165
2000 $ 336,590
2001 $ 343,251
2002 $ 363,233
2003-2016 $ 5,404,346
F-61
4. CONSOLIDATED JOINT VENTURES
The Company consolidates all of its joint ventures due to its
ability to control operations.
On October 16, 1997, the Company entered into a joint venture
with AAA Net Realty XI, Ltd., an entity with common management.
The joint venture was formed for the purchase of a property,
which is being operated as a Hollywood Video store in
Lafayette, Louisiana. The property was purchased on October 31,
1997 after the construction was completed. The Company's
interest in the joint venture is 74.58%.
On February 11, 1997, the Company entered into a joint venture
with AAA Net Realty XI, Ltd. The joint venture was formed for
the purchase of a property, which is being operated as a Just
For Feet retail store in Baton Rouge, Louisiana. The property
was purchased on June 9, 1997 after the construction was
completed. The Company's interest in the joint venture is 51%.
On September 23, 1996, the Company formed a joint venture, AAA
Joint Venture 96-2, with AAA Net Realty Fund XI, Ltd. The
joint venture was formed for the purpose of acquiring a parcel
of land in The Woodlands, Texas upon which the tenant, Bank
United, constructed a branch bank building at its cost. At the
termination of the lease the improvements will be owned by the
joint venture. The Company's interest in the joint venture is
51%.
On April 5, 1996, the Company formed a joint venture, AAA Joint
Venture 96-1, with AAA Net Realty Fund XI, Ltd. and AAA Net
Realty Fund X, Ltd., entities with common management, for the
purpose of acquiring a property which is being operated as a
Just For Feet retail store in Tucson, Arizona. The property
was purchased on September 11, 1996 after construction was
completed. The Company's interest in the joint venture is
51.9%.
On September 12, 1995, the Company formed a joint venture, AAA
Joint Venture 95-2, with AAA Net Realty Fund XI, Ltd. for the
purpose of acquiring a property in Wichita, Kansas on lease to
Blockbuster Music Retail, Inc. The Company's interest in the
joint venture is 51%.
On October 27, 1994, the Company formed a joint venture, AAA
Joint Venture 94-1, with AAA Net Realty Fund X, Ltd. for the
purpose of acquiring a property in Independence, Missouri on
lease to Blockbuster Music Retail, Inc. The Company's interest
in the joint venture is 54.84%.
5. NOTES PAYABLE
In December 1997, the Company entered into an amended and
restated unsecured revolving credit agreement (the "Amended
Credit Agreement") with a borrowing capacity up to $15,000,000
through February 1999. The actual amount available to the
Company is dependent on certain covenants such as the value of
unencumbered assets. The Amended Credit Agreement currently
bears interest at 2.00% over varying London Interbank Offered
Rates and it is being used to acquire additional properties.
As of December 31, 1997, $5,981,489 was outstanding under the
Amended Credit Agreement.
In addition, the Company has a note payable to its president in
the amount of $150,000 plus accrued interest totaling $17,000
as of December 31, 1997. This note is unsecured, payable upon
demand and bears interest at 8%. Interest incurred on this
note was $12,000 in 1997 (of which $6,000 was capitalized) and
$5,000 in 1996.
F-62
6. MAJOR TENANTS
The Company's operations are related to the acquisition and
leasing of commercial real estate properties. The following
schedule summarizes rental income by lessee for 1997 and 1996
under both operating lease and direct financing lease methods
of accounting:
1997 1996
Tandy Corporation (Mesquite, Texas) $ 108,900 $ 108,900
America's Favorite Chicken Company (Smyrna, Georgia) 97,931 91,875
Blockbuster Music Retail, Inc. (Independence, Missouri
and Wichita, Kansas) 377,901 377,901
OneCare Health Industries, Inc. (Houston, Texas) 201,638 201,638
Just For Feet, Inc. (Tucson, Arizona and Baton Rouge,
Louisiana) 590,192 123,244
Bank United (The Woodlands, Texas and Houston, Texas) 157,801 21,230
Hollywood Entertainment Corp. (Lafayette, Louisiana and
Ridgeland, Mississippi) 22,452 -
Total $1,556,815 $ 924,788
7. FEDERAL INCOME TAXES
The differences between net income for financial reporting
purposes and taxable income before distribution deductions
relate primarily to temporary differences and to certain
organization costs which are amortized for financial reporting
purposes only.
For income tax purposes, distributions paid to shareholders
consist of ordinary income, capital gains and return of capital
as follows:
1997 1996
Ordinary Income $ 795,918 $ 545,967
Capital gains - -
Return of capital 297,521 191,310
$ 1,093,439 $ 737,277
8. RELATED PARTY TRANSACTIONS
AAA owns 20,001 shares of the Company's stock. The common
stock of AAA is wholly owned by the president and director of
the Company. In addition, the Company has entered into an
Omnibus Services Agreement with AAA whereby AAA provides
property acquisition, leasing, administrative and management
services for the Company. Reimbursements and fees of $106,504
and $37,910 were incurred and charged to expense in 1997 and
1996, respectively.
F-63
AAA has incurred certain costs in connection with the
organization and syndication of the Company. Reimbursement of
these costs become obligations of the Company in accordance
with the terms of the offering. Costs of $164,985 and $98,494
were incurred by AAA in 1997 and 1996, respectively, in
connection with the issuance and marketing of the Company's
stock. These costs are reflected as issuance costs and are
recorded as a reduction to capital in excess of par value.
Acquisition fees, including real estate commissions, finders
fees, consulting fees and any other non-recurring fees incurred
in connection with locating, evaluating and selecting
properties and structuring and negotiating the acquisition of
properties are included in the basis of the properties.
Acquisition fees of $1,059,805 and $222,785 were incurred and
paid to AAA during 1997 and 1996, respectively. Acquisition
fees paid to AAA in 1997 included $372,686 that was earned
prior to purchasing certain properties.
On August 8, 1997, the Company entered into a loan agreement as
the lender with AmReit Development Corp., an entity with common
management, in the amount of $2,247,254 for the purpose of
developing a property in Lake Jackson, Texas that will be
acquired by the Company upon completion of the property. As of
December 31, 1997, $1,928,974 was outstanding on the loan. The
loan bears interest at the prime lending rate and matures on
May 1, 1998.
On September 18, 1997, the Company entered into a loan
agreement as the lender with Centurion Video, Ltd. in the
amount of $1,153,794 for the purpose of developing a property
in Ridgeland, Mississippi that was acquired by the Company upon
completion of the property. AAA Net Developers, Ltd., an
entity with common management, was the limited partner in
Centurion Video, Ltd. As of December 31, 1997, the loan was
repaid in full. The loan had interest at the prime lending rate
plus .5%.
See Note 4 for joint venture agreements with related parties.
9. PROPERTY ACQUISITIONS IN 1997
On December 30, 1997, the Company acquired a newly constructed
property on lease to Hollywood Entertainment Corporation for
the purchase price of $1,285,854. The property is being
operated as a Hollywood Video store in Ridgeland, Mississippi.
The lease agreement extends for fifteen years, however the
tenant has the option to renew the lease for four additional
terms of five years each. The lease has provisions for an
escalation in the rent after the fifth year of the lease. The
Company did not record any income from Hollywood Entertainment
Corporation in 1997 related to this property.
On October 31, 1997, the Company acquired a 74.58% interest in
a newly constructed property on lease to Hollywood
Entertainment Corporation through a joint venture with an
entity with common management for the purchase price of
$863,407. The property is being operated as a Hollywood Video
store in Lafayette, Louisiana. The lease agreement extends for
fifteen years, however the tenant has the option to renew the
lease for four additional terms of five years each. The lease
has provisions for an escalation in the rent after the fifth
year of the lease. The Company recorded $22,452 of income from
Hollywood Entertainment Corporation in 1997.
On June 9, 1997, the Company acquired a 51% interest in a newly
constructed property on lease to Just For Feet, Inc. through a
joint venture with an entity with common management for the
purchase price of $1,517,005. The property is being operated
as a Just For Feet retail store in Baton Rouge, Louisiana. The
F-64
lease agreement extends for fifteen years, however the tenant
has the option to renew the lease for two additional terms of
five years each. The lease has provisions for an escalation in
the rent after the fifth and tenth years of the lease. The
Company recorded $184,296 of income from this Just For Feet
location in 1997.
As no buildings had previously been constructed on any of the
properties acquired by the Company during 1997, the rental
income received by the Company from these properties represents
the initial results of operations. Consequently, no pro-forma
information is presented.
10. COMMITMENTS
At December 31, 1997, the Company is committed to incur
additional costs of approximately $3,880,000 in connection with
properties under development.
At a special meeting of the Company's Board of Directors held
on December 31, 1997, the Board of Directors, other than Mr. H.
Kerr Taylor, who abstained from the vote due to his interest in
the transaction, approved the Company's becoming a self-managed
REIT through the acquisition of AAA. In pursuing this
acquisition, the Company will incur additional costs of
approximately $100,000. Such costs incurred in 1997 of
$282,890 were charged to expense. If approved by the
shareholders and consummated, the Company will initially issue
213,260 shares. The fair market value of the shares paid in
consideration will be charged to expense. In addition, the
Company may issue 686,740 additional shares upon the
achievement of certain goals. The fair market value of such
shares will be charged to expense.
F-65
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of AmREIT
(formerly American Asset Advisers Trust, Inc.)
We have audited the accompanying combined statements of revenues
and certain expenses (defined as being operating revenues less
direct operating expenses) of real estate properties anticipated
to be acquired (as disclosed at Note 1 of the combined statement
of revenues and certain expenses) (the "Acquired Properties") for
the years ended December 31, 1997 and 1996. These combined
financial statements are the responsibility of the management of
the Acquired Properties. Our responsibility is to express an
opinion on the combined statements of revenues and certain
expenses based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the combined statements of revenues and certain expenses are free
of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the
combined statements of revenues and certain expenses. An audit
also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall presentation of the combined statements of revenues
and certain expenses. We believe that our audits provide a
reasonable basis for our opinion.
The accompanying combined statements of revenues and certain
expenses were prepared for the purpose of inclusion in a proxy
statement to be filed on Schedule 14A of AmREIT. Material
amounts, described in Note 1 to the combined statements of
revenues and certain expenses, that would not be comparable to
those resulting from the proposed future operations of the
properties are excluded and the statements are not intended to be
a complete presentation of the revenues and expenses of these
properties.
In our opinion, such combined statements of revenues and certain
expenses presents fairly, in all material respects, the combined
revenues and certain expenses, as defined above, of the various
real estate properties (as disclosed at Note 1 of the combined
statements of revenues and certain expenses) for the years ended
December 31, 1997 and 1996 in conformity with generally accepted
accounting principles.
DELOITTE & TOUCHE LLP
Houston, Texas
May 27, 1998
F-66
<TABLE>
COMBINED STATEMENTS OF REVENUES AND CERTAIN EXPENSES
OF REAL ESTATE PROPERTIES ANTICIPATED TO BE ACQUIRED
<CAPTION>
Years ended Six months ended
December 31, June 30,
1997 1996 1998 1997
(Unaudited)
<S> <C> <C> <C> <C>
REVENUES
Rental income from operating
leases $ 2,089,958 $ 2,059,305 $ 1,108,357 $ 1,041,514
Earned income from direct
financing leases 70,026 63,727 35,188 35,010
TOTAL REVENUES 2,159,984 2,123,032 1,143,545 1,076,524
EXPENSES
Property expenses 3,368 5,405 1,786 2,739
TOTAL EXPENSES 3,368 5,405 1,786 2,739
REVENUES IN EXCESS OF
CERTAIN EXPENSES $ 2,156,616 $ 2,117,627 $ 1,141,759 $ 1,073,785
See Notes to Financial Statements
</TABLE>
F-67
NOTES TO COMBINED STATEMENTS OF REVENUES AND CERTAIN EXPENSES OF
REAL ESTATE PROPERTIES ANTICIPATED TO BE ACQUIRED
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
Note 1-Description and summary of significant accounting policies
Description
The operations of the following Acquired Properties are included
in the accompanying combined statements for the years ended
December 31, 1997 and 1996:
Steak and Ale (Houston, TX) Goodyear Tire (Carrollton, TX)
Bank of America (Houston, TX) Foodmaker - JackIn The Box (Dallas, TX)
Taco Bell (Houston, TX) Baptist Memorial Health (Memphis, TN)
Pizza Inn (Clute, TX) Payless Shoes - WaldenBooks (Austin, TX)
Whataburger (Clute, TX) Golden Corral (Houston, TX)
La Petite Academy (Houston, TX) Golden Corral (Humble, TX)
Whataburger (Dallas, TX) TGI Friday's (Houston, TX)
Arandas Bakery (Houston, TX) Goodyear Tire (Houston, TX)
AFC, Inc. - Church's (Houston, TX) Computer City (Minnesota, MN)
Gannett - Billboard (Houston, TX) AFC, Inc. - Popeye's (Atlanta, GA)
Discount Tire (Fort Worth, TX) OneCare Health (Sugar Land, TX)
La Petite Academy (Houston, TX) Blockbuster Video (Oklahoma City, OK)
Goodyear Tire (Dallas, TX) Pier One Imports (Longmont, CO)
Basis of presentation
The accompanying financial statements are presented on a combined
basis because the partnerships owning the properties have a
common general partner and are under common management. Each of
the properties are managed by an entity which was previously
owned by the chairman, president and 10.6% shareholder of
American Asset Advisers Trust, Inc. (the "Company"). On June 5,
1998, the entity merged into the Company. The chairman is also
the general partner or a majority shareholder of the corporate
general partner of the partnerships that currently own the
properties.
The accompanying historical financial statement information is
presented in conformity with Rule 3-14 of the Securities and
Exchange Commission. Accordingly, the accompanying combined
financial statements include only expenses directly related to
the operations of the properties. Expenses not directly related
to the future operations of the properties, such as depreciation,
amortization, management fees and professional fees, are not
included in the accompanying combined financial statements.
F-68
Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Revenue recognition
Operating revenues are presented on the accrual basis of
accounting. Rental income is recognized ratably over the life of
the lease. Lease agreements do not provide for contingent
rentals.
Interim Financial Statements
In the opinion of management all adjustments necessary for a fair
presentation of such interim unaudited financial statements have
been included. Such adjustments consisted of normal recurring
items. Interim results are not necessarily indicative of results
for a full year.
Note 2-Operating leases
A summary of minimum future rentals, exclusive of any renewals,
under non-cancelable operating leases in existence at December
31, 1997 is as follows:
1998 $ 2,164,822
1999 2,154,980
2000 2,045,111
2001 1,998,380
2002 1,927,203
2003-2016 7,921,351
$18,211,847
Note 3-Major tenants
Following is a summary of rental income by lessee for 1997 and
1996 who have contributed 10% or more of the total revenues:
Tenant 1997 1996
Golden Corral Corporation $364,676 $364,676
Tandy Corporation $366,516 $421,464
F-69
Annex Volume
Table of Contents
Form of Agreement and Plan of Merger . . . . . . . . . . .Annex 1
Form of Amendment to Partnership Agreement . . . . . . . .Annex 2
Forms of the Note and Loan Agreement . . . . . . . . . . .Annex 3
Form of Bishop-Crown Fairness Opinion. . . . . . . . . . .Annex 4
Form of Houlihan Fairness Opinions . . . . . . . . . . . .Annex 5
Form of
AGREEMENT AND PLAN OF MERGER
ANNEX 1
To AmREIT Joint Consent
Solicitation Statement
and
Prospectus
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER (this "Agreement"), dated
as of ____________, 1998, is entered into by and between AmREIT,
Inc., a Maryland real estate investment trust (the "REIT"), and
[Name of Partnership], a Texas [Nebraska] limited partnership
(the "Partnership"). [H. Kerr Taylor, on behalf of [himself as
the individual General Partner and] [name of corporate General
Partner], a Texas [Nebraska] corporation, the General Partner[s]
of the Partnership (referred to herein as the "General Partner"),
is a party to this Agreement solely for the purpose of binding
itself to the provisions of Section 5 and Section 7.9, hereunder.
RECITALS
A. The Board of Directors of the REIT (the "Board of
Directors" or the "Board") and the General Partner of the
Partnership have each determined that a business combination
between the REIT and the Partnership is in the best interests of
their shareholders and partners, respectively, and presents an
opportunity for their respective businesses to achieve strategic
and financial benefits, and accordingly have agreed to effect a
merger subject to the terms and conditions set forth herein.
B. The REIT and the Partnership desire to make certain
representations, warranties and agreements in connection with the
merger.
NOW, THEREFORE, in consideration of the foregoing, and of
the representations, warranties, covenants and agreements
contained herein, the REIT and the Partnership hereby agree as
follows:
SECTION 1
THE MERGER
1.1 The Merger. Subject to the terms and conditions of
this Agreement, at the Effective Time (as defined in Section
1.3), the Partnership shall be merged with and into the REIT in
accordance with this Agreement and the Plan of Merger (the "Plan
of Merger"), with such completions, additions and substitutions
conforming to the terms of this Agreement as the parties shall
approve, such approval to be conclusively evidenced by their
causing the Plan of Merger containing such completions, additions
or substitutions to be filed in accordance with applicable laws.
The separate existence of the Partnership shall thereupon cease
(the "Merger"). The REIT shall be the surviving entity in the
Merger (sometimes hereinafter referred to as the "Survivor"). The
Merger shall have the effects specified in the Maryland General
Corporations Act, as amended (the "Maryland Act") and Section
2.11 of the Texas [Nebraska] Revised Uniform Limited Partnership
Act (the "LP Act").
1.2 The Closing. Subject to the terms and conditions of
this Agreement, the closing of the Merger (the "Closing") shall
take place at the offices of the REIT, located at Eight Greenway
Plaza, Suite 824, Houston, Texas 77046 at ________, ___.m., local
time, within five business days after receipt of approval of the
Merger by the REIT's shareholders and the Partnership's partners
(the "Partners"), or at such other time, date or place as the
REIT and the Partnership may agree. The date on which the Closing
occurs is hereinafter referred to as the "Closing Date."
1.3 Effective Time. If all the conditions to the Merger set
forth in Section 8 shall have been fulfilled or waived (and this
Agreement shall not have been terminated as provided in Section
9), the REIT and the Partnership shall cause Articles of Merger
satisfying the requirements of the Maryland Act and Articles of
Merger satisfying the requirements of the LP Act to be properly
executed, verified and delivered for filing in accordance with
the LP Act and the Maryland Act on the Closing Date. The Merger
shall become effective for accounting and all other purposes to
the fullest extent permitted by law as of the close of business
on the date on which approval of the Merger by the REIT's
shareholders and the Partners, whichever is the last to occur
(the "Effective Time") or such other date as may be agreed to by
the parties, but not later than the Closing Date. For state law
purposes, the Merger shall become effective upon the issuance of
a certificate of merger by the Secretary of State of the State of
Texas [Nebraska] in accordance with the LP Act or at such later
time which the REIT and the Partnership shall have agreed upon
and designated in such filings in accordance with applicable law.
SECTION 2
THE SURVIVING CORPORATION
2.1 Surviving Corporation. The Surviving Corporation shall
be the REIT.
2.2 Certificate of Incorporation and Bylaws. The
Certificate of Incorporation and Bylaws of the REIT as in effect
immediately prior to the Effective Time shall be the Certificate
of Incorporation and Bylaws of the REIT at the Effective Time.
2.3 Officers and Directors. The officers of the REIT
immediately prior to the Effective Time shall continue as
officers of the Surviving Corporation and remain officers until
their successors are duly appointed or their prior resignation,
removal or death. The directors of the REIT immediately prior to
the Effective Time shall continue as directors of the Surviving
Corporation and shall remain directors until their successors are
duly elected and qualified or their prior resignation, removal or
death.
SECTION 3
CONSIDERATION FOR PARTNERSHIP ASSETS
3.1 Consideration Paid by the REIT. At or as of the
Effective Time, the assets and the liabilities of the Partnership
shall be the assets and liabilities of Company.
-2-
3.2 Consideration to the Partnership in the Merger
(a) REIT Shares. Except as provided in Section 3(b),
as of the Effective Time, each unit of limited partner interest
of the Partnership (the "Units") and the interest of the General
Partner entitled to receive consideration, if any, shall become
in the Merger the number of shares of the REIT's Common Stock,
$0.01 par value (the "REIT Shares"), as provided in Section 4.
No fractional REIT Shares shall be issued. Any Partner who would
be entitled to a fractional REIT Share will receive cash at the
rate of $9.34 per REIT Share (the "Exchange Price").
(b) Issuance of Notes. As of the Effective Time, each
Unit held of record by a Partner who does not vote in favor of
the Merger or who elects to do so, subject to the Note
Restriction as defined below, shall receive the REIT's unsecured,
convertible 6.0% Note due December 31, 2004, in the form of the
6.0% Note and Loan Agreement attached hereto as Exhibit A and
incorporated herein (the "Notes"). Any Partner of the
Partnership voting against the Merger (a "Dissenting Limited
Partner") shall receive Notes for his or her Units, unless he or
she timely elects to receive REIT Shares therefore. In no event
shall Notes in the principal amount of more than twenty percent
(20%) of the Partnership's Net Asset Value ("NAV"), as defined in
Section 4.3 below, be issued in the Merger (the "Note
Restriction"). Partners voting for or abstaining from voting for
the Merger may elect to receive Notes, provided that Notes shall
first the allocated to the Dissenting Limited Partners.
3.3 Issuance of Certificate for REIT Shares and Notes.
Upon or as soon as practicable after the Effective Time, the REIT
shall distribute in accordance with this Agreement to the holders
of the Units of each Partnership the Share Certificates and the
6.0% Notes to which they are entitled pursuant hereto.
SECTION 4
PARTNERSHIP INTERESTS
4.1 Conversion of the Units
(a) REIT Shares. At the Effective Time, each REIT
Share outstanding immediately prior to the Effective Time shall
remain outstanding and shall represent one REIT Share.
(b) Partnership Interests. At the Effective Time, the
Units of the Partnership issued and outstanding immediately prior
to the Effective Time shall, by virtue of the Merger and without
any action on the part of holder thereof, be converted into REIT
Shares or Notes determined in accordance with the Partnership's
Net Asset Value as set forth below.
-3-
<TABLE>
Calculation of Partnership
Net Asset Value (NAV)
Negotiated Price of Net Cash at Partnership
Partnership Properties March 31, 1998 Net Asset Value
REIT Shares and/or Notes
Payable to Partnership
Shares and Notes Offered per Unit
<CAPTION>
<S> <C> <C> <C> <C>
No. of REIT Maximum Principal No. of Principal
Shares Offered Amount of Notes Offered REIT Shares Amount of Note
To Limited Partnership
Interests:
To General Partner:
</TABLE>
As a result of the Merger and without any action on the part
of the holder thereof, at the Effective Time, all of the Units
and the general partner interests of the Partnership shall cease
to be outstanding and shall be canceled and retired, and each
holder of such Units or interests shall thereafter cease to have
any rights with respect to the Partnership Interest, except the
right to receive, without interest, the REIT Shares and cash for
fractional shares of the REIT Shares in accordance with this
Section 4.1 and 4.4(e), or Notes.
4.2 Adjustment to Conversion Price. The amount of REIT
Shares and/or Notes to be issued in the Merger to a Partnership
shall be adjusted as of the Effective Time as follows:
(i) If, during the period from March 31, 1998 to
and including the Effective Time, the
outstanding the REIT Shares shall have been
changed to a different number of shares or
securities by reason of any share dividend,
subdivision, reclassification,
recapitalization, share split, reverse share
split, combination, exchange of shares or the
like, shall be appropriately adjusted, and
(ii) If, as of the Effective Time the Net Cash of
the Partnership, as defined in Section 4.3
below, is different than its Net Cash amount
shown in Section 4.1 above, the Net Cash of
the Partnership shall be increased (if
greater) or decreased (if less) and the
number of REIT Shares issuable to the
Partnership in the Merger shall be increased
or decreased, as the case may be, by an
amount equal to such difference divided by
Exchange Price [;and
-4-
(iii) The Net Cash of the Partnership shall be
reduced by the difference between the
Partnership's share of the unpaid
balance of principal and interest on the
Atlas Note on March 31, 1998 and such
balance as of the Effective Time and the
number of REIT Shares issuable to the
Partnership in the Merger shall be
reduced by the number of REIT Shares
equal to the amount of such difference
divided by the Exchange Price. For the
purposes hereof, the Atlas Note shall
refer to that certain note dated October
9, 1997 by Transmark, Inc. in favor of
Taylor Income Investors IV and V Joint
Venture in the original amount of
$215,000.]
4.3 Definitions. For the purposes of this Section 4:
(a) "Net Asset Value" or "NAV" means the sum of the
price of a Partnership's properties set forth under Section 4.1
plus its Net Cash as of the Effective Time.
(b) "NET CASH" means, as of the date determined, (i)
the sum of a Partnership's cash and cash equivalents, less (ii)
the sum of the Partnership's liabilities, as determined on an
accrual accounting basis.
4.4 Exchange of Partnership Interests
(a) As of the Effective Time, the REIT shall deposit,
or shall cause to be deposited, with an exchange agent selected
by the REIT, which shall be the REIT's Transfer Agent or such
other party reasonably satisfactory to the Partnership (the
"Exchange Agent"), for the benefit of the Partners, for exchange
in accordance with this Section 4, certificates representing the
Total Shares and the cash in lieu of fractional REIT Shares and
Notes (such cash, certificates for the Total Shares and Notes,
together with any dividends or distributions with respect
thereto, being hereinafter referred to as the "Exchange Fund") to
be issued pursuant to Sections 4.1 and 4.2 and paid pursuant to
this Section 4.4 in exchange for the outstanding Units and
interests.
(b) Promptly after the Closing, the REIT shall cause
the Exchange Agent to mail to each holder of record of a
Partnership Interest (x) a certificate representing the number of
whole REIT Shares, (y) a check representing the amount of cash in
lieu of fractional shares, if any, and the principal amount of
the Note, if any, which such Partner has the right to receive in
respect of such Partner's Units surrendered pursuant to the
provisions of this Section 4, after giving effect to any required
withholding tax. No interest will be paid or accrued on the cash
in lieu of fractional shares and unpaid dividends and
distributions, if any, payable to the Partners with respect to
their Units. In the event of a transfer of ownership of a Unit
which is not registered in the transfer records of the
Partnership, a certificate representing the proper number of the
REIT Shares, together with a check for the cash to be paid in
lieu of fractional shares or Note, as the case may be, may be
-5-
issued to such a transferee if such holder presents to the
Exchange Agent, all documents required to evidence and effect
such transfer and to evidence that any applicable transfer taxes
have been paid.
(c) At and after the Effective Time, there shall be no
transfers on the transfer books of the Partnership of the Units
which were outstanding immediately prior to the Effective Time.
(d) No fractional REIT Shares shall be issued pursuant
hereto. In lieu of the issuance of any fractional REIT Shares
pursuant to Section 3.2(a), cash adjustments will be paid to
holders in respect of any fractional REIT Shares that would
otherwise be issuable, and the amount of such cash adjustment
shall be equal to such fractional proportion of the Exchange
Price.
(e) Any portion of the Exchange Fund (including the
proceeds of any investments thereof, any REIT Shares, and any
Note or interest thereon) that remains unclaimed by the former
Partners of the Partnership one year after the Effective Time
shall be delivered to the REIT. Any former Partners of the
Partnership who have not theretofore complied with this Section 4
shall thereafter look only to the REIT for delivery of their REIT
Shares, and payment of cash in lieu of fractional shares and/or
dividends on such REIT Shares in respect of each Unit such
Partners hold as determined pursuant to this Agreement, in each
case, without any interest thereon.
(f) None of the REIT, the Partnership, the Exchange
Agent or any other person shall be liable to any former holder of
the Partner's Interest or with respect to the Units for any
amount properly delivered to a public official pursuant to
applicable abandoned property, escheat or similar laws.
SECTION 5
REPRESENTATIONS AND WARRANTIES
OF THE PARTNERSHIPS
The Partnership represents and warrants to the REIT as set
forth below. As contemplated below, the "Partnership Disclosure
Letter" will be delivered to the REIT on or before the Closing.
The Partnership Disclosure Letter shall provide the information
or exceptions described below. The Partnership Disclosure Letter
shall be amended prior to Closing to cause such representations
and warranties to be materially true and correct on the Closing
Date, but the Partnership shall remain liable for any material
breach of such representations and warranties reflected in such
amendment only as provided in Section 9.5(d), below.
-6-
5.1 Existence; Good Standing; Authority; Compliance with Law
(a) The Partnership is a limited partnership, duly
formed, validly existing and in good standing under the laws of
the State of Texas [Nebraska]. To the General Partner's actual
knowledge, the Partnership is duly licensed or qualified to do
business as a foreign limited partnership and is in good standing
under the laws of any other state of the United States in which
the character of the properties owned or leased by it therein or
in which the transaction of its business makes such qualification
necessary, except where the failure to be so qualified would not
have a material adverse effect on the business, results of
operations or financial condition of the Partnership (a
"Partnership Material Adverse Effect"). The Partnership has all
requisite power and authority to own, operate, lease and encumber
its properties and carry on its business as now conducted.
(b) To the General Partner's actual knowledge, it is
not in violation of any order of any court, governmental
authority or arbitration board or tribunal, or any law,
ordinance, governmental rule or regulation to which the
Partnership or any of its properties or assets are subject, where
such violation would have a Partnership Material Adverse Effect.
The Partnership has obtained all licenses, permits and other
authorizations and has taken all actions required by applicable
law or governmental regulations in connection with its business
as now conducted, where the failure to obtain any such item or to
take any such action would have a Partnership Material Adverse
Effect. A copy of the Partnership's Agreement of Limited
Partnership and Certificate of Limited Partnership (collectively,
the "Partnership Organizational Documents") have been delivered
or made available to the REIT and its counsel and such documents
will be listed in the Partnership Disclosure Letter and were or
will be true and correct when delivered or made available.
5.2 Authorization, Validity and Effect of Agreements. The
Partnership has the requisite power and authority to enter into
the transactions contemplated hereby and to execute and deliver
this Agreement and all other documents, agreements and
instruments related to the transactions contemplated by this
Agreement (the "Partnership Ancillary Agreements"). Subject only
to the approval of this Agreement and the transactions
contemplated hereby in accordance with the Agreement of Limited
Partnership of the Partnership, the consummation by the
Partnership of this Agreement, the Partnership Ancillary
Agreements and the transactions contemplated hereby have been
duly authorized by all requisite action on the part of the
Partnership. In reliance upon the legal opinion described in
Section 8.2(e), the Partnership believes this Agreement
constitutes, and the Partnership Ancillary Agreements (when
executed and delivered pursuant hereto for value received) will
constitute, the valid and legally binding obligations of the
Partnership, enforceable against the Partnership in accordance
with their respective terms, subject to applicable bankruptcy,
insolvency, moratorium or other similar laws relating to
creditors' rights and general principles of equity (collectively,
"Equitable Remedies").
5.3 Future Issuances. To the Partnership's actual
knowledge, there are not at the date of this Agreement any
existing options, warrants, calls, subscriptions, convertible
securities, or other rights, agreements or commitments which
obligate the Partnership to issue, transfer or sell any of its
-7-
Units or other Partner Interests. After the Effective Time, the
REIT will have no obligation to issue, transfer or sell any the
Partnership Interest.
5.4 Other Interests. Except as set forth in the Partnership
Disclosure Letter, the Partnership does not own directly or
indirectly any interest or investment (whether equity or debt) in
any corporation, partnership, joint venture, business, trust or
entity (other than investments in short-term investment
securities) except as set forth in the Partnership Disclosure
Letter.
5.5 No Violation. To General Partner's actual knowledge,
neither the execution and delivery by the Partnership of this
Agreement nor the consummation by the Partnership of the
transactions contemplated hereby in accordance with the terms
hereof, will: (i) conflict with or result in a breach of any
provisions of the Agreement of Limited Partnership of the
Partnership; (ii) except as contemplated by the Partnership
Ancillary Agreements or as will be set forth in the Partnership
Disclosure Letter, violate, or conflict with, or result in a
breach of any provision of, or constitute a default (or an event
which, with notice or lapse of time or both, would constitute a
default) under, or result in the termination or in a right of
termination or cancellation of, or accelerate the performance
required by, or result in the creation of any lien, security
interest, charge or encumbrance upon any of the properties of the
Partnership under, or result in being declared void, voidable or
without further binding effect, any of the terms, conditions or
provisions of any note, bond, mortgage, indenture, deed of trust
or any license, franchise, permit, lease, contract, agreement or
other instrument, commitment or obligation to which the
Partnership is a party, or by which the Partnership or any of its
properties are bound or affected, except for any of the foregoing
matters which, individually or in the aggregate, would not have a
Partnership Material Adverse Effect; or (iii) other than the
filings provided for in this Agreement to effect the Merger, any
filings required under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), the Securities Act or applicable
state securities and "Blue Sky" laws (collectively, the
"Regulatory Filings"), require any consent, approval or
authorization of, or declaration, filing or registration with,
any domestic governmental or regulatory authority, except where
the failure to obtain any such consent, approval or authorization
of, or declaration, filing or registration with, any governmental
or regulatory authority would not have a Partnership Material
Adverse Effect.
5.6 Litigation. To the Partnership's actual knowledge,
there are (i) no continuing orders, injunctions or decrees of any
court, arbitrator or governmental authority to which the
Partnership is a party or by which any of its properties or
assets are bound or to which the General Partner is a party or by
which any of his/its properties or assets are bound, and (ii)
except as will be set forth in the Partnership Disclosure Letter,
no actions, suits or proceedings pending against the Partnership
or against the General Partner or, to the knowledge of the
General Partner, threatened against the Partnership or against
the General Partner, at law or in equity, or before or by any
federal or state commission, board, bureau, agency or
instrumentality that in the case of clauses (i) or (ii) above are
reasonably likely, individually or in the aggregate, to have a
Partnership Material Adverse Effect.
-8-
5.7 Absence of Certain Changes. Except as disclosed in the
Partnership Reports, since December 31, 1998, (i) the Partnership
conducted its business only in the ordinary course of such
business (which for purposes of this section only, shall include
all acquisitions of real estate properties and financing
arrangements made in connection therewith); (ii) there has not
been any Partnership Material Adverse Effect; (iii) there has not
been any distribution, setting aside or payment of any
distribution with respect to any Partner interest in the
Partnership, and (iv) there has not been any material change in
the Partnership's accounting principles, practices or methods.
5.8 Taxes
(a) Except as may be set forth in the Partnership
Disclosure Letter, the Partnership (i) has timely filed all
federal, state and foreign tax returns including, without
limitation, information returns and reports required to be filed
by it for tax periods ended prior to the date of this Agreement
or requests for extensions have been timely filed and any such
request has been granted and has not expired and all such returns
are accurate and complete in all material respects, (ii) has paid
or accrued all taxes shown to be due and payable on such returns
or which have become due and payable pursuant to any assessment,
deficiency notice, 30-day letter or other notice received by it
and (iii) has properly accrued all taxes for such periods and
periods subsequent to the periods covered by such returns. The
Partnership has not received notice that the federal, state and
local income and franchise tax returns of the Partnership have
been or will be examined by any taxing authority. The Partnership
has not executed or filed with the Internal Revenue Service (the
"IRS") or any other taxing authority any agreement now in effect
extending the period for assessment or collection of any income
or other taxes.
(b) Except as may be set forth in the Partnership
Disclosure Letter, the Partnership is not a party to any pending
action or proceeding by any governmental authority for assessment
or collection of taxes, and no claim for assessment or collection
of taxes has been asserted against it. True, correct and complete
copies of all federal, state and local income or franchise tax
returns filed by the Partnership since its inception and all
communications relating thereto have been delivered to the REIT
or made available to representatives of the REIT or will be so
delivered or made available prior to the Closing. The
Partnership does not hold any asset (i) the disposition of which
could be subject to rules similar to Section 1374 of the Internal
Revenue Code of 1986, as amended (the "Code") as a result of an
election under IRS Notice 88-19 or (ii) that is subject to a
consent filed pursuant to Section 341(f) of the Code and
regulations thereunder. For purposes of this Section 5.9, "taxes"
includes any interest, penalty or additional amount payable with
respect to any tax.
5.9 Books and Records. The books of account and other
financial records of the Partnership are in all material respects
true, complete and correct, have been maintained in accordance
with good business practices, and are accurately reflected in all
material respects in the financial statements included in the
Partnership Reports.
-9-
5.10 Properties
(a) The Partnership owns fee simple title to, or an
interest in a Joint Venture which owns fee title to each of the
real properties reflected on the most recent balance sheet of the
Partnership included in the Partnership Reports or as may be
identified in the Disclosure Letter (the "Partnership
Properties"), which are all of the real estate properties owned
by it, free and clear of liens, mortgages or deeds of trust,
claims against title, charges which are liens or security
interests ("Encumbrances") except as will be noted in the
Partnership Disclosure Letter. To the General Partner's actual
knowledge, the Partnership Properties are not subject to any
rights of way, written agreements, laws, ordinances and
regulations affecting building use or occupancy, or reservations
of an interest in title (collectively, "Property Restrictions"),
except for (i) Encumbrances and Property Restrictions that will
be set forth in the Partnership Disclosure Letter, (ii) Property
Restrictions imposed or promulgated by law or any governmental
body or authority with respect to real property, including zoning
regulations, provided they do not materially adversely affect the
current use of the property, (iii) Encumbrances and Property
Restrictions disclosed on existing title reports or current
surveys (in either case copies of which title reports and surveys
have been or will be delivered or made available to the REIT
prior to the Closing, 1998), (iv) mechanics', carriers',
workmen's, repairmen's liens and other Encumbrances, Property
Restrictions and other limitations of any kind, if any, which
have heretofore been bonded (and that will be listed in the
Partnership Disclosure Letter) or which individually or in the
aggregate do not exceed $10,000, do not materially detract from
the value of or materially interfere with the present use of any
of the Partnership Properties subject thereto or affected
thereby, and do not otherwise materially impair business
operations conducted by the Partnership and which have arisen or
been incurred only in its construction activities or in the
ordinary course of business.
(b) Valid policies of title insurance have been issued
insuring the Partnership's fee simple title to the Partnership
Properties subject only to the matters disclosed above and as
may be set forth in the Partnership Disclosure Letter, and such
policies are, at the date hereof, in full force and effect and no
claim has been made against any such policy. To the Partnership's
actual knowledge, except as will be set forth in the Partnership
Disclosure Letter: (i) there is no certificate, permit or license
from any governmental authority having jurisdiction over any of
the Partnership Properties or any agreement, easement or other
right which is necessary to permit the lawful use and operation
of the buildings and improvements on any of the Partnership
Properties or which is necessary to permit the lawful use and
operation of all driveways, roads and other means of egress and
ingress to and from any of the Partnership Properties that has
not been obtained and is not in full force and effect, or of any
pending threat of modification or cancellation of any of same;
(ii) the Partnership has not received written notice of any
material violation of any federal, state or municipal law,
ordinance, order, regulation or requirement affecting any portion
of any of the Partnership Properties issued by any governmental
authority; (iii) there are no structural defects relating to the
Partnership Properties and no Partnership Properties whose
building systems are not in working order in any material
respect; and (iv) there is (A) no physical damage to any
Partnership Property in excess of $10,000 for which there is no
insurance in effect covering the cost of the restoration, (B) no
-10-
current renovation to any Partnership Property the cost of which
exceeds $10,000 and (C) no current restoration (excluding tenant
improvements) of any Partnership Property, the cost of which
exceeds $10,000.
(c) Except as will be set forth in the Disclosure
Letter, the Partnership has not received notice to the effect
that and there are no (A) condemnation or rezoning proceedings
that are pending or threatened with respect to any of the
Partnership Properties or (B) zoning, building or similar laws,
codes, ordinances, orders or regulations that are or will be
violated by the continued maintenance, operation or use of any
buildings or other improvements on any of the Partnership
Properties or by the continued maintenance, operation or use of
the parking areas. All work to be performed, payments to be made
and actions to be taken by the Partnership prior to the date
hereof pursuant to any agreement entered into with a governmental
body or authority in connection with a site approval, zoning
reclassification or other similar action relating to the
Partnership Properties (e.g., Local Improvement District, Road
Improvement District, Environmental Mitigation) has been
performed, paid or taken, as the case may be, and the General
Partner is not aware of any planned or proposed work, payments or
actions that may be required after the date hereof pursuant to
such agreements, except as will be set forth in the Disclosure
Letter.
5.11 Environmental Matters. To the General Partner's actual
knowledge, the Partnership has not caused (i) the unlawful
presence of any hazardous substances, hazardous materials, toxic
substances or waste materials (collectively, "Hazardous
Materials") on any of the Partnership Properties, or (ii) any
unlawful spills, releases, discharges or disposal of Hazardous
Materials to have occurred or be presently occurring on or from
the Partnership Properties as a result of any construction on or
operation and use of such properties, which presence or
occurrence would, individually or in the aggregate, have a
Partnership Material Adverse Effect; and in connection with the
construction on or operation and use of the Partnership
Properties, the Partnership has not failed to comply, in any
material respect, with any applicable local, state and federal
environmental laws, regulations, ordinances and administrative
and judicial orders relating to the generation, recycling, reuse,
sale, storage, handling, transport and disposal of any Hazardous
Materials.
5.12 Labor Matters. The Partnership is not a party to, or
bound by, any collective bargaining agreement, contract or other
agreement or understanding with a labor union or labor union
organization. There is no unfair labor practice or labor
arbitration proceeding pending or, to the actual knowledge of the
General Partner, threatened against the Partnership relating to
its business, except for any such proceeding which would not have
a Partnership Material Adverse Effect. To the actual knowledge of
the General Partner, there are no organizational efforts with
respect to the formation of a collective bargaining unit
presently being made or threatened involving employees of the
Partnership.
5.13 No Brokers. Except the fee that is to be paid to
Houlihan Lokey Howard & Zukin Financial Advisors, Inc.
("Houlihan") by the Partnership as described in Section 5.14
below, the Partnership has not entered into any contract,
arrangement or understanding with any person or firm which may
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result in the obligation of the Partnership or the REIT to pay
any finder's fees, brokerage or agent's commissions or other like
payments in connection with the negotiations leading to this
Agreement or the consummation of the transactions contemplated
hereby. The Partnership is not aware of any claim for payment of
any finder's fees, brokerage or agent's commissions or other like
payments in connection with the negotiations leading to this
Agreement or the consummation of the transactions contemplated
hereby.
5.14 Opinions of Financial Advisor. The General Partner, on
behalf of the Partnership, has retained Houlihan to deliver its
opinion as to the value of the Partnership's properties (the
"Valuation Opinion") and to review the transaction contemplated
by this Agreement and to issue an opinion to the effect that, as
of the date of such opinion, the Purchase Price is fair to the
holders of the Units of the Partnership from a financial point
of view (the "Fairness Opinion").
5.15 Related Party Transactions. Except as set forth in the
Partnership Disclosure Letter, there are no arrangements,
agreements or contracts entered into by the Partnership with (i)
any consultant, (ii) any person who is an officer, director or
affiliate of the Partnership or the General Partner, any relative
of any of the foregoing or any entity of which any of the
foregoing is an affiliate, or (iii) any person who acquired the
Units of the Partnership in a private placement.
5.16 Contracts and Commitments. The Partnership Disclosure
Letter will set forth (i) all unsecured notes or other
obligations of the Partnership which individually may result in
total payments in excess of $10,000, (ii) all notes, debentures,
bonds and other evidence of indebtedness which are secured or
collateralized by mortgages, deeds of trust or other security
interests in the Partnership Properties or personal property of
the Partnership, and (iii) each commitment entered into by the
Partnership which may result in total payments or liability in
excess of $10,000. Copies of the foregoing will be delivered or
made available to the REIT prior to March 31, 1998, will be
listed on the Disclosure Letter and will be materially true and
correct when delivered or made available. The Partnership has
not received any notice of a default that has not been cured
under any of the documents described in clause (i) above or is in
default respecting any payment obligations thereunder beyond any
applicable grace periods. All options of the Partnership to
purchase real property will be set forth on the Partnership
Disclosure Letter and such options and the Partnership's rights
thereunder are in full force and effect. All joint venture
agreements to which the Partnership is a party will be set forth
on the Partnership Disclosure Letter and the Partnership is not
in default with respect to any obligations, which individually or
in the aggregate are material, thereunder.
5.17 Development Rights. Set forth in the Partnership
Disclosure Letter will be a list of all material agreements
entered into by the Partnership relating to the development,
rehabilitation, capital improvement or construction of office
buildings, industrial facilities or other real estate properties,
which development or construction has not been substantially
completed as of the date of this Agreement. Such agreements, true
and correct copies of all of which will be delivered or made
available to the REIT prior to the Closing, will be listed in the
Partnership Disclosure Letter, have not been modified and are
valid and binding in accordance with their respective terms.
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5.18 Convertible Securities. To the General Partner's actual
knowledge, the Partnership has no outstanding options, warrants
or other securities exercisable for, or convertible into, Units
or other Partner Interests of the Partnership, the terms of which
would require any anti-dilution adjustments by reason of the
consummation of the transactions contemplated hereby.
5.19 SEC Documents [If Reporting under 1934 Exchange Act].
(a) The Partnership has made available or will make
available to the REIT prior to _____________ 1998, each
registration statement, report, proxy statement or information
statement and all exhibits thereto prepared by it or relating to
its properties since January 1, 1995, each in the form (including
exhibits and any amendments thereto) filed with the U.S.
Securities and Exchange Commission (the "SEC") (collectively, the
"Partnership Reports"). The Partnership Reports, which were or
will be filed with the SEC in a timely manner, constitute all
forms, reports and documents required to be filed by the
Partnership under the Securities Act of 1933, as amended (the
"Securities Act"), the Exchange Act and the rules and regulations
promulgated thereunder (collectively the "Securities Laws") for
the periods stated above.
(b) To the Partnership's actual knowledge, as of their
respective dates, the Partnership Reports (i) complied as to form
in all material respects with the applicable requirements of the
Securities Laws and (ii) did not contain any untrue statement of
a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements made therein,
in the light of the circumstances under which they were made, not
misleading. To the General Partner's actual knowledge, each of
the balance sheets of the Partnership included in or incorporated
by reference into the Partnership Reports (including the related
notes and schedules) fairly presents the financial position of
the Partnership as of its date and each of the consolidated
statements of income, retained earnings and cash flows of the
Partnership included in or incorporated by reference into the
Partnership Reports (including any related notes and schedules)
fairly presents the results of operations, retained earnings and
cash flows, as the case may be, of the Partnership for the
periods set forth therein (subject, in the case of unaudited
statements, to normal year-end audit adjustments which would not
be material in amount or effect), in each case in accordance with
generally accepted accounting principles consistently applied
during the periods involved, except as may be noted therein and
except, in the case of the unaudited statements, as permitted by
the Securities Laws.
(c) Except as and to the extent set forth on the
balance sheet of the Partnership at March 31, 1998, including all
notes thereto, or as set forth in the Partnership Reports, the
Partnership has no material liabilities or obligations of any
nature (whether accrued, absolute, contingent or otherwise) that
would be required to be reflected on, or reserved against in, a
balance sheet of the Partnership or in the notes thereto,
prepared in accordance with generally accepted accounting
principles consistently applied, except liabilities arising in
the ordinary course of business since such date which would not
have a Partnership Material Adverse Effect.
-13-
SECTION 6
REPRESENTATIONS AND WARRANTIES OF THE REIT
The REIT represents and warrants to the Partnership as set
forth below. As contemplated below, the "REIT Disclosure Letter"
will be delivered to the Partnership on or before the Closing.
The REIT Disclosure Letter shall provide the information or
exceptions described below. The REIT Disclosure Letter shall be
amended prior to Closing to cause such representations and
warranties to be materially true and correct on the Closing Date,
but the REIT shall remain liable for any material breach of such
representations and warranties reflected in such amendment only
as provided in Section 9.5(d), below.
6.1 Existence; Good Standing; Authority; Compliance with Law
(a) The REIT is a corporation duly organized and
validly existing under the laws of the State of Maryland. To the
REIT's actual knowledge, the REIT is duly licensed or qualified
to do business and is in good standing under the laws of any
other state of the United States in which the character of the
properties owned or leased by it therein or in which the
transaction of its business makes such qualification necessary,
except where the failure to be so qualified would not have a
material adverse effect on the business, results of operations or
financial condition of the REIT and its subsidiaries taken as a
whole (a "REIT Material Adverse Effect"). The REIT has all
requisite power and authority to own, operate, lease and encumber
its properties and carry on its business as now conducted. Each
of the REIT's Subsidiaries is a corporation, or partnership duly
organized, validly existing and in good standing under the laws
of its jurisdiction of incorporation or organization, has the
requisite power and authority to own its properties and to carry
on its business as it is now being conducted, and is duly
qualified to do business and is in good standing in each
jurisdiction in which the ownership of its property or the
conduct of its business requires such qualification, except for
jurisdictions in which such failure to be so qualified or to be
in good standing would not have a REIT Material Adverse Effect.
(b) To the REIT's actual acknowledge, neither the REIT
nor any REIT Subsidiary is in violation of any order of any
court, governmental authority or arbitration board or tribunal,
or any law, ordinance, governmental rule or regulation to which
the REIT or any REIT Subsidiary or any of their respective
properties or assets are subject, where such violation would have
a REIT Material Adverse Effect. The REIT and its Subsidiaries
have obtained all licenses, permits and other authorizations and
have taken all actions required by applicable law or governmental
regulations in connection with their business as now conducted,
where the failure to obtain any such item or to take any such
action would have a REIT Material Adverse Effect. Copies of the
REIT's and its Subsidiaries' Articles of Incorporation, Bylaws,
organizational documents and partnership and joint venture
agreements have been or will be prior to the Closing, delivered
or made available to the Partnership and such documents will be
listed in the REIT Disclosure Letter and were or will be true and
correct when delivered or made available. For the purposes of the
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immediately preceding sentence, the term "Subsidiary" shall
include the entities set forth in the REIT Disclosure Letter,
which are all of the REIT's Subsidiaries.
6.2 Authorization, Validity and Effect of Agreements. The
REIT has the requisite power and authority to enter into the
transactions contemplated hereby and to execute and deliver this
Agreement and all other documents, agreements and instruments
related to the transactions contemplated by this Agreement to
which it is a party (the "REIT Ancillary Agreements"). Subject
only to the approval of the issuance of the REIT Shares and the
Notes pursuant to the Merger contemplated hereby by the holders
of a majority of the outstanding the REIT Shares, present and
voting thereon, the consummation by the REIT of this Agreement,
the REIT Ancillary Agreements and the transactions contemplated
hereby have been duly authorized by all requisite action on the
part of the REIT. This Agreement constitutes, and the REIT
Ancillary Agreements (when executed and delivered pursuant hereto
for value received) will constitute, the valid and legally
binding obligations of the REIT enforceable against the REIT in
accordance with their respective terms, subject to Equitable
Remedies.
6.3 Capitalization. On ____________, 1998, the authorized
capital stock of the REIT consists of _______________ Common
Shares. As of the date hereof, all _______________ Common Shares
are outstanding. The REIT has no outstanding bonds, debentures,
notes or other obligations, the holders of which have the right
to vote (or which are convertible into or exercisable for
securities having the right to vote) with the shareholders of the
REIT on any matter. Except as set forth in the REIT Disclosure
Letter, all such issued and outstanding of REIT Shares are duly
authorized, validly issued, fully paid, nonassessable and free of
preemptive rights. Except as set forth in the REIT Disclosure
Letter, there are not at the date of this Agreement any existing
options, warrants, calls, subscriptions, convertible securities,
or other rights, agreements or commitments which obligate the
REIT or any of its Subsidiaries to issue, transfer or sell any
shares or other equity interest of the REIT or any of its
Subsidiaries except under any employee incentive plan approved by
the REIT's shareholders. There are no agreements or
understandings to which the REIT is a party with respect to the
voting of any REIT Shares or which restrict the transfer of any
such shares, except in order to protect its REIT status.
6.4 Subsidiaries. Except as set forth in the REIT
Disclosure Letter, the REIT owns directly or indirectly each of
the outstanding shares of capital stock or all of the partnership
or other equity interests of each of the REIT's Subsidiaries
(except those joint venture interests as may be disclosed in the
REIT Disclosure Letter) and such stock interests are free and
clear of all liens, pledges, security interests, claims or other
encumbrances other than liens imposed by local law which are not
material.
6.5 Other Interests. Except as will be disclosed in the
REIT Disclosure Letter and except for interests in the REIT
Subsidiaries, neither the REIT nor any REIT Subsidiary owns
directly or indirectly any interest or investment (whether equity
or debt) in any corporation, partnership, joint venture,
business, trust or entity (other than investments in short-term
investment securities).
-15-
6.6 No Violation. Neither the execution and delivery by the
REIT of this Agreement nor the consummation by the REIT of the
transactions contemplated hereby in accordance with the terms
hereof, will: (i) conflict with or result in a breach of any
provisions of the REIT's Declaration of Trust; (ii) violate, or
conflict with, or result in a breach of any provision of, or
constitute a default (or an event which, with notice or lapse of
time or both, would constitute a default) under, or result in the
termination or in a right of termination or cancellation of, or
accelerate the performance required by, or result in the creation
of any lien, security interest, charge or encumbrance upon any of
the properties of the REIT or its Subsidiaries under, or result
in being declared void, voidable or without further binding
effect, any of the terms, conditions or provisions of any note,
bond, mortgage, indenture, deed of trust or any license,
franchise, permit, lease, contract, agreement or other
instrument, commitment or obligation to which the REIT or any of
its Subsidiaries is a party, or by which the REIT or any of its
Subsidiaries or any of their properties is bound or affected,
except for any of the foregoing matters which, individually or in
the aggregate, would not have a REIT Material Adverse Effect; or
(iii) other than the Regulatory Filings require any consent,
approval or authorization of, or declaration, filing or
registration with, any domestic governmental or regulatory
authority, except where the failure to obtain such consent,
approval or authorization of, or declaration, filing or
registration with, any governmental or regulatory authority would
not have a REIT Material Adverse Effect.
6.7 SEC Documents
(a) The REIT has made available or will make available
to the Partnership prior to the Closing, the registration
statements of the REIT filed with the SEC in connection with
public offerings of REIT securities since its inception and all
exhibits, amendments and supplements thereto (the "REIT
Registration Statements"), and each registration statement,
report, proxy statement or information statement and all exhibits
thereto prepared by it or relating to its properties since the
effective date of the latest REIT Registration Statement, each in
the form (including exhibits and any amendments thereto) filed
with the SEC (collectively, the "REIT Reports"). The REIT
Reports, which were or will be filed with the SEC in a timely
manner, constitute all forms, reports and documents required to
be filed by the REIT under the Securities Laws.
(b) To the REIT's actual knowledge, as of their
respective dates, the REIT Reports (i) complied as to form in all
material respects with the applicable requirements of the
Securities Laws, and (ii) did not contain any untrue statement of
a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements made therein,
in the light of the circumstances under which they were made, not
misleading. To the REIT's actual acknowledge, each of the
consolidated balance sheets of the REIT included in or
incorporated by reference into the REIT Reports (including the
related notes and schedules) fairly presents the consolidated
financial position of the REIT and the REIT Subsidiaries as of
its date and each of the consolidated statements of income,
retained earnings and cash flows of the REIT included in or
incorporated by reference into the REIT Reports (including any
related notes and schedules) fairly presents the results of
operations, retained earnings or cash flows, as the case may be,
-16-
of the REIT and the REIT Subsidiaries for the periods set forth
therein (subject, in the case of unaudited statements, to normal
year-end audit adjustments which would not be material in amount
or effect), in each case in accordance with generally accepted
accounting principles consistently applied during the periods
involved, except as may be noted therein and except, in the case
of the unaudited statements, as permitted by the Securities Laws.
(c) Except as and to the extent set forth on the
consolidated balance sheet of the REIT and its Subsidiaries at
March 31, 1998, including all notes thereto, or as set forth in
the REIT Reports, neither the REIT nor any of the REIT
Subsidiaries has any material liabilities or obligations of any
nature (whether accrued, absolute, contingent or otherwise) that
would be required to be reflected on, or reserved against in, a
balance sheet of the REIT or in the notes thereto, prepared in
accordance with generally accepted accounting principles
consistently applied, except liabilities arising in the ordinary
course of business since such date which would not have a REIT
Material Adverse Effect.
6.8 Litigation. To the REIT's actual knowledge, there are
(i) no continuing orders, injunctions or decrees of any court,
arbitrator or governmental authority to which the REIT or any
REIT Subsidiary is a party or by which any of its properties or
assets are bound or, to which any of its directors, officers, or
affiliates is a party or by which any of their properties or
assets are bound, and (ii) except as will be set forth in the
REIT Disclosure Letter, no actions, suits or proceedings pending
against the REIT or any REIT Subsidiary or, to the knowledge of
the REIT, against any of its Directors, officers, or affiliates
or, to the knowledge of the REIT, threatened against the REIT or
any REIT Subsidiary or against any of its directors, officers, or
affiliates, at law or in equity, or before or by any federal or
state commission, board, bureau, agency or instrumentality, that
in the case of clauses (i) or (ii) above are reasonably likely,
individually or in the aggregate, to have a REIT Material Adverse
Effect.
6.9 Absence of Certain Changes. Except as disclosed in the
REIT Reports filed with the SEC prior to the date hereof, (i) the
REIT and its Subsidiaries have conducted their business only in
the ordinary course of such business (which, for purposes of this
section only, shall include all acquisitions of real estate
properties and financing arrangements made in connection
therewith); (ii) there has not been any REIT Material Adverse
Effect; (iii) there has not been any declaration, setting aside
or payment of any dividend or other distribution with respect to
the REIT Shares; and (iv) there has not been any material change
in the REIT's accounting principles, practices or methods.
6.10 Taxes
(a) Except as may be disclosed in the REIT Disclosure
Letter, the REIT and each of its Subsidiaries (i) has timely
filed all federal, state and foreign tax returns including,
without limitation, information returns and reports required to
be filed by any of them for tax periods ended prior to the date
of this Agreement or requests for extensions have been timely
filed and any such request has been granted and has not expired
and all such returns are absolute and complete in all material
-17-
respects, (ii) has paid or accrued all taxes shown to be due and
payable on such returns or which have become due and payable
pursuant to any assessment, deficiency notice, 30-day letter or
other notice received by it and (iii) has properly accrued all
taxes for such periods subsequent to the periods covered by such
returns. Neither the REIT nor any of its Subsidiaries has
received notice that the federal, state and local income and
franchise tax returns of the REIT or any such Subsidiary has been
or will be examined by any taxing authority. Neither the REIT nor
any of its Subsidiaries has executed or filed with the IRS or any
other taxing authority any agreement now in effect extending the
period for assessment or collection of any income or other taxes.
(b) Except as will be disclosed in the REIT Disclosure
Letter, neither the REIT nor any of its Subsidiaries is a party
to any pending action or proceeding by any governmental authority
for assessment or collection of taxes, and no claim for
assessment or collection of taxes has been asserted against it.
True, correct and complete copies of all federal, state and local
income or franchise tax returns filed by the REIT and each of its
Subsidiaries and all communications relating thereto have been
delivered to the Partnership or made available to representatives
of the Partnership or will be so delivered or made available
prior to the Closing. The REIT (i) has qualified to be taxed as a
REIT pursuant to Sections 856 through 859 of the Code for its
taxable years ended December 31, 1995 through 1997, inclusive
(ii) has operated, and intends to continue to operate, in such a
manner as to qualify to be taxed as a REIT pursuant to Sections
856 through 859 of the Code for its taxable year ended on the
effective date of the Merger, and (iii) has not taken or omitted
to take any action which could result in, and each of the
executive officers of the REIT, each acting in his respective
capacity as such, has no actual knowledge of, a challenge to its
status as a REIT. REIT represents that each of its Subsidiaries
is a Qualified REIT Subsidiary as defined in Section 856(i) of
the Code. Neither the REIT nor any of its Subsidiaries holds any
asset (i) the disposition of which could be subject to rules
similar to Section 1374 of the Code as a result of an election
under IRS Notice 88-19 or (ii) that is subject to a consent filed
pursuant to Section 341(f) of the Code and regulations
thereunder. For purposes of this Section 6.10, "taxes" includes
any interest, penalty or additional amount payable with respect
to any tax.
6.11 Books and Records
(a) The books of account and other financial records
of the REIT and its Subsidiaries are in all material respects
true, complete and correct, have been maintained in accordance
with good business practices, and are accurately reflected in all
material respects in the financial statements included in the
REIT Reports.
(b) The minute books and other records of the REIT and
its Subsidiaries contain in all material respects accurate
records of all meetings and accurately reflect in all material
respects all other corporate action of the shareholders and the
Board and any committees of the Board and its Subsidiaries.
-18-
6.12 Properties
(a) The REIT and its Subsidiaries own, and each joint
venture to which the REIT or its subsidiary is a party owns, fee
simple title to each of the real properties reflected on the most
recent balance sheet of the REIT included in the REIT Reports or
as may be identified in the REIT Disclosure Letter (the "REIT
Properties"), which are all of the real estate properties owned
by them, free and clear of Encumbrances. To the REIT's actual
knowledge, the REIT Properties are not subject to any rights of
way, written agreements, laws, ordinances and regulations
affecting building use or occupancy, or reservations of an
interest in title (collectively, "Property Restrictions"), except
for (i) Encumbrances and Property Restrictions that will be set
forth in the REIT Disclosure Letter, (ii) Property Restrictions
imposed or promulgated by law or any governmental body or
authority with respect to real property, including zoning
regulations, provided they do not materially adversely affect the
current use of the property, (iii) Encumbrances and Property
Restrictions disclosed on existing title reports or surveys (in
either case copies of which title reports and surveys have been
or will be delivered or made available to the Partnership prior
to the Closing, and (iv) mechanics', carriers', workmen's,
repairmen's liens and other Encumbrances, Property Restrictions
and other limitations of any kind, if any, which have heretofore
been bonded (and that will be listed in the REIT Disclosure
Letter) or which individually or in the aggregate, do not exceed
$100,000, do not materially detract from the value of or
materially interfere with the present use of any of the REIT
Properties subject thereto or affected thereby, and do not
otherwise materially impair business operations conducted by the
REIT and its Subsidiaries and which have arisen or been incurred
only in its construction activities or in the ordinary course of
business.
(b) Valid policies of title insurance have been issued
insuring the REIT's or any of its Subsidiaries' fee simple title
to the REIT Properties, subject only to the matters disclosed
above and as may be set forth in the REIT Disclosure Letter, and
such policies are, at the date hereof, in full force and effect
and no material claim has been made against any such policy. To
the REIT's actual knowledge, except as will be set forth in the
REIT Disclosure Letter, (i) there is no certificate, permit or
license from any governmental authority having jurisdiction over
any of the REIT Properties or any agreement, easement or other
right which is necessary to permit the lawful use and operation
of the buildings and improvements on any of the REIT Properties
or which is necessary to permit the lawful use and operation of
all driveways, roads and other means of egress and ingress to and
from any of the REIT Properties that has not been obtained and is
not in full force and effect, or of any pending threat of
modification or cancellation of any of same; (ii) neither the
REIT nor its Subsidiaries has received written notice of any
material violation of any federal, state or municipal law,
ordinance, order, regulation or requirement affecting any portion
of any of the REIT Properties issued by any governmental
authority; (iii) there are no structural defects relating to the
REIT Properties and no the REIT Properties whose building systems
are not in working order in any material respect; and (iv) there
is (A) no physical damage to any the REIT Property in excess of
$10,000 for which there is no insurance in effect covering the
cost of the restoration, (B) no current renovation to any the
REIT Property the cost of which exceeds $100,000 and (C) no
-19-
current restoration (excluding tenant improvements) of any the
REIT Property the cost of which exceeds $100,000.
(c) Except as will be set forth in the REIT Disclosure
Letter, the REIT or its Subsidiaries have received no notice to
the effect that and there are no (A) condemnation or rezoning
proceedings that are pending or threatened with respect to any of
the REIT Properties or (B) any zoning, building or similar laws,
codes, ordinances, orders or regulations that are or will be
violated by the continued maintenance, operation or use of any
buildings or other improvements on any of the REIT Properties or
by the continued maintenance, operation or use of the parking
areas in any material respect. All work to be performed, payments
to be made and actions to be taken by the REIT or its
Subsidiaries prior to the date hereof pursuant to any agreement
entered into with a governmental body or authority in connection
with a site approval, zoning reclassification or other similar
action relating to the REIT Properties (e.g., Local Improvement
District, Road Improvement District, Environmental Mitigation)
has been performed, paid or taken, as the case may be, and the
REIT is not aware of any planned or proposed work, payments or
actions that may be required after the date hereof pursuant to
such agreements, except as will be set forth in the REIT
Disclosure Letter.
6.13 Environmental Matters. To the actual knowledge of the
REIT, none of the REIT, any of its Subsidiaries or, any other
person has caused or permitted (i) the unlawful presence of any
Hazardous Materials on any of the REIT Properties, or (ii) any
unlawful spills, releases, discharges or disposal of Hazardous
Materials to have occurred or be presently occurring on or from
the REIT Properties as a result of any construction on or
operation and use of such properties, which presence or
occurrence would, individually or in the aggregate, have a REIT
Material Adverse Effect; and in connection with the construction
on or operation and use of the REIT Properties, the REIT and its
Subsidiaries have not failed to comply, in any material respect,
with any applicable local, state and federal environmental laws,
regulations, ordinances and administrative and judicial orders
relating to the generation, recycling, reuse, sale, storage,
handling, transport and disposal of any Hazardous Materials.
6.14 Labor Matters. Neither the REIT nor any of its
Subsidiaries is a party to, or bound by, any collective
bargaining agreement, contract or other agreement or
understanding with a labor union or labor union organization.
There is no unfair labor practice or labor arbitration proceeding
pending or, to the knowledge of the executive officers of the
REIT, threatened against the REIT or its Subsidiaries relating to
their business, except for any such proceeding which would not
have the REIT Material Adverse Effect. To the knowledge of the
REIT, there are no organizational efforts with respect to the
formation of a collective bargaining unit presently being made or
threatened involving employees of the REIT or any of its
Subsidiaries.
6.15 No Brokers. Except for the fee payable to Bishop Crown
Investment Research, Inc. ("Bishop-Crown") as described in
Section 6.16 below, the REIT has not entered into any contract,
arrangement or understanding with any person or firm which may
result in the obligation of the REIT or the Partnership to pay
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any finder's fees, brokerage or agent's commissions or other like
payments in connection with the negotiations leading to this
Agreement or the consummation of the transactions contemplated
hereby. The REIT is not aware of any claim for payment of any
finder's fees, brokerage or agent's commissions or other like
payments in connection with the negotiations leading to this
Agreement or the consummation of the transactions contemplated
hereby.
6.16 Opinion of Financial Advisor. The REIT has retained
Bishop-Crown to review the transaction contemplated by this
Agreement and to issue an opinion as to the fairness to the REIT,
from a financial point of view, of the consideration to be paid
by the REIT pursuant to the Merger.
6.17 Partnership Share Ownership. Except as may be set forth
in the REIT Disclosure Letter, neither the REIT nor any of its
Subsidiaries owns any Units or other partner interests of the
Partnership or other securities convertible into the Partnership
interests.
6.18 The REIT Shares. The issuance and delivery by the REIT
of the REIT Shares in connection with the Merger and this
Agreement have been duly and validly authorized by all necessary
action on the part of the REIT except for the approval of its
shareholders contemplated by this Agreement. The REIT Shares to
be issued in connection with the Merger and this Agreement, when
issued in accordance with the terms of this Agreement, will be
validly issued, fully paid and nonassessable, except that
shareholders may be subject to further assessment with respect to
certain claims for tort, contract, taxes, statutory liability and
otherwise in some jurisdictions to the extent such claims are not
satisfied by the REIT.
6.19 The Notes. The issuance and delivery by the REIT of the
Notes in connection with the Merger and this Agreement have been
duly and validly authorized by all necessary action on the part
of the REIT except for the approval of its shareholders
contemplated by this Agreement. The Notes to be issued in
connection with the Merger and this Agreement, when issued in
accordance with the terms of this Agreement, will constitute
binding obligations of the REIT enforceable in accordance with
these terms, subject to the laws respecting debtor rights
generally, except that shareholders may be subject to further
assessment with respect to certain claims for tort, contract,
taxes, statutory liability and otherwise in some jurisdictions to
the extent such claims are not satisfied by the REIT.
6.20 Convertible Securities. Except as disclosed in the
REIT Disclosure letter, the REIT has no outstanding options,
warrants or other securities exercisable for, or convertible
into, shares of the REIT Shares, the terms of which would require
any anti-dilution adjustments by reason of the consummation of
the transactions contemplated hereby.
6.21 Related Party Transactions. Set forth in the REIT
Disclosure Letter will be a list of all arrangements, agreements
and contracts entered into by the REIT or any of its Subsidiaries
with (i) any person who is an officer, director or affiliate of
the REIT or any of its Subsidiaries, any relative of any of the
foregoing or any entity of which any of the foregoing is an
affiliate or (ii) any person who acquired the REIT Shares in a
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private placement. The copies of such documents, all of which
have been or will be delivered or made available to the
Partnership prior to the Closing, are or will be true, complete
and correct when delivered or made available.
6.22 Contracts and Commitments. The REIT Disclosure Letter
will set forth (i) all unsecured notes or other obligations of
the REIT and the REIT Subsidiaries which individually may result
in total payments in excess of $100,000, (ii) notes, debentures,
bonds and other evidence of indebtedness which are secured or
collateralized by mortgages, deeds of trust or other security
interests in the REIT Properties or personal property of the REIT
and its Subsidiaries, and (iii) each commitment entered into by
the REIT or any of its Subsidiaries which individually may result
in total payments or liability in excess of $100,000. Copies of
the foregoing have been or will be delivered or made available to
the Partnership prior to the Closing will be listed on the REIT
Disclosure Letter and are or will be materially true and correct
when delivered or made available. None of the REIT or any of its
Subsidiaries has received any notice of a default that has not
been cured under any of the documents described in clause (i) or
(ii) above or is in default respecting any payment obligations
thereunder beyond any applicable grace periods. All options of
the REIT or any of its Subsidiaries to purchase real property
will be set forth on the REIT Disclosure Letter and such options
and the REIT's or its Subsidiaries' rights thereunder are in full
force and effect. All joint venture agreements to which the REIT
or any of its Subsidiaries is a party will be set forth on the
REIT Disclosure Letter and the REIT or its Subsidiaries are not
in default with respect to any obligations, which individually or
in the aggregate are material, thereunder.
6.23 Development Rights. Set forth in the REIT Disclosure
Letter will be a list of all material agreements entered into by
the REIT or any of its Subsidiaries relating to the development,
rehabilitation, capital improvement or construction of office
buildings, industrial facilities or other real estate properties
which development or construction has not been substantially
completed as of the date of this Agreement. Such agreements,
true, complete and correct copies of all of which have been or
will be delivered or made available to the Partnership prior to
the Closing will be listed in the REIT Disclosure Letter.
6.24 Certain Payments Resulting From Transactions. Except as
Disclosed in the REIT Disclosure Letter, the execution of, and
performance of the transactions contemplated by, this Agreement
will not (either alone or upon the occurrence of any additional
or subsequent events) (i) constitute an event under any the REIT
Benefit Plan, policy, practice, agreement or other arrangement or
any trust or loan (the "Employee Arrangements") that will or may
result in any payment (whether of severance pay or otherwise),
acceleration, forgiveness of indebtedness, vesting, distribution,
increase in benefits or obligation to fund benefits with respect
to any employee, director or consultant of the REIT or any of its
Subsidiaries unless such rights have been waived by any such
person, or (ii) result in the triggering or imposition of any
restrictions or limitations on the right of the REIT or the
Partnership to amend or terminate any Employee Arrangement and
receive the full amount of any excess assets remaining or
resulting from such amendment or termination, subject to
applicable taxes. No payment or benefit which will be required to
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be made pursuant to the terms of any agreement, commitment or the
REIT Benefit Plan, as a result of the transactions contemplated
by this Agreement, to any officer, director or employee of the
REIT or any of its Subsidiaries, will be characterized as an
"excess parachute payment" within the meaning of Section
280G(b)(1) of the Code.
SECTION 7
COVENANTS
7.1 Acquisition Proposals. Prior to the Effective Time, the
Partnership and the REIT each agree (i) that neither of them nor
any of their Subsidiaries shall, and each of them shall direct
and use its best efforts to cause its respective officers,
general partner(s), limited partners, Directors, employees,
agents, affiliates and representatives (including, without
limitation, any investment banker, attorney or accountant
retained by it or any of its Subsidiaries), as applicable, not
to, initiate, solicit or encourage, directly or indirectly, any
inquiries or the making or implementation of any proposal or
offer (including, without limitation, any proposal or offer to
its shareholders or limited partners) with respect to a merger,
acquisition, tender offer, exchange offer, consolidation or
similar transaction involving, or any purchase of all or any
significant portion of the assets or any equity securities (or
any debt securities convertible into equity securities) of, such
party or any of its Subsidiaries, other than the transactions
contemplated by this Agreement (any such proposal or offer being
hereinafter referred to as an "Acquisition Proposal") or engage
in any negotiations concerning, or provide any confidential
information or data to, or have any discussions with, any person
relating to an Acquisition Proposal, or otherwise facilitate any
effort or attempt to make or implement an Acquisition Proposal;
(ii) that it will immediately cease and cause to be terminated
any existing activities, discussions or negotiations with any
parties conducted heretofore with respect to any of the foregoing
and each will take the necessary steps to inform the individuals
or entities referred to above of the obligations undertaken in
this Section 7.1; and (iii) that it will notify the other party
immediately if any such inquiries or proposals are received by,
any such information is requested from, or any such negotiations
or discussions are sought to be initiated or continued with, it;
provided, however, that nothing contained in this Section 7.1
shall prohibit the General Partner or the Board from (x)
furnishing information to or entering into discussions or
negotiations with, any person or entity that makes an unsolicited
bona fide Acquisition Proposal, if, and only to the extent that,
(A) the General Partner or the Board, as applicable, determines
in good faith that such action is required for it to comply with
its fiduciary duties to limited partners or shareholders, as
applicable, imposed by law as advised by counsel, (B) prior to
furnishing such information to, or entering into discussions or
negotiations with, such person or entity, such party provides
written notice to the other party to this Agreement to the effect
that it is furnishing information to, or entering into
discussions with, such person or entity, and (C) subject to any
confidentiality agreement with such person or entity (which such
party determined in good faith was required to be executed in
order for the General Partner or the Board, as applicable, to
comply with its fiduciary duties to limited partners or
shareholders, as applicable, imposed by law as advised by
counsel), such party keeps the other party to this Agreement
informed of the status (but not the terms) of any such
discussions or negotiations; and (y) to the extent applicable,
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complying with Rule 14e-2 promulgated under the Exchange Act with
regard to an Acquisition Proposal.
Nothing in this Section 7.1 shall (i) permit any party to
terminate this Agreement (except as specifically provided in
Section 9 hereof), (ii) permit any party to enter into any
agreement with respect to an Acquisition Proposal during the term
of this Agreement (it being agreed that during the term of this
Agreement, no party shall enter into any agreement with any
person that provides for, or in any way facilitates, an
Acquisition Proposal (other than a confidentiality agreement in
customary form)), or (iii) affect any other obligation of any
party under this Agreement.
7.2 Conduct of Businesses
(i) Prior to the Effective Time, except as may be set forth
in the Partnership Disclosure Letter or the REIT Disclosure
Letter or as contemplated by this Agreement, unless the other
party has consented in writing thereto, the REIT and the
Partnership:
(a) Shall use their reasonable efforts, and shall
cause each of their respective Subsidiaries to use their
reasonable efforts, to preserve intact their business
organizations and goodwill and keep available the services
of their respective officers and employees;
(b) Shall confer on a regular basis with one or more
representatives of the other to report operational matters
of materiality and, subject to Section 7.1, any proposals to
engage in material transactions;
(c) Shall promptly notify the other of any material
emergency or other material change in the condition
(financial or otherwise) of the business, properties, assets
or liabilities, or any material governmental complaints,
investigations or hearings (or communications indicating
that the same may be contemplated), or the breach in any
material respect of any representation, warranty, covenant
or agreement contained herein;
(d) Shall continue to pay quarterly dividends or
distributions, as the case may be, at the interest rates but
shall not make any other distributions payable with respect
to the REIT Shares and Partnership Interests, respectively;
and
(e) Shall promptly deliver to the other true and
correct copies of any report, statement or schedule filed
with the SEC subsequent to the date of this Agreement.
(ii) Prior to the Effective Time, except as may be set forth
in the Partnership Disclosure Letter, unless the REIT has
consented (such consent not to be unreasonably withheld or
delayed) in writing thereto, the Partnership:
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(a) Shall conduct its operations according to its
usual, regular and ordinary course in substantially the same
manner as heretofore conducted;
(b) Shall not amend the Partnership Organizational
Documents;
(c) Shall not (i) except pursuant to the exercise of
options, warrants, conversion rights and other contractual
rights existing on the date hereof and disclosed pursuant to
this Agreement, issue any Units or other Partner interests
in the Partnership, make any distribution, effect any
recapitalization or other similar transaction, (ii) grant,
confer or award any option, warrant, conversion right or
other right not existing on the date hereof to acquire any
Partnership Units, (iii) increase any compensation or enter
into or amend any employment agreement with the General
Partner or any of the present or future affiliates of the
General Partner, or (iv) adopt any new employee benefit plan
or amend any existing employee benefit plan in any material
respect, except for changes which are less favorable to
participants in such plans;
(d) Shall not declare, set aside or make any
distribution or payment with respect to any Units or other
Partner interests in the Partnership or directly or
indirectly redeem, purchase or otherwise acquire any Units
or other Partner interest in the Partnership, or make any
commitment for any such action;
(e) Shall not sell or otherwise dispose of (i) any
Partnership Properties, or (ii) except in the ordinary
course of business, any of its other assets which are
material, individually or in the aggregate;
(f) Shall not make any loans, advances or capital
contributions to, or investments in, any other person;
(g) Shall not pay, discharge or satisfy any claims,
liabilities or obligations (absolute, accrued, asserted or
unasserted, contingent or otherwise), other than the
payment, discharge or satisfaction in the ordinary course of
business consistent with past practice or in accordance with
their terms, of liabilities reflected or reserved against
in, or contemplated by, the most recent consolidated
financial statements (or the notes thereto) of the
Partnership included in the Partnership Reports or incurred
in the ordinary course of business consistent with past
practice;
(h) Shall not enter into any commitment which
individually may result in total payments or liability by or
to it in excess of $10,000 (or 5% of its Net Asset Value, if
less) in the case of any one commitment or in excess of
$20,000 (or 10% of its Net Asset Value, if less) for all
commitments;
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(i) Shall not, and shall not permit any of its
Subsidiaries to, enter into any commitment with any officer,
director or affiliate of the Partnership or its General
Partner(s) except to the extent the same occur in the
ordinary course of business consistent with past practice
and would not have a Partnership Material Adverse Effect;
and
(j) Shall not enter into or terminate any lease
representing annual revenues of $10,000 or more (or 5% of
its Net Asset Value, if less).
(iii) Prior to the Effective Time, except as may be set
forth in the REIT Disclosure Letter, unless the Partnership has
consented (such consent not to be unreasonably withheld or
delayed) in writing thereto, the REIT:
(a) Shall, and shall cause each of its Subsidiaries
to, conduct its operations according to their usual, regular
and ordinary course in substantially the same manner as
heretofore conducted;
(b) Shall not amend its Articles of Incorporation or
Bylaws except as contemplated by this Agreement;
(c) Shall not (i) except pursuant to the exercise of
options, warrants, conversion rights and other contractual
rights (including the REIT's existing dividend reinvestment
plan) existing on the date hereof and disclosed pursuant to
this Agreement, issue any shares of its capital stock,
effect any share split, reverse share split, share dividend,
recapitalization or other similar transaction, (ii) grant,
confer or award any option, warrant, conversion right or
other right not existing on the date hereof to acquire any
shares of its capital stock (except pursuant to any employee
incentive plan approved by shareholders), (iii) amend any
employment agreement with any of its present or future
officers or the Board, or (iv) adopt any new employee
benefit plan (including any share option, share benefit or
share purchase plan) except the employee incentive plan to
be voted on at its shareholder meeting for the fiscal year
ended December 31, 1998;
(d) Shall not declare (except as provided above for
the continuing payment of quarterly dividends), set aside or
pay any dividend or make any other distribution or payment
with respect to any common shares or directly or indirectly
redeem, purchase or otherwise acquire any common shares or
capital stock of any of its Subsidiaries, or make any
commitment for any such action;
(e) Except as will be set forth in the REIT Disclosure
Letter, shall not, and shall not permit any of its
Subsidiaries to, sell or otherwise dispose of (i) any the
REIT Properties or any of its capital stock of or other
interests in Subsidiaries or (ii) except in the ordinary
course of business, any of its other assets which are
material, individually or in the aggregate;
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(f) Shall not, and shall not permit any of its
Subsidiaries to (except in the ordinary course of business),
make any loans, advances or capital contributions to, or
investments in, any other person other than in connection
with the sale of properties;
(g) Shall not, and shall not permit any of its
Subsidiaries to, pay, discharge or satisfy any claims,
liabilities or obligations (absolute, accrued, asserted or
unasserted, contingent or otherwise), other than the
payment, discharge or satisfaction in the ordinary course of
business consistent with past practice or in accordance with
their terms, of liabilities reflected or reserved against
in, or contemplated by, the most recent consolidated
financial statements (or the notes thereto) of the REIT
included in the REIT Reports or incurred in the ordinary
course of business consistent with past practice;
(h) Shall not, and shall not permit any of its
Subsidiaries to, enter into any commitment which
individually may result in total payments or liability by or
to it in excess of $50,000 in the case of any one commitment
or in excess of $250,000 for all commitments, except for
those commitments in connection with the acquisition and/or
development of property disclosed in the REIT Disclosure
Letter; and
(i) Shall not, and shall not permit any of its
Subsidiaries to, enter into any commitment with any officer,
director or affiliate of the REIT or any of its
Subsidiaries, except as herein or in the REIT Disclosure
Letter provided and except in the ordinary course of
business.
For purposes of this Section 7.2, any consent shall be
deemed to be unreasonably delayed if notice of consent or
withholding of consent is not received within three days of
request. Further, if no response is received by the end of
business on such third day, the party receiving the request shall
be deemed to have consented to such action.
7.3 Meetings of Shareholders and Partners. Each of the REIT
and the Partnership will take all action necessary in accordance
with applicable law and its organizational documents to convene a
meeting of its shareholders or partners, as applicable, as
promptly as practicable to consider and vote upon or otherwise to
obtain the consent of its shareholders or partners, as
applicable, to approve this Agreement and the transactions
contemplated hereby. The General Partner and the Board shall each
recommend such approval and the REIT and the Partnership shall
each take all lawful action to solicit such approval, including,
without limitation, timely mailing the Consent
Statement/Prospectus (as defined in Section 7.7); provided,
however, that such recommendation or solicitation is subject to
any action taken by, or upon authority of, the General Partner
and the Board, as the case may be, in the exercise of its good
faith judgment as to its fiduciary duties to its shareholders or
partners, as applicable, imposed by law as advised by counsel.
The REIT and the Partnership shall coordinate and cooperate with
respect to the timing of such meetings and shall use their best
efforts to hold such meetings on the same day.
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7.4 Filings; Other Action. Subject to the terms and
conditions herein provided, the Partnership and the REIT shall:
(a) use all reasonable efforts to cooperate with one another in
(i) determining which filings are required to be made prior to
the Effective Time with, and which consents, approvals, permits
or authorizations are required to be obtained prior to the
Effective Time from governmental or regulatory authorities of the
United States and the several states in connection with the
execution and delivery of this Agreement and the consummation of
the transactions contemplated hereby and (ii) timely making all
such filings and timely seeking all such consents, approvals,
permits or authorizations; (b) use all reasonable efforts to
obtain in writing any consents required from third parties in
form reasonably satisfactory to the Partnership and the REIT
necessary to effectuate the Merger; and (c) use all reasonable
efforts to take, or cause to be taken, all other action and do,
or cause to be done, all other things necessary, proper or
appropriate to consummate and make effective the transactions
contemplated by this Agreement. If, at any time after the
Effective Time, any further action is necessary or desirable to
carry out the purpose of this Agreement, the proper officers and
directors of the REIT and the General Partner shall take all such
necessary action.
7.5 Inspection of Records. From the date hereof to the
Effective Time, each of the Partnerships and the REIT shall allow
all designated officers, attorneys, accountants and other
representatives of the other access at all reasonable times to
the records and files, correspondence, audits and properties, as
well as to all information relating to commitments, contracts,
titles and financial position, or otherwise pertaining to the
business and affairs of the Partnership and the REIT and their
respective Subsidiaries.
7.6 Publicity. The Partnership and the REIT shall, subject
to their respective legal obligations (including requirements of
stock exchanges and other similar regulatory bodies), consult
with each other, and use reasonable efforts to agree upon the
text of any press release before issuing any such press release
or otherwise making public statements with respect to the
transactions contemplated hereby and in making any filings with
any federal or state governmental or regulatory agency or with
any national securities exchange with respect thereto.
7.7 Regulatory Filings. The REIT and Partnership shall
cooperate and promptly prepare and the REIT shall (i) file with
the California Department of Corporations an application for
permit pursuant to Section 25121 of the California Corporate
Securities Law of 1968, as amended (the "California Act") and a
request for a fairness hearing pursuant to Section 25143 of the
California Act and for the issuance of the REIT Shares and Notes
under the Merger (the "California Application") and (ii) file
with the SEC as soon as practicable Joint Preliminary Consent
Solicitation material under section 14(a) of the Exchange Act,
with respect to the REIT Shares issuable in connection with the
Merger (the "Consent Statement"). The respective parties will
cause the California Application and the Consent Statement to
comply as to form in all material respects with the applicable
provisions of the Securities Act, the Exchange Act and the rules
and regulations promulgated thereunder. The REIT shall use all
reasonable efforts, and the Partnership will cooperate with the
REIT to have the California Application declared effective by the
California Department of Corporation as promptly as practicable.
The REIT shall use its best efforts to obtain, prior to the
filing of one Definitive Consent Statement, any necessary state
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securities law or "Blue Sky" permits or approvals required to
carry out the transactions contemplated by this Agreement and
will pay all expenses incident thereto. The REIT agrees that the
Consent Statement and each amendment or supplement thereto, at
the time of mailing thereof and at the time of the respective
meetings of shareholders and partners, respectively, of the REIT
and the Partnership, or, in the case of the California
Application and each amendment or supplement thereto, at the time
it is filed or becomes effective, will not include an untrue
statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were
made, not misleading; provided, however, that the foregoing shall
not apply to the extent that any such untrue statement of a
material fact or omission to state a material fact was made by
the REIT in reliance upon and in conformity with written
information concerning the Partnership furnished to the REIT by
the Partnership specifically for use in the Consent Statement.
The Partnership agrees that the written information provided by
it specifically for inclusion in the Consent Statement and each
amendment or supplement thereto, at the time of mailing thereof
and at the time of the respective meetings of shareholders and
partners, respectively, of the REIT and the Partnership, or, in
the case of written information provided by the Partnership
specifically for inclusion in the California Application, the
Consent Statement or any amendments or supplement thereto, at the
time it is filed or becomes effective, will not include an untrue
statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were
made, not misleading. The REIT will advise the Partnership,
promptly after it receives notice thereof, of the time when the
California Application will become effective and when the
Definitive Consent Statement may be filed or any supplement or
amendment has been filed, the issuance of any stop order, the
suspension of the qualification of the REIT Shares issuable in
connection with the Merger for offering or sale in any
jurisdiction, or any request by the SEC for amendment of the
Consent Statement or the California Application or comments
thereon and responses thereto or requests by the SEC or the
California Department of Corporations for additional information.
7.8 Further Action. Each party hereto shall, subject to the
fulfillment at or before the Effective Time of each of the
conditions of performances set forth herein or the waiver
thereof, perform such further acts and execute such documents as
may reasonably be required to effect the Merger.
7.9 Expenses. Subject to Section 9.3, all transaction costs
and expenses of the Merger in connection with the Merger
Agreement, the transactions contemplated thereby and of the
mergers of each other Partnership to whom the REIT makes a merger
offer pursuant to the Definitive Consent Statement (the "Merger
Expenses") shall be paid by the REIT (the "REIT Expenses"),
except the Partnership shall pay its Proportionate Share, as
defined below, of the costs of the Houlihan Valuation Opinion
and the Houlihan Fairness Opinion delivered to the General
Partner (collectively the "Houlihan Opinions"), the legal and
accounting costs of the Partnerships to whom such merger offers
are made by the REIT (and any other costs in connection with the
valuation or appraisal of such partnerships' properties prepared
for the benefit of such partnerships or their partners) (the
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"Partnership Merger Expenses"). In addition, the Partnership
will bear its own direct costs of partner communications and
transaction administration. The Partnership Proportionate Share
of the Partnership Merger Expenses for the purposes of this
Agreement, shall be the fraction, the numeration of which is the
Partnerships Net Asset Value and the denomination of which is the
total Net Asset Values of all Partnerships to whom merger offers
are being made by the REIT as listed in the Definitive Consent
Statement. In the event the Limited Partners of the Partnership
do not approve the Merger, the General Partner will pay or
reimburse the Partnership's Proportionate Share of the
Partnership Merger Expenses.
7.10 Indemnification. For a period of six years from and
after the Effective Time, the REIT shall indemnify the partners,
or agents of the Partnership who at any time prior to the
Effective Time were entitled to indemnification under the
Agreement of Limited Partnership of the Partnership existing on
the date hereof to the same extent as such partners or agents are
entitled to indemnification under such Agreement of Limited
Partnership in respect of actions or omissions occurring at or
prior to the Effective Time (including, without limitation, the
transactions contemplated by this Agreement).
7.11 Survival of the Partnership Obligations; Assumption of
the Partnership Liabilities by the REIT. All of the obligations
of the Partnership that are outstanding at the Closing shall
survive the Closing and shall not be merged therein. Upon the
consummation of the Merger, such obligations shall be assumed,
automatically, by the REIT; provided, however, that such
assumption shall not impose upon or expose the REIT to any
liability for which the Partnership was not liable, and provided,
further, that the REIT shall be entitled to the same defenses,
offsets and counterclaims to which the Partnership would have
been entitled, but for the Merger.
7.12 The REIT Status. From and after the date and until the
Effective Time, neither the REIT nor the Partnership nor any of
their respective Subsidiaries or other affiliates shall (i)
knowingly take any action, or knowingly fail to take any action,
that would jeopardize qualification of the REIT as the REIT
within the meaning of Sections 856 through 859 of the Code; or
(ii) enter into any contract, agreement, commitment or
arrangement with respect to the foregoing.
7.13 Third Party Consents. The REIT and the Partnership
each shall take all necessary corporate and other action and will
use its commercially reasonable efforts to obtain the consents
and applicable approvals from third parties that may be required
to enable it to carry out the transactions contemplated by this
Agreement.
7.14 Efforts to Fulfill Conditions. The REIT and the
Partnership each shall use commercially reasonable efforts to
insure that all conditions precedent to its obligations hereunder
are fulfilled at or prior to the Closing.
7.15 Representations, Warranties and Conditions Prior to
Closing. The REIT and the Partnership each shall use its
commercially reasonable efforts to cause its representations and
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warranties contained in this Agreement to be true and correct on
and as of the Closing Date in all material respects. Prior to
Closing, the REIT and the Partnership each shall promptly notify
the other in writing (i) if any representation or warranty
contained in this Agreement is discovered to be or becomes untrue
or (ii) if the REIT or the Partnership fails to perform or comply
with any of its covenants or agreements contained in this
Agreement or it is reasonably expected that it will be unable to
perform or comply with any of its covenants or agreements
contained in this Agreement.
7.16 Cooperation of the Parties. The REIT and the
Partnership each will cooperate with the other in supplying such
information as may be reasonably requested by the other in
connection with obtaining consents or approvals to the
transactions contemplated by this Agreement.
SECTION 8
CONDITIONS
8.1 Conditions to Each Party's Obligations to Effect the
Merger. The respective obligation of each party to effect the
Merger shall be subject to the fulfillment at or prior to the
Closing Date of the following conditions:
(a) This Agreement and the transactions contemplated
hereby shall have been approved in the manner required by the
Charter and Bylaws and Agreement of Limited Partnership of the
REIT and the Partnership, respectively, and by applicable law or
by applicable regulations of any stock exchange or other
regulatory body by the holders of the REIT Shares, the Notes, and
the Partnership Interests entitled to vote thereon.
(b) Neither of the parties hereto shall be subject to
any order or injunction of a court of competent jurisdiction
which prohibits the consummation of the transactions contemplated
by this Agreement. In the event any such order or injunction
shall have been issued, each party agrees to use its reasonable
efforts to have any such injunction lifted.
(c) The California Application shall have become
effective and the Definitive Consent Statement shall have been
timely filed and all necessary state securities law or "Blue Sky"
permits or approvals required to carry out the transactions
contemplated by this Agreement shall have been obtained and no
stop order with respect to any of the foregoing shall be in
effect.
(d) All consents, authorizations, orders and approvals
of (or filings or registrations with) any governmental
commission, board, other regulatory body or third parties
required in connection with the execution, delivery and
performance of this Agreement shall have been obtained or made,
except for filings in connection with the Merger and any other
documents required to be filed after the Effective Time and
except where the failure to have obtained or made any such
consent, authorization, order, approval, filing or registration
would not have a material adverse effect on the business, results
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of operations or financial condition of the REIT and the
Partnership (and their respective Subsidiaries), taken as a
whole, following the Effective Time.
8.2 Conditions to Obligations of the Partnership to Effect
the Merger. The obligation of the Partnership to effect the
Merger shall be subject to the fulfillment at or prior to the
Closing Date of the following conditions, unless waived by the
Partnership:
(a) The REIT shall have performed its agreements
contained in this Agreement required to be performed on or prior
to the Effective Time and the representations and warranties of
the REIT contained in this Agreement shall be true and correct in
all material respects as of the Closing Date as if made on the
Closing Date, and the Partnership shall have received a
certificate of the President or an Executive or Senior Vice
President of the REIT, dated the Closing Date, certifying to such
effect.
(b) The Partnership shall have received the opinion of
legal counsel to the REIT, as approved by the Partnership, dated
the Closing Date, to the effect that the REIT met the
requirements for qualification and taxation as a REIT for its
taxable years 1995 through 1997; the REIT's diversity of equity
ownership, operations through the Closing Date and proposed
method of operation for future periods should allow it to qualify
as a REIT for its taxable year ending December 31, 1998; and the
discussion contained under the caption "Material Federal Income
Tax Consequences" in the California Application and the Consent
Statement each accurately reflects existing law and fairly
addresses the material Federal income tax issues described
therein. In rendering its opinion, said counsel shall be entitled
to rely as to any factual matter upon certificates given by
executive officers and other duly authorized representatives of
the Partnership and the REIT and shall be entitled to assume that
the covenants set forth in Section 7 shall be fully complied
with.
(c) From the date of the Agreement through the
Effective Time, there shall not have occurred any change in the
financial condition, business or operations of the REIT and its
Subsidiaries, taken as a whole, that would have or would be
reasonably likely to have the REIT Material Adverse Effect other
than any such change that affects both the Partnership and the
REIT in a substantially similar manner.
(d) The Houlihan Valuation Opinion addressed to the
Partnership shall not have been withdrawn or materially modified.
(e) The Houlihan Fairness Opinion addressed to the
Partnership that the Merger is fair, from a financial point of
view, to the partners of the Partnership shall not have been
withdrawn or materially modified.
(f) The Partnership shall have received the opinion of
legal counsel to the REIT, as approved by the Partnership, dated
the Closing Date, as to such customary matters as the General
Partner may reasonably request, such opinion to be reasonably
satisfactory to the Partnership.
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8.3 Conditions to Obligation of the REIT to Effect the
Merger. The obligations of the REIT to effect the Merger shall be
subject to the fulfillment at or prior to the Closing Date of the
following conditions, unless waived by the REIT:
(a) The Partnership shall have performed its
agreements contained in this Agreement required to be performed
on or prior to the Effective Time and the representations and
warranties of the Partnership contained in this Agreement shall
be true and correct in all material respects as of the Closing
Date as if made on the Closing Date and the REIT shall have
received a certificate of the General Partner or the corporate
general partner if applicable) dated the Closing Date, certifying
to such effect.
(b) The REIT shall have received the opinion of legal
counsel to the Partnership, as approved by the REIT, dated the
Closing Date, to the effect that the consummation of the Merger
will not result in the REIT's failure to continue to satisfy the
requirements for qualification as a REIT for federal income tax
purposes. In rendering its opinion, said counsel shall be
entitled to rely as to any factual matter upon certificates given
by executive officers and other duly authorized representatives
of the REIT and the Partnership and shall be entitled to assume
that the covenants of Section 7 shall be fully complied with.
(c) From the date of this Agreement through the
Effective Time, there shall not have occurred any change in the
financial condition, business or operations of the Partnership
and its Subsidiaries, taken as a whole, that would have or would
be reasonably likely to have a Partnership Material Adverse
Effect, other than any such change that affects both the
Partnership and the REIT in a substantially similar manner.
(d) The opinion of Bishop-Crown Investment, Inc.,
addressed to the Board of Directors of the REIT that the
consideration to be paid by the REIT pursuant to the Merger is
fair, from a financial point of view, to the REIT shall not have
been withdrawn or materially modified.
(e) The REIT shall have received the opinion of legal
counsel to the Partnership, as approved by the REIT, dated the
Closing Date, as to such customary matters as the REIT may
reasonably request, such opinion to be reasonably satisfactory to
the REIT.
(f) The holders of not more than ______% of the REIT
Shares eligible to vote on the merger have not exercised their
dissenters rights.
[(g) The General Partner shall have delivered to the
REIT a written agreement to the effect that it [they] will not
offer to sell, sell or otherwise dispose of any shares of the
REIT Common Stock issued in the Merger, except, in each case,
pursuant to an effective registration statement or in compliance
with Rule 145, as amended from time to time, or in a transaction
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which, in the opinion of legal counsel reasonably satisfactory to
the REIT, is exempt from the registration requirements of the
Securities Act and that the certificates representing the REIT
shares issued to him or her in the Merger may bear a legend to
such effect.]
SECTION 9
TERMINATION
9.1 Termination by Mutual Consent. This Agreement may be
terminated and the Merger may be abandoned at any time prior to
the Effective Time, before or after the approval of this
Agreement by the partners of the Partnership or the shareholders
of the REIT by the mutual written consent of the REIT and the
Partnership.
9.2 Termination By Either the REIT or the Partnership for
Good Reason.
The Merger Agreement may be terminated and the Merger may be
abandoned by action of the General Partner for the Partnership or
the Independent Directors for the REIT only for good reason. Only
the following shall constitute termination for "good reason" for
the purposes of this Agreement.
(i) By either the REIT or the Partnership if the
Merger shall not have been consummated by
December 31, 1998;
(ii) By the REIT if the approval of the Limited
Partners of a Partnership shall not have been
obtained as required under the Merger
Agreement;
(iii) By the Partnership if the approval of
the shareholders of the REIT shall not
have been obtained as required under the
Merger Agreement;
(iv) By either the REIT or the Partnership upon a
Change In Control, as defined below, of the
other;
(v) By either the REIT or the Partnership if
there has been a breach by the other of any
representation or warranty contained in the
Merger Agreement, or if either determines in
good faith that facts or circumstances of
which it had no previous knowledge, which
would have or would be reasonably likely to
have a REIT Material Adverse Effect or a
Partnership Material Adverse Effect, as the
case may be, which breach is not cured within
30 days after written notice of such breach
is given to the breaching party by the
non-breaching party;
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(vi) By either the REIT or the Partnership if
there has been a material breach of any of
the covenants or agreements set forth in the
Merger Agreement by the other, which breach
is not curable or, if curable, is not cured
within 30 days after written notice of such
breach is given to the breaching party by the
non breaching party;
(vii) By the Partnership if in the exercise of
his good faith judgment as to his
fiduciary duties as imposed by law, and
as advised by counsel, the General
Partner determines that such termination
is required by reason of a Partnership
Acquisition Proposal being made;
(viii) By the REIT if, in the exercise of its
good faith judgment as to its fiduciary
duties as imposed by law, and as advised
by counsel, the Independent Directors
determine that such termination is
required by reason of a REIT Acquisition
Proposal being made; or
(ix) By either the REIT or the Partnership if a
United States federal or state court of
competent jurisdiction or United States
federal or state governmental, regulatory or
administrative agency or commission shall
have issued an order, decree or ruling or
taken any other action permanently
restraining, enjoining or otherwise
prohibiting the transactions contemplated by
the Merger Agreement and such order, decree,
ruling or other action shall have become
final and non-appealable, provided that the
party seeking to terminate the Merger
Agreement shall have used all reasonable
efforts to remove such order, decree, ruling
or injunction.
Provided, however, that the terminating party shall not have
breached in any material respect its obligations under the Merger
Agreement in any manner that shall have proximately contributed
to the occurrence of the failure.
For the purposes of this Section 9.2, a "Change in Control"
means (i) the sale or transfer of substantially all of the assets
of the REIT, whether in one transaction or a series of
transactions, except a sale to a successor corporation in which
the stockholders immediately prior to the transaction hold,
directly or indirectly, at least 50% of the total voting power of
the successor corporation immediately after the transaction, (ii)
any merger or consolidation between the REIT and another
corporation immediately after which the stockholders hold,
directly or indirectly, less than 50% of the total voting power
of the surviving corporation, (iii) the dissolution or
liquidation of the REIT, (iv) the acquisition by any person or
group of persons of direct or indirect beneficial ownership of
the REIT's common shares representing more than 50% of the total
REIT Shares then outstanding, or (v) the date the Board Changes.
For the purposes of the foregoing, a "Board Change" means the
date that a majority of the Board is comprised of persons other
than persons (i) whose election or appointment shall have been
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solicited by the General Partner, or (ii) who are serving as
directors appointed by the Board to fill vacancies caused by
death or resignation (but not by removal) or to fill newly
created directorships.
9.3 Effect of Termination and Abandonment
(a) If an election to terminate the Merger Agreement
is made by the Partnership (i) other than for good reason or (ii)
for good reason pursuant to Section 9.2(vii) hereof, and a
Partnership Acquisition Proposal shall have been made and,
within one year from the date of such termination, the
Partnership consummates a Partnership Acquisition Proposal or
enters into an agreement to consummate a Partnership Acquisition
Proposal to be subsequently consummated, the Partnership shall
pay as liquidated damages (not as a penalty or forfeiture) to the
REIT, provided that the REIT was not in material breach of its
obligations at the time of such termination, an amount equal to
the lesser of (x) the Partnership's Proportionate Share of
$500,000 (a "REIT Liquidated Damages Amount") and (y) the sum of
(1) the maximum amount that can be paid to the REIT without
causing the REIT to fail to meet the requirements of Sections
856(c)(2) and (3) of the Code determined as if the payment of
such amount did not constitute income described in Sections
856(c)(2)(A)-(H) and 856(c)(3)(A)-(I) of the Code ("Qualifying
Income"), as determined by the REIT's certified public
accountants plus (2) an amount equal to the REIT Liquidated
Damages Amount less the amount payable under clause (1) above in
the event the REIT receives a letter from its counsel indicating
that it has received a ruling from the IRS to the effect that
the REIT Liquidated Damages Amount payment constitutes Qualifying
Income. In addition to the REIT Liquidated Damages Amount, the
REIT shall be entitled to receive from the Partnership (or its
successor in interest) all documented out-of-pocket costs and
expenses incurred by it, up to a maximum of the Partnership's
Proportionate Share of Expenses of the REIT Expenses. The
payments to which the REIT is entitled as described above shall
be its sole remedy with respect to the termination of the Merger
Agreement under the circumstances contemplated above.
(b) If an election to terminate the Merger Agreement
is made because of a Partnership Material Adverse Effect under
Section 9.2(v), the Partnership shall, provided that the REIT was
not in material breach of its obligations at the time of such
termination, pay the REIT for the REIT Expenses, up to a maximum
of the Partnership's Proportionate Share thereof (although it
shall not be required to pay the REIT Liquidated Damages Amount),
which payment of the REIT Expenses shall be the REIT's sole
remedy for termination of the Merger Agreement in such
circumstances.
(c) If an election to terminate the Merger Agreement
is made by the REIT (i) other than for good reason or (ii) for
good reason pursuant to Section 9.2(viii) and, within one year
from the date of such termination, the REIT consummates a REIT
Acquisition Proposal or enters into an agreement to consummate a
REIT Acquisition Proposal to be subsequently consummated; the
REIT shall pay liquidated damages (not as a penalty or
forfeiture) to the Partnership, provided that the Partnership was
not in material breach of its obligations at the time of such
termination. Such liquidated damages shall be in an amount equal
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to 120% of the Partnership's Proportionate Share of the
Partnership Merger Expenses (the "Partnership Liquidated Damages
Amount"). The payments to which the Partnership is entitled as
described above shall be its sole remedy with respect to the
termination of the Merger Agreement under the circumstances
contemplated above.
(d) If an election to terminate the Merger Agreement
is made by the Partnership pursuant to Section 9.2(v) because of
REIT Material Adverse Effect, the REIT shall, provided that the
Partnership was not in material breach of its obligations at the
time of such termination, pay the Partnership for the
Proportionate Share of the Partnership Expenses, up to a maximum
amount equal to the amount of the Partnership's Proportionate
Share of the Partnership Merger Expenses and (although it shall
not be required to pay the Liquidated Damages Amount), which
payment shall be the Partnership's sole remedy for termination of
the Merger Agreement in such circumstances.
(e) If the Merger Agreement is terminated by either
party pursuant to Sections 9.2(iv) or (vi), the non-terminating
party shall, provided that the terminating party was not in
material breach of its obligations at the time of such
termination, pay the terminating party (x) in the case of
termination by the Partnership the Partnership Liquidated Damages
Amount, and in the case of termination by the REIT, the REIT
Liquidated Damages Amount, plus (y) an amount equal to the
terminating parties' Proportionate Share of the Merger Expenses
and (z) the non-terminating party shall remain liable to the
terminating party for its breach.
(f) If this Agreement is terminated pursuant to
Section 9.2(i) (as a result of the condition set forth in Section
8.2(c) or Section 9.2(ix) not being satisfied), the REIT shall,
provided that the Partnership was not in material breach of its
obligations hereunder at the time of such termination, pay the
Partnership an amount equal to the Partnership's Proportionate
Share of the Partnership Expenses, which payment shall be the
Partnership's sole remedy for termination of the Agreement in
such circumstances.
(g) If an election to terminate this Agreement is made
pursuant to Section 9.2(i), (ii) or (iii), and a Partnership
Acquisition Proposal or a REIT Acquisition Proposal shall have
been made and, within one year from the date of such termination,
the non-nominating party consummates such Acquisition Proposal
or enters into an agreement to consummate such Acquisition
Proposal which is subsequently consummated, the non-terminating
party shall pay to the terminating party, provided that the
terminating party was not in material breach of its obligations
hereunder at the time of such termination, as liquidated damages
and not as a penalty or forfeiture, an amount equal to (x) in the
case of termination by the Partnership, the Partnership
Liquidated Damages Amount, and in the case of termination by the
REIT, the REIT Liquidated Damages Amount, plus (y) its
Proportionate Share of the Merger Expenses. In addition to such
amount, the terminating party shall be entitled to receive from
the non-terminating party (or its successor in interest) all of
its documented out-of-pocket costs and expenses in connection
with this Agreement and the transactions contemplated thereby.
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The payments to which the terminating party is entitled under
this Section 9.3(f) shall be its sole remedy with respect to the
termination of the Agreement under the circumstances contemplated
in this Section 9.3(f).
(h) The REIT and the Partnership agree to amend this
Section 9.3 at the request of the REIT in order to (x) maximize
the portion of the Liquidated Damages Amount that may be
distributed to the REIT hereunder without causing the REIT to
fail to meet the requirements of Sections 856(c)(2) and (3) of
the Code or (y) improve the REIT's chances of securing a
favorable ruling described in this Section 9.3, provided that no
such amendment may result in any additional cost or expense to
such other party.
(i) In the event of termination of this Agreement and
the abandonment of the Merger pursuant to this Section 9, all
obligations of the parties hereto shall terminate, except the
obligations of the parties pursuant to this Section 9.3 and
Section 7.9 and except for the provisions of Sections 10.3, 10.4,
10.5, 10.6, 10.7, 10.9, 10.10, 10.13, 10.14 and 10.16. In the
event the REIT or the Partnership has received a Liquidated
Damages Amount as provided in this Section 9.3, such recipient
shall not assert or pursue in any manner, directly or indirectly,
any claim or cause of action against the other party hereto or
any of its officers, Independent Directors, or General Partners,
as applicable, based in whole or part upon its or their receipt,
consideration, recommendation or approval of an Acquisition
Proposal or the exercise by the REIT of its right to termination
under Section 9.2(ix) or the exercise by the Partnership of its
right to termination under Section 9.2(viii). Notwithstanding
the foregoing, in the event the REIT or the Partnership is
required to file suit to seek all or a portion of such Liquidated
Damages Amount, and it ultimately succeeds, it shall be entitled
to all expenses, including attorney's fees and expenses, which it
has incurred in enforcing its right hereunder.
(j) If either party willfully fails to perform its
duties and obligations under this Agreement, the non-breaching
party is additionally entitled to all remedies available to it at
law or in equity and to recover its expenses from the breaching
party.
9.4 Extension; Waiver. At any time prior to the Effective
Time, any party hereto, by action taken by the General Partner or
the Board of Directors, as applicable, may, to the extent
legally allowed, (i) extend the time for the performance of any
of the obligations or other acts of the other parties hereto,
(ii) waive any inaccuracies in the representations and warranties
made to such party contained herein or in any document delivered
pursuant hereto and (iii) waive compliance with any of the
agreements or conditions for the benefit of such party contained
herein. Any agreement on the part of a party hereto to any such
extension or waiver shall be valid only if set forth in an
instrument in writing signed on behalf of such party.
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SECTION 10
GENERAL PROVISIONS
10.1 Nonsurvival of Representations, Warranties and
Agreements. All representations, warranties and agreements in
this Agreement or in any instrument delivered pursuant to this
Agreement shall not survive the Merger; provided, however, that
the agreements contained in Section 4, the last sentence of
Section 7.4 and Sections 7.9, 7.10, 7.11, 7.12, 7.13, 7.14, 7.15
and 7.16 and this Section 10 shall survive the Merger.
10.2 Notices. Any notice required to be given hereunder
shall be in writing and shall be sent by facsimile transmission
(confirmed by any of the methods that follow), courier service
(with proof of service), hand delivery or certified or registered
mail (return receipt requested and first-class postage prepaid)
and addressed as follows:
If to the REIT:
AmREIT, Inc.
Eight Greenway Plaza, Suite 824
Houston, TX 77046
Attention: H. Kerr Taylor, President
Telecopy: (713) 850-0498
If to the Partnership:
[Name of Partnership]
Eight Greenway Plaza, Suite 824
Houston, TX 77046
Attention: ______________________
or to such other address as any party shall specify by written
notice so given, and such notice shall be deemed to have been
delivered as of the date so delivered.
10.3 Assignment; Binding Effect; Benefit. Neither this
Agreement nor any of the rights, interests or obligations
hereunder shall be assigned by any of the parties hereto (whether
by operation of law or otherwise) without the prior written
consent of the other parties. Subject to the preceding sentence,
this Agreement shall be binding upon and shall inure to the
benefit of the parties hereto and their respective successors and
assigns. Notwithstanding anything contained in this Agreement to
the contrary, except as provided in the following sentence,
nothing in this Agreement, expressed or implied, is intended to
confer on any person other than the parties hereto or their
respective heirs, successors, executors, administrators and
assigns any rights, remedies, obligations or liabilities under or
by reason of this Agreement. The provisions of Section 4 and
Sections 7.10, 7.12, 7.13, 7.14, 7.15 and 7.16 (collectively, the
"Third Party Provisions") shall benefit the persons identified
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therein, but the aggregate liability of the REIT with respect
thereto shall not exceed the amount specified in Section 9.
10.4 Entire Agreement. This Agreement, the Exhibits, the
Partnership Disclosure Letter, the REIT Disclosure Letter, the
Partnership Ancillary Agreements, the REIT Ancillary Agreements
and any documents delivered by the parties in connection herewith
constitute the entire agreement among the parties with respect to
the subject matter hereof and supersede all prior agreements and
understandings among the parties with respect thereto. No
addition to or modification of any provision of this Agreement
shall be binding upon any party hereto unless made in writing and
signed by all parties hereto.
10.5 Confidentiality
(a) As used herein, "Confidential Material" means,
with respect to either party hereto (the "Providing Party"), all
information (written or oral) furnished (whether before or after
the date hereof) by the Providing Party and its directors,
officers, employees, affiliates or representatives of advisors,
including counsel, lenders and financial advisors (collectively,
the "Providing Party Representatives") to the other party hereto
(the "Receiving Party") or such Receiving Party's directors,
officers, employees, affiliates or representatives of advisors,
including counsel, lenders and financial advisors or the
Receiving Party's potential sources of financing for the
transactions contemplated by this Agreement (collectively "the
Receiving Party Representatives") and all analyses, compilations,
forecasts and other studies or other documents prepared by the
Providing Party or the Providing Party Representatives in
connection with its or their review of the transactions
contemplated by this Agreement which contain or reflect such
information. The term "Confidential Material" does not include,
however, information which (i) at the time of disclosure or
thereafter is generally available to and known by the public
other than as a result of a disclosure directly or indirectly by
the Receiving Party or the Receiving Party Representatives in
violation of this Agreement, (ii) at the time of disclosure was
available on a nonconfidential basis from a source other than the
Providing Party or the Providing Party Representatives, providing
that such source is not and was not bound by a confidentiality
agreement with the Providing Party, (iii) was known by the
Receiving Party prior to receiving the Confidential Material from
the Providing Party or has been independently acquired or
developed by the Receiving Party without violating any of its
obligations under this Agreement, or (iv) is contained in any
Partnership Reports or the REIT Reports or Consent
Statement/Prospectus.
(b) Subject to paragraph (c) below or except as
required by law, the Confidential Material will be kept
confidential and will not, without the prior written consent of
the Providing Party, be disclosed by the Receiving Party or its
Representatives, in whole or in part and will not be used by the
Receiving Party or its Representatives, directly or indirectly,
for any purpose other than in connection with this Agreement, the
Merger or the evaluating, negotiating or advising with respect to
a transaction contemplated herein. Moreover, each Receiving Party
agrees to transmit Confidential Material to its Representatives
only if and to the extent that such Representatives need to know
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the Confidential Material for purposes of such transaction and
are informed by such Receiving Party of the confidential nature
of the Confidential Material and of the terms of this Section.
(c) In the event that either Receiving Party, its
Representatives or anyone to whom such Receiving Party or its
Representatives supply the Confidential Material, are requested
or required (by oral questions, interrogatories, requests for
information or documents, subpoena, civil investigative demand,
any informal or formal investigation by any government or
governmental agency or authority or otherwise in connection with
legal processes) to disclose any Confidential Material, such
Receiving Party agrees (i) to immediately notify the Providing
Party of the existence, terms and circumstances surrounding such
a request, (ii) to consult with the Providing Party on the
advisability of taking legally available steps to resist or
narrow such request and (iii) if disclosure of such information
is required, to furnish only that portion of the Confidential
Material which, in the opinion of such Receiving Party's counsel,
such Receiving Party is legally compelled to disclose and to
cooperate with any action by the Providing Party to obtain an
appropriate protective order or otherwise reliable assurances
that confidential treatment will be accorded the Confidential
Material (it being agreed that the Providing Party shall
reimburse the Receiving Party for all reasonable out-of-pocket
expenses incurred by the Receiving Party in connection with such
cooperation).
(d) In the event of the termination of this Agreement
in accordance with its terms, promptly upon request from either
Providing Party, the Receiving Party shall, except to the extent
prevented by law, redeliver to the Providing Party or destroy all
tangible Confidential Material and will not retain any copies,
extracts or other reproductions thereof in whole or in part. Any
such destruction shall be certified in writing to the Providing
Party by an authorized officer of the Receiving Party supervising
the same. Notwithstanding the foregoing, each Receiving Party and
one Representative designated by each Receiving Party shall be
permitted to retain one permanent file copy of each document
constituting Confidential Material.
(e) Each party hereto further agrees that if this
Agreement is terminated in accordance with its terms, until one
year from the date of termination, (1) it will not offer to hire
or hire any person currently or formerly employed by the other
party with whom such party has had contact prior hereto other
than persons whose employment shall have been terminated by such
other party prior to the date of such offer to hire or hiring and
(2) neither it nor its affiliates shall directly or indirectly,
(a)(w) solicit, seek or offer to effect or effect, (x) negotiate
with or provide any information to the Board of Directors or
General Partner(s), as applicable, of the other party, or officer
of the other party or any shareholder or partner, as applicable,
of the other party with respect to, (y) make any statement or
proposal, whether written or oral, either alone or in concert
with others, to the Board of Directors or Board of Directors of
the General Partner(s) of the other party, any director, Trust
Manager or officer of the other party or any shareholder or
partner of the other party or any other person with respect to,
or (z) make any public announcement (except as required by law in
respect of actions permitted hereby) or proposal or offer
whatsoever (including, but not limited to, any solicitation of
consents as such terms are defined or used in Regulation 14A of
the Exchange Act) with respect to, (i) any form of business
combination or similar or other extraordinary transaction
-41-
involving the other party or any affiliate thereof, including,
without limitation, a merger, tender or exchange offer or
liquidation of the other party's assets, (ii) any form of
restructuring, recapitalization or similar transaction with
respect to the other party or any affiliate thereto, (iii) any
purchase of any securities or assets, or rights or options to
acquire any securities or assets (through purchase, exchange,
conversion or otherwise), of the other party or any affiliate
thereof, (iv) any proposal to seek representation on the Board of
Directors or the Board of Directors of the General Partner(s), as
applicable, or otherwise to seek to control or influence the
management, Board of Directors or the Board of Directors of the
General Partner(s), as applicable, or policies of the other party
or any affiliate thereof, (v) any request or proposal to waive,
terminate or amend the provisions of this Section 10.5 or (vi)
any proposal or other statement inconsistent with the terms of
this Section 10.5 or (b) instigate, encourage, join, act in
concert with or assist (including, but not limited to, providing
or assisting in any way in the obtaining of financing for, or
acting as a joint or co-bidder for the other party with) any
third party to do any of the foregoing, unless and until such
party has received the prior written invitation or approval of a
majority of the Board of Directors or the General Partner(s), as
applicable, to do any of the foregoing; provided that without
such invitation or approval, either party may at any time, on a
confidential non-public basis, submit to the Chief Executive
Officer of the REIT or the General Partner(s), as applicable, a
proposal to (a) amend any of the provisions of this Section
10.5(e) or (b) effect a business combination or other
extraordinary transaction with the other party providing for the
acquisition of all or substantially all of the assets or the
securities of the other party, including, without limitation, a
merger, tender offer or exchange offer. Each party hereto agrees
that it will not agree with any third party to waive its rights
under this Section 10.5.
10.6 Amendment. This Agreement may be amended by the parties
hereto, by action taken by the Board of Directors or the Board of
Directors of the General Partner(s), as applicable, at any time
before or after approval of this Agreement or any other matter
presented in connection with the Merger by the shareholders of
the REIT and partners of the Partnership, but after any such
approval, no amendment shall be made which by law requires the
further approval of shareholders or partners, as applicable,
without obtaining such further approval. This Agreement may not
be amended except by an instrument in writing signed on behalf of
each of the parties hereto.
10.7 Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of Texas
without regard to its rules of conflict of laws. Each of the REIT
and the Partnership hereby irrevocably and unconditionally
consents to submit to the exclusive jurisdiction of the courts of
the State of Texas and of the United States District Court,
Southern District of Texas (the "Texas Courts") for any
litigation arising out of or relating to this Agreement and the
transactions contemplated hereby (and agrees not to commence any
litigation relating thereto except in such courts), waives any
objection to the laying of venue of any such litigation in the
Texas Courts and agrees not to plead or claim in any Texas Court
that such litigation brought therein has been brought in an
inconvenient forum.
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10.8 Counterparts. This Agreement may be executed by the
parties hereto in separate counterparts, each of which when so
executed and delivered shall be an original, but all such
counterparts shall together constitute one and the same
instrument. Each counterpart may consist of a number of copies
hereof each signed by less than all, but together signed by all
of the parties hereto.
10.9 Headings. Headings of the Sections of this Agreement
are for the convenience of the parties only and shall be given no
substantive or interpretive effect whatsoever.
10.10 Interpretation. In this Agreement, unless the
context otherwise requires, words describing the singular number
shall include the plural and vice versa, and words denoting any
gender shall include all genders and words denoting natural
persons shall include corporations and partnerships and vice
versa.
10.11 Waivers. Except as provided in this Agreement, no
action taken pursuant to this Agreement, including, without
limitation, any investigation by or on behalf of any party, shall
be deemed to constitute a waiver by the party taking such action
of compliance with any representations, warranties, covenants or
agreements contained in this Agreement. The waiver by any party
hereto of a breach of any provision hereunder shall not operate
or be construed as a waiver of any prior or subsequent breach of
the same or any other provision hereunder.
10.12 Incorporation. The Partnership Disclosure Letter
and the REIT Disclosure Letter and all Exhibits and Schedules
attached hereto and thereto and referred to herein and therein
are hereby incorporated herein and made a part hereof for all
purposes as if fully set forth herein.
10.13 Severability. If any provision of this Agreement
is held to be illegal, invalid or unenforceable under any current
or future law, and if the rights or obligations of the parties
under this Agreement would not be materially and adversely
affected thereby, such provision shall be fully separable, and
this Agreement shall be construed and enforced as if such
illegal, invalid or unenforceable provision had never comprised a
part thereof, and the remaining provisions of this Agreement
shall remain in full force and effect and shall not be affected
by the illegal, invalid or unenforceable provision or by its
severance therefrom. In lieu of such illegal, invalid or
unenforceable provision, there shall be added automatically as a
part of this Agreement, a legal, valid and enforceable provision
as similar in terms to such illegal, invalid or unenforceable
provision as may be possible, and the parties hereto request the
court or any arbitrator to whom disputes relating to this
Agreement are submitted to reform the otherwise illegal, invalid
or unenforceable provision in accordance with this Section 10.13.
10.14 Enforcement of Agreement. The parties hereto agree
that irreparable damage would occur in the event that any of the
provisions of this Agreement were not performed in accordance
with its specific terms or was otherwise breached. It is
accordingly agreed that the parties shall be entitled to an
injunction or injunctions to prevent breaches of this Agreement
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and to enforce specifically the terms and provisions hereof in
any Texas Court, this being in addition to any other remedy to
which they are entitled at law or in equity.
10.15 Subsidiaries. As used in this Agreement, the word
"Subsidiary" when used with respect to any party means any
corporation, partnership, joint venture, business trust or other
entity, of which such party directly or indirectly owns or
controls at least a majority of the securities or other interests
having by their terms ordinary voting power to elect a majority
of the board of directors or others performing similar functions
with respect to such corporation or other organization.
10.16 Non-Recourse. Neither the officers, Directors nor
shareholders of the REIT shall be personally bound or have any
personal liability hereunder. The Partnership shall look solely
to the assets of the REIT for satisfaction of any liability of
the REIT with respect to this Agreement and the Ancillary
Agreements to which it is a party. The Partnership will not seek
recourse or commence any action against any of the shareholders
of the REIT or any of their personal assets, and will not
commence any action for money judgments against any of the
Directors or officers of the REIT or seek recourse against any of
their personal assets, for the performance or payment of any
obligation of the REIT hereunder or thereunder. The partners of
the Partnership shall not be personally bound or have any
personal liability hereunder. The REIT shall look solely to the
assets of the Partnership for satisfaction of any liability of
the Partnership with respect to this Agreement and the Ancillary
Agreements to which it is a party. The REIT will not seek
recourse or commence any action against any of the partners of
the Partnership or any of their personal assets, and will not
commence any action for money judgments against any of the
directors or officers of the Partnership or seek recourse against
any of their personal assets, for the performance or payment of
any obligation of the Partnership hereunder or thereunder.
IN WITNESS WHEREOF, the parties have executed this Agreement
and caused the same to be duly delivered on their behalf on the
day and year first written above.
AmREIT, Inc.
____________________________________________________
H. Kerr Taylor, President and Chief Executive Officer
[Name of Partnership]
By: ________________________________________________
Its General Partner
By: ____________________________________________
President
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FIRST AMENDMENT TO AGREEMENT AND PLAN OF MERGER
This Agreement to amend the Agreement and Plan of Merger, as
defined below, is made by and between AmREIT, Inc. (the "REIT"),
the Partnership and H. Kerr Taylor, on behalf of himself [and as
the individual General Partner], and [Name of Corporate General
Partner] to be effective on and as of October 28, 1998, in
accordance with the following terms and conditions.
1. Each of the above parties is a party to that certain
Agreement and Plan of Merger dated July 1, 1998, by and between
AmREIT, Inc., a Maryland real estate investment trust (the "REIT"),
and [Name of Partnership], a Texas [Nebraska] limited partnership
(the "Partnership"). [H. Kerr Taylor, on behalf of [himself as the
individual General Partner and] [name of corporate General
Partner], a Texas [Nebraska] corporation, the General Partner[s] of
the Partnership (referred to herein as the "General Partner"), is
a party to this Agreement solely for the purpose of binding the
General Partner to the provisions of Section 5 and Section 7.9,
hereunder.
2. The parties hereby amend Section 9.2(i) to change the
date stated therein from December 31, 1997 to March 31, 1999.
3. All other provisions of the Merger Agreement as otherwise
in effect on the date hereof shall remain unchanged, modified or
altered by this Amendment except to the extent necessary to
implement the purposes of this Amendment.
IN WITNESS WHEREOF, the undersigned hereby execute this
Amendment on and effective as of the date first written above.
AmREIT, Inc.
__________________________________
H. Kerr Taylor, President and Chief Executive Officer
[Name of Partnership]
By: _____________________________
Its General Partner
By: _________________________
President
Form of
AMENDMENT TO THE PARTNERSHIP AGREEMENT
ANNEX 2
To AmREIT Joint Consent
Solicitation Statement
and
Prospectus
FORM OF AMENDMENT TO THE PARTNERSHIP AGREEMENT
THIS AMENDMENT TO THE AGREEMENT OF LIMITED PARTNERSHIP (this
"Amendment") of ________________________________ (the "Partnership") is made and
entered into by and among ____________, a corporation organized under the laws
of the state of _________[and H. Kerr Taylor, the Individual General Partner],
as the general partner[s] of the Partnership (the "General Partner[s]") and
those persons who are listed on Schedule A hereto as limited partners of the
Partnership (the "Limited Partners"). The capitalized terms used within this
Amendment shall have the meanings set forth in the Partnership Agreement (as
defined below) unless otherwise provided herein.
A. The Partnership was formed on ____________________, 199___ under the
provisions of the Limited Partnership Act (the "Act") pursuant to the terms of
the (certificate and /or) Agreement of Limited Partnership entered into on
_____________________, 199___ (the "Partnership Agreement").
B. On __________________, 199___, pursuant to the terms of that certain
Joint Consent Solicitation Statement and Prospectus dated _______, 1998 (the
"Prospectus"), the Limited Partners holding a majority of the outstanding
limited partnership interests in the Partnership voted for and consented to this
Amendment and to certain transactions resulting in the sale of all of the assets
of the Partnership to AmREIT, Inc., a Maryland corporation ("AmREIT") affiliated
with the General Partner(s), (such transactions being referred to herein as the
"Merger") as described in the Prospectus. Subject to certain limitations, and
depending on the election made by the Limited Partners in connection with the
Merger, the Limited Partners will receive either Shares of AmREIT or AmREIT's
6.0% Notes due December 31, 2004 (the "Notes") and dissenting Limited Partners
will have the right to receive Notes unless they elect to receive Shares, as
described in the Prospectus.
C. In accordance with the terms of the Partnership Agreement, the
General Partner and the Limited Partners hereby amend the Partnership Agreement
as follows:
1. Definitions. The Partnership Agreement shall be
amended to include the following defined terms:
"AmREIT" means AmREIT, Inc., a Maryland corporation..
"Merger" means the transactions resulting in the
statutory merger of the Partnership into AmREIT under
the laws of the state of __________, in the manner
described in the Prospectus.
2. Consummation of the Merger. Notwithstanding anything to the
contrary in the Partnership Agreement, the vote or written consent given by the
Limited Partners holding at least a majority of the Limited Partner interests
(Units) in the Partnership (the "Majority Vote of the Limited Partners") shall
be sufficient to authorize and empower the Partnership to (i) transfer all of
its assets to AmREIT whether or not such other corporation or entity is an
affiliate of a General Partner, in the Merger pursuant to the Merger Agreement
as described in the Prospectus, and (ii) consummate such Merger transactions in
the manner described in the Prospectus; and (iii) consummate the Merger without
providing any dissenter's or appraisal rights to the Limited Partners to which
they may otherwise be entitled under the Partnership Agreement.
3. Distributions and Allocations. The terms of the Merger
Agreement and the transactions relating thereto described in paragraph 2 above,
shall, in regards to the distribution of cash or property by, or allocations of
income or loss of, the Partnership to the Limited Partners control, and to the
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<PAGE>
extent inconsistent with the Partnership Agreement, shall constitute an
amendment to the Partnership Agreement.
4. General Partner Authorization
(a) Notwithstanding anything to the contrary in the
Partnership Agreement, upon the Majority Vote of the Limited Partners, all
transactions between the Partnership and the General Partner[s] described and
contemplated by the Prospectus as necessary or appropriate to consummate the
Merger shall be deemed to be approved by the Partnership and the Limited
Partners.
(b) The General Partner[s] is [are] hereby
authorized, at such time as he [they] in his [their] sole discretion, deem[s]
appropriate, to execute, acknowledge, verify, deliver, file and record, for and
in the name of the Partnership and Limited Partners, any and all documents and
instruments and shall do and perform any and all acts required by applicable law
or which the General Partner[s] deem[s] necessary or advisable in order to give
effect to this Amendment, to the consummation of the Merger and each transaction
necessary or appropriate to effect the Merger.
5. Full Force and Effect of Agreement. Except as provided in
this Amendment, all other terms of the Partnership Agreement remain in full
force and effect.
6. Successors and Assigns. This Amendment shall be binding
upon, and shall inure to the benefit of, the parties hereto and their respective
successors and assigns.
7. Counterparts. This Amendment may be executed in
counterparts, all of which together shall constitute one agreement binding on
all parties hereto, notwithstanding that all such parties are not signatories to
the original or same counterpart.
8. Governing Law. This Amendment shall be interpreted in
accordance with the laws of the State of ______________, all rights and remedies
being governed by such laws.
IN WITNESS WHEREOF, the undersigned hereby execute this Amendment on
the ____ day of ________________, 19___.
GENERAL PARTNER(S)
By:
LIMITED PARTNERS
By each Limited Partner listed on
Schedule A hereto
By:
Their Attorney-in-Fact
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<PAGE>
Forms of
THE NOTE AND LOAN AGREEMENT
ANNEX 3
To AmREIT Joint Consent
Solicitation Statement
and
Prospectus
SPECIMEN
6.0% UNSECURED NOTE
AmREIT, INC.
NOTE NO. N-_____________ $
MATURITY DATE: December 31, 2004
DATE OF ISSUANCE: ________, 19__
HOUSTON, TEXAS
THIS NOTE IS SUBJECT TO THE PROVISIONS OF THE LOAN AGREEMENT DATED
_______________ , 1998.
1. Principal and Interest. For value received, AmREIT, INC., a Maryland
corporation ("Maker"), hereby promises to pay to the order of the registered
holder of this Note ("Holder"), at such address of Holder as is set forth on the
records of Maker, or at such other place as Holder may designate in writing to
Maker, the principal sum of Dollars ($ ) (hereafter the "Principal"). This Note
shall bear interest from the date hereof on the unpaid Principal balance until
paid at the rate of six and no one hundredths percent (6.0%) per annum. Interest
accruing hereunder shall be calculated on the basis of a 365-day year for actual
days elapsed.
2. Manner and Form of Payment. This Note shall be payable interest
only, in arrears, on the fifth day of ________ and on the fifth day of each
calendar quarter thereafter until December 31, 2005, (the "Maturity Date"), on
which date the unpaid balance of Principal and accrued interest shall be due and
payable. All Principal and interest shall be payable in lawful money of the
United States of America. All payments made hereunder shall be applied first to
the payment of accrued interest and the balance remaining to the payment of
Principal.
3. Loan Agreement. This Note is one of up to $10,000,000 in principal
amount of 6.0% unsecured Notes which may be issued pursuant to that certain Loan
Agreement dated _____________, 1998 (the "Loan Agreement"), the terms and
conditions of which are incorporated herein by reference. As a condition to the
issuance of this Note, Holder agrees to adopt and to be bound by the terms and
conditions of the Loan Agreement.
4. Events of Default. This Note shall be subject to each of the Events
of Default and remedies set forth in the Loan Agreement. In order to cure
Payment Default, Maker must mail to the Holder, or direct deposit if that option
is selected, the amount of the nonpayment plus a late payment penalty equal to
simple interest on the amount unpaid at the rate of ten and no one hundredths
percent (10.0%) per annum, measured from the date the payment should have been
mailed, deposited or credited pursuant to the terms of this Note until the date
it actually is mailed, deposited or credited.
If an Event of Default occurs and is continuing, then and in every such
case the Holders of not less than a Majority in Principal Amount of the
Outstanding Notes may appoint a Trustee to represent the interest of all the
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<PAGE>
Holders pursuant to the Loan Agreement as provided therein. No Holder shall have
the right to institute or continue any proceeding, judicial or otherwise, with
respect to the Notes except pursuant to the Loan Agreement.
Under the Loan Agreement, the Trustee, at the direction of the Majority
Vote of the Holders, may declare all the Notes to be due and payable immediately
and take any action allowed by law to collect such amounts. Notwithstanding the
foregoing, in the case of an Event of Default arising from events of bankruptcy
or insolvency with respect to Maker, all Outstanding Notes will become due and
payable without further action or notice.
5. Prepayment of Note. The Maker may at any time, upon not less than
thirty (30) nor more than sixty (60) days prior written notice to the Holder,
elect to prepay the Principal Amount in whole or in part, and by delivering to
the Holder payment equal to such amount of prepayment plus accrued and unpaid
interest thereon through such date of prepayment. Notice of prepayment shall be
mailed by first class mail to Holder. If less than all Notes are prepaid, the
Notes may be redeemed either pro rata or by lot in the sole discretion of the
Maker. In the event of such prepayment, a new Note in principal amount equal to
the unpaid principal amount of the original Note shall be issued in the name of
Holder and the original Note shall be canceled. On and after the prematurity
date, interest shall cease to accrue on the portion of the Principal Amount
prepaid. The foregoing obligation to prepay the Notes either on a pro rata basis
or by lot shall not in any manner limit the Maker's right to repurchase or
prepay any Note on a voluntary basis agreed to by the holder thereof, including
any prepayment of the Note prior to maturity as described below.
6. Amendment, Supplement and Wavier. Pursuant to the Loan Agreement,
the Notes may be amended or supplemented by a Majority Vote of the Holders and
any Default, Event of Default, compliance or noncompliance with any provision of
the Notes may be waived by a Majority Vote of the Holders, provided that any
such amendment or supplement affecting the term, interest rate and other terms
of the Notes must be ratable and proportionate in effect on all Holders of the
then outstanding Notes based on the aggregate amount of principal and interest
and penalty payments due them.
7. Waivers. The Maker waives demand for payment, presentment for
payment, protest, notice of protest, notice of dishonor, notice of nonpayment,
notice of acceleration or maturity, or diligence in taking any action to collect
sums owing hereunder.
8. Separability. In case any provision in this Note shall be invalid,
illegal or unenforceable, the validity, legality and enforceability of the
remaining provisions shall not in any way be affected or impaired thereby.
9. Texas Law; Jurisdiction. This Note is made in the State of Texas and
the provisions hereof shall be construed in accordance with the laws of the
State of Texas, except to the extent preempted by federal law; and such parties
further agree that in the event of a default hereunder, this Note may be
enforced in any court of competent jurisdiction in the State of Texas, and they
do hereby submit to the jurisdiction of such court regardless of their residence
or where this Note or any endorsement hereof may have been executed.
AmREIT, INC.
By: _______________________________
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<PAGE>
LOAN AGREEMENT
6.0% Unsecured Notes
Due December 31, 2004
AmREIT, INC.
THIS LOAN AGREEMENT is entered into by and among AmREIT, INC., a
Maryland corporation, (hereinafter referred to as "AmREIT") and the undersigned,
a Registered Holder of one or more of AmREIT's 6.0% Unsecured Notes (the
"Notes"), as defined below (each of whom is referred to herein as "Holder" and
together referred to as "Holders") and such Trustee or Trustees as may be
appointed by the Holders pursuant to the terms set forth herein.
PREFACE
A. The Notes are part of up to $10,000,000 of 6.0% Unsecured Notes due
December 31, 2004, which are being offered and sold by AmREIT to the Holders,
pursuant to the Merger of one or more of the Participating Partnerships into
AmREIT (collectively referred to herein as the "Merger") as described in the
Joint Consent Solicitation Statement and Prospectus dated _____________, 1998,
as supplemented (the "Prospectus"). Unless otherwise defined herein, the terms
used herein have the same meanings as those set forth in the Prospectus, which
is incorporated herein by reference.
B. The Holder is a Registered Holder of one or more of the Notes.
C. A copy of the form of the Notes is set forth as Exhibit "A" to this
Agreement.
D. By electing to receive his or her Note(s) in the Merger and as a
condition thereto, the Holder has adopted and agreed to be bound by this Loan
Agreement.
E. By adopting and agreeing to be bound by this Agreement, the Holder
appoints the Trustee, as such Trustee or Trustees may be appointed pursuant to
Article III, Section B below, to act as Holder's exclusive agent under this
Agreement for the sole purposes of providing the services and performing the
duties specified in Article IV of this Agreement, and of enforcing the
obligations of AmREIT under the Notes as provided herein. The Agent understands
the purposes of its appointment as Holder's agent and accepts the appointment as
such for the stated purposes only, and on the terms and conditions of this
Agreement.
NOW, THEREFORE, in consideration of the agreements contained herein and
for other good and valuable consideration, the adequacy of which is hereby
acknowledged, AmREIT, the Holders and the Trustee mutually agree as follows:
<PAGE>
ARTICLE I
Definitions and Other Provisions of General Application
Section A. Definitions
For the purposes of this Agreement, except as otherwise expressly
provided or unless the context otherwise requires, the capitalized terms used
herein and not otherwise defined in this section have the meaning assigned to
them in the Prospectus and include the plural as well as the singular. All
accounting terms not otherwise defined herein have the meanings assigned to them
in the Prospectus and all computations herein provided for shall be made in
accordance with generally accepted accounting principles. In determining
generally accepted accounting principles, AmREIT may conform to any other rule
or regulation of any regulatory authority having jurisdiction over AmREIT.
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition, "control,"
"controlling" and "controlled," when used with respect to any specified Person,
means the power to direct the management and policies of such Person, directly
or indirectly, whether through the ownership of voting securities, by contract
or otherwise.
"Agreement" means this instrument as originally executed or as it may
from time to time be supplemented, modified or amended by one or more
supplemental agreements hereto entered into pursuant to the applicable
provisions hereof. The Agreement is not qualified under or subject to the Trust
Indenture Act of 1939, as amended.
"Bankruptcy" or "Insolvency" means the filing in any court pursuant to
any statute of the United States or of any state, a petition in bankruptcy or
insolvency, or filing for reorganization or for the appointment of a receiver or
trustee of all or a material portion of AmREIT's assets, an assignment for the
benefit of creditors, if AmREIT admits in writing its inability to pay its debts
as they fall due or the seeking, consenting to, or acquiescing in the
appointment of a trustee, receiver or liquidator of any material portion of its
property. Bankruptcy or insolvency shall also include the filing against AmREIT,
in any court, pursuant to any statute of the United States or of any state, of a
petition in bankruptcy or insolvency, or for reorganization, or for appointment
of a receiver or trustee of all or a substantial portion of AmREIT's property,
and within 90 days after such commencement of any such proceeding against AmREIT
such petition shall not have been dismissed.
"Business Day" means any day other than a Saturday or Sunday or a day
on which banking institutions in the State of Texas are not required to be open.
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<PAGE>
"Default" means any event that with the passage of time or the giving
of notice or both is or could be an Event of Default.
"Events of Default" means those Events of Default defined under "Events
of Default" herein, whatever the reason for such event and whether it shall be
voluntary or involuntary or be effected by operation of law or pursuant to any
judgment, decree or order of any court or any order, rule or regulation of any
administrative or governmental body.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as approved by a significant segment of the accounting profession,
which are in effect from time to time.
"Holder" means the Person or Persons in whose name a Note is registered
on the books and records of AmREIT as a holder of the Note.
"Indebtedness" means any indebtedness, whether or not contingent, (i)
in respect of borrowed money or evidenced by bonds, notes, debentures or similar
instruments or credit (or reimbursement agreements in respect thereof), (ii)
representing the balance deferred and unpaid of the purchase price of any
property, (iii) representing capital lease obligations; and (iv) representing
any hedging obligations, except, in each case, any such balance that constitutes
an accrued expense or trade payable, if and to the extent any of the foregoing
Indebtedness (other than hedging obligations) would appear as a liability upon a
balance sheet prepared in accordance with GAAP, and also includes, to the extent
not otherwise included, the guarantee of obligations of other persons that would
be included within this definition.
"Majority in Interest" or "Majority of Principal Amount" shall mean a
majority of the outstanding unpaid principal amount of all Outstanding Notes
plus all unpaid interest due thereon (as reflected on the books and records of
AmREIT as voted by the Holders thereof).
"Maturity Date" means the date on which the unpaid balance of principal
and accrued interest is due and payable on the Notes.
"Net Income" means, with respect to AmREIT for any period, the
aggregate of the net income of AmREIT for such period, on a consolidated basis,
determined in accordance with GAAP; provided that the Net Income of any entity
that is not a subsidiary of AmREIT or that is accounted for by the equity method
of accounting shall be included only to the extent of the amount of dividends or
distributions paid to the referent entity or a wholly-owned subsidiary of
AmREIT.
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<PAGE>
"Outstanding Notes" when used with respect to the Notes means, as of
the date of determination, all Notes theretofore issued and delivered by AmREIT
and not paid, prepaid or redeemed in full pursuant to their terms.
"Person" means any individual, corporation, partnership, joint venture,
association, joint-stock partnership, trust, unincorporated organization or
government or any agency or political subdivision thereof.
"Trustee" means the Person or Persons elected as the "Trustee" pursuant
to the terms of this Agreement or a successor thereto once the latter shall have
become such pursuant to the applicable provisions of this Agreement.
Section B. Acts of Holders
1. Any request, demand, authorization, direction, notice, consent,
waiver or other action provided by this Agreement to be given or taken by
Holders may be embodied in and evidenced by one or more substantially concurrent
instruments of substantially similar tenor signed by such Holders in person or
by an agent or attorney duly appointed in writing; and, except as herein
otherwise expressly provided, such action shall become effective when such
instrument or instruments are delivered to the Trustee, and, where it is herein
expressly required, to AmREIT. Such instrument or instruments (and the action
embodied therein and evidenced thereby) are herein sometimes referred to as the
"Act" of the Holders signing such instrument or instruments.
2. The ownership of the Notes shall be conclusively proven by the books
and records of AmREIT.
3. Any request, demand, authorization, direction, notice, consent,
waiver or other action by the Holder of a Note shall bind every future Holder of
the Note and the Holder of every Note issued upon the transfer thereof or in
exchange therefor or in lieu thereof, in respect of anything done or suffered to
be done by the Trustee or AmREIT in reliance thereon, whether or not notation of
such action is made upon such Note.
Section C. Notices to Trustee and AmREIT
Any request, demand, authorization, direction, notice, consent, waiver
or Act of Holders or other document provided or permitted by this Agreement to
be made upon, given or furnished to, or filed with:
1. The Trustee by any Holder or by AmREIT shall be sufficient for every
purpose hereunder if given in writing by personal service or mailed by certified
mail, return receipt requested, addressed to the Trustee at the address provided
to the Holder by the Trustee in writing, or
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<PAGE>
2. AmREIT by the Trustee or by any Holder shall be sufficient for every
purpose hereunder if given in writing by personal service or mailed by certified
mail, return receipt requested, addressed to AmREIT at Eight Greenway Plaza,
Suite 824, Houston, Texas 77046, Attention: Timothy Kelley, Vice President, or
at any other address previously furnished in writing to the Trustee by AmREIT.
Section D. Notices to Holders
Where this Agreement provides for publication of notice to Holders of
any event, such notice shall be sufficiently given (unless otherwise herein
expressly provided) if in writing and mailed, first-class postage prepaid, to
each Holder of the Notes, at the address of such Holder as it appears in the
books and records of AmREIT, not later than the latest date, and not earlier
than the earliest date, prescribed for the first publication of such notice.
Section E. Effect of Headings and Table of Contents
The Article and Section headings herein are for convenience only and
shall not affect the construction hereof.
Section F. Successors and Assigns
All covenants and agreements in this Agreement by AmREIT shall bind its
successors and assigns, whether so expressed or not.
Section G. Severability
In case any provision in this Agreement shall be invalid, illegal or
unenforceable, the validity, legality and enforceability of the remaining
provisions shall not in any way be affected or impaired thereby.
Section H. Benefits of Agreement
Nothing in this Agreement or in the Notes, expressed or implied, shall
give to any Person, other than the parties hereto and their successors
hereunder, any benefit or any legal or equitable right, remedy or claim under
this Agreement.
Section I. Governing Law
This Agreement and all rights and obligations of the undersigned hereof
shall be governed, construed and interpreted in accordance with the laws of the
State of Texas without regard to conflict of law principles.
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<PAGE>
Section J. Persons Deemed Owners
AmREIT, the Trustee and any agent of AmREIT or the Trustee may treat
the Person in whose name any Note is registered as the owner of such Note for
the purpose of receiving payment of principal of or interest on such Note and
for all other purposes whatsoever, whether or not such Note is overdue.
ARTICLE II
Continuing Covenants of AmREIT
Section A. Continuing Covenants of AmREIT
1. No Default on Other Debt. AmREIT shall not be in default with
respect to any other of its debt obligations, including any payment of principal
or interest. For the purposes hereof, "default" means AmREIT's failure to cure
any default under the terms of any debt obligation within thirty (30) days of
written notice of such default by the creditor under the respective debt
obligation.
2. Merger, Reorganization or Sale of Assets. While any Note remains
unpaid and outstanding, AmREIT shall not consolidate or merge with or into any
other person or entity (whether or not AmREIT is the surviving corporation) or
sell, assign, transfer, lease, convey or otherwise dispose of all or
substantially all of its properties or assets (excepting loans held for sale in
the normal course of AmREIT's mortgage banking operations) in one or more
related transactions to, another corporation, person or entity, unless (i)
AmREIT is the surviving corporation of such consolidation or merger; and (ii)
immediately after such transaction no Default or Event of Default exists.
3. Prepayment of Notes. During the time any Principal is due and owing
on the Notes, AmREIT shall apply an amount equal to eighty percent (80%) of the
net proceeds from the sale or refinancing of the real properties acquired from
the Participating Partnerships pursuant to the Merger as described in the
Prospectus to prepay (call) the Notes as provided above. Such prepayment may, in
the sole discretion of AmREIT, be either pro rata as to the outstanding
principal amount of all of the Notes or be used to prepay less than all of the
outstanding Notes in full where the Notes to be prepaid are determined by lot.
For the purposes of this covenant (the "Prepayment Requirement"), "net proceeds
from sale or refinancing" shall mean any cash proceeds received from the sale or
financing of such real property remaining after the payment of the costs of such
transaction, the payment of all encumbrances or obligations relating to the real
property and the payment of any other debt obligations of AmREIT then due and
payable or which AmREIT's Board of Directors determines to be in the best
interests of AmREIT to prepay.
4. Books and Records. AmREIT shall keep proper books of record and
account, in which full and correct entries shall be made of all dealings or
transactions of or in relation to the
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Notes and the business and affairs of AmREIT in accordance with generally
accepted accounting principles. AmREIT shall furnish to the Trustee any and all
information related to the Notes as the Trustee may reasonably request and which
is in AmREIT's possession.
ARTICLE III
Remedies
Section A. Events of Default
Each of the following constitutes an Event of Default under the Notes:
(i) default for thirty (30) days in the payment when due of interest or penalty
on any Note; (ii) default for thirty (30) days in the payment when due of
principal of any Note; (iii) if not cured in a timely manner, failure by AmREIT
to observe or perform any of the covenants or agreements in the Notes or set
forth under Article II hereof required to be performed by it; (iv) if not cured
in a timely manner, default under the instruments governing any Other
Indebtedness or any mortgage, indenture or instrument under which there may be
issued or by which there may be secured or evidenced any Other Indebtedness for
money borrowed by AmREIT, whether such Other Indebtedness or guarantee now
exists or is hereafter created, which default (a) is caused by a failure to pay
when due principal or interest on such Other Indebtedness within the grace
period provided in such Other Indebtedness and which continues beyond any
applicable grace period (a "Payment default") or (b) results in the acceleration
of such Other Indebtedness prior to its express maturity, provided in each case
the principal amount of any such Other Indebtedness, together with the principal
amount of any other such Other Indebtedness under which there has been a Payment
default or the maturity of which has been so accelerated, aggregates $250,000 or
more or (v) AmREIT's bankruptcy or insolvency.
In order to cure payment Default, AmREIT must mail to the Holder,
direct deposit or credit if that option is selected, the amount of the
nonpayment plus a late payment penalty equal to simple interest on the amount
unpaid at the rate of 10% per annum, measured from the date the payment should
have been mailed, deposited or credited pursuant to the terms of the Notes until
the date it actually is mailed, deposited or credited.
Section B. Appointment of Trustee and Commencement of Operation of the Trust
If an Event of Default occurs and is continuing, then and in every such
case the Holders of not less than a Majority in Principal Amount of the
Outstanding Notes by written and signed ballot or other written and signed
consent may, within thirty (30) days of such Event of Default, appoint a
Trustee. Upon delivery of the properly executed written instrument evidencing
the appointment of the Trustee and the latter's acceptance of such appointment
by due execution of this specific and exact form of Agreement, the operation of
this Trust shall commence and the power and rights of the Trustee hereunder
shall begin.
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Section C. Covenant to Pay Trustee Amounts Due on Notes and Right of Trustee
and Holders of Judgment
AmREIT covenants that, if an Event of Default has occurred and is
continuing, AmREIT will, upon written request of the Trustee, cure such default
and pay forthwith for the benefit of the Holders the whole amount then due, any
penalties which may be due and, in addition thereto, such further amount as
shall be sufficient to cover the costs and expenses of collection, including the
reasonable compensation, expenses, disbursements and advances of the Trustee,
its agents and counsel and all other amounts due to the Trustee hereunder. If
AmREIT fails to cure such defaults and pay such amounts forthwith upon such
demand, the Trustee, in its own name and as trustee of an express trust, shall
be entitled to sue for and recover judgment against AmREIT and any other obligor
on the Notes for the amount so due and unpaid pursuant to the terms of the
Notes.
If any Event of Default occurs and is continuing, the Trustee or the
Holders of not less than a Majority in Principal Amount of the then Outstanding
Notes may declare all the Notes to be due and payable immediately and take any
action allowed by law to collect such amounts. Notwithstanding the foregoing, in
the case of an Event of Default arising from certain events of bankruptcy or
insolvency with respect to AmREIT, all Outstanding Notes will become due and
payable without further action or notice.
The Trustee may withhold from the Holders notice of any Default or
Event of Default if it believes that withholding notice is in their interest,
except a Default or Event of Default relating to the payment of principal,
interest or penalties.
Section D. Application of Money Collected
Any money collected by the Trustee pursuant to this Article, together
with any other sums then held by the Trustee hereunder, shall be applied in the
following order, at the date or dates fixed by the Trustee and, in case of the
distribution of such money on account of principal or interest upon presentation
of the Notes, and the notation thereof of the payment if only partially paid and
upon surrender thereof if fully paid:
(i) First: To the payment of all unpaid amounts due to the
Trustee hereunder;
(ii) Second: To the payment of the whole amount then due and
unpaid on the Outstanding Notes, for principal and interest and any
penalties which may be due under the terms of the Notes, in respect of
which or for the benefit of which such money has been collected; and in
case such proceeds shall be insufficient to pay in full the whole
amount so due and unpaid on such Notes, then to the payment of such
principal and interest and without any preference or priority, ratably
according to the aggregate amount so due; and
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(iii) Third: To the payment of the remainder, if any, to
AmREIT or to whosoever may be lawfully entitled to receive the same or
as a court of competent jurisdiction may direct.
Section E. Trustee May File Proofs of Claim
In case of the pendency of any receivership, insolvency, liquidation,
bankruptcy, reorganization, arrangement, adjustment, composition or other
judicial proceeding relative to AmREIT or any other obligor upon the Notes or
the property of AmREIT or of such other obligor or their creditors, the Trustee
(irrespective of whether the principal of the Notes shall then be due and
payable, as therein expressed or by declaration or otherwise, and irrespective
of whether the Trustee shall have made any demand on AmREIT for the payment of
overdue principal or interest) shall be entitled and empowered, by intervention
in such proceeding or otherwise,
(i) To file and prove a claim for the whole amount of
principal, interest and penalty owing and unpaid in respect of the
Outstanding Notes and to file such other papers or documents as may be
necessary or advisable in order to have the claims of the Trustee
(including to the extent permitted by law any claim for the reasonable
compensation, expenses, disbursements and advances of the Trustee, its
agents and counsel) and of the Holders allowed in such judicial
proceeding, and
(ii) To collect and receive any monies or other property
payable or deliverable on any such claims and to distribute the same;
and any custodian, receiver, assignee, trustee, liquidator, sequestrator or
other similar official in any such judicial proceeding is hereby authorized by
each Holder to make such payments to the Trustee, and in the event that the
Trustee shall consent to the making of such payments directly to the Holders, to
pay to the Trustee any amount due to it for the reasonable compensation,
expenses, disbursements and advances of the Trustee, its agents and counsel, and
any other amounts due the Trustee under this Agreement.
Nothing herein contained shall be deemed to authorize the Trustee to
authorize or consent to or accept or adopt on behalf of any Holder any plan or
reorganization, arrangement, adjustment or composition affecting the Notes or
the rights of any Holder thereof, or to authorize the Trustee to vote in respect
of the claim of any Holder.
Section F. Trustee May Enforce Claims Without Possession of Notes
All rights of action and claims under this Agreement, or documents
related thereto, may be prosecuted and enforced by the Trustee without the
possession of any of the Notes or the production thereof in any proceeding
relating thereto, and any such proceeding instituted by the Trustee shall be
brought in its own name as trustee of an express trust. Any recovery of judgment
shall, after provision for the payment of the reasonable compensation, expenses,
disbursements
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and advances of the Trustee, its agents and counsel and all other amounts due to
the Trustee hereunder, be for the ratable benefit of the Holders of the Notes
(based on the aggregate amount of unpaid principal and interest due each such
Holder on such date) in respect of which such judgment has been recovered.
Section G. Limitation on Suits
DURING THE PERIOD OF THE OPERATION OF THIS AGREEMENT, NO HOLDER
SHALL HAVE ANY RIGHT TO INSTITUTE OR CONTINUE ANY PROCEEDING or judicial
action pursuant to Articles II and III above or otherwise, under or with respect
to this Agreement or the Notes, or for the appointment of a receiver or trustee
or for any other remedy hereunder, unless all of the following have occurred:
(i) Such Holder has previously given written notice to the
Trustee of a continuing Event of Default;
(ii) The Holders of not less than a Majority in Principal
Amount of the Outstanding Notes shall have made written request to the
Trustee to institute proceedings in respect of such Event of Default in
its own name as Trustee hereunder;
(iii) Such Holder has offered to the Trustee indemnity
reasonably acceptable to the Trustee against the costs, expenses and
liabilities to be incurred in compliance with such request and provided
security therefor reasonably acceptable to the Trustee;
(iv) The Trustee for 60 days after its receipt of such notice,
request and offer of indemnity has failed to institute any such
proceeding; and
(v) No written direction inconsistent with such written
request has been given to the Trustee during such 60-day period by the
Holders of a Majority in Principal Amount of the Outstanding Notes;
it being understood and intended that no one or more Holders of Notes shall have
any right in any manner whatever by virtue of, or pursuant to any provision of
this Agreement to affect, disturb or prejudice the rights created under this
Agreement or the rights of any other Holders of Notes, or to obtain or to seek
to obtain priority or preference over any other Holders or to enforce any right
under this Agreement, except in the manner herein provided and for the equal and
ratable benefit of all Outstanding Note Holders. No Holder shall have the right
and each Holder hereby waives the right to sue individually except in accordance
with the provisions of this Agreement.
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Section H. Rights to Settle or Compromise
A Trustee may not make any settlement or compromise concerning the
rights of Holders, including in regard to payments of principal or interest,
unless it is approved in a separate vote by a Majority in Interest of the
Holders. Any settlement or compromise so approved would be binding upon all the
Holders.
Section I. Rights and Remedies Cumulative
Except insofar as same shall contradict the express terms of this
Agreement, no right or remedy herein conferred upon or reserved to the Trustee
or to the Holders is intended to be exclusive of any other right or remedy, and
every right and remedy shall, to the extent permitted by law and the terms of
this Agreement, be cumulative and in addition to every other right and remedy
given hereunder or now or hereafter existing at law or in equity or otherwise.
Section J. Delay or Omission not Waiver
No delay or omission of the Trustee or of any Holder of any Note to
exercise any right or remedy accruing upon an Event of Default shall impair any
such right or remedy or constitute a waiver of any such Event of Default or an
acquiescence therein. Every right and remedy given by this Agreement or by law
to the Trustee or to the Holders may be exercised from time to time, and as
often as may be deemed expedient, by the Trustee or by the Holders, as the case
may be.
Section K. Waiver of Past Defaults
Before any judgment or decree for payment of money due has been
obtained by the Trustee as provided in this Article, the Holders of not less
than a Majority in Principal Amount of the Outstanding Notes may, by Act of such
Holders delivered to the Trustee and AmREIT, on behalf of the Holders of all the
Notes waive any past default hereunder and its consequences and settle or
compromise any claim related to the payment of principal and interest on the
Outstanding Notes, provided the terms of such settlement or compromise have been
made known to all Holders of Outstanding Notes and the approval of the Majority
in Interest has been made in a signed written document. If and only if required
by law, the Trustee may provide a procedure for any Holder so desiring to remove
itself from the group settlement and to allow the Holder opting out of the group
settlement to proceed to enforce its rights individually and as it sees fit.
Upon any such waiver, such default shall cease to exist, and any Event
of Default arising therefrom shall be deemed to have been cured, for every
purpose of this Agreement; but no such waiver shall extend to any subsequent or
other Default or impair any right consequent thereon.
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Section L. Notice of Defaults
As soon as practicable after the occurrence of any Event of Default
hereunder, AmREIT shall transmit notice thereof by mail to all Holders of Notes,
as their names and addresses appear on the books and records of AmREIT.
ARTICLE IV
The Trustee
Section A. Certain Duties and Responsibilities
1. The Trustee shall, in the exercise of the rights and powers vested
in it by this Agreement, use the same degree of care and skill in its exercise
as a reasonable person would exercise or use.
2. No provision of this Agreement shall be construed to relieve the
Trustee from liability for its own grossly negligent action, its own grossly
negligent failure to act, or its own willful misconduct, except that:
a. The Trustee shall not be liable with respect to any action
taken or omitted to be taken by it in good faith in accordance with the
direction of the Holders of a Majority in Principal Amount of the Outstanding
Notes relating to the time, method and place of conducting any proceeding for
any remedy available to the Trustee, or exercising any trust or power conferred
upon the Trustee, under this Agreement;
b. No provision of this Agreement shall require the Trustee to
advance, expend or risk its own funds or otherwise incur any financial liability
in the performance of any of its duties hereunder, or in the exercise of any of
its rights or powers;
c. The Trustee shall be presumed to have acted without
negligence if it acted, or omitted to act, in good faith and in reliance upon an
opinion of counsel obtained by it.
Section B. Certain Rights of Trustee
Except as otherwise provided below:
1. The Trustee may consult with counsel, accountants and other experts
and the advice or opinion of such counsel, accountants and other experts shall
be full and complete authorization and protection in respect of any action
taken, suffered or omitted by the Trustee hereunder in good faith and in
reliance thereon and the Trustee shall have the right at any time to seek
instructions from a court of competent jurisdiction;
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2. The Trustee shall be under no obligation to exercise any of the
rights or powers vested in it by this Agreement at the request or direction of
any of the Holders pursuant to this Agreement, unless such Holders shall have
offered to the Trustee security or indemnity reasonably acceptable to the
Trustee against the costs, expenses and liabilities which might be incurred by
it in compliance with such request or direction;
3. The Trustee may execute any of the powers hereunder or perform any
duties hereunder either directly or by or through agents or attorneys and the
Trustee shall not be responsible for any misconduct or negligence on the part of
any agent or attorney appointed by it hereunder with the care required below;
and
4. Anything to the contrary contained herein notwithstanding, the
Trustee shall have no duty to take any action whatsoever if it believes in good
faith that the taking of such action may expose the Trustee to personal
liability.
Section C. May Hold Notes
The Trustee in its individual or any other capacity may become the
owner or pledgee of Notes and may otherwise deal with AmREIT with the same
rights it would have if it were not Trustee.
Section D. Compensation, Reimbursement and Security Therefor
AmREIT agrees:
1. To pay to the Trustee from time to time reasonable compensation for
all services rendered by it hereunder;
2. To reimburse the Trustee upon its request for all reasonable
expenses, disbursements and advances incurred or made by the Trustee in
accordance with any provision of this Agreement, including reasonable fees and
expenses of counsel for the Trustee, except as such expense, disbursement or
advance may be attributable to the Trustee's gross negligence or bad faith;
3. To indemnify the Trustee for, and to hold it harmless against any
loss, liability or expense incurred without gross negligence or bad faith on its
part, arising out of or in connection with the acceptance or administration of
this trust, including the costs and expenses of defending itself against any
claim or liability in connection with the exercise or performance of any of its
powers or duties hereunder.
Section E. Trustee Eligibility
The Trustee may not be an Affiliate of AmREIT.
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Section F. Termination of Trust and Removal of Trustee, Appointment of
Successor
1. Upon the moment all Defaults or Events of Defaults are cured or
deemed cured pursuant to this Agreement, the appointment of the Trustee and the
operation of the Trust will terminate and the powers and the rights of the
Trustee hereunder shall cease forthwith.
2. No resignation or removal of the Trustee and no appointment of a
successor Trustee pursuant to this Article shall become effective until the
acceptance of appointment by the successor Trustee as provided herein.
3. The Trustee may resign as Trustee hereunder at any time by giving
written notice thereof to AmREIT and the Holders. Upon delivery of an instrument
of acceptance by a successor Trustee duly appointed by a Majority in Interest of
the Holders the resignation will become effective.
4. The Trustee may be removed as Trustee hereunder at any time by Act
of the Holders of a Majority in Principal Amount of the Notes, delivered to the
Trustee and to AmREIT.
5. If at any time:
a. The Trustee shall cease to be eligible as Trustee and shall
fail to resign after written request therefor by AmREIT or by any Holder, or
b. The Trustee shall be adjudged incompetent, bankrupt or
insolvent or a receiver of the Trustee or of its property shall be appointed or
any public officer shall take charge or control of the Trustee or of its
property or affairs for the purpose of rehabilitation, conservation or
liquidation;
then in any such case, any Holder may, on behalf of himself and all others
similarly situated, petition any court of competent jurisdiction for the removal
of the Trustee and the appointment of a successor Trustee.
Section G. Acceptance of Appointment by Successor
Every successor Trustee appointed hereunder shall execute, acknowledge
and deliver to AmREIT and to the retiring Trustee an instrument accepting such
appointment, and thereupon the resignation or removal of the retiring Trustee
shall become effective and such successor Trustee, without any further act, deed
or conveyance, shall become vested with all the rights, powers and duties of the
retiring Trustee under this Agreement.
No successor Trustee shall accept its appointment unless at the time of
such acceptance such successor Trustee shall be qualified and eligible under
this Article.
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ARTICLE V
Holder's Lists and Reports by Trustee and AmREIT
Section A. AmREIT to Furnish Trustee Lists of Holders
AmREIT will furnish or cause to be furnished to the Trustee not more
than five (5) days after its appointment and acceptance as Trustee, and at such
other times as the Trustee may reasonably request in writing, within ten (10)
business days after receipt by AmREIT of any such request, a list in such form
as the Trustee may reasonably request containing all the information in the
possession or control of AmREIT, or any of its paying agents, as to the names
and addresses of the Holders of Notes, obtained since the date as of which the
next previous list, if any, was furnished, and the status of the amount of
principal and interest paid or outstanding in respect of each Notes.
ARTICLE VI
Supplemental Agreements
Section A. Supplement Agreement Without Consent of Holders
Without the consent of the Holder of any Note, AmREIT, when authorized
by a board resolution, and the Trustee may from time to time enter into one or
more agreements supplemental hereto, in form satisfactory to the Trustee, for
any of the following purposes:
1. To add to the conditions, limitations and restrictions on the
authorized amount or purposes of issue, authentication and delivery of Notes, as
herein set forth, additional conditions, limitations and restrictions thereafter
to be observed; provided that any such modification does not adversely affect
the rights and interests of the Holders.
2. To evidence the succession of another corporation or entity to
AmREIT and the assumption by any such successor of the covenants of AmREIT
contained herein; or
3. To add to the covenants of AmREIT for the benefit of the Holders or
to surrender any right or power herein conferred upon AmREIT; or
4. To cure any ambiguity, to amend any provision herein which may be
inconsistent with any other provision herein or to make any other provisions,
with respect to matters or questions arising under this Agreement, which shall
not be inconsistent with the provisions of this Agreement, provided such action
shall not adversely affect the rights and interests of the Holders.
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Section B. Supplemental Agreements with Consent of Holders
With the consent of the Holders of not less than a Majority in
Principal Amount affected by such agreement or supplemental agreement, by Act of
such Holders delivered to AmREIT and the Trustee, AmREIT and the Trustee may
enter into an agreement or agreements supplemental hereto for the purpose of
adding any provisions to or changing in any manner or eliminating any of the
provisions of this Agreement or of modifying in any manner the rights of the
Holders of the Notes under this Agreement. Such agreement or supplemental
agreement may, with the consent of a Majority in Interest of the Holders of each
Outstanding Note affected thereby, effect a compromise or settlement affecting
the term, interest rate and other terms of all the Notes; provided that any such
compromise or settlement must be ratable and proportionate in effect on all
Outstanding Notes based on the aggregate amount of principal and interest and
penalty payments due them under the terms of such Notes as of the date of
settlement.
The Trustee may in its discretion determine whether or not any Notes
would be affected by any supplemental agreement and any such determination shall
be conclusive upon the Holders of all Notes, whether theretofore or thereafter
authenticated and delivered hereunder. The Trustee shall not be liable for any
such determination made in good faith.
It shall not be necessary for any Act of Holders under this section to
approve the particular form of any proposed supplemental agreement, but it shall
be sufficient if such Act shall approve the substance thereof.
Section C. Effect of Supplemental Agreements
Upon the execution of any supplemental agreements under this Article,
this Agreement shall be modified in accordance therewith and such supplemental
agreement shall form a part of this Agreement for all purposes; and every Holder
theretofore or thereafter authenticated and delivered hereunder shall be bound
thereby.
ARTICLE VII
Defeasance
Section A. Payment of Indebtedness, Satisfaction and Discharge of Agreement.
Whenever AmREIT has paid or caused to be paid all amounts then
currently due and payable pursuant to the terms of the Notes then this Agreement
and the rights and interests created hereby shall cease and become null and void
(except as to any surviving rights of transfer or exchange of Notes herein or
therein provided for and except as otherwise stated in the next paragraph) and
the Trustee then acting as such hereunder shall, at the expense of AmREIT,
execute and deliver such instruments of satisfaction and discharge as may be
necessary.
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Notwithstanding anything to the contrary herein contained, the
obligations of AmREIT to pay or reimburse the Trustee as provided herein shall
survive the termination, satisfaction and discharge of this Agreement.
ARTICLE VIII
Miscellaneous
Section A. Counterparts
This Agreement may be executed in several counterparts, all of which
together shall constitute one agreement binding on all parties hereto,
notwithstanding that all the parties have not signed the same counterpart. The
Holders have consented hereto and are bound hereto by executing an agreement to
be bound hereby contained in the subscription document related to the offering
of the Notes.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the ____ day of __________, 1998.
HOLDER: AmREIT
By their election to receive Notes, each AmREIT, INC.
Holder has irrevocably adopted and A Maryland Corporation
agreed to be bound by the terms and
conditions of this Loan Agreement.
By: _____________________________________
TRUSTEE
_____________________________________
Name
By: _________________________________
Print Name and Title
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Form of
BISHIP-CROWN FAIRNESS OPINION
ANNEX 4
To AmREIT Joint Consent
Solicitation Statement
and
Prospectus
June 5, 1998
Board of Directors
AMERICAN ASSET ADVISERS TRUST, INC.
Eight Greenway Plaza, Suite 824
Houston, TX 77046
Gentlemen:
We understand that AmREIT, Inc., a Maryland corporation ("AmREIT"),
Taylor Income Investors III, Ltd. ("FUND III"), Taylor Income Investors IV, Ltd.
("FUND IV"), Taylor Income Investors V, Ltd. ("FUND V"), Taylor Income Investors
VI, Ltd. ("FUND VI"), AAA Net Realty Fund VII, Ltd. ("FUND VII"), AAA Net Realty
Fund VIII, Ltd. ("FUND VIII"), AAA Net Realty Fund Goodyear, Ltd. ("AAA GDYR"),
AAA Net Realty Fund IX, Ltd. ("FUND IX"), AAA Net Realty Fund X, Ltd. ("FUND
X"), and AAA Net Realty Fund XI, Ltd. ("FUND XI") (each, a "Partnership" and
collectively the "Partnerships") propose to enter into ten separate merger
agreements (collectively, the "Merger Agreement") pursuant to which, among other
things, each Partnership will merge into AmREIT and all of the properties and
cash assets of the Partnerships will be merged with and into AmREIT (the
"Merger").
You have asked us whether, in our opinion, the consideration to be paid
by AmREIT pursuant to the Merger with any or all of the Partnerships is fair to
AmREIT and its shareholders from a financial point of view.
Pursuant to the Merger, the partnership interests of the Partnerships
issued and outstanding prior to the closing of the Merger will be converted into
the right to receive shares of common stock, $0.01 par value per share (the
"Shares") or, in the alternative, and subject to the Note Restriction, AmREIT's
unsecured 6.0% Notes due December 31, 2004 (the "Notes"). The aggregate number
of Shares to be issued to the partners of each Partnership in connection with
the Merger will equal the Net Asset Value for such Partnership divided by the
Exchange Price of $9.34 (the "Total Partnership Shares"). The Net Asset Value of
each Partnership is equal to the value of its real property assets as agreed
upon by AmREIT and the Partnership (the "Negotiated Price") plus the excess, if
any, of its cash and accounts receivable over its debt (its "Net Cash") on the
effective date of the Merger. The Negotiated Prices of the Partnerships are,
respectively: FUND III, $1.1 million; FUND IV, $0.5 million; FUND V, $0.42
million; FUND VI, $0.285 million; FUND VII, $1.01 million; FUND VIII, $1.80
million; FUND GDYR, $1.09 million; FUND IX, $4.85 million; FUND X, $10.355
million; and FUND XI, $6.35 million. The number of Shares to be received by a
<PAGE>
Board of Directors
AMERICAN ASSET ADVISERS TRUST, INC.
June 5, 1998
Page 2
limited partner of each Partnership will equal such partner's respective
percentage interest in the individual Partnership multiplied by the Total
Partnership Shares for such Partnership. The principal amount of Notes to be
received by a limited partner of each Partnership will equal such partner's
respective percentage interest in the individual Partnership multiplied by the
Partnership's Net Asset Value. For their interests in the Partnership, the
general partners will not receive any shares to which they may be entitled in
exchange for the general partner interest except with respect to their
unsubordinated interest as General Partner.
In conducting our analysis and arriving at the opinion set forth below,
we have reviewed such materials and considered such financial and other factors
as we deemed relevant under the circumstances, including:
1. the Form 10-KSB and related financial information for
the fiscal year ended December 31, 1997 and the Form
10-QSB and the related unaudited financial
information for the quarterly period ended March 31,
1998 for AmREIT;
2. the Forms 10-KSB and related financial information
for the fiscal year ended December 31, 1997 and the
Forms 10-QSB and the related unaudited financial
information for the quarterly period ended March 31,
1998 for each of Fund IX and Fund X, and unaudited
financial statements for each of the other
Partnerships for the year ended December 31, 1997 and
for the quarterly period ended March 31, 1998;
3. the audited rental income statements for the
Partnerships for the years ended December 31, 1996
and 1997;
4. certain information, including projections, relating
to the business, earnings, cash flow, assets and
prospects of AmREIT furnished to us by the Management
of AmREIT ("Management");
5. certain information, including projections, relating
to the business, earnings, cash flow, assets and
prospects regarding the properties of each
partnership provided to us by Mr. H. Kerr Taylor on
behalf of the General Partners of each Partnership;
<PAGE>
Board of Directors
AMERICAN ASSET ADVISERS TRUST, INC.
June 5, 1998
Page 3
6. certain information provided by Mr. Taylor and
Management relating to the properties of the
Partnerships, including projections of net operating
income for 1998 based on Mr. Taylor's and
Management's review and analysis of the properties
and lease profiles of the Partnerships;
7. the historical offering prices for the Shares and
certain publicly traded companies we deemed to be
reasonably similar to AmREIT, the historical and
projected results of operations of AmREIT, and
historical and certain future earnings estimates of
selected companies we deemed to be reasonably similar
to AmREIT.
8. publicly available financial, operating and stock
market data concerning certain companies engaged in
businesses we deemed comparable to AmREIT or
otherwise relevant to our inquiry.
9. the financial terms of certain recent transactions we
deemed relevant;
10. drafts of the form of the Merger Agreement;
11. drafts of the Joint Consent Solicitation Statement
and Prospectus of AmREIT and the Partnerships; and
12. such other financial studies, analyses and
investigations and such other matters we deemed
necessary.
We have met with Management of AmREIT to discuss; (i) the prospects for
their business, (ii) their estimate of such business' future financial
performance, (iii) the financial impact of the Merger on AmREIT, and (iv) such
other matters as we deemed relevant. We have also visited selected Partnership
properties. We have assumed, with your consent, that the drafts of the Merger
Agreement which we reviewed will conform in all material respects to that
document when in final form.
In preparing our opinion, we have relied on the accuracy and
completeness of publicly available information and all of the information
supplied or otherwise made available to us by AmREIT and the Partnerships,
including the financial projections for AmREIT and of each of the properties
owned by the Partnerships, and we have not independently verified such
information or undertaken an independent appraisal of the assets of AmREIT or
the Partnerships. With respect to the projections furnished by AmREIT and the
<PAGE>
Board of Directors
AMERICAN ASSET ADVISERS TRUST, INC.
June 5, 1998
Page 4
Partnerships, we have assumed that they have been reasonably prepared and
reflect the best currently available estimates and judgment of Management and
Mr. Taylor as to the expected future financial performance of the respective
entities. Further, our opinion is based on economic, financial and market
conditions as they exist and can be evaluated as of the date hereof.
As you know, we have been retained by AmREIT to render this opinion in
connection with the Merger and will receive a fee for such service. We may
actively trade the Shares for our own account and for the accounts of customers
and, accordingly, may at any time hold a long or short position in such
securities. This letter and the opinion expressed herein may not be reproduced,
summarized, excerpted from or otherwise publicly referred to or disclosed in any
manner without our prior written consent; provided AmREIT may set forth in full
this letter in any proxy statement relating to the Merger sent to the AmREIT
shareholders.
Our opinion expressed herein is provided for the use of the Independent
Directors of AmREIT in the evaluation of the Merger, and our opinion is not
intended to be, and does not constitute, a recommendation to any shareholder of
AmREIT as to how such shareholder should vote in connection with the Merger.
On the basis of, and subject to, the foregoing, we are of the opinion
that, as of the date hereof, the consideration to be paid by AmREIT pursuant to
the Merger is fair to AmREIT and its Shareholders from a financial point of
view. Based on our analysis and conclusions, our opinion addresses the Merger as
a whole and with respect to the merger of each Partnership and each combination
of Partnerships from a financial point of view.
Very truly yours,
BISHOP-CROWN INVESTMENT RESEARCH, INC.
<PAGE>
Form of
HOULIHAN FAIRNESS OPINIONS
ANNEX 5
To AmREIT Joint Consent
Solicitation Statement
and
Prospectus
[HOULIHAN LOKEY LETTERHEAD]
June 1, 1998
Mr. H. Kerr Taylor in his capacity as
President of the General Partner of
Taylor Income Investors, LTD.
8 Greenway Plaza
Suite 824
Houston, TX 77046
Dear Mr. Taylor:
We understand the following regarding American Assets Advisers Trust Inc.
("AmREIT"), and Taylor Income Investors, LTD (the "Partnership"). AmREIT has
recently completed a transaction pursuant to which it acquired its advisor,
American Asset Advisers Realty Corp (the "Adviser") (the "Adviser Acquisition").
Prior to the Adviser Acquisition, the Advisor provided property management and
other related services to the Partnerships pursuant to an Omnibus Service
Agreement (the "Service Agreement"). As a result of the Advisor Acquisition, all
services contracts associated with the Service Agreement have been assumed by a
wholly owned subsidiary of AmREIT. Additionally, prior to the Advisor
Acquisition, the Advisor was owned by Kerr Taylor, who was (and is) a
shareholder of AmREIT. As a result of the Advisor Acquisition, Mr. Taylor
increased his ownership interest in AmREIT. Mr. Taylor serves as the President
of Taylor Income Investors, Inc., which is the corporate general partner of the
Partnership (the "General Partner"). The Partnership owns interests in three
retail properties. Following the Adviser Acquisition, Mr. Taylor and his
affiliated corporation retained their fiduciary responsibilities associated with
such General Partner of the Partnership.
Finally, we understand that AmREIT has entered into a plan to acquire the
Partnership (the "Partnership Acquisition"). Specifically, we understand that
pursuant to the Partnership Acquisition, AmREIT will provide a total of 125,116
shares of AmREIT common stock in exchange for the aggregate limited partnership
interests in the Partnership. The Partnership Acquisition and other related
transactions disclosed to Houlihan Lokey are referred to collectively herein as
the "Transaction."
AmREIT and the General Partner(s) have requested that Houlihan Lokey have
requested our opinion(the "Opinion") as to the matters set forth below. The
Opinion does not address AmREIT's, the General Partner's or the Partnership's
underlying business decision to effect the Transaction. We have not been
requested to, and did not, solicit third party indications of interest in
acquiring all or any part of AmREIT, or the Partnership. Furthermore,
at your request, we have not negotiated the Transaction or advised you with
respect to alternatives to it.
Taylor III - fairness opinion
<PAGE>
Mr. H. Kerr Taylor in his capacity as
President of the General Partner of
Taylor Income Investors, LTD.
June 1, 1998
-2-
In connection with this Opinion, we have made such reviews, analyses and
inquiries as we have deemed necessary and appropriate under the circumstances.
Among other things, we have:
1. met with the General Partner and certain members of its senior
management to discuss the operations, financial condition, future
prospects and projected operations and performance of the Partnership;
2. visited certain facilities and business offices of the General Partner
and AmREIT;
3. reviewed the Partnership's annual reports to shareholders for the
fiscal years ended December 31, 1997 and 1996 which the General Partner
have identified as being the most current financial statements
available and have indicated that there has been no material change in
the financial position of the Partnership since such financial
statements;
4. reviewed copies of the 1985 Agreement of Limited Partnership of the
Partnership; and
5. reviewed AmREIT's annual reports to shareholders and on Form 10-K for
the fiscal years ended 1997 and quarterly reports on Form 10-Q for the
quarter ended March 31, 1998;
6. reviewed forecasts and projections prepared by the General Partner with
respect to the Partnership for the year ended December 31, 1998 and
reviewed summary pro-forma forecast prepared by AmREIT's management
with respect to AmREIT, the Partnership and affiliated partnerships;
7. reviewed drafts of the Joint Consent Solicitation Statement and
Prospectus for American Asset Advisers Trust, Inc.;
8. reviewed the historical market prices for the AmREIT's publicly traded
securities;
9. reviewed certain other publicly available financial data for certain
companies that we deem comparable to the Partnership and AmREIT, and
publicly available prices and premiums paid in other transactions that
we considered similar to the Transaction; and
10. conducted such other studies, analyses and inquiries as we have deemed
appropriate.
Taylor III - fairness opinion
<PAGE>
Mr. H. Kerr Taylor in his capacity as
President of the General Partner of
Taylor Income Investors, LTD.
June 1, 1998
-3-
We have relied upon and assumed, without independent verification, that the
financial forecasts and projections provided to us have been reasonably prepared
and reflect the best currently available estimates of the future financial
results and condition of AmREIT and the Partnership and that there has been no
material change in the assets, financial condition, business or prospects of
AmREIT or the Partnership since the date of the most recent financial statements
made available to us.
We have not independently verified the accuracy and completeness of the
information supplied to us with respect to AmREIT or the Partnership and do not
assume any responsibility with respect to it. We have not made any physical
inspection or independent appraisal of any of the properties or assets of AmREIT
or the Partnership. Our opinion is necessarily based on business, economic,
market and other conditions as they exist and can be evaluated by us at the date
of this letter.
Based upon the foregoing, and in reliance thereon, it is our opinion that the
aggregate consideration to be received by the limited partners of Taylor Income
Investors, LTD in connection with the Transaction is fair to them from a
financial point of view.
HOULIHAN LOKEY HOWARD & ZUKIN FINANCIAL ADVISORS, INC.
Taylor III - fairness opinion
<PAGE>
[HOULIHAN LOKEY LETTERHEAD]
June 1, 1998
Mr. H. Kerr in his capacity as
President of the General Partner of
Taylor Income Investors IV, LTD.
8 Greenway Plaza
Suite 824
Houston, TX 77046
Dear Mr. Taylor:
We understand the following regarding American Assets Advisers Trust Inc.
("AmREIT"), and Taylor Income Investors IV, LTD (the "Partnership"). AmREIT has
recently completed a transaction pursuant to which it acquired its advisor,
American Asset Advisers Realty Corp (the "Adviser") (the "Adviser Acquisition").
Prior to the Adviser Acquisition, the Advisor provided property management and
other related services to the Partnerships pursuant to an Omnibus Service
Agreement (the "Service Agreement"). As a result of the Advisor Acquisition, all
services contracts associated with the Service Agreement have been assumed by a
wholly owned subsidiary of AmREIT. Additionally, prior to the Advisor
Acquisition, the Advisor was owned by Kerr Taylor, who was (and is) a
shareholder of AmREIT. As a result of the Advisor Acquisition, Mr. Taylor
increased his ownership interest in AmREIT. Mr. Taylor serves as the President
of Taylor Income Investors IV, Inc., which is the corporate general partner of
the Partnership (the "General Partner"). The Partnership owns interests in one
retail property. Following the Adviser Acquisition, Mr. Taylor and his
affiliated corporation retained their fiduciary responsibilities associated with
such General Partner of the Partnership.
Finally, we understand that AmREIT has entered into a plan to acquire the
Partnership (the "Partnership Acquisition"). Specifically, we understand that
pursuant to the Partnership Acquisition, AmREIT will provide a total of 56,034
shares of AmREIT common stock in exchange for the aggregate limited partnership
interests in the Partnership. The Partnership Acquisition and other related
transactions disclosed to Houlihan Lokey are referred to collectively herein as
the "Transaction."
AmREIT and the General Partner(s) have requested that Houlihan Lokey have
requested our opinion (the "Opinion") as to the matters set forth below. The
Opinion does not address AmREIT's, the General Partner's or the Partnership's
underlying business decision to effect the Transaction. We have not been
requested to, and did not, solicit third party indications of interest in
acquiring all or any part of AmREIT, or the Partnership. Furthermore,
at your request, we have not negotiated the Transaction or advised you with
respect to alternatives to it.
Taylor IV - fairness opinion
<PAGE>
Mr. H. Kerr Taylor in his capacity as
President of the General Partner of
Taylor Income Investors IV, LTD.
June 1, 1998
-2-
In connection with this Opinion, we have made such reviews, analyses and
inquiries as we have deemed necessary and appropriate under the circumstances.
Among other things, we have:
1. met with the General Partner and certain members of its senior
management to discuss the operations, financial condition, future
prospects and projected operations and performance of the Partnership;
2. visited certain facilities and business offices of the General Partner
and AmREIT;
3. reviewed the Partnership's annual reports to shareholders for the
fiscal years ended December 31, 1997 and 1996 which the General Partner
have identified as being the most current financial statements
available and have indicated that there has been no material change in
the financial position of the Partnership since such financial
statements;
4. reviewed copies of the 1986 Agreement of Limited Partnership of the
Partnership; and
5. reviewed AmREIT's annual reports to shareholders and on Form 10-K for
the fiscal years ended 1997 and quarterly reports on Form 10-Q for the
quarter ended March 31, 1998;
6. reviewed forecasts and projections prepared by the General Partner with
respect to the Partnership for the year ended December 31, 1998 and
reviewed summary pro-forma forecast prepared by AmREIT's management
with respect to AmREIT, the Partnership and affiliated partnerships;
7. reviewed drafts of the Joint Consent Solicitation Statement and
Prospectus for American Asset Advisers Trust, Inc.;
8. reviewed the historical market prices for the AmREIT's publicly traded
securities;
9. reviewed certain other publicly available financial data for certain
companies that we deem comparable to the Partnership and AmREIT, and
publicly available prices and premiums paid in other transactions that
we considered similar to the Transaction; and
10. conducted such other studies, analyses and inquiries as we have deemed
appropriate.
Taylor IV - fairness opinion
<PAGE>
Mr. H. Kerr Taylor in his capacity as
President of the General Partner of
Taylor Income Investors IV, LTD.
June 1, 1998
-3-
We have relied upon and assumed, without independent verification, that the
financial forecasts and projections provided to us have been reasonably prepared
and reflect the best currently available estimates of the future financial
results and condition of AmREIT and the Partnership and that there has been no
material change in the assets, financial condition, business or prospects of
AmREIT or the Partnership since the date of the most recent financial statements
made available to us.
We have not independently verified the accuracy and completeness of the
information supplied to us with respect to AmREIT or the Partnership and do not
assume any responsibility with respect to it. We have not made any physical
inspection or independent appraisal of any of the properties or assets of AmREIT
or the Partnership. Our opinion is necessarily based on business, economic,
market and other conditions as they exist and can be evaluated by us at the date
of this letter.
Based upon the foregoing, and in reliance thereon, it is our opinion that the
aggregate consideration to be received by the limited partners of Taylor Income
Investors IV, LTD in connection with the Transaction is fair to them from a
financial point of view.
HOULIHAN LOKEY HOWARD & ZUKIN FINANCIAL ADVISORS, INC.
Taylor IV - fairness opinion
<PAGE>
[HOULIHAN LOKEY LETTERHEAD]
June 1, 1998
Mr. H. Kerr in his capacity as
President of the General Partner of
Taylor Income Investors V, LTD.
8 Greenway Plaza
Suite 824
Houston, TX 77046
Dear Mr. Taylor:
We understand the following regarding American Assets Advisers Trust Inc.
("AmREIT"), and Taylor Income Investors V, LTD (the "Partnership"). AmREIT has
recently completed a transaction pursuant to which it acquired its advisor,
American Asset Advisers Realty Corp (the "Adviser") (the "Adviser Acquisition").
Prior to the Adviser Acquisition, the Advisor provided property management and
other related services to the Partnerships pursuant to an Omnibus Service
Agreement (the "Service Agreement"). As a result of the Advisor Acquisition, all
services contracts associated with the Service Agreement have been assumed by a
wholly owned subsidiary of AmREIT. Additionally, prior to the Advisor
Acquisition, the Advisor was owned by Kerr Taylor, who was (and is) a
shareholder of AmREIT. As a result of the Advisor Acquisition, Mr. Taylor
increased his ownership interest in AmREIT. Mr. Taylor serves as the President
of Taylor Income Investors V, Inc., which is the corporate general partner of
the Partnership (the "General Partner"). The Partnership owns interests in three
retail properties. Following the Adviser Acquisition, Mr. Taylor and his
affiliated corporation retained their fiduciary responsibilities associated with
such General Partner of the Partnership.
Finally, we understand that AmREIT has entered into a plan to acquire the
Partnership (the "Partnership Acquisition"). Specifically, we understand that
pursuant to the Partnership Acquisition, AmREIT will provide a total of 47,240
shares of AmREIT common stock in exchange for the aggregate limited partnership
interests in the Partnership. The Partnership Acquisition and other related
transactions disclosed to Houlihan Lokey are referred to collectively herein as
the "Transaction."
AmREIT and the General Partner(s) have requested that Houlihan Lokey have
requested our opinion (the "Opinion") as to the matters set forth below. The
Opinion does not address AmREIT's, the General Partner's or the Partnership's
underlying business decision to effect the Transaction. We have not been
requested to, and did not, solicit third party indications of interest in
acquiring all or any part of AmREIT, or the Partnership. Furthermore, at your
request, we have not negotiated the Transaction or advised you with respect to
alternatives to it.
Taylor V - fairness opinion
<PAGE>
Mr. H. Kerr Taylor in his capacity as
President of the General Partner of
Taylor Income Investors V, LTD.
June 1, 1998
-2-
In connection with this Opinion, we have made such reviews, analyses and
inquiries as we have deemed necessary and appropriate under the circumstances.
Among other things, we have:
1. met with the General Partner and certain members of its senior
management to discuss the operations, financial condition, future
prospects and projected operations and performance of the Partnership;
2. visited certain facilities and business offices of the General Partner
and AmREIT;
3. reviewed the Partnership's annual reports to shareholders for the
fiscal years ended December 31, 1997 and 1996 which the General Partner
have identified as being the most current financial statements
available and have indicated that there has been no material change in
the financial position of the Partnership since such financial
statements;
4. reviewed copies of the 1986 Agreement of Limited Partnership of the
Partnership; and
5. reviewed AmREIT's annual reports to shareholders and on Form 10-K for
the fiscal years ended 1997 and quarterly reports on Form 10-Q for the
quarter ended March 31, 1998;
6. reviewed forecasts and projections prepared by the General Partner with
respect to the Partnership for the year ended December 31, 1998 and
reviewed summary pro-forma forecast prepared by AmREIT's management
with respect to AmREIT, the Partnership and affiliated partnerships;
7. reviewed drafts of the Joint Consent Solicitation Statement and
Prospectus for American Asset Advisers Trust, Inc.;
8. reviewed the historical market prices for the AmREIT's publicly traded
securities;
9. reviewed certain other publicly available financial data for certain
companies that we deem comparable to the Partnership and AmREIT, and
publicly available prices and premiums paid in other transactions that
we considered similar to the Transaction; and
10. conducted such other studies, analyses and inquiries as we have deemed
appropriate.
Taylor V - fairness opinion
<PAGE>
Mr. H. Kerr Taylor in his capacity as
President of the General Partner of
Taylor Income Investors V, LTD.
June 1, 1998
-3-
We have relied upon and assumed, without independent verification, that the
financial forecasts and projections provided to us have been reasonably prepared
and reflect the best currently available estimates of the future financial
results and condition of AmREIT and the Partnership and that there has been no
material change in the assets, financial condition, business or prospects of
AmREIT or the Partnership since the date of the most recent financial statements
made available to us.
We have not independently verified the accuracy and completeness of the
information supplied to us with respect to AmREIT or the Partnership and do not
assume any responsibility with respect to it. We have not made any physical
inspection or independent appraisal of any of the properties or assets of AmREIT
or the Partnership. Our opinion is necessarily based on business, economic,
market and other conditions as they exist and can be evaluated by us at the date
of this letter.
Based upon the foregoing, and in reliance thereon, it is our opinion that the
aggregate consideration to be received by the limited partners of Taylor Income
Investors V, LTD in connection with the Transaction is fair to them from a
financial point of view.
HOULIHAN LOKEY HOWARD & ZUKIN FINANCIAL ADVISORS, INC.
Taylor V - fairness opinion
<PAGE>
[HOULIHAN LOKEY LETTERHEAD]
June 1, 1998
Mr. H. Kerr in his capacity as
President of the General Partner of
Taylor Income Investors VI, LTD.
8 Greenway Plaza
Suite 824
Houston, TX 77046
Dear Mr. Taylor:
We understand the following regarding American Assets Advisers Trust Inc.
("AmREIT"), and Taylor Income Investors VI, LTD (the "Partnership"). AmREIT has
recently completed a transaction pursuant to which it acquired its advisor,
American Asset Advisers Realty Corp (the "Adviser") (the "Adviser Acquisition").
Prior to the Adviser Acquisition, the Advisor provided property management and
other related services to the Partnerships pursuant to an Omnibus Service
Agreement (the "Service Agreement"). As a result of the Advisor Acquisition, all
services contracts associated with the Service Agreement have been assumed by a
wholly owned subsidiary of AmREIT. Additionally, prior to the Advisor
Acquisition, the Advisor was owned by Kerr Taylor, who was (and is) a
shareholder of AmREIT. As a result of the Advisor Acquisition, Mr. Taylor
increased his ownership interest in AmREIT. Mr. Taylor serves as the President
of Taylor Income Investors VI, Inc., which is the corporate general partner of
the Partnership (the "General Partner"). The Partnership owns interests in three
retail properties. Following the Adviser Acquisition, Mr. Taylor and his
affiliated corporation retained their fiduciary responsibilities associated with
such General Partner of the Partnership.
Finally, we understand that AmREIT has entered into a plan to acquire the
Partnership (the "Partnership Acquisition"). Specifically, we understand that
pursuant to the Partnership Acquisition, AmREIT will provide a total of 30,807
shares of AmREIT common stock in exchange for the aggregate limited partnership
interests in the Partnership. The Partnership Acquisition and other related
transactions disclosed to Houlihan Lokey are referred to collectively herein as
the "Transaction."
AmREIT and the General Partner(s) have requested that Houlihan Lokey have
requested our opinion (the "Opinion") as to the matters set forth below. The
Opinion does not address AmREIT's, the General Partner's or the Partnership's
underlying business decision to effect the Transaction. We have not been
requested to, and did not, solicit third party indications of interest in
acquiring all or any part of AmREIT, or the Partnership. Furthermore, at your
request, we have not negotiated the Transaction or advised you with respect to
alternatives to it.
Taylor VI - fairness opinion
<PAGE>
Mr. H. Kerr Taylor in his capacity as
President of the General Partner of
Taylor Income Investors VI, LTD.
June 1, 1998
-2-
In connection with this Opinion, we have made such reviews, analyses and
inquiries as we have deemed necessary and appropriate under the circumstances.
Among other things, we have:
1. met with the General Partner and certain members of its senior
management to discuss the operations, financial condition, future
prospects and projected operations and performance of the Partnership;
2. visited certain facilities and business offices of the General Partner
and AmREIT;
3. reviewed the Partnership's annual reports to shareholders for the
fiscal years ended December 31, 1997 and 1996 which the General Partner
have identified as being the most current financial statements
available and have indicated that there has been no material change in
the financial position of the Partnership since such financial
statements;
4. reviewed copies of the 1987 Agreement of Limited Partnership of the
Partnership; and
5. reviewed AmREIT's annual reports to shareholders and on Form 10-K for
the fiscal years ended 1997 and quarterly reports on Form 10-Q for the
quarter ended March 31, 1998;
6. reviewed forecasts and projections prepared by the General Partner with
respect to the Partnership for the year ended December 31, 1998 and
reviewed summary pro-forma forecast prepared by AmREIT's management
with respect to AmREIT, the Partnership and affiliated partnerships;
7. reviewed drafts of the Joint Consent Solicitation Statement and
Prospectus for American Asset Advisers Trust, Inc.;
8. reviewed the historical market prices for the AmREIT's publicly traded
securities;
9. reviewed certain other publicly available financial data for certain
companies that we deem comparable to the Partnership and AmREIT, and
publicly available prices and premiums paid in other transactions that
we considered similar to the Transaction; and
10. conducted such other studies, analyses and inquiries as we have deemed
appropriate.
Taylor VI - fairness opinion
<PAGE>
Mr. H. Kerr Taylor in his capacity as
President of the General Partner of
Taylor Income Investors VI, LTD.
June 1, 1998
-3-
We have relied upon and assumed, without independent verification, that the
financial forecasts and projections provided to us have been reasonably prepared
and reflect the best currently available estimates of the future financial
results and condition of AmREIT and the Partnership and that there has been no
material change in the assets, financial condition, business or prospects of
AmREIT or the Partnership since the date of the most recent financial statements
made available to us.
We have not independently verified the accuracy and completeness of the
information supplied to us with respect to AmREIT or the Partnership and do not
assume any responsibility with respect to it. We have not made any physical
inspection or independent appraisal of any of the properties or assets of AmREIT
or the Partnership. Our opinion is necessarily based on business, economic,
market and other conditions as they exist and can be evaluated by us at the date
of this letter.
Based upon the foregoing, and in reliance thereon, it is our opinion that the
aggregate consideration to be received by the limited partners of Taylor Income
Investors VI, LTD in connection with the Transaction is fair to them from a
financial point of view.
HOULIHAN LOKEY HOWARD & ZUKIN FINANCIAL ADVISORS, INC.
Taylor VI - fairness opinion
<PAGE>
[HOULIHAN LOKEY LETTERHEAD]
June 1, 1998
Mr. H. Kerr Taylor in his capacity as
Individual General Partner
AAA Net Realty Fund VII, LTD
8 Greenway Plaza
Suite 824
Houston, TX 77046
Dear Mr. Taylor:
We understand the following regarding American Assets Advisers Trust Inc.
("AmREIT"), and AAA Net Realty Fund VII, LTD (the "Partnership"). AmREIT has
recently completed a transaction pursuant to which it acquired its advisor,
American Asset Advisers Realty Corp (the "Adviser") (the "Adviser Acquisition").
Prior to the Adviser Acquisition, the Advisor provided property management and
other related services to the Partnerships pursuant to an Omnibus Service
Agreement (the "Service Agreement"). As a result of the Advisor Acquisition, all
services contracts associated with the Service Agreement have been assumed by a
wholly owned subsidiary of AmREIT. Additionally, prior to the Advisor
Acquisition, the Advisor was owned by Kerr Taylor, who was (and is) a
shareholder of AmREIT. As a result of the Advisor Acquisition, Mr. Taylor
increased his ownership interest in AmREIT. Mr. Taylor serves as individual
general partner of the Partnership ( the "General Partner"). The Partnership
owns interests in five retail properties. Following the Adviser Acquisition, Mr.
Taylor and his affiliated corporation retained their fiduciary responsibilities
associated with such General Partner of the Partnership.
Finally, we understand that AmREIT has entered into a plan to acquire the
Partnership (the "Partnership Acquisition"). Specifically, we understand that
pursuant to the Partnership Acquisition, AmREIT will provide a total of 110,284
shares of AmREIT common stock in exchange for the aggregate limited partnership
interests in the Partnership. The Partnership Acquisition and other related
transactions disclosed to Houlihan Lokey are referred to collectively herein as
the "Transaction."
AmREIT and the General Partner(s) have requested that Houlihan Lokey have
requested our opinion (the "Opinion") as to the matters set forth below. The
Opinion does not address AmREIT's, the General Partner's or the Partnership's
underlying business decision to effect the Transaction. We have not been
requested to, and did not, solicit third party indications of interest in
acquiring all or any part of AmREIT, or the Partnership. Furthermore, at your
request, we have not negotiated the Transaction or advised you with respect to
alternatives to it.
Realty Fund 7 - fairness opinion
<PAGE>
Mr. H. Kerr Taylor in his capacity as
Individual General Partner
AAA Net Realty Fund VII, LTD
June 1, 1998
-2-
In connection with this Opinion, we have made such reviews, analyses and
inquiries as we have deemed necessary and appropriate under the circumstances.
Among other things, we have:
1. met with the General Partner and certain members of its senior
management to discuss the operations, financial condition, future
prospects and projected operations and performance of the Partnership;
2. visited certain facilities and business offices of the General Partner
and AmREIT;
3. reviewed the Partnership's annual reports to shareholders for the
fiscal years ended December 31, 1997 and 1996 which the General Partner
have identified as being the most current financial statements
available and have indicated that there has been no material change in
the financial position of the Partnership since such financial
statements;
4. reviewed copies of the 1988 Agreement of Limited Partnership of the
Partnership; and
5. reviewed AmREIT's annual reports to shareholders and on Form 10-K for
the fiscal years ended 1997 and quarterly reports on Form 10-Q for the
quarter ended March 31, 1998;
6. reviewed forecasts and projections prepared by the General Partner with
respect to the Partnership for the year ended December 31, 1998 and
reviewed summary pro-forma forecast prepared by AmREIT's management
with respect to AmREIT, the Partnership and affiliated partnerships;
7. reviewed drafts of the Joint Consent Solicitation Statement and
Prospectus for American Asset Advisers Trust, Inc.;
8. reviewed the historical market prices for the AmREIT's publicly traded
securities;
9. reviewed certain other publicly available financial data for certain
companies that we deem comparable to the Partnership and AmREIT, and
publicly available prices and premiums paid in other transactions that
we considered similar to the Transaction; and
10. conducted such other studies, analyses and inquiries as we have deemed
appropriate.
Realty Fund 7 - fairness opinion
<PAGE>
Mr. H. Kerr Taylor in his capacity as
Individual General Partner
AAA Net Realty Fund VII, LTD
June 1, 1998
-3-
We have relied upon and assumed, without independent verification, that the
financial forecasts and projections provided to us have been reasonably prepared
and reflect the best currently available estimates of the future financial
results and condition of AmREIT and the Partnership and that there has been no
material change in the assets, financial condition, business or prospects of
AmREIT or the Partnership since the date of the most recent financial statements
made available to us.
We have not independently verified the accuracy and completeness of the
information supplied to us with respect to AmREIT or the Partnership and do not
assume any responsibility with respect to it. We have not made any physical
inspection or independent appraisal of any of the properties or assets of AmREIT
or the Partnership. Our opinion is necessarily based on business, economic,
market and other conditions as they exist and can be evaluated by us at the date
of this letter.
Based upon the foregoing, and in reliance thereon, it is our opinion that the
aggregate consideration to be received by the limited partners of AAA Net Realty
Fund VII, LTD in connection with the Transaction is fair to them from a
financial point of view.
HOULIHAN LOKEY HOWARD & ZUKIN FINANCIAL ADVISORS, INC.
Realty Fund 7 - fairness opinion
<PAGE>
[HOULIHAN LOKEY LETTERHEAD]
June 1, 1998
Mr. H. Kerr Taylor in his capacity in his capacity as
Individual General Partner
AAA Net Realty Fund VIII, LTD
8 Greenway Plaza
Suite 824
Houston, TX 77046
Dear Mr. Taylor:
We understand the following regarding American Assets Advisers Trust Inc.
("AmREIT"), and AAA Net Realty Fund VIII, LTD (the "Partnership"). AmREIT has
recently completed a transaction pursuant to which it acquired its advisor,
American Asset Advisers Realty Corp (the "Adviser") (the "Adviser Acquisition").
Prior to the Adviser Acquisition, the Advisor provided property management and
other related services to the Partnerships pursuant to an Omnibus Service
Agreement (the "Service Agreement"). As a result of the Advisor Acquisition, all
services contracts associated with the Service Agreement have been assumed by a
wholly owned subsidiary of AmREIT. Additionally, prior to the Advisor
Acquisition, the Advisor was owned by Kerr Taylor, who was (and is) a
shareholder of AmREIT. As a result of the Advisor Acquisition, Mr. Taylor
increased his ownership interest in AmREIT. Mr. Taylor serves as individual
general partner of the Partnership ( the "General Partner"). The Partnership
owns interests in seven retail properties. Following the Adviser Acquisition,
Mr. Taylor and his affiliated corporation retained their fiduciary
responsibilities associated with such General Partner of the Partnership.
Finally, we understand that AmREIT has entered into a plan to acquire the
Partnership (the "Partnership Acquisition"). Specifically, we understand that
pursuant to the Partnership Acquisition, AmREIT will provide a total of 195,973
shares of AmREIT common stock in exchange for the aggregate limited partnership
interests in the Partnership. The Partnership Acquisition and other related
transactions disclosed to Houlihan Lokey are referred to collectively herein as
the "Transaction."
AmREIT and the General Partner(s) have requested that Houlihan Lokey have
requested our opinion (the "Opinion") as to the matters set forth below. The
Opinion does not address AmREIT's, the General Partner's or the Partnership's
underlying business decision to effect the Transaction. We have not been
requested to, and did not, solicit third party indications of interest in
acquiring all or any part of AmREIT, or the Partnership. Furthermore, at your
request, we have not negotiated the Transaction or advised you with respect to
alternatives to it.
Realty Fund 8 - fairness opinion
<PAGE>
Mr. H. Kerr Taylor in his capacity in his capacity as
Individual General Partner
AAA Net Realty Fund VIII, LTD
June 1, 1998
-2-
In connection with this Opinion, we have made such reviews, analyses and
inquiries as we have deemed necessary and appropriate under the circumstances.
Among other things, we have:
1. met with the General Partner and certain members of its senior
management to discuss the operations, financial condition, future
prospects and projected operations and performance of the Partnership;
2. visited certain facilities and business offices of the General Partner
and AmREIT;
3. reviewed the Partnership's annual reports to shareholders for the
fiscal years ended December 31, 1997 and 1996 which the General Partner
have identified as being the most current financial statements
available and have indicated that there has been no material change in
the financial position of the Partnership since such financial
statements;
4. reviewed copies of the 1989 Agreement of Limited Partnership of the
Partnership; and
5. reviewed AmREIT's annual reports to shareholders and on Form 10-K for
the fiscal years ended 1997 and quarterly reports on Form 10-Q for the
quarter ended March 31, 1998;
6. reviewed forecasts and projections prepared by the General Partner with
respect to the Partnership for the year ended December 31, 1998 and
reviewed summary pro-forma forecast prepared by AmREIT's management
with respect to AmREIT, the Partnership and affiliated partnerships;
7. reviewed drafts of the Joint Consent Solicitation Statement and
Prospectus for American Asset Advisers Trust, Inc.;
8. reviewed the historical market prices for the AmREIT's publicly traded
securities;
9. reviewed certain other publicly available financial data for certain
companies that we deem comparable to the Partnership and AmREIT, and
publicly available prices and premiums paid in other transactions that
we considered similar to the Transaction; and
10. conducted such other studies, analyses and inquiries as we have deemed
appropriate.
Realty Fund 8 - fairness opinion
<PAGE>
Mr. H. Kerr Taylor in his capacity in his capacity as
Individual General Partner
AAA Net Realty Fund VIII, LTD
June 1, 1998
-3-
We have relied upon and assumed, without independent verification, that the
financial forecasts and projections provided to us have been reasonably prepared
and reflect the best currently available estimates of the future financial
results and condition of AmREIT and the Partnership and that there has been no
material change in the assets, financial condition, business or prospects of
AmREIT or the Partnership since the date of the most recent financial statements
made available to us.
We have not independently verified the accuracy and completeness of the
information supplied to us with respect to AmREIT or the Partnership and do not
assume any responsibility with respect to it. We have not made any physical
inspection or independent appraisal of any of the properties or assets of AmREIT
or the Partnership. Our opinion is necessarily based on business, economic,
market and other conditions as they exist and can be evaluated by us at the date
of this letter.
Based upon the foregoing, and in reliance thereon, it is our opinion that the
aggregate consideration to be received by the limited partners of AAA Net Realty
Fund VIII, LTD in connection with the Transaction is fair to them from a
financial point of view.
HOULIHAN LOKEY HOWARD & ZUKIN FINANCIAL ADVISORS, INC.
Realty Fund 8 - fairness opinion
<PAGE>
[HOULIHAN LOKEY LETTERHEAD]
June 1, 1998
Mr. H. Kerr Taylor in his capacity in his capacity as
Individual General Partner
AAA Net Realty Fund -- Goodyear, LTD
8 Greenway Plaza
Suite 824
Houston, TX 77046
Dear Mr. Taylor:
We understand the following regarding American Assets Advisers Trust Inc.
("AmREIT"), and AAA Net Realty Fund -- Goodyear, LTD (the "Partnership"). AmREIT
has recently completed a transaction pursuant to which it acquired its advisor,
American Asset Advisers Realty Corp (the "Adviser") (the "Adviser Acquisition").
Prior to the Adviser Acquisition, the Advisor provided property management and
other related services to the Partnerships pursuant to an Omnibus Service
Agreement (the "Service Agreement"). As a result of the Advisor Acquisition, all
services contracts associated with the Service Agreement have been assumed by a
wholly owned subsidiary of AmREIT. Additionally, prior to the Advisor
Acquisition, the Advisor was owned by Kerr Taylor, who was (and is) a
shareholder of AmREIT. As a result of the Advisor Acquisition, Mr. Taylor
increased his ownership interest in AmREIT. Mr. Taylor serves as individual
general partner of the Partnership ( the "General Partner"). The Partnership
owns interests in two retail properties. Following the Adviser Acquisition, Mr.
Taylor and his affiliated corporation retained their fiduciary responsibilities
associated with such General Partner of the Partnership.
Finally, we understand that AmREIT has entered into a plan to acquire the
Partnership (the "Partnership Acquisition"). Specifically, we understand that
pursuant to the Partnership Acquisition, AmREIT will provide a total of 117,707
shares of AmREIT common stock in exchange for the aggregate limited partnership
interests in the Partnership. The Partnership Acquisition and other related
transactions disclosed to Houlihan Lokey are referred to collectively herein as
the "Transaction."
AmREIT and the General Partner(s) have requested that Houlihan Lokey have
requested our opinion (the "Opinion") as to the matters set forth below. The
Opinion does not address AmREIT's, the General Partner's or the Partnership's
underlying business decision to effect the Transaction. We have not been
requested to, and did not, solicit third party indications of interest in
acquiring all or any part of AmREIT, or the Partnership. Furthermore, at your
request, we have not negotiated the Transaction or advised you with respect to
alternatives to it.
Goodyear - fairness opinion
<PAGE>
Mr. H. Kerr Taylor in his capacity in his capacity as
Individual General Partner
AAA Net Realty Fund -- Goodyear, LTD
June 1, 1998
-2-
In connection with this Opinion, we have made such reviews, analyses and
inquiries as we have deemed necessary and appropriate under the circumstances.
Among other things, we have:
1. met with the General Partner and certain members of its senior
management to discuss the operations, financial condition, future
prospects and projected operations and performance of the Partnership;
2. visited certain facilities and business offices of the General Partner
and AmREIT;
3. reviewed the Partnership's annual reports to shareholders for the
fiscal years ended December 31, 1997 and 1996 which the General Partner
have identified as being the most current financial statements
available and have indicated that there has been no material change in
the financial position of the Partnership since such financial
statements;
4. reviewed copies of the 1990 Agreement of Limited Partnership of the
Partnership; and
5. reviewed AmREIT's annual reports to shareholders and on Form 10-K for
the fiscal years ended 1997 and quarterly reports on Form 10-Q for the
quarter ended March 31, 1998;
6. reviewed forecasts and projections prepared by the General Partner with
respect to the Partnership for the year ended December 31, 1998 and
reviewed summary pro-forma forecast prepared by AmREIT's management
with respect to AmREIT, the Partnership and affiliated partnerships;
7. reviewed drafts of the Joint Consent Solicitation Statement and
Prospectus for American Asset Advisers Trust, Inc.;
8. reviewed the historical market prices for the AmREIT's publicly traded
securities;
9. reviewed certain other publicly available financial data for certain
companies that we deem comparable to the Partnership and AmREIT, and
publicly available prices and premiums paid in other transactions that
we considered similar to the Transaction; and
10. conducted such other studies, analyses and inquiries as we have deemed
appropriate.
Goodyear - fairness opinion
<PAGE>
Mr. H. Kerr Taylor in his capacity in his capacity as
Individual General Partner
AAA Net Realty Fund -- Goodyear, LTD
June 1, 1998
-3-
We have relied upon and assumed, without independent verification, that the
financial forecasts and projections provided to us have been reasonably prepared
and reflect the best currently available estimates of the future financial
results and condition of AmREIT and the Partnership and that there has been no
material change in the assets, financial condition, business or prospects of
AmREIT or the Partnership since the date of the most recent financial statements
made available to us.
We have not independently verified the accuracy and completeness of the
information supplied to us with respect to AmREIT or the Partnership and do not
assume any responsibility with respect to it. We have not made any physical
inspection or independent appraisal of any of the properties or assets of AmREIT
or the Partnership. Our opinion is necessarily based on business, economic,
market and other conditions as they exist and can be evaluated by us at the date
of this letter.
Based upon the foregoing, and in reliance thereon, it is our opinion that the
aggregate consideration to be received by the limited partners of AAA Net Realty
Fund -- Goodyear, LTD in connection with the Transaction is fair to them from a
financial point of view.
HOULIHAN LOKEY HOWARD & ZUKIN FINANCIAL ADVISORS, INC.
Goodyear - fairness opinion
<PAGE>
[HOULIHAN LOKEY LETTERHEAD]
June 1, 1998
Mr. H. Kerr Taylor in his capacity in his capacity as
President of the General Partner of
AAA Net Realty Fund IX, LTD
8 Greenway Plaza
Suite 824
Houston, TX 77046
Dear Mr. Taylor:
We understand the following regarding American Assets Advisers Trust Inc.
("AmREIT"), and AAA Net Realty Fund IX, LTD (the "Partnership"). AmREIT has
recently completed a transaction pursuant to which it acquired its advisor,
American Asset Advisers Realty Corp (the "Adviser") (the "Adviser Acquisition").
Prior to the Adviser Acquisition, the Advisor provided property management and
other related services to the Partnerships pursuant to an Omnibus Service
Agreement (the "Service Agreement"). As a result of the Advisor Acquisition, all
services contracts associated with the Service Agreement have been assumed by a
wholly owned subsidiary of AmREIT. Additionally, prior to the Advisor
Acquisition, the Advisor was owned by Kerr Taylor, who was (and is) a
shareholder of AmREIT. As a result of the Advisor Acquisition, Mr. Taylor
increased his ownership interest in AmREIT. Mr. Taylor serves as the President
of American Asset Advisors Management Corporation IX, the general partner of the
Partnership ( the "General Partner"). The Partnership owns interests in five
retail properties. Following the Adviser Acquisition, Mr. Taylor and his
affiliated corporation retained their fiduciary responsibilities associated with
such General Partner of the Partnership.
Finally, we understand that AmREIT has entered into a plan to acquire the
Partnership (the "Partnership Acquisition"). Specifically, we understand that
pursuant to the Partnership Acquisition, AmREIT will provide a total of 527,630
shares of AmREIT common stock in exchange for the aggregate limited partnership
interests in the Partnership. The Partnership Acquisition and other related
transactions disclosed to Houlihan Lokey are referred to collectively herein as
the "Transaction."
AmREIT and the General Partner(s) have requested that Houlihan Lokey have
requested our opinion (the "Opinion") as to the matters set forth below. The
Opinion does not address AmREIT's, the General Partner's or the Partnership's
underlying business decision to effect the Transaction. We have not been
requested to, and did not, solicit third party indications of interest in
acquiring all or any part of AmREIT, or the Partnership. Furthermore, at your
request, we have not negotiated the Transaction or advised you with respect to
alternatives to it.
Realty Fund 9 - fairness opinion
<PAGE>
Mr. H. Kerr Taylor in his capacity in his capacity as
President of the General Partner of
AAA Net Realty Fund IX, LTD
June 1, 1998
-2-
In connection with this Opinion, we have made such reviews, analyses and
inquiries as we have deemed necessary and appropriate under the circumstances.
Among other things, we have:
1. met with the General Partner and certain members of its senior
management to discuss the operations, financial condition, future
prospects and projected operations and performance of the Partnership;
2. visited certain facilities and business offices of the General Partner
and AmREIT;
3. reviewed the Partnership's annual reports to shareholders for the
fiscal years ended December 31, 1997 and 1996 which the General Partner
have identified as being the most current financial statements
available and have indicated that there has been no material change in
the financial position of the Partnership since such financial
statements;
4. reviewed copies of the undated Agreement of Limited Partnership of the
Partnership; and
5. reviewed AmREIT's annual reports to shareholders and on Form 10-K for
the fiscal years ended 1997 and quarterly reports on Form 10-Q for the
quarter ended March 31, 1998;
6. reviewed forecasts and projections prepared by the General Partner with
respect to the Partnership for the year ended December 31, 1998 and
reviewed summary pro-forma forecast prepared by AmREIT's management
with respect to AmREIT, the Partnership and affiliated partnerships;
7. reviewed drafts of the Joint Consent Solicitation Statement and
Prospectus for American Asset Advisers Trust, Inc.;
8. reviewed the historical market prices for the AmREIT's publicly traded
securities;
9. reviewed certain other publicly available financial data for certain
companies that we deem comparable to the Partnership and AmREIT, and
publicly available prices and premiums paid in other transactions that
we considered similar to the Transaction; and
10. conducted such other studies, analyses and inquiries as we have deemed
appropriate.
Realty Fund 9 - fairness opinion
<PAGE>
Mr. H. Kerr Taylor in his capacity in his capacity as
President of the General Partner of
AAA Net Realty Fund IX, LTD
June 1, 1998
-3-
We have relied upon and assumed, without independent verification, that the
financial forecasts and projections provided to us have been reasonably prepared
and reflect the best currently available estimates of the future financial
results and condition of AmREIT and the Partnership and that there has been no
material change in the assets, financial condition, business or prospects of
AmREIT or the Partnership since the date of the most recent financial statements
made available to us.
We have not independently verified the accuracy and completeness of the
information supplied to us with respect to AmREIT or the Partnership and do not
assume any responsibility with respect to it. We have not made any physical
inspection or independent appraisal of any of the properties or assets of AmREIT
or the Partnership. Our opinion is necessarily based on business, economic,
market and other conditions as they exist and can be evaluated by us at the date
of this letter.
Based upon the foregoing, and in reliance thereon, it is our opinion that the
aggregate consideration to be received by the limited partners of AAA Net Realty
Fund IX, LTD in connection with the Transaction is fair to them from a financial
point of view.
HOULIHAN LOKEY HOWARD & ZUKIN FINANCIAL ADVISORS, INC.
Realty Fund 9 - fairness opinion
<PAGE>
[HOULIHAN LOKEY LETTERHEAD]
June 1, 1998
Mr. H. Kerr Taylor in his capacity in his capacity as
President of the General Partner of
AAA Net Realty Fund X, LTD
8 Greenway Plaza
Suite 824
Houston, TX 77046
Dear Mr. Taylor:
We understand the following regarding American Assets Advisers Trust Inc.
("AmREIT"), and AAA Net Realty Fund X, LTD (the "Partnership"). AmREIT has
recently completed a transaction pursuant to which it acquired its advisor,
American Asset Advisers Realty Corp (the "Adviser") (the "Adviser Acquisition").
Prior to the Adviser Acquisition, the Advisor provided property management and
other related services to the Partnerships pursuant to an Omnibus Service
Agreement (the "Service Agreement"). As a result of the Advisor Acquisition, all
services contracts associated with the Service Agreement have been assumed by a
wholly owned subsidiary of AmREIT. Additionally, prior to the Advisor
Acquisition, the Advisor was owned by Kerr Taylor, who was (and is) a
shareholder of AmREIT. As a result of the Advisor Acquisition, Mr. Taylor
increased his ownership interest in AmREIT. Mr. Taylor serves as the President
of American Asset Advisors Management Corporation X, the general partner of the
Partnership ( the "General Partner"). The Partnership owns interests in eight
retail properties. Following the Adviser Acquisition, Mr. Taylor and his
affiliated corporation retained their fiduciary responsibilities associated with
such General Partner of the Partnership.
Finally, we understand that AmREIT has entered into a plan to acquire the
Partnership (the "Partnership Acquisition"). Specifically, we understand that
pursuant to the Partnership Acquisition, AmREIT will provide a total of
1,108,672 shares of AmREIT common stock in exchange for the aggregate limited
partnership interests in the Partnership. The Partnership Acquisition and other
related transactions disclosed to Houlihan Lokey are referred to collectively
herein as the "Transaction."
AmREIT and the General Partner(s) have requested that Houlihan Lokey have
requested our opinion (the "Opinion") as to the matters set forth below. The
Opinion does not address AmREIT's, the General Partner's or the Partnership's
underlying business decision to effect the Transaction. We have not been
requested to, and did not, solicit third party indications of interest in
acquiring all or any part of AmREIT, or the Partnership. Furthermore, at your
request, we have not negotiated the Transaction or advised you with respect to
alternatives to it.
Realty Fund 10 - fairness opinion
<PAGE>
Mr. H. Kerr Taylor in his capacity in his capacity as
President of the General Partner of
AAA Net Realty Fund X, LTD
June 1, 1998
-2-
In connection with this Opinion, we have made such reviews, analyses and
inquiries as we have deemed necessary and appropriate under the circumstances.
Among other things, we have:
1. met with the General Partner and certain members of its senior
management to discuss the operations, financial condition, future
prospects and projected operations and performance of the Partnership;
2. visited certain facilities and business offices of the General Partner
and AmREIT;
3. reviewed the Partnership's annual reports to shareholders for the
fiscal years ended December 31, 1997 and 1996 which the General Partner
have identified as being the most current financial statements
available and have indicated that there has been no material change in
the financial position of the Partnership since such financial
statements;
4. reviewed copies of the 1992 Agreement of Limited Partnership of the
Partnership; and
5. reviewed AmREIT's annual reports to shareholders and on Form 10-K for
the fiscal years ended 1997 and quarterly reports on Form 10-Q for the
quarter ended March 31, 1998;
6. reviewed forecasts and projections prepared by the General Partner with
respect to the Partnership for the year ended December 31, 1998 and
reviewed summary pro-forma forecast prepared by AmREIT's management
with respect to AmREIT, the Partnership and affiliated partnerships;
7. reviewed drafts of the Joint Consent Solicitation Statement and
Prospectus for American Asset Advisers Trust, Inc.;
8. reviewed the historical market prices for the AmREIT's publicly traded
securities;
9. reviewed certain other publicly available financial data for certain
companies that we deem comparable to the Partnership and AmREIT, and
publicly available prices and premiums paid in other transactions that
we considered similar to the Transaction; and
10. conducted such other studies, analyses and inquiries as we have deemed
appropriate.
Realty Fund 10 - fairness opinion
<PAGE>
Mr. H. Kerr Taylor in his capacity in his capacity as
President of the General Partner of
AAA Net Realty Fund X, LTD
June 1, 1998
-3-
We have relied upon and assumed, without independent verification, that the
financial forecasts and projections provided to us have been reasonably prepared
and reflect the best currently available estimates of the future financial
results and condition of AmREIT and the Partnership and that there has been no
material change in the assets, financial condition, business or prospects of
AmREIT or the Partnership since the date of the most recent financial statements
made available to us.
We have not independently verified the accuracy and completeness of the
information supplied to us with respect to AmREIT or the Partnership and do not
assume any responsibility with respect to it. We have not made any physical
inspection or independent appraisal of any of the properties or assets of AmREIT
or the Partnership. Our opinion is necessarily based on business, economic,
market and other conditions as they exist and can be evaluated by us at the date
of this letter.
Based upon the foregoing, and in reliance thereon, it is our opinion that the
aggregate consideration to be received by the limited partners of AAA Net Realty
Fund X, LTD in connection with the Transaction is fair to them from a financial
point of view.
HOULIHAN LOKEY HOWARD & ZUKIN FINANCIAL ADVISORS, INC.
Realty Fund 10 - fairness opinion
<PAGE>
[HOULIHAN LOKEY LETTERHEAD]
June 1, 1998
Mr. H. Kerr Taylor in his capacity in his capacity as
President of the General Partner of
AAA Net Realty Fund XI, LTD
8 Greenway Plaza
Suite 824
Houston, TX 77046
Dear Mr. Taylor:
We understand the following regarding American Assets Advisers Trust Inc.
("AmREIT"), and AAA Net Realty Fund XI, LTD (the "Partnership"). AmREIT has
recently completed a transaction pursuant to which it acquired its advisor,
American Asset Advisers Realty Corp (the "Adviser") (the "Adviser Acquisition").
Prior to the Adviser Acquisition, the Advisor provided property management and
other related services to the Partnerships pursuant to an Omnibus Service
Agreement (the "Service Agreement"). As a result of the Advisor Acquisition, all
services contracts associated with the Service Agreement have been assumed by a
wholly owned subsidiary of AmREIT. Additionally, prior to the Advisor
Acquisition, the Advisor was owned by Kerr Taylor, who was (and is) a
shareholder of AmREIT. As a result of the Advisor Acquisition, Mr. Taylor
increased his ownership interest in AmREIT. Mr. Taylor serves as the President
of American Asset Advisors Management Corporation XI, the general partner of the
Partnership ( the "General Partner"). The Partnership owns interests in seven
retail properties. Following the Adviser Acquisition, Mr. Taylor and his
affiliated corporation retained their fiduciary responsibilities associated with
such General Partner of the Partnership.
Finally, we understand that AmREIT has entered into a plan to acquire the
Partnership (the "Partnership Acquisition"). Specifically, we understand that
pursuant to the Partnership Acquisition, AmREIT will provide a total of 687,875
shares of AmREIT common stock in exchange for the aggregate limited partnership
interests in the Partnership. The Partnership Acquisition and other related
transactions disclosed to Houlihan Lokey are referred to collectively herein as
the "Transaction."
AmREIT and the General Partner(s) have requested that Houlihan Lokey have
requested our opinion (the "Opinion") as to the matters set forth below. The
Opinion does not address AmREIT's, the General Partner's or the Partnership's
underlying business decision to effect the Transaction. We have not been
requested to, and did not, solicit third party indications of interest in
acquiring all or any part of AmREIT, or the Partnership. Furthermore, at your
request, we have not negotiated the Transaction or advised you with respect to
alternatives to it.
Realty Fund 11 - fairness opinion
<PAGE>
Mr. H. Kerr Taylor in his capacity in his capacity as
President of the General Partner of
AAA Net Realty Fund XI, LTD
June 1, 1998
-2-
In connection with this Opinion, we have made such reviews, analyses and
inquiries as we have deemed necessary and appropriate under the circumstances.
Among other things, we have:
1. met with the General Partner and certain members of its senior
management to discuss the operations, financial condition, future
prospects and projected operations and performance of the Partnership;
2. visited certain facilities and business offices of the General Partner
and AmREIT;
3. reviewed the Partnership's annual reports to shareholders for the
fiscal years ended December 31, 1997 and 1996 which the General Partner
have identified as being the most current financial statements
available and have indicated that there has been no material change in
the financial position of the Partnership since such financial
statements;
4. reviewed copies of the 1994 Agreement of Limited Partnership of the
Partnership; and
5. reviewed AmREIT's annual reports to shareholders and on Form 10-K for
the fiscal years ended 1997 and quarterly reports on Form 10-Q for the
quarter ended March 31, 1998;
6. reviewed forecasts and projections prepared by the General Partner with
respect to the Partnership for the year ended December 31, 1998 and
reviewed summary pro-forma forecast prepared by AmREIT's management
with respect to AmREIT, the Partnership and affiliated partnerships;
7. reviewed drafts of the Joint Consent Solicitation Statement and
Prospectus for American Asset Advisers Trust, Inc.;
8. reviewed the historical market prices for the AmREIT's publicly traded
securities;
9. reviewed certain other publicly available financial data for certain
companies that we deem comparable to the Partnership and AmREIT, and
publicly available prices and premiums paid in other transactions that
we considered similar to the Transaction; and
10. conducted such other studies, analyses and inquiries as we have deemed
appropriate.
Realty Fund 11 - fairness opinion
<PAGE>
Mr. H. Kerr Taylor in his capacity in his capacity as
President of the General Partner of
AAA Net Realty Fund XI, LTD
June 1, 1998
-3-
We have relied upon and assumed, without independent verification, that the
financial forecasts and projections provided to us have been reasonably prepared
and reflect the best currently available estimates of the future financial
results and condition of AmREIT and the Partnership and that there has been no
material change in the assets, financial condition, business or prospects of
AmREIT or the Partnership since the date of the most recent financial statements
made available to us.
We have not independently verified the accuracy and completeness of the
information supplied to us with respect to AmREIT or the Partnership and do not
assume any responsibility with respect to it. We have not made any physical
inspection or independent appraisal of any of the properties or assets of AmREIT
or the Partnership. Our opinion is necessarily based on business, economic,
market and other conditions as they exist and can be evaluated by us at the date
of this letter.
Based upon the foregoing, and in reliance thereon, it is our opinion that the
aggregate consideration to be received by the limited partners of AAA Net Realty
Fund XI, LTD in connection with the Transaction is fair to them from a financial
point of view.
HOULIHAN LOKEY HOWARD & ZUKIN FINANCIAL ADVISORS, INC.
Realty Fund 11 - fairness opinion
<PAGE>
AMREIT, INC.
SUPPLEMENT TO
JOINT CONSENT SOLICITATION STATEMENT AND PROSPECTUS
FOR
TAYLOR INCOME INVESTORS III, LTD.
A TEXAS LIMITED PARTNERSHIP
Mr. H. Kerr Taylor (the "General Partner") is soliciting the approval
of the Limited Partners of Taylor Income Investors, Ltd., a Texas Limited
Partnership (the "Partnership" or "Fund III"), for the Merger of the Partnership
with and into AmREIT, Inc., a Maryland Corporation ("AmREIT"). As part of the
Merger, the Limited Partners will exchange Units of Limited Partnership
Interests ("Units") in the Partnership for shares of common stock of AmREIT (the
"Shares") or, subject to the Note restriction, 6.0% Notes of AmREIT due December
31, 2004 (the "Notes"). The Merger, if it is approved, will involve up to ten
limited partnerships, including the Partnership. This solicitation is being made
on behalf of the general partner of the Partnership. The proposal is described
in detail in the Joint Consent Solicitation Statement and Prospectus dated ,
1998 (the "Prospectus"). For the definition of capitalized terms used in the
Supplement, which are not separately defined herein, see "GLOSSARY" in the
Prospectus. Cross-references in this Supplement also refer to the cited
discussions in the Prospectus, unless specifically noted to the contrary.
The effects of the Merger may be different for Limited Partners in each
of the Partnerships participating in the Merger (the "Partnerships"). This
Supplement has been prepared to highlight the risks, effects and fairness of the
Merger for the Limited Partners of the Partnership. This Supplement is not
intended to repeat or duplicate the Prospectus and the Prospectus must be
referred to in reading this Supplement. Moreover, this Supplement does not
purport to provide an overall summary of the Merger or to highlight all of its
material terms, conditions, risks or effects. See "SUMMARY" and "THE MERGER" in
the Prospectus. To the extent this Supplement summarizes portions of the
Prospectus, such discussions are qualified in their entirety by the more
detailed discussions of those matters appearing in the Prospectus. Supplements
have also been prepared for each of the other Partnerships and copies of such
Supplements will be provided promptly without charge to each Limited Partner or
his representative who has been so designated in writing upon written request to
Timothy W. Kelley, Vice President at AmREIT, Inc., Eight Greenway Plaza, Suite
824, Houston, Texas 77046. Telephone (800) 888-4400, extension 26 or fax to
(713) 850-0498.
RISK FACTORS
The Merger involves material risks to the Limited Partners,
the more significant of which are:
o The General Partner did not retain an unaffiliated
person to represent the Limited Partners in
negotiating the terms of the Merger.
o The Negotiated Prices for the Partnership
properties were determined by the General Partner,
who has substantial conflicts of interest in the
Merger due to his financial interest in AmREIT and
the prospects of receiving substantial financial
benefits if the Merger is consummated.
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o The Negotiated Prices of the properties are not
based on appraisals from independent real estate
appraisers.
o The Merger will be a taxable transaction to the
Limited Partners.
o There is no assurance that the value of the
consideration received in the Merger by the Limited
Partners for their Units will not be less than the
fair value of their Units as might result from
negotiations between unrelated parties.
o No public market exists for the Shares or the
Notes. Upon completion of the Merger, it is
uncertain if and when a public market will develop
for the Shares and no public market is expected to
develop for the Notes.
o If and when a public market for the Shares
develops, there is no assurance that the Shares
will not trade at prices that are less than the
Exchange Price.
o There is no assurance that the Exchange Price,
which was determined by the General Partner and the
Independent Directors of AmREIT, reflects the fair
value of the Shares which might result from
negotiations between unrelated parties.
o The Appraised Value, upon which payment under the
ALV Payment Election will be determined, will not
be determined or known until after the Merger is
consummated.
o Limited Partners receiving Shares in the Merger
will realize a substantial change in the form of
their investment from a finite life Partnership,
which cannot leverage its investments, to an
infinite life REIT which can leverage its
investments.
o The anticipated benefits to Limited Partners as a
result of the Merger may not be realized.
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POTENTIAL BENEFITS TO LIMITED PARTNERS
The General Partner believes the Merger is fair to and in the best
interests of the Limited Partners for a number of reasons, including:
o The General Partner believes that the terms of the Merger
Agreement, including the Exchange Price and the Partnership's
Net Asset Value are favorable to the Limited Partners.
o The General Partner believes that the Negotiated Price for
each of the Partnership's Properties is in the highest range
of values for the property in the current real estate market
and that such value would likely exceed the price at which the
property would sell for in the market. The General Partner
believes that the Partnership would thus therefor realize
significantly less value for its Properties than their
Negotiated Prices if the Partnership was liquidated in the
current real estate market.
o By merging into AmREIT, the Limited Partners will be relieved
of uncertainties regarding the Partnership's real estate
investments, including the expiration of its leases on its
properties within the next 5 years, the possible difficulties
in releasing the properties and/or the possible substantial
costs of releasing these properties. As a result of the
Merger, these risks would be spread over and more economically
absorbed by AmREIT's larger and more diversified portfolio.
o The special purpose nature of the Partnership's properties,
which makes them suitable for limited types of tenants and
uses and increases the risks of releasing the properties. As a
result of the Merger, these risks would be spread over and
more economically absorbed by AmREIT's larger and more
diversified portfolio.
o Co-ownership of one of the Partnership's properties in joint
venture with another Partnership which, as a practical matter,
allows the sale of the property only with the consent of its
co-owner. In the Merger, the property is valued at an amount
pro rata to the Negotiated Price of the entire property
without reduction for less than 100% ownership.
o By combining the Partnership with AmREIT, the Merger will
create an investment portfolio substantially larger and more
geographically diversified than the portfolio of the
Partnership. The Merger will consolidate operations and spread
the risk of an investment in AmREIT over a broader group of
assets and reduce the dependence of the investment upon the
performance of any particular asset or group of assets, such
as assets in the same geographical area.
o The allocations of Merger Expenses under which the Partnership
is required to pay only its proportionate share of the
Partnership Merger Expenses based on its relative Net Asset
Value. Also, if the Limited Partners do not elect to
participate in the Merger, the General Partner will pay or
reimburse the Partnership its Proportionate Share of the
Partnership Merger Expenses.
o As a result of the Merger, the Partnership will no longer
incur the expense for the preparation of separate financial
statements, required annual and quarterly filings, tax returns
and investor communications. The accurate preparation of these
statements and reports requires substantial cost and
management time and effort.
o The General Partner believes the Merger will provide the
combined AmREIT-Partnership entity improved future access to
capital markets for future growth and that Limited Partners,
as AmREIT shareholders, will have enhanced liquidity as a
result of the larger total equity market capitalization of
AmREIT.
o The General Partner received the Houlihan Fairness Opinion
that the Merger is fair, from a financial point of view, to
the Limited Partners.
o The Partnership's strategic combination with a publicly held
REIT which takes advantage of the growth in the REIT industry
and real estate markets is preferable to the alternatives of
complete liquidation of the Partnership, continuation of the
Partnership or reorganization of the Partnership into one
separate REIT.
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These possible benefits of the Merger to the Limited Partners are
discussed in greater detail in the Prospectus. Limited Partners should refer to
the discussions in the Prospectus under the heading "THE MERGER--The General
Partners Reasons and Recommendations for the Merger."
RISK FACTORS AND POTENTIAL ADVERSE CONSEQUENCES
Limited Partners participating in the Merger will be subject to various
risks and possible adverse consequences which they should take into account in
deciding how they will vote on the Merger. The most significant of these
material risks are:
The Merger involves the following risks for the Limited Partners:
o The General Partner did not retain an unaffiliated
representative to represent the Limited Partners or the
Partnership, or to represent all of the Partnerships as a
Group, in the Merger. Had independent representation been
arranged for a Partnership, the terms of the Merger might have
been more favorable to such Partnership.
o The Negotiated Prices of the Partnership's Properties were
determined by the General Partner who is also the Chief
Executive Officer and largest shareholder of AmREIT. The NAV
of each Partnership should be considered as having been
negotiated by the common management of the Partnerships and
AmREIT.
o The Negotiated Price of the Partnership's Properties is not
based on an independent appraisal.
o The conflicts of interest of the General Partner who will
receive significant financial and other benefits from and/or
as a result of the Merger.
o The possibility that the Partnership's Net Asset Values may
not reflect the actual value of its net assets.
o The fixed Exchange Price which means the Limited Partners will
not receive more Shares (or a Note in a greater principal
amount) if the value of the Shares decreases as of the
Effective Date.
o AmREIT's Shares are not publically traded, a market for the
Shares is not expected to exist immediately upon completion of
this Merger, and there is no assurance that a market for the
Shares will develop in the future. Unless and until there is a
public market for the Shares, shareholders will have
difficulty in liquidating their investment.
o If and when a market for the Shares develops, the Shares may
trade at prices substantially below the Exchange Price.
o The Merger will be a taxable transaction for the Limited
Partners.
o A majority vote of Limited Partners binds the Partnership.
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<PAGE>
o Limited Partners who vote against the Merger will receive
Notes for their Units in the Merger unless they elect to
receive Shares if the Merger is approved.
o Limited Partners who become shareholders of AmREIT may not
receive the same level of distributions as previously received
from their respective Partnership Units.
o Because it is not known how many Partnerships will participate
in the Merger, there are uncertainties as to the capital
structure and size of AmREIT following consummation of the
Merger as they will vary depending on the number which elect
to participate in the Merger.
o As a result of the Merger, the nature of each Limited
Partner's investment will change from holding an interest in a
specified portfolio of properties in a finite life entity to
holding an equity investment in an ongoing REIT, whose
portfolio of properties may be changed from time to time
without the approval of its shareholders and which does not
plan to liquidate such assets within a fixed period.
o If it participates in the Merger, the Partnership will bear
these costs of the Merger in proportion to its relative NAV.
Should the Partnership not participate in the Merger, the
General Partner will pay or reimburse the Partnership for its
portion of these costs. The costs of the Merger allocated to
the Partnerships are limited to the costs of the Houlihan
Fairness Opinions, the Partnership accounting costs (and other
valuation or appraisal costs, if any), which are estimated to
total $150,000, and any direct partner communication costs.
o The anticipated benefits of the Merger may not be realized.
o The anticipated benefits of AmREIT's change to self-management
through the recently completed Adviser Acquisition may not be
fully realized.
o The proceeds of future asset sales or refinancings by AmREIT
will generally be reinvested rather than distributed to
shareholders to the extent not required to be distributed to
maintain REIT status.
o AmREIT's Board of Directors has the power to change the
investment, acquisition and financing policies of AmREIT
(including policies regarding the level of indebtedness)
without a vote of the shareholders, which could result in
policies which do not reflect the interests of all
shareholders.
o Following the consummation of the Merger, AmREIT intends to
borrow additional funds (equal to or exceeding 50% of the
value of the properties acquired in the Merger) to acquire
additional, as yet unidentified, real estate.
These risks and possible adverse consequences of the Merger to the
Limited Partners are discussed in greater detail in the Prospectus. Limited
Partners should refer to the discussion of the risks in participating in the
Merger set forth in the Prospectus under the sections "RISK FACTORS," "CONFLICTS
OF INTEREST," "MATERIAL FEDERAL INCOME TAX ASPECTS" and "COMPARISON OF UNITS,
SHARES AND NOTES."
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THE MERGER
The purpose of the Merger is to strategically unite AmREIT with one or
more of the Partnerships, each of which has compatible properties in AmREIT's
existing and new markets, and to give the Limited Partners the ability to
participate in a strategic business combination with a publicly held REIT in
order to take advantage of the growth in the REIT industry and real estate
markets in general, with the prospect of being able to liquidate their
investment through the sale of the publicly-traded Shares or retain their
investment indefinitely.
If the Merger is approved, the Partnership will cease to exist and all
of its properties will be transferred to AmREIT. Any Limited Partner may abstain
from or vote against the Merger and, if the Merger is approved, the Limited
Partner will still participate in the Merger and will receive Notes for their
Units unless they elect to receive Shares. Limited Partners will not have
appraisal rights or other dissenter's rights by reason of the Merger. For a
discussion of the effect of abstaining from or voting against the Merger, the
rights of Limited Partners who do so, and the effects of exercising dissenters'
rights, see "THE MERGER - Dissenting Partners and Shareholders."
The General Partner is proposing amendments to the Partnership's
Agreement of Limited Partnership to permit the closing of the transactions
contemplated by the Merger Agreement. Limited Partners voting in favor of the
Merger will be deemed to have voted in favor of each of these proposed
amendments. A majority vote of Limited Partners is required to approve the
proposed amendments and to approve the Merger Agreement. The proposed amendments
authorize the following: (i) the Merger of the Partnership with and into AmREIT,
whether or not AmREIT would be regarded as an Affiliate of the general partner;
and (ii) such other actions as may be necessary under or contemplated by the
Merger Agreement or the Prospectus, irrespective of any provision in the
Partnership Agreement which might otherwise prohibit such actions. See "THE
MERGER -- Proposed Amendments to Partnership Agreements." The General Partner
owns no Units of the Partnership. The general partner of the Partnership has
agreed to waive any right to receive Shares to which it may otherwise have been
entitled except with respect to its capital interests as general partner.
The General Partner reasonably believes that the terms of the Merger,
including the consideration to be received by the Limited Partners in the
Merger, are fair to and in the best interests of the Limited Partners.
THE GENERAL PARTNER STRONGLY RECOMMENDS THAT ALL LIMITED PARTNERS
VOTE "YES" IN FAVOR OF THE MERGER. THE GENERAL PARTNER REQUESTS THAT EACH
LIMITED PARTNER COMPLETE, SIGN AND RETURN THE ENCLOSED CONSENT AS SOON AS
POSSIBLE.
ALLOCATION OF CONSIDERATION
In the Merger, the Limited Partners will receive Shares (or Notes)
based upon the Net Asset Value ("NAV") of the Partnership. The Partnership's NAV
equals the Negotiated Price of its properties plus its Net Cash. The
Partnership's Net Cash equals the excess, if any, of its cash and accounts
receivable over its debt at the Effective Date. The Negotiated Price of each
property of the Partnership was determined and agreed to by Mr. H. Kerr Taylor,
the General Partner, on behalf of the Partnership in negotiations with the two
directors of AmREIT who are not affiliated with Mr. Taylor (the "Independent
Directors").
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The number of Shares issuable in the Merger to the Partnership equals
the Partnership's NAV divided by the Exchange Price of $9.34. The Exchange Price
was negotiated and agreed to by the General Partner and the Independent
Directors based on the last public offering price of the Shares, $10.25, net of
certain costs of that offering. However, the Shares are not publically traded
and will not be listed for trading immediately after the Merger. Limited
Partners should refer to the discussion in the Prospectus under the heading "THE
MERGER--The Merger Consideration."
Calculated as if the Effective Date were June 30, 1998, AmREIT is
offering 3,971.94 Shares or, subject to the Note Restriction, a Note in the
principal amount of $37,098, in consideration for each Unit of the Partnership.
The following table sets forth the methodology utilized in determining the
number of Shares and Notes being offered by AmREIT for each Unit:
Net Asset Value:
Value of Properties:
Steak and Ale, Houston, TX (44%)(1) $310,000
Bank of America, Houston, TX (100%) 460,000
Taco Bell, Houston, TX (100%) 330,000
-------
Negotiated Price $1,100,000
Net Cash(2) $68,585
Other Assets 0
Other Liabilities 0
--------------
Net Asset Value of Partnership(3) $1,168,585
---------
Percentage of Aggregate Net Asset Value of All Partnerships 4.15%
Net Asset Value Per Original Investment of $1,000(4) $1,236.60
--------
Allocation of Shares Received in Merger:
Number of Shares Allocable to Partnership 125,116
Percentage of Total Shares to be Issued in the Merger 4.15%
Percentage of Total Shares of AmREIT After the Merger 2.18%
Allocation of Shares to Limited Partners 125,116
Allocation of Shares to General Partners(5) 0
-----------
Allocation of Shares per Unit 3,971.94
Allocation of Shares Per Original Investment of $1,000(4) 132.40
Maximum Total Outstanding Shares in AmREIT After the Merger(6) 5,742,873
---------
Notes Offered in Merger:
Maximum Principal Amount Offered to Partnership $409,005
Principal Amount of Note Offered per Unit $ 37,098
Principal Amount of Note Offered per Original Investment
of $1,000(4) $1,236.60
--------
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Return to Limited Partners Per $1,000 of Adjusted Capital From
Shares(7):
Return From Merger per $1,000 of Adjusted Capital based on $1,250
Exchange Price(8)
Total Return from Merger based on Exchange Price plus Cumulative $2,448.68
Distributions Through 6/30/1998 per $1,000 of Adjusted Capital
Total Return from Merger based on Exchange Price plus Cumulative 244.87%
Distributions through 6/30/1998 as a Percentage of Adjusted
Capital
Return From Merger per $1,000 of Adjusted Capital based on $10.25 $1,375
per Share Price(9)
(1) Percentage of property owned by Partnership shown in parentheses.
(2) Net Cash is the excess, if any, of the Partnership's cash and
accounts receivable over its debt.
(3) Net Asset Value equals Negotiated Price of property plus Net Cash.
(4) "Per Original Investment of $1,000" is computed by dividing the Limited
Partners' allocable share of such amount by the Limited Partners'
original capital of the Partnership (the Partnership's "Original
Capital") and multiplying the result by 1,000.
(5) The general partner of the Partnership has agreed to waive any right to
receive Shares to which it may otherwise have been entitled in the
Merger other than with respect to the payment to Mr. Taylor of the
disposition fee in the amount of $33,000 (3.0% of the Negotiated Price
of each property). Mr. Taylor has agreed to purchase 3,533 shares at
the Exchange Price with this disposition fee. The general partner will
not be receiving any other compensation or reimbursement for claims
against or interests in the Partnership.
(6) Calculated as if effective date were June 30, 1998. Assumes 100%
participation of the Partnerships and that no Notes are issued.
Includes portion of Share Balance from Adviser Acquisition issuable to
Mr. Taylor upon consummation of Merger.
(7) Adjusted Capital equals a Limited Partner's original invested capital
less cumulative distributions constituting a return of capital under
the Partnership Agreement.
(8) Shares valued at $9.34 per Share.
(9) $10.25 is the most recent public offering price of the Shares.
CONSIDERATIONS UNIQUE TO THE PARTNERSHIPS
Due to the substantial similarities among the Partnerships, such as
their similar investment portfolios and property locations, common investment
objectives and policies, similar financial condition, the fact that the
Partnerships' assets are managed by AmREIT or its Affiliates and substantial
similarities in the language and scope of their Partnership Agreements, many of
the consequences of participating in the Merger are common to the Limited
Partners of each of the Partnerships. The purpose of this section is, however,
to highlight features of the Partnership which may distinguish the situation of
the Partnership from that of the other Partnerships and which should be taken
into account by the Limited Partners when evaluating the merits and risks of the
proposed Merger.
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Special Considerations Regarding Partnership Properties. Unless the
Limited Partners approve the Merger, the General Partner will continue the
Partnership in accordance with its current investment strategies and objectives
described below. At the time of the Partnership's formation, the General Partner
anticipated the liquidation of its portfolio and distribution of the net
proceeds from the sale of the properties to the Limited Partners within 8 to 12
years after the acquisition of the properties. Based on the completion of the
acquisition of the Partnership's portfolio in 1987, it was anticipated that
liquidation of the portfolio would begin by 1999. However, the Partnership's
ability to achieve its goals will be influenced by the following factors. See
"THE PARTNERSHIPS--Properties" in the Prospectus for additional information
regarding the Partnership's portfolio.
Expiration of Leases. The leases on the Partnership's
properties all expire within the next 5 years. Also, there is a significant
chance that Bank of America, the Partnership's largest tenant, which is
currently being merged with another bank, will not renew its lease when it
expires in May 2000 or will renew its lease only if the Partnership makes
significant improvements to the property. Also, should any of these tenants fail
to renew their leases, the Partnership would need to find a new tenant and incur
significant additional costs by reason of temporary vacancy and/or significant
rehabilitation and/or tenant improvement costs.
Concentration of Investment. The Partnership has concentrated
its investments in 3 properties. If a vacancy or other interruption of rents
occur in one or more of these properties, the distributions of the Partnership
may be significantly reduced. The Partnership has also concentrated its
investments in a limited geographic area. If conditions in this area
deteriorate, the Partnership may experience more difficulty in re-leasing its
properties than it would experience if the properties were more geographically
diversified.
Co-ownership of Property. The Partnership owns one of its
properties, the Steak & Ale Restaurant property in co-ownership with Fund IV.
The Partnership owns 44% of this property and is dependent upon the consent and
cooperation of the majority co-owner to sell or re-lease the property.
Therefore, there is no assurance that the co-owner will agree to the sale or
re-lease of the property at such time or under the terms the Partnership may
desire.
Possible Need for Additional Capital. The Limited Partners may
be required to contribute additional capital and/or approve Partnership
borrowings in order to finance future lease renewal or releasing costs as
described above. Moreover, without an economically desirable lease in place, the
Partnership could not expect to realize an attractive price for the sale of its
properties.
Merger is a Taxable Event. Limited Partners will realize a gain on the
Merger in an amount equal to their allocable share of the excess of the sum of
the fair market value of the Shares received by the Partnership over the
Partnership's adjusted tax basis of the Partnership assets. In general, Limited
Partners can expect to pay tax on 63% of this gain at long term capital gains
rates, which will generally by 20%. The remaining 37% of the gain will be
taxable at the rates for ordinary income. Assuming that the value of the Shares
reflects the Net Asset Values of the assets acquired in the Merger, if the
Partnership participates in the Merger, each of its Limited Partners would have
recoginzed taxable gain of approximately 53% (as of June 30, 1998) for every
Unit held, representing an original investment of $30,000. Those Limited
Partners who have owned their Units since the inception of the Partnership can
expect to recognize a taxable gain of approximately $3,700 per Unit
as a result of the Merger. The actual amount of gain recognized by each Limited
Partner will depend upon the value ascribed to the Shares for federal tax
purposes. Because the Shares will not be publically traded immediately after the
Merger, and the 1998 operating results have not been included, it is possible
that the value of the Shares used for purposes of calculating the taxable income
(or loss) and the taxable income (or loss) per Unit will differ from the
calculation stated above.
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The Partnership's federal income tax returns are subject to review and possible
adjustment by the Internal Revenue Service. Under federal income tax laws,
regulations and administrative rulings, certain types of transactions may be
accorded varying interpretations. Accordingly, the Partnership's financial
statements, as well as the individual tax returns of the partners, may be
changed to cause them to conform to the tax treatment resulting from such
review, if any.
Investment Strategy. Each of the properties is currently fully leased
to a single tenant, however, as described above, these leases expire at varying
times in the future. The Partnership is not authorized to raise additional
capital or borrow funds. The Partnership has a history of making regular
quarterly distributions to its Limited Partners. See "Miscellaneous --
Distributions to Limited Partners" below in this Supplement. The Partnership's
strategy is to continue to hold its properties with a view towards liquidating
them at such times as the General Partner deems beneficial and appropriate in a
manner consistent with the Partnership's investment objectives. The principal
investment objectives of the Partnership are to (i) preserve and protect the
Limited Partners' capital; (ii) provide the Limited Partners with quarterly cash
distributions from operations; (iii) obtain long-term appreciation in the value
of its properties; and (iv) provide increased cash distributions to the Limited
Partners as the cash flow from its investments increases over the life of the
Partnership. The Partnership acquired each of its properties for cash and
without the use of borrowed funds (leverage).
Management Compensation. The Partnership has no employees but its
operations are managed by AmREIT. Under the Omnibus Services Agreement, pursuant
to which AmREIT manages the operations of the Partnership, AmREIT is entitled to
annual property management fees equal to 3% of gross rental revenues. Also, the
Omnibus Services Agreement provides for payment of reimbursement fees of up to
6% of the Partnership's gross rental revenues. This relationship will terminate
after the Merger if the Partnership merges into AmREIT. If the Partnership
participates in the Merger, neither AmREIT nor the General Partner or any of
their Affiliates will receive any compensation for services rendered in
connection with the Merger.
Offers From Third Parties. No offers on the Partnership's properties
have been received during the past twelve months by the General Partner from
unaffiliated third parties. See "THE MERGER-Acquisition Proposals" in the
Prospectus.
FAIRNESS OF THE MERGER
Based upon his analysis of the Merger, the General Partner reasonably
believes that:
(1) The terms of the Merger, when considered as a whole, are fair
to the Limited Partners;
(2) The Shares offered in exchange for the Units constitute fair
consideration for the Units of the Limited Partners; and
(3) After comparing the potential benefits and detriments of the Merger
with those of several alternatives, the Merger is more attractive to the Limited
Partners than such alternatives.
THE GENERAL PARTNER REASONABLY BELIEVES THAT THE TERMS OF THE MERGER
AGREEMENT, INCLUDING THE CONSIDERATION TO BE RECEIVED BY THE LIMITED PARTNERS IN
CONNECTION WITH THE MERGER, ARE FAIR TO AND IN THE BEST INTERESTS OF THE LIMITED
PARTNERS. ACCORDINGLY, THE GENERAL PARTNER HAS APPROVED THE MERGER AGREEMENT AND
RECOMMENDS THAT THE LIMITED PARTNERS VOTE FOR APPROVAL OF THE MERGER AGREEMENT
AND AMENDMENT OF THE PARTNERSHIP AGREEMENT.
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The General Partner's determination is based upon the transaction as a
whole, as well as the combination of less than all Partnerships, because the
Partnership's value for the purposes of the Merger is its Net Asset Value. The
General Partner believes that Net Asset Value is a reasonable estimate of the
value of each Partnership for the Merger as it is directly derived from the
value of the Partnership's net assets at the Effective Date, independent of the
valuations of the assets of the other Partnerships. The General Partner also
believes the Exchange Price, the value on which Shares will be issued to the
Partnership in the Merger, is a reasonable estimate of the value of the Shares
based on the last public offering price of the Shares and within the overall
context of the Merger. See "THE MERGER - The General Partner's Reasons and
Recommendations for the Merger. For a full discussion of the General Partner's
reasons for the Merger, see "THE MERGER -- The General Partner's Reasons for the
Merger and Recommendation to the Limited Partners" in the Prospectus.
Fairness Opinion. The General Partners, on behalf of the Partnership,
retained Houlihan to render an opinion as to whether the consideration to be
received by the Limited Partners in connection with the Merger was fair, from a
financial point of view, to its Limited Partners. Houlihan was not requested to,
and did not make, any recommendation to the Partnerships as to the consideration
to be received by the Limited Partners in connection with the Merger, which
consideration was determined through negotiations between the common management
of the Partnerships and AmREIT. The General Partner retained Houlihan to render
its fairness opinion based upon Houlihan's experience in the valuation of
businesses and their securities in connection with mergers and acquisitions, and
valuations for corporate purposes especially with respect to REITs and other
real estate companies. Houlihan delivered its written opinion, dated June 1,
1998, to the General Partner, to the effect that, as of the date of such
opinion, based on Houlihan's review and subject to the limitations described in
the Prospectus, the consideration to be received by the Limited Partners, in
connection with the Merger is fair, from a financial point of view, to the
Limited Partners. The Houlihan Fairness Opinion does not constitute a
recommendation to any Limited Partner as to how any such Limited Partner should
vote on the Merger. See "FAIRNESS OPINION--The Houlihan Fairness Opinion."
Comparison of Benefits and Detriments. The General Partner's assessment
of the fairness of the proposed Merger was based on the review of different
alternatives that were available. The evaluations of the different alternatives
included, but were not limited to, a strategic combination with a publicly
traded REIT to take advantage of the growth of the REIT industry and real estate
markets in general, completely liquidating the Partnership, continuing the
Partnership or reorganizing the Partnership into a REIT. In order to determine
whether the Merger or one of its alternatives would be more attractive to the
Limited Partners, the General Partner compared the potential benefits and
detriments of the Merger with the potential benefits and detriments of the
alternatives. A detailed discussion of the potential benefits and detriments of
each of these alternatives is provided in "THE MERGER -- The General Partners'
Reasons and Recommendation for the Merger" and "-- Alternatives to the Merger"
in the Prospectus.
In the event the Merger is not consummated for any reason, the
Partnership will continue to pursue its business objectives of maximizing the
value of its properties, in addition to the possible liquidation of its
portfolio, another strategic combination or another attractive alternative that
may become available.
COMPARATIVE COMPENSATION, FEES AND DISTRIBUTIONS
COMPENSATION PAID TO THE GENERAL PARTNER AND HIS AFFILIATES
This section is intended to provide Limited Partners with a brief
comparison of the compensation, fees and distributions paid to the General
Partner and his Affiliates under the Partnership's current arrangements with
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<PAGE>
those that would have been paid had the Merger been in place. The following
table sets forth the compensation, fees and distributions by the Partnership to
the General Partner and his Affiliates during the two most recent fiscal years
and the six-month period ended June 30, 1998 and compares those payments against
the amount that would have been paid assuming the Merger had occurred January 1,
1996.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
Six Months
Ended
1996 1997 June 30,
1998
---- ----
- -------------
Actual Pro Forma Actual Pro Forma Actual
Pro Forma
<S> <C> <C> <C> <C> <C>
<C>
Administrative Reimb.(1) $5,700 $6,722 $5,700 $7,372 $2,850
$3,595
Cash Distributions(2) 1,800 --- 1,800 --- 900
---
General Partner Salary(3) --- 545 --- 654 ---
327
(1) An AmREIT subsidiary receives administrative reimbursements of up to 6%
of gross rental revenues from the properties. No other fees, salaries
or other compensation were paid by the Partnership to its general
partner or its affiliates during these periods.
(2) Includes all cash distributions made to Mr. Taylor and his affiliates
resulting from ownership of Units and general partner interests. Mr.
Taylor's employment agreement with AmREIT provides for a fixed base
salary of $25,000 and $30,000 per annum for 1998 and 1999 respectively,
which amounts will not increase as a result of the Merger.
(3) Mr. Taylor's salary represents the total salary and benefits Mr. Taylor
is currently entitled to receive as an officer and director of AmREIT
allocated to the Partnership based on the percentage of shares of
AmREIT to be owned by the Limited Partners immediately after the
Merger. No other affiliate of the general partner of the Partnership
will receive compensation from AmREIT upon completion of the Merger.
</TABLE>
New Compensation
AmREIT will internally manage and lease the properties obtained by
AmREIT from the Partnership pursuant to the Merger. The terms of this engagement
will be substantially similar to the terms governing the management arrangements
that AmREIT typically uses in managing its current properties.
MISCELLANEOUS
Distributions to Limited Partners
Set forth below are distributions per Unit made by the Partnership to
the Limited Partners during the most recent five fiscal years and the most
recently completed interim period. Also see "THE PARTNERSHIPS - Partnership
Distributions" in the Prospectus.
<TABLE>
<CAPTION>
Six Months Ended
1993 1994 1995 1996 1997 June 30, 1998
---- ---- ---- ---- ---- -------------
<S> <C> <C> <C> <C> <C> <C>
Distributions $2,910 $2,895 $2,896 $2,896 $2,896 $1,448
Portion of Distribution That Was a --- --- --- --- --- ---
Return of Capital(1)
(1) Distributions treated as a return of capital under the Partnership
Agreement.
- ----------------------
</TABLE>
Financial Information
Rental income statements for the properties of the Partnership for the
years ended December 31, 1997 and 1996 and certain pro forma financial
statements with respect to the Partnership are set forth in "The Unaudited Pro
Forma Financial Information" and "INDEX TO FINANCIAL INFORMATION" in the
Prospectus.
List of Investors
Under the Partnership Agreement and Texas state law, a Limited Partner
may obtain a list of the names, addresses and number of Units owned by the other
Limited Partners entitled to so vote on the Merger by making written request
therefor from the General Partner, c/o Timothy W. Kelley, AmREIT, Inc., Eight
Greenway Plaza, Suite 824, Houston, Texas 77046. At the time of making the
request, the requesting Limited Partner must submit a payment of $10.00 in
payment for the costs of copying and mailing the list and, if the Units are held
through a nominee, provide the Partnership with a statement from the nominee or
other independent third party confirming such Limited Partner's beneficial
ownership. A Limited Partner is only entitled to the foregoing information with
respect to the Partnership in which the Limited Partner holds Units. See
"CONSENT PROCEDURES" in the Prospectus.
End of Partnership Supplement for Taylor Income Investors, Ltd.
-12-
<PAGE>
AMREIT, INC.
SUPPLEMENT TO
JOINT CONSENT SOLICITATION STATEMENT AND PROSPECTUS
FOR
TAYLOR INCOME INVESTORS IV, LTD.
A TEXAS LIMITED PARTNERSHIP
Mr. H. Kerr Taylor (the "General Partner") is soliciting the approval
of the Limited Partners of Taylor Income Investors IV, Ltd., a Texas Limited
Partnership (the "Partnership"), for the Merger of the Partnership with and into
AmREIT, Inc., a Maryland Corporation ("AmREIT"). As part of the Merger, the
Limited Partners will exchange Units of Limited Partnership Interests ("Units")
in the Partnership for shares of common stock of AmREIT (the "Shares") or,
subject to the Note restriction, 6.0% Notes of AmREIT due December 31, 2004 (the
"Notes"). The Merger, if it is approved, will involve up to ten limited
partnerships, including the Partnership. This solicitation is being made on
behalf of the general partners of the Partnership. The proposal is described in
detail in the Joint Consent Solicitation Statement and Prospectus dated , 1998
(the "Prospectus"). For the definition of capitalized terms used in the
Supplement, which are not separately defined herein, see "GLOSSARY" in the
Prospectus. Cross-references in this Supplement also refer to the cited
discussions in the Prospectus, unless specifically noted to the contrary.
The effects of the Merger may be different for Limited Partners in each
of the Partnerships participating in the Merger (the "Partnerships"). This
Supplement has been prepared to highlight the risks, effects and fairness of the
Merger for the Limited Partners of the Partnership. This Supplement is not
intended to repeat or duplicate the Prospectus and the Prospectus must be
referred to in reading this Supplement. Moreover, this Supplement does not
purport to provide an overall summary of the Merger or to highlight all of its
material terms, conditions, risks or effects. See "SUMMARY" and "THE MERGER" in
the Prospectus. To the extent this Supplement summarizes portions of the
Prospectus, such discussions are qualified in their entirety by the more
detailed discussions of those matters appearing in the Prospectus. Supplements
have also been prepared for each of the other Partnerships and copies of such
Supplements will be provided promptly without charge to each Limited Partner or
his representative who has been so designated in writing upon written request to
Timothy W. Kelley, Vice President at AmREIT, Inc., Eight Greenway Plaza, Suite
824, Houston, Texas 77046. Telephone (800) 888-4400, extension 26 or fax to
(713) 850-0498.
RISKS FACTORS
The Merger involves material risks to the Limited Partners,
the more significant of which are:
o The General Partner did not retain an unaffiliated
person to represent the Limited Partners in
negotiating the terms of the Merger.
o The Negotiated Prices for the Partnership
properties were determined by the General Partner,
who has substantial conflicts of interest in the
Merger due to his financial interest in AmREIT and
the prospects of receiving substantial financial
benefits if the Merger is consummated.
-1-
<PAGE>
o The Negotiated Prices of the properties are not
based on appraisals from independent real estate
appraisers.
o The Merger will be a taxable transaction to the
Limited Partners.
o There is no assurance that the value of the
consideration received in the Merger by the Limited
Partners for their Units will not be less than the
fair value of their Units as might result from
negotiations between unrelated parties.
o No public market exists for the Shares or the
Notes. Upon completion of the Merger, it is
uncertain if and when a public market will develop
for the Shares and no public market is expected to
develop for the Notes.
o If and when a public market for the Shares
develops, there is no assurance that the Shares
will not trade at prices that are less than the
Exchange Price.
o There is no assurance that the Exchange Price,
which was determined by the General Partner and the
Independent Directors of AmREIT, reflects the fair
value of the Shares which might result from
negotiations between unrelated parties.
o The Appraised Value, upon which payment under the
ALV Payment Election will be determined, will not
be determined or known until after the Merger is
consummated.
o Limited Partners receiving Shares in the Merger
will realize a substantial change in the form of
their investment from a finite life Partnership,
which cannot leverage its investments, to an
infinite life REIT which can leverage its
investments.
o The anticipated benefits to Limited Partners as a
result of the Merger may not be realized.
POTENTIAL BENEFITS TO LIMITED PARTNERS
The General Partner believes the Merger is fair to and in the best
interests of the Limited Partners for a number of reasons, including:
o The General Partner believes that the terms of the Merger
Agreement, including the Exchange Price and the Partnership's
Net Asset Value are favorable to the Limited Partners.
o The General Partner believes that the Negotiated Price for
each of the Partnership's Properties is in the highest range
of values for the property in the current real estate market
and that such value would likely exceed the price at which the
property would sell for in the market. The General Partner
believes that the Partnership would thus therefor realize
significantly less value for its Properties than their
Negotiated Prices if the Partnership was liquidated in the
current real estate market.
-2-
<PAGE>
o By merging into AmREIT, the Limited Partners will be relieved
of uncertainties regarding the Partnership's real estate
investments, including the expiration of its only property on
March 22, 2002, the possible difficulties in releasing the
properties and the likely substantial costs of releasing this
property. As a result of the Merger, these risks would be
spread over and more economically absorbed by AmREIT's larger
and more diversified portfolio.
o The special purpose nature of the Partnership's only real
property, which makes it suitable for limited types of tenants
and uses and increases the risks of releasing the properties.
As a result of the Merger, these risks would be spread over
and more economically absorbed by AmREIT's larger and more
diversified portfolio.
o Co-ownership of the Partnership's only property in joint
venture with Fund III, which, as a practical matter, allows
the sale of the property only with the consent of its
co-owner. In the Merger, the property is valued at an amount
pro rata to the Negotiated Price of the entire property
without reduction for less than 100% ownership.
o By combining the Partnership with AmREIT, the Merger will
create an investment portfolio substantially larger and more
geographically diversified than the portfolio of the
Partnership. The Merger will consolidate operations and spread
the risk of an investment in AmREIT over a broader group of
assets and reduce the dependence of the investment upon the
performance of any particular asset or group of assets, such
as assets in the same geographical area.
o The allocations of Merger Expenses under which the Partnership
is required to pay only its proportionate share of the
Partnership Merger Expenses based on its relative Net Asset
Value. Also, if the Limited Partners do not elect to
participate in the Merger, the General Partner will pay or
reimburse the Partnership its Proportionate Share of the
Partnership Merger Expenses.
o As a result of the Merger, the Partnership will no longer
incur the expense for the preparation of separate financial
statements, required annual and quarterly filings, tax returns
and investor communications. The accurate preparation of these
statements and reports requires substantial cost and
management time and effort.
o The General Partner believes the Merger will provide the
combined AmREIT-Partnership entity improved future access to
capital markets for future growth and that Limited Partners,
as AmREIT shareholders, will have enhanced liquidity as a
result of the larger total equity market capitalization of
AmREIT.
o The General Partner received the Houlihan Fairness Opinion
that the Merger is fair, from a financial point of view, to
the Limited Partners.
o The Partnership's strategic combination with a publicly held
REIT which takes advantage of the growth in the REIT industry
and real estate markets is preferable to the alternatives of
complete liquidation of the Partnership, continuation of the
Partnership or reorganization of the Partnership into one
separate REIT.
-3-
<PAGE>
These possible benefits of the Merger to the Limited Partners are
discussed in greater detail in the Prospectus. Limited Partners should refer to
the discussions in the Prospectus under the heading "THE MERGER--The General
Partners Reasons and Recommendations for the Merger."
RISK FACTORS AND POTENTIAL ADVERSE CONSEQUENCES
Limited Partners participating in the Merger will be subject to various
risks and possible adverse consequences which they should take into account in
deciding how they will vote on the Merger. The most significant of these
material risks are:
The Merger involves the following risks for the Limited Partners:
o The General Partner did not retain an unaffiliated
representative to represent the Limited Partners or the
Partnership, or to represent all of the Partnerships as a
Group, in the Merger. Had independent representation been
arranged for a Partnership, the terms of the Merger might have
been more favorable to such Partnership.
o The Negotiated Prices of the Partnership's Properties were
determined by the General Partner who is also the Chief
Executive Officer and largest shareholder of AmREIT. The NAV
of each Partnership should be considered as having been
negotiated by the common management of the Partnerships and
AmREIT.
o The Negotiated Price of the Partnership's Properties is not
based on an independent appraisal.
o The conflicts of interest of the General Partner who will
receive significant financial and other benefits from and/or
as a result of the Merger.
o The possibility that the Partnership's Net Asset Values may
not reflect the actual value of its net assets.
o The fixed Exchange Price which means the Limited Partners will
not receive more Shares (or a Note in a greater principal
amount) if the value of the Shares decreases as of the
Effective Date.
o AmREIT's Shares are not publically traded, a market for the
Shares is not expected to exist immediately upon completion of
this Merger, and there is no assurance that a market for the
Shares will develop in the future. Unless and until there is a
public market for the Shares, shareholders will have
difficulty in liquidating their investment.
o If and when a market for the Shares develops, the Shares may
trade at prices substantially below the Exchange Price.
o The Merger will be a taxable transaction for the Limited
Partners.
o A majority vote of Limited Partners binds the Partnership.
-4-
<PAGE>
o Limited Partners who vote against the Merger will receive
Notes for their Units in the Merger unless they elect to
receive Shares if the Merger is approved.
o Limited Partners who become shareholders of AmREIT may not
receive the same level of distributions as previously received
from their respective Partnership Units.
o Because it is not known how many Partnerships will participate
in the Merger, there are uncertainties as to the capital
structure and size of AmREIT following consummation of the
Merger as they will vary depending on the number which elect
to participate in the Merger.
o As a result of the Merger, the nature of each Limited
Partner's investment will change from holding an interest in a
specified portfolio of properties in a finite life entity to
holding an equity investment in an ongoing REIT, whose
portfolio of properties may be changed from time to time
without the approval of its shareholders and which does not
plan to liquidate such assets within a fixed period.
o If it participates in the Merger, the Partnership will bear
these costs of the Merger in proportion to its relative NAV.
Should the Partnership not participate in the Merger, the
General Partner will pay or reimburse the Partnership for its
portion of these costs. The costs of the Merger allocated to
the Partnerships are limited to the costs of the Houlihan
Fairness Opinions, the Partnership accounting costs (and other
valuation or appraisal costs, if any), which are estimated to
total $150,000, and any direct partner communication costs.
o The anticipated benefits of the Merger may not be realized.
o The anticipated benefits of AmREIT's change to self-management
through the recently completed Adviser Acquisition may not be
fully realized.
o The proceeds of future asset sales or refinancings by AmREIT
will generally be reinvested rather than distributed to
shareholders to the extent not required to be distributed to
maintain REIT status.
o AmREIT's Board of Directors has the power to change the
investment, acquisition and financing policies of AmREIT
(including policies regarding the level of indebtedness)
without a vote of the shareholders, which could result in
policies which do not reflect the interests of all
shareholders.
o Following the consummation of the Merger, AmREIT intends to
borrow additional funds (equal to or exceeding 50% of the
value of the properties acquired in the Merger) to acquire
additional, as yet unidentified, real estate.
These risks and possible adverse consequences of the Merger to the
Limited Partners are discussed in greater detail in the Prospectus. Limited
Partners should refer to the discussion of the risks in participating in the
Merger set forth in the Prospectus under the sections "RISK FACTORS," "CONFLICTS
OF INTEREST," "MATERIAL FEDERAL INCOME TAX ASPECTS" and "COMPARISON OF UNITS,
SHARES AND NOTES."
-5-
<PAGE>
THE MERGER
The purpose of the Merger is to strategically unite AmREIT with one or
more of the Partnerships, each of which has compatible properties in AmREIT's
existing and new markets, and to give the Limited Partners the ability to
participate in a strategic business combination with a publicly held REIT in
order to take advantage of the growth in the REIT industry and real estate
markets in general, with the prospect of being able to liquidate their
investment through the sale of the publicly-traded Shares or retain their
investment indefinitely.
If the Merger is approved, the Partnership will cease to exist and all
of its properties will be transferred to AmREIT. Any Limited Partner may abstain
from or vote against the Merger and, if the Merger is approved, the Limited
Partner will still participate in the Merger and will receive Notes for their
Units unless they elect to receive Shares. Limited Partners will not have
appraisal rights or other dissenter's rights by reason of the Merger. For a
discussion of the effect of abstaining from or voting against the Merger, the
rights of Limited Partners who do so, and the effects of exercising dissenters'
rights, see "THE MERGER - Dissenting Partners and Shareholders."
The General Partner is proposing amendments to the Partnership's
Agreement of Limited Partnership to permit the closing of the transactions
contemplated by the Merger Agreement. Limited Partners voting in favor of the
Merger will be deemed to have voted in favor of each of these proposed
amendments. A majority vote of Limited Partners is required to approve the
proposed amendments and to approve the Merger Agreement. The proposed amendments
authorize the following: (i) the Merger of the Partnership with and into AmREIT,
whether or not AmREIT would be regarded as an Affiliate of the general partners;
and (ii) such other actions as may be necessary under or contemplated by the
Merger Agreement or the Prospectus, irrespective of any provision in the
Partnership Agreement which might otherwise prohibit such actions. See "THE
MERGER -- Proposed Amendments to Partnership Agreements." The General Partner
owns no Units of the Partnership. The general partners of the Partnership have
agreed to waive any right to receive Shares to which they may otherwise have
been entitled except with respect to their capital interests as general
partners.
The General Partner reasonably believes that the terms of the Merger,
including the consideration to be received by the Limited Partners in the
Merger, are fair to and in the best interests of the Limited Partners.
THE GENERAL PARTNER STRONGLY RECOMMENDS THAT ALL LIMITED PARTNERS
VOTE "YES" IN FAVOR OF THE MERGER. THE GENERAL PARTNER REQUESTS THAT EACH
LIMITED PARTNER COMPLETE, SIGN AND RETURN THE ENCLOSED CONSENT AS SOON AS
POSSIBLE.
ALLOCATION OF CONSIDERATION
In the Merger, the Limited Partners will receive Shares (or Notes)
based upon the Net Asset Value ("NAV") of the Partnership. The Partnership's NAV
equals the Negotiated Price of its properties plus its Net Cash. The
Partnership's Net Cash equals the excess, if any, of its cash and accounts
receivable over its debt at the Effective Date. The Negotiated Price of each
property of the Partnership was determined and agreed to by Mr. H. Kerr Taylor,
the General Partner, on behalf of the Partnership in negotiations with the two
directors of AmREIT who are not affiliated with Mr. Taylor (the "Independent
Directors").
-6-
<PAGE>
The number of Shares issuable in the Merger to the Partnership equals
the Partnership's NAV divided by the Exchange Price of $9.34. The Exchange Price
was negotiated and agreed to by the General Partner and the Independent
Directors based on the last public offering price of the Shares, $10.25, net of
certain costs of that offering. However, the Shares are not publically traded
and will not been listed for trading after the Merger. Limited Partners should
refer to the discussion in the Prospectus under the heading "THE MERGER--The
Merger Consideration."
Calculated as if the Effective Date were June 30, 1998, AmREIT is
offering 2,733.37 Shares or, subject to the Note Restriction, a Note in the
principal amount of $25,529.66, in consideration for each Unit of the
Partnership. The following table sets forth the methodology utilized in
determining the number of Shares and Notes being offered by AmREIT for each
Unit:
Net Asset Value:
Value of Properties:(1)
Steak and Ale, Houston, TX (56%) $394,791
Atlas Note (51.31%) 105,209
-------
Negotiated Price $500,000
Net Cash(2) 23,358
Other Assets ---
Other Liabilities ---
----------
Net Asset Value of Partnership(3) $523,358
Percentage of Aggregate Net Asset Value of All Partnerships 1.86%
Net Asset Value Per Original Investment of $1,000(4) $850.99
Allocation of Shares Received in Merger:
Number of Shares Allocable to Partnership 56,034
Percentage of Total Shares to be Issued in the Merger 1.86%
Percentage of Total Shares of AmREIT After the Merger 0.98%
Allocation of Shares to Limited Partners 56,034
Allocation of Shares to General Partners(5) ---
Allocation of Shares Per Unit 2,733.37
Allocation of Shares Per Original Investment of $1,000(4) 91.11
Maximum Total Shares in AmREIT After the Merger(6) 5,742,873
---------
Notes Offered in Merger:
Maximum Principal Amount Offered to Partnership $183,175
Principal Amount of Note Offered per Unit $25,529.66
Principal Amount of Note Offered per Original Investment
of $1,000(4) $850.99
-------
-7-
<PAGE>
Return to Limited Partners Per $1,000 of Adjusted Capital From
Shares(7)
Return From Merger per $1,000 of Adjusted Capital Based on $850.99
Exchange Price(8)
Total Return from Merger Based on Exchange Price plus Cumulative $1,608.70
Distributions per $1,000 of Adjusted Capital(7)
Total Return from Merger Based on Exchange Price plus Cumulative 160.87%
Distributions through 6/30/1998 as a Percentage of Adjusted
Capital
Return From Merger per $1,000 of Adjusted Capital Based on $10.25 $933.90
per Share Price(9)
(1) Percentage of property owned by Partnership shown in parentheses.
(2) Net Cash is the excess, if any, of the Partnership's cash and accounts
receivable over its debt.
(3) Net Asset Value equals Negotiated Price of property plus Net Cash.
(4) "Per Original Investment of $1,000" is computed by dividing the Limited
Partners' allocable share of such amount by the Limited Partners'
original capital of the Partnership (the Partnership's "Original
Capital") and multiplying the result by 1,000.
(5) The general partners of the Partnership have agreed to waive any right
to receive Shares to which they may otherwise have been entitled in the
Merger other than with respect to the payment to Mr. Taylor of the
disposition fee in the amount of $15,000 (3.0% of the Negotiated Price
of each property). Mr. Taylor has agreed to purchase 1,606 shares at
the Exchange Price with this disposition fee. The general partners will
not be receiving any other compensation or reimbursement for claims
against or interests in the Partnership.
(6) Calculated as if effective date were June 30, 1998. Assumes 100%
participation of the Partnerships and that no Notes are issued.
Includes portion of Share Balance from Adviser Acquisition issuable to
Mr. Taylor upon consummation of Merger.
(7) Adjusted Capital equals a Limited Partner's original invested capital
less cumulative distributions constituting a return of capital under
the Partnership Agreement.
(8) Shares valued at $9.34 per Share.
(9) $10.25 is the most recent public offering price of the Shares.
CONSIDERATIONS UNIQUE TO THE PARTNERSHIPS
Due to the substantial similarities among the Partnerships, such as
their similar investment portfolios and property locations, common investment
objectives and policies, similar financial condition, the fact that the
Partnerships' assets are managed by AmREIT or its Affiliates and substantial
similarities in the language and scope of their Partnership Agreements, many of
the consequences of participating in the Merger are common to the Limited
Partners of each of the Partnerships. The purpose of this section is, however,
to highlight features of the Partnership which may distinguish the situation of
the Partnership from that of the other Partnerships and which should be taken
into account by the Limited Partners when evaluating the merits and risks
of the proposed Merger.
-8-
<PAGE>
Special Considerations Regarding Partnership Properties. Unless the
Limited Partners approve the Merger, the General Partner will continue the
Partnership in accordance with its current investment strategies and objectives
described below. At the time of the Partnership's formation, the General Partner
anticipated the liquidation of its portfolio and distribution of the net
proceeds from the sale of the properties to the Limited Partners within 8 to 12
years after the acquisition of the properties. Based on the completion of the
acquisition of the Partnership's portfolio in 1987, it was anticipated that
liquidation of the portfolio would begin by 1999. However, the Partnership's
ability to achieve its goals will be influenced by the following factors. See
"THE PARTNERSHIPS--Properties" in the Prospectus for additional information
regarding the Partnership's portfolio.
Expiration of Lease. The lease on the Partnership's only real
property expires on March 22, 1002. The General Partner believes the rentals on
the ground lease on this property are significantly below current market rates.
The General Partner anticipates that in order to release this property at market
rates, the Partnership will be required to build a new retail structure and/or
make other significant improvements to the property. Also, the Partnership may
incur significant additional costs and/or delays in procuring a replacement
tenant.
Concentration of Investment. The Partnership has concentrated
its investments in one property. If a vacancy or other interruption of rents
occurs in that property, the distributions of the Partnership may be
significantly reduced. The Partnership has also concentrated its investments in
a limited geographic area. If conditions in this area deteriorate, the
Partnership may experience more difficulty in re-leasing its property than it
would experience if the property was more geographically diversified.
Co-ownership of Property. The Partnership owns the Steak & Ale
Restaurant property in co-ownership with Fund III. The Partnership owns 56% of
this property and is dependent upon the consent and cooperation of the co-owner
to sell or re-lease the property. Therefore, there is no assurance that the
co-owner will agree to the sale or re-lease of the property at such time or
under the terms the Partnership may desire.
Possible Need for Additional Capital. The Limited Partners may
be required to contribute additional capital and/or approve Partnership
borrowings in order to finance future lease renewal or releasing costs as
described above. Moreover, without an economically desirable lease in place, the
Partnership could not expect to realize an attractive price for the sale of its
properties.
Merger is a Taxable Event. Limited Partners will realize a gain on the
Merger in an amount equal to their allocable share of the excess of the sum of
the fair market value of the Shares received by the Partnership over the
Partnership's adjusted tax basis of the Partnership assets. In general, Limited
Partners can expect to pay tax on this gain at long term capital gains rates,
which will generally be 20%. Assuming that the value of the Shares reflects the
Net Asset Values of the assets acquired in the Merger, if the Partnership
participates in the Merger, each of its Limited Partners would have recognized
taxable gain of approximately 2.5% (as of June 30, 1998) for every Unit held,
representing an original investment of $30,000. Those Limited Partners who have
owned their Units since the inception of the Partnership can expect to recognize
a taxable gain of approximately $150 per Unit as a result of the Merger. The
actual amount of gain recognized by each Limited Partner will depend upon the
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<PAGE>
value ascribed to the Shares for federal tax purposes. Because the Shares will
not be publically traded immediately after the Merger, and the 1998 operating
results have not been included,it is possible that the value of the Shares used
for purposes of calculating the taxable income (or loss) and the taxable income
(or loss) per Unit will differ from the calculation stated above.
The Partnership's federal income tax returns are subject to review and possible
adjustment by the Internal Revenue Service. Under federal income tax laws,
regulations and administrative rulings, certain types of transactions may be
accorded varying interpretations. Accordingly, the Partnership's financial
statements, as well as the individual tax returns of the partners, may be
changed to cause them to conform to the tax treatment resulting from such
review, if any.
Investment Strategy. The property is currently fully leased to a single
tenant, however, as described above, this lease expires on March 22, 2002. The
Partnership is not authorized to raise additional capital or borrow funds. The
Partnership has a history of making regular quarterly distributions to its
Limited Partners. See "Miscellaneous -- Distributions to Limited Partners" below
in this Supplement. The Partnership's strategy is to continue to hold its
property with a view towards liquidating it at such time as the General Partner
deems beneficial and appropriate in a manner consistent with the Partnership's
investment objectives. The principal investment objectives of the Partnership
are to (i) preserve and protect the Limited Partners' capital; (ii) provide the
Limited Partners with quarterly cash distributions from operations; (iii) obtain
long-term appreciation in the value of its property; and (iv) provide increased
cash distributions to the Limited Partners as the cash flow from its investments
increases over the life of the Partnership. The Partnership acquired its
property for cash and without the use of borrowed funds (leverage).
Management Compensation. The Partnership has no employees but its
operations are managed by AmREIT. Under the Omnibus Services Agreement, pursuant
to which AmREIT manages the operations of the Partnership, AmREIT is entitled to
annual property management fees equal to 3% of gross rental revenues. Also, the
Omnibus Services Agreement provides for payment of reimbursement fees of up to
6% of the Partnership's gross rental revenues. This relationship will terminate
after the Merger if the Partnership merges into AmREIT. If the Partnership
participates in the Merger, neither AmREIT nor the General Partner or any of
their Affiliates will receive any compensation for services rendered in
connection with the Merger.
Offers From Third Parties. No offers on the Partnership's property have
been received during the past twelve months by the General Partner from
unaffiliated third parties. See "THE MERGER-Acquisition Proposals" in the
Prospectus.
FAIRNESS OF THE MERGER
Based upon his analysis of the Merger, the General Partner reasonably
believes that:
(1) The terms of the Merger, when considered as a whole, are fair to
the Limited Partners;
(2) The Shares offered in exchange for the Units constitute fair
consideration for the Units of the Limited Partners; and
(3) After comparing the potential benefits and detriments of the Merger
with those of several alternatives, the Merger is more attractive to the Limited
Partners than such alternatives.
THE GENERAL PARTNER REASONABLY BELIEVES THAT THE TERMS OF THE
MERGER AGREEMENT, INCLUDING THE CONSIDERATION TO BE RECEIVED BY THE
LIMITED PARTNERS IN CONNECTION WITH THE MERGER, ARE FAIR TO AND IN THE BEST
INTERESTS OF THE LIMITED PARTNERS. ACCORDINGLY, THE GENERAL PARTNER HAS
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APPROVED THE MERGER AGREEMENT AND RECOMMENDS THAT THE LIMITED PARTNERS
VOTE FOR APPROVAL OF THE MERGER AGREEMENT AND AMENDMENT OF THE
PARTNERSHIP AGREEMENT.
The General Partner's determination is based upon the transaction as a
whole, as well as the combination of less than all Partnerships, because the
Partnership's value for the purposes of the Merger is its Net Asset Value. The
General Partner believes that Net Asset Value is a reasonable estimate of the
value of each Partnership for the Merger as it is directly derived from the
value of the Partnership's net assets at the Effective Date, independent of the
valuations of the assets of the other Partnerships. The General Partner also
believes the Exchange Price, the value on which Shares will be issued to the
Partnership in the Merger, is a reasonable estimate of the value of the Shares
based on the last public offering price of the Shares and within the overall
context of the Merger. See "THE MERGER - The General Partner's Reasons and
Recommendations for the Merger. For a full discussion of the General Partner's
reasons for the Merger, see "THE MERGER -- The General Partner's Reasons for the
Merger and Recommendation to the Limited Partners" in the Prospectus.
Fairness Opinion. The General Partners, on behalf of the Partnership,
retained Houlihan to render an opinion as to whether the consideration to be
received by the Limited Partners in connection with the Merger was fair, from a
financial point of view, to its Limited Partners. Houlihan was not requested to,
and did not make, any recommendation to the Partnerships as to the consideration
to be received by the Limited Partners in connection with the Merger, which
consideration was determined through negotiations between the common management
of the Partnerships and AmREIT. The General Partner retained Houlihan to render
its fairness opinion based upon Houlihan's experience in the valuation of
businesses and their securities in connection with mergers and acquisitions, and
valuations for corporate purposes especially with respect to REITs and other
real estate companies. Houlihan delivered its written opinion, dated June 1,
1998, to the General Partner, to the effect that, as of the date of such
opinion, based on Houlihan's review and subject to the limitations described in
the Prospectus, the consideration to be received by the Limited Partners, in
connection with the Merger is fair, from a financial point of view, to the
Limited Partners. The Houlihan Fairness Opinion does not constitute a
recommendation to any Limited Partner as to how any such Limited Partner should
vote on the Merger. See "FAIRNESS OPINION--The Houlihan Fairness Opinion."
Comparison of Benefits and Detriments. The General Partner's assessment
of the fairness of the proposed Merger was based on the review of different
alternatives that were available. The evaluations of the different alternatives
included, but were not limited to, a strategic combination with a publicly
traded REIT to take advantage of the growth of the REIT industry and real estate
markets in general, completely liquidating the Partnership, continuing the
Partnership or reorganizing the Partnership into a REIT. In order to determine
whether the Merger or one of its alternatives would be more attractive to the
Limited Partners, the General Partner compared the potential benefits and
detriments of the Merger with the potential benefits and detriments of the
alternatives. A detailed discussion of the potential benefits and detriments of
each of these alternatives is provided in "THE MERGER -- The General Partners'
Reasons and Recommendation for the Merger" and "-- Alternatives to the Merger"
in the Prospectus.
In the event the Merger is not consummated for any reason, the
Partnership will continue to pursue its business objectives of maximizing the
value of its property, in addition to the possible liquidation of its portfolio,
another strategic combination or another attractive alternative that may become
available.
-11-
<PAGE>
COMPARATIVE COMPENSATION, FEES AND DISTRIBUTIONS
COMPENSATION PAID TO THE GENERAL PARTNER AND HIS AFFILIATES
This section is intended to provide Limited Partners with a brief
comparison of the compensation, fees and distributions paid to the General
Partner and his Affiliates under the Partnership's current arrangements with
those that would have been paid had the Merger been in place. The following
table sets forth the compensation, fees and distributions by the Partnership to
the General Partner and his Affiliates during the two most recent fiscal years
and the six-month period ended June 30, 1998 and compares those payments against
the amount that would have been paid assuming the Merger had occurred January 1,
1996.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
Six Months Ended
1996 1997 June 30, 1998
---- ---- -------------
Actual Pro Forma Actual Pro Forma Actual Pro Forma
<S> <C> <C> <C> <C> <C> <C>
Administrative Reimb.(1) $1,656 $2,520 $1,656 $1,936 $828 $756
Cash Distributions(2) 720 --- 720 --- 360 ---
General Partner Salary(3) --- 244 --- 293 --- 146
(1) An AmREIT subsidiary receives administrative reimbursements of up to 6%
of gross rental revenues from the properties. No other fees, salaries
or other compensation were paid by the Partnership to its general
partner or its affiliates during these periods.
(2) Includes all cash distributions made to Mr. Taylor and his affiliates
resulting from ownership of Units and general partner interests. Mr.
Taylor's employment agreement with AmREIT provides for a fixed base
salary of $25,000 and $30,000 per annum for 1998 and 1999 respectively,
which amounts will not increase as a result of the Merger.
(3) Mr. Taylor's salary represents the total salary and benefits Mr. Taylor
is currently entitled to receive as an officer and director of AmREIT
allocated to the Partnership based on the percentage of shares of
AmREIT to be owned by the Limited Partners immediately after the
Merger. No other affiliate of the general partners of the Partnership
will receive compensation from AmREIT upon completion of the Merger.
</TABLE>
New Compensation
AmREIT will internally manage and lease the properties obtained by
AmREIT from the Partnership pursuant to the Merger. The terms of this engagement
will be substantially similar to the terms governing the management arrangements
that AmREIT typically uses in managing its current properties.
MISCELLANEOUS
Distributions to Limited Partners
Set forth below are distributions per Unit made by the Partnership to
the Limited Partners during the most recent five fiscal years and the most
recently completed interim period. Also see "THE PARTNERSHIPS - Partnership
Distributions" in the Prospectus.
-12-
<PAGE>
<TABLE>
<CAPTION>
Six Months Ended
1993 1994 1995 1996 1997 June 30, 1998
---- ---- ---- ---- ---- -------------
<S> <C> <C> <C> <C> <C> <C>
Distributions $1,860 $1,865 $1,860 $1,860 $1,860 $930
Portion of Distribution That Was a --- --- --- --- --- ---
Return of Capital(1)
(1) Distributions treated as a return of capital under the Partnership
Agreement.
- ----------------------
</TABLE>
Financial Information
Rental income statements for the property of the Partnership for the
years ended December 31, 1997 and 1996 and certain pro forma financial
statements with respect to the Partnership are set forth in "The Unaudited Pro
Forma Financial Information" and "INDEX TO FINANCIAL INFORMATION" in the
Prospectus.
List of Investors
Under the Partnership Agreement and Texas state law, a Limited Partner
may obtain a list of the names, addresses and number of Units owned by the other
Limited Partners entitled to so vote on the Merger by making written request
therefor from the General Partner, c/o Timothy W. Kelley, AmREIT, Inc., Eight
Greenway Plaza, Suite 824, Houston, Texas 77046. At the time of making the
request, the requesting Limited Partner must submit a payment of $10.00 in
payment for the costs of copying and mailing the list and, if the Units are held
through a nominee, provide the Partnership with a statement from the nominee or
other independent third party confirming such Limited Partner's beneficial
ownership. A Limited Partner is only entitled to the foregoing information with
respect to the Partnership in which the Limited Partner holds Units. See
"CONSENT PROCEDURES" in the Prospectus.
End of Partnership Supplement for Taylor Income Investors IV, Ltd.
-13-
<PAGE>
AMREIT, INC.
SUPPLEMENT TO
JOINT CONSENT SOLICITATION STATEMENT AND PROSPECTUS
FOR
TAYLOR INCOME INVESTORS V, LTD.
A TEXAS LIMITED PARTNERSHIP
Mr. H. Kerr Taylor (the "General Partner") is soliciting the approval
of the Limited Partners of Taylor Income Investors V, Ltd., a Texas Limited
Partnership (the "Partnership"), for the Merger of the Partnership with and into
AmREIT, Inc., a Maryland Corporation ("AmREIT"). As part of the Merger, the
Limited Partners will exchange Units of Limited Partnership Interests ("Units")
in the Partnership for shares of common stock of AmREIT (the "Shares") or,
subject to the Note restriction, 6.0% Notes of AmREIT due December 31, 2004 (the
"Notes"). The Merger, if it is approved, will involve up to ten limited
partnerships, including the Partnership. This solicitation is being made on
behalf of the general partners of the Partnership. The proposal is described in
detail in the Joint Consent Solicitation Statement and Prospectus dated , 1998
(the "Prospectus"). For the definition of capitalized terms used in the
Supplement, which are not separately defined herein, see "GLOSSARY" in the
Prospectus. Cross-references in this Supplement also refer to the cited
discussions in the Prospectus, unless specifically noted to the contrary.
The effects of the Merger may be different for Limited Partners in each
of the Partnerships participating in the Merger (the "Partnerships"). This
Supplement has been prepared to highlight the risks, effects and fairness of the
Merger for the Limited Partners of the Partnership. This Supplement is not
intended to repeat or duplicate the Prospectus and the Prospectus must be
referred to in reading this Supplement. Moreover, this Supplement does not
purport to provide an overall summary of the Merger or to highlight all of its
material terms, conditions, risks or effects. See "SUMMARY" and "THE MERGER" in
the Prospectus. To the extent this Supplement summarizes portions of the
Prospectus, such discussions are qualified in their entirety by the more
detailed discussions of those matters appearing in the Prospectus. Supplements
have also been prepared for each of the other Partnerships and copies of such
Supplements will be provided promptly without charge to each Limited Partner or
his representative who has been so designated in writing upon written request to
Timothy W. Kelley, Vice President at AmREIT, Inc., Eight Greenway Plaza, Suite
824, Houston, Texas 77046. Telephone (800) 888-4400, extension 26 or fax to
(713) 850-0498.
RISK FACTORS
The Merger involves material risks to the Limited Partners,
the more significant of which are:
o The distributions on the securities received by
Limited Partners for their Units in the Merger
will, at least initially, be lower as a percentage
of their investment as compared to distributions
currently received on their Units.
o The General Partner did not retain an unaffiliated
person to represent the Limited Partners in
negotiating the terms of the Merger.
-1-
<PAGE>
o The Negotiated Prices for the Partnership
properties were determined by the General Partner,
who has substantial conflicts of interest in the
Merger due to his financial interest in AmREIT and
the prospects of receiving substantial financial
benefits if the Merger is consummated.
o The Negotiated Prices of the properties are not
based on appraisals from independent real estate
appraisers.
o The Merger will be a taxable transaction to the
Limited Partners.
o There is no assurance that the value of the
consideration received in the Merger by the Limited
Partners for their Units will not be less than the
fair value of their Units as might result from
negotiations between unrelated parties.
o No public market exists for the Shares or the
Notes. Upon completion of the Merger, it is
uncertain if and when a public market will develop
for the Shares and no public market is expected to
develop for the Notes.
o If and when a public market for the Shares
develops, there is no assurance that the Shares
will not trade at prices that are less than the
Exchange Price.
o There is no assurance that the Exchange Price,
which was determined by the General Partner and the
Independent Directors of AmREIT, reflects the fair
value of the Shares which might result from
negotiations between unrelated parties.
o The Appraised Value, upon which payment under the
ALV Payment Election will be determined, will not
be determined or known until after the Merger is
consummated.
o Limited Partners receiving Shares in the Merger
will realize a substantial change in the form of
their investment from a finite life Partnership,
which cannot leverage its investments, to an
infinite life REIT which can leverage its
investments.
o The anticipated benefits to Limited Partners as a
result of the Merger may not be realized.
-2-
<PAGE>
POTENTIAL BENEFITS TO LIMITED PARTNERS
The General Partner believes the Merger is fair to and in the best
interests of the Limited Partners for a number of reasons, including:
o The General Partner believes that the terms of the Merger
Agreement, including the Exchange Price and the Partnership's
Net Asset Value are favorable to the Limited Partners.
o The General Partner believes that the Negotiated Price for
each of the Partnership's Properties is in the highest range
of values for the property in the current real estate market
and that such value would likely exceed the price at which the
property would sell for in the market. The General Partner
believes that the Partnership would thus therefor realize
significantly less value for its Properties than their
Negotiated Prices if the Partnership was liquidated in the
current real estate market.
o By merging into AmREIT, the Limited Partners will be relieved
of uncertainties regarding the Partnership's real estate
investments, including the expiration of its leases on its
properties, the possible difficulties in releasing the
properties and/or the possible substantial costs of releasing
these properties. As a result of the Merger, these risks would
be spread over and more economically absorbed by AmREIT's
larger and more diversified portfolio.
o The special purpose nature of the Partnership's properties,
which makes them suitable for limited types of tenants and
uses and increases the risks of releasing the properties. As a
result of the Merger, these risks would be spread over and
more economically absorbed by AmREIT's larger and more
diversified portfolio.
o Co-ownership of each of the Partnership's properties in joint
venture with one or more other Partnerships which, as a
practical matter, allows the sale of the property only with
the consent of its co-owner. In the Merger, the property is
valued at an amount pro rata to the Negotiated Price of the
entire property without reduction for less than 100%
ownership.
o By combining the Partnership with AmREIT, the Merger will
create an investment portfolio substantially larger and more
geographically diversified than the portfolio of the
Partnership. The Merger will consolidate operations and spread
the risk of an investment in AmREIT over a broader group of
assets and reduce the dependence of the investment upon the
performance of any particular asset or group of assets, such
as assets in the same geographical area.
o The allocations of Merger Expenses under which the Partnership
is required to pay only its proportionate share of the
Partnership Merger Expenses based on its relative Net Asset
Value. Also, if the Limited Partners do not elect to
participate in the Merger, the General Partner will pay or
reimburse the Partnership its Proportionate Share of the
Partnership Merger Expenses.
o As a result of the Merger, the Partnership will no longer
incur the expense for the preparation of separate financial
statements, required annual and quarterly filings, tax returns
and investor communications. The accurate preparation of these
statements and reports requires substantial cost and
management time and effort.
o The General Partner believes the Merger will provide the
combined AmREIT-Partnership entity improved future access to
capital markets for future growth and that Limited Partners,
as AmREIT shareholders, will have enhanced liquidity as a
result of the larger total equity market capitalization of
AmREIT.
o The General Partner received the Houlihan Fairness Opinion
that the Merger is fair, from a financial point of view, to
the Limited Partners.
o The Partnership's strategic combination with a publicly held
REIT which takes advantage of the growth in the REIT industry
and real estate markets is preferable to the alternatives of
complete liquidation of the Partnership, continuation of the
Partnership or reorganization of the Partnership into one
separate REIT.
-3-
<PAGE>
These possible benefits of the Merger to the Limited Partners are
discussed in greater detail in the Prospectus. Limited Partners should refer to
the discussions in the Prospectus under the heading "THE MERGER--The General
Partners Reasons and Recommendations for the Merger."
RISK FACTORS AND POTENTIAL ADVERSE CONSEQUENCES
Limited Partners participating in the Merger will be subject to various
risks and possible adverse consequences which they should take into account in
deciding how they will vote on the Merger. The most significant of these
material risks are:
The Merger involves the following risks for the Limited Partners:
o The General Partner did not retain an unaffiliated
representative to represent the Limited Partners or the
Partnership, or to represent all of the Partnerships as a
Group, in the Merger. Had independent representation been
arranged for a Partnership, the terms of the Merger might have
been more favorable to such Partnership.
o The Negotiated Prices of the Partnership's Properties were
determined by the General Partner who is also the Chief
Executive Officer and largest shareholder of AmREIT. The NAV
of each Partnership should be considered as having been
negotiated by the common management of the Partnerships and
AmREIT.
o The Negotiated Price of the Partnership's Properties is not
based on an independent appraisal.
o The conflicts of interest of the General Partner who will
receive significant financial and other benefits from and/or
as a result of the Merger.
o The possibility that the Partnership's Net Asset Values may
not reflect the actual value of its net assets.
o The fixed Exchange Price which means the Limited Partners will
not receive more Shares (or a Note in a greater principal
amount) if the value of the Shares decreases as of the
Effective Date.
o AmREIT's Shares are not publically traded, a market for the
Shares is not expected to exist immediately upon completion of
this Merger, and there is no assurance that a market for the
Shares will develop in the future. Unless and until there is a
public market for the Shares, shareholders will have
difficulty in liquidating their investment.
o If and when a market for the Shares develops, the Shares may
trade at prices substantially below the Exchange Price.
o The Merger will be a taxable transaction for the Limited
Partners.
o A majority vote of Limited Partners binds the Partnership.
-4-
<PAGE>
o Limited Partners who vote against the Merger will receive
Notes for their Units in the Merger unless they elect to
receive Shares if the Merger is approved.
o Limited Partners who become shareholders of AmREIT may not
receive the same level of distributions as previously received
from their respective Partnership Units.
o Because it is not known how many Partnerships will participate
in the Merger, there are uncertainties as to the capital
structure and size of AmREIT following consummation of the
Merger as they will vary depending on the number which elect
to participate in the Merger.
o As a result of the Merger, the nature of each Limited
Partner's investment will change from holding an interest in a
specified portfolio of properties in a finite life entity to
holding an equity investment in an ongoing REIT, whose
portfolio of properties may be changed from time to time
without the approval of its shareholders and which does not
plan to liquidate such assets within a fixed period.
o If it participates in the Merger, the Partnership will bear
these costs of the Merger in proportion to its relative NAV.
Should the Partnership not participate in the Merger, the
General Partner will pay or reimburse the Partnership for its
portion of these costs. The costs of the Merger allocated to
the Partnerships are limited to the costs of the Houlihan
Fairness Opinions, the Partnership accounting costs (and other
valuation or appraisal costs, if any), which are estimated to
total $150,000, and any direct partner communication costs.
o The anticipated benefits of the Merger may not be realized.
o The anticipated benefits of AmREIT's change to self-management
through the recently completed Adviser Acquisition may not be
fully realized.
o The proceeds of future asset sales or refinancings by AmREIT
will generally be reinvested rather than distributed to
shareholders to the extent not required to be distributed to
maintain REIT status.
o AmREIT's Board of Directors has the power to change the
investment, acquisition and financing policies of AmREIT
(including policies regarding the level of indebtedness)
without a vote of the shareholders, which could result in
policies which do not reflect the interests of all
shareholders.
o Following the consummation of the Merger, AmREIT intends to
borrow additional funds (equal to or exceeding 50% of the
value of the properties acquired in the Merger) to acquire
additional, as yet unidentified, real estate.
These risks and possible adverse consequences of the Merger to the
Limited Partners are discussed in greater detail in the Prospectus. Limited
Partners should refer to the discussion of the risks in participating in the
Merger set forth in the Prospectus under the sections "RISK FACTORS," "CONFLICTS
OF INTEREST," "MATERIAL FEDERAL INCOME TAX ASPECTS" and "COMPARISON OF UNITS,
SHARES AND NOTES."
-5-
<PAGE>
THE MERGER
The purpose of the Merger is to strategically unite AmREIT with one or
more of the Partnerships, each of which has compatible properties in AmREIT's
existing and new markets, and to give the Limited Partners the ability to
participate in a strategic business combination with a publicly held REIT in
order to take advantage of the growth in the REIT industry and real estate
markets in general, with the prospect of being able to liquidate their
investment through the sale of the publicly-traded Shares or retain their
investment indefinitely.
If the Merger is approved, the Partnership will cease to exist and all
of its properties will be transferred to AmREIT. Any Limited Partner may abstain
from or vote against the Merger and, if the Merger is approved, the Limited
Partner will still participate in the Merger and will receive Notes for their
Units unless they elect to receive Shares. Limited Partners will not have
appraisal rights or other dissenter's rights by reason of the Merger. For a
discussion of the effect of abstaining from or voting against the Merger, the
rights of Limited Partners who do so, and the effects of exercising dissenters'
rights, see "THE MERGER - Dissenting Partners and Shareholders."
The General Partner is proposing amendments to the Partnership's
Agreement of Limited Partnership to permit the closing of the transactions
contemplated by the Merger Agreement. Limited Partners voting in favor of the
Merger will be deemed to have voted in favor of each of these proposed
amendments. A majority vote of Limited Partners is required to approve the
proposed amendments and to approve the Merger Agreement. The proposed amendments
authorize the following: (i) the Merger of the Partnership with and into AmREIT,
whether or not AmREIT would be regarded as an Affiliate of the general partners;
and (ii) such other actions as may be necessary under or contemplated by the
Merger Agreement or the Prospectus, irrespective of any provision in the
Partnership Agreement which might otherwise prohibit such actions. See "THE
MERGER -- Proposed Amendments to Partnership Agreements." The General Partner
owns no Units of the Partnership. The general partners of the Partnership have
agreed to waive any right to receive Shares to which they may otherwise have
been entitled except with respect to their capital interests as general
partners.
The General Partner reasonably believes that the terms of the Merger,
including the consideration to be received by the Limited Partners in the
Merger, are fair to and in the best interests of the Limited Partners.
THE GENERAL PARTNER STRONGLY RECOMMENDS THAT ALL LIMITED PARTNERS
VOTE "YES" IN FAVOR OF THE MERGER. THE GENERAL PARTNER REQUESTS THAT EACH
LIMITED PARTNER COMPLETE, SIGN AND RETURN THE ENCLOSED CONSENT AS SOON AS
POSSIBLE.
ALLOCATION OF CONSIDERATION
In the Merger, the Limited Partners will receive Shares (or Notes)
based upon the Net Asset Value ("NAV") of the Partnership. The Partnership's NAV
equals the Negotiated Price of its properties plus its Net Cash. The
Partnership's Net Cash equals the excess, if any, of its cash and accounts
receivable over its debt at the Effective Date. The Negotiated Price of each
property of the Partnership was determined and agreed to by Mr. H. Kerr Taylor,
the General Partner, on behalf of the Partnership in negotiations with the two
directors of AmREIT who are not affiliated with Mr. Taylor (the "Independent
Directors").
-6-
<PAGE>
The number of Shares issuable in the Merger to the Partnership equals
the Partnership's NAV divided by the Exchange Price of $9.34. The Exchange Price
was negotiated and agreed to by the General Partner and the Independent
Directors based on the last public offering price of the Shares, $10.25, net of
certain costs of that offering. However, the Shares are not publically traded
and will not been listed for trading after the Merger. Limited Partners should
refer to the discussion in the Prospectus under the heading "THE MERGER--The
Merger Consideration."
Calculated as if the Effective Date were June 30, 1998, AmREIT is
offering 2,952.5 Shares or, subject to the Note Restriction, a Note in the
principal amount of $27,576.31, in consideration for each Unit of the
Partnership. The following table sets forth the methodology utilized in
determining the number of Shares and Notes being offered by AmREIT for each
Unit:
Net Asset Values:
Value of Properties:
Pizza Inn (Clute, TX)(50%)(1) $130,163
Whataburger (Clute, TX)(50%) 152,000
La Petite Academy (Houston, TX)(6.02%) 38,000
Atlas Note (48.79%) 99,837
------
Negotiated Price $420,000
Net Cash(2) $ 21,221
Other Assets ---
Other Liabilities ---
-----------
Net Asset Value of Partnership(3) $441,221
-------
Percentage of Aggregate Net Asset Value of All Partnerships 1.57%
Net Asset Value Per Original Investment of $1,000(4) $919.21
------
Allocation of Shares Received in Merger:
Number of Shares Allocable to Partnership 47,240
Percentage of Total Shares to be Issued in the Merger 1.57%
Percentage of Total Shares of AmREIT After the Merger 0.82%
Allocation of Shares to Limited Partners 47,240
Allocation of Shares to General Partners(5) ---
Allocation of Shares Per Unit 2,952.50
Allocation of Shares Per Original Investment of $1,000(4) 98.42
Maximum Total Shares in AmREIT After the Merger(6) 5,742,873
---------
Notes Offered in Merger:
Maximum Principal Amount Offered to Partnership $154,427
Principal Amount of Note Offered Per Unit $27,576.31
Principal Amount of Note Offered per Original Investment of $919.21
$1,000(4) ------
-7-
<PAGE>
Return to Limited Partners Per $1,000 of Adjusted Capital From
Shares(7)
Return From Merger per $1,000 of Adjusted Capital Based on $958.37
Exchange Price(8)
Total Return from Merger based on Exchange Price plus Cumulative $1,886.94
Distributions per $1,000 of Adjusted Capital(7)
Total Return from Merger based on Exchange Price plus Cumulative 188.69%
Distributions through 6/30/1998 as a Percentage of Adjusted
Capital
Return From Merger per $1,000 of Adjusted Capital Based on $10.25 $1,051.74
per Share Price(9)
(1) Percentage of property owned by Partnership shown in parentheses.
(2) Net Cash is the excess, if any, of the Partnership's cash and accounts
receivable over its debt.
(3) Net Asset Value equals Negotiated Price of property plus Net Cash.
(4) "Per Original Investment of $1,000" is computed by dividing the Limited
Partners' allocable share of such amount by the Limited Partners'
original capital of the Partnership (the Partnership's "Original
Capital") and multiplying the result by 1,000.
(5) The general partners of the Partnership have agreed to waive any right
to receive Shares to which they may otherwise have been entitled in the
Merger other than with respect to the payment to Mr. Taylor of the
disposition fee in the amount of $12,600 (3.0% of the Negotiated Price
of each property). Mr. Taylor has agreed to purchase 1,349 shares at
the Exchange Price with this disposition fee. The general partners will
not be receiving any other compensation or reimbursement for claims
against or interests in the Partnership.
(6) Calculated as if effective date were June 30, 1998. Assumes 100%
participation of the Partnerships and that no Notes are issued.
Includes portion of Share Balance from Adviser Acquisition issuable to
Mr. Taylor upon consummation of Merger.
(7) Adjusted Capital equals a Limited Partner's original invested capital
less cumulative distributions constituting a return of capital under
the Partnership Agreement.
(8) Shares valued at $9.34 per Share.
(9) $10.25 is the most recent public offering price of the Shares.
CONSIDERATIONS UNIQUE TO THE PARTNERSHIPS
Due to the substantial similarities among the Partnerships, such as
their similar investment portfolios and property locations, common investment
objectives and policies, similar financial condition, the fact that the
Partnerships' assets are managed by AmREIT or its Affiliates and substantial
similarities in the language and scope of their Partnership Agreements, many of
the consequences of participating in the Merger are common to the Limited
Partners of each of the Partnerships. The purpose of this section is, however,
to highlight features of the Partnership which may distinguish the situation of
-8-
<PAGE>
the Partnership from that of the other Partnerships and which should be taken
into account by the Limited Partners when evaluating the merits and risks of the
proposed Merger.
Special Considerations Regarding Partnership Properties. Unless the
Limited Partners approve the Merger, the General Partner will continue the
Partnership in accordance with its current investment strategies and objectives
described below. At the time of the Partnership's formation, the General Partner
anticipated the liquidation of its portfolio and distribution of the net
proceeds from the sale of the properties to the Limited Partners within 8 to 12
years after the acquisition of the properties. Based on the completion of the
acquisition of the Partnership's portfolio in 1987, it was anticipated that
liquidation of the portfolio would begin by 1999. However, the Partnership's
ability to achieve its goals will be influenced by the following factors. See
"THE PARTNERSHIPS--Properties" in the Prospectus for additional information
regarding the Partnership's portfolio.
Expiration of Leases. When the leases on the Partnership's
properties all expire, the tenants may elect not to renew their leases or to
renew their leases only if the Partnership makes significant improvements to the
property. Should tenants fail to renew their leases, the Partnership would be
required to find new tenants and would likely incur significant additional
expense by reason of temporary vacancy and/or significant rehabilitation and/or
tenant improvement costs.
Concentration of Investment. The Partnership has concentrated
its investments in 4 properties, including co-ownership of a secured promissory
note with Fund IV. If a vacancy or other interruption of rents occur in one or
more of these properties, the distributions of the Partnership may be
significantly reduced. The Partnership has also concentrated its investments in
a limited geographic area. If conditions in this area deteriorate, the
Partnership may experience more difficulty in re-leasing its properties than it
would experience if the properties were more geographically diversified.
Co-ownership of Property. The Partnership owns all 3 of its
real properties in co-ownership with Fund VII and/or Fund VI. The Partnership,
as a practical matter, is dependent upon the consent and cooperation of the
majority co-owner to sell or re-lease the property. Therefore, there is no
assurance that the co-owner will agree to the sale or re-lease of the property
at such time or under the terms the Partnership may desire.
Possible Need for Additional Capital. The Limited Partners may
be required to contribute additional capital and/or approve Partnership
borrowings in order to finance future lease renewal or releasing costs as
described above. Moreover, without an economically desirable lease in place, the
Partnership could not expect to realize an attractive price for the sale of its
properties.
Merger is a Taxable Event. Limited Partners will realize a gain on the
Merger in an amount equal to their allocable share of the excess of the sum of
the fair market value of the Shares received by the Partnership over the
Partnership's adjusted tax basis of the Partnership assets. In general, Limited
Partners can expect to pay tax on this gain at long term capital gains rates.
Approximately 70% of the gain will be taxable at the 20% rate and 30% will be
taxable at the 25% rate. Assuming that the value of the Shares reflects the
Net Asset Values of the assets acquired in the Merger, if the Partnership
participates in the Merger, each of its Limited Partners would have recognized
taxable gain of approximately 30% (as of June 30, 1998) for every Unit held,
representing an original investment of $30,000. Those Limited Partners who have
owned their Units since the inception of the Partnership can expect to recognize
a taxable gain of approximately $1,900 per Unit as a result of the Merger. The
actual amount of gain recognized by each Limited Partner will depend upon the
value ascribed to the Shares for federal tax purposes. Because the Shares will
-9-
<PAGE>
not be publically traded immediately after the Merger, and the 1998 operating
results have not been included, it is possible that the value of the Shares
used for purposes of calculating the taxable income (or loss) and the taxable
income (or loss) per Unit will differ from the calculation stated above.
The Partnership's federal income tax returns are subject to review and possible
adjustment by the Internal Revenue Service. Under federal income tax laws,
regulations and administrative rulings, certain types of transactions may be
accorded varying interpretations. Accordingly, the Partnership's financial
statements, as well as the individual tax returns of the partners, may be
changed to cause them to conform to the tax treatment resulting from such
review, if any.
Investment Strategy. Each of the properties is currently fully leased
to a single tenant, however, as described above, these leases expire at varying
times in the future. The Partnership is not authorized to raise additional
capital or borrow funds. The Partnership has a history of making regular
quarterly distributions to its Limited Partners. See "Miscellaneous --
Distributions to Limited Partners" below in this Supplement. The Partnership's
strategy is to continue to hold its properties with a view towards liquidating
them at such times as the General Partner deems beneficial and appropriate in a
manner consistent with the Partnership's investment objectives. The principal
investment objectives of the Partnership are to (i) preserve and protect the
Limited Partners' capital; (ii) provide the Limited Partners with quarterly cash
distributions from operations; (iii) obtain long-term appreciation in the value
of its properties; and (iv) provide increased cash distributions to the Limited
Partners as the cash flow from its investments increases over the life of the
Partnership. The Partnership acquired each of its properties for cash and
without the use of borrowed funds (leverage).
Management Compensation. The Partnership has no employees but its
operations are managed by AmREIT. Under the Omnibus Services Agreement, pursuant
to which AmREIT manages the operations of the Partnership, AmREIT is entitled to
annual property management fees equal to 3% of gross rental revenues. Also, the
Omnibus Services Agreement provides for payment of reimbursement fees of up to
6% of the Partnership's gross rental revenues. This relationship will terminate
after the Merger if the Partnership merges into AmREIT. If the Partnership
participates in the Merger, neither AmREIT nor the General Partner or any of
their Affiliates will receive any compensation for services rendered in
connection with the Merger.
Offers From Third Parties. No offers on the Partnership's properties
have been received during the past twelve months by the General Partner from
unaffiliated third parties. See "THE MERGER-Acquisition Proposals" in the
Prospectus.
FAIRNESS OF THE MERGER
Based upon his analysis of the Merger, the General Partner reasonably
believes that:
(1) The terms of the Merger, when considered as a whole, are fair
to the Limited Partners;
(2) The Shares offered in exchange for the Units constitute fair
consideration for the Units of the Limited Partners; and
(3) After comparing the potential benefits and detriments of the Merger
with those of several alternatives, the Merger is more attractive to the Limited
Partners than such alternatives.
THE GENERAL PARTNER REASONABLY BELIEVES THAT THE TERMS OF THE MERGER
AGREEMENT, INCLUDING THE CONSIDERATION TO BE RECEIVED BY THE LIMITED PARTNERS IN
CONNECTION WITH THE MERGER, ARE FAIR TO AND IN THE BEST INTERESTS OF THE LIMITED
PARTNERS. ACCORDINGLY, THE GENERAL PARTNER HAS APPROVED THE MERGER AGREEMENT AND
RECOMMENDS THAT THE LIMITED PARTNERS VOTE FOR APPROVAL OF THE MERGER AGREEMENT
AND AMENDMENT OF THE PARTNERSHIP AGREEMENT.
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<PAGE>
The General Partner's determination is based upon the transaction as a
whole, as well as the combination of less than all Partnerships, because the
Partnership's value for the purposes of the Merger is its Net Asset Value. The
General Partner believes that Net Asset Value is a reasonable estimate of the
value of each Partnership for the Merger as it is directly derived from the
value of the Partnership's net assets at the Effective Date, independent of the
valuations of the assets of the other Partnerships. The General Partner also
believes the Exchange Price, the value on which Shares will be issued to the
Partnership in the Merger, is a reasonable estimate of the value of the Shares
based on the last public offering price of the Shares and within the overall
context of the Merger. See "THE MERGER - The General Partner's Reasons and
Recommendations for the Merger. For a full discussion of the General Partner's
reasons for the Merger, see "THE MERGER -- The General Partner's Reasons for the
Merger and Recommendation to the Limited Partners" in the Prospectus.
Fairness Opinion. The General Partners, on behalf of the Partnership,
retained Houlihan to render an opinion as to whether the consideration to be
received by the Limited Partners in connection with the Merger was fair, from a
financial point of view, to its Limited Partners. Houlihan was not requested to,
and did not make, any recommendation to the Partnerships as to the consideration
to be received by the Limited Partners in connection with the Merger, which
consideration was determined through negotiations between the common management
of the Partnerships and AmREIT. The General Partner retained Houlihan to render
its fairness opinion based upon Houlihan's experience in the valuation of
businesses and their securities in connection with mergers and acquisitions, and
valuations for corporate purposes especially with respect to REITs and other
real estate companies. Houlihan delivered its written opinion, dated June 1,
1998, to the General Partner, to the effect that, as of the date of such
opinion, based on Houlihan's review and subject to the limitations described in
the Prospectus, the consideration to be received by the Limited Partners, in
connection with the Merger is fair, from a financial point of view, to the
Limited Partners. The Houlihan Fairness Opinion does not constitute a
recommendation to any Limited Partner as to how any such Limited Partner should
vote on the Merger. See "FAIRNESS OPINION--The Houlihan Fairness Opinion."
Comparison of Benefits and Detriments. The General Partner's assessment
of the fairness of the proposed Merger was based on the review of different
alternatives that were available. The evaluations of the different alternatives
included, but were not limited to, a strategic combination with a publicly
traded REIT to take advantage of the growth of the REIT industry and real estate
markets in general, completely liquidating the Partnership, continuing the
Partnership or reorganizing the Partnership into a REIT. In order to determine
whether the Merger or one of its alternatives would be more attractive to the
Limited Partners, the General Partner compared the potential benefits and
detriments of the Merger with the potential benefits and detriments of the
alternatives. A detailed discussion of the potential benefits and detriments of
each of these alternatives is provided in "THE MERGER -- The General Partners'
Reasons and Recommendation for the Merger" and "-- Alternatives to the Merger"
in the Prospectus.
In the event the Merger is not consummated for any reason, the
Partnership will continue to pursue its business objectives of maximizing the
value of its properties, in addition to the possible liquidation of its
portfolio, another strategic combination or another attractive alternative that
may become available.
-11-
<PAGE>
COMPARATIVE COMPENSATION, FEES AND DISTRIBUTIONS
COMPENSATION PAID TO THE GENERAL PARTNER AND HIS AFFILIATES
This section is intended to provide Limited Partners with a brief
comparison of the compensation, fees and distributions paid to the General
Partner and his Affiliates under the Partnership's current arrangements with
those that would have been paid had the Merger been in place. The following
table sets forth the compensation, fees and distributions by the Partnership to
the General Partner and his Affiliates during the two most recent fiscal years
and the six-month period ended June 30, 1998 and compares those payments against
the amount that would have been paid assuming the Merger had occurred January 1,
1996.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
Six Months Ended
1996 1997 June 30, 1998
---- ---- ------------
Actual Pro Forma Actual Pro Forma Actual Pro Forma
<S> <C> <C> <C> <C> <C> <C>
Administrative Reimb.(1) $2,880 $2,799 $2,800 $2,550 $1,440 $905
Cash Distributions(2) 600 --- 600 --- 300 ---
General Partner Salary(3) --- 206 --- 247 --- 123
(1) An AmREIT subsidiary receives administrative reimbursements of up to 6%
of gross rental revenues from the properties. No other fees, salaries
or other compensation were paid by the Partnership to its general
partner or its affiliates during these periods.
(2) Includes all cash distributions made to Mr. Taylor and his affiliates
resulting from ownership of Units and general partner interests. Mr.
Taylor's employment agreement with AmREIT provides for a fixed base
salary of $25,000 and $30,000 per annum for 1998 and 1999 respectively,
which amounts will not increase as a result of the Merger.
(3) Mr. Taylor's salary represents the total salary and benefits Mr. Taylor
is currently entitled to receive as an officer and director of AmREIT
allocated to the Partnership based on the percentage of shares of
AmREIT to be owned by the Limited Partners immediately after the
Merger. No other affiliate of the general partners of the Partnership
will receive compensation from AmREIT upon completion of the Merger.
</TABLE>
New Compensation
AmREIT will internally manage and lease the properties obtained by
AmREIT from the Partnership pursuant to the Merger. The terms of this engagement
will be substantially similar to the terms governing the management arrangements
that AmREIT typically uses in managing its current properties.
MISCELLANEOUS
Distributions to Limited Partners
Set forth below are distributions per Unit made by the Partnership to
the Limited Partners during the most recent five fiscal years and the most
recently completed interim period. Also see "THE PARTNERSHIPS - Partnership
Distributions" in the Prospectus.
-12-
<PAGE>
<TABLE>
<CAPTION>
Six Months Ended
1993 1994 1995 1996 1997 June 30, 1998
---- ---- ---- ---- ---- -------------
<S> <C> <C> <C> <C> <C> <C>
Distributions $2,520 $2,475 $2,490 $2,490 $2,490 $1,245
Portion of Distribution That Was a --- --- --- --- --- ---
Return of Capital(1)
(1) Distributions treated as a return of capital under the Partnership
Agreement.
- ----------------------
</TABLE>
Financial Information
Rental income statements for the properties of the Partnership for the
years ended December 31, 1997 and 1996 and certain pro forma financial
statements with respect to the Partnership are set forth in "The Unaudited Pro
Forma Financial Information" and "INDEX TO FINANCIAL INFORMATION" in the
Prospectus.
List of Investors
Under the Partnership Agreement and Texas state law, a Limited Partner
may obtain a list of the names, addresses and number of Units owned by the other
Limited Partners entitled to so vote on the Merger by making written request
therefor from the General Partner, c/o Timothy W. Kelley, AmREIT, Inc., Eight
Greenway Plaza, Suite 824, Houston, Texas 77046. At the time of making the
request, the requesting Limited Partner must submit a payment of $10.00 in
payment for the costs of copying and mailing the list and, if the Units are held
through a nominee, provide the Partnership with a statement from the nominee or
other independent third party confirming such Limited Partner's beneficial
ownership. A Limited Partner is only entitled to the foregoing information with
respect to the Partnership in which the Limited Partner holds Units. See
"CONSENT PROCEDURES" in the Prospectus.
End of Partnership Supplement for Taylor Income Investors V, Ltd.
-13-
<PAGE>
AMREIT, INC.
SUPPLEMENT TO
JOINT CONSENT SOLICITATION STATEMENT AND PROSPECTUS
FOR
TAYLOR INCOME INVESTORS VI, LTD.
A TEXAS LIMITED PARTNERSHIP
Mr. H. Kerr Taylor (the "General Partner") is soliciting the approval
of the Limited Partners of Taylor Income Investors VI, Ltd., a Texas Limited
Partnership (the "Partnership"), for the Merger of the Partnership with and into
AmREIT, Inc., a Maryland Corporation ("AmREIT"). As part of the Merger, the
Limited Partners will exchange Units of Limited Partnership Interests ("Units")
in the Partnership for shares of common stock of AmREIT (the "Shares") or,
subject to the Note restriction, 6.0% Notes of AmREIT due December 31, 2004 (the
"Notes"). The Merger, if it is approved, will involve up to ten limited
partnerships, including the Partnership. This solicitation is being made on
behalf of the general partners of the Partnership. The proposal is described in
detail in the Joint Consent Solicitation Statement and Prospectus dated , 1998
(the "Prospectus"). For the definition of capitalized terms used in the
Supplement, which are not separately defined herein, see "GLOSSARY" in the
Prospectus. Cross-references in this Supplement also refer to the cited
discussions in the Prospectus, unless specifically noted to the contrary.
The effects of the Merger may be different for Limited Partners in each
of the Partnerships participating in the Merger (the "Partnerships"). This
Supplement has been prepared to highlight the risks, effects and fairness of the
Merger for the Limited Partners of the Partnership. This Supplement is not
intended to repeat or duplicate the Prospectus and the Prospectus must be
referred to in reading this Supplement. Moreover, this Supplement does not
purport to provide an overall summary of the Merger or to highlight all of its
material terms, conditions, risks or effects. See "SUMMARY" and "THE MERGER" in
the Prospectus. To the extent this Supplement summarizes portions of the
Prospectus, such discussions are qualified in their entirety by the more
detailed discussions of those matters appearing in the Prospectus. Supplements
have also been prepared for each of the other Partnerships and copies of such
Supplements will be provided promptly without charge to each Limited Partner or
his representative who has been so designated in writing upon written request to
Timothy W. Kelley, Vice President at AmREIT, Inc., Eight Greenway Plaza, Suite
824, Houston, Texas 77046. Telephone (800) 888-4400, extension 26 or fax to
(713) 850-0498.
RISK FACTORS
The Merger involves material risks to the Limited Partners,
the more significant of which are:
o The distributions on the securities received by
Limited Partners for their Units in the Merger
will, at least initially, be lower as a percentage
of their investment as compared to distributions
currently received on their Units.
o The General Partner did not retain an unaffiliated
person to represent the Limited Partners in
negotiating the terms of the Merger.
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<PAGE>
o The Negotiated Prices for the Partnership
properties were determined by the General Partner,
who has substantial conflicts of interest in the
Merger due to his financial interest in AmREIT and
the prospects of receiving substantial financial
benefits if the Merger is consummated.
o The Negotiated Prices of the properties are not
based on appraisals from independent real estate
appraisers.
o The Merger will be a taxable transaction to the
Limited Partners.
o There is no assurance that the value of the
consideration received in the Merger by the Limited
Partners for their Units will not be less than the
fair value of their Units as might result from
negotiations between unrelated parties.
o No public market exists for the Shares or the
Notes. Upon completion of the Merger, it is
uncertain if and when a public market will develop
for the Shares and no public market is expected to
develop for the Notes.
o If and when a public market for the Shares
develops, there is no assurance that the Shares
will not trade at prices that are less than the
Exchange Price.
o There is no assurance that the Exchange Price,
which was determined by the General Partner and the
Independent Directors of AmREIT, reflects the fair
value of the Shares which might result from
negotiations between unrelated parties.
o The Appraised Value, upon which payment under the
ALV Payment Election will be determined, will not
be determined or known until after the Merger is
consummated.
o Limited Partners receiving Shares in the Merger
will realize a substantial change in the form of
their investment from a finite life Partnership,
which cannot leverage its investments, to an
infinite life REIT which can leverage its
investments.
o The anticipated benefits to Limited Partners as a
result of the Merger may not be realized.
-2-
<PAGE>
POTENTIAL BENEFITS TO LIMITED PARTNERS
The General Partner believes the Merger is fair to and in the best
interests of the Limited Partners for a number of reasons, including:
o The General Partner believes that the terms of the Merger
Agreement, including the Exchange Price and the Partnership's
Net Asset Value are favorable to the Limited Partners.
o The General Partner believes that the Negotiated Price for
each of the Partnership's Properties is in the highest range
of values for the property in the current real estate market
and that such value would likely exceed the price at which the
property would sell for in the market. The General Partner
believes that the Partnership would thus therefor realize
significantly less value for its Properties than their
Negotiated Prices if the Partnership was liquidated in the
current real estate market.
o By merging into AmREIT, the Limited Partners will be relieved
of uncertainties regarding the Partnership's real estate
investments, including the expiration of its leases on its
properties, the possible difficulties in releasing the
properties and/or the possible substantial costs of releasing
these properties. As a result of the Merger, these risks would
be spread over and more economically absorbed by AmREIT's
larger and more diversified portfolio.
o The special purpose nature of the Partnership's properties,
which makes them suitable for limited types of tenants and
uses and increases the risks of releasing the properties. As a
result of the Merger, these risks would be spread over and
more economically absorbed by AmREIT's larger and more
diversified portfolio.
o Co-ownership of each of the Partnership's properties in joint
venture with one or more other Partnerships which, as a
practical matter, allows the sale of the property only with
the consent of its co-owner. In the Merger, the property is
valued at an amount pro rata to the Negotiated Price of the
entire property without reduction for less than 100%
ownership.
o By combining the Partnership with AmREIT, the Merger will
create an investment portfolio substantially larger and more
geographically diversified than the portfolio of the
Partnership. The Merger will consolidate operations and spread
the risk of an investment in AmREIT over a broader group of
assets and reduce the dependence of the investment upon the
performance of any particular asset or group of assets, such
as assets in the same geographical area.
o The allocations of Merger Expenses under which the Partnership
is required to pay only its proportionate share of the
Partnership Merger Expenses based on its relative Net Asset
Value. Also, if the Limited Partners do not elect to
participate in the Merger, the General Partner will pay or
reimburse the Partnership its Proportionate Share of the
Partnership Merger Expenses.
o As a result of the Merger, the Partnership will no longer
incur the expense for the preparation of separate financial
statements, required annual and quarterly filings, tax returns
and investor communications. The accurate preparation of these
statements and reports requires substantial cost and
management time and effort.
o The General Partner believes the Merger will provide the
combined AmREIT-Partnership entity improved future access to
capital markets for future growth and that Limited Partners,
as AmREIT shareholders, will have enhanced liquidity as a
result of the larger total equity market capitalization of
AmREIT.
o The General Partner received the Houlihan Fairness Opinion
that the Merger is fair, from a financial point of view, to
the Limited Partners.
o The Partnership's strategic combination with a publicly held
REIT which takes advantage of the growth in the REIT industry
and real estate markets is preferable to the alternatives of
complete liquidation of the Partnership, continuation of the
Partnership or reorganization of the Partnership into one
separate REIT.
-3-
<PAGE>
These possible benefits of the Merger to the Limited Partners are
discussed in greater detail in the Prospectus. Limited Partners should refer to
the discussions in the Prospectus under the heading "THE MERGER--The General
Partners Reasons and Recommendations for the Merger."
RISK FACTORS AND POTENTIAL ADVERSE CONSEQUENCES
Limited Partners participating in the Merger will be subject to various
risks and possible adverse consequences which they should take into account in
deciding how they will vote on the Merger. The most significant of these
material risks are:
The Merger involves the following risks for the Limited Partners:
o The General Partner did not retain an unaffiliated
representative to represent the Limited Partners or the
Partnership, or to represent all of the Partnerships as a
Group, in the Merger. Had independent representation been
arranged for a Partnership, the terms of the Merger might have
been more favorable to such Partnership.
o The Negotiated Prices of the Partnership's Properties were
determined by the General Partner who is also the Chief
Executive Officer and largest shareholder of AmREIT. The NAV
of each Partnership should be considered as having been
negotiated by the common management of the Partnerships and
AmREIT.
o The Negotiated Price of the Partnership's Properties is not
based on an independent appraisal.
o The conflicts of interest of the General Partner who will
receive significant financial and other benefits from and/or
as a result of the Merger.
o The possibility that the Partnership's Net Asset Values may
not reflect the actual value of its net assets.
o The fixed Exchange Price which means the Limited Partners will
not receive more Shares (or a Note in a greater principal
amount) if the value of the Shares decreases as of the
Effective Date.
o AmREIT's Shares are not publically traded, a market for the
Shares is not expected to exist immediately upon completion of
this Merger, and there is no assurance that a market for the
Shares will develop in the future. Unless and until there is a
public market for the Shares, shareholders will have
difficulty in liquidating their investment.
o If and when a market for the Shares develops, the Shares may
trade at prices substantially below the Exchange Price.
o The Merger will be a taxable transaction for the Limited
Partners.
o A majority vote of Limited Partners binds the Partnership.
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<PAGE>
o Limited Partners who vote against the Merger will receive
Notes for their Units in the Merger unless they elect to
receive Shares if the Merger is approved.
o Limited Partners who become shareholders of AmREIT may not
receive the same level of distributions as previously received
from their respective Partnership Units.
o Because it is not known how many Partnerships will participate
in the Merger, there are uncertainties as to the capital
structure and size of AmREIT following consummation of the
Merger as they will vary depending on the number which elect
to participate in the Merger.
o As a result of the Merger, the nature of each Limited
Partner's investment will change from holding an interest in a
specified portfolio of properties in a finite life entity to
holding an equity investment in an ongoing REIT, whose
portfolio of properties may be changed from time to time
without the approval of its shareholders and which does not
plan to liquidate such assets within a fixed period.
o If it participates in the Merger, the Partnership will bear
these costs of the Merger in proportion to its relative NAV.
Should the Partnership not participate in the Merger, the
General Partner will pay or reimburse the Partnership for its
portion of these costs. The costs of the Merger allocated to
the Partnerships are limited to the costs of the Houlihan
Fairness Opinions, the Partnership accounting costs (and other
valuation or appraisal costs, if any), which are estimated to
total $150,000, and any direct partner communication costs.
o The anticipated benefits of the Merger may not be realized.
o The anticipated benefits of AmREIT's change to self-management
through the recently completed Adviser Acquisition may not be
fully realized.
o The proceeds of future asset sales or refinancings by AmREIT
will generally be reinvested rather than distributed to
shareholders to the extent not required to be distributed to
maintain REIT status.
o AmREIT's Board of Directors has the power to change the
investment, acquisition and financing policies of AmREIT
(including policies regarding the level of indebtedness)
without a vote of the shareholders, which could result in
policies which do not reflect the interests of all
shareholders.
o Following the consummation of the Merger, AmREIT intends to
borrow additional funds (equal to or exceeding 50% of the
value of the properties acquired in the Merger) to acquire
additional, as yet unidentified, real estate.
These risks and possible adverse consequences of the Merger to the
Limited Partners are discussed in greater detail in the Prospectus. Limited
Partners should refer to the discussion of the risks in participating in the
Merger set forth in the Prospectus under the sections "RISK FACTORS," "CONFLICTS
OF INTEREST," "MATERIAL FEDERAL INCOME TAX ASPECTS" and "COMPARISON OF UNITS,
SHARES AND NOTES."
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<PAGE>
THE MERGER
The purpose of the Merger is to strategically unite AmREIT with one or
more of the Partnerships, each of which has compatible properties in AmREIT's
existing and new markets, and to give the Limited Partners the ability to
participate in a strategic business combination with a publicly held REIT in
order to take advantage of the growth in the REIT industry and real estate
markets in general, with the prospect of being able to liquidate their
investment through the sale of the publicly-traded Shares or retain their
investment indefinitely.
If the Merger is approved, the Partnership will cease to exist and all
of its properties will be transferred to AmREIT. Any Limited Partner may abstain
from or vote against the Merger and, if the Merger is approved, the Limited
Partner will still participate in the Merger and will receive Notes for their
Units unless they elect to receive Shares. Limited Partners will not have
appraisal rights or other dissenter's rights by reason of the Merger. For a
discussion of the effect of abstaining from or voting against the Merger, the
rights of Limited Partners who do so, and the effects of exercising dissenters'
rights, see "THE MERGER - Dissenting Partners and Shareholders."
The General Partner is proposing amendments to the Partnership's
Agreement of Limited Partnership to permit the closing of the transactions
contemplated by the Merger Agreement. Limited Partners voting in favor of the
Merger will be deemed to have voted in favor of each of these proposed
amendments. A majority vote of Limited Partners is required to approve the
proposed amendments and to approve the Merger Agreement. The proposed amendments
authorize the following: (i) the Merger of the Partnership with and into AmREIT,
whether or not AmREIT would be regarded as an Affiliate of the general partners;
and (ii) such other actions as may be necessary under or contemplated by the
Merger Agreement or the Prospectus, irrespective of any provision in the
Partnership Agreement which might otherwise prohibit such actions. See "THE
MERGER -- Proposed Amendments to Partnership Agreements." The General Partner
owns no Units of the Partnership. The general partners of the Partnership have
agreed to waive any right to receive Shares to which they may otherwise have
been entitled except with respect to their capital interests as general
partners.
The General Partner reasonably believes that the terms of the Merger,
including the consideration to be received by the Limited Partners in the
Merger, are fair to and in the best interests of the Limited Partners.
THE GENERAL PARTNER STRONGLY RECOMMENDS THAT ALL LIMITED PARTNERS
VOTE "YES" IN FAVOR OF THE MERGER. THE GENERAL PARTNER REQUESTS THAT EACH
LIMITED PARTNER COMPLETE, SIGN AND RETURN THE ENCLOSED CONSENT AS SOON AS
POSSIBLE.
ALLOCATION OF CONSIDERATION
In the Merger, the Limited Partners will receive Shares (or Notes)
based upon the Net Asset Value ("NAV") of the Partnership. The Partnership's NAV
equals the Negotiated Price of its properties plus its Net Cash. The
Partnership's Net Cash equals the excess, if any, of its cash and accounts
receivable over its debt at the Effective Date. The Negotiated Price of each
property of the Partnership was determined and agreed to by Mr. H. Kerr Taylor,
the General Partner, on behalf of the Partnership in negotiations with the two
directors of AmREIT who are not affiliated with Mr. Taylor (the "Independent
Directors").
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<PAGE>
The number of Shares issuable in the Merger to the Partnership equals
the Partnership's NAV divided by the Exchange Price of $9.34. The Exchange Price
was negotiated and agreed to by the General Partner and the Independent
Directors based on the last public offering price of the Shares, $10.25, net of
certain costs of that offering. However, the Shares are not publically traded
and will not been listed for trading after the Merger. Limited Partners should
refer to the discussion in the Prospectus under the heading "THE MERGER--The
Merger Consideration."
Calculated as if the Effective Date were June 30, 1998, AmREIT is
offering 3,080.73 Shares or, subject to the Note Restriction, a Note in the
principal amount of $28,774.00, in consideration for each Unit of the
Partnership. The following table sets forth the methodology utilized in
determining the number of Shares and Notes being offered by AmREIT for each
Unit:
Net Asset Value of Partnership Properties:
Value of Properties:(1)
Pizza Inn (Clute, TX) (50%)(1) $130,163
Whataburger (Clute, TX (50%) 142,000
La Petite Academy (Houston, TX) (2.74%) 12,837
------
Negotiated Price $285,000
Net Cash(2) $2,740
Other Assets ---
Other Liabilities ---
-----------
Net Asset Value of Partnership(3) $287,740
-------
Percentage of Aggregate Net Asset Value of All Partnerships 1.02%
Net Asset Value Per Original Investment of $1,000(4) $959.13
------
Allocation of Shares Received in Merger:
Number of Shares Allocable to Partnership 30,807
Percentage of Total Shares to be Issued in the Merger 1.02%
Percentage of Total Shares of AmREIT After the Merger 0.54%
Allocation of Shares to Limited Partners 30,807
Allocation of Shares to General Partners(5) ---
Allocation of Shares Per Unit 3,080.73
Allocation of Shares Per Original Investment of $1,000(4) 102.69
Maximum Total Shares in AmREIT After the Merger(6) 5,742,873
---------
Notes Offered in Merger:
Maximum Principal Amount Offered to Partnership $100,709
Principal Amount of Note Offered Per Unit $28,774.00
Principal Amount of Note Offered per Original Investment of
$1,000(4) $959.13
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Return to Limited Partners Per $1,000 of Adjusted Capital From
Shares(7)
Return From Merger per $1,000 of Adjusted Capital Based on $976.27
Exchange Price(8)
Total Return from Merger based on Exchange Price plus Cumulative $1,806.10
Distributions through 6/30/1998 per $1,000 of Adjusted Capital(7)
Total Return from Merger based on Exchange Price plus Cumulative 180.61%
Distributions through 6/30/1998 as a Percentage of Adjusted
Capital
Return From Merger per $1,000 of Adjusted Capital Based on $10.25 $1,071.39
per Share Price(9)
(1) Percentage of property owned by Partnership shown in parentheses.
(2) Net Cash is the excess, if any, of the Partnership's cash and accounts
receivable over its debt.
(3) Net Asset Value equals Negotiated Price of property plus Net Cash.
(4) "Per Original Investment of $1,000" is computed by dividing the Limited
Partners' allocable share of such amount by the Limited Partners'
original capital of the Partnership (the Partnership's "Original
Capital") and multiplying the result by 1,000.
(5) The general partners of the Partnership have agreed to waive any right
to receive Shares to which they may otherwise have been entitled in the
Merger other than with respect to the payment to Mr. Taylor of the
disposition fee in the amount of $8,550 (3.0% of the Negotiated Price
of each property). Mr. Taylor has agreed to purchase 915 shares at the
Exchange Price with this disposition fee. The general partners will not
be receiving any other compensation or reimbursement for claims against
or interests in the Partnership.
(6) Calculated as if effective date were June 30, 1998. Assumes 100%
participation of the Partnerships and that no Notes are issued.
Includes portion of Share Balance from Adviser Acquisition issuable to
Mr. Taylor upon consummation of Merger.
(7) Adjusted Capital equals a Limited Partner's original invested capital
less cumulative distributions constituting a return of capital under
the Partnership Agreement.
(8) Shares valued at $9.34 per Share.
(9) $10.25 is the most recent public offering price of the Shares.
CONSIDERATIONS UNIQUE TO THE PARTNERSHIPS
Due to the substantial similarities among the Partnerships, such as
their similar investment portfolios and property locations, common investment
objectives and policies, similar financial condition, the fact that the
Partnerships' assets are managed by AmREIT or its Affiliates and substantial
similarities in the language and scope of their Partnership Agreements, many of
the consequences of participating in the Merger are common to the Limited
Partners of each of the Partnerships. The purpose of this section is, however,
to highlight features of the Partnership which may distinguish the situation of
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the Partnership from that of the other Partnerships and which should be taken
into account by the Limited Partners when evaluating the merits and risks of the
proposed Merger.
Special Considerations Regarding Partnership Properties. Unless the
Limited Partners approve the Merger, the General Partner will continue the
Partnership in accordance with its current investment strategies and objectives
described below. At the time of the Partnership's formation, the General Partner
anticipated the liquidation of its portfolio and distribution of the net
proceeds from the sale of the properties to the Limited Partners within 8 to 12
years after the acquisition of the properties. Based on the completion of the
acquisition of the Partnership's portfolio in 1987, it was anticipated that
liquidation of the portfolio would begin by 1999. However, the Partnership's
ability to achieve its goals will be influenced by the following factors. See
"THE PARTNERSHIPS--Properties" in the Prospectus for additional information
regarding the Partnership's portfolio.
Expiration of Leases. When the leases on the Partnership's
properties all expire, the tenants may elect not to renew their leases or to
renew their leases only if the Partnership makes significant improvements to the
property. Should tenants fail to renew their leases, the Partnership would be
required to find new tenants and would likely incur significant additional
expense by reason of temporary vacancy and/or significant rehabilitation and/or
tenant improvement costs.
Concentration of Investment. The Partnership has concentrated
its investments in 3 properties. If a vacancy or other interruption of rents
occur in one or more of these properties, the distributions of the Partnership
may be significantly reduced. The Partnership has also concentrated its
investments in a limited geographic area. If conditions in this area
deteriorate, the Partnership may experience more difficulty in re-leasing its
properties than it would experience if the properties were more geographically
diversified.
Co-ownership of Property. The Partnership owns each of its 3
properties in co-ownership with Fund VII and/or V. The Partnership, as a
practical matter, is dependent upon the consent and cooperation of the majority
co-owner to sell or re-lease the property. Therefore, there is no assurance that
the co-owner will agree to the sale or re-lease of the property at such time or
under the terms the Partnership may desire.
Possible Need for Additional Capital. The Limited Partners may
be required to contribute additional capital and/or approve Partnership
borrowings in order to finance future lease renewal or releasing costs as
described above. Moreover, without an economically desirable lease in place, the
Partnership could not expect to realize an attractive price for the sale of its
properties.
Merger is a Taxable Event. Limited Partners will realize a gain on the
Merger in an amount equal to their allocable share of the excess of the sum of
the fair market value of the Shares received by the Partnership over the
Partnership's adjusted tax basis of the Partnership assets. In general, Limited
Partners can expect to pay tax on this gain at long term capital gains rates.
Approximately 52% of the gain will be taxable at the 20% rate and 48% will be
taxable at the 25% rate. Assuming that the value of the Shares reflects the
Net Asset Values of the assets acquired in the Merger, if the Partnership
participates in the Merger, each of its Limited Partners would have recognized
taxable gain of approximately 28% (as of June 30, 1998) for every Unit held,
representing an original investment of $30,000. Those Limited Partners who have
owned their Units since the inception of the Partnership can expect to recognize
a taxable gain of approximately $1,890 per Unit as a result of the Merger. The
actual amount of gain recognized by each Limited Partner will depend upon the
value ascribed to the Shares for federal tax purposes. Because the Shares will
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<PAGE>
not be publically traded immediately after the Merger, and the 1998 operating
results have not been included, it is possible that the value of the Shares used
for purposes of calculating the taxable income (or loss) and the taxable income
(or loss) per Unit will differ from the calculation stated above.
The Partnership's federal income tax returns are subject to review and possible
adjustment by the Internal Revenue Service. Under federal income tax laws,
regulations and administrative rulings, certain types of transactions may be
accorded varying interpretations. Accordingly, the Partnership's financial
statements, as well as the individual tax returns of the partners, may be
changed to cause them to conform to the tax treatment resulting from such
review, if any.
Investment Strategy. Each of the properties is currently fully leased
to a single tenant, however, as described above, these leases expire at varying
times in the future. The Partnership is not authorized to raise additional
capital or borrow funds. The Partnership has a history of making regular
quarterly distributions to its Limited Partners. See "Miscellaneous --
Distributions to Limited Partners" below in this Supplement. The Partnership's
strategy is to continue to hold its properties with a view towards liquidating
them at such times as the General Partner deems beneficial and appropriate in a
manner consistent with the Partnership's investment objectives. The principal
investment objectives of the Partnership are to (i) preserve and protect the
Limited Partners' capital; (ii) provide the Limited Partners with quarterly cash
distributions from operations; (iii) obtain long-term appreciation in the value
of its properties; and (iv) provide increased cash distributions to the Limited
Partners as the cash flow from its investments increases over the life of the
Partnership. The Partnership acquired each of its properties for cash and
without the use of borrowed funds (leverage).
Management Compensation. The Partnership has no employees but its
operations are managed by AmREIT. Under the Omnibus Services Agreement, pursuant
to which AmREIT manages the operations of the Partnership, AmREIT is entitled to
annual property management fees equal to 3% of gross rental revenues. Also, the
Omnibus Services Agreement provides for payment of reimbursement fees of up to
6% of the Partnership's gross rental revenues. This relationship will terminate
after the Merger if the Partnership merges into AmREIT. If the Partnership
participates in the Merger, neither AmREIT nor the General Partner or any of
their Affiliates will receive any compensation for services rendered in
connection with the Merger.
Offers From Third Parties. No offers on the Partnership's properties
have been received during the past twelve months by the General Partner from
unaffiliated third parties. See "THE MERGER-Acquisition Proposals" in the
Prospectus.
FAIRNESS OF THE MERGER
Based upon his analysis of the Merger, the General Partner reasonably
believes that:
(1) The terms of the Merger, when considered as a whole, are fair
to the Limited Partners;
(2) The Shares offered in exchange for the Units constitute fair
consideration for the Units of the Limited Partners; and
(3) After comparing the potential benefits and detriments of the Merger
with those of several alternatives, the Merger is more attractive to the Limited
Partners than such alternatives.
THE GENERAL PARTNER REASONABLY BELIEVES THAT THE TERMS OF THE MERGER
AGREEMENT, INCLUDING THE CONSIDERATION TO BE RECEIVED BY THE LIMITED PARTNERS IN
CONNECTION WITH THE MERGER, ARE FAIR TO AND IN THE BEST INTERESTS OF THE LIMITED
PARTNERS. ACCORDINGLY, THE GENERAL PARTNER HAS APPROVED THE MERGER AGREEMENT AND
RECOMMENDS THAT THE LIMITED PARTNERS VOTE FOR APPROVAL OF THE MERGER AGREEMENT
OF THE PARTNERSHIP AGREEMENT.
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<PAGE>
The General Partner's determination is based upon the transaction as a
whole, as well as the combination of less than all Partnerships, because the
Partnership's value for the purposes of the Merger is its Net Asset Value. The
General Partner believes that Net Asset Value is a reasonable estimate of the
value of each Partnership for the Merger as it is directly derived from the
value of the Partnership's net assets at the Effective Date, independent of the
valuations of the assets of the other Partnerships. The General Partner also
believes the Exchange Price, the value on which Shares will be issued to the
Partnership in the Merger, is a reasonable estimate of the value of the Shares
based on the last public offering price of the Shares and within the overall
context of the Merger. See "THE MERGER - The General Partner's Reasons and
Recommendations for the Merger. For a full discussion of the General Partner's
reasons for the Merger, see "THE MERGER -- The General Partner's Reasons for the
Merger and Recommendation to the Limited Partners" in the Prospectus.
Fairness Opinion. The General Partners, on behalf of the Partnership,
retained Houlihan to render an opinion as to whether the consideration to be
received by the Limited Partners in connection with the Merger was fair, from a
financial point of view, to its Limited Partners. Houlihan was not requested to,
and did not make, any recommendation to the Partnerships as to the consideration
to be received by the Limited Partners in connection with the Merger, which
consideration was determined through negotiations between the common management
of the Partnerships and AmREIT. The General Partner retained Houlihan to render
its fairness opinion based upon Houlihan's experience in the valuation of
businesses and their securities in connection with mergers and acquisitions, and
valuations for corporate purposes especially with respect to REITs and other
real estate companies. Houlihan delivered its written opinion, dated June 1,
1998, to the General Partner, to the effect that, as of the date of such
opinion, based on Houlihan's review and subject to the limitations described in
the Prospectus, the consideration to be received by the Limited Partners, in
connection with the Merger is fair, from a financial point of view, to the
Limited Partners. The Houlihan Fairness Opinion does not constitute a
recommendation to any Limited Partner as to how any such Limited Partner should
vote on the Merger. See "FAIRNESS OPINION--The Houlihan Fairness Opinion."
Comparison of Benefits and Detriments. The General Partner's assessment
of the fairness of the proposed Merger was based on the review of different
alternatives that were available. The evaluations of the different alternatives
included, but were not limited to, a strategic combination with a publicly
traded REIT to take advantage of the growth of the REIT industry and real estate
markets in general, completely liquidating the Partnership, continuing the
Partnership or reorganizing the Partnership into a REIT. In order to determine
whether the Merger or one of its alternatives would be more attractive to the
Limited Partners, the General Partner compared the potential benefits and
detriments of the Merger with the potential benefits and detriments of the
alternatives. A detailed discussion of the potential benefits and detriments of
each of these alternatives is provided in "THE MERGER -- The General Partners'
Reasons and Recommendation for the Merger" and "-- Alternatives to the Merger"
in the Prospectus.
In the event the Merger is not consummated for any reason, the
Partnership will continue to pursue its business objectives of maximizing the
value of its properties, in addition to the possible liquidation of its
portfolio, another strategic combination or another attractive alternative that
may become available.
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<PAGE>
COMPARATIVE COMPENSATION, FEES AND DISTRIBUTIONS
COMPENSATION PAID TO THE GENERAL PARTNER AND HIS AFFILIATES
This section is intended to provide Limited Partners with a brief
comparison of the compensation, fees and distributions paid to the General
Partner and his Affiliates under the Partnership's current arrangements with
those that would have been paid had the Merger been in place. The following
table sets forth the compensation, fees and distributions by the Partnership to
the General Partner and his Affiliates during the two most recent fiscal years
and the six-month period ended June 30, 1998 and compares those payments against
the amount that would have been paid assuming the Merger had occurred January 1,
1996.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
Six Months Ended
1996 1997 June 30, 1998
---- ---- -------------
Actual Pro Forma Actual Pro Forma Actual Pro Forma
<S> <C> <C> <C> <C> <C> <C>
Administrative Reimb.(1) $504 $1,647 $504 $1,622 $252 $848
Cash Distributions(2) 360 --- 360 --- 180 ---
General Partner Salary(3) --- 134 --- 161 --- 80
(1) An AmREIT subsidiary receives administrative reimbursements of up to 6%
of gross rental revenues from the properties. No other fees, salaries
or other compensation were paid by the Partnership to its general
partner or its affiliates during these periods.
(2) Includes all cash distributions made to Mr. Taylor and his affiliates
resulting from ownership of Units and general partner interests. Mr.
Taylor's employment agreement with AmREIT provides for a fixed base
salary of $25,000 and $30,000 per annum for 1998 and 1999 respectively,
which amounts will not increase as a result of the Merger.
(3) Mr. Taylor's salary represents the total salary and benefits Mr. Taylor
is currently entitled to receive as an officer and director of AmREIT
allocated to the Partnership based on the percentage of shares of
AmREIT to be owned by the Limited Partners immediately after the
Merger. No other affiliate of the general partners of the Partnership
will receive compensation from AmREIT upon completion of the Merger.
</TABLE>
New Compensation
AmREIT will internally manage and lease the properties obtained by
AmREIT from the Partnership pursuant to the Merger. The terms of this engagement
will be substantially similar to the terms governing the management arrangements
that AmREIT typically uses in managing its current properties.
MISCELLANEOUS
Distributions to Limited Partners
Set forth below are distributions per Unit made by the Partnership to
the Limited Partners during the most recent five fiscal years and the most
recently completed interim period. Also see "THE PARTNERSHIPS - Partnership
Distributions" in the Prospectus.
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<PAGE>
<TABLE>
<CAPTION>
Six Months Ended
1993 1994 1995 1996 1997 June 30, 1998
---- ---- ---- ---- ---- -------------
<S> <C> <C> <C> <C> <C> <C>
Distributions $2,328 $2,337 $2,400 $2,400 $2,400 $1,200
Portion of Distribution That Was a --- --- --- --- --- ---
Return of Capital(1)
(1) Distributions treated as a return of capital under the Partnership
Agreement.
- ----------------------
</TABLE>
Financial Information
Rental income statements for the properties of the Partnership for the
years ended December 31, 1997 and 1996 and certain pro forma financial
statements with respect to the Partnership are set forth in "The Unaudited Pro
Forma Financial Information" and "INDEX TO FINANCIAL INFORMATION" in the
Prospectus.
List of Investors
Under the Partnership Agreement and Texas state law, a Limited Partner
may obtain a list of the names, addresses and number of Units owned by the other
Limited Partners entitled to so vote on the Merger by making written request
therefor from the General Partner, c/o Timothy W. Kelley, AmREIT, Inc., Eight
Greenway Plaza, Suite 824, Houston, Texas 77046. At the time of making the
request, the requesting Limited Partner must submit a payment of $10.00 in
payment for the costs of copying and mailing the list and, if the Units are held
through a nominee, provide the Partnership with a statement from the nominee or
other independent third party confirming such Limited Partner's beneficial
ownership. A Limited Partner is only entitled to the foregoing information with
respect to the Partnership in which the Limited Partner holds Units. See
"CONSENT PROCEDURES" in the Prospectus.
End of Partnership Supplement for Taylor Income Investors VI, Ltd.
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<PAGE>
AMREIT, INC.
SUPPLEMENT TO
JOINT CONSENT SOLICITATION STATEMENT AND PROSPECTUS
FOR
AAA NET REALTY FUND VII, LTD.
A TEXAS LIMITED PARTNERSHIP
Mr. H. Kerr Taylor (the "General Partner") is soliciting the approval
of the Limited Partners of AAA Net Realty Fund VII, Ltd., a Texas Limited
Partnership (the "Partnership"), for the Merger of the Partnership with and into
AmREIT, Inc., a Maryland Corporation ("AmREIT"). As part of the Merger, the
Limited Partners will exchange Units of Limited Partnership Interests ("Units")
in the Partnership for shares of common stock of AmREIT (the "Shares") or,
subject to the Note restriction, 6.0% Notes of AmREIT due December 31, 2004 (the
"Notes"). The Merger, if it is approved, will involve up to ten limited
partnerships, including the Partnership. This solicitation is being made on
behalf of the general partners of the Partnership. The proposal is described in
detail in the Joint Consent Solicitation Statement and Prospectus dated , 1998
(the "Prospectus"). For the definition of capitalized terms used in the
Supplement, which are not separately defined herein, see "GLOSSARY" in the
Prospectus. Cross-references in this Supplement also refer to the cited
discussions in the Prospectus, unless specifically noted to the contrary.
The effects of the Merger may be different for Limited Partners in each
of the Partnerships participating in the Merger (the "Partnerships"). This
Supplement has been prepared to highlight the risks, effects and fairness of the
Merger for the Limited Partners of the Partnership. This Supplement is not
intended to repeat or duplicate the Prospectus and the Prospectus must be
referred to in reading this Supplement. Moreover, this Supplement does not
purport to provide an overall summary of the Merger or to highlight all of its
material terms, conditions, risks or effects. See "SUMMARY" and "THE MERGER" in
the Prospectus. To the extent this Supplement summarizes portions of the
Prospectus, such discussions are qualified in their entirety by the more
detailed discussions of those matters appearing in the Prospectus. Supplements
have also been prepared for each of the other Partnerships and copies of such
Supplements will be provided promptly without charge to each Limited Partner or
his representative who has been so designated in writing upon written request to
Timothy W. Kelley, Vice President at AmREIT, Inc., Eight Greenway Plaza, Suite
824, Houston, Texas 77046. Telephone (800) 888-4400, extension 26 or fax to
(713) 850-0498.
RISK FACTORS
The Merger involves material risks to the Limited Partners,
the more significant of which are:
o The distributions on the securities received by
Limited Partners for their Units in the Merger
will, at least initially, be lower as a percentage
of their investment as compared to distributions
currently received on their Units.
o The General Partner did not retain an unaffiliated
person to represent the Limited Partners in
negotiating the terms of the Merger.
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<PAGE>
o The Negotiated Prices for the Partnership
properties were determined by the General Partner,
who has substantial conflicts of interest in the
Merger due to his financial interest in AmREIT and
the prospects of receiving substantial financial
benefits if the Merger is consummated.
o The Negotiated Prices of the properties are not
based on appraisals from independent real estate
appraisers.
o The Merger will be a taxable transaction to the
Limited Partners.
o There is no assurance that the value of the
consideration received in the Merger by the Limited
Partners for their Units will not be less than the
fair value of their Units as might result from
negotiations between unrelated parties.
o No public market exists for the Shares or the
Notes. Upon completion of the Merger, it is
uncertain if and when a public market will develop
for the Shares and no public market is expected to
develop for the Notes.
o If and when a public market for the Shares
develops, there is no assurance that the Shares
will not trade at prices that are less than the
Exchange Price.
o There is no assurance that the Exchange Price,
which was determined by the General Partner and the
Independent Directors of AmREIT, reflects the fair
value of the Shares which might result from
negotiations between unrelated parties.
o The Appraised Value, upon which payment under the
ALV Payment Election will be determined, will not
be determined or known until after the Merger is
consummated.
o Limited Partners receiving Shares in the Merger
will realize a substantial change in the form of
their investment from a finite life Partnership,
which cannot leverage its investments, to an
infinite life REIT which can leverage its
investments.
o The anticipated benefits to Limited Partners as a
result of the Merger may not be realized.
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<PAGE>
POTENTIAL BENEFITS TO LIMITED PARTNERS
The General Partner believes the Merger is fair to and in the best
interests of the Limited Partners for a number of reasons, including:
o The General Partner believes that the terms of the Merger
Agreement, including the Exchange Price and the Partnership's
Net Asset Value are favorable to the Limited Partners.
o The General Partner believes that the Negotiated Price for
each of the Partnership's Properties is in the highest range
of values for the property in the current real estate market
and that such value would likely exceed the price at which the
property would sell for in the market. The General Partner
believes that the Partnership would thus therefor realize
significantly less value for its Properties than their
Negotiated Prices if the Partnership was liquidated in the
current real estate market.
o By merging into AmREIT, the Limited Partners will be relieved
of uncertainties regarding the Partnership's real estate
investments, including the expiration of its leases on its
properties within the next 5 years, the possible difficulties
in releasing the properties and/or the possible substantial
costs of releasing these properties. As a result of the
Merger, these risks would be spread over and more economically
absorbed by AmREIT's larger and more diversified portfolio.
o The special purpose nature of the Partnership's properties,
which makes them suitable for limited types of tenants and
uses and increases the risks of releasing the properties. As a
result of the Merger, these risks would be spread over and
more economically absorbed by AmREIT's larger and more
diversified portfolio.
o Co-ownership of each of its properties in joint venture with
one or more other persons which, as a practical matter, allows
the sale of the property only with the consent of its
co-owner. In the Merger, the property is valued at an amount
pro rata to the Negotiated Price of the entire property
without reduction for less than 100% ownership.
o By combining the Partnership with AmREIT, the Merger will
create an investment portfolio substantially larger and more
geographically diversified than the portfolio of the
Partnership. The Merger will consolidate operations and spread
the risk of an investment in AmREIT over a broader group of
assets and reduce the dependence of the investment upon the
performance of any particular asset or group of assets, such
as assets in the same geographical area.
o The allocations of Merger Expenses under which the Partnership
is required to pay only its proportionate share of the
Partnership Merger Expenses based on its relative Net Asset
Value. Also, if the Limited Partners do not elect to
participate in the Merger, the General Partner will pay or
reimburse the Partnership its Proportionate Share of the
Partnership Merger Expenses.
o As a result of the Merger, the Partnership will no longer
incur the expense for the preparation of separate financial
statements, required annual and quarterly filings, tax returns
and investor communications. The accurate preparation of these
statements and reports requires substantial cost and
management time and effort.
o The General Partner believes the Merger will provide the
combined AmREIT-Partnership entity improved future access to
capital markets for future growth and that Limited Partners,
as AmREIT shareholders, will have enhanced liquidity as a
result of the larger total equity market capitalization of
AmREIT.
o The General Partner received the Houlihan Fairness Opinion
that the Merger is fair, from a financial point of view, to
the Limited Partners.
o The Partnership's strategic combination with a publicly held
REIT which takes advantage of the growth in the REIT industry
and real estate markets is preferable to the alternatives of
complete liquidation of the Partnership, continuation of the
Partnership or reorganization of the Partnership into one
separate REIT.
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<PAGE>
These possible benefits of the Merger to the Limited Partners are
discussed in greater detail in the Prospectus. Limited Partners should refer to
the discussions in the Prospectus under the heading "THE MERGER--The General
Partners Reasons and Recommendations for the Merger."
RISK FACTORS AND POTENTIAL ADVERSE CONSEQUENCES
Limited Partners participating in the Merger will be subject to various
risks and possible adverse consequences which they should take into account in
deciding how they will vote on the Merger. The most significant of these
material risks are:
The Merger involves the following risks for the Limited Partners:
o The General Partner did not retain an unaffiliated
representative to represent the Limited Partners or the
Partnership, or to represent all of the Partnerships as a
Group, in the Merger. Had independent representation been
arranged for a Partnership, the terms of the Merger might have
been more favorable to such Partnership.
o The Negotiated Prices of the Partnership's Properties were
determined by the General Partner who is also the Chief
Executive Officer and largest shareholder of AmREIT. The NAV
of each Partnership should be considered as having been
negotiated by the common management of the Partnerships and
AmREIT.
o The Negotiated Price of the Partnership's Properties is not
based on an independent appraisal.
o The conflicts of interest of the General Partner who will
receive significant financial and other benefits from and/or
as a result of the Merger.
o The possibility that the Partnership's Net Asset Values may
not reflect the actual value of its net assets.
o The fixed Exchange Price which means the Limited Partners will
not receive more Shares (or a Note in a greater principal
amount) if the value of the Shares decreases as of the
Effective Date.
o AmREIT's Shares are not publically traded, a market for the
Shares is not expected to exist immediately upon completion of
this Merger, and there is no assurance that a market for the
Shares will develop in the future. Unless and until there is a
public market for the Shares, shareholders will have
difficulty in liquidating their investment.
o If and when a market for the Shares develops, the Shares may
trade at prices substantially below the Exchange Price.
o The Merger will be a taxable transaction for the Limited
Partners.
o A majority vote of Limited Partners binds the Partnership.
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<PAGE>
o Limited Partners who vote against the Merger will receive
Notes for their Units in the Merger unless they elect to
receive Shares if the Merger is approved.
o Limited Partners who become shareholders of AmREIT may not
receive the same level of distributions as previously received
from their respective Partnership Units.
o Because it is not known how many Partnerships will participate
in the Merger, there are uncertainties as to the capital
structure and size of AmREIT following consummation of the
Merger as they will vary depending on the number which elect
to participate in the Merger.
o As a result of the Merger, the nature of each Limited
Partner's investment will change from holding an interest in a
specified portfolio of properties in a finite life entity to
holding an equity investment in an ongoing REIT, whose
portfolio of properties may be changed from time to time
without the approval of its shareholders and which does not
plan to liquidate such assets within a fixed period.
o If it participates in the Merger, the Partnership will bear
these costs of the Merger in proportion to its relative NAV.
Should the Partnership not participate in the Merger, the
General Partner will pay or reimburse the Partnership for its
portion of these costs. The costs of the Merger allocated to
the Partnerships are limited to the costs of the Houlihan
Fairness Opinions, the Partnership accounting costs (and other
valuation or appraisal costs, if any), which are estimated to
total $150,000, and any direct partner communication costs.
o The anticipated benefits of the Merger may not be realized.
o The anticipated benefits of AmREIT's change to self-management
through the recently completed Adviser Acquisition may not be
fully realized.
o The proceeds of future asset sales or refinancings by AmREIT
will generally be reinvested rather than distributed to
shareholders to the extent not required to be distributed to
maintain REIT status.
o AmREIT's Board of Directors has the power to change the
investment, acquisition and financing policies of AmREIT
(including policies regarding the level of indebtedness)
without a vote of the shareholders, which could result in
policies which do not reflect the interests of all
shareholders.
o Following the consummation of the Merger, AmREIT intends to
borrow additional funds (equal to or exceeding 50% of the
value of the properties acquired in the Merger) to acquire
additional, as yet unidentified, real estate.
These risks and possible adverse consequences of the Merger to the
Limited Partners are discussed in greater detail in the Prospectus. Limited
Partners should refer to the discussion of the risks in participating in the
Merger set forth in the Prospectus under the sections "RISK FACTORS," "CONFLICTS
OF INTEREST," "MATERIAL FEDERAL INCOME TAX ASPECTS" and "COMPARISON OF UNITS,
SHARES AND NOTES."
-5-
<PAGE>
THE MERGER
The purpose of the Merger is to strategically unite AmREIT with one or
more of the Partnerships, each of which has compatible properties in AmREIT's
existing and new markets, and to give the Limited Partners the ability to
participate in a strategic business combination with a publicly held REIT in
order to take advantage of the growth in the REIT industry and real estate
markets in general, with the prospect of being able to liquidate their
investment through the sale of the publicly-traded Shares or retain their
investment indefinitely.
If the Merger is approved, the Partnership will cease to exist and all
of its properties will be transferred to AmREIT. Any Limited Partner may abstain
from or vote against the Merger and, if the Merger is approved, the Limited
Partner will still participate in the Merger and will receive Notes for their
Units unless they elect to receive Shares. Limited Partners will not have
appraisal rights or other dissenter's rights by reason of the Merger. For a
discussion of the effect of abstaining from or voting against the Merger, the
rights of Limited Partners who do so, and the effects of exercising dissenters'
rights, see "THE MERGER - Dissenting Partners and Shareholders."
The General Partner is proposing amendments to the Partnership's
Agreement of Limited Partnership to permit the closing of the transactions
contemplated by the Merger Agreement. Limited Partners voting in favor of the
Merger will be deemed to have voted in favor of each of these proposed
amendments. A majority vote of Limited Partners is required to approve the
proposed amendments and to approve the Merger Agreement. The proposed amendments
authorize the following: (i) the Merger of the Partnership with and into AmREIT,
whether or not AmREIT would be regarded as an Affiliate of the general partners;
and (ii) such other actions as may be necessary under or contemplated by the
Merger Agreement or the Prospectus, irrespective of any provision in the
Partnership Agreement which might otherwise prohibit such actions. See "THE
MERGER -- Proposed Amendments to Partnership Agreements." The General Partner
owns no Units of the Partnership. The general partners of the Partnership have
agreed to waive any right to receive Shares to which they may otherwise have
been entitled except with respect to their capital interests as general
partners.
The General Partner reasonably believes that the terms of the Merger,
including the consideration to be received by the Limited Partners in the
Merger, are fair to and in the best interests of the Limited Partners.
THE GENERAL PARTNER STRONGLY RECOMMENDS THAT ALL LIMITED PARTNERS
VOTE "YES" IN FAVOR OF THE MERGER. THE GENERAL PARTNER REQUESTS THAT EACH
LIMITED PARTNER COMPLETE, SIGN AND RETURN THE ENCLOSED CONSENT AS SOON AS
POSSIBLE.
ALLOCATION OF CONSIDERATION
In the Merger, the Limited Partners will receive Shares (or Notes)
based upon the Net Asset Value ("NAV") of the Partnership. The Partnership's NAV
equals the Negotiated Price of its properties plus its Net Cash. The
Partnership's Net Cash equals the excess, if any, of its cash and accounts
receivable over its debt at the Effective Date. The Negotiated Price of each
property of the Partnership was determined and agreed to by Mr. H. Kerr Taylor,
the General Partner, on behalf of the Partnership in negotiations with the two
directors of AmREIT who are not affiliated with Mr. Taylor (the "Independent
Directors").
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<PAGE>
The number of Shares issuable in the Merger to the Partnership equals
the Partnership's NAV divided by the Exchange Price of $9.34. The Exchange Price
was negotiated and agreed to by the General Partner and the Independent
Directors based on the last public offering price of the Shares, $10.25, net of
certain costs of that offering. However, the Shares are not publically traded
and will not be listed for trading immediately after the Merger. Limited
Partners should refer to the discussion in the Prospectus under the heading "THE
MERGER--The Merger Consideration."
Calculated as if the Effective Date were June 30, 1998, AmREIT is
offering 2,940.66 Shares or, subject to the Note Restriction, a Note in the
principal amount of $27,468.16, in consideration for each Unit of the
Partnership. The following table sets forth the methodology utilized in
determining the number of Shares and Notes being offered by AmREIT for each
Unit:
Net Asset Value:
Value of Properties:(1)
La Petite Academy (Houston, TX)(91.25%) $530,000
Whataburger (Dallas, TX)(54.88%) 337,000
Super Sound (Houston, TX)(27.28%) 67,000
AFC, Inc./Church's (Houston, TX) (27.28%) 40,000
Gannett/Billboard (Houston, TX)(27.28%) 36,000
------
Negotiated Price $1,010,000
Net Cash(2) $30,461
Other Assets ---
Other Liabilities ---
----------
Net Asset Value of Partnership(3) $1,040,461
---------
Percentage of Aggregate Net Asset Value of All Partnerships 3.70%
Net Asset Value Per Original Investment of $1,000(4) $924.77
------
Allocation of Shares Received in Merger:
Number of Shares Allocable to Partnership 111,398
Percentage of Total Shares to be Issued in the Merger 3.70%
Percentage of Total Shares of AmREIT After the Merger 1.94%
Allocation of Shares to Limited Partners 110,284
Allocation of Shares to General Partners(5) 1,114
Allocation of Shares Per Unit 2,940.66
Allocation of Shares Per Original Investment of $1,000(4) 98.02
Maximum Total Shares in AmREIT After the Merger(6) 5,742,873
---------
Notes Offered in Merger:
Maximum Principal Amount Offered to Partnership $364,161
Principal Amount of Note Offered Per Unit $27,468.16
Principal Amount of Note Offered per Original Investment
of $1,000(4) $915.52
------
-7-
<PAGE>
Return to Limited Partners Per $1,000 of Adjusted Capital From Shares(7)
Return From Merger per $1,000 of Adjusted Capital Based on $915.52
Exchange Price(8)
Total Return from Merger based on Exchange Price plus Cumulative $1,710.90
Distributions per $1,000 of Adjusted Capital(7)
Total Return from Merger based on Exchange Price plus Cumulative 171.09%
Distributions through 6/30/1998 as a Percentage of Adjusted Capital
Return From Merger per $1,000 of Adjusted Capital Based on $10.25 $1,004.72
per Share Price(9)
(1) Percentage of property owned by Partnership shown in parentheses.
(2) Net Cash is the excess, if any, of the Partnership's cash and accounts
receivable over its debt.
(3) Net Asset Value equals Negotiated Price of property plus Net Cash.
(4) "Per Original Investment of $1,000" is computed by dividing the Limited
Partners' allocable share of such amount by the Limited Partners'
original capital of the Partnership (the Partnership's "Original
Capital") and multiplying the result by 1,000.
(5) The general partners of the Partnership have agreed to waive any right
to receive Shares to which they may otherwise have been entitled in the
Merger other than with respect to their unsubordinated 1% interest in
Partnership distributions. The general partners will not be receiving
any other compensation or reimbursement for claims against or interests
in the Partnership.
(6) Calculated as if effective date were June 30, 1998. Assumes 100%
participation of the Partnerships and that no Notes are issued.
Includes portion of Share Balance from Adviser Acquisition issuable to
Mr. Taylor upon consummation of Merger.
(7) Adjusted Capital equals a Limited Partner's original invested capital
less cumulative distributions constituting a return of capital under
the Partnership Agreement.
(8) Shares valued at $9.34 per Share.
(9) $10.25 is the most recent public offering price of the Shares.
CONSIDERATIONS UNIQUE TO THE PARTNERSHIPS
Due to the substantial similarities among the Partnerships, such as
their similar investment portfolios and property locations, common investment
objectives and policies, similar financial condition, the fact that the
Partnerships' assets are managed by AmREIT or its Affiliates and substantial
similarities in the language and scope of their Partnership Agreements, many of
the consequences of participating in the Merger are common to the Limited
Partners of each of the Partnerships. The purpose of this section is, however,
to highlight features of the Partnership which may distinguish the situation of
the Partnership from that of the other Partnerships and which should be taken
into account by the Limited Partners when evaluating the merits and risks of the
proposed Merger.
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<PAGE>
Special Considerations Regarding Partnership Properties. Unless the
Limited Partners approve the Merger, the General Partner will continue the
Partnership in accordance with its current investment strategies and objectives
described below. At the time of the Partnership's formation, the General Partner
anticipated the liquidation of its portfolio and distribution of the net
proceeds from the sale of the properties to the Limited Partners within 8 to 12
years after the acquisition of the properties. Based on the completion of the
acquisition of the Partnership's portfolio in 1987, it was anticipated that
liquidation of the portfolio would begin by 1999. However, the Partnership's
ability to achieve its goals will be influenced by the following factors. See
"THE PARTNERSHIPS--Properties" in the Prospectus for additional information
regarding the Partnership's portfolio.
Expiration of Leases. When the leases on the Partnership's
properties all expire, the tenants may elect not to renew their leases or to
renew their leases only if the Partnership makes significant improvements to the
property. Should tenants fail to renew their leases, the Partnership would be
required to find new tenants and would likely incur significant additional
expense by reason of temporary vacancy and/or significant rehabilitation and/or
tenant improvement costs.
Concentration of Investment. The Partnership has concentrated
its investments in 5 properties. If a vacancy or other interruption of rents
occur in one or more of these properties, the distributions of the Partnership
may be significantly reduced. The Partnership has also concentrated its
investments in a limited geographic area. If conditions in this area
deteriorate, the Partnership may experience more difficulty in re-leasing its
properties than it would experience if the properties were more geographically
diversified.
Co-ownership of Property. The Partnership owns each of its
properties in co-ownership with one or more other Partnerships. The Partnership,
as a practical matter, is dependent upon the consent and cooperation of the
majority co-owner to sell or re-lease the property. Therefore, there is no
assurance that the co-owner will agree to the sale or re-lease of the property
at such time or under the terms the Partnership may desire.
Possible Need for Additional Capital. The Limited Partners may
be required to contribute additional capital and/or approve Partnership
borrowings in order to finance future lease renewal or releasing costs as
described above. Moreover, without an economically desirable lease in place, the
Partnership could not expect to realize an attractive price for the sale of its
properties.
Merger is a Taxable Event. Limited Partners will realize a gain on the
Merger in an amount equal to their allocable share of the excess of the sum of
the fair market value of the Shares received by the Partnership over the
Partnership's adjusted tax basis of the Partnership assets. In general, Limited
Partners can expect to pay tax on this gain at long term capital gains rates.
Approximately 48% of the gain will be taxable at the 20% rate and 52% of the
gain will be taxable at the 25% rate. Assuming that the value of the Shares
reflects the Net Asset Values of the assets acquired in the Merger, if the
Partnership participates in the Merger, each of its Limited Partners would have
recoginzed taxable gain of approximately 16% (as of June 30, 1998) for every
Unit held, representing an original investment of $30,000. Those Limited
Partners who have owned their Units since the inception of the Partnership can
expect to recognize a taxable gain of approximately $1,070 per Unit as a result
of the Merger. The actual amount of gain recognized by each Limited
Partner will depend upon the value ascribed to the Shares for federal tax
purposes. Because the Shares will not be publically traded immediately after the
Merger, and the 1998 operating results have not been included, it is possible
that the value of the Shares used for purposes of calculating the taxable income
(or loss) and the taxable income (or loss) per Unit will differ from the
calculation stated above.
The Partnership's federal income tax returns are subject to review and possible
adjustment by the Internal Revenue Service. Under federal income tax laws,
regulations and administrative rulings, certain types of transactions may be
accorded varying interpretations. Accordingly, the Partnership's financial
statements, as well as the individual tax returns of the partners, may be
changed to cause them to conform to the tax treatment resulting from such
review, if any.
Investment Strategy. Each of the properties is currently fully leased
to a single tenant, however, as described above, these leases expire at varying
times in the future. The Partnership is not authorized to raise additional
capital or borrow funds. The Partnership has a history of making regular
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<PAGE>
quarterly distributions to its Limited Partners. See "Miscellaneous --
Distributions to Limited Partners" below in this Supplement. The
Partnership's strategy is to continue to hold its properties with
a view towards liquidating them at such times as the General Partner
deems beneficial and appropriate in a manner consistent with the
Partnership's investment objectives. The principal investment
objectives of the Partnership are to (i) preserve and protect the
Limited Partners' capital; (ii) provide the Limited Partners with
quarterly cash distributions from operations; (iii) obtain
long-term appreciation in the value of its properties; and
(iv) provide increased cash distributions to the Limited Partners
as the cash flow from its investments increases over the life of the
Partnership. The Partnership acquired each of its properties for
cash and without the use of borrowed funds (leverage).
Management Compensation. The Partnership has no employees but its
operations are managed by AmREIT. Under the Omnibus Services Agreement, pursuant
to which AmREIT manages the operations of the Partnership, AmREIT is entitled to
annual property management fees equal to 3% of gross rental revenues. Also, the
Omnibus Services Agreement provides for payment of reimbursement fees of up to
6% of the Partnership's gross rental revenues. This relationship will terminate
after the Merger if the Partnership merges into AmREIT. If the Partnership
participates in the Merger, neither AmREIT nor the General Partner or any of
their Affiliates will receive any compensation for services rendered in
connection with the Merger.
Offers From Third Parties. No offers on the Partnership's properties
have been received during the past twelve months by the General Partner from
unaffiliated third parties. See "THE MERGER-Acquisition Proposals" in the
Prospectus.
FAIRNESS OF THE MERGER
Based upon his analysis of the Merger, the General Partner reasonably
believes that:
(1) The terms of the Merger, when considered as a whole, are fair
to the Limited Partners;
(2) The Shares offered in exchange for the Units constitute fair
consideration for the Units of the Limited Partners; and
(3) After comparing the potential benefits and detriments of
the Merger with those of several alternatives, the Merger
is more attractive to the Limited Partners than such
alternatives.
THE GENERAL PARTNER REASONABLY BELIEVES THAT THE TERMS OF THE MERGER
AGREEMENT, INCLUDING THE CONSIDERATION TO BE RECEIVED BY THE LIMITED PARTNERS IN
CONNECTION WITH THE MERGER, ARE FAIR TO AND IN THE BEST INTERESTS OF THE LIMITED
PARTNERS. ACCORDINGLY, THE GENERAL PARTNER HAS APPROVED THE MERGER AGREEMENT AND
RECOMMENDS THAT THE LIMITED PARTNERS VOTE FOR APPROVAL OF THE MERGER AGREEMENT
AND AMENDMENT OF THE PARTNERSHIP AGREEMENT.
The General Partner's determination is based upon the transaction as a
whole, as well as the combination of less than all Partnerships, because the
Partnership's value for the purposes of the Merger is its Net Asset Value. The
General Partner believes that Net Asset Value is a reasonable estimate of the
value of each Partnership for the Merger as it is directly derived from the
value of the Partnership's net
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<PAGE>
assets at the Effective Date, independent of the valuations of the assets of the
other Partnerships. The General Partner also believes the Exchange Price, the
value on which Shares will be issued to the Partnership in the Merger, is a
reasonable estimate of the value of the Shares based on the last public offering
price of the Shares and within the overall context of the Merger. See "THE
MERGER - The General Partner's Reasons and Recommendations for the Merger. For a
full discussion of the General Partner's reasons for the Merger, see "THE MERGER
- -- The General Partner's Reasons for the Merger and Recommendation to the
Limited Partners" in the Prospectus.
Fairness Opinion. The General Partners, on behalf of the Partnership,
retained Houlihan to render an opinion as to whether the consideration to be
received by the Limited Partners in connection with the Merger was fair, from a
financial point of view, to its Limited Partners. Houlihan was not requested to,
and did not make, any recommendation to the Partnerships as to the consideration
to be received by the Limited Partners in connection with the Merger, which
consideration was determined through negotiations between the common management
of the Partnerships and AmREIT. The General Partner retained Houlihan to render
its fairness opinion based upon Houlihan's experience in the valuation of
businesses and their securities in connection with mergers and acquisitions, and
valuations for corporate purposes especially with respect to REITs and other
real estate companies. Houlihan delivered its written opinion, dated June 1,
1998, to the General Partner, to the effect that, as of the date of such
opinion, based on Houlihan's review and subject to the limitations described in
the Prospectus, the consideration to be received by the Limited Partners, in
connection with the Merger is fair, from a financial point of view, to the
Limited Partners. The Houlihan Fairness Opinion does not constitute a
recommendation to any Limited Partner as to how any such Limited Partner should
vote on the Merger. See "FAIRNESS OPINION--The Houlihan Fairness Opinion."
Comparison of Benefits and Detriments. The General Partner's assessment
of the fairness of the proposed Merger was based on the review of different
alternatives that were available. The evaluations of the different alternatives
included, but were not limited to, a strategic combination with a publicly
traded REIT to take advantage of the growth of the REIT industry and real estate
markets in general, completely liquidating the Partnership, continuing the
Partnership or reorganizing the Partnership into a REIT. In order to determine
whether the Merger or one of its alternatives would be more attractive to the
Limited Partners, the General Partner compared the potential benefits and
detriments of the Merger with the potential benefits and detriments of the
alternatives. A detailed discussion of the potential benefits and detriments of
each of these alternatives is provided in "THE MERGER -- The General Partners'
Reasons and Recommendation for the Merger" and "-- Alternatives to the Merger"
in the Prospectus.
In the event the Merger is not consummated for any reason, the
Partnership will continue to pursue its business objectives of maximizing the
value of its properties, in addition to the possible liquidation of its
portfolio, another strategic combination or another attractive alternative that
may become available.
COMPARATIVE COMPENSATION, FEES AND DISTRIBUTIONS
COMPENSATION PAID TO THE GENERAL PARTNER AND HIS AFFILIATES
This section is intended to provide Limited Partners with a brief
comparison of the compensation, fees and distributions paid to the General
Partner and his Affiliates under the Partnership's current arrangements with
those that would have been paid had the Merger been in place. The following
table sets forth the compensation, fees and distributions by the Partnership to
the General Partner and his Affiliates during the two most recent fiscal years
and the six-month period ended June 30, 1998 and compares those
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<PAGE>
payments against the amount that would have been paid assuming the Merger had
occurred January 1, 1996.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
Nine Months Ended
1996 1997 September 30, 1998
---- ---- ------------------
Actual Pro Forma Actual Pro Forma Actual Pro Forma
<S> <C> <C> <C> <C> <C> <C>
Administrative Reimb.(1) $5,400 $6,231 $5,400 $6,291 $2,700 $3,172
Cash Distributions(2) 900 719 900 734 450 367
General Partner Salary(3) --- 485 --- 582 --- 291
(1) An AmREIT subsidiary receives administrative reimbursements of up to 6%
of gross rental revenues from the properties. No other fees, salaries
or other compensation were paid by the Partnership to its general
partner or its affiliates during these periods.
(2) Includes all cash distributions made to Mr. Taylor and his affiliates
resulting from ownership of Units and general partner interests. Mr.
Taylor's employment agreement with AmREIT provides for a fixed base
salary of $25,000 and $30,000 per annum for 1998 and 1999 respectively,
which amounts will not increase as a result of the Merger.
(3) Mr. Taylor's salary represents the total salary and benefits Mr. Taylor
is currently entitled to receive as an officer and director of AmREIT
allocated to the Partnership based on the percentage of shares of
AmREIT to be owned by the Limited Partners immediately after the
Merger. No other affiliate of the general partners of the Partnership
will receive compensation from AmREIT upon completion of the Merger.
</TABLE>
New Compensation
AmREIT will internally manage and lease the properties obtained by
AmREIT from the Partnership pursuant to the Merger. The terms of this engagement
will be substantially similar to the terms governing the management arrangements
that AmREIT typically uses in managing its current properties.
MISCELLANEOUS
Distributions to Limited Partners
Set forth below are distributions per Unit made by the Partnership to
the Limited Partners during the most recent five fiscal years and the most
recently completed interim period. Also see "THE PARTNERSHIPS - Partnership
Distributions" in the Prospectus.
<TABLE>
<CAPTION>
Six Months Ended
1993 1994 1995 1996 1997 June 30, 1998
---- ---- ---- ---- ---- -------------
<S> <C> <C> <C> <C> <C> <C>
Distributions $2,490 $2,475 $2,486 $2,490 $2,490 $1,245
Portion of Distribution That
Was a Return of Capital (1) --- --- --- --- --- ---
(1) Distributions treated as a return of capital under the Partnership
Agreement.
- ----------------------
</TABLE>
Financial Information
Rental income statements for the properties of the Partnership for the
years ended December 31, 1997 and 1996 and certain pro forma financial
statements with respect to the Partnership are set forth in "The Unaudited Pro
Forma Financial Information" and "INDEX TO FINANCIAL INFORMATION" in the
Prospectus.
List of Investors
Under the Partnership Agreement and Texas state law, a Limited Partner
may obtain a list of the names, addresses and number of Units owned by the other
Limited Partners entitled to so vote on the Merger by making written request
therefor from the General Partner, c/o Timothy W. Kelley, AmREIT, Inc., Eight
Greenway Plaza, Suite 824, Houston, Texas 77046. At the time of making the
request, the requesting Limited Partner must submit a payment of $10.00 in
payment for the costs of copying and mailing the list and, if the Units are held
through a nominee, provide the Partnership with a statement from the nominee or
other independent third party confirming such Limited Partner's beneficial
ownership. A Limited Partner is only entitled to the foregoing information with
respect to the Partnership in which the Limited Partner holds Units. See
"CONSENT PROCEDURES" in the Prospectus.
End of Partnership Supplement for AAA Net Realty Fund VII, Ltd.
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<PAGE>
AMREIT, INC.
SUPPLEMENT TO
JOINT CONSENT SOLICITATION STATEMENT AND PROSPECTUS
FOR
AAA NET REALTY FUND VIII, LTD.
A TEXAS LIMITED PARTNERSHIP
Mr. H. Kerr Taylor (the "General Partner") is soliciting the approval
of the Limited Partners of AAA Net Realty Fund VIII, Ltd., a Texas Limited
Partnership (the "Partnership"), for the Merger of the Partnership with and into
AmREIT, Inc., a Maryland Corporation ("AmREIT"). As part of the Merger, the
Limited Partners will exchange Units of Limited Partnership interests ("Units")
in the Partnership for shares of common stock of AmREIT (the "Shares") or,
subject to the Note restriction, 6.0% Notes of AmREIT due December 31, 2004 (the
"Notes"). The Merger, if it is approved, will involve up to ten limited
partnerships, including the Partnership. This solicitation is being made on
behalf of the general partners of the Partnership. The proposal is described in
detail in the Joint Consent Solicitation Statement and Prospectus dated , 1998
(the "Prospectus"). For the definition of capitalized terms used in the
Supplement, which are not separately defined herein, see "GLOSSARY" in the
Prospectus. Cross-references in this Supplement also refer to the cited
discussions in the Prospectus, unless specifically noted to the contrary.
The effects of the Merger may be different for Limited Partners in each
of the Partnerships participating in the Merger (the "Partnerships"). This
Supplement has been prepared to highlight the risks, effects and fairness of the
Merger for the Limited Partners of the Partnership. This Supplement is not
intended to repeat or duplicate the Prospectus and the Prospectus must be
referred to in reading this Supplement. Moreover, this Supplement does not
purport to provide an overall summary of the Merger or to highlight all of its
material terms, conditions, risks or effects. See "SUMMARY" and "THE MERGER" in
the Prospectus. To the extent this Supplement summarizes portions of the
Prospectus, such discussions are qualified in their entirety by the more
detailed discussions of those matters appearing in the Prospectus. Supplements
have also been prepared for each of the other Partnerships and copies of such
Supplements will be provided promptly without charge to each Limited Partner or
his representative who has been so designated in writing upon written request to
Timothy W. Kelley, Vice President at AmREIT, Inc., Eight Greenway Plaza, Suite
824, Houston, Texas 77046. Telephone (800) 888-4400, extension 26 or fax to
(713) 850-0498.
RISK FACTORS
The Merger involves material risks to the Limited Partners,
the more significant of which are:
o The distributions on the securities received by
Limited Partners for their Units in the Merger
will, at least initially, be lower as a percentage
of their investment as compared to distributions
currently received on their Units.
o The General Partner did not retain an unaffiliated
person to represent the Limited Partners in
negotiating the terms of the Merger.
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<PAGE>
o The Negotiated Prices for the Partnership
properties were determined by the General Partner,
who has substantial conflicts of interest in the
Merger due to his financial interest in AmREIT and
the prospects of receiving substantial financial
benefits if the Merger is consummated.
o The Negotiated Prices of the properties are not
based on appraisals from independent real estate
appraisers.
o The Merger will be a taxable transaction to the
Limited Partners.
o There is no assurance that the value of the
consideration received in the Merger by the Limited
Partners for their Units will not be less than the
fair value of their Units as might result from
negotiations between unrelated parties.
o No public market exists for the Shares or the
Notes. Upon completion of the Merger, it is
uncertain if and when a public market will develop
for the Shares and no public market is expected to
develop for the Notes.
o If and when a public market for the Shares
develops, there is no assurance that the Shares
will not trade at prices that are less than the
Exchange Price.
o There is no assurance that the Exchange Price,
which was determined by the General Partner and the
Independent Directors of AmREIT, reflects the fair
value of the Shares which might result from
negotiations between unrelated parties.
o The Appraised Value, upon which payment under the
ALV Payment Election will be determined, will not
be determined or known until after the Merger is
consummated.
o Limited Partners receiving Shares in the Merger
will realize a substantial change in the form of
their investment from a finite life Partnership,
which cannot leverage its investments, to an
infinite life REIT which can leverage its
investments.
o The anticipated benefits to Limited Partners as a
result of the Merger may not be realized.
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<PAGE>
POTENTIAL BENEFITS TO LIMITED PARTNERS
The General Partner believes the Merger is fair to and in the best
interests of the Limited Partners for a number of reasons, including:
o The General Partner believes that the terms of the Merger
Agreement, including the Exchange Price and the Partnership's
Net Asset Value are favorable to the Limited Partners.
o The General Partner believes that the Negotiated Price for
each of the Partnership's Properties is in the highest range
of values for the property in the current real estate market
and that such value would likely exceed the price at which the
property would sell for in the market. The General Partner
believes that the Partnership would thus therefor realize
significantly less value for its Properties than their
Negotiated Prices if the Partnership was liquidated in the
current real estate market.
o By merging into AmREIT, the Limited Partners will be relieved
of uncertainties regarding the Partnership's real estate
investments, including the expiration of leases on its 3
properties within the next 5 years, the possible difficulties
in releasing the properties and/or the possible substantial
costs of releasing these properties. As a result of the
Merger, these risks would be spread over and more economically
absorbed by AmREIT's larger and more diversified portfolio.
o The special purpose nature of the Partnership's properties,
which makes them suitable for limited types of tenants and
uses and increases the risks of releasing the properties. As a
result of the Merger, these risks would be spread over and
more economically absorbed by AmREIT's larger and more
diversified portfolio.
o Co-ownership of 5 of its 7 properties in joint venture with
one or more other persons, which, as a practical matter,
allows the sale of the property only with the consent of its
co-owner. In the Merger, the property is valued at an amount
pro rata to the Negotiated Price of the entire property
without reduction for less than 100% ownership.
o By combining the Partnership with AmREIT, the Merger will
create an investment portfolio substantially larger and more
geographically diversified than the portfolio of the
Partnership. The Merger will consolidate operations and spread
the risk of an investment in AmREIT over a broader group of
assets and reduce the dependence of the investment upon the
performance of any particular asset or group of assets, such
as assets in the same geographical area.
o The allocations of Merger Expenses under which the Partnership
is required to pay only its proportionate share of the
Partnership Merger Expenses based on its relative Net Asset
Value. Also, if the Limited Partners do not elect to
participate in the Merger, the General Partner will pay or
reimburse the Partnership its Proportionate Share of the
Partnership Merger Expenses.
o As a result of the Merger, the Partnership will no longer
incur the expense for the preparation of separate financial
statements, required annual and quarterly filings, tax returns
and investor communications. The accurate preparation of these
statements and reports requires substantial cost and
management time and effort.
o The General Partner believes the Merger will provide the
combined AmREIT-Partnership entity improved future access to
capital markets for future growth and that Limited Partners,
as AmREIT shareholders, will have enhanced liquidity as a
result of the larger total equity market capitalization of
AmREIT.
o The General Partner received the Houlihan Fairness Opinion
that the Merger is fair, from a financial point of view, to
the Limited Partners.
o The Partnership's strategic combination with a publicly held
REIT which takes advantage of the growth in the REIT industry
and real estate markets is preferable to the alternatives of
complete liquidation of the Partnership, continuation of the
Partnership or reorganization of the Partnership into one
separate REIT.
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<PAGE>
These possible benefits of the Merger to the Limited Partners are
discussed in greater detail in the Prospectus. Limited Partners should refer to
the discussions in the Prospectus under the heading "THE MERGER--The General
Partners Reasons and Recommendations for the Merger."
RISK FACTORS AND POTENTIAL ADVERSE CONSEQUENCES
Limited Partners participating in the Merger will be subject to various
risks and possible adverse consequences which they should take into account in
deciding how they will vote on the Merger. The most significant of these
material risks are:
The Merger involves the following risks for the Limited Partners:
o The General Partner did not retain an unaffiliated
representative to represent the Limited Partners or the
Partnership, or to represent all of the Partnerships as a
Group, in the Merger. Had independent representation been
arranged for a Partnership, the terms of the Merger might have
been more favorable to such Partnership.
o The Negotiated Prices of the Partnership's Properties were
determined by the General Partner who is also the Chief
Executive Officer and largest shareholder of AmREIT. The NAV
of each Partnership should be considered as having been
negotiated by the common management of the Partnerships and
AmREIT.
o The Negotiated Price of the Partnership's Properties is not
based on an independent appraisal.
o The conflicts of interest of the General Partner who will
receive significant financial and other benefits from and/or
as a result of the Merger.
o The possibility that the Partnership's Net Asset Values may
not reflect the actual value of its net assets.
o The fixed Exchange Price which means the Limited Partners will
not receive more Shares (or a Note in a greater principal
amount) if the value of the Shares decreases as of the
Effective Date.
o AmREIT's Shares are not publically traded, a market for the
Shares is not expected to exist immediately upon completion of
this Merger, and there is no assurance that a market for the
Shares will develop in the future. Unless and until there is a
public market for the Shares, shareholders will have
difficulty in liquidating their investment.
o If and when a market for the Shares develops, the Shares may
trade at prices substantially below the Exchange Price.
o The Merger will be a taxable transaction for the Limited
Partners.
o A majority vote of Limited Partners binds the Partnership.
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<PAGE>
o Limited Partners who vote against the Merger will receive
Notes for their Units in the Merger unless they elect to
receive Shares if the Merger is approved.
o Limited Partners who become shareholders of AmREIT may not
receive the same level of distributions as previously received
from their respective Partnership Units.
o Because it is not known how many Partnerships will participate
in the Merger, there are uncertainties as to the capital
structure and size of AmREIT following consummation of the
Merger as they will vary depending on the number which elect
to participate in the Merger.
o As a result of the Merger, the nature of each Limited
Partner's investment will change from holding an interest in a
specified portfolio of properties in a finite life entity to
holding an equity investment in an ongoing REIT, whose
portfolio of properties may be changed from time to time
without the approval of its shareholders and which does not
plan to liquidate such assets within a fixed period.
o If it participates in the Merger, the Partnership will bear
these costs of the Merger in proportion to its relative NAV.
Should the Partnership not participate in the Merger, the
General Partner will pay or reimburse the Partnership for its
portion of these costs. The costs of the Merger allocated to
the Partnerships are limited to the costs of the Houlihan
Fairness Opinions, the Partnership accounting costs (and other
valuation or appraisal costs, if any), which are estimated to
total $150,000, and any direct partner communication costs.
o The anticipated benefits of the Merger may not be realized.
o The anticipated benefits of AmREIT's change to self-management
through the recently completed Adviser Acquisition may not be
fully realized.
o The proceeds of future asset sales or refinancings by AmREIT
will generally be reinvested rather than distributed to
shareholders to the extent not required to be distributed to
maintain REIT status.
o AmREIT's Board of Directors has the power to change the
investment, acquisition and financing policies of AmREIT
(including policies regarding the level of indebtedness)
without a vote of the shareholders, which could result in
policies which do not reflect the interests of all
shareholders.
o Following the consummation of the Merger, AmREIT intends to
borrow additional funds (equal to or exceeding 50% of the
value of the properties acquired in the Merger) to acquire
additional, as yet unidentified, real estate.
These risks and possible adverse consequences of the Merger to the
Limited Partners are discussed in greater detail in the Prospectus. Limited
Partners should refer to the discussion of the risks in participating in the
Merger set forth in the Prospectus under the sections "RISK FACTORS," "CONFLICTS
OF INTEREST," "MATERIAL FEDERAL INCOME TAX ASPECTS" and "COMPARISON OF UNITS,
SHARES AND NOTES."
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<PAGE>
THE MERGER
The purpose of the Merger is to strategically unite AmREIT with one or
more of the Partnerships, each of which has compatible properties in AmREIT's
existing and new markets, and to give the Limited Partners the ability to
participate in a strategic business combination with a publicly held REIT in
order to take advantage of the growth in the REIT industry and real estate
markets in general, with the prospect of being able to liquidate their
investment through the sale of the publicly-traded Shares or retain their
investment indefinitely.
If the Merger is approved, the Partnership will cease to exist and all
of its properties will be transferred to AmREIT. Any Limited Partner may abstain
from or vote against the Merger and, if the Merger is approved, the Limited
Partner will still participate in the Merger and will receive Notes for their
Units unless they elect to receive Shares. Limited Partners will not have
appraisal rights or other dissenter's rights by reason of the Merger. For a
discussion of the effect of abstaining from or voting against the Merger, the
rights of Limited Partners who do so, and the effects of exercising dissenters'
rights, see "THE MERGER - Dissenting Partners and Shareholders."
The General Partner is proposing amendments to the Partnership's
Agreement of Limited Partnership to permit the closing of the transactions
contemplated by the Merger Agreement. Limited Partners voting in favor of the
Merger will be deemed to have voted in favor of each of these proposed
amendments. A majority vote of Limited Partners is required to approve the
proposed amendments and to approve the Merger Agreement. The proposed amendments
authorize the following: (i) the Merger of the Partnership with and into AmREIT,
whether or not AmREIT would be regarded as an Affiliate of the general partners;
and (ii) such other actions as may be necessary under or contemplated by the
Merger Agreement or the Prospectus, irrespective of any provision in the
Partnership Agreement which might otherwise prohibit such actions. See "THE
MERGER -- Proposed Amendments to Partnership Agreements." The General Partner
owns no Units of the Partnership. The general partners of the Partnership have
agreed to waive any right to receive Shares to which they may otherwise have
been entitled except with respect to their capital interests as general
partners.
The General Partner reasonably believes that the terms of the Merger,
including the consideration to be received by the Limited Partners in the
Merger, are fair to and in the best interests of the Limited Partners.
THE GENERAL PARTNER STRONGLY RECOMMENDS THAT ALL LIMITED PARTNERS
VOTE "YES" IN FAVOR OF THE MERGER. THE GENERAL PARTNER REQUESTS THAT EACH
LIMITED PARTNER COMPLETE, SIGN AND RETURN THE ENCLOSED CONSENT AS SOON AS
POSSIBLE.
ALLOCATION OF CONSIDERATION
In the Merger, the Limited Partners will receive Shares (or Notes)
based upon the Net Asset Value ("NAV") of the Partnership. The Partnership's NAV
equals the Negotiated Price of its properties plus its Net Cash. The
Partnership's Net Cash equals the excess, if any, of its cash and accounts
receivable over its debt at the Effective Date. The Negotiated Price of each
property of the Partnership was determined and agreed to by Mr. H. Kerr Taylor,
the General Partner, on behalf of the Partnership in negotiations with the two
directors of AmREIT who are not affiliated with Mr. Taylor (the "Independent
Directors").
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<PAGE>
The number of Shares issuable in the Merger to the Partnership equals
the Partnership's NAV divided by the Exchange Price of $9.34. The Exchange Price
was negotiated and agreed to by the General Partner and the Independent
Directors based on the last public offering price of the Shares, $10.25, net of
certain costs of that offering. However, the Shares are not publically traded
and will not be listed for trading immediately after the Merger. Limited
Partners should refer to the discussion in the Prospectus under the heading "THE
MERGER--The Merger Consideration."
Calculated as if the Effective Date were June 30, 1998, AmREIT is
offering 3,160.86 Shares or, subject to the Note Restriction, a Note in the
principal amount of $29,522.44, in consideration for each Unit of the
Partnership. The following table sets forth the methodology utilized in
determining the number of Shares and Notes being offered by AmREIT for each
Unit:
Net Asset Value:
Value of Properties:(1)
Whataburger (Dallas, TX) (45.12%) $283,000
Super Sound (Houston, TX) (72.72%) 178,000
AFC, Inc./Church's (Houston, TX) (72.72%) 107,000
Gannett/Billboard (Houston, TX) (72.72%) 97,000
Discount Tire (Fort Worth, TX) (100%) 470,000
La Petite Academy (Houston, TX) (100%) 500,000
Goodyear Tire, Marsh Lane (Dallas, TX) (25.28%) 165,000
-------
Negotiated Price $1,800,000
Net Cash(2) $48,880
Other Assets ---
Other Liabilities ---
---------
Net Asset Value of Partnership(3) $1,848,880
---------
Percentage of Aggregate Net Asset Value of All Partnerships 6.57%
Net Asset Value Per Original Investment of $1,000(4) $984.08
-------
Allocation of Shares Received in Merger:
Number of Shares Allocable to Partnership 197,953
Percentage of Total Shares to be Issued in the Merger 6.57%
Percentage of Total Shares of AmREIT After the Merger 3.45%
Allocation of Shares to Limited Partners 195,973
Allocation of Shares to General Partners(5) 1,980
-----
Allocation of Shares per Unit 3,160.86
Allocation of Shares Per Original Investment of $1,000(4) 105.36
Maximum Total Outstanding Shares in AmREIT After the
Merger(6) 5,742,873
---------
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<PAGE>
Notes Offered in Merger:
Maximum Principal Amount Offered to Partnership $647,108
Principal Amount of Note Offered per Unit $29,522.44
Principal Amount of Note Offered per Original Investment of
$1,000(4) $984.08
------
Return to Limited Partners Per $1,000 of Adjusted Capital From
Shares(7):
Return From Merger per $1,000 of Adjusted Capital based on
Exchange Price (8) $987.28
Total Return from Merger based on Exchange Price plus Cumulative $1,727.90
Distributions Through 6/30/1998 per $1,000 of Adjusted Capital
Total Return from Merger based on Exchange Price plus Cumulative 172.79%
Distributions through 6/30/1998 as a Percentage of Adjusted
Capital
Return From Merger per $1,000 of Adjusted Capital based on $10.25 $1,083.47
per Share Price(9)
(1) Percentage of property owned by Partnership shown in parentheses.
(2) Net Cash is the excess, if any, of the Partnership's cash and accounts
receivable over its debt.
(3) Net Asset Value equals Negotiated Price of property plus Net Cash.
(4) "Per Original Investment of $1,000" is computed by dividing the Limited
Partners' allocable share of such amount by the Limited Partners'
original capital of the Partnership (the Partnership's "Original
Capital") and multiplying the result by 1,000.
(5) The general partners of the Partnership have agreed to waive any right
to receive Shares to which they may otherwise have been entitled in the
Merger other than with respect to their unsubordinated 1% interest in
Partnership distributions. The general partners will not be receiving
any other compensation or reimbursement for claims against or interests
in the Partnership.
(6) Calculated as if effective date were June 30, 1998. Assumes 100%
participation of the Partnerships and that no Notes are issued.
Includes portion of Share Balance from Adviser Acquisition issuable to
Mr. Taylor upon consummation of Merger.
(7) Adjusted Capital equals a Limited Partner's original invested capital
less cumulative distributions constituting a return of capital under
the Partnership Agreement.
(8) Shares valued at $9.34 per Share.
(9) $10.25 is the most recent public offering price of the Shares.
CONSIDERATIONS UNIQUE TO THE PARTNERSHIPS
Due to the substantial similarities among the Partnerships, such as
their similar investment portfolios and property locations, common investment
objectives and policies, similar financial condition, the fact that the
Partnerships' assets are managed by AmREIT or its Affiliates and substantial
-8-
<PAGE>
similarities in the language and scope of their Partnership Agreements, many of
the consequences of participating in the Merger are common to the Limited
Partners of each of the Partnerships. The purpose of this section is, however,
to highlight features of the Partnership which may distinguish the situation of
the Partnership from that of the other Partnerships and which should be taken
into account by the Limited Partners when evaluating the merits and risks of the
proposed Merger.
Special Considerations Regarding Partnership Properties. Unless the
Limited Partners approve the Merger, the General Partner will continue the
Partnership in accordance with its current investment strategies and objectives
described below. At the time of the Partnership's formation, the General Partner
anticipated the liquidation of its portfolio and distribution of the net
proceeds from the sale of the properties to the Limited Partners within 8 to 12
years after the acquisition of the properties. Based on the completion of the
acquisition of the Partnership's portfolio in 1991, it was anticipated that
liquidation of the portfolio would begin by 2003. However, the Partnership's
ability to achieve its goals will be influenced by the following factors. See
"THE PARTNERSHIPS--Properties" in the Prospectus for additional information
regarding the Partnership's portfolio.
Expiration of Leases. The leases on 3 of the Partnership's
properties expire by August 31, 2001. These properties account for approximately
24% of the Partnership's current rents. The leases on the remaining 4 properties
expire by September 30, 2006. It is possible than when these leases expire the
Partnership will need to make significant tenant improvements and/or repairs in
order to release the properties. Also, should any of these tenants fail to renew
their leases, the Partnership would need to find a new tenant and incur
significant additional costs by reason of temporary vacancy and/or significant
rehabilitation and/or tenant improvement costs.
Concentration of Investment. The Partnership has concentrated
its investments in 7 properties. If a vacancy or other interruption of rents
occur in one or more of these properties, the distributions of the Partnership
may be significantly reduced. The Partnership has also concentrated its
investments in a limited geographic area. If conditions in this area
deteriorate, the Partnership may experience more difficulty in re-leasing its
properties than it would experience if the properties were more geographically
diversified.
Co-ownership of Property. The Partnership owns 5 of its 7
properties in co-ownership with one or more other persons. The Partnership is,
as a practical matter, dependent upon the consent and cooperation of the
co-owner to sell or re-lease the property. Therefore, there is no assurance that
the co-owner will agree to the sale or re-lease of the property at such time or
under the terms the Partnership may desire.
Possible Need for Additional Capital. The Limited Partners may
be required to contribute additional capital and/or approve Partnership
borrowings in order to finance future lease renewals or releasing costs as
described above. Moreover, without an economically desirable lease in place, the
Partnership could not expect to realize an attractive price for the sale of its
properties.
Merger is a Taxable Event. Limited Partners will realize a gain on the
Merger in an amount equal to their allocable share of the excess of the sum of
the fair market value of the Shares received by the Partnership over the
Partnership's adjusted tax basis of the Partnership assets. In general, Limited
Partners can expect to pay tax on this gain at long term capital gains rates.
Approximately 27% of the gain will be taxable at the 20% rate and 73% will be
taxable at the 25% rate. Assuming that the value of the Shares reflects the Net
Asset Values of the assets acquired in the Merger, if the Partnership
participates in the Merger, each of its Limited Partners would have recognized
taxalbe gain of approximately 21% (as of June 30, 1998) for every Unit held,
representing an original investment of $30,000. Those Limited Partners who
have owned their Units since the inception of the Partnership can expect to
recognize a taxable gain of approximately $1,475 per Unit as a result of the
Merger. The actual amount of gain recognized by each Limited
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<PAGE>
Partner will depend upon the value ascribed to the Shares for federal tax
purposes. Because the Shares will not be publically traded immediately after the
Merger, and the 1998 operating results have not been included, it is possible
that the value of the Shares used for purposes of calculating the taxable income
(or loss) and the taxable income (or loss) per Unit will differ from the
calculation stated above.
The Partnership's federal income tax returns are subject to review and possible
adjustment by the Internal Revenue Service. Under federal income tax laws,
regulations and administrative rulings, certain types of transactions may be
accorded varying interpretations. Accordingly, the Partnership's financial
statements, as well as the individual tax returns of the partners, may be
changed to cause them to conform to the tax treatment resulting from such
review, if any.
Investment Strategy. Each of the properties is currently fully leased
to a single tenant, however, as described above, these leases expire at varying
times in the future. The Partnership is not authorized to raise additional
capital or borrow funds. The Partnership has a history of making regular
quarterly distributions to its Limited Partners. See "Miscellaneous --
Distributions to Limited Partners" below in this Supplement. The Partnership's
strategy is to continue to hold its properties with a view towards liquidating
them at such times as the General Partner deems beneficial and appropriate in a
manner consistent with the Partnership's investment objectives. The principal
investment objectives of the Partnership are to (i) preserve and protect the
Limited Partners' capital; (ii) provide the Limited Partners with quarterly cash
distributions from operations; (iii) obtain long-term appreciation in the value
of its properties; and (iv) provide increased cash distributions to the Limited
Partners as the cash flow from its investments increases over the life of the
Partnership. The Partnership acquired each of its properties for cash and
without the use of borrowed funds (leverage).
Management Compensation. The Partnership has no employees but its
operations are managed by AmREIT. Under the Omnibus Services Agreement, pursuant
to which AmREIT manages the operations of the Partnership, AmREIT is entitled to
annual property management fees equal to 3% of gross rental revenues. Also, the
Omnibus Services Agreement provides for payment of reimbursement fees of up to
6% of the Partnership's gross rental revenues. This relationship will terminate
after the Merger if the Partnership merges into AmREIT. If the Partnership
participates in the Merger, neither AmREIT nor the General Partner or any of
their Affiliates will receive any compensation for services rendered in
connection with the Merger.
Offers From Third Parties. No offers on the Partnership's properties
have been received during the past twelve months by the General Partner from
unaffiliated third parties. See "THE MERGER-Acquisition Proposals" in the
Prospectus.
FAIRNESS OF THE MERGER
Based upon his analysis of the Merger, the General Partner reasonably
believes that:
(1) The terms of the Merger, when considered as a whole, are fair to
the Limited Partners;
(2) The Shares offered in exchange for the Units constitute fair
consideration for the Units of the Limited Partners; and
(3) After comparing the potential benefits and detriments of the Merger
with those of several alternatives, the Merger is more attractive to the Limited
Partners than such alternatives.
THE GENERAL PARTNER REASONABLY BELIEVES THAT THE TERMS OF THE
MERGER AGREEMENT, INCLUDING THE CONSIDERATION TO BE RECEIVED BY THE
LIMITED PARTNERS IN CONNECTION WITH THE MERGER, ARE FAIR TO AND IN THE BEST
INTERESTS OF THE LIMITED PARTNERS. ACCORDINGLY, THE GENERAL PARTNER HAS
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<PAGE>
APPROVED THE MERGER AGREEMENT AND RECOMMENDS THAT THE LIMITED PARTNERS
VOTE FOR APPROVAL OF THE MERGER AGREEMENT AND AMENDMENT OF THE
PARTNERSHIP AGREEMENT.
The General Partner's determination is based upon the transaction as a
whole, as well as the combination of less than all Partnerships, because the
Partnership's value for the purposes of the Merger is its Net Asset Value. The
General Partner believes that Net Asset Value is a reasonable estimate of the
value of each Partnership for the Merger as it is directly derived from the
value of the Partnership's net assets at the Effective Date, independent of the
valuations of the assets of the other Partnerships. The General Partner also
believes the Exchange Price, the value on which Shares will be issued to the
Partnership in the Merger, is a reasonable estimate of the value of the Shares
based on the last public offering price of the Shares and within the overall
context of the Merger. See "THE MERGER - The General Partner's Reasons and
Recommendations for the Merger. For a full discussion of the General Partner's
reasons for the Merger, see "THE MERGER -- The General Partner's Reasons for the
Merger and Recommendation to the Limited Partners" in the Prospectus.
Fairness Opinion. The General Partners, on behalf of the Partnership,
retained Houlihan to render an opinion as to whether the consideration to be
received by the Limited Partners in connection with the Merger was fair, from a
financial point of view, to its Limited Partners. Houlihan was not requested to,
and did not make, any recommendation to the Partnerships as to the consideration
to be received by the Limited Partners in connection with the Merger, which
consideration was determined through negotiations between the common management
of the Partnerships and AmREIT. The General Partner retained Houlihan to render
its fairness opinion based upon Houlihan's experience in the valuation of
businesses and their securities in connection with mergers and acquisitions, and
valuations for corporate purposes especially with respect to REITs and other
real estate companies. Houlihan delivered its written opinion, dated June 1,
1998, to the General Partner, to the effect that, as of the date of such
opinion, based on Houlihan's review and subject to the limitations described in
the Prospectus, the consideration to be received by the Limited Partners, in
connection with the Merger is fair, from a financial point of view, to the
Limited Partners. The Houlihan Fairness Opinion does not constitute a
recommendation to any Limited Partner as to how any such Limited Partner should
vote on the Merger. See "FAIRNESS OPINION--The Houlihan Fairness Opinion."
Comparison of Benefits and Detriments. The General Partner's assessment
of the fairness of the proposed Merger was based on the review of different
alternatives that were available. The evaluations of the different alternatives
included, but were not limited to, a strategic combination with a publicly
traded REIT to take advantage of the growth of the REIT industry and real estate
markets in general, completely liquidating the Partnership, continuing the
Partnership or reorganizing the Partnership into a REIT. In order to determine
whether the Merger or one of its alternatives would be more attractive to the
Limited Partners, the General Partner compared the potential benefits and
detriments of the Merger with the potential benefits and detriments of the
alternatives. A detailed discussion of the potential benefits and detriments of
each of these alternatives is provided in "THE MERGER -- The General Partners'
Reasons and Recommendation for the Merger" and "-- Alternatives to the Merger"
in the Prospectus.
In the event the Merger is not consummated for any reason, the
Partnership will continue to pursue its business objectives of maximizing the
value of its properties, in addition to the possible liquidation of its
portfolio, another strategic combination or another attractive alternative that
may become available.
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<PAGE>
COMPARATIVE COMPENSATION, FEES AND DISTRIBUTIONS
COMPENSATION PAID TO THE GENERAL PARTNER AND HIS AFFILIATES
This section is intended to provide Limited Partners with a brief
comparison of the compensation, fees and distributions paid to the General
Partner and his Affiliates under the Partnership's current arrangements with
those that would have been paid had the Merger been in place. The following
table sets forth the compensation, fees and distributions by the Partnership to
the General Partner and his Affiliates during the two most recent fiscal years
and the six-month period ended June 30, 1998 and compares those payments against
the amount that would have been paid assuming the Merger had occurred January 1,
1996.
<TABLE>
YEAR ENDED DECEMBER 31,
<CAPTION>
Six Months Ended
1996 1997 June 30, 1998
---- ---- -------------
Actual Pro Forma Actual Pro Forma Actual Pro Forma
<S> <C> <C> <C> <C> <C> <C>
Administrative Reimb.(1) $12,960 $11,111 $12,960 11,404 6,480 5,689
Cash Distributions(2) 1,500 1,278 1,500 1,303 750 653
General Partner Salary(3) --- 862 --- 1,035 --- 518
(1) An AmREIT subsidiary receives administrative reimbursements of up to 6%
of gross rental revenues from the properties. No other fees, salaries
or other compensation were paid by the Partnership to its general
partner or its affiliates during these periods.
(2) Includes all cash distributions made to Mr. Taylor and his affiliates
resulting from ownership of Units and general partner interests. Mr.
Taylor's employment agreement with AmREIT provides for a fixed base
salary of $25,000 and $30,000 per annum for 1998 and 1999 respectively,
which amounts will not increase as a result of the Merger.
(3) Mr. Taylor's salary represents the total salary and benefits Mr. Taylor
is currently entitled to receive as an officer and director of AmREIT
allocated to the Partnership based on the percentage of shares of
AmREIT to be owned by the Limited Partners immediately after the
Merger. No other affiliate of the general partners of the Partnership
will receive compensation from AmREIT upon completion of the Merger.
</TABLE>
New Compensation
AmREIT will internally manage and lease the properties obtained by
AmREIT from the Partnership pursuant to the Merger. The terms of this engagement
will be substantially similar to the terms governing the management arrangements
that AmREIT typically uses in managing its current properties.
MISCELLANEOUS
Distributions to Limited Partners
Set forth below are distributions per Unit made by the Partnership to
the Limited Partners during the most recent five fiscal years and the most
recently completed interim period. Also see "THE PARTNERSHIPS - Partnership
Distributions" in the Prospectus.
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<TABLE>
<CAPTION>
Six Months Ended
1993 1994 1995 1996 1997 June 30, 1998
---- ---- ---- ---- ---- -------------
<S> <C> <C> <C> <C> <C> <C>
Distributions $2,556 $2,565 $2,580 $2,580 $2,580 $1,290
Portion of Distribution That Was a --- --- --- --- --- ---
Return of Capital(1)
(1) Distributions treated as a return of capital under the Partnership
Agreement.
- ----------------------
</TABLE>
Financial Information
Rental income statements for the properties of the Partnership for the
years ended December 31, 1997 and 1996 and certain pro forma financial
statements with respect to the Partnership are set forth in "The Unaudited Pro
Forma Financial Information" and "INDEX TO FINANCIAL INFORMATION" in the
Prospectus.
List of Investors
Under the Partnership Agreement and Texas state law, a Limited Partner
may obtain a list of the names, addresses and number of Units owned by the other
Limited Partners entitled to so vote on the Merger by making written request
therefor from the General Partner, c/o Timothy W. Kelley, AmREIT, Inc., Eight
Greenway Plaza, Suite 824, Houston, Texas 77046. At the time of making the
request, the requesting Limited Partner must submit a payment of $10.00 in
payment for the costs of copying and mailing the list and, if the Units are held
through a nominee, provide the Partnership with a statement from the nominee or
other independent third party confirming such Limited Partner's beneficial
ownership. A Limited Partner is only entitled to the foregoing information with
respect to the Partnership in which the Limited Partner holds Units. See
"CONSENT PROCEDURES" in the Prospectus.
End of Partnership Supplement for AAA Net Realty Fund VIII, Ltd.
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<PAGE>
AMREIT, INC.
SUPPLEMENT TO
JOINT CONSENT SOLICITATION STATEMENT AND PROSPECTUS
FOR
AAA NET REALTY FUND IX, LTD.
A NEBRASKA LIMITED PARTNERSHIP
Mr. H. Kerr Taylor (the "General Partner") is soliciting the approval
of the Limited Partners of AAA Net Realty Fund IX, Ltd., a Nebraska Limited
Partnership (the "Partnership"), for the Merger of the Partnership with and into
AmREIT, Inc., a Maryland Corporation ("AmREIT"). As part of the Merger, the
Limited Partners will exchange Units of Limited Partnership Interests ("Units")
in the Partnership for shares of common stock of AmREIT (the "Shares") or,
subject to the Note restriction, 6.0% Notes of AmREIT due December 31, 2004 (the
"Notes"). The Merger, if it is approved, will involve up to ten limited
partnerships, including the Partnership. This solicitation is being made on
behalf of the general partners of the Partnership. The proposal is described in
detail in the Joint Consent Solicitation Statement and Prospectus dated , 1998
(the "Prospectus"). For the definition of capitalized terms used in the
Supplement, which are not separately defined herein, see "GLOSSARY" in the
Prospectus. Cross-references in this Supplement also refer to the cited
discussions in the Prospectus, unless specifically noted to the contrary.
The effects of the Merger may be different for Limited Partners in each
of the Partnerships participating in the Merger (the "Partnerships"). This
Supplement has been prepared to highlight the risks, effects and fairness of the
Merger for the Limited Partners of the Partnership. This Supplement is not
intended to repeat or duplicate the Prospectus and the Prospectus must be
referred to in reading this Supplement. Moreover, this Supplement does not
purport to provide an overall summary of the Merger or to highlight all of its
material terms, conditions, risks or effects. See "SUMMARY" and "THE MERGER" in
the Prospectus. To the extent this Supplement summarizes portions of the
Prospectus, such discussions are qualified in their entirety by the more
detailed discussions of those matters appearing in the Prospectus. Supplements
have also been prepared for each of the other Partnerships and copies of such
Supplements will be provided promptly without charge to each Limited Partner or
his representative who has been so designated in writing upon written request to
Timothy W. Kelley, Vice President at AmREIT, Inc., Eight Greenway Plaza, Suite
824, Houston, Texas 77046. Telephone (800) 888-4400, extension 26 or fax to
(713) 850-0498.
RISK FACTORS
The Merger involves material risks to the Limited Partners,
the more significant of which are:
o The distributions on the securities received by
Limited Partners for their Units in the Merger
will, at least initially, be lower as a percentage
of their investment as compared to distributions
currently received on their Units.
o The General Partner did not retain an unaffiliated
person to represent the Limited Partners in
negotiating the terms of the Merger.
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o The Negotiated Prices for the Partnership
properties were determined by the General Partner,
who has substantial conflicts of interest in the
Merger due to his financial interest in AmREIT and
the prospects of receiving substantial financial
benefits if the Merger is consummated.
o The Negotiated Prices of the properties are not
based on appraisals from independent real estate
appraisers.
o The Merger will be a taxable transaction to the
Limited Partners.
o There is no assurance that the value of the
consideration received in the Merger by the Limited
Partners for their Units will not be less than the
fair value of their Units as might result from
negotiations between unrelated parties.
o No public market exists for the Shares or the
Notes. Upon completion of the Merger, it is
uncertain if and when a public market will develop
for the Shares and no public market is expected to
develop for the Notes.
o If and when a public market for the Shares
develops, there is no assurance that the Shares
will not trade at prices that are less than the
Exchange Price.
o There is no assurance that the Exchange Price,
which was determined by the General Partner and the
Independent Directors of AmREIT, reflects the fair
value of the Shares which might result from
negotiations between unrelated parties.
o The Appraised Value, upon which payment under the
ALV Payment Election will be determined, will not
be determined or known until after the Merger is
consummated.
o Limited Partners receiving Shares in the Merger
will realize a substantial change in the form of
their investment from a finite life Partnership,
which cannot leverage its investments, to an
infinite life REIT which can leverage its
investments.
o The anticipated benefits to Limited Partners as a
result of the Merger may not be realized.
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POTENTIAL BENEFITS TO LIMITED PARTNERS
The General Partner believes the Merger is fair to and in the best
interests of the Limited Partners for a number of reasons, including:
o The General Partner believes that the terms of the Merger
Agreement, including the Exchange Price and the Partnership's
Net Asset Value are favorable to the Limited Partners.
o The General Partner believes that the Negotiated Price for
each of the Partnership's Properties is in the highest range
of values for the property in the current real estate market
and that such value would likely exceed the price at which the
property would sell for in the market. The General Partner
believes that the Partnership would thus therefor realize
significantly less value for its Properties than their
Negotiated Prices if the Partnership was liquidated in the
current real estate market.
o By merging into AmREIT, the Limited Partners will be relieved
of uncertainties regarding the Partnership's real estate
investments, including the expiration of its leases on its
properties, the possible difficulties in releasing the
properties and/or the possible substantial costs of releasing
these properties. As a result of the Merger, these risks would
be spread over and more economically absorbed by AmREIT's
larger and more diversified portfolio.
o The special purpose nature of the Partnership's properties,
which makes them suitable for limited types of tenants and
uses and increases the risks of releasing the properties. As a
result of the Merger, these risks would be spread over and
more economically absorbed by AmREIT's larger and more
diversified portfolio.
o Co-ownership of one of the Partnership's properties in joint
venture with another Partnership which, as a practical matter,
allows the sale of the property only with the consent of its
co-owner. In the Merger, the property is valued at an amount
pro rata to the Negotiated Price of the entire property
without reduction for less than 100% ownership.
o By combining the Partnership with AmREIT, the Merger will
create an investment portfolio substantially larger and more
geographically diversified than the portfolio of the
Partnership. The Merger will consolidate operations and spread
the risk of an investment in AmREIT over a broader group of
assets and reduce the dependence of the investment upon the
performance of any particular asset or group of assets, such
as assets in the same geographical area.
o The allocations of Merger Expenses under which the Partnership
is required to pay only its proportionate share of the
Partnership Merger Expenses based on its relative Net Asset
Value. Also, if the Limited Partners do not elect to
participate in the Merger, the General Partner will pay or
reimburse the Partnership its Proportionate Share of the
Partnership Merger Expenses.
o As a result of the Merger, the Partnership will no longer
incur the expense for the preparation of separate financial
statements, required annual and quarterly filings, tax returns
and investor communications. The accurate preparation of these
statements and reports requires substantial cost and
management time and effort.
o The General Partner believes the Merger will provide the
combined AmREIT-Partnership entity improved future access to
capital markets for future growth and that Limited Partners,
as AmREIT shareholders, will have enhanced liquidity as a
result of the larger total equity market capitalization of
AmREIT.
o The General Partner received the Houlihan Fairness Opinion
that the Merger is fair, from a financial point of view, to
the Limited Partners.
o The Partnership's strategic combination with a publicly held
REIT which takes advantage of the growth in the REIT industry
and real estate markets is preferable to the alternatives of
complete liquidation of the Partnership, continuation of the
Partnership or reorganization of the Partnership into one
separate REIT.
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These possible benefits of the Merger to the Limited Partners are
discussed in greater detail in the Prospectus. Limited Partners should refer to
the discussions in the Prospectus under the heading "THE MERGER--The General
Partners Reasons and Recommendations for the Merger."
RISK FACTORS AND POTENTIAL ADVERSE CONSEQUENCES
Limited Partners participating in the Merger will be subject to various
risks and possible adverse consequences which they should take into account in
deciding how they will vote on the Merger. The most significant of these
material risks are:
The Merger involves the following risks for the Limited Partners:
o The General Partner did not retain an unaffiliated
representative to represent the Limited Partners or the
Partnership, or to represent all of the Partnerships as a
Group, in the Merger. Had independent representation been
arranged for a Partnership, the terms of the Merger might have
been more favorable to such Partnership.
o The Negotiated Prices of the Partnership's Properties were
determined by the General Partner who is also the Chief
Executive Officer and largest shareholder of AmREIT. The NAV
of each Partnership should be considered as having been
negotiated by the common management of the Partnerships and
AmREIT.
o The Negotiated Price of the Partnership's Properties is not
based on an independent appraisal.
o The conflicts of interest of the General Partner who will
receive significant financial and other benefits from and/or
as a result of the Merger.
o The possibility that the Partnership's Net Asset Values may
not reflect the actual value of its net assets.
o The fixed Exchange Price which means the Limited Partners will
not receive more Shares (or a Note in a greater principal
amount) if the value of the Shares decreases as of the
Effective Date.
o AmREIT's Shares are not publically traded, a market for the
Shares is not expected to exist immediately upon completion of
this Merger, and there is no assurance that a market for the
Shares will develop in the future. Unless and until there is a
public market for the Shares, shareholders will have
difficulty in liquidating their investment.
o If and when a market for the Shares develops, the Shares may
trade at prices substantially below the Exchange Price.
o The Merger will be a taxable transaction for the Limited
Partners.
o A majority vote of Limited Partners binds the Partnership.
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o Limited Partners who vote against the Merger will receive
Notes for their Units in the Merger unless they elect to
receive Shares if the Merger is approved.
o Limited Partners who become shareholders of AmREIT may not
receive the same level of distributions as previously received
from their respective Partnership Units.
o Because it is not known how many Partnerships will participate
in the Merger, there are uncertainties as to the capital
structure and size of AmREIT following consummation of the
Merger as they will vary depending on the number which elect
to participate in the Merger.
o As a result of the Merger, the nature of each Limited
Partner's investment will change from holding an interest in a
specified portfolio of properties in a finite life entity to
holding an equity investment in an ongoing REIT, whose
portfolio of properties may be changed from time to time
without the approval of its shareholders and which does not
plan to liquidate such assets within a fixed period.
o If it participates in the Merger, the Partnership will bear
these costs of the Merger in proportion to its relative NAV.
Should the Partnership not participate in the Merger, the
General Partner will pay or reimburse the Partnership for its
portion of these costs. The costs of the Merger allocated to
the Partnerships are limited to the costs of the Houlihan
Fairness Opinions, the Partnership accounting costs (and other
valuation or appraisal costs, if any), which are estimated to
total $150,000, and any direct partner communication costs.
o The anticipated benefits of the Merger may not be realized.
o The anticipated benefits of AmREIT's change to self-management
through the recently completed Adviser Acquisition may not be
fully realized.
o The proceeds of future asset sales or refinancings by AmREIT
will generally be reinvested rather than distributed to
shareholders to the extent not required to be distributed to
maintain REIT status.
o AmREIT's Board of Directors has the power to change the
investment, acquisition and financing policies of AmREIT
(including policies regarding the level of indebtedness)
without a vote of the shareholders, which could result in
policies which do not reflect the interests of all
shareholders.
o Following the consummation of the Merger, AmREIT intends to
borrow additional funds (equal to or exceeding 50% of the
value of the properties acquired in the Merger) to acquire
additional, as yet unidentified, real estate.
These risks and possible adverse consequences of the Merger to the
Limited Partners are discussed in greater detail in the Prospectus. Limited
Partners should refer to the discussion of the risks in participating in the
Merger set forth in the Prospectus under the sections "RISK FACTORS," "CONFLICTS
OF INTEREST," "MATERIAL FEDERAL INCOME TAX ASPECTS" and "COMPARISON OF UNITS,
SHARES AND NOTES."
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THE MERGER
The purpose of the Merger is to strategically unite AmREIT with one or
more of the Partnerships, each of which has compatible properties in AmREIT's
existing and new markets, and to give the Limited Partners the ability to
participate in a strategic business combination with a publicly held REIT in
order to take advantage of the growth in the REIT industry and real estate
markets in general, with the prospect of being able to liquidate their
investment through the sale of the publicly-traded Shares or retain their
investment indefinitely.
If the Merger is approved, the Partnership will cease to exist and all
of its properties will be transferred to AmREIT. Any Limited Partner may abstain
from or vote against the Merger and, if the Merger is approved, the Limited
Partner will still participate in the Merger and will receive Notes for their
Units unless they elect to receive Shares. Limited Partners will not have
appraisal rights or other dissenter's rights by reason of the Merger. For a
discussion of the effect of abstaining from or voting against the Merger, the
rights of Limited Partners who do so, and the effects of exercising dissenters'
rights, see "THE MERGER - Dissenting Partners and Shareholders."
The General Partner is proposing amendments to the Partnership's
Agreement of Limited Partnership to permit the closing of the transactions
contemplated by the Merger Agreement. Limited Partners voting in favor of the
Merger will be deemed to have voted in favor of each of these proposed
amendments. A majority vote of Limited Partners is required to approve the
proposed amendments and to approve the Merger Agreement. The proposed amendments
authorize the following: (i) the Merger of the Partnership with and into AmREIT,
whether or not AmREIT would be regarded as an Affiliate of the general partners;
and (ii) such other actions as may be necessary under or contemplated by the
Merger Agreement or the Prospectus, irrespective of any provision in the
Partnership Agreement which might otherwise prohibit such actions. See "THE
MERGER -- Proposed Amendments to Partnership Agreements." The General Partner
owns no Units of the Partnership. The general partners of the Partnership have
agreed to waive any right to receive Shares to which they may otherwise have
been entitled except with respect to their capital interests as general
partners.
The General Partner reasonably believes that the terms of the Merger,
including the consideration to be received by the Limited Partners in the
Merger, are fair to and in the best interests of the Limited Partners.
THE GENERAL PARTNER STRONGLY RECOMMENDS THAT ALL LIMITED PARTNERS
VOTE "YES" IN FAVOR OF THE MERGER. THE GENERAL PARTNER REQUESTS THAT EACH
LIMITED PARTNER COMPLETE, SIGN AND RETURN THE ENCLOSED CONSENT AS SOON AS
POSSIBLE.
ALLOCATION OF CONSIDERATION
In the Merger, the Limited Partners will receive Shares (or Notes)
based upon the Net Asset Value ("NAV") of the Partnership. The Partnership's NAV
equals the Negotiated Price of its properties plus its Net Cash. The
Partnership's Net Cash equals the excess, if any, of its cash and accounts
receivable over its debt at the Effective Date. The Negotiated Price of each
property of the Partnership was determined and agreed to by Mr. H. Kerr Taylor,
the General Partner, on behalf of the Partnership in negotiations with the two
directors of AmREIT who are not affiliated with Mr. Taylor (the "Independent
Directors").
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The number of Shares issuable in the Merger to the Partnership equals
the Partnership's NAV divided by the Exchange Price of $9.34. The Exchange Price
was negotiated and agreed to by the General Partner and the Independent
Directors based on the last public offering price of the Shares, $10.25, net of
certain costs of that offering. However, the Shares are not publically traded
and will not be listed for trading immediately after the Merger. Limited
Partners should refer to the discussion in the Prospectus under the heading "THE
MERGER--The Merger Consideration."
Calculated as if the Effective Date were June 30, 1998, AmREIT is
offering 97.88 Shares or, subject to the Note Restriction, a Note in the
principal amount of $914.21, in consideration for each Unit of the Partnership.
The following table sets forth the methodology utilized in determining the
number of Shares and Notes being offered by AmREIT for each Unit:
Net Asset Value:
Value of Properties:(1)
Foodmaker/Jack-in-the-Box (Dallas, TX) (100%) $690,000
Baptist Health Services (Memphis, TN) (100%) 1,695,000
Walden Books/Payless (Austin, TX) (100%) 700,000
Golden Corral, I-45 (Houston, TX) (100%) 1,695,000
Golden Corral, Hwy. 1960 (Houston, TX (4.80%) 70,000
------
Negotiated Price $4,850,000
Net Cash(2) $78,062
Other Assets ---
Other Liabilities ---
---------
Net Asset Value of Partnership(3) $4,928,062
Percentage of Aggregate Net Asset Value of All Partnerships 17.52%
Net Asset Value Per Original Investment of $1,000(4) $914.21
------
Allocation of Shares Received in Merger:
Number of Shares Allocable to Partnership 527,630
Percentage of Total Shares to be Issued in the Merger 17.52%
Percentage of Total Shares of AmREIT After the Merger 9.19%
Allocation of Shares to Limited Partners 527,630
Allocation of Shares to General Partners(5) ---
---------
Allocation of Shares per Unit 97.88
Allocation of Shares Per Original Investment of $1,000(4) 97.88
Maximum Total Outstanding Shares in AmREIT After the Merger(6) 5,742,873
---------
Notes Offered in Merger:
Maximum Principal Amount Offered to Partnership $1,724,822
Principal Amount of Note Offered per Unit $914.21
Principal Amount of Note Offered per Original Investment of
$1,000(4) $914.21
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Return to Limited Partners Per $1,000 of Adjusted Capital From Shares(7):
Return From Merger per $1,000 of Adjusted Capital based on $914.21
Exchange Price(8)
Total Return from Merger based on Exchange Price plus Cumulative $1,495.45
Distributions Through 6/30/1998 per $1,000 of Adjusted Capital
Total Return from Merger based on Exchange Price plus Cumulative 149.54%
Distributions through 6/30/1998 as a Percentage of Adjusted
Capital
Return From Merger per $1,000 of Adjusted Capital based on $10.25 $1,003.28
per Share Price(9)
(1) Percentage of property owned by Partnership shown in parentheses.
(2) Net Cash is the excess, if any, of the Partnership's cash and accounts
receivable over its debt.
(3) Net Asset Value equals Negotiated Price of property plus Net Cash.
(4) "Per Original Investment of $1,000" is computed by dividing the Limited
Partners' allocable share of such amount by the Limited Partners'
original capital of the Partnership (the Partnership's "Original
Capital") and multiplying the result by 1,000.
(5) The general partners have agreed to waive any right to receive Shares
to which they may otherwise have been entitled in the Merger. The
general partners will not receive any compensation or reimbursement for
claims against or interests in the Partnership.
(6) Calculated as if effective date were June 30, 1998. Assumes 100%
participation of the Partnerships and that no Notes are issued.
Includes portion of Share Balance from Adviser Acquisition issuable to
Mr. Taylor upon consummation of Merger.
(7) Adjusted Capital equals a Limited Partner's original invested capital
less cumulative distributions constituting a return of capital under
the Partnership Agreement.
(8) Shares valued at $9.34 per Share.
(9) $10.25 is the most recent public offering price of the Shares.
CONSIDERATIONS UNIQUE TO THE PARTNERSHIPS
Due to the substantial similarities among the Partnerships, such as
their similar investment portfolios and property locations, common investment
objectives and policies, similar financial condition, the fact that the
Partnerships' assets are managed by AmREIT or its Affiliates and substantial
similarities in the language and scope of their Partnership Agreements, many of
the consequences of participating in the Merger are common to the Limited
Partners of each of the Partnerships. The purpose of this section is, however,
to highlight features of the Partnership which may distinguish the situation of
the Partnership from that of the other Partnerships and which should be taken
into account by the Limited Partners when evaluating the merits and risks of the
proposed Merger.
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Special Considerations Regarding Partnership Properties. Unless the
Limited Partners approve the Merger, the General Partner will continue the
Partnership in accordance with its current investment strategies and objectives
described below. At the time of the Partnership's formation, the General Partner
anticipated the liquidation of its portfolio and distribution of the net
proceeds from the sale of the properties to the Limited Partners within 8 to 12
years after the acquisition of the properties. Based on the completion of the
acquisition of the Partnership's portfolio in 1991, it was anticipated that
liquidation of the portfolio would begin by 2003. However, the Partnership's
ability to achieve its goals will be influenced by the following factors. See
"THE PARTNERSHIPS--Properties" in the Prospectus for additional information
regarding the Partnership's portfolio.
Expiration of Leases. When the leases on each of the
Partnership's 5 properties all expire, the tenants may elect not to renew their
leases or to renew their leases only if the Partnership makes significant
improvements to the property. Should tenants fail to renew their leases, the
Partnership would be required to find new tenants and would likely incur
significant additional expense by reason of temporary vacancy and/or significant
rehabilitation and/or tenant improvement costs.
Concentration of Investment. The Partnership has concentrated
its investments in 5 properties. If a vacancy or other interruption of rents
occur in one or more of these properties, the distributions of the Partnership
may be significantly reduced. The Partnership has also concentrated its
investments in a limited geographic area. If conditions in this area
deteriorate, the Partnership may experience more difficulty in re-leasing its
properties than it would experience if the properties were more geographically
diversified.
Co-ownership of Property. The Partnership owns one of its
properties in co-ownership with Fund X. The Partnership owns 4.8% of this
property and is dependent upon the consent and cooperation of the majority
co-owner to sell or re-lease the property. Therefore, there is no assurance that
the co-owner will agree to the sale or re-lease of the property at such time or
under the terms the Partnership may desire.
Possible Need for Additional Capital. The Limited Partners may
be required to contribute additional capital and/or approve Partnership
borrowings in order to finance future lease renewal or releasing costs as
described above. Moreover, without an economically desirable lease in place, the
Partnership could not expect to realize an attractive price for the sale of its
properties.
Merger is a Taxable Event. Limited Partners will realize a gain on the
Merger in an amount equal to their allocable share of the excess of the sum of
the fair market value of the Shares received by the Partnership over the
Partnership's adjusted tax basis of the Partnership assets. In general, Limited
Partners can expect to pay tax on this gain at long term capital gains rates,
which will generally by 25%. Assuming that the value of the Shares reflects the
Net Asset Values of the assets acquired in ther Merger, if the Partnership
participates in the Merger, each of its Limited Partners would have recoginzed
taxable gain of approximately 8.2% (as of June 30, 1998) for every Unit held,
representing an original investment of $1,000. Those Limited Partners who have
owned their Units since the inception of the Partnership can expect to recognize
a taxable gain of approximately $20 per Unit as a result of the Merger. The
actual amount of gain recognized by each Limited Partner will depend upon the
value ascribed to the Shares for federal tax purposes. Because the Shares will
not be publically traded immediately after the Merger, and the 1998 operating
results have not been included, it is possible that the value of the Shares used
for purposes of calculating the taxable income (or loss) and the taxable income
(or loss) per Unit will differ from the calculation stated above.
The Partnership's federal income tax returns are subject to review and possible
adjustment by the Internal Revenue Service. Under federal income tax laws,
regulations and administrative rulings, certain types of transactions may be
accorded varying interpretations. Accordingly, the Partnership's financial
statements, as well as the individual tax returns of the partners, may be
changed to cause them to conform to the tax treatment resulting from such
review, if any.
Investment Strategy. Each of the properties is currently fully leased
to a single tenant, however, as described above, these leases expire at varying
times in the future. The Partnership is not authorized to raise additional
capital or borrow funds. The Partnership has a history of making regular
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quarterly distributions to its Limited Partners. See "Miscellaneous --
Distributions to Limited Partners" below in this Supplement. The Partnership's
strategy is to continue to hold its properties with a view towards liquidating
them at such times as the General Partner deems beneficial and appropriate in a
manner consistent with the Partnership's investment objectives. The principal
investment objectives of the Partnership are to (i) preserve and protect the
Limited Partners' capital; (ii) provide the Limited Partners with quarterly cash
distributions from operations; (iii) obtain long-term appreciation in the value
of its properties; and (iv) provide increased cash distributions to the Limited
Partners as the cash flow from its investments increases over the life of the
Partnership. The Partnership acquired each of its properties for cash and
without the use of borrowed funds (leverage).
Management Compensation. The Partnership has no employees but its
operations are managed by AmREIT. Under the Omnibus Services Agreement, pursuant
to which AmREIT manages the operations of the Partnership, AmREIT is entitled to
annual property management fees equal to 3% of gross rental revenues. Also, the
Omnibus Services Agreement provides for payment of reimbursement fees of up to
6% of the Partnership's gross rental revenues. This relationship will terminate
after the Merger if the Partnership merges into AmREIT. If the Partnership
participates in the Merger, neither AmREIT nor the General Partner or any of
their Affiliates will receive any compensation for services rendered in
connection with the Merger.
Offers From Third Parties. No offers on the Partnership's properties
have been received during the past twelve months by the General Partner from
unaffiliated third parties. See "THE MERGER-Acquisition Proposals" in the
Prospectus.
FAIRNESS OF THE MERGER
Based upon his analysis of the Merger, the General Partner reasonably
believes that:
(1) The terms of the Merger, when considered as a whole, are fair
to the Limited Partners;
(2) The Shares offered in exchange for the Units constitute fair
consideration for the Units of the Limited Partners; and
(3) After comparing the potential benefits and detriments of the Merger
with those of several alternatives, the Merger is more attractive to the Limited
Partners than such alternatives.
THE GENERAL PARTNER REASONABLY BELIEVES THAT THE TERMS OF THE MERGER
AGREEMENT, INCLUDING THE CONSIDERATION TO BE RECEIVED BY THE LIMITED PARTNERS IN
CONNECTION WITH THE MERGER, ARE FAIR TO AND IN THE BEST INTERESTS OF THE LIMITED
PARTNERS. ACCORDINGLY, THE GENERAL PARTNER HAS APPROVED THE MERGER AGREEMENT AND
RECOMMENDS THAT THE LIMITED PARTNERS VOTE FOR APPROVAL OF THE MERGER AGREEMENT
AND AMENDMENT OF THE PARTNERSHIP AGREEMENT.
The General Partner's determination is based upon the transaction as a
whole, as well as the combination of less than all Partnerships, because the
Partnership's value for the purposes of the Merger is its Net Asset Value. The
General Partner believes that Net Asset Value is a reasonable estimate of the
value of each Partnership for the Merger as it is directly derived from the
value of the Partnership's net
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assets at the Effective Date, independent of the valuations of the assets of the
other Partnerships. The General Partner also believes the Exchange Price, the
value on which Shares will be issued to the Partnership in the Merger, is a
reasonable estimate of the value of the Shares based on the last public offering
price of the Shares and within the overall context of the Merger. See "THE
MERGER - The General Partner's Reasons and Recommendations for the Merger. For a
full discussion of the General Partner's reasons for the Merger, see "THE MERGER
- -- The General Partner's Reasons for the Merger and Recommendation to the
Limited Partners" in the Prospectus.
Fairness Opinion. The General Partners, on behalf of the Partnership,
retained Houlihan to render an opinion as to whether the consideration to be
received by the Limited Partners in connection with the Merger was fair, from a
financial point of view, to its Limited Partners. Houlihan was not requested to,
and did not make, any recommendation to the Partnerships as to the consideration
to be received by the Limited Partners in connection with the Merger, which
consideration was determined through negotiations between the common management
of the Partnerships and AmREIT. The General Partner retained Houlihan to render
its fairness opinion based upon Houlihan's experience in the valuation of
businesses and their securities in connection with mergers and acquisitions, and
valuations for corporate purposes especially with respect to REITs and other
real estate companies. Houlihan delivered its written opinion, dated June 1,
1998, to the General Partner, to the effect that, as of the date of such
opinion, based on Houlihan's review and subject to the limitations described in
the Prospectus, the consideration to be received by the Limited Partners, in
connection with the Merger is fair, from a financial point of view, to the
Limited Partners. The Houlihan Fairness Opinion does not constitute a
recommendation to any Limited Partner as to how any such Limited Partner should
vote on the Merger. See "FAIRNESS OPINION--The Houlihan Fairness Opinion."
Comparison of Benefits and Detriments. The General Partner's assessment
of the fairness of the proposed Merger was based on the review of different
alternatives that were available. The evaluations of the different alternatives
included, but were not limited to, a strategic combination with a publicly
traded REIT to take advantage of the growth of the REIT industry and real estate
markets in general, completely liquidating the Partnership, continuing the
Partnership or reorganizing the Partnership into a REIT. In order to determine
whether the Merger or one of its alternatives would be more attractive to the
Limited Partners, the General Partner compared the potential benefits and
detriments of the Merger with the potential benefits and detriments of the
alternatives. A detailed discussion of the potential benefits and detriments of
each of these alternatives is provided in "THE MERGER -- The General Partners'
Reasons and Recommendation for the Merger" and "-- Alternatives to the Merger"
in the Prospectus.
In the event the Merger is not consummated for any reason, the
Partnership will continue to pursue its business objectives of maximizing the
value of its properties, in addition to the possible liquidation of its
portfolio, another strategic combination or another attractive alternative that
may become available.
COMPARATIVE COMPENSATION, FEES AND DISTRIBUTIONS
COMPENSATION PAID TO THE GENERAL PARTNER AND HIS AFFILIATES
This section is intended to provide Limited Partners with a brief
comparison of the compensation, fees and distributions paid to the General
Partner and his Affiliates under the Partnership's current arrangements with
those that would have been paid had the Merger been in place. The following
table sets forth the compensation, fees and distributions by the Partnership to
the General Partner and his Affiliates during the two most recent fiscal years
and the six-month period ended June 30, 1998 and compares those payments against
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the amount that would have been paid assuming the Merger had occurred January 1,
1996.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
Six Months Ended
1996 1997 June 30, 1998
---- ---- -------------
Actual Pro Forma Actual Pro Forma Actual Pro Forma
<S> <C> <C> <C> <C> <C> <C>
Administrative Reimb.(1) $16,200 $29,658 $17,678 $30,883 $8,778 $16,542
Cash Distributions(2) 3,000 --- 3,000 --- 1,500 ---
General Partner Salary(3) --- 2,297 --- 2,756 --- 1,378
(1) An AmREIT subsidiary receives administrative reimbursements of up to 6%
of gross rental revenues from the properties. No other fees, salaries
or other compensation were paid by the Partnership to its general
partner or its affiliates during these periods.
(2) Includes all cash distributions made to Mr. Taylor and his affiliates
resulting from ownership of Units and general partner interests. Mr.
Taylor's employment agreement with AmREIT provides for a fixed base
salary of $25,000 and $30,000 per annum for 1998 and 1999 respectively,
which amounts will not increase as a result of the Merger.
(3) Mr. Taylor's salary represents the total salary and benefits Mr. Taylor
is currently entitled to receive as an officer and director of AmREIT
allocated to the Partnership based on the percentage of shares of
AmREIT to be owned by the Limited Partners immediately after the
Merger. No other affiliate of the general partners of the Partnership
will receive compensation from AmREIT upon completion of the Merger.
</TABLE>
New Compensation
AmREIT will internally manage and lease the properties obtained by
AmREIT from the Partnership pursuant to the Merger. The terms of this engagement
will be substantially similar to the terms governing the management arrangements
that AmREIT typically uses in managing its current properties.
MISCELLANEOUS
Distributions to Limited Partners
Set forth below are distributions per Unit made by the Partnership to
the Limited Partners during the most recent five fiscal years and the most
recently completed interim period. Also see "THE PARTNERSHIPS - Partnership
Distributions" in the Prospectus.
<TABLE>
<CAPTION>
Six Months Ended
1993 1994 1995 1996 1997 June 30, 1998
---- ---- ---- ---- ---- -------------
<S> <C> <C> <C> <C> <C> <C>
Distributions $83.00 $84.00 $85.00 $85.00 $85.45 $42.87
Portion of Distribution That Was a --- --- --- --- --- ---
Return of Capital(1)
(1) Distributions treated as a return of capital under the Partnership
Agreement.
- ----------------------
</TABLE>
-12-
<PAGE>
Financial Information
Rental income statements for the properties of the Partnership for the
years ended December 31, 1997 and 1996 and certain pro forma financial
statements with respect to the Partnership are set forth in "The Unaudited Pro
Forma Financial Information" and "INDEX TO FINANCIAL INFORMATION" in the
Prospectus.
List of Investors
Under the Partnership Agreement and Nebraska state law, a Limited
Partner may obtain a list of the names, addresses and number of Units owned by
the other Limited Partners entitled to so vote on the Merger by making written
request therefor from the General Partner, c/o Timothy W. Kelley, AmREIT, Inc.,
Eight Greenway Plaza, Suite 824, Houston, Texas 77046. At the time of making the
request, the requesting Limited Partner must submit a payment of $10.00 in
payment for the costs of copying and mailing the list and, if the Units are held
through a nominee, provide the Partnership with a statement from the nominee or
other independent third party confirming such Limited Partner's beneficial
ownership. A Limited Partner is only entitled to the foregoing information with
respect to the Partnership in which the Limited Partner holds Units. See
"CONSENT PROCEDURES" in the Prospectus.
End of Partnership Supplement for AAA Net Realty Fund IX, Ltd.
-13-
<PAGE>
AMREIT, INC.
SUPPLEMENT TO
JOINT CONSENT SOLICITATION STATEMENT AND PROSPECTUS
FOR
AAA NET REALTY FUND X, LTD.
A NEBRASKA LIMITED PARTNERSHIP
Mr. H. Kerr Taylor (the "General Partner") is soliciting the approval
of the Limited Partners of AAA Net Realty Fund X, Ltd., a Nebraska Limited
Partnership (the "Partnership"), for the Merger of the Partnership with and into
AmREIT, Inc., a Maryland Corporation ("AmREIT"). As part of the Merger, the
Limited Partners will exchange Units of Limited Partnership Interests ("Units")
in the Partnership for shares of common stock of AmREIT (the "Shares") or,
subject to the Note restriction, 6.0% Notes of AmREIT due December 31, 2004 (the
"Notes"). The Merger, if it is approved, will involve up to ten limited
partnerships, including the Partnership. This solicitation is being made on
behalf of the general partners of the Partnership. The proposal is described in
detail in the Joint Consent Solicitation Statement and Prospectus dated , 1998
(the "Prospectus"). For the definition of capitalized terms used in the
Supplement, which are not separately defined herein, see "GLOSSARY" in the
Prospectus. Cross-references in this Supplement also refer to the cited
discussions in the Prospectus, unless specifically noted to the contrary.
The effects of the Merger may be different for Limited Partners in each
of the Partnerships participating in the Merger (the "Partnerships"). This
Supplement has been prepared to highlight the risks, effects and fairness of the
Merger for the Limited Partners of the Partnership. This Supplement is not
intended to repeat or duplicate the Prospectus and the Prospectus must be
referred to in reading this Supplement. Moreover, this Supplement does not
purport to provide an overall summary of the Merger or to highlight all of its
material terms, conditions, risks or effects. See "SUMMARY" and "THE MERGER" in
the Prospectus. To the extent this Supplement summarizes portions of the
Prospectus, such discussions are qualified in their entirety by the more
detailed discussions of those matters appearing in the Prospectus. Supplements
have also been prepared for each of the other Partnerships and copies of such
Supplements will be provided promptly without charge to each Limited Partner or
his representative who has been so designated in writing upon written request to
Timothy W. Kelley, Vice President at AmREIT, Inc., Eight Greenway Plaza, Suite
824, Houston, Texas 77046. Telephone (800) 888-4400, extension 26 or fax to
(713) 850-0498.
RISK FACTORS
The Merger involves material risks to the Limited Partners,
the more significant of which are:
o The distributions on the securities received by
Limited Partners for their Units in the Merger
will, at least initially, be lower as a percentage
of their investment as compared to distributions
currently received on their Units.
o The General Partner did not retain an unaffiliated
person to represent the Limited Partners in
negotiating the terms of the Merger.
-1-
<PAGE>
o The Negotiated Prices for the Partnership
properties were determined by the General Partner,
who has substantial conflicts of interest in the
Merger due to his financial interest in AmREIT and
the prospects of receiving substantial financial
benefits if the Merger is consummated.
o The Negotiated Prices of the properties are not
based on appraisals from independent real estate
appraisers.
o The Merger will be a taxable transaction to the
Limited Partners.
o There is no assurance that the value of the
consideration received in the Merger by the Limited
Partners for their Units will not be less than the
fair value of their Units as might result from
negotiations between unrelated parties.
o No public market exists for the Shares or the
Notes. Upon completion of the Merger, it is
uncertain if and when a public market will develop
for the Shares and no public market is expected to
develop for the Notes.
o If and when a public market for the Shares
develops, there is no assurance that the Shares
will not trade at prices that are less than the
Exchange Price.
o There is no assurance that the Exchange Price,
which was determined by the General Partner and the
Independent Directors of AmREIT, reflects the fair
value of the Shares which might result from
negotiations between unrelated parties.
o The Appraised Value, upon which payment under the
ALV Payment Election will be determined, will not
be determined or known until after the Merger is
consummated.
o Limited Partners receiving Shares in the Merger
will realize a substantial change in the form of
their investment from a finite life Partnership,
which cannot leverage its investments, to an
infinite life REIT which can leverage its
investments.
o The anticipated benefits to Limited Partners as a
result of the Merger may not be realized.
-2-
<PAGE>
POTENTIAL BENEFITS TO LIMITED PARTNERS
The General Partner believes the Merger is fair to and in the best
interests of the Limited Partners for a number of reasons, including:
o The General Partner believes that the terms of the Merger
Agreement, including the Exchange Price and the Partnership's
Net Asset Value are favorable to the Limited Partners.
o The General Partner believes that the Negotiated Price for
each of the Partnership's Properties is in the highest range
of values for the property in the current real estate market
and that such value would likely exceed the price at which the
property would sell for in the market. The General Partner
believes that the Partnership would thus therefor realize
significantly less value for its Properties than their
Negotiated Prices if the Partnership was liquidated in the
current real estate market.
o By merging into AmREIT, the Limited Partners will be relieved
of uncertainties regarding the Partnership's real estate
investments, including the expiration of its leases on its
properties, the possible difficulties in releasing the
properties and/or the possible substantial costs of releasing
these properties. As a result of the Merger, these risks would
be spread over and more economically absorbed by AmREIT's
larger and more diversified portfolio.
o The special purpose nature of the Partnership's properties,
which makes them suitable for limited types of tenants and
uses and increases the risks of releasing the properties. As a
result of the Merger, these risks would be spread over and
more economically absorbed by AmREIT's larger and more
diversified portfolio.
o Co-ownership of 3 of its properties in joint venture with one
or more other persons, which, as a practical matter, allows
the sale of the property only with the consent of its
co-owner. In the Merger, the property is valued at an amount
pro rata to the Negotiated Price of the entire property
without reduction for less than 100% ownership.
o By combining the Partnership with AmREIT, the Merger will
create an investment portfolio substantially larger and more
geographically diversified than the portfolio of the
Partnership. The Merger will consolidate operations and spread
the risk of an investment in AmREIT over a broader group of
assets and reduce the dependence of the investment upon the
performance of any particular asset or group of assets, such
as assets in the same geographical area.
o The allocations of Merger Expenses under which the Partnership
is required to pay only its proportionate share of the
Partnership Merger Expenses based on its relative Net Asset
Value. Also, if the Limited Partners do not elect to
participate in the Merger, the General Partner will pay or
reimburse the Partnership its Proportionate Share of the
Partnership Merger Expenses.
o As a result of the Merger, the Partnership will no longer
incur the expense for the preparation of separate financial
statements, required annual and quarterly filings, tax returns
and investor communications. The accurate preparation of these
statements and reports requires substantial cost and
management time and effort.
o The General Partner believes the Merger will provide the
combined AmREIT-Partnership entity improved future access to
capital markets for future growth and that Limited Partners,
as AmREIT shareholders, will have enhanced liquidity as a
result of the larger total equity market capitalization of
AmREIT.
o The General Partner received the Houlihan Fairness Opinion
that the Merger is fair, from a financial point of view, to
the Limited Partners.
o The Partnership's strategic combination with a publicly held
REIT which takes advantage of the growth in the REIT industry
and real estate markets is preferable to the alternatives of
complete liquidation of the Partnership, continuation of the
Partnership or reorganization of the Partnership into one
separate REIT.
-3-
<PAGE>
These possible benefits of the Merger to the Limited Partners are
discussed in greater detail in the Prospectus. Limited Partners should refer to
the discussions in the Prospectus under the heading "THE MERGER--The General
Partners Reasons and Recommendations for the Merger."
RISK FACTORS AND POTENTIAL ADVERSE CONSEQUENCES
Limited Partners participating in the Merger will be subject to various
risks and possible adverse consequences which they should take into account in
deciding how they will vote on the Merger. The most significant of these
material risks are:
The Merger involves the following risks for the Limited Partners:
o The General Partner did not retain an unaffiliated
representative to represent the Limited Partners or the
Partnership, or to represent all of the Partnerships as a
Group, in the Merger. Had independent representation been
arranged for a Partnership, the terms of the Merger might have
been more favorable to such Partnership.
o The Negotiated Prices of the Partnership's Properties were
determined by the General Partner who is also the Chief
Executive Officer and largest shareholder of AmREIT. The NAV
of each Partnership should be considered as having been
negotiated by the common management of the Partnerships and
AmREIT.
o The Negotiated Price of the Partnership's Properties is not
based on an independent appraisal.
o The conflicts of interest of the General Partner who will
receive significant financial and other benefits from and/or
as a result of the Merger.
o The possibility that the Partnership's Net Asset Values may
not reflect the actual value of its net assets.
o The fixed Exchange Price which means the Limited Partners will
not receive more Shares (or a Note in a greater principal
amount) if the value of the Shares decreases as of the
Effective Date.
o AmREIT's Shares are not publically traded, a market for the
Shares is not expected to exist immediately upon completion of
this Merger, and there is no assurance that a market for the
Shares will develop in the future. Unless and until there is a
public market for the Shares, shareholders will have
difficulty in liquidating their investment.
o If and when a market for the Shares develops, the Shares may
trade at prices substantially below the Exchange Price.
o The Merger will be a taxable transaction for the Limited
Partners.
o A majority vote of Limited Partners binds the Partnership.
-4-
<PAGE>
o Limited Partners who vote against the Merger will receive
Notes for their Units in the Merger unless they elect to
receive Shares if the Merger is approved.
o Limited Partners who become shareholders of AmREIT may not
receive the same level of distributions as previously received
from their respective Partnership Units.
o Because it is not known how many Partnerships will participate
in the Merger, there are uncertainties as to the capital
structure and size of AmREIT following consummation of the
Merger as they will vary depending on the number which elect
to participate in the Merger.
o As a result of the Merger, the nature of each Limited
Partner's investment will change from holding an interest in a
specified portfolio of properties in a finite life entity to
holding an equity investment in an ongoing REIT, whose
portfolio of properties may be changed from time to time
without the approval of its shareholders and which does not
plan to liquidate such assets within a fixed period.
o If it participates in the Merger, the Partnership will bear
these costs of the Merger in proportion to its relative NAV.
Should the Partnership not participate in the Merger, the
General Partner will pay or reimburse the Partnership for its
portion of these costs. The costs of the Merger allocated to
the Partnerships are limited to the costs of the Houlihan
Fairness Opinions, the Partnership accounting costs (and other
valuation or appraisal costs, if any), which are estimated to
total $150,000, and any direct partner communication costs.
o The anticipated benefits of the Merger may not be realized.
o The anticipated benefits of AmREIT's change to self-management
through the recently completed Adviser Acquisition may not be
fully realized.
o The proceeds of future asset sales or refinancings by AmREIT
will generally be reinvested rather than distributed to
shareholders to the extent not required to be distributed to
maintain REIT status.
o AmREIT's Board of Directors has the power to change the
investment, acquisition and financing policies of AmREIT
(including policies regarding the level of indebtedness)
without a vote of the shareholders, which could result in
policies which do not reflect the interests of all
shareholders.
o Following the consummation of the Merger, AmREIT intends to
borrow additional funds (equal to or exceeding 50% of the
value of the properties acquired in the Merger) to acquire
additional, as yet unidentified, real estate.
These risks and possible adverse consequences of the Merger to the
Limited Partners are discussed in greater detail in the Prospectus. Limited
Partners should refer to the discussion of the risks in participating in the
Merger set forth in the Prospectus under the sections "RISK FACTORS," "CONFLICTS
OF INTEREST," "MATERIAL FEDERAL INCOME TAX ASPECTS" and "COMPARISON OF UNITS,
SHARES AND NOTES."
-5-
<PAGE>
THE MERGER
The purpose of the Merger is to strategically unite AmREIT with one or
more of the Partnerships, each of which has compatible properties in AmREIT's
existing and new markets, and to give the Limited Partners the ability to
participate in a strategic business combination with a publicly held REIT in
order to take advantage of the growth in the REIT industry and real estate
markets in general, with the prospect of being able to liquidate their
investment through the sale of the publicly-traded Shares or retain their
investment indefinitely.
If the Merger is approved, the Partnership will cease to exist and all
of its properties will be transferred to AmREIT. Any Limited Partner may abstain
from or vote against the Merger and, if the Merger is approved, the Limited
Partner will still participate in the Merger and will receive Notes for their
Units unless they elect to receive Shares. Limited Partners will not have
appraisal rights or other dissenter's rights by reason of the Merger. For a
discussion of the effect of abstaining from or voting against the Merger, the
rights of Limited Partners who do so, and the effects of exercising dissenters'
rights, see "THE MERGER - Dissenting Partners and Shareholders."
The General Partner is proposing amendments to the Partnership's
Agreement of Limited Partnership to permit the closing of the transactions
contemplated by the Merger Agreement. Limited Partners voting in favor of the
Merger will be deemed to have voted in favor of each of these proposed
amendments. A majority vote of Limited Partners is required to approve the
proposed amendments and to approve the Merger Agreement. The proposed amendments
authorize the following: (i) the Merger of the Partnership with and into AmREIT,
whether or not AmREIT would be regarded as an Affiliate of the general partners;
and (ii) such other actions as may be necessary under or contemplated by the
Merger Agreement or the Prospectus, irrespective of any provision in the
Partnership Agreement which might otherwise prohibit such actions. See "THE
MERGER -- Proposed Amendments to Partnership Agreements." The General Partner
owns no Units of the Partnership. The general partners of the Partnership have
agreed to waive any right to receive Shares to which they may otherwise have
been entitled except with respect to their capital interests as general
partners.
The General Partner reasonably believes that the terms of the Merger,
including the consideration to be received by the Limited Partners in the
Merger, are fair to and in the best interests of the Limited Partners.
THE GENERAL PARTNER STRONGLY RECOMMENDS THAT ALL LIMITED PARTNERS
VOTE "YES" IN FAVOR OF THE MERGER. THE GENERAL PARTNER REQUESTS THAT EACH
LIMITED PARTNER COMPLETE, SIGN AND RETURN THE ENCLOSED CONSENT AS SOON AS
POSSIBLE.
ALLOCATION OF CONSIDERATION
In the Merger, the Limited Partners will receive Shares (or Notes)
based upon the Net Asset Value ("NAV") of the Partnership. The Partnership's NAV
equals the Negotiated Price of its properties plus its Net Cash. The
Partnership's Net Cash equals the excess, if any, of its cash and accounts
receivable over its debt at the Effective Date. The Negotiated Price of each
property of the Partnership was determined and agreed to by Mr. H. Kerr Taylor,
the General Partner, on behalf of the Partnership in negotiations with the two
directors of AmREIT who are not affiliated with Mr. Taylor (the "Independent
Directors").
-6-
<PAGE>
The number of Shares issuable in the Merger to the Partnership equals
the Partnership's NAV divided by the Exchange Price of $9.34. The Exchange Price
was negotiated and agreed to by the General Partner and the Independent
Directors based on the last public offering price of the Shares, $10.25, net of
certain costs of that offering. However, the Shares are not publically traded
and will not be listed for trading immediately after the Merger. Limited
Partners should refer to the discussion in the Prospectus under the heading "THE
MERGER--The Merger Consideration."
Calculated as if the Effective Date were June 30, 1998, AmREIT is
offering 96.80 Shares or, subject to the Note Restriction, a Note in the
principal amount of $904.08, in consideration for each Unit of the Partnership.
The following table sets forth the methodology utilized in determining the
number of Shares and Notes being offered by AmREIT for each Unit:
Net Asset Value:
Value of Properties:(1)
Golden Corral, Hwy. 1960 (Houston, TX) (95.20%) $1,750,000
TGI Friday's (Houston, TX) (100%) 1,785,000
Goodyear Tire (Houston, TX) (100%) 535,000
Computer City (Minneapolis, MN) (100%) 2,470,000
AFC, Inc./Popeye's (Atlanta, GA) (100%) 925,000
Blockbuster Music (Independence, MO) (45.16%) 775,000
OneCare (Sugarland, TX) (100%) 1,400,000
Just For Feet (Tucson, AZ) (18.25%) 715,000
-------
Negotiated Price $10,355,000
Net Cash(2) ---
Other Assets ---
Other Liabilities ---
---------
Net Asset Value of Partnership(3) $10,355,000
Percentage of Aggregate Net Asset Value of All Partnerships 36.81%
Net Asset Value Per Original Investment of $1,000(4) $904.08
------
Allocation of Shares Received in Merger:
Number of Shares Allocable to Partnership 1,108,672
Percentage of Total Shares to be Issued in the Merger 36.81%
Percentage of Total Shares of AmREIT After the Merger 19.31%
Allocation of Shares to Limited Partners 1,108,672
Allocation of Shares to General Partners(5) ---
---------
Allocation of Shares per Unit 96.80
Allocation of Shares Per Original Investment of $1,000(4) 96.80
Maximum Total Outstanding Shares in AmREIT After the Merger(6) 5,742,873
---------
-7-
<PAGE>
Notes Offered in Merger:
Maximum Principal Amount Offered to Partnership $3,624,250
Principal Amount of Note Offered per Unit $904.08
Principal Amount of Note Offered per Original Investment of
$1,000(4) $904.08
Return to Limited Partners Per $1,000 of Adjusted Capital From
Shares(7):
Return From Merger per $1,000 of Adjusted Capital based on $904.08
Exchange Price(8)
Total Return from Merger based on Exchange Price plus Cumulative $1,256.00
Distributions Through 6/30/1998 per $1,000 of Adjusted Capital
Total Return from Merger based on Exchange Price plus Cumulative 125.60%
Distributions through 6/30/1998 as a Percentage of Adjusted Capital
Return From Merger per $1,000 of Adjusted Capital based on $10.25 $992.17
per Share Price(9)
(1) Percentage of property owned by Partnership shown in parentheses.
(2) Net Cash is the excess, if any, of the Partnership's cash and accounts
receivable over its debt.
(3) Net Asset Value equals Negotiated Price of property plus Net Cash.
(4) "Per Original Investment of $1,000" is computed by dividing the Limited
Partners' allocable share of such amount by the Limited Partners'
original capital of the Partnership (the Partnership's "Original
Capital") and multiplying the result by 1,000.
(5) The general partners have agreed to waive any right to receive Shares
to which they may otherwise have been entitled in the Merger. The
general partners will not receive any compensation or reimbursement for
claims against or interests in the Partnership.
(6) Calculated as if effective date were June 30, 1998. Assumes 100%
participation of the Partnerships and that no Notes are issued.
Includes portion of Share Balance from Adviser Acquisition issuable to
Mr. Taylor upon consummation of Merger.
(7) Adjusted Capital equals a Limited Partner's original invested capital
less cumulative distributions constituting a return of capital under
the Partnership Agreement.
(8) Shares valued at $9.34 per Share.
(9) $10.25 is the most recent public offering price of the Shares.
CONSIDERATIONS UNIQUE TO THE PARTNERSHIPS
Due to the substantial similarities among the Partnerships, such as
their similar investment portfolios and property locations, common investment
objectives and policies, similar financial condition, the fact that the
Partnerships' assets are managed by AmREIT or its Affiliates and substantial
similarities in the language and scope of their Partnership Agreements, many of
the consequences of participating in the Merger are common to the Limited
Partners of each of the Partnerships. The purpose of this section
-8-
<PAGE>
is, however, to highlight features of the Partnership which may distinguish the
situation of the Partnership from that of the other Partnerships and which
should be taken into account by the Limited Partners when evaluating the merits
and risks of the proposed Merger.
Special Considerations Regarding Partnership Properties. Unless the
Limited Partners approve the Merger, the General Partner will continue the
Partnership in accordance with its current investment strategies and objectives
described below. At the time of the Partnership's formation, the General Partner
anticipated the liquidation of its portfolio and distribution of the net
proceeds from the sale of the properties to the Limited Partners within 8 to 12
years after the acquisition of the properties. Based on the completion of the
acquisition of the Partnership's portfolio in 1994, it was anticipated that
liquidation of the portfolio would begin by 2006. However, the Partnership's
ability to achieve its goals will be influenced by the following factors. See
"THE PARTNERSHIPS--Properties" in the Prospectus for additional information
regarding the Partnership's portfolio.
Expiration of Leases. When the leases on each of the
Partnership's 8 properties all expire, the tenants may elect not to renew their
leases or to renew their leases only if the Partnership makes significant
improvements to the property. Should tenants fail to renew their leases, the
Partnership would be required to find new tenants and would likely incur
significant additional expense by reason of temporary vacancy and/or significant
rehabilitation and/or tenant improvement costs.
Concentration of Investment. The Partnership has concentrated
its investments in 8 properties. If a vacancy or other interruption of rents
occurs in one or more of these properties, the distributions of the Partnership
may be significantly reduced. The Partnership has also concentrated its
investments in a limited geographic area. If conditions in this area
deteriorate, the Partnership may experience more difficulty in re-leasing its
properties than it would experience if the properties were more geographically
diversified.
Business Interruption. Memorial-Herman Health System, the
parent of OneCare Health Industries, has approved a plan to dissolve OneCare by
the end of 1998. While the tenant will remain responsible for the OneCare lease
through its initial term, the subsequent use of the property is uncertain at
this time.
Co-ownership of Property. The Partnership owns 3 of its 8
properties in co-ownership with one or more other persons. The Partnership is
dependent upon the consent and cooperation of the majority co-owner to sell or
re-lease the property. Therefore, there is no assurance that the co-owner will
agree to the sale or re-lease of the property at such time or under the terms
the Partnership may desire.
Possible Need for Additional Capital. The Limited Partners may
be required to contribute additional capital and/or approve Partnership
borrowings in order to finance future lease renewal or releasing costs as
described above. Moreover, without an economically desirable lease in place, the
Partnership could not expect to realize an attractive price for the sale of its
properties.
Merger will result in Capitol Loss. Limited Partners will realize a
small capitol loss from the Merger in an amount equal to their allocable share
of the excess of the Partnership's adjusted tax basis of the Partnership assets
over the sum of the fair market value of the Shares received by the Partnership.
Those Limited Partners who have owned their Units since the inception of the
Partnership can expect to recognize a capitol loss of approximately $3 per Unit
as a result of the Merger. The actual amount of loss recognized by
-9-
<PAGE>
each Limited Partner will depend upon the value ascribed to the Shares for
federal tax purposes. Because the Shares will not be publically traded
immediately after the Merger, and the 1998 operating results have not been
included, it is possible that the value of the Shares used for purposes of
calculating the taxable income (or loss) and the taxable income (or loss) per
Unit will differ from the calculation stated above.
The Partnership's federal income tax returns are subject to review and possible
adjustment by the Internal Revenue Service. Under federal income tax laws,
regulations and administrative rulings, certain types of transactions may be
accorded varying interpretations. Accordingly, the Partnership's financial
statements, as well as the individual tax returns of the partners, may be
changed to cause them to conform to the tax treatment resulting from such
review, if any.
Investment Strategy. Each of the properties is currently fully leased
to a single tenant, however, as described above, these leases expire at varying
times in the future. The Partnership is not authorized to raise additional
capital or borrow funds. The Partnership has a history of making regular
quarterly distributions to its Limited Partners. See "Miscellaneous --
Distributions to Limited Partners" below in this Supplement. The Partnership's
strategy is to continue to hold its properties with a view towards liquidating
them at such times as the General Partner deems beneficial and appropriate in a
manner consistent with the Partnership's investment objectives. The principal
investment objectives of the Partnership are to (i) preserve and protect the
Limited Partners' capital; (ii) provide the Limited Partners with quarterly cash
distributions from operations; (iii) obtain long-term appreciation in the value
of its properties; and (iv) provide increased cash distributions to the Limited
Partners as the cash flow from its investments increases over the life of the
Partnership. The Partnership acquired each of its properties for cash and
without the use of borrowed funds (leverage).
Management Compensation. The Partnership has no employees but its
operations are managed by AmREIT. Under the Omnibus Services Agreement, pursuant
to which AmREIT manages the operations of the Partnership, AmREIT is entitled to
annual property management fees equal to 3% of gross rental revenues. Also, the
Omnibus Services Agreement provides for payment of reimbursement fees of up to
6% of the Partnership's gross rental revenues. This relationship will terminate
after the Merger if the Partnership merges into AmREIT. If the Partnership
participates in the Merger, neither AmREIT nor the General Partner or any of
their Affiliates will receive any compensation for services rendered in
connection with the Merger.
Offers From Third Parties. No offers on the Partnership's properties
have been received during the past twelve months by the General Partner from
unaffiliated third parties. See "THE MERGER-Acquisition Proposals" in the
Prospectus.
FAIRNESS OF THE MERGER
Based upon his analysis of the Merger, the General Partner reasonably
believes that:
(1) The terms of the Merger, when considered as a whole, are fair
to the Limited Partners;
(2) The Shares offered in exchange for the Units constitute fair
consideration for the Units of the Limited Partners; and
(3) After comparing the potential benefits and detriments of the
Merger with those of several alternatives, the Merger is more
attractive to the Limited Partners than such alternatives.
THE GENERAL PARTNER REASONABLY BELIEVES THAT THE TERMS OF THE
MERGER AGREEMENT, INCLUDING THE CONSIDERATION TO BE RECEIVED BY THE
LIMITED PARTNERS IN CONNECTION WITH THE MERGER, ARE FAIR TO AND IN THE BEST
INTERESTS OF THE LIMITED PARTNERS. ACCORDINGLY, THE GENERAL PARTNER HAS
-10-
<PAGE>
APPROVED THE MERGER AGREEMENT AND RECOMMENDS THAT THE LIMITED PARTNERS
VOTE FOR APPROVAL OF THE MERGER AGREEMENT AND AMENDMENT OF THE
PARTNERSHIP AGREEMENT.
The General Partner's determination is based upon the transaction as a
whole, as well as the combination of less than all Partnerships, because the
Partnership's value for the purposes of the Merger is its Net Asset Value. The
General Partner believes that Net Asset Value is a reasonable estimate of the
value of each Partnership for the Merger as it is directly derived from the
value of the Partnership's net assets at the Effective Date, independent of the
valuations of the assets of the other Partnerships. The General Partner also
believes the Exchange Price, the value on which Shares will be issued to the
Partnership in the Merger, is a reasonable estimate of the value of the Shares
based on the last public offering price of the Shares and within the overall
context of the Merger. See "THE MERGER - The General Partner's Reasons and
Recommendations for the Merger. For a full discussion of the General Partner's
reasons for the Merger, see "THE MERGER -- The General Partner's Reasons for the
Merger and Recommendation to the Limited Partners" in the Prospectus.
Fairness Opinion. The General Partners, on behalf of the Partnership,
retained Houlihan to render an opinion as to whether the consideration to be
received by the Limited Partners in connection with the Merger was fair, from a
financial point of view, to its Limited Partners. Houlihan was not requested to,
and did not make, any recommendation to the Partnerships as to the consideration
to be received by the Limited Partners in connection with the Merger, which
consideration was determined through negotiations between the common management
of the Partnerships and AmREIT. The General Partner retained Houlihan to render
its fairness opinion based upon Houlihan's experience in the valuation of
businesses and their securities in connection with mergers and acquisitions, and
valuations for corporate purposes especially with respect to REITs and other
real estate companies. Houlihan delivered its written opinion, dated June 1,
1998, to the General Partner, to the effect that, as of the date of such
opinion, based on Houlihan's review and subject to the limitations described in
the Prospectus, the consideration to be received by the Limited Partners, in
connection with the Merger is fair, from a financial point of view, to the
Limited Partners. The Houlihan Fairness Opinion does not constitute a
recommendation to any Limited Partner as to how any such Limited Partner should
vote on the Merger. See "FAIRNESS OPINION--The Houlihan Fairness Opinion."
Comparison of Benefits and Detriments. The General Partner's assessment
of the fairness of the proposed Merger was based on the review of different
alternatives that were available. The evaluations of the different alternatives
included, but were not limited to, a strategic combination with a publicly
traded REIT to take advantage of the growth of the REIT industry and real estate
markets in general, completely liquidating the Partnership, continuing the
Partnership or reorganizing the Partnership into a REIT. In order to determine
whether the Merger or one of its alternatives would be more attractive to the
Limited Partners, the General Partner compared the potential benefits and
detriments of the Merger with the potential benefits and detriments of the
alternatives. A detailed discussion of the potential benefits and detriments of
each of these alternatives is provided in "THE MERGER -- The General Partners'
Reasons and Recommendation for the Merger" and "-- Alternatives to the Merger"
in the Prospectus.
In the event the Merger is not consummated for any reason, the
Partnership will continue to pursue its business objectives of maximizing the
value of its properties, in addition to the possible liquidation of its
portfolio, another strategic combination or another attractive alternative that
may become available.
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<PAGE>
COMPARATIVE COMPENSATION, FEES AND DISTRIBUTIONS
COMPENSATION PAID TO THE GENERAL PARTNER AND HIS AFFILIATES
This section is intended to provide Limited Partners with a brief
comparison of the compensation, fees and distributions paid to the General
Partner and his Affiliates under the Partnership's current arrangements with
those that would have been paid had the Merger been in place. The following
table sets forth the compensation, fees and distributions by the Partnership to
the General Partner and his Affiliates during the two most recent fiscal years
and the six-month period ended June 30, 1998 and compares those payments against
the amount that would have been paid assuming the Merger had occurred January 1,
1996.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
Six Months Ended
1996 1997 June 30, 1998
---- ---- -------------
Actual Pro Forma Actual Pro Forma Actual Pro Forma
<S> <C> <C> <C> <C> <C> <C>
Administrative Reimb.(1) $65,883 $60,686 $68,932 $64,104 $34,566 $32,196
Cash Distributions(2) 3,600 --- 4,450 --- 2,800 ---
General Partner Salary(3) --- 4,827 --- 5,792 --- 2,896
(1) An AmREIT subsidiary receives administrative reimbursements of up to 6%
of gross rental revenues from the properties. No other fees, salaries
or other compensation were paid by the Partnership to its general
partner or its affiliates during these periods.
(2) Includes all cash distributions made to Mr. Taylor and his affiliates
resulting from ownership of Units and general partner interests. Mr.
Taylor's employment agreement with AmREIT provides for a fixed base
salary of $25,000 and $30,000 per annum for 1998 and 1999 respectively,
which amounts will not increase as a result of the Merger.
(3) Mr. Taylor's salary represents the total salary and benefits Mr. Taylor
is currently entitled to receive as an officer and director of AmREIT
allocated to the Partnership based on the percentage of shares of
AmREIT to be owned by the Limited Partners immediately after the
Merger. No other affiliate of the general partners of the Partnership
will receive compensation from AmREIT upon completion of the Merger.
</TABLE>
New Compensation
AmREIT will internally manage and lease the properties obtained by
AmREIT from the Partnership pursuant to the Merger. The terms of this engagement
will be substantially similar to the terms governing the management arrangements
that AmREIT typically uses in managing its current properties.
MISCELLANEOUS
Distributions to Limited Partners
Set forth below are distributions per Unit made by the Partnership to
the Limited Partners during the most recent five fiscal years and the most
recently completed interim period. Also see "THE PARTNERSHIPS - Partnership
Distributions" in the Prospectus.
-12-
<PAGE>
<TABLE>
<CAPTION>
Six Months Ended
1993 1994 1995 1996 1997 June 30, 1998
---- ---- ---- ---- ---- -------------
<S> <C> <C> <C> <C> <C> <C>
Distributions $32.38 $51.83 $76.75 $80.05 $80.61 $40.46
Portion of Distribution That
Was a Return of Capital (1) --- --- --- --- --- ---
(1) Distributions treated as a return of capital under the Partnership
Agreement.
- ----------------------
</TABLE>
Financial Information
Rental income statements for the properties of the Partnership for the
years ended December 31, 1997 and 1996 and certain pro forma financial
statements with respect to the Partnership are set forth in "The Unaudited Pro
Forma Financial Information" and "INDEX TO FINANCIAL INFORMATION" in the
Prospectus.
List of Investors
Under the Partnership Agreement and Nebraska state law, a Limited
Partner may obtain a list of the names, addresses and number of Units owned by
the other Limited Partners entitled to so vote on the Merger by making written
request therefor from the General Partner, c/o Timothy W. Kelley, AmREIT, Inc.,
Eight Greenway Plaza, Suite 824, Houston, Texas 77046. At the time of making the
request, the requesting Limited Partner must submit a payment of $10.00 in
payment for the costs of copying and mailing the list and, if the Units are held
through a nominee, provide the Partnership with a statement from the nominee or
other independent third party confirming such Limited Partner's beneficial
ownership. A Limited Partner is only entitled to the foregoing information with
respect to the Partnership in which the Limited Partner holds Units. See
"CONSENT PROCEDURES" in the Prospectus.
End of Partnership Supplement for AAA Net Realty Fund X, Ltd.
-13-
<PAGE>
AMREIT, INC.
SUPPLEMENT TO
JOINT CONSENT SOLICITATION STATEMENT AND PROSPECTUS
FOR
AAA NET REALTY FUND XI, LTD.
A TEXAS LIMITED PARTNERSHIP
Mr. H. Kerr Taylor (the "General Partner") is soliciting the approval
of the Limited Partners of AAA Net Realty Fund XI, Ltd., a Texas Limited
Partnership (the "Partnership"), for the Merger of the Partnership with and into
AmREIT, Inc., a Maryland Corporation ("AmREIT"). As part of the Merger, the
Limited Partners will exchange Units of Limited Partnership Interests ("Units")
in the Partnership for shares of common stock of AmREIT (the "Shares") or,
subject to the Note restriction, 6.0% Notes of AmREIT due December 31, 2004 (the
"Notes"). The Merger, if it is approved, will involve up to ten limited
partnerships, including the Partnership. This solicitation is being made on
behalf of the general partners of the Partnership. The proposal is described in
detail in the Joint Consent Solicitation Statement and Prospectus dated , 1998
(the "Prospectus"). For the definition of capitalized terms used in the
Supplement, which are not separately defined herein, see "GLOSSARY" in the
Prospectus. Cross-references in this Supplement also refer to the cited
discussions in the Prospectus, unless specifically noted to the contrary.
The effects of the Merger may be different for Limited Partners in each
of the Partnerships participating in the Merger (the "Partnerships"). This
Supplement has been prepared to highlight the risks, effects and fairness of the
Merger for the Limited Partners of the Partnership. This Supplement is not
intended to repeat or duplicate the Prospectus and the Prospectus must be
referred to in reading this Supplement. Moreover, this Supplement does not
purport to provide an overall summary of the Merger or to highlight all of its
material terms, conditions, risks or effects. See "SUMMARY" and "THE MERGER" in
the Prospectus. To the extent this Supplement summarizes portions of the
Prospectus, such discussions are qualified in their entirety by the more
detailed discussions of those matters appearing in the Prospectus. Supplements
have also been prepared for each of the other Partnerships and copies of such
Supplements will be provided promptly without charge to each Limited Partner or
his representative who has been so designated in writing upon written request to
Timothy W. Kelley, Vice President at AmREIT, Inc., Eight Greenway Plaza, Suite
824, Houston, Texas 77046. Telephone (800) 888-4400, extension 26 or fax to
(713) 850-0498.
RISK FACTORS
The Merger involves material risks to the Limited Partners,
the more significant of which are:
o The distributions on the securities received by
Limited Partners for their Units in the Merger
will, at least initially, be lower as a percentage
of their investment as compared to distributions
currently received on their Units.
o The General Partner did not retain an unaffiliated
person to represent the Limited Partners in
negotiating the terms of the Merger.
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<PAGE>
o The Negotiated Prices for the Partnership
properties were determined by the General Partner,
who has substantial conflicts of interest in the
Merger due to his financial interest in AmREIT and
the prospects of receiving substantial financial
benefits if the Merger is consummated.
o The Negotiated Prices of the properties are not
based on appraisals from independent real estate
appraisers.
o The Merger will be a taxable transaction to the
Limited Partners.
o There is no assurance that the value of the
consideration received in the Merger by the Limited
Partners for their Units will not be less than the
fair value of their Units as might result from
negotiations between unrelated parties.
o No public market exists for the Shares or the
Notes. Upon completion of the Merger, it is
uncertain if and when a public market will develop
for the Shares and no public market is expected to
develop for the Notes.
o If and when a public market for the Shares
develops, there is no assurance that the Shares
will not trade at prices that are less than the
Exchange Price.
o There is no assurance that the Exchange Price,
which was determined by the General Partner and the
Independent Directors of AmREIT, reflects the fair
value of the Shares which might result from
negotiations between unrelated parties.
o The Appraised Value, upon which payment under the
ALV Payment Election will be determined, will not
be determined or known until after the Merger is
consummated.
o Limited Partners receiving Shares in the Merger
will realize a substantial change in the form of
their investment from a finite life Partnership,
which cannot leverage its investments, to an
infinite life REIT which can leverage its
investments.
o The anticipated benefits to Limited Partners as a
result of the Merger may not be realized.
-2-
<PAGE>
POTENTIAL BENEFITS TO LIMITED PARTNERS
The General Partner believes the Merger is fair to and in the best
interests of the Limited Partners for a number of reasons, including:
o The General Partner believes that the terms of the Merger
Agreement, including the Exchange Price and the Partnership's
Net Asset Value are favorable to the Limited Partners.
o The General Partner believes that the Negotiated Price for
each of the Partnership's Properties is in the highest range
of values for the property in the current real estate market
and that such value would likely exceed the price at which the
property would sell for in the market. The General Partner
believes that the Partnership would thus therefor realize
significantly less value for its Properties than their
Negotiated Prices if the Partnership was liquidated in the
current real estate market.
o By merging into AmREIT, the Limited Partners will be relieved
of uncertainties regarding the Partnership's real estate
investments, including the expiration of its leases on its
properties, the possible difficulties in releasing the
properties and/or the possible substantial costs of releasing
these properties. As a result of the Merger, these risks would
be spread over and more economically absorbed by AmREIT's
larger and more diversified portfolio.
o The special purpose nature of the Partnership's properties,
which makes them suitable for limited types of tenants and
uses and increases the risks of releasing the properties. As a
result of the Merger, these risks would be spread over and
more economically absorbed by AmREIT's larger and more
diversified portfolio.
o Co-ownership of 5 of its 7 properties in joint venture with
one or more other persons, which, as a practical matter,
allows the sale of the property only with the consent of its
co-owner. In the Merger, the property is valued at an amount
pro rata to the Negotiated Price of the entire property
without reduction for less than 100% ownership.
o By combining the Partnership with AmREIT, the Merger will
create an investment portfolio substantially larger and more
geographically diversified than the portfolio of the
Partnership. The Merger will consolidate operations and spread
the risk of an investment in AmREIT over a broader group of
assets and reduce the dependence of the investment upon the
performance of any particular asset or group of assets, such
as assets in the same geographical area.
o The allocations of Merger Expenses under which the Partnership
is required to pay only its proportionate share of the
Partnership Merger Expenses based on its relative Net Asset
Value. Also, if the Limited Partners do not elect to
participate in the Merger, the General Partner will pay or
reimburse the Partnership its Proportionate Share of the
Partnership Merger Expenses.
o As a result of the Merger, the Partnership will no longer
incur the expense for the preparation of separate financial
statements, required annual and quarterly filings, tax returns
and investor communications. The accurate preparation of these
statements and reports requires substantial cost and
management time and effort.
o The General Partner believes the Merger will provide the
combined AmREIT-Partnership entity improved future access to
capital markets for future growth and that Limited Partners,
as AmREIT shareholders, will have enhanced liquidity as a
result of the larger total equity market capitalization of
AmREIT.
o The General Partner received the Houlihan Fairness Opinion
that the Merger is fair, from a financial point of view, to
the Limited Partners.
o The Partnership's strategic combination with a publicly held
REIT which takes advantage of the growth in the REIT industry
and real estate markets is preferable to the alternatives of
complete liquidation of the Partnership, continuation of the
Partnership or reorganization of the Partnership into one
separate REIT.
-3-
<PAGE>
These possible benefits of the Merger to the Limited Partners are
discussed in greater detail in the Prospectus. Limited Partners should refer to
the discussions in the Prospectus under the heading "THE MERGER--The General
Partners Reasons and Recommendations for the Merger."
RISK FACTORS AND POTENTIAL ADVERSE CONSEQUENCES
Limited Partners participating in the Merger will be subject to various
risks and possible adverse consequences which they should take into account in
deciding how they will vote on the Merger. The most significant of these
material risks are:
The Merger involves the following risks for the Limited Partners:
o The General Partner did not retain an unaffiliated
representative to represent the Limited Partners or the
Partnership, or to represent all of the Partnerships as a
Group, in the Merger. Had independent representation been
arranged for a Partnership, the terms of the Merger might have
been more favorable to such Partnership.
o The Negotiated Prices of the Partnership's Properties were
determined by the General Partner who is also the Chief
Executive Officer and largest shareholder of AmREIT. The NAV
of each Partnership should be considered as having been
negotiated by the common management of the Partnerships and
AmREIT.
o The Negotiated Price of the Partnership's Properties is not
based on an independent appraisal.
o The conflicts of interest of the General Partner who will
receive significant financial and other benefits from and/or
as a result of the Merger.
o The possibility that the Partnership's Net Asset Values may
not reflect the actual value of its net assets.
o The fixed Exchange Price which means the Limited Partners will
not receive more Shares (or a Note in a greater principal
amount) if the value of the Shares decreases as of the
Effective Date.
o AmREIT's Shares are not publically traded, a market for the
Shares is not expected to exist immediately upon completion of
this Merger, and there is no assurance that a market for the
Shares will develop in the future. Unless and until there is a
public market for the Shares, shareholders will
have difficulty in liquidating their investment.
o If and when a market for the Shares develops, the Shares
may trade at prices substantially below the Exchange Price.
o The Merger will be a taxable transaction for the Limited
Partners.
o A majority vote of Limited Partners binds the Partnership.
-4-
<PAGE>
o Limited Partners who vote against the Merger will receive
Notes for their Units in the Merger unless they elect to
receive Shares if the Merger is approved.
o Limited Partners who become shareholders of AmREIT may not
receive the same level of distributions as previously received
from their respective Partnership Units.
o Because it is not known how many Partnerships will participate
in the Merger, there are uncertainties as to the capital
structure and size of AmREIT following consummation of the
Merger as they will vary depending on the number which elect
to participate in the Merger.
o As a result of the Merger, the nature of each Limited
Partner's investment will change from holding an interest in a
specified portfolio of properties in a finite life entity to
holding an equity investment in an ongoing REIT, whose
portfolio of properties may be changed from time to time
without the approval of its shareholders and which does not
plan to liquidate such assets within a fixed period.
o If it participates in the Merger, the Partnership will bear
these costs of the Merger in proportion to its relative NAV.
Should the Partnership not participate in the Merger, the
General Partner will pay or reimburse the Partnership for its
portion of these costs. The costs of the Merger allocated to
the Partnerships are limited to the costs of the Houlihan
Fairness Opinions, the Partnership accounting costs (and other
valuation or appraisal costs, if any), which are estimated to
total $150,000, and any direct partner communication costs.
o The anticipated benefits of the Merger may not be realized.
o The anticipated benefits of AmREIT's change to self-management
through the recently completed Adviser Acquisition may not be
fully realized.
o The proceeds of future asset sales or refinancings by AmREIT
will generally be reinvested rather than distributed to
shareholders to the extent not required to be distributed to
maintain REIT status.
o AmREIT's Board of Directors has the power to change the
investment, acquisition and financing policies of AmREIT
(including policies regarding the level of indebtedness)
without a vote of the shareholders, which could result in
policies which do not reflect the interests of all
shareholders.
o Following the consummation of the Merger, AmREIT intends to
borrow additional funds (equal to or exceeding 50% of the
value of the properties acquired in the Merger) to acquire
additional, as yet unidentified, real estate.
These risks and possible adverse consequences of the Merger to the
Limited Partners are discussed in greater detail in the Prospectus. Limited
Partners should refer to the discussion of the risks in participating in the
Merger set forth in the Prospectus under the sections "RISK FACTORS," "CONFLICTS
OF INTEREST," "MATERIAL FEDERAL INCOME TAX ASPECTS" and "COMPARISON OF UNITS,
SHARES AND NOTES."
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<PAGE>
THE MERGER
The purpose of the Merger is to strategically unite AmREIT with one or
more of the Partnerships, each of which has compatible properties in AmREIT's
existing and new markets, and to give the Limited Partners the ability to
participate in a strategic business combination with a publicly held REIT in
order to take advantage of the growth in the REIT industry and real estate
markets in general, with the prospect of being able to liquidate their
investment through the sale of the publicly-traded Shares or retain their
investment indefinitely.
If the Merger is approved, the Partnership will cease to exist and all
of its properties will be transferred to AmREIT. Any Limited Partner may abstain
from or vote against the Merger and, if the Merger is approved, the Limited
Partner will still participate in the Merger and will receive Notes for their
Units unless they elect to receive Shares. Limited Partners will not have
appraisal rights or other dissenter's rights by reason of the Merger. For a
discussion of the effect of abstaining from or voting against the Merger, the
rights of Limited Partners who do so, and the effects of exercising dissenters'
rights, see "THE MERGER - Dissenting Partners and Shareholders."
The General Partner is proposing amendments to the Partnership's
Agreement of Limited Partnership to permit the closing of the transactions
contemplated by the Merger Agreement. Limited Partners voting in favor of the
Merger will be deemed to have voted in favor of each of these proposed
amendments. A majority vote of Limited Partners is required to approve the
proposed amendments and to approve the Merger Agreement. The proposed amendments
authorize the following: (i) the Merger of the Partnership with and into AmREIT,
whether or not AmREIT would be regarded as an Affiliate of the general partners;
and (ii) such other actions as may be necessary under or contemplated by the
Merger Agreement or the Prospectus, irrespective of any provision in the
Partnership Agreement which might otherwise prohibit such actions. See "THE
MERGER -- Proposed Amendments to Partnership Agreements." The General Partner
owns no Units of the Partnership. The general partners of the Partnership have
agreed to waive any right to receive Shares to which they may otherwise have
been entitled except with respect to their capital interests as general
partners.
The General Partner reasonably believes that the terms of the Merger,
including the consideration to be received by the Limited Partners in the
Merger, are fair to and in the best interests of the Limited Partners.
THE GENERAL PARTNER STRONGLY RECOMMENDS THAT ALL LIMITED PARTNERS
VOTE "YES" IN FAVOR OF THE MERGER. THE GENERAL PARTNER REQUESTS THAT EACH
LIMITED PARTNER COMPLETE, SIGN AND RETURN THE ENCLOSED CONSENT AS SOON AS
POSSIBLE.
ALLOCATION OF CONSIDERATION
In the Merger, the Limited Partners will receive Shares (or Notes)
based upon the Net Asset Value ("NAV") of the Partnership. The Partnership's NAV
equals the Negotiated Price of its properties plus its Net Cash. The
Partnership's Net Cash equals the excess, if any, of its cash and accounts
receivable over its debt at the Effective Date. The Negotiated Price of each
property of the Partnership was determined and agreed to by Mr. H. Kerr Taylor,
the General Partner, on behalf of the Partnership in negotiations with the two
directors of AmREIT who are not affiliated with Mr. Taylor (the "Independent
Directors").
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<PAGE>
The number of Shares issuable in the Merger to the Partnership equals
the Partnership's NAV divided by the Exchange Price of $9.34. The Exchange Price
was negotiated and agreed to by the General Partner and the Independent
Directors based on the last public offering price of the Shares, $10.25, net of
certain costs of that offering. However, the Shares are not publically traded
and will not be listed for trading immediately after the Merger. Limited
Partners should refer to the discussion in the Prospectus under the heading "THE
MERGER--The Merger Consideration."
Calculated as if the Effective Date were June 30, 1998, AmREIT is
offering 97.42 Shares or, subject to the Note Restriction, a Note in the
principal amount of $909.87, in consideration for each Unit of the Partnership.
The following table sets forth the methodology utilized in determining the
number of Shares and Notes being offered by AmREIT for each Unit:
Net Asset Value:
Value of Properties:(1)
Blockbuster Video (Wichita, KS) (49%) $940,000
Blockbuster Video (Oklahoma City, OK) (100%) 825,000
Just For Feet (Tucson, AZ) (29.85%) 1,175,000
Bank United (The Woodlands, TX) (49%) 260,000
Just For Feet (Baton Rouge, LA) (49%) 1,520,000
Hollywood Video (Lafayette, LA) (25.42%) 345,000
Pier One (Longmont, CO) (100%) 1,285,000
----------
Negotiated Price $6,350,000
Net Cash(2) $74,748
Other Assets ---
Other Liabilities ---
----------
Net Asset Value of Partnership(3) $6,424,748
----------
Percentage of Aggregate Net Asset Value of All Partnerships 22.84%
Net Asset Value Per Original Investment of $1,000(4) $909.87
------
Allocation of Shares Received in Merger:
Number of Shares Allocable to Partnership 687,875
Percentage of Total Shares to be Issued in the Merger 22.84%
Percentage of Total Shares of AmREIT After the Merger 11.98%
Allocation of Shares to Limited Partners 687,875
Allocation of Shares to General Partners(5) ---
----------
Allocation of Shares per Unit 97.42
Allocation of Shares Per Original Investment of $1,000(4) 97.42
Maximum Total Outstanding Shares in AmREIT After the Merger(6) 5,742,873
----------
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<PAGE>
Notes Offered in Merger:
Maximum Principal Amount Offered to Partnership $2,248,662
Principal Amount of Note Offered per Unit $909.87
Principal Amount of Note Offered per Original Investment
of $1,000(4) $909.87
-------
Return to Limited Partners Per $1,000 of Adjusted Capital
From Shares(7):
Return From Merger per $1,000 of Adjusted Capital based on $909.87
Exchange Price(8)
Total Return from Merger based on Exchange Price plus Cumulative $1,080.80
Distributions Through 6/30/1998 per $1,000 of Adjusted Capital
Total Return from Merger based on Exchange Price plus Cumulative 108.08%
Distributions through 6/30/1998 as a Percentage of Adjusted Capital
Return From Merger per $1,000 of Adjusted Capital based on $10.25 $998.51
per Share Price(9)
(1) Percentage of property owned by Partnership shown in parentheses.
(2) Net Cash is the excess, if any, of the Partnership's cash and
accounts receivable over its debt.
(3) Net Asset Value equals Negotiated Price of property plus Net Cash.
(4) "Per Original Investment of $1,000" is computed by dividing the Limited
Partners' allocable share of such amount by the Limited Partners'
original capital of the Partnership (the Partnership's "Original
Capital") and multiplying the result by 1,000.
(5) The general partners have agreed to waive any right to receive Shares
to which they may otherwise have been entitled in the Merger. The
general partners will not receive any compensation or reimbursement for
claims against or interests in the Partnership.
(6) Calculated as if effective date were June 30, 1998. Assumes 100%
participation of the Partnerships and that no Notes are issued.
Includes portion of Share Balance from Adviser Acquisition issuable to
Mr. Taylor upon consummation of Merger.
(7) Adjusted Capital equals a Limited Partner's original invested capital
less cumulative distributions constituting a return of capital under
the Partnership Agreement.
(8) Shares valued at $9.34 per Share.
(9) $10.25 is the most recent public offering price of the Shares.
CONSIDERATIONS UNIQUE TO THE PARTNERSHIPS
Due to the substantial similarities among the Partnerships, such as
their similar investment portfolios and property locations, common investment
objectives and policies, similar financial condition, the fact that the
Partnerships' assets are managed by AmREIT or its Affiliates and substantial
similarities in the language and scope of their Partnership Agreements, many of
the consequences of participating in the Merger are common to the Limited
Partners of each of the Partnerships. The purpose of this section is, however,
to highlight features of the Partnership which may distinguish the situation of
the Partnership
-8-
<PAGE>
from that of the other Partnerships and which should be taken into account by
the Limited Partners when evaluating the merits and risks of the proposed
Merger.
Special Considerations Regarding Partnership Properties. Unless the
Limited Partners approve the Merger, the General Partner will continue the
Partnership in accordance with its current investment strategies and objectives
described below. At the time of the Partnership's formation, the General Partner
anticipated the liquidation of its portfolio and distribution of the net
proceeds from the sale of the properties to the Limited Partners within 8 to 12
years after the acquisition of the properties. Based on the completion of the
acquisition of the Partnership's portfolio in 1996, it was anticipated that
liquidation of the portfolio would begin by 2008. However, the Partnership's
ability to achieve its goals will be influenced by the following factors. See
"THE PARTNERSHIPS--Properties" in the Prospectus for additional information
regarding the Partnership's portfolio.
Expiration of Leases. When the leases on the Partnership's
properties all expire, the tenants may elect not to renew their leases or to
renew their leases only if the Partnership makes significant improvements to the
property. Should tenants fail to renew their leases, the Partnership would be
required to find new tenants and would likely incur significant additional
expense by reason of temporary vacancy and/or significant rehabilitation and/or
tenant improvement costs.
Concentration of Investment. The Partnership has leased 2 of
its 7 properties to organizations or affiliates of organizations that are
engaged in the video tape rental business. This business is subject to
substitute technologies that pose a potential risk to its long-term viability.
If a technological development did occur which negatively affected that
business, it is possible each of these locations would be affected at the same
time and may cause a significant reduction in the distributions of the
Partnership.
Co-ownership of Property. The Partnership owns 5 of its 7
properties in co-ownership with one or more other persons. The Partnership is
dependent upon the consent and cooperation of the majority co-owner to sell or
re-lease the property. Therefore, there is no assurance that the co-owner will
agree to the sale or re-lease of the property at such time or under the terms
the Partnership may desire.
Possible Need for Additional Capital. The Limited Partners may
be required to contribute additional capital and/or approve Partnership
borrowings in order to finance future lease renewal or releasing costs as
described above. Moreover, without an economically desirable lease in place, the
Partnership could not expect to realize an attractive price for the sale of its
properties.
Merger will result in Capitol Loss. Limited Partners will realize a
small capitol loss from the Merger in an amount equal to their allocable share
of the excess of the Partnership's adjusted tax basis of the Partnership assets
over the sum of the fair market value of the Shares received by the Partnership.
Those Limited Partners who have owned their Units since the inception of the
Partnership can expect to recognize a capitol loss of approximately $34 per Unit
as a result of the Merger. The actual amount of loss recognized by each Limited
Partner will depend upon the value ascribed to the Shares for federal tax
purposes. Because the Shares will not be publically traded immediately after the
Merger, and the 1998 operating results have not been included, it is possible
that the value of the Shares used for purposes of calculating the taxable income
(or loss) and the taxable income (or loss) per Unit will differ from the
calculation stated above.
-9-
<PAGE>
The Partnership's federal income tax returns are subject to review and possible
adjustment by the Internal Revenue Service. Under federal income tax laws,
regulations and administrative rulings, certain types of transactions may be
accorded varying interpretations. Accordingly, the Partnership's financial
statements, as well as the individual tax returns of the partners, may be
changed to cause them to conform to the tax treatment resulting from such
review, if any.
Investment Strategy. Each of the properties is currently fully leased
to a single tenant, however, as described above, these leases expire at varying
times in the future. The Partnership is not authorized to raise additional
capital or borrow funds. The Partnership has a history of making regular
quarterly distributions to its Limited Partners. See "Miscellaneous --
Distributions to Limited Partners" below in this Supplement. The Partnership's
strategy is to continue to hold its properties with a view towards liquidating
them at such times as the General Partner deems beneficial and appropriate in a
manner consistent with the Partnership's investment objectives. The principal
investment objectives of the Partnership are to (i) preserve and protect the
Limited Partners' capital; (ii) provide the Limited Partners with quarterly cash
distributions from operations; (iii) obtain long-term appreciation in the value
of its properties; and (iv) provide increased cash distributions to the Limited
Partners as the cash flow from its investments increases over the life of the
Partnership. The Partnership acquired each of its properties for cash and
without the use of borrowed funds (leverage).
Management Compensation. The Partnership has no employees but its
operations are managed by AmREIT. Under the Omnibus Services Agreement, pursuant
to which AmREIT manages the operations of the Partnership, AmREIT is entitled to
annual property management fees equal to 3% of gross rental revenues. Also, the
Omnibus Services Agreement provides for payment of reimbursement fees of up to
6% of the Partnership's gross rental revenues. This relationship will terminate
after the Merger if the Partnership merges into AmREIT. If the Partnership
participates in the Merger, neither AmREIT nor the General Partner or any of
their Affiliates will receive any compensation for services rendered in
connection with the Merger.
Offers From Third Parties. No offers on the Partnership's properties
have been received during the past twelve months by the General Partner from
unaffiliated third parties. See "THE MERGER-Acquisition Proposals" in the
Prospectus.
FAIRNESS OF THE MERGER
Based upon his analysis of the Merger, the General Partner reasonably
believes that:
(1) The terms of the Merger, when considered as a whole, are fair
to the Limited Partners;
(2) The Shares offered in exchange for the Units constitute
fair consideration for the Units of the Limited Partners; and
(3) After comparing the potential benefits and detriments of the
Merger with those of several alternatives, the Merger is more
attractive to the Limited Partners than such alternatives.
THE GENERAL PARTNER REASONABLY BELIEVES THAT THE TERMS OF THE MERGER
AGREEMENT, INCLUDING THE CONSIDERATION TO BE RECEIVED BY THE LIMITED PARTNERS IN
CONNECTION WITH THE MERGER, ARE FAIR TO AND IN THE BEST INTERESTS OF THE LIMITED
PARTNERS. ACCORDINGLY, THE GENERAL PARTNER HAS APPROVED THE MERGER AGREEMENT AND
RECOMMENDS THAT THE LIMITED PARTNERS VOTE FOR APPROVAL OF THE MERGER AGREEMENT
AND AMENDMENT OF THE PARTNERSHIP AGREEMENT.
-10-
<PAGE>
The General Partner's determination is based upon the transaction as a
whole, as well as the combination of less than all Partnerships, because the
Partnership's value for the purposes of the Merger is its Net Asset Value. The
General Partner believes that Net Asset Value is a reasonable estimate of the
value of each Partnership for the Merger as it is directly derived from the
value of the Partnership's net assets at the Effective Date, independent of the
valuations of the assets of the other Partnerships. The General Partner also
believes the Exchange Price, the value on which Shares will be issued to the
Partnership in the Merger, is a reasonable estimate of the value of the Shares
based on the last public offering price of the Shares and within the overall
context of the Merger. See "THE MERGER - The General Partner's Reasons and
Recommendations for the Merger. For a full discussion of the General Partner's
reasons for the Merger, see "THE MERGER -- The General Partner's Reasons for the
Merger and Recommendation to the Limited Partners" in the Prospectus.
Fairness Opinion. The General Partners, on behalf of the Partnership,
retained Houlihan to render an opinion as to whether the consideration to be
received by the Limited Partners in connection with the Merger was fair, from a
financial point of view, to its Limited Partners. Houlihan was not requested to,
and did not make, any recommendation to the Partnerships as to the consideration
to be received by the Limited Partners in connection with the Merger, which
consideration was determined through negotiations between the common management
of the Partnerships and AmREIT. The General Partner retained Houlihan to render
its fairness opinion based upon Houlihan's experience in the valuation of
businesses and their securities in connection with mergers and acquisitions, and
valuations for corporate purposes especially with respect to REITs and other
real estate companies. Houlihan delivered its written opinion, dated June 1,
1998, to the General Partner, to the effect that, as of the date of such
opinion, based on Houlihan's review and subject to the limitations described in
the Prospectus, the consideration to be received by the Limited Partners, in
connection with the Merger is fair, from a financial point of view, to the
Limited Partners. The Houlihan Fairness Opinion does not constitute a
recommendation to any Limited Partner as to how any such Limited Partner should
vote on the Merger. See "FAIRNESS OPINION--The Houlihan Fairness Opinion."
Comparison of Benefits and Detriments. The General Partner's assessment
of the fairness of the proposed Merger was based on the review of different
alternatives that were available. The evaluations of the different alternatives
included, but were not limited to, a strategic combination with a publicly
traded REIT to take advantage of the growth of the REIT industry and real estate
markets in general, completely liquidating the Partnership, continuing the
Partnership or reorganizing the Partnership into a REIT. In order to determine
whether the Merger or one of its alternatives would be more attractive to the
Limited Partners, the General Partner compared the potential benefits and
detriments of the Merger with the potential benefits and detriments of the
alternatives. A detailed discussion of the potential benefits and detriments of
each of these alternatives is provided in "THE MERGER -- The General Partners'
Reasons and Recommendation for the Merger" and "-- Alternatives to the Merger"
in the Prospectus.
In the event the Merger is not consummated for any reason, the
Partnership will continue to pursue its business objectives of maximizing the
value of its properties, in addition to the possible liquidation of its
portfolio, another strategic combination or another attractive alternative that
may become available.
-11-
<PAGE>
COMPARATIVE COMPENSATION, FEES AND DISTRIBUTIONS
COMPENSATION PAID TO THE GENERAL PARTNER AND HIS AFFILIATES
This section is intended to provide Limited Partners with a brief
comparison of the compensation, fees and distributions paid to the General
Partner and his Affiliates under the Partnership's current arrangements with
those that would have been paid had the Merger been in place. The following
table sets forth the compensation, fees and distributions by the Partnership to
the General Partner and his Affiliates during the two most recent fiscal years
and the six-month period ended June 30, 1998 and compares those payments against
the amount that would have been paid assuming the Merger had occurred January 1,
1996.
<TABLE>
YEAR ENDED DECEMBER 31,
<CAPTION>
Six Months Ended
1996 1997 June 30, 1998
---- ---- -------------
Actual Pro Forma Actual Pro Forma Actual Pro Forma
<S> <C> <C> <C> <C> <C> <C>
Administrative Reimb.(1) $17,832 $12,776 $25,350 $25,166 $20,140 $17,487
Cash Distributions(2) 2,040 --- 2,820 --- 1,410 ---
General Partner Salary(3) --- 2,995 --- 3,593 --- 1,797
(1) An AmREIT subsidiary receives administrative reimbursements of up to 6%
of gross rental revenues from the properties. No other fees, salaries
or other compensation were paid by the Partnership to its general
partner or its affiliates during these periods.
(2) Includes all cash distributions made to Mr. Taylor and his affiliates
resulting from ownership of Units and general partner interests. Mr.
Taylor's employment agreement with AmREIT provides for a fixed base
salary of $25,000 and $30,000 per annum for 1998 and 1999 respectively,
which amounts will not increase as a result of the Merger.
(3) Mr. Taylor's salary represents the total salary and benefits Mr. Taylor
is currently entitled to receive as an officer and director of AmREIT
allocated to the Partnership based on the percentage of shares of
AmREIT to be owned by the Limited Partners immediately after the
Merger. No other affiliate of the general partners of the Partnership
will receive compensation from AmREIT upon completion of the Merger.
</TABLE>
New Compensation
AmREIT will internally manage and lease the properties obtained by
AmREIT from the Partnership pursuant to the Merger. The terms of this engagement
will be substantially similar to the terms governing the management arrangements
that AmREIT typically uses in managing its current properties.
-12-
<PAGE>
MISCELLANEOUS
Distributions to Limited Partners
Set forth below are distributions per Unit made by the Partnership to
the Limited Partners since its inception and the most recently completed interim
period. Also see "THE PARTNERSHIPS Partnership Distributions" in the Prospectus.
<TABLE>
<CAPTION>
Six Months Ended
1995 1996 1997 June 30, 1998
---- ---- ---- -------------
<S> <C> <C> <C> <C>
Distributions $22.02 $65.48 $68.43 $35.36
Portion of Distribution That Was a --- --- --- ---
Return of Capital(1)
(1) Distributions treated as a return of capital under the Partnership
Agreement.
- ----------------------
</TABLE>
Financial Information
Rental income statements for the properties of the Partnership for the
years ended December 31, 1997 and 1996 and certain pro forma financial
statements with respect to the Partnership are set forth in "The Unaudited Pro
Forma Financial Information" and "INDEX TO FINANCIAL INFORMATION" in the
Prospectus.
List of Investors
Under the Partnership Agreement and Texas state law, a Limited Partner
may obtain a list of the names, addresses and number of Units owned by the other
Limited Partners entitled to so vote on the Merger by making written request
therefor from the General Partner, c/o Timothy W. Kelley, AmREIT, Inc., Eight
Greenway Plaza, Suite 824, Houston, Texas 77046. At the time of making the
request, the requesting Limited Partner must submit a payment of $10.00 in
payment for the costs of copying and mailing the list and, if the Units are held
through a nominee, provide the Partnership with a statement from the nominee or
other independent third party confirming such Limited Partner's beneficial
ownership. A Limited Partner is only entitled to the foregoing information with
respect to the Partnership in which the Limited Partner holds Units. See
"CONSENT PROCEDURES" in the Prospectus.
End of Partnership Supplement for AAA Net Realty Fund XI, Ltd.
-13-
<PAGE>
SUPPLEMENT TO
JOINT CONSENT SOLICITATION STATEMENT AND PROSPECTUS
FOR
AAA NET REALTY FUND GOODYEAR LTD.
A TEXAS LIMITED PARTNERSHIP
Mr. H. Kerr Taylor (the "General Partner") is soliciting the approval
of the Limited Partners of AAA Net Realty Fund GoodYear, Ltd., a Texas Limited
Partnership (the "Partnership"), for the Merger of the Partnership with and into
AmREIT, Inc., a Maryland Corporation ("AmREIT"). As part of the Merger, the
Limited Partners will exchange Units of Limited Partnership Interests ("Units")
in the Partnership for shares of common stock of AmREIT (the "Shares") or,
subject to the Note restriction, 6.0% Notes of AmREIT due December 31, 2004 (the
"Notes"). The Merger, if it is approved, will involve up to ten limited
partnerships, including the Partnership. This solicitation is being made on
behalf of the general partners of the Partnership. The proposal is described in
detail in the Joint Consent Solicitation Statement and Prospectus dated , 1998
(the "Prospectus"). For the definition of capitalized terms used in the
Supplement, which are not separately defined herein, see "GLOSSARY" in the
Prospectus. Cross-references in this Supplement also refer to the cited
discussions in the Prospectus, unless specifically noted to the contrary.
The effects of the Merger may be different for Limited Partners in each
of the Partnerships participating in the Merger (the "Partnerships"). This
Supplement has been prepared to highlight the risks, effects and fairness of the
Merger for the Limited Partners of the Partnership. This Supplement is not
intended to repeat or duplicate the Prospectus and the Prospectus must be
referred to in reading this Supplement. Moreover, this Supplement does not
purport to provide an overall summary of the Merger or to highlight all of its
material terms, conditions, risks or effects. See "SUMMARY" and "THE MERGER" in
the Prospectus. To the extent this Supplement summarizes portions of the
Prospectus, such discussions are qualified in their entirety by the more
detailed discussions of those matters appearing in the Prospectus. Supplements
have also been prepared for each of the other Partnerships and copies of such
Supplements will be provided promptly without charge to each Limited Partner or
his representative who has been so designated in writing upon written request to
Timothy W. Kelley, Vice President at AmREIT, Inc., Eight Greenway Plaza, Suite
824, Houston, Texas 77046. Telephone (800) 888-4400, extension 26 or fax to
(713) 850-0498.
RISK FACTORS
The Merger involves material risks to the Limited Partners,
the more significant of which are:
o The distributions on the securities received by
Limited Partners for their Units in the Merger
will, at least initially, be lower as a percentage
of their investment as compared to distributions
currently received on their Units.
o The General Partner did not retain an unaffiliated
person to represent the Limited Partners in
negotiating the terms of the Merger.
-1-
<PAGE>
o The Negotiated Prices for the Partnership
properties were determined by the General Partner,
who has substantial conflicts of interest in the
Merger due to his financial interest in AmREIT and
the prospects of receiving substantial financial
benefits if the Merger is consummated.
o The Negotiated Prices of the properties are not
based on appraisals from independent real estate
appraisers.
o The Merger will be a taxable transaction to the
Limited Partners.
o There is no assurance that the value of the
consideration received in the Merger by the Limited
Partners for their Units will not be less than the
fair value of their Units as might result from
negotiations between unrelated parties.
o No public market exists for the Shares or the
Notes. Upon completion of the Merger, it is
uncertain if and when a public market will develop
for the Shares and no public market is expected to
develop for the Notes.
o If and when a public market for the Shares
develops, there is no assurance that the Shares
will not trade at prices that are less than the
Exchange Price.
o There is no assurance that the Exchange Price,
which was determined by the General Partner and the
Independent Directors of AmREIT, reflects the fair
value of the Shares which might result from
negotiations between unrelated parties.
o The Appraised Value, upon which payment under the
ALV Payment Election will be determined, will not
be determined or known until after the Merger is
consummated.
o Limited Partners receiving Shares in the Merger
will realize a substantial change in the form of
their investment from a finite life Partnership,
which cannot leverage its investments, to an
infinite life REIT which can leverage its
investments.
o The anticipated benefits to Limited Partners as a
result of the Merger may not be realized.
-2-
<PAGE>
POTENTIAL BENEFITS TO LIMITED PARTNERS
The General Partner believes the Merger is fair to and in the best
interests of the Limited Partners for a number of reasons, including:
o The General Partner believes that the terms of the Merger
Agreement, including the Exchange Price and the Partnership's
Net Asset Value are favorable to the Limited Partners.
o The General Partner believes that the Negotiated Price for
each of the Partnership's Properties is in the highest range
of values for the property in the current real estate market
and that such value would likely exceed the price at which the
property would sell for in the market. The General Partner
believes that the Partnership would thus therefor realize
significantly less value for its Properties than their
Negotiated Prices if the Partnership was liquidated in the
current real estate market.
o By merging into AmREIT, the Limited Partners will be relieved
of uncertainties regarding the Partnership's real estate
investments, including the expiration of the lease on one of
its properties on February 29, 2000 and the expiration of the
lease on the other in 2005, the possible difficulties in
releasing the properties and/or the possible substantial costs
of releasing these properties. As a result of the Merger,
these risks would be spread over and more economically
absorbed by AmREIT's larger and more diversified portfolio.
o The special purpose nature of the Partnership's properties,
which makes them suitable for limited types of tenants and
uses and increases the risks of releasing the properties. As a
result of the Merger, these risks would be spread over and
more economically absorbed by AmREIT's larger and more
diversified portfolio.
o Co-ownership of one of its properties in joint venture with
another Partnership which, as a practical matter, allows the
sale of the property only with the consent of its co-owner. In
the Merger, the property is valued at an amount pro rata to
the Negotiated Price of the entire property without reduction
for less than 100% ownership.
o By combining the Partnership with AmREIT, the Merger will
create an investment portfolio substantially larger and more
geographically diversified than the portfolio of the
Partnership. The Merger will consolidate operations and spread
the risk of an investment in AmREIT over a broader group of
assets and reduce the dependence of the investment upon the
performance of any particular asset or group of assets, such
as assets in the same geographical area.
o The allocations of Merger Expenses under which the Partnership
is required to pay only its proportionate share of the
Partnership Merger Expenses based on its relative Net Asset
Value. Also, if the Limited Partners do not elect to
participate in the Merger, the General Partner will pay or
reimburse the Partnership its Proportionate Share of the
Partnership Merger Expenses.
o As a result of the Merger, the Partnership will no longer
incur the expense for the preparation of separate financial
statements, required annual and quarterly filings, tax returns
and investor communications. The accurate preparation of these
statements and reports requires substantial cost and
management time and effort.
o The General Partner believes the Merger will provide the
combined AmREIT-Partnership entity improved future access to
capital markets for future growth and that Limited Partners,
as AmREIT shareholders, will have enhanced liquidity as a
result of the larger total equity market capitalization of
AmREIT.
o The General Partner received the Houlihan Fairness Opinion
that the Merger is fair, from a financial point of view, to
the Limited Partners.
o The Partnership's strategic combination with a publicly held
REIT which takes advantage of the growth in the REIT industry
and real estate markets is preferable to the alternatives of
complete liquidation of the Partnership, continuation of the
Partnership or reorganization of the Partnership into one
separate REIT.
-3-
<PAGE>
These possible benefits of the Merger to the Limited Partners are
discussed in greater detail in the Prospectus. Limited Partners should refer to
the discussions in the Prospectus under the heading "THE MERGER--The General
Partners Reasons and Recommendations for the Merger."
RISK FACTORS AND POTENTIAL ADVERSE CONSEQUENCES
Limited Partners participating in the Merger will be subject to various
risks and possible adverse consequences which they should take into account in
deciding how they will vote on the Merger. The most significant of these
material risks are:
The Merger involves the following risks for the Limited Partners:
o The General Partner did not retain an unaffiliated
representative to represent the Limited Partners or the
Partnership, or to represent all of the Partnerships as a
Group, in the Merger. Had independent representation been
arranged for a Partnership, the terms of the Merger might have
been more favorable to such Partnership.
o The Negotiated Prices of the Partnership's Properties were
determined by the General Partner who is also the Chief
Executive Officer and largest shareholder of AmREIT. The NAV
of each Partnership should be considered as having been
negotiated by the common management of the Partnerships and
AmREIT.
o The Negotiated Price of the Partnership's Properties is not
based on an independent appraisal.
o The conflicts of interest of the General Partner who will
receive significant financial and other benefits from and/or
as a result of the Merger.
o The possibility that the Partnership's Net Asset Values may
not reflect the actual value of its net assets.
o The fixed Exchange Price which means the Limited Partners will
not receive more Shares (or a Note in a greater principal
amount) if the value of the Shares decreases as of the
Effective Date.
o AmREIT's Shares are not publically traded, a market for the
Shares is not expected to exist immediately upon completion of
this Merger, and there is no assurance that a market for the
Shares will develop in the future. Unless and until there is a
public market for the Shares, shareholders will have
difficulty in liquidating their investment.
o If and when a market for the Shares develops, the Shares may
trade at prices substantially below the Exchange Price.
o The Merger will be a taxable transaction for the Limited
Partners.
o A majority vote of Limited Partners binds the Partnership.
-4-
<PAGE>
o Limited Partners who vote against the Merger will receive
Notes for their Units in the Merger unless they elect to
receive Shares if the Merger is approved.
o Limited Partners who become shareholders of AmREIT may not
receive the same level of distributions as previously received
from their respective Partnership Units.
o Because it is not known how many Partnerships will participate
in the Merger, there are uncertainties as to the capital
structure and size of AmREIT following consummation of the
Merger as they will vary depending on the number which elect
to participate in the Merger.
o As a result of the Merger, the nature of each Limited
Partner's investment will change from holding an interest in a
specified portfolio of properties in a finite life entity to
holding an equity investment in an ongoing REIT, whose
portfolio of properties may be changed from time to time
without the approval of its shareholders and which does not
plan to liquidate such assets within a fixed period.
o If it participates in the Merger, the Partnership will bear
these costs of the Merger in proportion to its relative NAV.
Should the Partnership not participate in the Merger, the
General Partner will pay or reimburse the Partnership for its
portion of these costs. The costs of the Merger allocated to
the Partnerships are limited to the costs of the Houlihan
Fairness Opinions, the Partnership accounting costs (and other
valuation or appraisal costs, if any), which are estimated to
total $150,000, and any direct partner communication costs.
o The anticipated benefits of the Merger may not be realized.
o The anticipated benefits of AmREIT's change to self-management
through the recently completed Adviser Acquisition may not be
fully realized.
o The proceeds of future asset sales or refinancings by AmREIT
will generally be reinvested rather than distributed to
shareholders to the extent not required to be distributed to
maintain REIT status.
o AmREIT's Board of Directors has the power to change the
investment, acquisition and financing policies of AmREIT
(including policies regarding the level of indebtedness)
without a vote of the shareholders, which could result in
policies which do not reflect the interests of all
shareholders.
o Following the consummation of the Merger, AmREIT intends to
borrow additional funds (equal to or exceeding 50% of the
value of the properties acquired in the Merger) to acquire
additional, as yet unidentified, real estate.
These risks and possible adverse consequences of the Merger to the
Limited Partners are discussed in greater detail in the Prospectus. Limited
Partners should refer to the discussion of the risks in participating in the
Merger set forth in the Prospectus under the sections "RISK FACTORS," "CONFLICTS
OF INTEREST," "MATERIAL FEDERAL INCOME TAX ASPECTS" and "COMPARISON OF UNITS,
SHARES AND NOTES."
-5-
<PAGE>
THE MERGER
The purpose of the Merger is to strategically unite AmREIT with one or
more of the Partnerships, each of which has compatible properties in AmREIT's
existing and new markets, and to give the Limited Partners the ability to
participate in a strategic business combination with a publicly held REIT in
order to take advantage of the growth in the REIT industry and real estate
markets in general, with the prospect of being able to liquidate their
investment through the sale of the publicly-traded Shares or retain their
investment indefinitely.
If the Merger is approved, the Partnership will cease to exist and all
of its properties will be transferred to AmREIT. Any Limited Partner may abstain
from or vote against the Merger and, if the Merger is approved, the Limited
Partner will still participate in the Merger and will receive Notes for their
Units unless they elect to receive Shares. Limited Partners will not have
appraisal rights or other dissenter's rights by reason of the Merger. For a
discussion of the effect of abstaining from or voting against the Merger, the
rights of Limited Partners who do so, and the effects of exercising dissenters'
rights, see "THE MERGER - Dissenting Partners and Shareholders."
The General Partner is proposing amendments to the Partnership's
Agreement of Limited Partnership to permit the closing of the transactions
contemplated by the Merger Agreement. Limited Partners voting in favor of the
Merger will be deemed to have voted in favor of each of these proposed
amendments. A majority vote of Limited Partners is required to approve the
proposed amendments and to approve the Merger Agreement. The proposed amendments
authorize the following: (i) the Merger of the Partnership with and into AmREIT,
whether or not AmREIT would be regarded as an Affiliate of the general partners;
and (ii) such other actions as may be necessary under or contemplated by the
Merger Agreement or the Prospectus, irrespective of any provision in the
Partnership Agreement which might otherwise prohibit such actions. See "THE
MERGER -- Proposed Amendments to Partnership Agreements." The General Partner
owns no Units of the Partnership. The general partners of the Partnership have
agreed to waive any right to receive Shares to which they may otherwise have
been entitled except with respect to their capital interests as general
partners.
The General Partner reasonably believes that the terms of the Merger,
including the consideration to be received by the Limited Partners in the
Merger, are fair to and in the best interests of the Limited Partners.
THE GENERAL PARTNER STRONGLY RECOMMENDS THAT ALL LIMITED PARTNERS
VOTE "YES" IN FAVOR OF THE MERGER. THE GENERAL PARTNER REQUESTS THAT EACH
LIMITED PARTNER COMPLETE, SIGN AND RETURN THE ENCLOSED CONSENT AS SOON AS
POSSIBLE.
ALLOCATION OF CONSIDERATION
In the Merger, the Limited Partners will receive Shares (or Notes)
based upon the Net Asset Value ("NAV") of the Partnership. The Partnership's NAV
equals the Negotiated Price of its properties plus its Net Cash. The
Partnership's Net Cash equals the excess, if any, of its cash and accounts
receivable over its debt at the Effective Date. The Negotiated Price of each
property of the Partnership was determined and agreed to by Mr. H. Kerr Taylor,
the General Partner, on behalf of the Partnership in negotiations with the two
directors of AmREIT who are not affiliated with Mr. Taylor (the "Independent
Directors").
-6-
<PAGE>
The number of Shares issuable in the Merger to the Partnership equals
the Partnership's NAV divided by the Exchange Price of $9.34. The Exchange Price
was negotiated and agreed to by the General Partner and the Independent
Directors based on the last public offering price of the Shares, $10.25, net of
certain costs of that offering. However, the Shares are not publically traded
and will not be listed for trading immediately after the Merger. Limited
Partners should refer to the discussion in the Prospectus under the heading "THE
MERGER--The Merger Consideration."
Calculated as if the Effective Date were June 30, 1998, AmREIT is
offering 2,645.11 Shares or, subject to the Note Restriction, a Note in the
principal amount of $24,705.33, in consideration for each Unit of the
Partnership. The following table sets forth the methodology utilized in
determining the number of Shares and Notes being offered by AmREIT for each
Unit:
Net Asset Value:
Value of Properties:(1)
Goodyear Tire, Marsh Lane (Dallas, TX) (74.72%) $490,000
Goodyear Tire, Hillcrest (Dallas, TX) (100%) 600,000
-------
Negotiated Price $1,090,000
Net Cash(2) $20,492
Other Assets ---
Other Liabilities ---
---------
Net Asset Value of Partnership(3) $1,110,492
Percentage of Aggregate Net Asset Value of All Partnerships 3.95%
Net Asset Value Per Original Investment of $1,000(4) $823.51
------
Allocation of Shares Received in Merger:
Number of Shares Allocable to Partnership 118,896
Percentage of Total Shares to be Issued in the Merger 3.95%
Percentage of Total Shares of AmREIT After the Merger 2.07%
Allocation of Shares to Limited Partners 117,707
Allocation of Shares to General Partners(5) 1,189
-----
Allocation of Shares per Unit 2,645.11
Allocation of Shares Per Original Investment of $1,000(4) 88.17
Maximum Total Outstanding Shares in AmREIT After the Merger(6) 5,742,873
---------
Notes Offered in Merger:
Maximum Principal Amount Offered to Partnership $388,672
Principal Amount of Note Offered per Unit $24,705.33
Principal Amount of Note Offered per Original Investment
of $1,000(4) $823.51
-7-
<PAGE>
Return to Limited Partners Per $1,000 of Adjusted Capital From
Shares(7):
Return From Merger per $1,000 of Adjusted Capital based on $894.47
Exchange Price(8)
Total Return from Merger based on Exchange Price plus Cumulative $1,581.60
Distributions Through 6/30/1998 per $1,000 of Adjusted Capital
Total Return from Merger based on Exchange Price plus Cumulative 158.16%
Distributions through 6/30/1998 as a Percentage of Adjusted
Capital
Return From Merger per $1,000 of Adjusted Capital based on $10.25 $981.62
Share Price(9)
(1) Percentage of property owned by Partnership shown in parentheses.
(2) Net Cash is the excess, if any, of the Partnership's cash and accounts
receivable over its debt.
(3) Net Asset Value equals Negotiated Price of property plus Net Cash.
(4) "Per Original Investment of $1,000" is computed by dividing the Limited
Partners' allocable share of such amount by the Limited Partners'
original capital of the Partnership (the Partnership's "Original
Capital") and multiplying the result by 1,000.
(5) The general partners of the Partnership have agreed to waive any right
to receive Shares to which they may otherwise have been entitled in the
Merger other than with respect to their unsubordinated 1% interest in
Partnership distributions. The general partners will not be receiving
any other compensation or reimbursement for claims against or interests
in the Partnership.
(6) Calculated as if effective date were June 30, 1998. Assumes 100%
participation of the Partnerships and that no Notes are issued.
Includes portion of Share Balance from Adviser Acquisition issuable to
Mr. Taylor upon consummation of Merger.
(7) Adjusted Capital equals a Limited Partner's original invested capital
less cumulative distributions constituting a return of capital under
the Partnership Agreement.
(8) Shares valued at $9.34 per Share.
(9) $10.25 is the most recent public offering price of the Shares.
CONSIDERATIONS UNIQUE TO THE PARTNERSHIPS
Due to the substantial similarities among the Partnerships, such as
their similar investment portfolios and property locations, common investment
objectives and policies, similar financial condition, the fact that the
Partnerships' assets are managed by AmREIT or its Affiliates and substantial
similarities in the language and scope of their Partnership Agreements, many of
the consequences of participating in the Merger are common to the Limited
Partners of each of the Partnerships. The purpose of this section is, however,
to highlight features of the Partnership which may distinguish the situation of
the Partnership from that of the other Partnerships and which should be taken
into account by the Limited Partners when evaluating the merits and risks of the
proposed Merger.
-8-
<PAGE>
Special Considerations Regarding Partnership Properties. Unless the
Limited Partners approve the Merger, the General Partner will continue the
Partnership in accordance with its current investment strategies and objectives
described below. At the time of the Partnership's formation, the General Partner
anticipated the liquidation of its portfolio and distribution of the net
proceeds from the sale of the properties to the Limited Partners within 8 to 12
years after the acquisition of the properties. Based on the completion of the
acquisition of the Partnership's portfolio in 1991, it was anticipated that
liquidation of the portfolio would begin by 2003. However, the Partnership's
ability to achieve its goals will be influenced by the following factors. See
"THE PARTNERSHIPS--Properties" in the Prospectus for additional information
regarding the Partnership's portfolio.
Expiration of Leases. One of the leases on the Partnership's
properties expires in February 2000 and the other expires in 2005. When the
leases on the Partnership's properties expire, the tenants may elect not to
renew their leases or to renew their leases only if the Partnership makes
significant improvements to the property. Should tenants fail to renew their
leases, the Partnership would be required to find new tenants and would likely
incur significant additional expense by reason of temporary vacancy and/or
significant rehabilitation and/or tenant improvement costs.
Concentration of Investment. The Partnership has concentrated
its investments in 2 properties. If a vacancy or other interruption of rents
occur in one or more of these properties, the distributions of the Partnership
may be significantly reduced. The Partnership has also concentrated its
investments in a limited geographic area. If conditions in this area
deteriorate, the Partnership may experience more difficulty in re-leasing its
properties than it would experience if the properties were more geographically
diversified.
Co-ownership of Property. The Partnership owns 1 of its 2
properties in co-ownership with Fund VIII. While the Partnership owns 74.72% of
this property, it is, as a practical matter, dependent upon the consent and
cooperation of the minority co-owner to sell or re-lease the property.
Therefore, there is no assurance that the co-owner will agree to the sale or
re-lease of the property at such time or under the terms the Partnership may
desire.
Possible Need for Additional Capital. The Limited Partners may
be required to contribute additional capital and/or approve Partnership
borrowings in order to finance future lease renewal or releasing costs as
described above. Moreover, without an economically desirable lease in place, the
Partnership could not expect to realize an attractive price for the sale of its
properties.
Merger is a Taxable Event. Limited Partners will realize a gain on the
Merger in an amount equal to their allocable share of the excess of the sum of
the fair market value of the Shares received by the Partnership over the
Partnership's adjusted tax basis of the Partnership assets. In general, Limited
Partners can expect to pay tax on this gain at long term capital gains rates.
Approximately 36% of the gain will be taxable at the 20% rate and 64% will be
taxable at the 25% rate. Assuming that the value of the Shares reflects the Net
Asset Values of the assets acquired in the Merger, if the Partnership
participates in the Merger, each of its Limited Partners would have recognized
taxable gain of approximately 9% (as of June 30, 1998) for every Unit held,
representing an original investment of $30,000. Those Limited Partners who
have owned their Units since the inception of the Partnership can expect to
recognize a taxable gain of approximately $600 per Unit as a result of the
Merger. The actual amount of gain recognized by each Limited Partner will
depend upon the value ascribed to the Shares for federal tax purposes.
Because the Shares will not be publically traded immediately after the
Merger, and the 1998 operating results have not been included, it is possible
that the value of the Shares used for purposes of calculating the taxable income
(or loss) and the taxable income (or loss) per Unit will differ from the
calculation stated above.
The Partnership's federal income tax returns are subject to review and possible
adjustment by the Internal Revenue Service. Under federal income tax laws,
regulations and administrative rulings, certain types of transactions may be
accorded varying interpretations. Accordingly, the Partnership's financial
statements, as well as the individual tax returns of the partners, may be
changed to cause them to conform to the tax treatment resulting from such
review, if any.
Investment Strategy. Each of the properties is currently fully leased
to a single tenant, however, as described above, these leases expire at varying
times in the future. The Partnership is not authorized to raise additional
-9-
<PAGE>
capital or borrow funds. The Partnership has a history of making regular
quarterly distributions to its Limited Partners. See "Miscellaneous --
Distributions to Limited Partners" below in this Supplement. The Partnership's
strategy is to continue to hold its properties with a view towards liquidating
them at such times as the General Partner deems beneficial and appropriate in a
manner consistent with the Partnership's investment objectives. The principal
investment objectives of the Partnership are to (i) preserve and protect the
Limited Partners' capital; (ii) provide the Limited Partners with quarterly cash
distributions from operations; (iii) obtain long-term appreciation in the value
of its properties; and (iv) provide increased cash distributions to the Limited
Partners as the cash flow from its investments increases over the life of the
Partnership. The Partnership acquired each of its properties for cash and
without the use of borrowed funds (leverage).
Management Compensation. The Partnership has no employees but its
operations are managed by AmREIT. Under the Omnibus Services Agreement, pursuant
to which AmREIT manages the operations of the Partnership, AmREIT is entitled to
annual property management fees equal to 3% of gross rental revenues. Also, the
Omnibus Services Agreement provides for payment of reimbursement fees of up to
6% of the Partnership's gross rental revenues. This relationship will terminate
after the Merger if the Partnership merges into AmREIT. If the Partnership
participates in the Merger, neither AmREIT nor the General Partner or any of
their Affiliates will receive any compensation for services rendered in
connection with the Merger.
Offers From Third Parties. No offers on the Partnership's properties
have been received during the past twelve months by the General Partner from
unaffiliated third parties. See "THE MERGER-Acquisition Proposals" in the
Prospectus.
FAIRNESS OF THE MERGER
Based upon his analysis of the Merger, the General Partner reasonably
believes that:
(1) The terms of the Merger, when considered as a whole, are fair
to the Limited Partners;
(2) The Shares offered in exchange for the Units constitute fair
consideration for the Units of the Limited Partners; and
(3) After comparing the potential benefits and detriments of the Merger
with those of several alternatives, the Merger is more attractive to the Limited
Partners than such alternatives.
THE GENERAL PARTNER REASONABLY BELIEVES THAT THE TERMS OF THE MERGER
AGREEMENT, INCLUDING THE CONSIDERATION TO BE RECEIVED BY THE LIMITED PARTNERS IN
CONNECTION WITH THE MERGER, ARE FAIR TO AND IN THE BEST INTERESTS OF THE LIMITED
PARTNERS. ACCORDINGLY, THE GENERAL PARTNER HAS APPROVED THE MERGER AGREEMENT AND
RECOMMENDS THAT THE LIMITED PARTNERS VOTE FOR APPROVAL OF THE MERGER AGREEMENT
AND AMENDMENT OF THE PARTNERSHIP AGREEMENT.
The General Partner's determination is based upon the transaction as a
whole, as well as the combination of less than all Partnerships, because the
Partnership's value for the purposes of the Merger is its Net Asset Value. The
General Partner believes that Net Asset Value is a reasonable estimate of the
-10-
<PAGE>
value of each Partnership for the Merger as it is directly derived from the
value of the Partnership's net assets at the Effective Date, independent of the
valuations of the assets of the other Partnerships. The General Partner also
believes the Exchange Price, the value on which Shares will be issued to the
Partnership in the Merger, is a reasonable estimate of the value of the Shares
based on the last public offering price of the Shares and within the overall
context of the Merger. See "THE MERGER - The General Partner's Reasons and
Recommendations for the Merger. For a full discussion of the General Partner's
reasons for the Merger, see "THE MERGER -- The General Partner's Reasons for the
Merger and Recommendation to the Limited Partners" in the Prospectus.
Fairness Opinion. The General Partners, on behalf of the Partnership,
retained Houlihan to render an opinion as to whether the consideration to be
received by the Limited Partners in connection with the Merger was fair, from a
financial point of view, to its Limited Partners. Houlihan was not requested to,
and did not make, any recommendation to the Partnerships as to the consideration
to be received by the Limited Partners in connection with the Merger, which
consideration was determined through negotiations between the common management
of the Partnerships and AmREIT. The General Partner retained Houlihan to render
its fairness opinion based upon Houlihan's experience in the valuation of
businesses and their securities in connection with mergers and acquisitions, and
valuations for corporate purposes especially with respect to REITs and other
real estate companies. Houlihan delivered its written opinion, dated June 1,
1998, to the General Partner, to the effect that, as of the date of such
opinion, based on Houlihan's review and subject to the limitations described in
the Prospectus, the consideration to be received by the Limited Partners, in
connection with the Merger is fair, from a financial point of view, to the
Limited Partners. The Houlihan Fairness Opinion does not constitute a
recommendation to any Limited Partner as to how any such Limited Partner should
vote on the Merger. See "FAIRNESS OPINION--The Houlihan Fairness Opinion."
Comparison of Benefits and Detriments. The General Partner's assessment
of the fairness of the proposed Merger was based on the review of different
alternatives that were available. The evaluations of the different alternatives
included, but were not limited to, a strategic combination with a publicly
traded REIT to take advantage of the growth of the REIT industry and real estate
markets in general, completely liquidating the Partnership, continuing the
Partnership or reorganizing the Partnership into a REIT. In order to determine
whether the Merger or one of its alternatives would be more attractive to the
Limited Partners, the General Partner compared the potential benefits and
detriments of the Merger with the potential benefits and detriments of the
alternatives. A detailed discussion of the potential benefits and detriments of
each of these alternatives is provided in "THE MERGER -- The General Partners'
Reasons and Recommendation for the Merger" and "-- Alternatives to the Merger"
in the Prospectus.
In the event the Merger is not consummated for any reason, the
Partnership will continue to pursue its business objectives of maximizing the
value of its properties, in addition to the possible liquidation of its
portfolio, another strategic combination or another attractive alternative that
may become available.
COMPARATIVE COMPENSATION, FEES AND DISTRIBUTIONS
COMPENSATION PAID TO THE GENERAL PARTNER AND HIS AFFILIATES
This section is intended to provide Limited Partners with a brief
comparison of the compensation, fees and distributions paid to the General
Partner and his Affiliates under the Partnership's current arrangements with
those that would have been paid had the Merger been in place. The following
table sets forth the compensation, fees and distributions by the Partnership to
the General Partner and his Affiliates
-11-
<PAGE>
during the two most recent fiscal years and the six-month period ended June 30,
1998 and compares those payments against the amount that would have been paid
assuming the Merger had occurred January 1, 1996.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
Six Months Ended
1996 1997 June 30, 1998
---- ---- -------------
Actual Pro Forma Actual Pro Forma Actual Pro Forma
<S> <C> <C> <C> <C> <C> <C>
Administrative Reimb.(1) $2,820 $6,415 $2,820 $6,386 $1,410 $3,208
Cash Distributions(2) 960 767 960 783 480 392
General Partner Salary(3) --- 518 --- 621 --- 311
(1) An AmREIT subsidiary receives administrative reimbursements of up to 6%
of gross rental revenues from the properties. No other fees, salaries
or other compensation were paid by the Partnership to its general
partner or its affiliates during these periods.
(2) Includes all cash distributions made to Mr. Taylor and his affiliates
resulting from ownership of Units and general partner interests. Mr.
Taylor's employment agreement with AmREIT provides for a fixed base
salary of $25,000 and $30,000 per annum for 1998 and 1999 respectively,
which amounts will not increase as a result of the Merger.
(3) Mr. Taylor's salary represents the total salary and benefits Mr. Taylor
is currently entitled to receive as an officer and director of AmREIT
allocated to the Partnership based on the percentage of shares of
AmREIT to be owned by the Limited Partners immediately after the
Merger. No other affiliate of the general partners of the Partnership
will receive compensation from AmREIT upon completion of the Merger.
</TABLE>
New Compensation
AmREIT will internally manage and lease the properties obtained by
AmREIT from the Partnership pursuant to the Merger. The terms of this engagement
will be substantially similar to the terms governing the management arrangements
that AmREIT typically uses in managing its current properties.
MISCELLANEOUS
Distributions to Limited Partners
Set forth below are distributions per Unit made by the Partnership to
the Limited Partners during the most recent five fiscal years and the most
recently completed interim period. Also see "THE PARTNERSHIPS - Partnership
Distributions" in the Prospectus.
<TABLE>
<CAPTION>
Six Months Ended
1993 1994 1995 1996 1997 June 30, 1998
---- ---- ---- ---- ---- -------------
<S> <C> <C> <C> <C> <C> <C>
Distributions $2,256 $2,256 $2,256 $2,256 $2,256 $1,128
Portion of Distribution That Was a --- --- --- --- --- ---
Return of Capital(1)
(1) Distributions treated as a return of capital under the Partnership
Agreement.
- ----------------------
</TABLE>
-12-
<PAGE>
Financial Information
Rental income statements for the properties of the Partnership for the
years ended December 31, 1997 and 1996 and certain pro forma financial
statements with respect to the Partnership are set forth in "The Unaudited Pro
Forma Financial Information" and "INDEX TO FINANCIAL INFORMATION" in the
Prospectus.
List of Investors
Under the Partnership Agreement and Texas state law, a Limited Partner
may obtain a list of the names, addresses and number of Units owned by the other
Limited Partners entitled to so vote on the Merger by making written request
therefor from the General Partner, c/o Timothy W. Kelley, AmREIT, Inc., Eight
Greenway Plaza, Suite 824, Houston, Texas 77046. At the time of making the
request, the requesting Limited Partner must submit a payment of $10.00 in
payment for the costs of copying and mailing the list and, if the Units are held
through a nominee, provide the Partnership with a statement from the nominee or
other independent third party confirming such Limited Partner's beneficial
ownership. A Limited Partner is only entitled to the foregoing information with
respect to the Partnership in which the Limited Partner holds Units. See
"CONSENT PROCEDURES" in the Prospectus.
End of Partnership Supplement for AAA Net Realty Fund GoodYear, Ltd.
-13-
<PAGE>
AmREIT, Inc.
BALLOT
Special meeting of Shareholders December __ , 1998
The undersigned shareholders of AmREIT, Inc., a Maryland Corporation, hereby
acknowledges the receipt of the Notice of Special Meeting of Shareholders and
the Joint Proxy and Consent Solicitation Statement and Prospectus for the
Special Meeting of Shareholders to be held on December __ , 1998 at 10:00 a.m.,
local time, at 8 Greenway Plaza, Suite 824, Houston, Texas, and hereby
appoints Timothy W. Kelley proxy and attorney-in-fact with full power of
substitution, on behalf of the undersigned, to represent the undersigned at
said Special Meeting and any adjournment thereof, and to vote all shares of
common stock which the undersigned would be entitled to vote if then and there
personally present, on the matters set forth below.
PLEASE VOTE TODAY AND AVOID THE COST OF RE-SOLICITATION
(Continued and to be dated and signed on the reverse side.)
AmREIT, Inc.
P.O. BOX 11088
NEW YORK, N.Y. 10203-0088
_____________________________________________________________________________
Independent Directors
Recommend
To Approve the Merger and the YES YES ( ) NO ( ) ABSTAIN ( )
Amendments to the Bylaws to
effect the Merger.
This Proxy will be voted as directed or, if no direction is indicated, voted
for the Merger and as said proxies deem advisable.
If you have questions about completing this ballot, contact Tim Kelley at
800-888-4400 ext. 26.
Changes of Address and or Comments Mark Here ( )
Note: Please sign exactly as shown at left. If stock is jointly held each
owner should sign. Executors, administrators, trustees, guardians, attorneys
and corporate officers should indicate their fiduciary capacity and full title
when signing.
Dated : __________ , 1998
Signed: _______________
______________________
Votes must be indicated (X) in Black or Blue ink.
MARK, DATE, SIGN AND MAIL THIS PROXY PROMPTLY IN THE ENCLOSED ENVELOPE.
<PAGE>
H. KERR TAYLOR
------------------
8 Greenway Plaza, Suite 824
Houston, Texas 77046
[Date]
Re: Letter of Instructions to Limited Partners
Consent Form for AmREIT Merger
Dear Limited Partner:
As more particularly described in the Joint Consent Solicitation
Statement and Prospectus dated September ___, 1998 (the "Prospectus"), a copy of
which is enclosed with this Letter of Instructions, AmREIT, Inc. ("AmREIT")
proposes to acquire by merger (the "Merger") the real property and other assets
of any or all of the following limited partnerships (the "Partnerships").
Taylor Income Investors III, Ltd., a Texas Limited Partnership
Taylor Income Investors IV, Ltd., a Texas Limited Partnership
Taylor Income Investors V, Ltd., a Texas Limited Partnership
Taylor Income Investors VI, Ltd., a Texas Limited Partnership
AAA Net Realty Fund VII, Ltd., a Texas Limited Partnership
AAA Net Realty Fund VIII, Ltd., a Nebraska Limited Partnership
AAA Net Realty Fund Goodyear, Ltd., a Texas Limited Partnership
AAA Net Realty Fund IX, Ltd., a Nebraska Limited Partnership
AAA Net Realty Fund X, Ltd., a Nebraska Limited Partnership
AAA Net Realty Fund XI, Ltd., a Texas Limited Partnership
Persons holding Limited Partner interests ("Units") in a Partnership
which participates in the Merger (a "Participating Partnership") may elect to
receive either:
(1) Shares of AmREIT's $0.01 par value common stock (the
"Shares"), or
(2) AmREIT's 6.0% Notes due December 31, 2004 (the "Notes").
The Shares and Notes will be issued to the Limited Partners based on
the Net Asset Value of their Partnership, as described in the Prospectus.
In the event that a majority of Limited Partners in a Partnership do
not approve their Partnership's participation in the Merger, such Limited
Partners will continue to hold Units and their Partnership will continue in
existence as a limited partnership, all as more particularly described in the
Prospectus.
<PAGE>
[Date]
Page 2
Plan of Merger
Pursuant to the Merger Agreement, as described in the Prospectus,
AmREIT would acquire the assets and assume the liabilities of each Participating
Partnership pursuant to a statutory merger under applicable state law whereby
the Participating Partnership would merge with and into AmREIT. The Limited
Partners of the Participating Partnership would receive Shares or Notes for
their Units. If the Merger is approved, these transactions would all occur on
and as of the Effective Date.
If the Merger is approved, the Amendment to the Partnership Agreement
of each Participating Partnership will be effective. On behalf of the general
partner(s) of each Partnership, Mr. H. Kerr Taylor (the "General Partner")
recommends that the Merger be approved.
Voting
Enclosed with this Letter of Instructions is a Consent Form for your
Partnership in which you own Units of record as of ___________, 1998 (the
"Record Date"). You are entitled to one vote per Unit. For each of the
Partnerships in which you own Units you may vote "YES" in favor of the Merger,
"NO" against the Merger or "ABSTAIN" from voting. A vote for the Merger is also
a vote to approve the Amendment to the Partnership Agreement (the "Partnership
Amendment") authorizing the Merger. THE GENERAL PARTNER RECOMMENDS THAT YOU VOTE
"YES" TO THE MERGER.
If you vote "YES" for the Merger and the Merger is approved, you will
receive Shares in the Merger. You may elect to receive Notes rather than Shares,
subject to a Note Restriction whereby no more than an aggregate of $10,000,000
in Notes may be issued in the Merger. THE GENERAL PARTNER RECOMMENDS THAT YOU DO
NOT CHOOSE TO RECEIVE NOTES IN THE MERGER.
A "NO" vote would require that the voting Limited Partner receive Notes
unless he or she marked the Consent Form to choose to receive Shares in the
Merger. THE GENERAL PARTNER RECOMMENDS THAT YOU CHOOSE TO RECEIVE SHARES IN THE
MERGER.
An "ABSTAIN" vote would require that the abstaining Limited Partner
receive Shares unless the abstaining Limited Partner may receive Notes in the
Merger. THE GENERAL PARTNER RECOMMENDS THAT YOU DO NOT CHOOSE TO RECEIVE NOTES
IN THE MERGER.
<PAGE>
[Date]
Page 3
A vote in favor of the Merger will constitute your approval of the
Partnership Amendment. The General Partner is requesting your consent to the
Partnership Amendment, which expressly authorizes all actions necessary to
complete the Merger. A form of the Partnership Amendment is set forth in the
Prospectus as Annex 2. A vote "NO" against the Merger will constitute a vote not
to merge the Partnership(s) in which you own Units into AmREIT. If you do not
return the Consent Form, you will be deemed to have abstained from voting with
respect to the Merger and you will receive AmREIT Shares for your Units if the
Merger is approved and consummated.
Election to Receive Shares or Notes
Limited Partners who vote "YES" to the Merger or vote to "ABSTAIN" will
receive Shares if their Partnership participates in the Merger unless they
choose to receive Notes. Limited Partners who vote "NO" to the Merger will
receive Notes unless they choose to receive Shares. Due to the Note Restriction
which limits the aggregate principal balance of the Notes, AmREIT may not be in
a position to honor the requests of all Limited Partners in a particular
Partnership who vote "YES" to the Merger and choose to receive Notes because of
the Note Restriction. If the Note Restriction applies, Notes will be issued
first to Limited Partners in that Partnership who voted "NO" to the Merger
("Dissenting Partners"), and thereafter, to Limited Partners who voted "YES" or
"ABSTAIN" to the Merger and choose to receive Notes. Reference is made to the
Prospectus for the complete terms of the Merger and the factors which should be
considered by you in deciding whether to vote in favor of the Merger. In
addition, capitalized but undefined terms used in this Letter of Instructions
are defined in the Prospectus. You should carefully review the Prospectus,
including, without limitation, the sections entitled "THE MERGER" and "CONSENT
PROCEDURES" for additional information concerning such matters as the vote
required to approve the Merger and the conditions to the Merger.
You may elect to receive Shares in the event you vote "NO" to the Merger
and the Merger is consummated. THE GENERAL PARTNER RECOMMENDS THAT YOU
CHOOSE TO RECEIVE SHARES.
Delivery of Partnership Consent Form
The Partnership Consent Form must be received by Service Data
Corporation (the "Partnership Tabulation Agent"), on or before the end of the
Solicitation Period, which is, unless sooner terminated, __:__ __.m., Central
Standard Time, on _____ ___, 1998, or such later time
<PAGE>
[Date]
Page 4
and date as may be agreed to by AmREIT and the General Partner in their sole
discretion. Please mail or deliver the completed Partnership Consent Form to:
Service Data Corporation
Attn: AAA Partnership Consents
2424 South 130th Circle
Omaha, NE 68144-2596
A postage-paid, self-addressed envelope is enclosed for your
convenience.
Withdrawal Rights
The Partnership Consent Form may be withdrawn at any time prior to the
end of the Solicitation Period. To be effective, a written or facsimile
transmission notice of withdrawal of the Partnership Consent Form must be
received by the Partnership Tabulation Agent at the above address. A notice of
withdrawal must specify your name and the Partnership to which such withdrawal
relates. See "CONSENT PROCEDURES--Withdrawal Rights; Change of Vote" in the
Prospectus.
You may submit a second Partnership Consent Form after withdrawal of
your first Partnership Consent Form, provided the second Partnership Consent
Form is submitted prior to the end of the Solicitation Period. You may obtain a
second Partnership Consent Form by calling the General Partner at the telephone
number set forth below. If you want to change any information on a completed
Partnership Consent Form, you must withdraw the Partnership Consent Form and
submit a second Partnership Consent Form in accordance with the instructions
contained herein prior to the end of the Solicitation Period.
Representations and Partnership Covenants
By executing the Partnership Consent Form you represent and warrant
that as of the date hereof and the date of the consummation of the Merger (i)
you have received a copy of the Prospectus, (ii) you are the owner of the number
of the Units of the Partnership(s) indicated on the Partnership Consent Form
and, (iii) you have the power and authority to execute and deliver the
Partnership Consent Form. Subject to approval of the Merger by the requisite
vote, you hereby covenant and agree (a) to be bound by the terms of the Merger
Agreement, and (b) to authorize the General Partner to execute and deliver, as
your attorney-in-fact under the Partnership Agreement, such documents and
instruments as may be reasonably required to consummate the Merger including,
without limitation, the Partnership Amendment.
<PAGE>
[Date]
Page 5
Signature
In order for your vote to be counted, you must sign the enclosed
Partnership Consent Form and mail it in the enclosed envelope. Please sign the
Partnership Consent Form exactly as your name is printed on the mailing label
attached to the Partnership Consent Form, unless the name is printed
incorrectly. When signing as a general partner, corporate officer,
attorney-in-fact, executor, administrator or guardian, please give your full
title and send proper evidence of authority with the Partnership Consent Form.
For joint owners, each joint owner must sign. By signing the Partnership Consent
Form, you hereby agree to all of the provisions contained in this letter.
If you have any questions regarding the completion of the Partnership
Consent Form or the options available, you should call the General Partner,
toll-free at 1-800/888-4400; fax 1- 713/658-9720.
Very truly yours,
[Name of Partnership]
By: -------------------------
H. Kerr Taylor
General Partner
Enclosures
<PAGE>
PARTNERSHIP CONSENT FORM
[Name of Partnership]
Reference is made to the Joint Consent Solicitation Statement and
Prospectus dated September ___, 1998 (the "Prospectus") and to the Partnership
Letter of Instructions. This Consent Form incorporates by reference the
representations, warranties, covenants and agreements set forth in the Letter of
Instructions.
The undersigned hereby votes all of his or her Partnership interests
("Units") in the above-referenced Partnership as to the following matters
regarding the Partnership's proposed Merger with AmREIT, Inc. ("AmREIT") and the
Partnership Amendment. Please put an "X" in the appropriate box to vote "YES" in
favor of the Merger and the related Amendments to your Partnership Agreement (as
described in the Letter of Instructions), "NO" against the Merger and the
Partnership's Amendment, or to "ABSTAIN" from voting. If you sign and return
this Consent Form without indicating a vote with respect to the Merger, you will
be deemed to have voted "YES" in favor of the Merger, and for the adoption of
the related Amendment to the Partnership Agreement (the "Partnership
Amendment.") THE GENERAL PARTNER RECOMMENDS THAT YOU VOTE "YES" ON THE MERGER.
|_| "YES," I vote all of my Units to approve of my Partnership's
participation in the Merger and the adoption of the Partnership
Amendment. Unless I choose to receive a 6.0% Note by marking the box
below, I will receive shares of AmREIT Common Stock ("Shares") in the
Merger.
|_| I vote Yes for the Merger, but I elect to receive a 6.0% Note
instead of Shares for all _____ of my Units in the Merger if it is
approved and consummated, subject to the Note Restriction. Note - you
will elect to receive Notes for all of your Units if you check this
box unless you choose to receive Notes for less than all of your Units
by lining out "all" and placing the desired number of Units on the
line following "all."
|_| "NO," I do not approve of my Partnership's participation in the
Merger or the adoption of the Partnership Amendment. Unless I choose
to receive Shares by marking the box below,I will receive a 6.0% Note
in the Merger if it is approved by my Partnership and consummated.
THE GENERAL PARTNER RECOMMENDS THAT YOU CHOOSE TO RECEIVE SHARES IN
THE MERGER.
|_| I vote No on the Merger, but I elect to receive Shares instead of
Notes for all ____ of my Units if the Merger is approved and
consummated. Note - you will elect to receive Shares for all of your
Units if you check this box unless you choose to receive Shares for
less than all of your Units by lining out "all" and placing the
desired number of Units on the line following "all."
|_| "ABSTAIN," I abstain from voting on the Merger. Unless I choose to
receive a 6.0% Note by marking the box below, I will receive Shares if
the Merger is approved by my Partnership and consummated.
|_| I Abstain from voting, but I elect to receive a 6.0% Note instead
of Shares for all ____ of my Units if the Merger is approved and
consummated, subject to the Note Restriction. Note - you will elect to
receive Notes for all of your Units if you check this box unless you
choose to receive Notes for less than all of your Units by lining out
"all" and placing the desired number of Units on the line following
"all."
PLEASE DATE, SIGN AND MAIL THIS CONSENT FORM EXACTLY AS YOUR NAME APPEARS ON THE
MAILING LABEL, UNLESS YOUR NAME IS PRINTED INCORRECTLY.
SEE REVERSE SIDE
<PAGE>
Further Agreements
By signing this Consent Form, you hereby covenant and agree, if the
Merger is approved by a majority of the Units of the Partnership: (a) to be
bound by the terms of the Agreement and Plan of Merger, and (b) to execute and
deliver (and you hereby irrevocably appoint each General Partner of the
Partnership(s) in which you own Units as your attorney-in-fact to execute and
deliver on your behalf) such additional documents and instruments as may be
reasonably required to consummate the Merger including, without limitation, the
Partnership Amendment. The foregoing power of attorney is hereby declared to be
irrevocable and a power coupled with an interest, and it shall survive your
subsequent death, incompetency, dissolution, disability, incapacity, bankruptcy
or termination and shall extend to your heirs, successors and assigns. Each
person signing this Consent Form also affirms and makes the other
representations, warranties, covenants and agreements set forth in the Letter of
Instructions.
IF YOU HAVE ANY QUESTIONS OR NEED ASSISTANCE IN COMPLETING THE CONSENT
FORM, PLEASE CALL AMREIT, INC., TOLL-FREE AT 1-800-888-4400.
- - - SIGNATURE
MAILING LABEL
(Includes name of Partnership ----------------------------------------
and number of Units held) Signature
- - - ----------------------------------------
Print Name
Dated: -----------------------
[Back of Page]
<PAGE>
PRELIMINARY PROXY MATERIAL
AMREIT, INC.
Eight Greenway Plaza, Suite 824
Houston, Texas 77046
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON DECEMBER ____, 1998
TO THE SHAREHOLDERS OF AMREIT, INC.:
A Special Meeting of the shareholders of AmREIT, Inc. (the
"Company") will be held at Eight Greenway Plaza, Suite 824,
Houston, Texas on __________, December ___, 1998 at _______.m.,
Local Time for the following purposes:
1. To approve the Merger of the Company with each of the 10
affiliated Limited Partnerships and the Amendment to its
Bylaws expressly authorizing each such Merger.
THE BOARD OF DIRECTORS OF THE COMPANY UNANIMOUSLY APPROVED
THESE PROPOSALS AND RECOMMENDS THAT YOU VOTE "FOR" APPROVAL OF THE
PROPOSAL LISTED ON THIS NOTICE OF SPECIAL MEETING OF SHAREHOLDERS.
Shareholders of record at the close of business on October
___, 1998, are the only persons entitled to notice of and to vote
at the meeting.
Your attention is directed to the Joint Proxy and Consent
Solicitation Statement and Prospectus (the "Prospectus"). WHETHER
OR NOT YOU EXPECT TO BE PRESENT AT THE SPECIAL MEETING, PLEASE FILL
IN, SIGN, DATE AND MAIL THE ENCLOSED PROXY AS PROMPTLY AS POSSIBLE
IN ORDER TO SAVE THE COMPANY FURTHER SOLICITATION EXPENSE. If you
are present at the meeting, you may then revoke your proxy and vote
in person, as explained in the Prospectus in the section entitled
"SPECIAL MEETING OF SHAREHOLDERS - DECEMBER ___, 1998." A return
envelope is enclosed for your convenience.
Secretary
Dated: November ___, 1998
<PAGE>
