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PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED JUNE 18, 1996)
450,000 SHARES
[CRESCENT LOGO]
COMMON STOCK
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Crescent Real Estate Equities, Inc. (collectively with its subsidiaries,
the "Company") is a fully integrated real estate company operated as a real
estate investment trust. The Company offers hereby 450,000 shares of its common
stock (the "Common Stock") to the several underwriters (the "Underwriters") who
participated in the Company's offering of 11,500,000 shares of Common Stock
which closed on October 2, 1996 (the "October Offering"). The shares of Common
Stock offered hereby are being sold by the Company to the Underwriters at a
price of $42.00 per share so that the Underwriters may cover a portion of their
short position resulting from over-allotments in connection with the October
Offering. The shares of Common Stock are listed on the New York Stock Exchange
(the "NYSE") under the symbol "CEI." On October 3, 1996, the last reported sale
price of the Common Stock on the NYSE was $42 3/4 per share. It is expected that
delivery of the shares of Common Stock offered hereby will be made in New York,
New York, on or about October 9, 1996.
SEE "RISK FACTORS" AT PAGE 4 IN THE ACCOMPANYING PROSPECTUS FOR CERTAIN
FACTORS RELEVANT TO AN INVESTMENT IN THE COMPANY.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT
OR THE PROSPECTUS TO WHICH IT RELATES. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
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THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED THE
MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
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THE DATE OF THIS PROSPECTUS SUPPLEMENT IS OCTOBER 4, 1996.
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Capitalized terms used herein and not otherwise defined are as defined in
the Glossary appearing elsewhere in this Prospectus Supplement.
THE COMPANY
Unless the context requires otherwise, the term "Company" as used herein
includes Crescent Real Estate Equities, Inc. ("Crescent Equities"); its direct
and indirect subsidiaries, including Crescent Real Estate Equities Limited
Partnership (the "Operating Partnership"); Crescent Real Estate Equities, Ltd.
("CREE Ltd."), which is the general partner of the Operating Partnership; CRE
Limited Partner, Inc. ("CLP, Inc."), which is a limited partner of the Operating
Partnership; limited partnerships in which the Operating Partnership owns a
substantial interest and whose general partners are wholly owned subsidiaries of
CREE Ltd. and/or the Operating Partnership; and the other subsidiaries of the
Operating Partnership.
The Company is a fully integrated real estate company operated as a REIT,
which owns a portfolio of Properties located primarily in 15 metropolitan
submarkets in Texas and Colorado. The Properties include 37 Office Properties
with an aggregate of approximately 10.6 million net rentable square feet, three
full-service Hotel Properties with a total of 1,303 rooms and one destination
health and fitness resort Hotel Property that can accommodate up to 240 guests
daily, two Retail Properties with an aggregate of approximately .2 million net
rentable square feet and the Residential Development Property Mortgages and
non-voting common stock in the three Residential Development Corporations. In
addition, the Company owns one Mortgage Note in the principal amount of $12.0
million secured by one Class A office property.
The Company owns its assets and carries on its operations and other
activities, including providing management, leasing and development services for
certain of its Properties, directly through the Operating Partnership and its
subsidiaries and indirectly through its investments in the Residential
Development Corporations. The structure of the Company is designed to facilitate
and maintain its qualification as a REIT and to permit persons contributing
Properties (or interests therein) to the Company to defer some or all of the tax
liability that they otherwise might incur.
Crescent Equities was formed on February 9, 1994. Its executive offices are
located at 900 Third Avenue, Suite 1800, New York, New York 10022, and its
telephone number is (212) 836-4216. The executive offices of the Operating
Partnership are located at 777 Main Street, Suite 2100, Fort Worth, Texas 76102,
and its telephone number is (817) 877-0477.
RECENT DEVELOPMENTS
INCREASE IN DISTRIBUTIONS
The Company has announced an increase in its quarterly distribution to $.61
per share beginning with the distribution for the third quarter of 1996, an
increase of approximately 10.9%. Holders of shares of Common Stock purchased in
this offering (the "Offering") will be entitled to receive the distribution for
the third quarter of 1996 (as long as they continue to be holders on the record
date for the distribution). The Board of Directors has established a record date
of October 16, 1996.
COMPLETED INVESTMENTS
The following briefly describes the Company's Property acquisitions since
January 1, 1996. The information regarding the replacement costs of the
Properties is based on management estimates at the times of the acquisitions.
3333 Lee Parkway. On January 5, 1996, the Company acquired 3333 Lee
Parkway, a 12-story Class A office building containing approximately 234,000 net
rentable square feet and located in the Oak Lawn submarket of Dallas, Texas.
Constructed in 1983, the building, including the six-level, 738-space
underground parking garage, was purchased for approximately $14.5 million,
approximately 46% of the Property's estimated replacement cost. As of June 30,
1996, 3333 Lee Parkway was 62% leased and had the largest block of available
contiguous Class A office space in the combined Oak Lawn/Uptown submarkets.
Leases of approximately 85,000 square feet of the leased
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space expire at the end of 1996 and, with this additional space, management
believes that the building will be well-positioned to attract prospective
tenants that are in the market for large, contiguous blocks of office space. In
August 1996, the Company entered into a nonbinding agreement to lease, in stages
from June 1997 through May 1998, a total of approximately 120,000 net rentable
square feet at an initial full-service equivalent rental rate of $19.24 per
square foot ($17.70 per square foot plus electricity), which represents an
approximately 24% increase from existing average full-service rental rates of
$15.50 per square foot (including expense recoveries) currently paid at the
Property. Under the agreement to lease, the rental rate increases to a
full-service equivalent rental rate of $21.74 ($20.20 plus electricity) by July
2006. Management anticipates that it will be able to increase the Property's
cash flow further by leasing the remaining currently available space at 3333 Lee
Parkway at similar rental rates.
301 Congress Avenue. On April 18, 1996, the Company, together with Aetna
Life Insurance Company ("Aetna"), formed 301 Congress Avenue, L.P., a Delaware
limited partnership in which the Company and Aetna each own a 50% interest.
Crescent/301, L.L.C., a Delaware limited liability company that is wholly owned
by the Operating Partnership and CREE Ltd., serves as the general partner of 301
Congress Avenue, L.P. On April 18, 1996, the partnership acquired 301 Congress
Avenue, a 22-story Class A office building located in the CBD submarket of
Austin, Texas. The Company contributed approximately $21.6 million to the
partnership, representing approximately 65% of the estimated replacement cost of
the Company's interest in the Property. Built in 1986, 301 Congress Avenue is
located on a 1.54-acre site, contains approximately 418,000 net rentable square
feet and has an attached 841-space parking structure. With Class A office space
in Austin's two principal suburban submarkets approximately 99% leased, as
reported by CB Commercial, management believes that the Austin CBD submarket
will become increasingly attractive to prospective tenants. As of June 30, 1996,
301 Congress Avenue was 86% leased. The Company recently entered into a lease
with a new tenant for approximately 40,000 net rentable square feet beginning in
February 1997. Upon commencement of this new lease, the Property will be 96%
leased.
Central Park Plaza. On June 13, 1996, the Company acquired Central Park
Plaza, a Class A office building, with two 15-story towers, located in the CBD
submarket of Omaha, Nebraska. Built in 1982 on a one-acre site, Central Park
Plaza is the largest office building in the Omaha metropolitan area. The
building contains approximately 410,000 net rentable square feet and has 20
covered parking spaces in the building and access to 700 parking spaces in an
adjacent parking garage. As of June 30, 1996, the average base rental rate
(adjusted to an equivalent full-service rental rate) paid at the Property was
$13.31 per square foot, approximately 29% below average Class A quoted market
rental rates for the Omaha CBD submarket, as reported by Compass Management and
Leasing. The average quoted market rental rate does not necessarily represent
the amount at which available space at the Property will be leased. Rental rates
in the Omaha CBD submarket are quoted on a full-service basis. The Company
purchased Central Park Plaza for approximately $25.5 million, approximately 45%
of the Property's estimated replacement cost. Management believes that the rapid
growth of the telecommunications industry combined with the revitalization of
Omaha's CBD submarket will continue to support high occupancy rates and
improving rental rates in the submarket. As of June 30, 1996, Central Park Plaza
was 98% leased, with 71% leased to high-credit tenants such as First National
Bank of Omaha, Acceptance Insurance Company, ConAgra, Inc. and Government
Services Administration Corps of Engineers-Omaha.
Canyon Ranch-Tucson. On July 26, 1996, the Company acquired Canyon
Ranch-Tucson, an award-winning, destination health and fitness resort located on
more than 50 acres at the base of the Catalina Mountains in Tucson, Arizona.
Canyon Ranch-Tucson, which can accommodate 240 guests on a daily basis, features
a 62,000 square foot spa complex, a 16,000 square foot life enhancement center
offering structured therapy and counseling, a 12,000 square foot health and
healing center with a complete staff of physicians, dietitians, psychologists
and therapists, dining facilities, eight outdoor tennis courts, one indoor and
three outdoor pools, massage therapists and a staff of fitness trainers. During
1995, the resort had an occupancy rate of 77%, based on a maximum occupancy of
240 guests per night, and approximately $32.0 million in revenue. Canyon
Ranch-Tucson, along with its "sister" spa, Canyon Ranch-Lenox, have consistently
been voted among the top U.S. spas, according to Conde Nast Traveler magazine.
The Company purchased the resort for approximately $57.0 million, approximately
$27.0 million of which was paid through the issuance of Units to the prior
owners. The previous owners will continue to manage and operate Canyon
Ranch-Tucson pursuant to a 30-year management agreement.
On July 26, 1996, the Company also obtained an option to acquire up to 30%
of a management company to be formed by the former owner of Canyon Ranch-Tucson
within the next year. The management company will have all
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rights to develop and manage new Canyon Ranch resorts, both within the United
States and internationally. In addition, the management company will have the
authority to use and sublicense the Canyon Ranch name and trademarks on a
worldwide basis for business opportunities. This authority includes all
licensing, development and management rights associated with a new Canyon Ranch
resort planned to be developed in Bali, Indonesia. The option, which the Company
must first exercise on or before July 26, 1997, may be exercised in full at that
time or in three separate increments for an aggregate maximum amount of $6.0
million. Management believes that, through the value associated with the Canyon
Ranch name, the Company will have the opportunity to receive significant returns
on its investment as Canyon Ranch expands its franchise.
The Woodlands. On July 31, 1996, the partnership that owns the 10
Woodlands Office Properties in The Woodlands community near Houston, Texas, and
in which the Company holds a 75% limited partner interest, acquired two
additional one-story office buildings containing an aggregate of approximately
109,000 net rentable square feet. With this acquisition, the Company owns
approximately 812,000 net rentable square feet in The Woodlands. The partnership
paid approximately $11.0 million for these two Office Properties. The two
buildings were constructed in 1995 and 1996, and each is currently occupied by a
single tenant. As of June 30, 1996, each of the two buildings was 100% leased.
Three Westlake Park. On August 16, 1996, the Company acquired for
approximately $29.0 million the principal economic interest in Three Westlake
Park through its acquisition from the lender of a mortgage note (the "Three
Westlake Note"), in the principal amount of approximately $46.3 million. Prior
to the Company's acquisition of the Three Westlake Note, the seller granted the
borrower an extension of the maturity date of the Three Westlake Note from
February 1997 to February 2004. Under the terms of the Three Westlake Note, as
modified, the Company will receive all net cash flow from the Property through
February 2004. The Three Westlake Note also provides for the acceleration of the
maturity of the Three Westlake Note if Amoco Production Company, the principal
tenant of the Property, does not exercise its option to renew its lease of 99%
of the Property's net rentable square feet by December 1999. The Three Westlake
Note is secured by a first priority deed of trust on Three Westlake Park, a
19-story Class A office property containing approximately 414,000 net rentable
square feet and located in the Katy Freeway submarket of Houston, Texas. Also
known as The Energy Corridor, this submarket is home to a number of the world's
largest oil companies. The purchase price of the Three Westlake Note represents
approximately 47% of the Property's estimated replacement cost. As of June 30,
1996, the Property, which was constructed in 1983, was 100% leased.
1615 Poydras. On August 23, 1996, the Company acquired 1615 Poydras, a
23-story Class A office building in New Orleans, Louisiana. Built in 1984, the
building contains approximately 509,000 net rentable square feet and has an
attached 495-space parking structure. The building is located on a 1.3-acre site
subject to a 99-year ground lease that commenced in 1990 and is part of a
three-building complex known as Equitable Center. In connection with the
acquisition, the Company assumed the rights and obligations of the lessee under
the ground lease, including the lessee's obligation to purchase the land for
approximately $1.0 million in May 1997. 1615 Poydras is one of the premier
office buildings in New Orleans and is in close proximity to the Regional
Medical Center, the Louisiana Superdome sports complex, the French Quarter, and
the New Orleans' financial and legal districts. The Company purchased 1615
Poydras for approximately $36.5 million, approximately 45% of the Property's
estimated replacement cost. The Property's major tenant is Freeport-McMoRan,
Inc., whose headquarters is located in the building. Freeport-McMoRan leases
approximately 62% of the Property's net rentable square feet under a lease that
expires in 2004. Management believes that New Orleans will be a major
beneficiary of anticipated long-term growth in global energy demand because the
city is at the center of the energy production and distribution network in the
Gulf of Mexico. As of June 30, 1996, 1615 Poydras was approximately 70% leased.
FINANCING ACTIVITIES
The Company obtained in June 1996, from a consortium of banks led by The
First National Bank of Boston, a credit facility (the "Credit Facility") with a
credit line of $175 million to enhance the Company's financial flexibility in
making new real estate investments. The Credit Facility initially had a term
that expired in March 1997, with advances under the Credit Facility bearing
interest at the Eurodollar rate plus 240 basis points for advances of $2 million
or more, or at the lender's prime rate plus 50 basis points for advances of less
than $2 million. Upon the completion of the October Offering, the Credit
Facility became unsecured, the annual interest rate was
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reduced to the Eurodollar rate plus 185 basis points or, as applicable, the
lender's prime rate, and the term was extended until March 1999. The Credit
Facility requires the Company to maintain compliance with a number of customary
financial and other covenants on an ongoing basis, including loan-to-value and
debt service coverage ratios, limitations on additional indebtedness and
distributions and a minimum net worth requirement.
On August 19, 1996, 301 Congress Avenue, L.P., whose sole asset is 301
Congress Avenue, entered into a financing commitment with Northwestern Life
Insurance Company for a $26 million mortgage loan to be secured by 301 Congress
Avenue. The loan will bear interest at a fixed rate of 7.65% and will have a
seven-year term during which only interest is payable, with a final payment of
the entire original principal amount due at the end of such term. The Company is
a 50% partner in 301 Congress Avenue, L.P. Following its receipt of the loan
proceeds (expected to occur at the end of October 1996), 301 Congress Avenue,
L.P. will make a distribution to the Company of approximately $13 million.
REORGANIZATION
On June 17, 1996, the stockholders of Crescent Equities approved a proposal
authorizing its reorganization as a Texas real estate investment trust (a "Texas
REIT") pursuant to the provisions of the Texas Real Estate Investment Trust Act
in order to take advantage of recent changes in Texas law. As a result of the
reorganization (which will be accomplished in a transaction exempt from federal
income taxation by means of a merger of Crescent Equities into a newly formed
Texas REIT), each share of Common Stock will be converted into a common share in
the Texas REIT. The common shares will be listed on the New York Stock Exchange
(the "NYSE"), and it is anticipated that it will not be necessary for
stockholders of Crescent Equities to surrender or exchange their existing stock
certificates for new stock certificates representing common shares of the Texas
REIT. The reorganization has been structured to preserve unchanged the Company's
existing business, purpose, tax status, management, capitalization and assets,
liabilities and net worth (other than due to the costs of the transaction) and
the economic interests and voting rights of the stockholders. The reorganization
is expected to be completed in October 1996. A more detailed description of the
reorganization and the common shares is contained in the Company's Current
Report on Form 8-K, dated June 17, 1996 and filed September 11, 1996.
USE OF PROCEEDS
The Company intends to use the proceeds of the Offering (expected to be
$18.9 million) to fund future acquisitions.
STRUCTURE OF THE COMPANY
The direct and indirect subsidiary entities of Crescent Equities include
the Operating Partnership, CREE Ltd., CLP, Inc., Crescent Real Estate Funding I,
L.P. ("Funding I"), Crescent Real Estate Funding II, L.P. ("Funding II"), and
Crescent/301, L.L.C., which is a wholly owned subsidiary of CREE Ltd. and the
Operating Partnership. Funding I and Funding II are limited partnerships in
which the Operating Partnership owns substantially all of the economic interests
directly, or with regard to Funding I's interest in Waterside Commons,
indirectly through its interest in the Waterside Commons Limited Partnership,
with the remaining interests in Funding I and Funding II owned indirectly by
Crescent Equities through CRE Management I Corp. ("Management I") and CRE
Management II Corp. ("Management II"), which are wholly owned subsidiaries of
CREE Ltd. and are the general partners of Funding I and Funding II,
respectively. Funding I owns nine Properties located in Texas and Colorado
consisting of eight Office Properties and one Retail Property, and Funding II
owns 12 Properties located in Texas, Colorado, Arizona and New Mexico consisting
of nine Office Properties, two Hotel Properties and one Retail Property. The
Operating Partnership owns directly, or indirectly through partnership
interests, 22 Properties consisting of 20 Office Properties and two Hotel
Properties located in Texas, Colorado, Arizona, Louisiana and Nebraska. The
Operating Partnership also owns the Mortgage Note and the Residential
Development Property Mortgages and non-voting common stock of three Residential
Development Corporations. The following table sets forth by subsidiary the
Properties owned by such subsidiary.
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<TABLE>
<S> <C> <C>
OPERATING
FUNDING I FUNDING II PARTNERSHIP
The Aberdeen Albuquerque Plaza Canyon Ranch-Tucson
The Avallon Barton Oaks Plaza One Central Park Plaza
Caltex House Briargate Office and Research Center Denver Marriott City Center
The Citadel Hyatt Regency Albuquerque MCI Tower
Continental Plaza Hyatt Regency Beaver Creek Spectrum Center(1)
The Crescent Atrium Las Colinas Plaza Three Westlake Park(2)
The Crescent Office Towers Liberty Plaza I & II The Woodlands Office
Regency Plaza One MacArthur Center I & II Properties(3)
Waterside Commons Ptarmigan Place 1615 Poydras
Stanford Corporate Centre 301 Congress Avenue(4)
Two Renaissance Square 3333 Lee Parkway
12404 Park Central 6225 North 24th Street
</TABLE>
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(1) The Operating Partnership owns the principal economic interest in Spectrum
Center through an interest in the Spectrum Partnership, which owns both the
Spectrum Note and the ground lessor's interest in the land underlying the
building.
(2) The Operating Partnership owns the principal economic interest in Three
Westlake Park through its ownership of the Three Westlake Note.
(3) The Operating Partnership owns a 75% limited partner interest in the
partnership that owns The Woodlands.
(4) The Operating Partnership owns a 49% limited partner interest and
Crescent/301 L.L.C. owns a 1% general partner interest in 301 Congress
Avenue, L.P., the partnership that owns 301 Congress Avenue.
FEDERAL INCOME TAX CONSIDERATIONS
INTRODUCTION
The following is a summary of the material federal income tax
considerations associated with an investment in the Common Stock offered hereby
prepared by Shaw, Pittman, Potts & Trowbridge, tax counsel to Crescent Equities
("Tax Counsel"). This discussion is based upon the laws, regulations and
reported rulings and decisions in effect as of the date of this Prospectus
Supplement, all of which are subject to change, retroactively or prospectively,
and to possibly differing interpretations. This discussion does not purport to
deal with the federal income or other tax consequences applicable to all
investors in light of their particular investment circumstances or to all
categories of investors, some of whom may be subject to special rules
(including, for example, insurance companies, tax-exempt organizations,
financial institutions, broker-dealers, foreign corporations and persons who are
not citizens or residents of the United States). No ruling on the federal, state
or local tax considerations relevant to the operation of Crescent Equities or
the Operating Partnership or to the purchase, ownership or disposition of the
Common Stock is being requested from the Internal Revenue Service (the "IRS") or
from any other tax authority. Tax Counsel has rendered certain opinions
discussed herein and believes that if the IRS were to challenge the conclusions
of Tax Counsel, such conclusions would prevail in court. However, opinions of
counsel are not binding on the IRS or on the courts, and no assurance can be
given that the conclusions reached by Tax Counsel would be sustained in court.
EACH PROSPECTIVE PURCHASER IS ADVISED TO CONSULT HIS OR HER OWN TAX ADVISOR
REGARDING THE SPECIFIC TAX CONSEQUENCES TO HIM OR HER OF THE PURCHASE, OWNERSHIP
AND DISPOSITION OF THE COMMON STOCK IN AN ENTITY ELECTING TO BE TAXED AS A REAL
ESTATE INVESTMENT TRUST, INCLUDING THE FEDERAL, STATE, LOCAL, FOREIGN AND OTHER
TAX CONSEQUENCES OF SUCH PURCHASE, OWNERSHIP, DISPOSITION AND ELECTION AND OF
POTENTIAL CHANGES IN APPLICABLE TAX LAWS.
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TAXATION OF CRESCENT EQUITIES
Crescent Equities has made an election to be treated as a real estate
investment trust under Sections 856 through 860 of the Internal Revenue Code of
1986, as amended (the "Code") (as used in this section, a "REIT"), commencing
with its taxable year ended December 31, 1994. Crescent Equities believes that
it was organized and has operated in such a manner so as to qualify as a REIT,
and Crescent Equities intends to continue to operate in such a manner, but no
assurance can be given that it has operated in a manner so as to qualify, or
will operate in a manner so as to continue to qualify as a REIT.
The sections of the Code relating to qualification and operation as a REIT
are highly technical and complex. The following sets forth the material aspects
of the Code sections that govern the federal income tax treatment of a REIT and
its stockholders. This summary is qualified in its entirety by the applicable
Code sections, rules and regulations promulgated thereunder, and administrative
and judicial interpretations thereof.
In the opinion of Tax Counsel, Crescent Equities qualified as a REIT under
the Code with respect to its taxable years ending on or before December 31,
1995, and is organized in conformity with the requirements for qualification as
a REIT, its manner of operation has enabled it to meet the requirements for
qualification as a REIT as of the date of this Prospectus Supplement, and its
proposed manner of operation will enable it to meet the requirements for
qualification as a REIT in the future. It must be emphasized that this opinion
is based on various assumptions relating to the organization and operation of
Crescent Equities and the Operating Partnership and is conditioned upon certain
representations made by Crescent Equities and the Operating Partnership as to
certain relevant factual matters, including matters related to the organization,
expected operation, and assets of Crescent Equities and the Operating
Partnership. Moreover, continued qualification as a REIT will depend upon
Crescent Equities' ability to meet, through actual annual operating results, the
distribution levels, stock ownership requirements and the various qualification
tests and other requirements imposed under the Code, as discussed below.
Accordingly, no assurance can be given that the actual stock ownership of
Crescent Equities, the mix of its assets, or the results of its operations for
any particular taxable year will satisfy such requirements. For a discussion of
the tax consequences of failing to qualify as a REIT, see "-- Taxation of
Crescent Equities -- Failure to Qualify," below.
If Crescent Equities qualifies for taxation as a REIT, it generally will
not be subject to federal corporate income taxes on its net income that is
currently distributed to stockholders. This treatment substantially eliminates
the "double taxation" (at the corporate and stockholder levels) that generally
results from investments in a corporation. However, Crescent Equities will be
subject to federal income tax in the following circumstances. First, Crescent
Equities will be taxed at regular corporate rates on any undistributed "real
estate investment trust taxable income," including undistributed net capital
gains. Second, under certain circumstances, Crescent Equities may be subject to
the "alternative minimum tax" on its items of tax preference. Third, if Crescent
Equities has "net income from foreclosure property," it will be subject to tax
on such income at the highest corporate rate. "Foreclosure property" generally
means real property and any personal property incident to such real property
which is acquired as a result of a default either on a lease of such property or
on indebtedness which such property secured and with respect to which an
appropriate election is made, except that property ceases to be foreclosure
property (i) after a two-year period (which in certain cases may be extended by
the IRS) or, if earlier, (ii) when the REIT engages in construction on the
property (other than for completion of certain improvements) or for more than 90
days uses the property in a business conducted other than through an independent
contractor. "Net income from foreclosure property" means (a) the net gain from
disposition of foreclosure property which is held primarily for sale to
customers in the ordinary course of business or (b) other net income from
foreclosure property which would not satisfy the 75% gross income test
(discussed below). Property is not eligible for the election to be treated as
foreclosure property if the loan or lease with respect to which the default
occurs (or is imminent) was made, entered into or acquired by the REIT with an
intent to evict or foreclose or when the REIT knew or had reason to know that
default would occur. Fourth, if Crescent Equities has "net income derived from
prohibited transactions," such income will be subject to a 100% tax. The term
"prohibited transaction" generally includes a sale or other disposition of
property (other than foreclosure property) that is held primarily for sale to
customers in the ordinary course of business. Fifth, if Crescent Equities should
fail to satisfy the 75% gross income test or the 95% gross income test (as
discussed below), but has nonetheless maintained its qualification as a REIT
because certain other requirements have been met, it will be subject to a 100%
tax on the net income attributable to the greater of the amount by which
Crescent Equities fails the 75% or 95% test. Sixth, if, during each calendar
year, Crescent Equities
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fails to distribute at least the sum of (i) 85% of its "real estate investment
trust ordinary income" for such year, (ii) 95% of its "real estate investment
trust capital gain net income" for such year, and (iii) any undistributed
taxable income from prior periods, Crescent Equities will be subject to a 4%
excise tax on the excess of such required distribution over the amounts actually
distributed. Seventh, if Crescent Equities acquires any asset from a C
corporation (i.e., a corporation generally subject to full corporate level tax)
in a transaction in which the basis of the asset in Crescent Equities' hands is
determined by reference to the basis of the asset (or any other property) in the
hands of the corporation, and Crescent Equities recognizes gain on the
disposition of such asset during the 10-year period beginning on the date on
which such asset was acquired by Crescent Equities, then, to the extent of such
property's "built-in" gain (the excess of the fair market value of such property
at the time of acquisition by Crescent Equities over the adjusted basis in such
property at such time), such gain will be subject to tax at the highest regular
corporate rate applicable (as provided in Treasury Regulations that have not yet
been promulgated). (The results described above with respect to the recognition
of "built-in gain" assume that Crescent Equities will make an election pursuant
to IRS Notice 88-19.)
Requirements of Qualification. The Code defines a REIT as a corporation,
trust or association (1) which is managed by one or more trustees or directors;
(2) the beneficial ownership of which is evidenced by transferable shares, or by
transferable certificates of beneficial interest; (3) which would be taxable as
a domestic corporation, but for Sections 856 through 860 of the Code; (4) which
is neither a financial institution nor an insurance company subject to certain
provisions of the Code; (5) the beneficial ownership of which is held (without
reference to any rules of attribution) by 100 or more persons; (6) during the
last half of each taxable year not more than 50% in value of the outstanding
stock of which is owned, directly or indirectly, by five or fewer individuals
(as defined in the Code); and (7) which meets certain other tests, described
below, regarding certain distributions and the nature of its income and assets
and properly files an election to be treated as a REIT. The Code provides that
conditions (1) through (4), inclusive, must be met during the entire taxable
year and that condition (5) must be met during at least 335 days of a taxable
year of 12 months (or during a proportionate part of a taxable year of less than
12 months).
Crescent Equities issued sufficient shares of Common Stock pursuant to its
initial public offering of shares of Common Stock that closed on May 5, 1994
(the "Initial Offering") to satisfy the requirements described in (5) and (6)
above. While the existence of the Exchange Rights may cause Limited Partners to
be deemed to own the shares of Common Stock they could acquire through the
Exchange Rights, the amount of Common Stock that can be acquired at any time
through the Exchange Rights is limited to an amount which, together with any
other Common Stock actually or constructively deemed, under the Articles of
Incorporation, to be owned by any person, does not exceed the Ownership Limit.
See "Description of Common Stock -- Ownership Limits and Restrictions on
Transfer" in the accompanying Prospectus. Moreover, the ownership of Common
Stock by persons other than contributing Limited Partners generally is limited
under the Ownership Limit to no more than 8.0% of the shares of outstanding
Common Stock. In addition, the Articles of Incorporation provide for
restrictions regarding the ownership or transfer of Common Stock in order to
assist Crescent Equities in continuing to satisfy the share ownership
requirements described in (5) and (6) above. See "Description of Common
Stock -- Ownership Limits and Restrictions on Transfer" in the accompanying
Prospectus.
If a REIT owns a "qualified REIT subsidiary," the Code provides that the
qualified REIT subsidiary is disregarded for federal income tax purposes, and
all assets, liabilities and items of income, deduction and credit of the
qualified REIT subsidiary are treated as assets, liabilities and such items of
the REIT itself. A qualified REIT subsidiary is a corporation all of the capital
stock of which has been owned by the REIT from the commencement of such
corporation's existence. CREE Ltd., CLP, Inc., Management I and Management II
Corp. are qualified REIT subsidiaries, and thus all of the assets (i.e., the
respective partnership interests in the Operating Partnership, Funding I and
Funding II), liabilities and items of income, deduction and credit of CREE Ltd.,
CLP, Inc., Management I and Management II are treated as assets and liabilities
and items of income, deduction and credit of Crescent Equities. Unless otherwise
required, all references to Crescent Equities in this "Federal Income Tax
Considerations" section refer to Crescent Equities and its qualified REIT
subsidiaries.
In the case of a REIT which is a partner in a partnership, Treasury
Regulations provide that the REIT will be deemed to own its proportionate share
of the assets of the partnership and will be deemed to be entitled to the income
of the partnership attributable to such share. In addition, the assets and gross
income (as defined in the Code) of the partnership attributed to the REIT shall
retain the same character as in the hands of the partnership
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for purposes of Section 856 of the Code, including satisfying the gross income
tests and the assets tests described below. Thus, Crescent Equities'
proportionate share of the assets, liabilities and items of income of the
Operating Partnership and its subsidiary partnerships are treated as assets,
liabilities and items of income of Crescent Equities for purposes of applying
the requirements described herein.
Income Tests. In order for Crescent Equities to achieve and maintain its
qualification as a REIT, there are three requirements relating to Crescent
Equities' gross income that must be satisfied annually. First, at least 75% of
Crescent Equities' gross income (excluding gross income from prohibited
transactions) for each taxable year must consist of temporary investment income
or of certain defined categories of income derived directly or indirectly from
investments relating to real property or mortgages on real property. These
categories include, subject to various limitations, rents from real property,
interest on mortgages on real property, gains from the sale or other disposition
of real property (including interests in real property and in mortgages on real
property) not primarily held for sale to customers in the ordinary course of
business, income from foreclosure property, and amounts received as
consideration for entering into either loans secured by real property or
purchases or leases of real property. Second, at least 95% of Crescent Equities'
gross income (excluding gross income from prohibited transactions) for each
taxable year must be derived from income qualifying under the 75% test and from
dividends, other types of interest and gain from the sale or disposition of
stock or securities, or from any combination of the foregoing. Third, for each
taxable year, gain from the sale or other disposition of stock or securities
held for less than one year, gain from prohibited transactions and gain on the
sale or other disposition of real property held for less than four years (apart
from involuntary conversions and sales of foreclosure property) must represent
less than 30% of Crescent Equities' gross income (including gross income from
prohibited transactions) for such taxable year. Crescent Equities, through its
partnership interests in the Operating Partnership and all subsidiary
partnerships, believes it satisfied all three of these income tests for 1994 and
1995 and expects to satisfy them for subsequent taxable years.
The bulk of the Operating Partnership's income is currently derived from
rents with respect to the Office Properties, the Hotel Properties and the Retail
Properties. Rents received by Crescent Equities will qualify as "rents from real
property" in satisfying the gross income requirements for a REIT described above
only if several conditions are met. First, the amount of rent must not be based
in whole or in part on the income or profits of any person. An amount received
or accrued generally will not be excluded from the term "rents from real
property" solely by reason of being based on a fixed percentage or percentages
of receipts or sales. Second, the Code provides that rents received from a
tenant will not qualify as "rents from real property" if the REIT, or an owner
of 10% or more of the REIT, directly or constructively, owns 10% or more of such
tenant (a "Related Party Tenant"). Third, if rent attributable to personal
property leased in connection with a lease of real property is greater than 15%
of the total rent received under the lease, then the portion of rent
attributable to such personal property will not qualify as "rents from real
property." Finally, for rents to qualify as "rents from real property," a REIT
generally must not operate or manage the property or furnish or render services
to the tenants of such property, other than through an independent contractor
from whom the REIT derives no revenue, except that a REIT may directly perform
services which are "usually or customarily rendered" in connection with the
rental of space for occupancy, other than services which are considered to be
rendered to the occupant of the property.
Crescent Equities, based in part upon opinions of Tax Counsel, including
opinions as to whether various tenants, including the lessees of the Hotel
Properties, constitute Related Party Tenants, believes that the income it
received in 1994 and 1995 and will receive in subsequent taxable years from (i)
charging rent for any property that is based in whole or in part on the income
or profits of any person (except by reason of being based on a percentage or
percentages of receipts or sales, as described above); (ii) charging rent for
personal property in an amount greater than 15% of the total rent received under
the applicable lease; (iii) directly performing services considered to be
rendered to the occupant of property or which are not usually or customarily
furnished or rendered in connection with the rental of real property; or (iv)
entering into any lease with a Related Party Tenant, will not cause Crescent
Equities to fail to meet the gross income tests. Opinions of counsel are not
binding upon the IRS or any court, and there can be no complete assurance that
the IRS will not assert successfully a contrary position.
The Operating Partnership will also receive fixed and contingent interest
on the Residential Development Property Mortgages. Interest on mortgages secured
by real property satisfies the 75% and 95% gross income tests only if it does
not include any amount whose determination depends in whole or in part on the
income of any person, except that (i) an amount is not excluded from the term
"interest" solely by reason of being based on a fixed
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percentage or percentages of receipts or sales and (ii) income derived from a
shared appreciation provision in a mortgage is treated as gain recognized from
the sale of the secured property. Certain of the Residential Development
Property Mortgages contain provisions for contingent interest based upon
property sales. In the opinion of Tax Counsel, each of the Residential
Development Property Mortgages constitutes debt for federal income tax purposes,
any contingent interest derived therefrom will be treated as being based on a
fixed percentage of sales, and therefore all interest derived therefrom will
constitute interest received from mortgages for purposes of the 75% and 95%
gross income tests. If, however, the contingent interest provisions were instead
characterized as shared appreciation provisions, any resulting income would,
because the underlying properties are primarily held for sale to customers in
the ordinary course, be treated as income from prohibited transactions, which
would not satisfy the 75% and 95% gross income tests, which would count toward
the 30% gross income test, and which would be subject to a 100% tax.
In applying the 95% and 75% gross income tests to Crescent Equities, it is
necessary to consider the form in which certain of its assets are held, whether
that form will be respected for federal income tax purposes, and whether, in the
future, such form may change into a new form with different tax attributes (for
example, as a result of a foreclosure on debt held by the Operating
Partnership). For example, the Residential Development Properties are primarily
held for sale to customers in the ordinary course of business, and the income
resulting from such sales, if directly attributed to Crescent Equities, would
not qualify under the 75% and 95% gross income tests and would count as gain
from the sale of assets for purposes of the 30% limitation. In addition, such
income would be considered "net income from prohibited transactions" and thus
would be subject to a 100% tax. The income from such sales, however, will be
earned by the Residential Development Corporations rather than by the Operating
Partnership and will be paid to the Operating Partnership in the form of
interest and principal payments on the Residential Development Property
Mortgages or distributions with respect to the stock in the Residential
Development Corporations held by the Operating Partnership. In similar fashion,
the income earned by the Hotel Properties, if directly attributed to Crescent
Equities, would not qualify under the 75% and 95% gross income tests because it
would not constitute "rents from real property." Such income is, however, earned
by the lessees of these Hotel Properties and what the Operating Partnership
receives from the lessees of these Hotel Properties is rent. Tax Counsel is of
the opinion that (i) the Residential Development Properties or any interest
therein will be treated as owned by the Residential Development Corporations,
(ii) amounts derived by the Operating Partnership from the Residential
Development Corporations under the terms of the Residential Development Property
Mortgages will qualify as interest or principal, as the case may be, paid on
mortgages on real property for purposes of the 75% and 95% gross income tests,
(iii) amounts derived by the Operating Partnership with respect to the stock of
the Residential Development Corporations will be treated as distributions on
stock (i.e., as dividends, a return of capital, or capital gain, depending upon
the circumstances) for purposes of the 75% and 95% gross income tests and (iv)
the leases of the Hotel Properties will be treated as leases for federal income
tax purposes, and the rent payable thereunder will qualify as "rents from real
property." Tax Counsel has provided opinions similar to those provided with
respect to the Operating Partnership's investment in the Residential Development
Corporations with respect to its investments in certain other entities through
non-voting securities and secured debt. Investors should be aware that there are
no controlling Treasury Regulations, published rulings, or judicial decisions
involving transactions with terms substantially the same as those with respect
to the Residential Development Corporations and the leases of the Hotel
Properties. Therefore, the opinions of Tax Counsel with respect to these matters
are based upon all of the facts and circumstances and upon rulings and judicial
decisions involving situations that are considered to be analogous. Opinions of
counsel are not binding upon the IRS or any court, and there can be no complete
assurance that the IRS will not assert successfully a contrary position. If one
or more of the leases of the Hotel Properties is not a true lease, part or all
of the payments that the Operating Partnership receives from the respective
lessee may not satisfy the various requirements for qualification as "rents from
real property," or the Operating Partnership might be considered to operate the
Hotel Properties directly. In that case, Crescent Equities likely would not be
able to satisfy either the 75% or 95% gross income tests and, as a result,
likely would lose its REIT status. Similarly, if the IRS were to challenge
successfully the arrangements with the Residential Development Corporations,
Crescent Equities' qualification as a REIT could be jeopardized.
If any of the Residential Development Properties were to be acquired by the
Operating Partnership as a result of foreclosure on any of the Residential
Development Property Mortgages, or if any of the Hotel Properties were to be
operated directly by the Operating Partnership or a subsidiary partnership as a
result of a default by the lessee
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under the lease, such property would constitute foreclosure property for two
years following its acquisition (or for up to an additional four years if an
extension is granted by the IRS), provided that (i) the Operating Partnership or
its subsidiary partnership conducts sales or operations through an independent
contractor; (ii) the Operating Partnership or its subsidiary partnership does
not undertake any construction on the foreclosed property other than completion
of improvements which were more than 10% complete before default became
imminent; and (iii) foreclosure was not regarded as foreseeable at the time
Crescent Equities acquired the Residential Development Property Mortgages or
leased the Hotel Properties. For so long as any of these properties constitutes
foreclosure property, the income from such sales would be subject to tax at the
maximum corporate rates and would qualify under the 75% and 95% gross income
tests. However, if any of these properties does not constitute foreclosure
property at any time in the future, income earned from the disposition or
operation of such property will not qualify under the 75% and 95% gross income
tests and, in the case of the Residential Development Properties, will count
toward the 30% test and will be subject to the 100% tax.
Crescent Equities anticipates that it will have certain income which will
not satisfy the 75% or the 95% gross income test and/or which will constitute
income whose receipt could cause Crescent Equities not to comply with the 30%
gross income test. For example, income from dividends on the stock of the
Residential Development Corporations will not satisfy the 75% gross income test.
It is also possible that certain income resulting from the use of creative
financing or acquisition techniques would not satisfy the 75%, 95% or 30% gross
income tests. Crescent Equities believes, however, that the aggregate amount of
nonqualifying income will not cause Crescent Equities to exceed the limits on
nonqualifying income under the 75%, 95% or 30% gross income tests.
Any gross income derived from a prohibited transaction is taken into
account in applying the 30% gross income test necessary to qualify as a REIT.
Crescent Equities believes that no asset owned by the Operating Partnership is
primarily held for sale to customers and that the sale of any of the Properties
will not be in the ordinary course of business. Whether property is held
primarily for sale to customers in the ordinary course of business depends,
however, on the facts and circumstances in effect from time to time, including
those related to a particular property. No assurance can be given that Crescent
Equities can (a) comply with certain safe-harbor provisions of the Code which
provide that certain sales do not constitute prohibited transactions or (b)
avoid owning property that may be characterized as property held primarily for
sale to customers in the ordinary course of business.
If Crescent Equities fails to satisfy one or both of the 75% or 95% gross
income tests for any taxable year, it may nevertheless qualify as a REIT for
such year if it is entitled to relief under certain provisions of the Code.
These relief provisions generally will be available if Crescent Equities'
failure to meet such tests is due to reasonable cause and not to willful
neglect, Crescent Equities attaches a schedule of the sources of its income to
its tax return, and any incorrect information on the schedule is not due to
fraud with intent to evade tax. It is not possible, however, to state whether in
all circumstances Crescent Equities would be entitled to the benefit of these
relief provisions. As discussed above, even if these relief provisions apply, a
tax would be imposed with respect to the excess of 75% or 95% of Crescent
Equities' gross income over Crescent Equities' qualifying income in the relevant
category, whichever is greater.
Asset Tests. Crescent Equities, at the close of each quarter of its taxable
year, must also satisfy three tests relating to the nature of its assets. First,
at least 75% of the value of Crescent Equities' total assets must be represented
by real estate assets (including (i) its allocable share of real estate assets
held by the Operating Partnership, any partnerships in which the Operating
Partnership owns an interest, or qualified REIT subsidiaries of Crescent
Equities and (ii) stock or debt instruments held for not more than one year
purchased with the proceeds of a stock offering or long-term (at least five
years) debt offering of Crescent Equities), cash, cash items and government
securities. Second, not more than 25% of Crescent Equities' total assets may be
represented by securities other than those in the 75% asset class. Third, of the
investments included in the 25% asset class, the value of any one issuer's
securities owned by Crescent Equities may not exceed 5% of the value of Crescent
Equities' total assets, and Crescent Equities may not own more than 10% of any
one issuer's outstanding voting securities. The 25% and 5% tests generally must
be met for any quarter in which Crescent Equities acquires securities of an
issuer. Thus, this requirement must be satisfied not only on the date Crescent
Equities first acquires corporate securities, but also each time Crescent
Equities increases its ownership of corporate securities (including as a result
of increasing its interest in the Operating Partnership either with the proceeds
of the Offering or by acquiring Units from Limited Partners upon the exercise of
their Exchange Rights).
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The Operating Partnership owns 100% of the non-voting stock of each
Residential Development Corporation. In addition, the Operating Partnership owns
the Residential Development Property Mortgages. As stated above, in the opinion
of Tax Counsel each of these mortgages will constitute debt for federal income
tax purposes and therefore will be treated as a real estate asset; however, the
IRS could assert that such mortgages should be treated as equity interests in
their respective issuers, which would not qualify as real estate assets. By
virtue of its ownership of partnership interests in the Operating Partnership,
Crescent Equities will be considered to own its pro rata share of these assets.
Neither Crescent Equities nor the Operating Partnership, however, will directly
own more than 10% of the voting securities of any Residential Development
Corporation and, in the opinion of Tax Counsel, Crescent Equities will not be
considered to own any of such voting securities. In addition, Crescent Equities
and its senior management believe that Crescent Equities' pro rata shares of the
value of the securities of each Residential Development Corporation do not
separately exceed 5% of the total value of Crescent Equities' total assets. This
belief is based in part upon its analysis of the estimated values of the various
securities owned by the Operating Partnership relative to the estimated value of
the total assets owned by the Operating Partnership. No independent appraisals
will be obtained to support this conclusion, and Tax Counsel, in rendering its
opinion as to the qualification of Crescent Equities as a REIT, is relying on
the conclusions of Crescent Equities and its senior management as to the value
of the various securities and other assets. There can be no assurance, however,
that the IRS might not contend that the values of the various securities held by
Crescent Equities through the Operating Partnership separately exceed the 5%
value limitation or, in the aggregate, exceed the 25% value limitation or that
the voting securities of the Residential Development Corporations should be
considered to be owned by Crescent Equities. Finally, if the Operating
Partnership were treated for tax purposes as a corporation rather than as a
partnership, Crescent Equities would violate the 10% of voting securities and 5%
of value limitations, and the treatment of any of the Operating Partnership's
subsidiary partnerships as a corporation rather than as a partnership could also
violate one or the other, or both, of these limitations. In the opinion of Tax
Counsel, for federal income tax purposes the Operating Partnership and all the
subsidiary partnerships will be treated as partnerships and not as either
associations taxable as corporations or publicly traded partnerships. See
"-- Tax Aspects of the Operating Partnership and the Subsidiary Partnerships"
below.
As noted above, the 5% and 25% value requirements must be satisfied not
only on the date Crescent Equities first acquires corporate securities, but also
each time Crescent Equities increases its ownership of corporate securities
(including as a result of increasing its interest in the Operating Partnership
either with the proceeds of the Offering or by acquiring Units from Limited
Partners upon the exercise of their Exchange Rights). Although Crescent Equities
plans to take steps to ensure that it satisfies the 5% and 25% value tests for
any quarter with respect to which retesting is to occur, there can be no
assurance that such steps (i) will always be successful; (ii) will not require a
reduction in Crescent Equities' overall interest in the various corporations; or
(iii) will not restrict the ability of the Residential Development Corporations
to increase the sizes of their respective businesses, unless the value of the
assets of Crescent Equities is increasing at a commensurate rate.
Annual Distribution Requirements. In order to qualify as a REIT, Crescent
Equities is required to distribute dividends (other than capital gain dividends)
to its stockholders in an amount at least equal to (A) the sum of (i) 95% of the
"real estate investment trust taxable income" of Crescent Equities (computed
without regard to the dividends paid deduction and Crescent Equities' net
capital gain) and (ii) 95% of the net income (after tax), if any, from
foreclosure property, minus (B) certain excess noncash income. Such
distributions must be paid in the taxable year to which they relate, or in the
following taxable year if declared before Crescent Equities timely files its tax
return for such year, and if paid on or before the date of the first regular
dividend payment after such declaration. To satisfy the 95% distribution
requirement for 1994, Crescent Equities made a distribution to stockholders in
1995 which it believes was properly attributable to its 1994 tax year in
accordance with the rules described in the preceding sentence. To the extent
that Crescent Equities does not distribute all of its net capital gain or
distributes at least 95%, but less than 100%, of its "real estate investment
trust taxable income," as adjusted, it will be subject to tax thereon at regular
capital gains and ordinary corporate tax rates. Furthermore, if Crescent
Equities should fail to distribute, during each calendar year, at least the sum
of (i) 85% of its "real estate investment trust ordinary income" for such year;
(ii) 95% of its "real estate investment trust capital gain income" for such
year; and (iii) any undistributed taxable income from prior periods, Crescent
Equities would be subject to a 4% excise tax on the excess of such required
distribution over the amounts actually distributed.
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Crescent Equities believes that it has made and intends to make timely
distributions sufficient to satisfy all annual distribution requirements. In
this regard, the Operating Partnership Agreement authorizes CREE Ltd., as
general partner, to take such steps as may be necessary to cause the Operating
Partnership to distribute to its partners an amount sufficient to permit
Crescent Equities to meet these distribution requirements. It is possible,
however, that, from time to time, Crescent Equities may experience timing
differences between (i) the actual receipt of income and actual payment of
deductible expenses and (ii) the inclusion of such income and deduction of such
expenses in arriving at its "real estate investment trust taxable income."
Issues may also arise as to whether certain items should be included in income.
For example, Tax Counsel has opined that the Operating Partnership should
include in income only its share of the interest income actually paid on the
Spectrum Note and the Three Westlake Note, both of which were acquired at a
substantial discount, rather than its share of the amount of interest accruing
pursuant to the terms of these investments, but opinions of counsel are not
binding on the IRS or the courts. In this regard, the IRS has taken a contrary
view in a recent technical advice memorandum concerning the accrual of original
issue discount ("OID"). The Company believes, however, that even if the
Operating Partnership were to include in income the full amount of interest
income accrued on these notes, and the Operating Partnership were not allowed
any offsetting deduction for the amount of such interest to the extent it is
uncollectible, the Company nonetheless would be able to satisfy the 95%
distribution requirement without borrowing additional funds or distributing
stock dividends (as discussed below). In addition, it is possible that certain
creative financing or creative acquisition techniques used by the Operating
Partnership may result in income (such as income from cancellation of
indebtedness or gain upon the receipt of assets in foreclosure whose fair market
value exceeds the Operating Partnership's basis in the debt which was foreclosed
upon) which is not accompanied by cash proceeds. In this regard, the
modification of a debt can result in taxable gain equal to the difference
between the holder's basis in the debt and the principal amount of the modified
debt. Tax Counsel has opined that the Spectrum Note and the Three Westlake Note
were not modified in the hands of the Operating Partnership. Based on the
foregoing, Crescent Equities may have less cash available for distribution in a
particular year than is necessary to meet its annual 95% distribution
requirement or to avoid tax with respect to capital gain or the excise tax
imposed on certain undistributed income for such year. To meet the 95%
distribution requirement necessary to qualify as a REIT or to avoid tax with
respect to capital gain or the excise tax imposed on certain undistributed
income, Crescent Equities may find it appropriate to arrange for borrowings
through the Operating Partnership or to pay distributions in the form of taxable
stock dividends.
Under certain circumstances, Crescent Equities may be able to rectify a
failure to meet the distribution requirement for a year by paying "deficiency
dividends" to stockholders in a later year, which may be included in Crescent
Equities' deduction for dividends paid for the earlier year. Thus, Crescent
Equities may be able to avoid being taxed on amounts distributed as deficiency
dividends; however, Crescent Equities will be required to pay interest based
upon the amount of any deduction taken for deficiency dividends.
Ownership Information. Pursuant to applicable Treasury Regulations, in
order to be treated as a REIT, Crescent Equities must maintain certain records
and request certain information from its stockholders designed to disclose the
actual ownership of its Equity Securities (as defined in the accompanying
Prospectus). Crescent Equities believes that it has complied and intends to
continue to comply with such requirements.
Failure to Qualify. If Crescent Equities fails to qualify as a REIT in any
taxable year and the relief provisions do not apply, Crescent Equities will be
subject to tax (including any applicable alternative minimum tax) on its taxable
income at regular corporate rates. Distributions to stockholders in any year in
which Crescent Equities fails to qualify as a REIT will not be deductible by
Crescent Equities; nor will they be required to be made. If Crescent Equities
fails to qualify as a REIT, then, to the extent of Crescent Equities' current
and accumulated earnings and profits, all distributions to stockholders will be
taxable as ordinary income and, subject to certain limitations of the Code,
corporate distributees may be eligible for the dividends received deduction.
Unless entitled to relief under specific statutory provisions, Crescent Equities
will also be disqualified from electing to be treated as a REIT for the four
taxable years following the year during which it ceased to qualify as a REIT. It
is not possible to state whether in all circumstances Crescent Equities would be
entitled to such statutory relief.
Possible Legislation. On October 6, 1995, the House of Representatives
passed budget reconciliation legislation entitled the Tax Simplification Act of
1995, which contained various amendments to the Code, including amendments to
the provisions governing the tax treatment of REITs. The modifications to the
REIT rules were
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sponsored by the REIT industry and would generally have operated to liberalize
the requirements for qualification as a REIT. These modifications would have
become effective in the first taxable year following their enactment. However,
these modifications were not part of the budget reconciliation legislation which
passed Congress and which, in any event, President Clinton subsequently vetoed.
Whether or when modifications to the REIT rules will ultimately be enacted, or
what provisions they will contain if they are enacted, cannot be ascertained at
this time.
TAXATION OF TAXABLE DOMESTIC STOCKHOLDERS
As long as Crescent Equities qualifies as a REIT, distributions made to
Crescent Equities' taxable U.S. stockholders out of Crescent Equities' current
or accumulated earnings and profits (and not designated as capital gain
dividends) will be taken into account by such U.S. stockholders as ordinary
income and, for corporate stockholders, will not be eligible for the dividends
received deduction. Distributions that are properly designated as capital gain
dividends will be taxed as long-term capital gains (to the extent they do not
exceed Crescent Equities' actual net capital gain for the taxable year) without
regard to the period for which the stockholder has held its Common Stock.
However, corporate stockholders may be required to treat up to 20% of certain
capital gain dividends as ordinary income. Distributions in excess of current
and accumulated earnings and profits will not be taxable to a stockholder to the
extent that they do not exceed the adjusted basis of the stockholder's shares of
Common Stock, but rather will reduce the adjusted basis of such shares. To the
extent that distributions in excess of current and accumulated earnings and
profits exceed the adjusted basis of a stockholder's shares of Common Stock,
such distributions will be included in income as long-term capital gain (or
short-term capital gain if the shares have been held for one year or less)
assuming the shares are a capital asset in the hands of the stockholder. In
addition, any distribution declared by Crescent Equities in October, November or
December of any year payable to a stockholder of record on a specified date in
any such month shall be treated as both paid by Crescent Equities and received
by the stockholder on December 31 of such year, provided that the distribution
is actually paid by Crescent Equities during January of the following calendar
year. Stockholders may not include any net operating losses or capital losses of
Crescent Equities in their respective income tax returns.
In general, any loss upon a sale or exchange of shares by a stockholder who
has held such shares for six months or less (after applying certain holding
period rules) will be treated as a long-term capital loss to the extent of
distributions from Crescent Equities required to be treated by such stockholder
as long-term capital gain.
TAXATION OF TAX-EXEMPT STOCKHOLDERS
Most tax-exempt employees' pension trusts are not subject to federal income
tax except to the extent of their receipt of "unrelated business taxable income"
as defined in Section 512(a) of the Code ("UBTI"). Distributions by the Company
to a shareholder that is a tax-exempt entity should not constitute UBTI,
provided that the tax-exempt entity has not financed the acquisition of its
Common Stock with "acquisition indebtedness" within the meaning of the Code and
the Common Stock is not otherwise used in an unrelated trade or business of the
tax-exempt entity. In addition, certain pension trusts that own more than 10% of
a "pension-held REIT" must report a portion of the dividends that they receive
from such a REIT as UBTI. The Company has not been and does not expect to be
treated as a pension-held REIT for purposes of this rule.
TAXATION OF FOREIGN STOCKHOLDERS
The rules governing United States federal income taxation of nonresident
alien individuals, foreign corporations, foreign partnerships and other foreign
stockholders (collectively, "Non-U.S. Stockholders") are complex, and no attempt
will be made herein to provide more than a summary of such rules. Prospective
Non-U.S. Stockholders should consult with their own tax advisors to determine
the impact of federal, state and local tax laws with regard to an investment in
shares of Common Stock, including any reporting requirements.
Distributions that are not attributable to gain from sales or exchanges by
Crescent Equities of United States real property interests and not designated by
Crescent Equities as capital gain dividends will be treated as dividends of
ordinary income to the extent that they are made out of current and accumulated
earnings and profits of Crescent Equities. Such distributions ordinarily will be
subject to a withholding tax equal to 30% of the gross amount of the
distribution, unless an applicable tax treaty reduces or eliminates that tax.
Crescent Equities expects to withhold
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U.S. income tax at the rate of 30% on the gross amount of any such distribution
made to a Non-U.S. Stockholder unless (i) a lower treaty rate applies and the
Non-U.S. Stockholder has filed the required IRS Form 1001 with Crescent Equities
or (ii) the Non-U.S. Stockholder files an IRS Form 4224 with Crescent Equities
claiming that the distribution is effectively connected with the Non-U.S.
Stockholder's conduct of a U.S. trade or business. Distributions in excess of
Crescent Equities' current and accumulated earnings and profits will be subject
to a 10% withholding requirement but will not be taxable to a stockholder to the
extent that such distributions do not exceed the adjusted basis of the
stockholder's shares of Common Stock, but rather will reduce the adjusted basis
of such shares. To the extent that distributions in excess of current and
accumulated earnings and profits exceed the adjusted basis of a Non-U.S.
Stockholder's shares, such distributions will give rise to tax liability if the
Non-U.S. Stockholder would otherwise be subject to tax on any gain from the sale
or disposition of the shares of Common Stock, as described below. If it cannot
be determined at the time a distribution is made whether or not such
distribution will be in excess of current and accumulated earnings and profits,
the distributions would be subject to withholding at the same rate as dividends.
However, a Non-U.S. Stockholder may seek a refund from the IRS of amounts of tax
withheld in excess of the Non-U.S. Stockholder's actual U.S. tax liability.
For any year in which Crescent Equities qualifies as a REIT, distributions
that are attributable to gain from sales or exchanges by Crescent Equities of
United States real property interests will be taxed to a Non-U.S. Stockholder
under the provisions of the Foreign Investment in Real Property Tax Act of 1980,
as amended ("FIRPTA"). Under FIRPTA, distributions attributable to gain from
sales of United States real property interests are taxed to a Non-U.S.
Stockholder as if such gain were effectively connected with a United States
business. Non-U.S. Stockholders would thus be taxed at the normal capital gain
rates applicable to U.S. stockholders (subject to applicable alternative minimum
tax and a special alternative minimum tax in the case of nonresident alien
individuals). Also, distributions subject to FIRPTA may be subject to a 30%
branch profits tax in the hands of a foreign corporate stockholder not entitled
to treaty exemption. Crescent Equities is required to withhold 35% of any
distribution that could be designated by Crescent Equities as a capital gain
dividend. This amount is creditable against the Non-U.S. Stockholder's FIRPTA
tax liability.
Gain recognized by a Non-U.S. Stockholder upon a sale of shares of Common
Stock generally will not be taxed under FIRPTA if Crescent Equities is a
"domestically controlled REIT," defined generally as a REIT in which at all
times during a specified testing period less than 50% in value of the stock was
held directly or indirectly by foreign persons. Crescent Equities is and
currently expects to continue to be a "domestically controlled REIT," and in
such case the sale of shares of Common Stock would not be subject to taxation
under FIRPTA. However, gain not subject to FIRPTA nonetheless will be taxable to
a Non-U.S. Stockholder if (i) investment in the Common Stock is treated as
effectively connected with the Non-U.S. Stockholder's U.S. trade or business, in
which case the Non-U.S. Stockholder will be subject to the same treatment as
U.S. stockholders with respect to such gain or (ii) the Non-U.S. Stockholder is
a nonresident alien individual who was present in the United States for 183 days
or more during the taxable year and either the individual has a "tax home" in
the United States or the gain is attributable to an office or other fixed place
of business maintained by the individual in the United States, in which case
gains will be subject to a 30% tax. If the gain on the sale of shares of Common
Stock were to be subject to taxation under FIRPTA, the Non-U.S. Stockholder
would be subject to the same treatment as U.S. stockholders with respect to such
gain (subject to applicable alternative minimum tax and a special alternative
minimum tax in the case of nonresident alien individuals), and the purchaser of
the Common Stock would be required to withhold and remit to the IRS 10% of the
purchase price.
TAX ASPECTS OF THE OPERATING PARTNERSHIP AND THE SUBSIDIARY PARTNERSHIPS
The following discussion summarizes certain federal income tax
considerations applicable solely to Crescent Equities' investment in the
Operating Partnership and its subsidiary partnerships and represents the views
of Tax Counsel. The discussion does not cover state or local tax laws or any
federal tax laws other than income tax laws.
Classification of the Operating Partnership and its Subsidiary Partnerships
for Tax Purposes. In the opinion of Tax Counsel, based on the provisions of the
Operating Partnership Agreement and the partnership agreements of the various
subsidiary partnerships, certain factual assumptions and certain representations
described in the opinion, the Operating Partnership and the subsidiary
partnerships will each be treated as a partnership and neither an association
taxable as a corporation for federal income tax purposes, nor a "publicly traded
partnership" taxable as a
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corporation. Unlike a ruling from the IRS, however, an opinion of counsel is not
binding on the IRS or the courts, and no assurance can be given that the IRS
will not challenge the status of the Operating Partnership and its subsidiary
partnerships as partnerships for federal income tax purposes. If for any reason
the Operating Partnership were taxable as a corporation rather than as a
partnership for federal income tax purposes, Crescent Equities would fail to
qualify as a REIT because it would not be able to satisfy the income and asset
requirements. See "-- Taxation of Crescent Equities," above. In addition, any
change in the Operating Partnership's status for tax purposes might be treated
as a taxable event, in which case Crescent Equities might incur a tax liability
without any related cash distributions. See "-- Taxation of Crescent Equities,"
above. Further, items of income and deduction for the Operating Partnership
would not pass through to the respective partners, and the partners would be
treated as stockholders for tax purposes. The Operating Partnership would be
required to pay income tax at regular corporate tax rates on its net income, and
distributions to partners would constitute dividends that would not be
deductible in computing the Operating Partnership's taxable income. Similarly,
if any of the subsidiary partnerships were taxable as a corporation rather than
as a partnership for federal income tax purposes, such treatment might cause
Crescent Equities to fail to qualify as a REIT, and in any event such
partnership's items of income and deduction would not pass through to its
partners, and its net income would be subject to income tax at regular corporate
rates.
Income Taxation of the Operating Partnership and its Subsidiary
Partnerships. A partnership is not a taxable entity for federal income tax
purposes. Rather, Crescent Equities will be required to take into account its
allocable share of the Operating Partnership's income, gains, losses, deductions
and credits for any taxable year of such Partnership ending within or with the
taxable year of Crescent Equities, without regard to whether Crescent Equities
has received or will receive any cash distributions. The Operating Partnership's
income, gains, losses, deductions and credits for any taxable year will include
its allocable share of such items from its subsidiary partnerships.
Tax Allocations with Respect to Pre-Contribution Gain. Pursuant to Section
704(c) of the Code, income, gain, loss and deduction attributable to appreciated
property that is contributed to a partnership in exchange for an interest in the
partnership must be allocated for federal income tax purposes in a manner such
that the contributor is charged with the unrealized gain associated with the
property at the time of the contribution. The amount of such unrealized gain is
generally equal to the difference between the fair market value of the
contributed property at the time of contribution and the adjusted tax basis of
such property at the time of contribution (the "Book-Tax Difference"). In
general, the fair market value of the properties initially contributed to the
Operating Partnership were substantially in excess of their adjusted tax bases.
The Operating Partnership Agreement requires that allocations attributable to
each item of initially contributed property be made so as to allocate the tax
depreciation available with respect to such property first to the partners other
than the partner that contributed the property, to the extent of, and in
proportion to, such partners' share of book depreciation, and then, if any tax
depreciation remains, to the partner that contributed the property. Accordingly,
the depreciation deductions allocable will not correspond exactly to the
percentage interests of the partners. Upon the disposition of any item of
initially contributed property, any gain attributable to an excess at such time
of basis for book purposes over basis for tax purposes will be allocated for tax
purposes to the contributing partner and, in addition, the Operating Partnership
Agreement provides that any remaining gain will be allocated for tax purposes to
the contributing partners to the extent that tax depreciation previously
allocated to the noncontributing partners was less than the book depreciation
allocated to them. These allocations are intended to be consistent with Section
704(c) of the Code and with Treasury Regulations thereunder. The tax treatment
of properties contributed to the Operating Partnership subsequent to its
formation is expected generally to be consistent with the foregoing.
In general, the contributing partners will be allocated lower amounts of
depreciation deductions for tax purposes and increased taxable income and gain
on sale by the Operating Partnership of one or more of the contributed
properties. These tax allocations will tend to reduce or eliminate the Book-Tax
Difference over the life of the Operating Partnership. However, the special
allocation rules of Section 704(c) of the Code do not always entirely rectify
the Book-Tax Difference on an annual basis. Thus, the carryover basis of the
contributed assets in the hands of the Operating Partnership will cause Crescent
Equities to be allocated lower depreciation and other deductions. This may cause
Crescent Equities to recognize taxable income in excess of cash proceeds, which
might adversely affect Crescent Equities' ability to comply with the REIT
distribution requirements. See "-- Taxation of Crescent Equities," above.
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<PAGE> 17
SALE OF PROPERTY
Generally, any gain realized by the Operating Partnership on the sale of
real property, if the property is held for more than one year, will be long-term
capital gain, except for any portion of such gain that is treated as
depreciation or cost recovery recapture.
Crescent Equities' share of any gain realized on the sale of any property
held by the Operating Partnership as inventory or other property held primarily
for sale to customers in the ordinary course of the Operating Partnership's
business, however, will be treated as income from a prohibited transaction that
is subject to a 100% penalty tax. See "-- Taxation of Crescent Equities," above.
Such prohibited transaction income will also have an adverse effect upon
Crescent Equities' ability to satisfy the income tests for status as a REIT for
federal income tax purposes. Under existing law, whether property is held as
inventory or primarily for sale to customers in the ordinary course of the
Operating Partnership's business is a question of fact that depends on all the
facts and circumstances with respect to the particular transaction. The
Operating Partnership intends to hold its properties for investment with a view
to long-term appreciation, to engage in the business of acquiring, developing,
owning and operating the properties, and to make such occasional sales of
properties as are consistent with these investment objectives.
TAXATION OF THE RESIDENTIAL DEVELOPMENT CORPORATIONS
A portion of the amounts to be used to fund distributions to stockholders
is expected to come from the Residential Development Corporations through
dividends on non-voting stock thereof held by the Operating Partnership and
interest on the Residential Development Property Mortgages held by the Operating
Partnership. The Residential Development Corporations will not qualify as REITs
and will pay federal, state and local income taxes on their taxable incomes at
normal corporate rates, which taxes will reduce the cash available for
distribution by Crescent Equities to its stockholders. The Company anticipates
that, initially, deductions for interest and amortization will largely offset
the otherwise taxable income of the Residential Development Corporations, but
there can be no assurance that this will be the case or that the IRS will not
challenge such deductions. Any federal, state or local income taxes that the
Residential Development Corporations are required to pay will reduce the cash
available for distribution by the Company to its stockholders.
STATE AND LOCAL TAXES
The Company and its shareholders may be subject to state and local tax in
various states and localities, including those states and localities in which it
or they transact business, own property, or reside. The tax treatment of the
Company and the shareholders in such jurisdictions may differ from the federal
income tax treatment described above. Consequently, prospective shareholders
should consult their own tax advisors regarding the effect of state and local
tax laws upon an investment in the Common Stock of the Company.
In particular, the State of Texas imposes a franchise tax upon corporations
that do business in Texas, including REITs that are organized as corporations.
Crescent Equities is organized as a Maryland corporation and anticipates that it
will not have any contacts with the State of Texas except for (i) its indirect
interests in the Operating Partnership, which interests the Company holds
through its wholly owned Delaware subsidiaries, CREE Ltd. and CLP, Inc. and (ii)
its indirect interests in Funding I and Funding II, a portion of which it holds
indirectly through Management I and Management II. CLP, Inc. is organized as a
Delaware corporation and anticipates that it will not have any contacts with the
State of Texas other than its limited partnership interest in the Operating
Partnership. The Operating Partnership, Funding I and Funding II are registered
in the State of Texas as foreign limited partnerships qualified to transact
business in Texas.
The Texas franchise tax is imposed on a corporation doing business in Texas
with respect to the corporation's "net taxable capital" and its "net taxable
earned surplus" (generally, a corporation's federal taxable income, with certain
adjustments). The franchise tax on net taxable capital is imposed at the rate of
0.25% of a corporation's net taxable capital. The franchise tax rate on "net
taxable earned surplus" is 4.5%. The Texas franchise tax is generally equal to
the greater of the tax on "net taxable capital" and the tax on "net taxable
earned surplus." The Texas franchise tax is not applied on a consolidated group
basis. Any Texas franchise tax that the Company is required to pay will reduce
the cash available for distribution by the Company to shareholders. The office
of the Texas State Comptroller of Public Accounts (the "Comptroller"), the
agency that administers the Texas franchise tax, has
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issued a regulation providing that a corporation is not considered to be doing
business in Texas for Texas franchise tax purposes merely because the
corporation owns an interest as a limited partner in a limited partnership that
does business in Texas. The same regulation provides, however, that a
corporation is considered to be doing business in Texas if it owns an interest
as a general partner in a partnership that does business in Texas. Although this
regulation applies only for purposes of the net taxable capital component of the
Texas franchise tax, the Comptroller has adopted a similar position for purposes
of the earned surplus component, even though not specifically addressed by
regulation. The Comptroller also has expressed, although not in a formal
regulation, that a corporation is not considered to be doing business in Texas
for Texas franchise tax purposes merely because the corporation owns stock in
another corporation that does business in Texas.
On the basis of these positions and pronouncements by the Comptroller, (i)
CREE Ltd., Management I and Management II will be subject to the Texas franchise
tax because they are general partners of the Operating Partnership, Funding I
and Funding II and the Operating Partnership, Funding I and Funding II are doing
business in Texas, (ii) Crescent Equities will not be considered to be doing
business in Texas merely on account of its direct ownership of the stock of CREE
Ltd. or CLP, Inc. or its indirect ownership of an interest in the Operating
Partnership, Funding I and Funding II, (iii) CLP, Inc. will not be treated as
doing business in Texas merely as a result of its status as a limited partner of
the Operating Partnership, (iv) as long as Crescent Equities and CLP, Inc. are
not otherwise doing business in Texas, Crescent Equities and CLP, Inc. will not
be subject to the Texas franchise tax and (v) it is anticipated that the
Company's Texas franchise tax liability will not be substantial because it is
anticipated that Crescent Equities and CLP, Inc. will not be subject to the
Texas franchise tax and that the franchise tax liability of CREE Ltd.,
Management I and Management II will not be substantial because they are
allocated only a small portion of the taxable income of the Operating
Partnership, Funding I and Funding II.
However, there is no assurance that the Comptroller will not contend that
Crescent Equities and CLP, Inc. are doing business in Texas for Texas franchise
tax purposes. First, no assurance exists that the Comptroller will not revise or
revoke the positions and pronouncements described above and contend that the
activities of Crescent Equities and/or CLP, Inc. will constitute the doing of
business in Texas. Second, no assurance exists that the Comptroller will not (i)
contend that some activity of Crescent Equities other than its ownership of the
stock of CREE Ltd. and CLP, Inc. and/or some activity of CLP, Inc. other than
its ownership of a limited partnership interest in the Operating Partnership
constitutes the doing of business in Texas, despite the general avoidance of
contacts with the State of Texas, (ii) revise its positions and pronouncements
or (iii) assert that, in light of the overall structure of Crescent Equities,
Funding I, Funding II, CLP, Inc., Management I, Management II and CREE Ltd., the
pronouncements and positions otherwise are inapplicable.
Even if a corporation is doing business in Texas for Texas franchise tax
purposes, the corporation is subject to the Texas franchise tax only on the
portion of the taxable capital or taxable earned surplus apportioned to Texas.
The Company has received a private letter ruling from the Comptroller on certain
Texas franchise tax issues. The Company had requested a determination that, even
if the Comptroller determined that Crescent Equities was doing business in
Texas, none of Crescent Equities' tax base would be apportioned to Texas because
all of Crescent Equities' gross receipts would be derived from sources outside
of Texas, resulting in Crescent Equities having no liability for Texas franchise
tax purposes. The Comptroller's ruling adopted this determination. The Company
had also requested a determination that, even if CLP, Inc. was doing business in
Texas and even though a significant portion of its gross receipts will be
derived from Texas sources (based on the operations of the Operating
Partnership), CLP, Inc. would not have significant Texas franchise tax liability
pursuant to the earned surplus portion of the franchise tax. The Comptroller
refused to adopt this determination. Under the determination adopted by the
Comptroller in its ruling, CLP, Inc. would have significant earned surplus and
therefore significant Texas franchise tax liability if the Comptroller
determined that CLP, Inc. was doing business in Texas.
The Operating Partnership, Funding I and Funding II will not be subject to
the Texas franchise tax, under the laws in existence at the time of this
Prospectus Supplement because they are partnerships instead of corporations.
There is no assurance, however, that the Texas legislature, which will meet
again in regular session in 1997, will not expand the scope of the Texas
franchise tax to apply to limited partnerships such as the Operating
Partnership, Funding I and Funding II or enact other legislation which may
result in subjecting Crescent Equities or CLP, Inc. to the Texas franchise tax.
Any statutory change by the Texas legislature may be applied retroactively.
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<PAGE> 19
In addition, it should be noted that two of the Residential Development
Corporations will be doing business in Texas and will be subject to the Texas
franchise tax. Further, Crescent/301, L.L.C. will be subject to the Texas
franchise tax because it is doing business in Texas and limited liability
companies are subject to Texas franchise tax. However, this franchise tax should
not be substantial because Crescent/301, L.L.C. owns a 1% interest in 301
Congress Avenue, L.P.
On June 17, 1996, the stockholders of the Company approved a proposal
authorizing the reorganization of the Company as a Texas REIT pursuant to the
provisions of the Texas Real Estate Investment Trust Act. See "Recent
Developments -- Reorganization." A Texas REIT is not subject to the Texas
franchise tax. However, CREE Ltd., Management I, Management II and Crescent/301,
L.L.C. will continue to be subject to the Texas franchise tax.
Locke Purnell Rain Harrell (A Professional Corporation), special tax
counsel to the Company ("Special Tax Counsel"), has reviewed the discussion in
this section with respect to Texas franchise tax matters and is of the opinion
that it accurately summarizes the Texas franchise tax matters expressly
described herein. Special Tax Counsel expresses no opinion on any other tax
considerations affecting the Company or a holder of Common Stock, including, but
not limited to, other Texas franchise tax matters not specifically discussed
above. Tax Counsel has not reviewed the discussion in this section with respect
to Texas franchise tax matters and has expressed no opinion with respect
thereto.
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PLAN OF DISTRIBUTION
Subject to the terms and conditions set forth in the purchase agreement and
related terms agreement (collectively, the "Purchase Agreement") among the
Company and each of the underwriters named below (the "Underwriters"), the
Company has agreed to sell to each of the Underwriters, for whom Merrill Lynch,
Pierce, Fenner & Smith Incorporated, Dean Witter Reynolds Inc., PaineWebber
Incorporated and Smith Barney Inc. are acting as representatives (the
"Representatives"), and each of the Underwriters severally has agreed to
purchase from the Company, the aggregate number of shares of Common Stock set
forth below opposite their respective names:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
- --------------------------------------------------------------------------------------- ---------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated.............................................................. 96,750
Dean Witter Reynolds Inc. ............................................................. 96,750
PaineWebber Incorporated............................................................... 96,750
Smith Barney Inc. ..................................................................... 96,750
Alex. Brown & Sons Incorporated........................................................ 4,500
CS First Boston Corporation............................................................ 4,500
Donaldson, Lufkin & Jenrette Securities Corporation.................................... 4,500
A.G. Edwards & Sons, Inc. ............................................................. 4,500
Furman Selz LLC........................................................................ 4,500
NatWest Securities Limited............................................................. 4,500
Salomon Brothers Inc .................................................................. 4,500
Southwest Securities, Inc. ............................................................ 4,500
UBS Securities LLC..................................................................... 4,500
EVEREN Securities, Inc. ............................................................... 2,250
Friedman, Billings, Ramsey & Co., Inc. ................................................ 2,250
Hanifen, Imhoff Inc. .................................................................. 2,250
Harris Webb & Garrison, Inc. .......................................................... 2,250
Edward D. Jones & Co., L.P. ........................................................... 2,250
Legg Mason Wood Walker, Incorporated................................................... 2,250
Principal Financial Securities, Inc. .................................................. 2,250
Rauscher Pierce Refsnes, Inc. ......................................................... 2,250
Raymond James & Associates, Inc. ...................................................... 2,250
Sutro & Co. Incorporated............................................................... 2,250
---------
Total..................................................................... 450,000
========
</TABLE>
The shares of Common Stock offered hereby are being sold by the Company to
the Underwriters at a price of $42.00 per share so that the Underwriters may
cover a portion of their short position resulting from over-allotments in
connection with the October Offering. There is no discount or commission
associated with the sale of the shares of Common Stock to the Underwriters.
In the Purchase Agreement, the several Underwriters have agreed, subject to
the terms and conditions set forth therein, to purchase all of the shares being
sold pursuant to the Purchase Agreement if any of such shares of Common Stock
are purchased. Under certain circumstances, the commitments of nondefaulting
Underwriters may be increased.
In the Purchase Agreement, the Company has agreed to indemnify the several
Underwriters against certain civil liabilities, including liabilities under the
Securities Act of 1933, as amended (the "Securities Act"), or to contribute to
payments the Underwriters may be required to make in respect thereof. Insofar as
indemnification of the Underwriters for liabilities arising under the Securities
Act may be permitted pursuant to such agreements, the Company has been informed
that, in the opinion of the Securities and Exchange Commission (the "SEC"), such
indemnification is against public policy as expressed in the Securities Act and
therefore is unenforceable.
The Common Stock is listed on the NYSE under the symbol "CEI."
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EXPERTS
The financial statements incorporated herein by reference to the Company's
Current Report on Form 8-K, dated August 15, 1996 and filed on September 11,
1996, as amended on September 27, 1996, relating to the Greenway Plaza Portfolio
for the year ended December 31, 1995 have been audited by Grant Thornton LLP,
independent certified public accountants, as indicated in their report with
respect thereto, and, for the five-month period ended May 31, 1996, have been
audited by Arthur Andersen, LLP, independent public accountants, as indicated in
their report with respect thereto, and are included herein in reliance upon the
authority of Grant Thornton LLP and Arthur Andersen, LLP, respectively, as
experts in accounting and auditing in giving said reports.
LEGAL MATTERS
The legality of the Common Stock offered hereby will be passed upon for the
Company by Shaw, Pittman, Potts & Trowbridge, Washington, D.C. Certain legal
matters described under "Federal Income Tax Considerations" will be passed upon
for the Company by Shaw, Pittman, Potts & Trowbridge, which will rely, as to all
Texas franchise tax matters, upon the opinion of Locke Purnell Rain Harrell (A
Professional Corporation), Dallas, Texas. Certain legal matters related to the
Offering will be passed upon for the Underwriters by Hogan & Hartson L.L.P.,
Washington, D.C.
ADDITIONAL AVAILABLE INFORMATION
The SEC maintains a web site (http://www.sec.gov) that contains reports,
proxy and information statements and other information regarding registrants
such as the Company that file electronically with the SEC.
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<PAGE> 22
GLOSSARY
"Articles of Incorporation" means the Amended and Restated Articles of
Incorporation of Crescent Equities, as in effect as of the date of this
Prospectus Supplement.
"Board of Directors" means the Board of Directors of Crescent Equities.
"Book-Tax Difference" means the difference between the fair market value
and the adjusted tax basis of property at the time of its contribution to a
partnership.
"CBD" means central business district.
"CDMC" means Crescent Development Management Corporation, a Delaware
corporation that is one of the Residential Development Corporations, that
indirectly owns interests in four Residential Development Properties in Colorado
(Cresta, Market Square, The Reserve at Frisco and One Beaver Creek),
approximately 90% of the effective interest in which is owned by the Company
through its investment in the non-voting common stock and approximately 90% of
the economic interest in which is owned by the Company through its investments
in the applicable Residential Development Property Mortgage and non-voting
common stock.
"CLP, Inc." means CRE Limited Partner, Inc., a Delaware corporation which
is a 79% limited partner of the Operating Partnership.
"Code" means the Internal Revenue Code of 1986, as amended.
"Common Stock" means the common stock, $0.01 par value, of Crescent
Equities.
"Company" means, unless the context requires otherwise, Crescent Equities,
its direct and indirect subsidiaries, including CREE Ltd., CLP, Inc., Funding I,
Funding II and the Operating Partnership and its subsidiaries.
"Comptroller" means the office of the Texas State Comptroller of Public
Accounts.
"Credit Facility" means the Company's line of credit from the consortium of
financial institutions led by The First National Bank of Boston in the aggregate
principal amount of up to $175 million.
"CREE Ltd." means Crescent Real Estate Equities, Ltd., a Delaware
corporation that is a wholly owned subsidiary of Crescent Equities and the sole
general partner of the Operating Partnership.
"Crescent Equities" means Crescent Real Estate Equities, Inc., a Maryland
corporation.
"Excess Stock" means equity securities transferred or proposed to be
transferred in excess of the Ownership Limit, or which otherwise would
jeopardize the status of the Company as a REIT under the Code.
"Exchange Rights" means the rights granted to Limited Partners of the
Operating Partnership other than CLP, Inc. to exchange their Units for shares of
Common Stock or, at the election of the Company, for cash equal to the
then-current fair market value of the number of shares of Common Stock for which
such Units are exchangeable.
"FIRPTA" means the Foreign Investment in Real Property Tax Act of 1980, as
amended.
"Funding I" means Crescent Real Estate Funding I, L.P., a Delaware limited
partnership whose general partners are indirect subsidiaries of CREE Ltd.
"Funding II" means Crescent Real Estate Funding II, L.P., a Delaware
limited partnership whose general partners are indirect subsidiaries of CREE
Ltd.
"HADC" means Houston Area Development Corp., a Texas corporation that is
one of the Residential Development Corporations, and that directly owns the
Falcon Point Residential Development Property and the Spring Lakes Residential
Development Property, approximately 94% of the effective interest in which is
owned by the Company through its investments in the non-voting common stock and
approximately 98% of the economic interest in which is owned by the Company
through its investments in the applicable Residential Development Property
Mortgages and non-voting common stock.
"Initial Offering" means the initial public offering of shares of Common
Stock that closed on May 5, 1994.
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<PAGE> 23
"IRS" means the United States Internal Revenue Service.
"Limited Partner(s)" means the limited partners in the Operating
Partnership, and any of them.
"Management I" means CRE Management I Corp., a Delaware corporation that is
the sole general partner of Funding I and a wholly owned subsidiary of CREE Ltd.
"Management II" means CRE Management II Corp., a Delaware corporation that
is the sole general partner of Funding II and a wholly owned subsidiary of CREE
Ltd.
"Mortgage Note" means the one mortgage note in the principal amount of
$12.0 million, held by the Company and secured by one Class A office building.
"MVDC" means Mira Vista Development Corporation, a Texas corporation that
is one of the Residential Development Corporations, that directly owns the Mira
Vista Residential Development Property, approximately 94% of the effective
interest in which is owned by the Company through its investments in the
non-voting common stock and approximately 98% of the economic interest in which
is owned by the Company through its investments in the applicable Residential
Development Property Mortgage and non-voting common stock.
"NYSE" means the New York Stock Exchange.
"Non-U.S. Stockholder(s)" means one or more nonresident alien individual,
foreign corporation, foreign partnership or other foreign stockholder of the
Company.
"October Offering" means the public offering of 11,500,000 shares of Common
Stock that closed on October 2, 1996.
"Offering" means the offering of 450,000 shares of Common Stock offered
hereby.
"Office Property(ies)" means 301 Congress Avenue, 1615 Poydras, 3333 Lee
Parkway, 6225 North Twenty-Fourth Street, 12404 Park Central, The Aberdeen,
Albuquerque Plaza, The Avallon, Barton Oaks Plaza One, Briargate Office and
Research Center, Caltex House, Central Park Plaza, The Citadel, Continental
Plaza, The Crescent Office Towers, Liberty Plaza I & II, MacArthur Center I &
II, MCI Tower, Ptarmigan Place, Regency Plaza One, Spectrum Center, Stanford
Corporate Centre, Three Westlake Park, Two Renaissance Square, Waterside Commons
and The Woodlands.
"Operating Partnership" means Crescent Real Estate Equities Limited
Partnership, a Delaware limited partnership, in which CREE Ltd. holds a 1%
general partner interest; CLP, Inc. owns an 79% limited partner interest; and
limited partners (other than CLP, Inc.) own, in the aggregate, a 20% limited
partner interest.
"Ownership Limit" means the prohibition on ownership, directly or by virtue
of the attribution provisions of the Code, of more than 8.0% of the issued and
outstanding shares of the Company's Common Stock by any single stockholder (or
in the case of Richard E. Rainwater, the Chairman of the Board of Directors of
Crescent Equities, and certain related persons as a group, more than 17.9% of
the issued and outstanding shares of the Company's Common Stock) and on
ownership, directly or by virtue of the attribution provisions of the Code, of
more than 9.9% of the issued and outstanding shares of any series of the
Company's Preferred Stock by any single stockholder.
"Property(ies)" means the Office Properties, the Retail Properties, the
Hotel Properties, the economic interests in the Residential Development
Properties, and any of them.
"Prospectus" means the prospectus, as the same may be amended.
"Prospectus Supplement" means this prospectus supplement, as the same may
be amended.
"Purchase Agreement" means the purchase agreement and related terms
agreement between the Company and the Underwriters.
"REIT" means a real estate investment trust.
"Related Party Tenant" means a tenant of a property owned by a REIT, 10% or
more of which is owned by the REIT or by an owner of the REIT.
S-22
<PAGE> 24
"Representatives" means Merrill Lynch, Pierce, Fenner & Smith Incorporated,
Dean Witter Reynolds Inc., PaineWebber Incorporated and Smith Barney Inc., the
representatives of the several Underwriters in this Offering.
"Residential Development Corporation(s)" means CDMC, HADC, MVDC, and any of
them.
"Residential Development Property(ies)" means the Mira Vista Residential
Development Property, the Falcon Point Residential Development Property, the
Spring Lakes Residential Development Property, The Highlands Residential
Development Property, The Reserve at Frisco Residential Development Property,
the Whitehawk Ranch Residential Development Property, the One Beaver Creek
Residential Development Property, the Cresta Residential Development Property,
the Market Square Residential Development Property, and any of them.
"Residential Development Property Mortgage(s)" means (i) the mortgage in
the principal amount of $14.4 million secured by the Mira Vista Residential
Development Property, (ii) the mortgages in the aggregate principal amount of
$14.4 million secured by the Falcon Point Residential Development Property and
the Spring Lakes Residential Development Property, (iii) the promissory note in
the principal amount of $20.2 million (of which $9.7 million had been advanced
as of August 31, 1996), which is secured by both CDMC's limited partner interest
in a partnership that owns four Residential Development Properties located in
Colorado and the obligation of the voting shareholders to make certain
additional capital contributions to CDMC, and (iv) the promissory note in the
principal amount of $4.0 million, of which $3.1 million had been advanced as of
August 31, 1996, secured by the Whitehawk Ranch Residential Development
Property, or any of them.
"Retail Properties" means Las Colinas Plaza and The Crescent Atrium.
"SEC" means the United States Securities and Exchange Commission.
"Securities Act" means the Securities Act of 1933, as amended.
"Special Tax Counsel" means Locke Purnell Rain Harrell (A Professional
Corporation), special tax counsel to the Company.
"Spectrum Note" means the approximately $68.4 million note purchased by the
Company and secured by the Spectrum Center Office Property.
"Spectrum Partnership" means the limited partnership that holds the
Spectrum Note and the ground lessor's interest, as well as an option to acquire
the second mortgage on the Spectrum Center Office Property.
"Tax Counsel" means Shaw, Pittman, Potts & Trowbridge, tax counsel to the
Company.
"Three Westlake Note" means the approximately $46.3 million note purchased
by the Company and secured by the Three Westlake Park Office Property.
"Treasury Regulations" means the regulations promulgated by the United
States Department of Treasury under the Code.
"UBTI" means unrelated business taxable income under the Code.
"Underwriters" means the underwriters set forth in the section of this
Prospectus Supplement entitled "Plan of Distribution."
"Units" means units of ownership interest in the Operating Partnership,
each of which (other than those held by CLP, Inc.) is exchangeable on a
one-for-one basis for shares of Common Stock or, at the option of the Company,
the cash equivalent thereof, and any of them.
S-23
<PAGE> 25
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NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED OR
INCORPORATED BY REFERENCE IN THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS IN
CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. NEITHER THE
DELIVERY OF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCE, CREATE ANY IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS SUPPLEMENT OR IN THE
PROSPECTUS OR IN AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF. THIS PROSPECTUS
SUPPLEMENT AND THE PROSPECTUS DO NOT CONSTITUTE AN OFFER OR SOLICITATION BY
ANYONE IN ANY STATE IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN
WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR
TO ANYONE TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
PROSPECTUS SUPPLEMENT
The Company............................ S-1
Recent Developments.................... S-1
Use of Proceeds........................ S-4
Structure of the Company............... S-4
Federal Income Tax Considerations...... S-5
Plan of Distribution................... S-19
Experts................................ S-20
Legal Matters.......................... S-20
Additional Available Information....... S-20
Glossary............................... S-21
PROSPECTUS
Available Information.................. 2
Incorporation of Certain Documents by
Reference............................ 2
The Company............................ 4
Risk Factors........................... 4
Use of Proceeds........................ 8
Ratios of Earnings to Combined Fixed
Charges and Preferred Stock
Dividends............................ 8
Description of Preferred Stock......... 8
Description of Common Stock............ 13
Description of Common Stock Warrants... 15
Certain Provisions of the Articles of
Incorporation, Bylaws and Maryland
Law.................................. 16
ERISA Considerations................... 19
Plan of Distribution................... 21
Experts................................ 22
Legal Matters.......................... 22
</TABLE>
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450,000 SHARES
[CRESCENT LOGO]
COMMON STOCK
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PROSPECTUS SUPPLEMENT
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OCTOBER 4, 1996
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