<PAGE> 1
Filed Pursuant to Rule 424(b)(5)
Registration No. 33-97794
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED JUNE 18, 1996)
10,000,000 SHARES
[CRESCENT LOGO]
COMMON STOCK
-------------------------------
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 (a "REIT"). The Company owns a portfolio of real estate
assets located primarily in 15 metropolitan submarkets in Texas and Colorado.
The portfolio includes 37 office properties with an aggregate of approximately
10.6 million net rentable square feet, three full-service hotels with a total of
1,303 rooms and one destination health and fitness resort, two retail properties
and economic interests in three residential development corporations. Upon
completion of the pending investments described herein, the Company will have
completed over $1 billion of real estate investments since the closing of its
initial public offering in May 1994. In the aggregate, these investments
represent an increase of approximately 256% in the gross book value of the
Company's real estate assets. The Company is one of the largest publicly held
REITs in the United States investing primarily in office properties.
All of the common stock (the "Common Stock") offered hereby is being sold
by the Company. Upon the closing of this offering, the Company's directors and
senior management will beneficially own approximately 18.2% of the common equity
of the Company.
Since the closing of the Company's initial public offering, the Company has
made regular quarterly distributions to holders of its Common Stock. The shares
of Common Stock are listed on the New York Stock Exchange (the "NYSE") under the
symbol "CEI." On September 26, 1996, the last reported sale price of the Common
Stock on the NYSE was $40 7/8 per share. See "Price Range of Common Stock and
Distributions." To ensure that the Company maintains its qualification as a REIT
for federal income tax purposes, ownership by any person generally is limited to
8.0% of the issued and outstanding shares of Common Stock. See "Description of
Common Stock -- Ownership Limits and Restrictions on Transfer" in the
accompanying Prospectus.
SEE "RISK FACTORS" AT PAGE 4 IN THE ACCOMPANYING PROSPECTUS FOR CERTAIN
FACTORS RELEVANT TO AN INVESTMENT IN THE COMPANY.
-------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS SUPPLEMENT OR THE PROSPECTUS TO WHICH IT
RELATES. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
===========================================================================================================
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2)
<S> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------
Per Share................................ $40.375 $2.12 $38.255
- -----------------------------------------------------------------------------------------------------------
Total (3)................................ $403,750,000 $21,200,000 $382,550,000
===========================================================================================================
</TABLE>
(1) The Company has agreed to indemnify the several Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting expenses payable by the Company, estimated at $2,500,000.
(3) The Company has granted the several Underwriters a 30-day option to purchase
up to 1,500,000 additional shares to cover any overallotments. If the option
is exercised in full, the total Price to Public, Underwriting Discount and
Proceeds to Company will be $464,312,500, $24,380,000 and $439,932,500,
respectively. See "Underwriting."
-------------------------------
The shares of Common Stock are offered by the several Underwriters subject
to prior sale, when, as and if delivered to and accepted by the Underwriters,
and subject to their right to withdraw, cancel or modify such offer and to
reject orders in whole or in part. 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 2, 1996.
-------------------------------
MERRILL LYNCH & CO.
DEAN WITTER REYNOLDS INC.
PAINEWEBBER INCORPORATED
SMITH BARNEY INC.
-------------------------------
THE DATE OF THIS PROSPECTUS SUPPLEMENT IS SEPTEMBER 27, 1996.
<PAGE> 2
PROPERTY LOCATIONS
The inside front cover is a gatefold.
The outside of the gatefold is a map of the United States that shows
the location by city or state of the Properties owned by the Company and the
Company's Pending Investments described in the Prospectus Supplement. The
outside of the gatefold also includes two pie charts that display (i) the
composition by Property type of the Company's property portfolio (including
Pending Investments) as a percentage of funds from operations and (ii) the
geographic distribution of the portfolio (including Pending Investments) as a
percentage of total investments.
The inside of the gatefold displays pictures of seven properties. The
pictures are three pictures of Greenway Plaza in Houston, Texas (a Pending
Investment) and one picture of each of the following: Canyon Ranch in Lenox,
Massachusetts, Canyon Ranch in Tucson, Arizona, Central Park Plaza in Omaha,
Nebraska, Three Westlake Park in Houston, Texas, 1615 Poydras in New Orleans,
Louisiana and 301 Congress Avenue in Austin, Texas. In addition, the words
"Continued Growth," the logo for Crescent Real Estate Equitites, Inc. and its
name appear on the inside of the gatefold.
-------------------------------
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.
-------------------------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVERALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT
A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE, IN THE
OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
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<PAGE> 3
PROSPECTUS SUPPLEMENT SUMMARY
The following Prospectus Supplement Summary is qualified in its entirety by
reference to the more detailed information and financial statements appearing
elsewhere in this Prospectus Supplement or in the accompanying Prospectus or
incorporated herein or therein by reference. Unless otherwise indicated, all
information presented in this Prospectus Supplement assumes no exercise of the
Underwriters' overallotment option.
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.
Certain matters discussed within this Prospectus Supplement are
forward-looking statements within the meaning of the federal securities laws.
Although the Company believes that the expectations reflected in such
forward-looking statements are based upon reasonable assumptions, there can be
no assurance that these expectations will be realized. Factors that could cause
actual results to differ materially from current expectations include the
failure of pending investments to close, changes in general economic conditions,
changes in local real estate conditions, timely leasing of unoccupied square
footage, timely re-leasing of occupied square footage upon expiration, the
Company's ability to generate sufficient revenues to meet debt service payments,
availability of equity and debt financing and other risks described in this
Prospectus Supplement or the accompanying Prospectus or incorporated herein or
therein by reference.
Capitalized terms used herein and not otherwise defined are as defined in
the Glossary appearing elsewhere in this Prospectus Supplement.
THE COMPANY
The Company is a fully integrated real estate company operated as a real
estate investment trust ("REIT"), which owns a portfolio of real estate assets
(the "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 (the "Office Properties"),
three full-service hotels with a total of 1,303 rooms and one destination health
and fitness resort (collectively, the "Hotel Properties"), two retail properties
with an aggregate of approximately .2 million net rentable square feet (the
"Retail Properties") and the real estate mortgages (the "Residential Development
Property Mortgages") and non-voting common stock in three residential
development corporations (the "Residential Development Corporations"). In
addition, the Company owns one mortgage note (the "Mortgage Note") in the
principal amount of $12.0 million secured by one Class A office property.
Upon completion of the pending investments described herein, the Company
will have completed over $1 billion of real estate investments consisting
primarily of 43 office properties, five hotel and resort properties and one
mortgage note, which in the aggregate represent an increase of approximately
256% in the gross book value of the Company's real estate assets since the
closing of the initial public offering (the "Initial Offering") of its common
stock (the "Common Stock") in May 1994. Management believes that it will be able
to identify substantial opportunities for future real estate investments from a
variety of sources, including life insurance companies seeking to reduce their
direct real estate investments, corporations divesting of nonstrategic real
estate assets and sellers requiring complex disposition structures.
The Company's business objective is the maximization of total return to
stockholders through increases in distributions and share price. Since the
Initial Offering, the Company has increased its quarterly distributions from
$.46 per share to $.55 per share, approximately 19.6%. In addition, the Company
has announced an increase in its quarterly distribution to $.61 per share
commencing with the distribution for the third quarter of 1996, an increase of
approximately 32.6% since the Initial Offering. The market price per share of
Common Stock has increased by approximately 63.5% since the Initial Offering,
from $25.00 per share to $40.875 per share as of September 26, 1996. Since the
Company's public offering of its Common Stock in April 1995 (the "April 1995
Offering"), the
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<PAGE> 4
market price per share of Common Stock has increased by approximately 45.3%,
from $28.125 per share to $40.875 per share as of September 26, 1996.
INVESTMENT STRATEGY
The Company intends to continue utilizing its extensive network of
relationships, market reputation and ready access to capital to achieve
favorable returns on invested capital and growth in cash flow by:
- acquiring high-quality office properties at prices significantly below
their estimated replacement cost in selected markets and submarkets
that management expects to experience above-average population and
employment growth;
- acquiring unique destination resort and luxury hotel properties at
prices significantly below their estimated replacement cost; and
- employing the corporate, transactional and financial skills of the
Company's management team to structure innovative real estate
investments.
OPERATING AND FINANCING STRATEGIES
The Company seeks to enhance its operating performance and financial
position by:
- maintaining a high tenant retention rate through quality service,
individualized attention to its tenants and active preventive
maintenance programs;
- applying aggressive leasing strategies in order to capture the
potential rental growth in the Company's existing portfolio as
occupancy and rental rates increase with the recovery of the markets
and submarkets in which the Company has invested;
- empowering management and employing compensation formulas linked
directly with enhanced operating performance of the Company and its
Properties; and
- optimizing the use of debt and other sources of financing to create a
flexible capital structure that will allow the Company to continue its
opportunistic investment strategy.
Upon the closing of this offering (the "Offering"), the Company's directors
and senior management will beneficially own approximately 18.2% of the Company's
common equity (consisting of shares of Common Stock and Units of ownership
interest in the Operating Partnership), excluding options. This ownership
percentage includes the approximately 16.1% ownership position of Richard E.
Rainwater, the Chairman of the Board of Directors, the approximately 1.1%
ownership position of John C. Goff, the Chief Executive Officer, and the
approximately .7% ownership position of Gerald W. Haddock, the President and
Chief Operating Officer. In addition, directors and senior management have been
granted options vesting over periods ranging from one to seven years to acquire
common equity representing approximately 8.3% of the Company's total common
equity following the closing of the Offering, assuming the exercise of all such
options. These amounts include options granted to Messrs. Rainwater, Goff and
Haddock to acquire approximately 1.3%, 3.3% and 3.0%, respectively, of such
common equity.
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<PAGE> 5
PROPERTIES
The following table provides an overview of the Office Properties as of
June 30, 1996 and the states, cities and submarkets in which they are located.
For information regarding additional office properties expected to be acquired
by the Company, see "Recent Developments -- Pending Investments."
<TABLE>
<CAPTION>
PERCENT
TOTAL PERCENT OF LEASED AT
NUMBER OF COMPANY TOTAL COMPANY COMPANY
STATE, CITY, SUBMARKET PROPERTIES NRA(1) NRA(1) PROPERTIES
-------------------------------------------- ---------- ---------- ------------- ----------
<S> <C> <C> <C> <C>
TEXAS
DALLAS
Far North Dallas........................ 4 1,403,199 13% 95%
Las Colinas/Irving...................... 3 1,198,801 11 97
Uptown.................................. 1 1,205,212 12 93
LBJ/North Central Expressway............ 1 239,103 2 100
Oak Lawn................................ 1 233,484 2 62
--- ---------- --- ---
Subtotal/Weighted Average Dallas...... 10 4,279,799 40% 93%
--- ---------- --- ---
FORT WORTH
Central Business District ("CBD")....... 1 954,895 9% 84%
--- ---------- --- ---
HOUSTON
The Woodlands(2)........................ 12 812,359 8% 90%
Katy Freeway(3)......................... 1 414,251 4 100
--- ---------- --- ---
Subtotal/Weighted Average Houston..... 13 1,226,610 12% 93%
--- ---------- --- ---
AUSTIN
CBD..................................... 1 418,443 4% 86%
Northwest............................... 1 125,959 1 100
Southwest............................... 1 99,792 1 89
--- ---------- --- ---
Subtotal/Weighted Average Austin...... 3 644,194 6% 89%
--- ---------- --- ---
COLORADO
DENVER
CBD..................................... 1 550,807 5% 97%
Cherry Creek............................ 2 549,217 5 72
Denver Technology Center ("DTC")........ 1 309,862 3 98
--- ---------- --- ---
Subtotal/Weighted Average Denver...... 4 1,409,886 13% 87%
--- ---------- --- ---
COLORADO SPRINGS........................... 1 252,857 2% 100%
--- ---------- --- ---
ARIZONA
PHOENIX
CBD..................................... 1 476,373 4% 74%
Camelback Corridor...................... 1 84,460 1 100
--- ---------- --- ---
Subtotal/Weighted Average Phoenix..... 2 560,833 5% 78%
--- ---------- --- ---
LOUISIANA
NEW ORLEANS
CBD(3).................................. 1 508,741 5% 70%
--- ---------- --- ---
NEBRASKA
OMAHA
CBD..................................... 1 409,850 4% 98%
--- ---------- --- ---
NEW MEXICO
ALBUQUERQUE
CBD..................................... 1 365,952 4% 87%
--- ---------- --- ---
TOTAL/WEIGHTED AVERAGE............. 37 10,613,617 100% 90%
=== ========== === ===
</TABLE>
- ---------------
(1) Represents net rentable area in square feet owned by the Company.
(2) Two of the Company's Office Properties in this submarket were acquired
subsequent to June 30, 1996.
(3) The Office Property in this submarket was acquired subsequent to June 30,
1996.
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<PAGE> 6
The following table sets forth certain information about the Hotel
Properties for the six months ended June 30, 1996 and 1995. The information for
the Hotel Properties is based on available rooms, except for Canyon Ranch-
Tucson, which is a destination health and fitness resort that measures its
performance based on available guest nights.
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
ENDED JUNE 30,
----------------------------------------------
AVERAGE AVERAGE REVENUE PER
OCCUPANCY DAILY AVAILABLE
RATE RATE ROOM
------------- ------------ ------------
HOTEL PROPERTY(1) LOCATION ROOMS 1996 1995 1996 1995 1996 1995
- --------------------------- ---------------- ------ ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Hyatt Regency Beaver Creek Avon, CO 295 68% 70% $241 $220 $173 $160
Denver Marriott City Center Denver, CO 613 81 78 104 97 84 76
Hyatt Regency Albuquerque Albuquerque, NM 395 78 77 93 85 72 66
----- -- -- ---- ---- ---- ----
TOTAL/WEIGHTED AVERAGE 1,303 77% 76% $132 $121 $101 $ 92
===== == == ==== ==== ==== ====
Canyon Ranch-Tucson(2) Tucson, AZ 240(3) 85%(4) 80%(4) $503(5) $509(5) $413(6) $395(6)
</TABLE>
- ---------------
(1) The Company cannot, consistent with its status as a REIT for federal income
tax purposes, operate the Hotel Properties directly and, accordingly, has
leased the Hotel Properties to lessees pursuant to long-term leases. See
"Properties -- Hotel Leases."
(2) Acquired subsequent to June 30, 1996.
(3) Represents the maximum number of guests that Canyon Ranch-Tucson can
accommodate per night.
(4) The occupancy rate equals the number of paying and complimentary guests for
the period, divided by the maximum number of available guest nights for the
period (43,440 guest nights for the six months ended June 30, 1995 and
43,680 guest nights for the six months ended June 30, 1996, based on a
maximum of 240 guests per night).
(5) ADR equals the average daily "all-inclusive" guest package charges for the
period, divided by the average daily number of paying guests for the period.
(6) REVPAR equals the total "all-inclusive" guest package charges for the
period, divided by the maximum number of available guest nights for the
period.
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
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 record date has not yet been determined.
COMPLETED INVESTMENTS
Since January 1, 1996, the Company has completed approximately $194 million
of real estate investments, consisting primarily of five Class A Office
Properties containing approximately 2.0 million net rentable square feet and one
destination health and fitness resort. These Properties are located in
submarkets of metropolitan areas within Texas (in Dallas, Austin and Houston),
Louisiana (in New Orleans), Nebraska (in Omaha) and Arizona (in Tucson).
PENDING INVESTMENTS
As of September 10, 1996, the Company had pending approximately $244
million in additional real estate investments (the "Pending Investments"),
including a property portfolio that consists primarily of 10 office properties
containing approximately 4.3 million net rentable square feet and one
destination health and fitness resort. These investments, which are expected to
close in October and November 1996, respectively, are subject to the completion
of due diligence and to customary closing conditions. The Pending Investments
also include one Class A office building to be developed adjacent to an existing
Office Property, with the building (which is substantially pre-leased) expected
to be completed in October 1997. Upon completion of the Pending Investments
(excluding the
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<PAGE> 7
Class A office building to be developed), the Company's Office and Retail
Properties in Dallas/Fort Worth and Houston, Texas and in Denver, Colorado will
represent an aggregate of approximately 81% of such portfolio based on total net
rentable square feet, and are expected to account for an aggregate of
approximately 82% of office and retail property rental revenues, based on pro
forma financial information for the six months ended June 30, 1996.
FINANCING ACTIVITIES
The Company obtained a $175 million credit facility (the "Credit Facility")
in June 1996 to enhance the Company's financial flexibility in making new real
estate investments. The Credit Facility initially has a term that expires in
March 1997, and outstanding advances under the Credit Facility currently bear
interest at the Eurodollar rate plus 240 basis points. Upon completion of the
Offering, the Credit Facility will be unsecured, the term will be extended until
March 1999, and the annual interest rate will be reduced to the Eurodollar rate
plus 185 basis points.
REORGANIZATION
On June 17, 1996, the stockholders of Crescent Equities approved a proposal
authorizing its reorganization as a Texas real estate investment trust in order
to take advantage of recent changes in Texas law. The reorganization is expected
to be completed in October 1996.
DISTRIBUTIONS
The Company intends to continue making regular quarterly distributions to
its stockholders. The Company's current quarterly distribution rate is $.55 per
share, an indicated annualized distribution of $2.20 per share, and the Company
has announced an increase in its quarterly distribution to $.61 per share, an
indicated annualized distribution of $2.44 per share, commencing with the
distribution for the third quarter of 1996. Future distributions will be at the
discretion of the Board of Directors. See "Recent Developments -- Increase in
Distributions" and "Price Range of Common Stock and Distributions."
THE OFFERING
All of the shares of Common Stock offered hereby are being offered by the
Company.
<TABLE>
<S> <C>
Common Stock Offered in the Offering......................... 10,000,000 shares
Common Stock to be Outstanding After the Offering............ 33,596,586 shares(1)
Common Stock and Units to be Outstanding After the
Offering................................................... 39,630,552 shares and Units(1)(2)
Use of Proceeds.............................................. To repay indebtedness under the
Credit Facility and other
short-term financing incurred in
connection with recently acquired
Properties, to fund the cash
portion of the Pending Investments,
to pay certain indebtedness
associated with one Pending
Investment and to make future
acquisitions.
NYSE Symbol.................................................. "CEI"
</TABLE>
- ---------------
(1) This amount does not include $25 million of shares of Common Stock issuable
in connection with one Pending Investment and an additional up to $19
million of shares of Common Stock issuable in connection with another
Pending Investment.
(2) Units are exchangeable on a one-for-one basis for shares of Common Stock or,
at the option of the Company, cash, subject to certain exceptions.
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<PAGE> 8
SUMMARY SELECTED FINANCIAL DATA
The following table sets forth certain summary financial information for
the Company on a consolidated pro forma and historical basis and for the
Rainwater Property Group (the Company's predecessor) on a combined historical
basis, which consists of the combined financial statements of the entities that
contributed Properties in exchange for Units or shares of Common Stock in
connection with the formation of the Company. Such information should be read in
conjunction with "Selected Financial Data" and the financial statements and
notes thereto incorporated by reference into the accompanying Prospectus.
The pro forma information for the year ended December 31, 1995 assumes
completion of (i) the April 1995 Offering and Mr. Rainwater's concurrent $31
million investment in the Operating Partnership and the use of the net proceeds
therefrom to repay approximately $167 million of indebtedness secured by certain
of the Properties, (ii) the Offering and the use of the net proceeds therefrom
to repay approximately $160 million of indebtedness, to pay approximately $160
million of the acquisition cost of two Pending Investments and to invest the
remaining proceeds of approximately $60 million in short-term marketable
securities and (iii) the acquisition of the Properties acquired during 1995 and
1996 and the completion of the Pending Investments (excluding the Class A office
building to be developed), in each case as of January 1, 1995, in determining
operating and other data.
The pro forma information for the six months ended June 30, 1996 assumes
completion of (i) the Offering and the use of the net proceeds therefrom to
repay approximately $160 million of indebtedness, to pay approximately $160
million of the acquisition cost of two Pending Investments and to invest the
remaining proceeds of approximately $60 million in short-term marketable
securities and (ii) the acquisition of the Properties acquired during 1996 and
the completion of the Pending Investments (excluding the Class A office building
to be developed), in each case as of January 1, 1996, in determining operating
and other data, and the acquisition of the Properties acquired subsequent to
June 30, 1996 and the completion of the Pending Investments (excluding the Class
A office building to be developed), in each case as of June 30, 1996, in
determining balance sheet data.
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<PAGE> 9
CRESCENT REAL ESTATE EQUITIES, INC.
CONSOLIDATED PRO FORMA AND HISTORICAL FINANCIAL DATA AND
RAINWATER PROPERTY GROUP COMBINED HISTORICAL FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
COMPANY
-------------------------------------------------------------------------------------------
SIX MONTHS ENDED FOR THE
JUNE 30, PERIOD FROM
------------------------------------------ PRO FORMA MAY 5,
HISTORICAL YEAR ENDED YEAR ENDED 1994 TO
PRO FORMA -------------------------- DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1996 1995 1995 1995 1994
----------- ----------- ----------- ------------ ------------ ------------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Total Revenue................. $ 133,893 $ 88,059 $ 55,183 $ 266,599 $ 129,960 $ 50,343
Operating income (loss)....... 37,242 16,043 14,393 76,209 30,858 10,864
Income (loss) before minority
interests and extraordinary
item......................... 39,417 18,218 16,332 81,709 36,358 12,595
Income per share before
extraordinary item........... $ .96 $ .62 $ .65 $ 1.96 $ 1.31 $ .56
BALANCE SHEET DATA
(AT PERIOD END):
Total assets.................. $ 1,498,591 $ 1,053,366 $ 703,211 -- $ 964,171 $ 538,354
Total debt.................... 545,053 534,408 199,000 -- 444,528 194,642
Total stockholders' equity.... 799,999 395,148 378,497 -- 406,531 235,262
OTHER DATA:
Funds from Operations before
minority interests(1)........ $ 62,618 $ 36,728 $ 29,884 $ 124,600 $ 64,475 $ 32,723
Weighted average shares of
Common Stock and Units
outstanding.................. 40,230,886 28,876,941 25,348,191 40,174,267 27,091,003 22,498,855
Cash flow provided by (used in):
Operating activities......... --(2) $ 29,676 $ 26,467 --(2) $ 62,107 $ 33,716
Investing activities......... --(2) (90,566) (188,987) --(2) (418,502) (272,740)
Financing activities......... --(2) 55,640 142,170 --(2) 343,079 265,608
<CAPTION>
RAINWATER PROPERTY GROUP
-------------------------------------------------
PERIOD FROM
JANUARY 1,
1994 TO YEAR ENDED DECEMBER 31,
MAY 4, ----------------------------------
1994 1993 1992 1991
----------- -------- --------- ---------
<S> <C> <C> <C> <C>
OPERATING DATA:
Total Revenue................. $ 21,185 $ 57,168 $ 49,586 $ 44,211
Operating income (loss)....... (1,599) (53,024) (36,612) (41,876)
Income (loss) before minority
interests and extraordinary
item......................... (1,599) (53,024) (36,612) (41,876)
Income per share before
extraordinary item........... -- -- -- --
BALANCE SHEET DATA
(AT PERIOD END):
Total assets.................. -- $290,869 $ 296,291 $ 300,702
Total debt.................... -- 278,060 548,517 550,878
Total stockholders' equity.... -- 2,941 (328,240) (308,827)
OTHER DATA:
Funds from Operations before
minority interests(1)........ -- -- -- --
Weighted average shares of
Common Stock and Units
outstanding.................. -- -- -- --
Cash flow provided by (used in):
Operating activities......... $ 2,455 $ 9,313 $ (640) $ (7,294)
Investing activities......... (2,379) (20,572) (8,924) (6,094)
Financing activities......... (21,310) 28,861 14,837 14,061
</TABLE>
- ---------------
(1) Funds from Operations ("FFO"), based on the revised definition adopted by
the Board of Governors of the National Association of Real Estate Investment
Trusts ("NAREIT") and as used herein, means net income (loss) (determined in
accordance with generally accepted accounting principles), excluding gains
(or losses) from debt restructuring and sales of property, plus depreciation
and amortization of real estate assets, and after adjustments for
unconsolidated partnerships and joint ventures. For a more detailed
definition and description of FFO, see "Selected Financial Data."
(2) Pro forma information relating to operating, investing and financing
activities has not been included because management believes that the
information would not be meaningful due to the number of assumptions
required in order to calculate this information.
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<PAGE> 10
THE COMPANY
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 business objective of the Company is the maximization of total return
to stockholders through increases in distributions and share price. Since the
Initial Offering in May 1994, the Company has increased its quarterly
distributions from $.46 per share to $.55 per share, approximately 19.6%. In
addition, the Company has announced an increase in its quarterly distribution to
$.61 per share commencing with the distribution for the third quarter of 1996,
an increase of approximately 32.6% since the Initial Offering. The market price
per share of Common Stock has increased by approximately 63.5% since the Initial
Offering, from $25.00 per share to $40.875 per share as of September 26, 1996.
Since the April 1995 Offering, the market price per share of Common Stock has
increased by approximately 45.3%, from $28.125 per share to $40.875 per share as
of September 26, 1996.
The Company has achieved these results by employing a well-defined
investment strategy that focuses on high-quality office properties in selected
growth markets, unique destination resort and luxury hotel properties and other
opportunistic real estate investments. In addition, the Company employs an
operating strategy that is designed to capitalize on the rental growth potential
of the Company's Office Property portfolio.
INVESTMENT STRATEGY
The Company acquires both premier and underperforming assets by utilizing
its extensive network of relationships, market reputation, ready access to
capital and ability to structure transactions creatively. Management believes
that it will be able to identify substantial opportunities for future real
estate investments from sources such as life insurance companies seeking to
reduce their direct real estate investments, corporations divesting of
nonstrategic real estate assets and sellers requiring complex disposition
structures.
The Company's targeted investments include office properties that can be
acquired at significant discounts from replacement costs and that provide both a
favorable current return on invested capital and the opportunity for significant
cash flow growth through future increases in rental rates. Integral to this
investment strategy is the identification of specific markets and submarkets
that management believes will experience significant increases in demand for
office space due to the impact of factors that management expects to have a
positive effect on population and employment growth, including (i) local
factors, such as political environments favorable to business, the availability
of skilled and competitively priced labor, favorable corporate and individual
tax structures, affordable housing and a favorable quality of life, as in
markets such as Albuquerque, Omaha and Austin, (ii) demographic shifts in the
United States, such as the relocation of businesses and the migration of people
from the Northeast and the West Coast to Texas, Colorado and Arizona and (iii)
specific regional, national and global economic developments, such as an
increase in demand for natural resources and the resulting employment growth in
markets that have a significant presence in the oil and gas industry such as
Houston and New Orleans.
The markets and submarkets in which the Company concentrates its
acquisitions of office properties are those in which, in addition to anticipated
above-average population and employment growth, replacement cost rental rates
are significantly in excess of current market rental rates. Management believes
that investment in markets and submarkets in which market rental rates are below
the level necessary to justify new construction will allow the Company to
continue to increase rental rates and cash flows as demand for available office
space increases.
In addition to office properties, the Company targets destination resort
and luxury hotel properties which, due to their high replacement cost or unique
concept or location, are difficult to replace and experience little or no direct
competition. The recent increase in demand for destination resort and luxury
hotel rooms has been met with virtually no increase in the supply of rooms,
resulting in increasing occupancies and room rates. Management
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anticipates that this trend will continue. In addition, management believes that
numerous opportunities to purchase destination resort and luxury hotel
properties at prices significantly below replacement cost will continue to be
available. The competition for such acquisitions is limited as a result of (i)
the high dollar value of these types of properties, (ii) the specialized
management expertise necessary to operate destination resorts and luxury hotels
and (iii) the complex ownership structures currently associated with these types
of properties. As a result, management believes that the Company will be able to
acquire these types of properties on terms that will provide attractive returns
and substantial potential for cash flow growth.
The Company also seeks other opportunistic real estate investments that
offer superior returns on its capital investment. For example, the Company has
invested in nine single-family, townhome and luxury condominium Residential
Development Properties. In making these types of investments, the Company
focuses on opportunities that require a relatively low capital investment in
comparison to the Company's other real estate investments or that have
substantial infrastructure in place and have been undermanaged and
undermarketed.
Upon completion of the Pending Investments, the Company will have completed
over $1 billion of real estate investments since the Initial Offering. As a
result, the gross book value of the Company's real estate assets will have
increased by approximately 256% since the Initial Offering. Management believes
that the Company's success in completing investments is the result of several
competitive advantages, including (i) management's ability, due to its extensive
network of relationships, to identify property acquisition opportunities, often
before the property is offered for sale, (ii) the proven ability of management
to identify underperforming assets that can be acquired at market prices not
reflecting their potential value, (iii) management's skill and creativity in
consummating unusual and complex transactions, such as acquisitions of mixed-use
facilities, and transactions that satisfy the special needs of sellers and (iv)
the Company's reputation for "certainty of closure" as a result of its proven
ability to complete large, time-sensitive transactions based on its internal due
diligence capability and expertise and its ready access to capital. Management
also believes that these competitive advantages offer the Company increased
opportunities to acquire attractive properties, often on terms more favorable
than those available to other potential purchasers.
OPERATING STRATEGY
The Company focuses its operational efforts on providing quality service,
active preventive maintenance programs and individualized attention to its
tenants, while managing Property operating expenses to ensure competitive
pricing. Management believes that this focus on creating and maintaining
long-term relationships with its tenants increases tenant retention, which in
turn reduces vacancy rates and leasing costs and enhances overall operating
performance. For the year ended December 31, 1995, the Company retained 60% of
the tenants whose leases expired during the year at an average leasing cost
(including tenant improvements and leasing commissions) of $5.45 per square
foot, compared to an average leasing cost during the same period of $11.02 per
square foot for new tenants.
The Company also maintains an aggressive leasing strategy in order to
capture the potential rental growth in its portfolio as the submarkets in which
the Company has invested continue to recover and occupancy and rental rates
increase. As of June 30, 1996, the weighted average rental rate for the
Company's Office Properties was $17.71 per square foot (including free rent and
scheduled rent increases that would be taken into account under generally
accepted accounting principles and expense recoveries), compared to an estimated
weighted average replacement cost rental rate (the rate necessary to justify new
construction) of $26.09 per square foot. Many of the Company's submarkets have
experienced substantial rental rate growth during the past 18 months. As a
result, the Company has been successful in renewing or re-leasing office space
in these markets at rental rates significantly above the expiring rental rates.
For the six months ended June 30, 1996, leases were signed renewing or
re-leasing 372,230 square feet of office space at a weighted average rental rate
of $19.68 per square foot, compared to expiring leases with a weighted average
rental rate of $15.88 per square foot, a 23.9% increase, with each of these
average rental rates including free rent and scheduled rent increases that would
be taken into account under generally accepted accounting principles and expense
recoveries.
In appropriate circumstances, the Company also expects to capitalize on and
enhance its long-term relationships with tenants that have a need for additional
or alternative office space by making such space available through new
construction. One example is the recently executed BMC Software, Inc. lease for
additional space in a new building to be owned by the Company and designed to
suit the needs of BMC Software. The office building will
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be constructed adjacent to The Avallon (an Office Property in the Northwest
submarket of Austin, Texas). The Avallon was 100% leased as of August 31, 1996,
with 78% leased to BMC Software, which has extended its current lease.
The Company provides its skilled management team with substantial
flexibility in conducting Company operations while offering incentives that
reward management based on compensation formulas linked directly with enhanced
operating performance. Upon the closing of the Offering, the Company's directors
and senior management will beneficially own approximately 18.2% of the common
equity of the Company (consisting of shares of Common Stock and Units),
excluding options, including the approximately 16.1% ownership position of Mr.
Rainwater, the approximately 1.1% ownership position of Mr. Goff and the
approximately .7% ownership position of Mr. Haddock. In addition, directors and
senior management have been granted options vesting over periods ranging from
one to seven years to acquire common equity that will represent approximately
8.3% of the Company's total common equity following the closing of the Offering,
assuming the exercise of all such options. These amounts include options granted
to Messrs. Rainwater, Goff and Haddock to acquire approximately 1.3%, 3.3% and
3.0%, respectively, of such common equity. All options granted to directors and
senior management were granted at fair market value on the date of grant,
including options to acquire 1,000,000 Units granted to each of Messrs. Goff and
Haddock on July 16, 1996. The average exercise price of all options granted to
directors and senior management is $31.32 per share or Unit. More detailed
information regarding options granted to the Company's directors and senior
management is contained in the Proxy Statement in connection with the Company's
1996 Annual Meeting of Stockholders and its Current Report on Form 8-K, dated
June 17, 1996 and filed September 11, 1996.
FINANCING STRATEGY
The Company intends to maintain a conservative capital structure with total
debt targeted at approximately 40% of total market capitalization. The Company,
however, consistently seeks to optimize its use of debt and other sources of
financing to create a flexible capital structure that will allow the Company to
continue its opportunistic investment strategy and maximize the returns to its
stockholders.
ORGANIZATION
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
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 record date has not yet been determined.
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COMPLETED INVESTMENTS
The following briefly describes the Company's Property acquisitions since
January 1, 1996. More detailed information regarding each of the Properties
described, including significant tenants and lease expirations, is set forth
below under "Properties." The information regarding the replacement costs of the
Properties is based on management estimates at the times of the acquisitions.
Average quoted market rental rates and occupancy and leasing percentages
for the Company's submarkets, as specified below or as set forth under
"-- Pending Investments" and in more detail under "Properties," are derived from
third-party sources, consisting of M/PF Research, Inc., The Woodlands
Corporation, Cushman & Wakefield of Texas, Inc., CB Commercial, Cushman &
Wakefield of Colorado, Inc., Turner Commercial Research, Grubb & Ellis, Jamison
Research, Inc., Compass Management and Leasing, BOMA, Koll-CBS and Baca Landata,
Inc. Average quoted market rental rates do not necessarily represent the amounts
at which available space at the Company's Office Properties will be leased.
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 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,
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. 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
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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 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
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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.
PENDING INVESTMENTS
The following briefly describes the Pending Investments. The Pending
Investments are expected to close by November 1996 (other than the expansion of
The Avallon, which is expected to be completed in October 1997) and are subject
to the completion of due diligence and to customary closing conditions. There is
no assurance that the Pending Investments will be completed.
Greenway Plaza Portfolio. On August 15, 1996, the Company signed a
contract to acquire a property portfolio located in Houston, Texas (the
"Greenway Plaza Portfolio"), consisting primarily of 10 suburban office
properties with an aggregate of approximately 4.3 million net rentable square
feet (the "Greenway Plaza Office Portfolio"), and the 389-room full-service
Renaissance Hotel and the Houston City Club building, which are subject to
triple-net leases. Greenway Plaza is a 127-acre master-planned, mixed-use
development located five miles southwest of downtown Houston in the
Richmond-Buffalo Speedway submarket. The Greenway Plaza Portfolio is
strategically situated between Houston's two major business centers, the Central
Business District and the West Loop 610/Galleria areas, and is only minutes from
the city's foremost executive residential areas, the Galleria, the Astrodome
sports complex and the Texas Medical Center. The Greenway Plaza Office Portfolio
will continue to be managed for two years (three years for construction
management) and marketed for five years by Senterra Development, L.L.C.
The aggregate cost of the acquisition of the Greenway Plaza Portfolio,
which is expected to close in October 1996, is approximately $206 million,
approximately 35% of the estimated replacement cost of the Greenway Plaza
Portfolio. The acquisition price includes the Company's assumption of $115
million of nonrecourse indebtedness secured by the Greenway Plaza Portfolio from
Asset Securitization Corporation. The loan, which matures in July 1999, bears
interest at the 30-day LIBOR rate plus an average rate of 2.135% (7.60% at
August 31, 1996). The loan is subject to a rate cap agreement which caps the
overall interest rate at 10% through the maturity date. The loan provides for
the payment of interest only throughout the term of the loan, with a final
payment of $115 million due in July 1999. The loan may be prepaid in whole or in
part subject to certain prepayment conditions and penalties. The Company expects
to prepay $75 million of the loan with proceeds from the Offering. The Company
also expects to pay $66 million of the acquisition price with proceeds from the
Offering. See "Use of Proceeds." The Company will finance the balance of the
acquisition price of approximately $25 million through the issuance of shares of
Common Stock in an amount based on the market price of the Common Stock at the
time of the closing.
Located on 50.3 acres, the Greenway Plaza Office Portfolio consists of
approximately 2.0 million net rentable square feet of Class A office space and
approximately 2.3 million net rentable square feet of Class B office space in
buildings constructed between 1969 and 1982 and ranging in size from
approximately 150,000 to 880,000 net rentable square feet. Structured parking
accommodates approximately 11,500 cars. As of June 30, 1996, the Greenway Plaza
Office Portfolio was 72% leased (94% of the Class A office space and 53% of the
Class B office space) with a weighted average base rental rate per leased square
foot of $12.65 ($13.36 for Class A office space and $11.52 for Class B office
space). The weighted average remaining lease term for the Greenway Plaza Office
Portfolio is approximately eight years. The Greenway Plaza Office Portfolio is
leased to more than 280 tenants, including The Coastal Corporation, which is the
major tenant, occupying over 600,000 net rentable square feet pursuant to leases
that expire in 2010 and 2014. Management anticipates increases in global energy
demand and believes that Houston's location at the center of the domestic
petroleum industry's production, processing and distribution network, together
with continued corporate relocations attracted by some of the lowest rental
rates for
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Class A office space in any major metropolitan area, will result in increased
occupancies and rental rates for the Greenway Plaza Portfolio.
The Greenway Plaza Office Portfolio contains a majority of the total Class
A and Class B office space in the Richmond-Buffalo Speedway submarket. As of
June 30, 1996, the Class A office space in the Richmond-Buffalo Speedway
submarket was 95% leased, and the Class A average quoted market rental rate was
$13.37 per square foot. As of June 30, 1996, the Class B office space in the
Richmond-Buffalo Speedway submarket was 68% leased and the Class B average
quoted market rental rate was $12.62 per square foot. Upon completion of this
acquisition, the Greenway Plaza Office Portfolio will represent approximately
29% of the Company's portfolio of Office Properties on the basis of net rentable
square feet. Based on pro forma financial information for the six months ended
June 30, 1996, the Greenway Plaza Office Portfolio is expected to account for
approximately 25% of the Company's office property rental revenues, with
approximately 6.2% of the Company's office property rental revenues expected to
be contributed by The Coastal Corporation.
The following table sets forth a schedule of the lease expirations for
leases in place for the Greenway Plaza Office Portfolio as of June 30, 1996, for
each of the 10 years beginning with the remainder of 1996, assuming that none of
the tenants exercises renewal options.
<TABLE>
<CAPTION>
1996 1997 1998 1999 2000 2001 2002 2003
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
GREENWAY PLAZA
OFFICE
PORTFOLIO(1)... Sq. Ft.(2) 134,579 268,373 292,174 378,976 251,639 147,501 192,136 438,696
% Sq. Ft.(3) 4.4% 8.8% 9.5% 12.4% 8.2% 4.8% 6.3% 14.3%
Annual Rent(4) $1,348,455 $3,566,713 $3,971,527 $5,008,380 $3,372,221 $2,120,725 $3,057,212 $7,032,904
No. of Tenants 44 61 49 42 28 19 16 15
Rent per Sq. Ft.(4) $10.02 $13.29 $13.59 $13.22 $13.40 $14.38 $15.91 $16.03
Quoted Rental $13.53
Rate per
Sq. Ft.(5)
<CAPTION>
2006 &
2004 2005 BEYOND
------ -------- -----------
<S> <C> <C> <C> <C>
GREENWAY PLAZA
OFFICE
PORTFOLIO(1)... Sq. Ft.(2) 1,458 31,972 925,061
% Sq. Ft.(3) 0.1% 1.0% 30.2%
Annual Rent(4) $32,805 $444,132 $23,068,874
No. of Tenants 1 3 4
Rent per Sq. Ft.(4) $22.50 $13.89 $24.94
Quoted Rental
Rate per
Sq. Ft.(5)
</TABLE>
- ---------------
(1) Excludes 1,194,320 square feet of unleased space.
(2) Total net rentable square feet represented by expiring leases.
(3) Percentage of total net rentable square feet represented by expiring leases.
(4) Based on base rent payable as of the expiration day of the lease, for net
rentable square feet expiring, without giving effect to free rent or
scheduled rent increases that would be taken into account under generally
accepted accounting principles and excluding (i) any operating costs (such
as utilities, real estate taxes and/or insurance) payable by the tenants and
(ii) any expense reimbursements received from the tenants.
(5) Represents weighted average full-service rental rates per square foot quoted
by the current owner as of June 30, 1996, based on total net rentable square
feet of the office properties (both Class A and Class B) in the Greenway
Plaza Office Portfolio.
The Company is currently evaluating the nature, extent and timing of
capital improvements that the Greenway Plaza Portfolio will require during the
next 10 years. Major projects identified consist of renovation of the central
plant and building and lobby renovations in two of the office buildings.
Management believes that a portion of these expenditures will be recovered from
the tenants. In addition, certain of the office buildings, the garages and the
hotel in the Greenway Plaza Portfolio contain asbestos. Based on third-party
asbestos abatement reports, however, the Company does not believe that abatement
costs or other costs associated with asbestos clean-up in these buildings will
have a material adverse impact on the Company's business, financial condition or
results of operations. Management anticipates that a significant portion of
these expenditures will be incurred only upon leasing of currently vacant space
or re-leasing or renovation of occupied space.
Additional information regarding the Greenway Plaza Office Portfolio and
the market and submarket in which the portfolio is located is set forth under
"Properties -- Houston Metropolitan Area." In addition, a more detailed
description of the Greenway Plaza Portfolio is contained in the Company's
Current Report on Form 8-K, dated August 15, 1996 and filed September 11, 1996,
as amended on September 27, 1996.
Canyon Ranch-Lenox. On August 12, 1996, the Company entered into a letter
of intent to acquire the Canyon Ranch resort located on 120 acres in the
Berkshire Mountains in Lenox, Massachusetts. Like its "sister" spa, the Canyon
Ranch-Tucson, the Canyon Ranch-Lenox property is an award-winning, destination
health and fitness resort. The resort, which opened in 1989, can accommodate up
to 202 guests per night and features a 100,000 square foot spa complex, a 10,600
square foot health and healing center, dining facilities, six indoor/outdoor
tennis
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courts, two pools and a staff of health and fitness professionals and massage
therapists. The Company will acquire the resort for approximately $27.0 million,
including the assumption of approximately $8.0 million in mortgage debt secured
by the property. The purchase price is subject to increase by up to
approximately $3.0 million depending on operating results of the property during
the next three years. The limited partners of the seller have the option to
receive the cash portion of the purchase price (including any increase in the
purchase price) in shares of Common Stock. For the six months ended June 30,
1996, the average occupancy rate of Canyon Ranch-Lenox was 82%. This rate is not
necessarily indicative of the occupancy rate for the full year. This investment
is expected to close in November 1996.
The Avallon. On August 8, 1996, the Company entered into a lease with BMC
Software, Inc., pursuant to which BMC Software will lease a new 106,000 square
foot office building that the Company has arranged to develop as an expansion of
The Avallon, the Company's three-building, approximately 126,000 square foot
office development in the Northwest submarket of Austin, Texas. BMC Software has
agreed to lease 50% of the new building upon its completion and an additional
25% within 12 months. BMC Software also has agreed to lease the remaining 25% of
the new building within 24 months after completion, subject to the right of BMC
Software to withdraw its commitment for the remaining 25% within 12 months after
completion. The Company has contracted for the construction of the building,
expected to be completed in October 1997, for a fixed price of approximately
$11.9 million. BMC Software also has agreed to extend the term of its lease of
existing space in The Avallon until October 2004.
FINANCING ACTIVITIES
The Company obtained in June 1996, from a consortium of banks led by The
First National Bank of Boston, 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 has a term that expires 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 Offering, the Credit Facility will be unsecured, the
annual interest rate will be reduced to the Eurodollar rate plus 185 basis
points or, as applicable, the lender's prime rate, and the term will be 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,
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.
S-17
<PAGE> 18
PROPERTIES
OFFICE AND RETAIL PROPERTIES
The Company's Office and Retail Properties are located primarily in
Dallas/Fort Worth and Houston, Texas and in Denver, Colorado. As of June 30,
1996, the Office and Retail Properties in these cities represented an aggregate
of approximately 74% of the Company's portfolio of Office and Retail Properties
on the basis of total net rentable square feet (50%, 11% and 13% for Dallas/Fort
Worth, Houston and Denver, respectively) and accounted for approximately 77% of
the Company's total revenues, excluding the Pending Investments, for the six
months ended June 30, 1996 (55%, 10% and 12%, respectively). Upon completion of
the Pending Investments (excluding the Class A office building to be developed),
the Company's Office and Retail Properties in Dallas/Fort Worth, Houston and
Denver will represent an aggregate of approximately 81% of the Company's
portfolio of office and retail properties on the basis of total net rentable
square feet (36%, 36% and 9% for Dallas/Fort Worth, Houston and Denver,
respectively) and are expected to account for approximately 82% of office and
retail property rental revenues (41%, 32% and 9%, respectively), based on pro
forma financial information for the six months ended June 30, 1996.
The following tables set forth certain information about the Office and
Retail Properties as of June 30, 1996, without giving effect to the Pending
Investments. Based on annualized base rental revenues from leases in place as of
June 30, 1996, no single tenant would account for more than 5% of the Company's
total annualized revenues for 1996, based on total revenues for the six months
ended June 30, 1996.
<TABLE>
<CAPTION>
NET AVERAGE
RENTABLE BASE RENT
YEAR AREA (SQ. PERCENT PER LEASED
PROPERTY LOCATION/SUBMARKET COMPLETED FT.) LEASED SQ. FT.(1)
- ----------------------- ----------------------- --------- ----------- ------- ----------
<S> <C> <C> <C> <C> <C>
OFFICE PROPERTIES
The Crescent Office Dallas, TX/Uptown 1986 1,205,212 93% $21.87(3)
Towers
Continental Plaza Fort Worth, TX/CBD 1982 954,895 84 14.68(3)
The Woodlands Office Houston, TX/The 1980-1996 812,359 90 12.03(3)(6)
Properties(4)(5) Woodlands
Spectrum Center(7) Dallas, TX/Far North 1983 598,250 91 14.39
Dallas
MCI Tower Denver, CO/CBD 1982 550,807 97 16.03
1615 Poydras(8) New Orleans, LA/CBD 1984 508,741 70 14.72
Two Renaissance Square Phoenix, AZ/CBD 1990 476,373 74 21.30
Waterside Commons Irving, TX/Las Colinas- 1986 458,739 98 9.18(9)
Irving
Caltex House Irving, TX/Las Colinas- 1982 445,993 94 18.95(3)
Irving
Ptarmigan Place Denver, CO/Cherry Creek 1984 418,565 66 13.26
301 Congress Avenue(10) Austin, TX/CBD 1986 418,443 86 12.49(11)
Three Westlake Houston, TX/Katy 1983 414,251 100 7.39(11)
Park(8)(12) Freeway
Central Park Plaza Omaha, NE/CBD 1982 409,850 98 11.77(11)
Albuquerque Plaza Albuquerque, NM/CBD 1990 365,952 87 17.03
The Aberdeen Dallas, TX/Far North 1986 320,629 100 15.75
Dallas
Regency Plaza One Denver, CO/DTC 1985 309,862 98 17.08
MacArthur Center I & II Irving, TX/Las Colinas- 1982/1986 294,069 100 15.89
Irving
Stanford Corporate Dallas, TX/Far North 1985 265,507 100 13.39
Centre Dallas
Briargate Office and Colorado Springs, CO 1988 252,857 100 8.48(11)
Research Center
<CAPTION>
PROPERTY SIGNIFICANT TENANTS(2)
- ----------------------- ----------------------------------------------
<S> <C>
OFFICE PROPERTIES
The Crescent Office Tracy-Locke, Inc.
Towers
Continental Plaza Burlington Northern Santa Fe Railroad; Banc
One Corporation
The Woodlands Office Allstate Insurance Company; Chevron Pipeline
Properties(4)(5) Co.
Spectrum Center(7) Federal Deposit Insurance Corp.; Frito-Lay,
Inc.
MCI Tower Atlantic Richfield Company; KPMG Peat Marwick
1615 Poydras(8) Freeport-McMoRan, Inc.
Two Renaissance Square Lewis & Roca; Ernst and Young LLP
Waterside Commons Sprint Communications Company L.P.; GTE North
Incorporated
Caltex House Caltex Petroleum Corporation
Ptarmigan Place Janus Capital Corporation; Tilly & Graves,
P.C.
301 Congress Avenue(10) International Business Machines Corporation;
Lumberman's Investment Corporation
Three Westlake Amoco Production Company
Park(8)(12)
Central Park Plaza Acceptance Insurance Company; ConAgra, Inc.;
First National Bank of Omaha; McGrath, North,
Mullin & Kratz; GSA Corps of Engineers-Omaha
Albuquerque Plaza U.S. West Communications; Rodey, Dickason,
Sloan, Akin & Robb, P.A.
The Aberdeen Pepsico, Inc.
Regency Plaza One OneComm Corporation, N.A.; Prudential
Insurance Company of America
MacArthur Center I & II Federal Home Loan Bank of Dallas; North Texas
Healthcare Network
Stanford Corporate TENET Healthcare, Inc.; Crawford & Co.
Centre
Briargate Office and The Principal Mutual Life Insurance Company;
Research Center Lockheed-Martin Corporation; Progressive
Casualty Insurance
</TABLE>
S-18
<PAGE> 19
<TABLE>
<CAPTION>
NET AVERAGE
RENTABLE BASE RENT
YEAR AREA (SQ. PERCENT PER LEASED
PROPERTY LOCATION/SUBMARKET COMPLETED FT.) LEASED SQ. FT.(1)
- ----------------------- ----------------------- --------- ----------- ------- ----------
<S> <C> <C> <C> <C> <C>
12404 Park Central Dallas TX/LBJ-North 1987 239,103 100 13.12
Central Expressway
3333 Lee Parkway Dallas, TX/Oak Lawn 1983 233,484 62 14.46
Liberty Plaza I & II Dallas, TX/Far North 1981/1986 218,813 95 11.46(3)
Dallas
The Citadel Denver, CO/Cherry Creek 1987 130,652 96 15.81
The Avallon Austin, TX/Northwest 1993 125,959 100 16.20
Barton Oaks Plaza One Austin, TX/Southwest 1986 99,792 89 17.59
6225 North 24th Street Phoenix, AZ/Camelback 1981 84,460 100 12.00(11)
Corridor
---------- ---- ------
TOTAL OFFICE PROPERTIES/WEIGHTED AVERAGE 10,613,617 90% $14.95
========== ==== ======
RETAIL PROPERTIES
Las Colinas Plaza Irving, TX/Las Colinas- 1989 135,449 98% $10.70(11)
Irving
The Crescent Atrium Dallas, TX/Uptown 1986 94,852 86 14.39(11)
---------- ---- ------
TOTAL RETAIL PROPERTIES/WEIGHTED AVERAGE 230,301 92% $12.12
========== ==== ======
<CAPTION>
PROPERTY SIGNIFICANT TENANTS(2)
- ----------------------- ----------------------------------------------
<S> <C>
12404 Park Central Steak & Ale Restaurant Corporation; Parker &
Parsley Properties LP
3333 Lee Parkway Centex Corporation
Liberty Plaza I & II Intecom, Inc.; Anthem Group Services
Corporation
The Citadel New York Life Insurance; Daniels & Associates;
Multum Information Services, Inc.
The Avallon BMC Software, Inc.; Hewlett-Packard Company
Barton Oaks Plaza One Iguana Entertainment, Inc.; Tocquigny
Advertising & Design, Inc.; Barton Creek
Health Inc.
6225 North 24th Street American Express Travel Related Services
Company, Inc.
TOTAL OFFICE PROPERTIES/WEIGHTED AVERAGE
RETAIL PROPERTIES
Las Colinas Plaza Tom Thumb Stores, Inc.
The Crescent Atrium Stanley Korshak
TOTAL RETAIL PROPERTIES/WEIGHTED AVERAGE
</TABLE>
- ---------------
(1) Calculated based on base rent payable as of June 30, 1996, without giving
effect to free rent or scheduled rent increases that would be taken into
account under generally accepted accounting principles and excluding (i)
any operating costs (such as utilities, real estate taxes and/or insurance)
payable by the tenants and (ii) any expense reimbursements received from
the tenants.
(2) Identifies tenants with leases that contribute 10% or more of total base
rental revenue currently paid at the Property.
(3) Excludes electricity costs, which (with the exception of five of The
Woodlands Office Properties, and the major tenants of Caltex House and
Liberty Plaza I) are paid in full by the tenants.
(4) The Company has a 75% limited partner interest in the partnership that owns
the 12 Office Properties that comprise The Woodlands Office Properties.
(5) Two of The Woodlands Office Properties were acquired subsequent to June 30,
1996.
(6) Two of The Woodlands Office Properties are leased pursuant to a triple-net
lease, which means that the tenant is responsible for paying all operating
costs for the Property, including utilities, real estate taxes and
insurance. The listed rate excludes such items for the two Office
Properties.
(7) The Company 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 office
building.
(8) Acquired subsequent to June 30, 1996.
(9) Includes base rent payable as of September 1, 1996 pursuant to Sprint's
lease of 77% of the Property's net rentable area (approximately 356,000
square feet). Prior to that date, Sprint was entitled to free rent under
the terms of the lease. The lease is a triple-net lease, which means that
the tenant is responsible for paying all operating costs of the Property,
including utilities, real estate taxes and insurance. The listed rate
excludes such items for the net rentable square feet leased by Sprint.
(10) The Company has a 1% general partner and a 49% limited partner interest in
the partnership that owns 301 Congress Avenue.
(11) Lease(s) are triple-net, with the tenant(s) responsible for the payment of
all operating costs of the Property, including utilities, real estate taxes
and insurance (with the exception of 75% of the leased square feet in
Central Park Plaza). The listed rate excludes such items for the Property
or, for Central Park Plaza, the portion of the Property subject to a
triple-net lease.
(12) The Company owns the principal economic interest in Three Westlake Park
through its ownership of the Three Westlake Note.
S-19
<PAGE> 20
The following schedule provides information for the Company's Office
Properties by state, city and submarket as of June 30, 1996, without giving
effect to the Pending Investments.
<TABLE>
<CAPTION>
CLASS A COMPANY
OFFICE SHARE OF
PERCENT OF PERCENT SUBMARKET CLASS A
NUMBER TOTAL TOTAL LEASED AT PERCENT OFFICE
OF COMPANY COMPANY COMPANY LEASED/ SUBMARKET
STATE, CITY, SUBMARKET PROPERTIES NRA(1) NRA(1) PROPERTIES OCCUPIED(2) NRA
- ---------------------- ---------- ---------- ---------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
TEXAS
DALLAS
Far North Dallas..... 4 1,403,199 13% 95% 95% 20%
Las Colinas/Irving... 3 1,198,801 11 97 94 13
Uptown............... 1 1,205,212 12 93 93 29
LBJ/North Central
Expressway......... 1 239,103 2 100 95 6
Oak Lawn............. 1 233,484 2 62 79(6) 10
-- ---------- --- --- --- ---
Subtotal/Weighted
Average.......... 10 4,279,799 40% 93% 93% 16%
-- ---------- --- --- --- ---
FORT WORTH
CBD................. 1 954,895 9% 84% 85% 38%
-- ---------- --- --- --- ---
HOUSTON
The Woodlands(7).... 12 812,359 8% 90% 90% 100%
Katy Freeway(9)..... 1 414,251 4 100 98 15
-- ---------- --- --- --- ---
Subtotal/Weighted
Average......... 13 1,226,610 12% 93% 96% 35%
-- ---------- --- --- --- ---
AUSTIN
CBD................. 1 418,443 4% 86% 86% 12%
Northwest........... 1 125,959 1 100 99 6
Southwest........... 1 99,792 1 89 98 9
-- ---------- --- --- --- ---
Subtotal/Weighted
Average......... 3 644,194 6% 89% 92% 10%
-- ---------- --- --- --- ---
COLORADO
DENVER
CBD................. 1 550,807 5% 97% 89% 5%
Cherry Creek........ 2 549,217 5 72 89(6) 26
Denver Technology
Center ("DTC").... 1 309,862 3 98 95 8
-- ---------- --- --- --- ---
Subtotal/Weighted
Average......... 4 1,409,886 13% 87% 90% 9%
-- ---------- --- --- --- ---
COLORADO SPRINGS...... 1 252,857 2% 100% 94% 7%
-- ---------- --- --- --- ---
ARIZONA
PHOENIX
CBD................. 1 476,373 4% 74% 90%(6) 27%
Camelback Corridor... 1 84,460 1 100 95 3
-- ---------- --- --- --- ---
Subtotal/Weighted
Average.......... 2 560,833 5% 78% 93% 13%
-- ---------- --- --- --- ---
LOUISIANA
NEW ORLEANS
CBD(9)............... 1 508,741 5% 70% 84% 6%
-- ---------- --- --- --- ---
NEBRASKA
OMAHA
CBD.................. 1 409,850 4% 98% 98% 32%
-- ---------- --- --- --- ---
NEW MEXICO
ALBUQUERQUE
CBD.................. 1 365,952 4% 87% 91% 63%
-- ---------- --- --- --- ---
TOTAL/WEIGHTED
AVERAGE.......... 37 10,613,617 100% 90% 91% 14%
== ========== === === === ===
<CAPTION>
CLASS A
QUOTED COMPANY ADJUSTED
MARKET QUOTED AVERAGE
RENTAL RATE RENTAL RATE BASE RENTAL
PER SQUARE PER SQUARE RATE PER
STATE, CITY, SUBMARKET FOOT(2)(3) FOOT(4) SQUARE FOOT(5)
- ---------------------- ------------ ----------- --------------
<S> <C> <C> <C>
TEXAS
DALLAS
Far North Dallas..... $18.51 $18.88 $15.10
Las Colinas/Irving... 20.59 20.38 18.43
Uptown............... 21.17 30.50 24.65
LBJ/North Central
Expressway......... 17.43 19.00 15.36
Oak Lawn............. 18.19 19.00 15.50
------ ------ ------
Subtotal/Weighted
Average.......... $19.48 $22.58 $18.77
------ ------ ------
FORT WORTH
CBD................. $17.43 $18.00 $17.01
------ ------ ------
HOUSTON
The Woodlands(7).... $13.81(8) $13.81 $14.36
Katy Freeway(9)..... 15.26 16.00 14.25
------ ------ ------
Subtotal/Weighted
Average......... $14.92 $14.60 $14.32
------ ------ ------
AUSTIN
CBD................. $20.82 $20.50 $20.39
Northwest........... 20.50 20.50 17.22
Southwest........... 20.33 20.50 17.94
------ ------ ------
Subtotal/Weighted
Average......... $20.65 $20.50 $19.31
------ ------ ------
COLORADO
DENVER
CBD................. $16.19 $16.00 $16.94
Cherry Creek........ 16.31 18.57 14.52
Denver Technology
Center ("DTC").... 20.87 24.00 18.48
------ ------ ------
Subtotal/Weighted
Average......... $17.37 $18.79 $16.53
------ ------ ------
COLORADO SPRINGS...... $16.29(10) $15.30 $12.31
------ ------ ------
ARIZONA
PHOENIX
CBD................. $18.66 $20.00 $23.43
Camelback Corridor... 24.29 21.00 19.50
------ ------ ------
Subtotal/Weighted
Average.......... $22.07 $20.19 $22.67
------ ------ ------
LOUISIANA
NEW ORLEANS
CBD(9)............... $14.88 $15.00 $14.74
------ ------ ------
NEBRASKA
OMAHA
CBD.................. $18.74 $19.00 $13.31
------ ------ ------
NEW MEXICO
ALBUQUERQUE
CBD.................. $17.30 $18.00 $17.91
------ ------ ------
TOTAL/WEIGHTED
AVERAGE.......... $18.26 $19.73 $17.43
====== ====== ======
</TABLE>
S-20
<PAGE> 21
- ---------------
(1) Represents net rentable area in square feet owned by the Company.
(2) Sources are M/PF Research, Inc. (for the Far North Dallas, Las
Colinas/Irving, Uptown, LBJ/North Central Expressway, Oak Lawn and Fort
Worth CBD submarkets), The Woodlands Corporation (for The Woodlands
submarket), Cushman & Wakefield of Texas, Inc. (for the Katy Freeway
submarket), CB Commercial (for the Austin CBD, Northwest and Southwest
submarkets), Cushman & Wakefield of Colorado, Inc. (for the Denver CBD,
Cherry Creek and Denver DTC submarkets), Turner Commercial Research (for
the Colorado Springs market), Grubb & Ellis (for the Phoenix CBD and
Camelback Corridor submarkets), Jamison Research, Inc. (for the New Orleans
CBD submarket), Compass Management and Leasing and BOMA (for the Omaha CBD
submarket) and Koll-CBS (for the Albuquerque CBD submarket).
(3) Represents full-service rental rates. These rates do not necessarily
represent the amounts at which available space at the Company's Office
Properties will be leased.
(4) Represents weighted average rental rates per square foot quoted by the
Company as of August 31, 1996, based on total net rentable square feet of
Company Properties in the submarket, adjusted to an equivalent full-service
quoted rental rate to facilitate comparison to Class A quoted market rental
rates per square foot. These rates do not necessarily represent the amounts
at which available space at the Company's Office Properties will be leased.
(5) Represents average base rent per leased square foot (as shown in the
preceding table), weighted on the basis of square feet of Company Office
Properties within the submarket, and adjusted for those Office Properties
with lease rates calculated on other than a full-service basis to an
equivalent full-service rental rate per leased square foot.
(6) Excluding those Company Properties that are currently significantly below
submarket occupancy or lease levels, the Class A office space in the Dallas
Oak Lawn submarket would be 81% occupied, the Class A office space in the
Denver Cherry Creek submarket would be 94% leased and the Class A office
space in the Phoenix CBD submarket would be 96% leased.
(7) Two of the Company's Properties in this submarket were acquired subsequent
to June 30, 1996.
(8) Represents an average of the market rental rate per square foot quoted for
all classes of office properties within The Woodlands submarket, adjusted
based on management estimates, to full-service equivalent rental rates. The
12 Office Properties included in the schedule represent all of the
competitive office space within The Woodlands submarket.
(9) The Property in this submarket was acquired subsequent to June 30, 1996.
(10) Represents quoted triple-net rental rates per square foot, adjusted based
on management estimates, to full-service equivalent rental rates.
HOTEL PROPERTIES
The following table sets forth certain information about the Hotel
Properties for the six months ended June 30, 1996 and 1995. The information for
the Hotel Properties is based on available rooms, except for Canyon
Ranch-Tucson, which is a destination health and fitness resort that measures its
performance based on available guest nights.
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
ENDED JUNE 30,
------------------------------------------
REVENUE
AVERAGE AVERAGE PER
OCCUPANCY DAILY AVAILABLE
YEAR RATE RATE ROOM
COMPLETED/ ----------- ------------ ------------
HOTEL PROPERTY(1) LOCATION OPENED ROOMS 1996 1995 1996 1995 1996 1995 MANAGER
- --------------------------- ---------------- ---------- ------ ---- ---- ---- ---- ---- ---- -----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Hyatt Regency Beaver Creek Avon, CO 1989 295 68% 70% $241 $220 $173 $160 Hyatt Corporation
Denver Marriott City Center Denver, CO 1982 613 81 78 104 97 84 76 Marriott
International,
Inc.
Hyatt Regency Albuquerque Albuquerque, NM 1990 395 78 77 93 85 72 66 Hyatt Corporation
----- --- --- ---- ---- ---- ----
TOTAL/WEIGHTED AVERAGE 1,303 77% 76% $132 $121 $101 $ 92
===== === === ==== ==== ==== ====
Canyon Ranch-Tucson(2) Tucson, AZ 1980 240(3) 85%(4) 80%(4) $503(5) $509(5) $413(6) $395(6) Canyon Ranch
===== === === ==== ==== ==== ==== Management
L.L.C.
</TABLE>
- ---------------
(1) The Company cannot, consistent with its status as a REIT for federal income
tax purposes, operate the Hotel Properties directly and, accordingly, has
leased the Hotel Properties to lessees pursuant to long-term leases. See
"-- Hotel Leases," below.
(2) Acquired subsequent to June 30, 1996.
(3) Represents the maximum number of guests that Canyon Ranch-Tucson can
accommodate per night.
(4) The occupancy rate equals the number of paying and complimentary guests for
the period, divided by the maximum number of available guest nights for the
period (43,440 guest nights for the six months ended June 30, 1995 and
43,680 guest nights for the six months ended June 30, 1996, based on a
maximum of 240 guests per night).
(5) ADR equals the average daily "all-inclusive" guest package charges for the
period, divided by the average daily number of paying guests for the period.
(6) REVPAR equals the total "all-inclusive" guest package charges for the
period, divided by the maximum number of available guest nights for the
period.
S-21
<PAGE> 22
RESIDENTIAL DEVELOPMENT PROPERTIES
The following table sets forth certain information about the Residential
Development Properties as of June 30, 1996. The Company owns economic interests
in three Residential Development Corporations through the Residential
Development Property Mortgages and the non-voting common stock of these
Residential Development Corporations. The Residential Development Corporations
in turn, through joint ventures or partnership arrangements, own interests in
the nine Residential Development Properties.
<TABLE>
<CAPTION>
TOTAL
RESIDENTIAL LOTS/
DEVELOPMENT TOTAL UNITS
RESIDENTIAL CORPORATION'S LOTS/ DEVELOPED
RESIDENTIAL DEVELOPMENT DEVELOPMENT TYPE OF EFFECTIVE UNITS SINCE
CORPORATION PROPERTIES(RDP)(1) RDP(2) LOCATION OWNERSHIP PLANNED INCEPTION
- ---------------------------- ---------------------- ------- ---------------- -------------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Mira Vista Mira Vista SF Fort Worth, TX 100.0% 691(5) 521(6)
Development The Highlands SF Breckenridge, CO 12.25 750 165
Corporation Whitehawk Ranch SF Graeagle, CA 20.0 223 14
------ ---
TOTAL MIRA VISTA DEVELOPMENT CORPORATION 1,664 700
------ ---
Houston Area Falcon Point SF Houston, TX 100.0% 1,051(5)(7) 288(6)
Development Spring Lakes SF Houston, TX 100.0 533(7)(8) --
Corporation
------ ---
TOTAL HOUSTON AREA DEVELOPMENT CORPORATION 1,584 288
------ ---
Crescent One Beaver Creek CO Avon, CO 60.0% 18(9) --
Development Market Square CO Avon, CO 60.0 26(9) --
Management Cresta TH Edwards, CO 60.0 25 --
Corporation The Reserve at Frisco SF Frisco, CO 60.0 131(10) --
------ ---
TOTAL CRESCENT DEVELOPMENT MANAGEMENT CORPORATION 200 --
------ ---
TOTAL RESIDENTIAL DEVELOPMENT PROPERTIES 3,448 988
====== ===
<CAPTION>
TOTAL
LOTS/ AVERAGE RANGE OF
UNITS CLOSED PROPOSED
RESIDENTIAL CLOSED SALE PRICE SALE
RESIDENTIAL DEVELOPMENT DEVELOPMENT SINCE PER LOT/ PRICE PER
CORPORATION PROPERTIES(RDP)(1) INCEPTION UNIT(3) LOT/UNIT(4)
- ---------------------------- ---------------------- --------- ---------- ----------------------
<S> <C> <C> <C> <C>
Mira Vista Mira Vista 431(6) $ 94,000 $50,000 - 265,000
Development The Highlands 93 146,000 55,000 - 225,000
Corporation Whitehawk Ranch 8 95,000 65,000 - 150,000
---
TOTAL MIRA VISTA DEVELOPMENT CORPORATION 532
---
Houston Area Falcon Point 99(6) $ 36,000 $16,000 - 50,000
Development Spring Lakes -- -- 21,000 - 45,000
Corporation
---
TOTAL HOUSTON AREA DEVELOPMENT CORPORATION 99
---
Crescent One Beaver Creek -- $ -- $1,330,000 - 3,420,000
Development Market Square -- -- 356,000 - 2,161,000
Management Cresta -- -- 1,278,000 - 1,725,000
Corporation The Reserve at Frisco -- -- 86,000 - 110,000
---
--
TOTAL CRESCENT DEVELOPMENT MANAGEMENT CORPORATION
---
TOTAL RESIDENTIAL DEVELOPMENT PROPERTIES
631
===
</TABLE>
- ---------------
(1) The Residential Development Properties are subject to Residential
Development Property Mortgages held by the Company.
(2) SF (Single-Family); CO (Condominium); TH (Townhome).
(3) Excludes lots sold under previous ownership.
(4) Based on existing inventory of developed lots and lots to be developed.
(5) Does not include any lots that may be planned for approximately 30 and 40
additional acres at Mira Vista and Falcon Point, respectively.
(6) Includes 37 lots at Mira Vista and 13 lots at Falcon Point developed and
closed under prior ownership.
(7) Houston Area Development Corporation has entered into a letter of intent
with a national homebuilder to sell 166 lots in Falcon Point and 93 lots in
Spring Lakes over a 24-month period commencing in the fourth quarter of
1996.
(8) The initial phase of this project (93 lots) is expected to be completed in
early 1997.
(9) As of June 30, 1996, 10 of the condominium units at One Beaver Creek and 19
of the condominium units at Market Square had been pre-sold, generating
aggregate gross sales of $20.5 and $13.9 million, respectively. Closings
are expected to begin in the fourth quarter of 1997.
(10) As of July 31, 1996, 16 lots had been pre-sold. The sales of these lots are
expected to close in September 1996.
S-22
<PAGE> 23
OFFICE PROPERTY MARKET INFORMATION
The demographic conditions, economic conditions and trends (population
growth and employment growth) favoring the Dallas/Fort Worth, Denver, Houston,
Austin, Phoenix, Omaha, Albuquerque and Colorado Springs markets are projected
to continue to be at or above the national average, as illustrated in the
following graphs.
PROJECTED POPULATION AND EMPLOYMENT GROWTH
1996-2006
(% INCREASE)
<TABLE>
<CAPTION>
GEOGRAPHICAL AREA
POPULATION (1) EMPLOYMENT (2)
<S> <C> <C>
UNITED STATES 9.4 14.2
DALLAS-FORT WORTH, TX 21.1 22.2
DENVER, CO 20.9 21.6
HOUSTON, TX 12.7 14.0
AUSTIN, TX 41.0 41.2
PHOENIX, AZ 31.7 34.2
NEW ORLEANS, LA 4.0 8.9
OMAHA, NE 11.4 16.3
ALBUQUERQUE, NM 24.8 26.8
COLORADO SPRINGS, CO 22.5 26.3
</TABLE>
(1) Represents projected population growth from year-end 1996 through year-end
2006.
(2) Represents projected employment growth from year-end 1996 through year-end
2006.
- ---------------
Source: Cognetics, Inc.
As reported in the 1996 edition of Emerging Trends magazine, a panel of
more than 100 real estate professionals has ranked Denver, Phoenix and Dallas
among the top eight markets in the country for general real estate investment in
1996. In addition, as reported by Cognetics, Inc. in December 1995, Dallas/Fort
Worth, Phoenix, Houston/Galveston and Denver/Boulder are projected to be among
the leading markets in the country for primary office employment growth in the
next decade. Fortune magazine, in its November 13, 1995 issue, also ranked
Denver, Austin, Dallas/Fort Worth, Houston and Phoenix among the top 10 U.S.
cities having the best overall environment for business.
<TABLE>
<CAPTION>
TOP MARKETS FOR
GENERAL REAL
ESTATE TOP MARKETS FOR PRIMARY TOP TEN BEST
INVESTMENTS IN OFFICE EMPLOYMENT AMERICAN METROPOLITAN
1996 GROWTH -- 1995 TO 2005 AREAS FOR BUSINESS -- 1995
------------------ --------------------------- ---------------------------
<C> <S> <C> <C> <C> <C>
1. Atlanta, GA 1. Los Angeles, CA 1. San Francisco Bay Area, CA
2. San Francisco, CA 2. Atlanta, GA 2. Atlanta, GA
3. Boston, MA 3. San Francisco Bay Area, CA 3. DENVER, CO
4. Seattle, WA 4. Washington, D.C. 4. New York, NY
5. DENVER, CO 5. DALLAS/FORT WORTH, TX 5. Boston, MA
6. Washington, D.C. 6. Chicago, IL 6. Seattle, WA
7. PHOENIX, AZ 7. PHOENIX, AZ 7. AUSTIN, TX
8. DALLAS, TX 8. New York, NY 8. DALLAS/FORT WORTH, TX
9. San Diego, CA 9. HOUSTON/GALVESTON, TX 9. HOUSTON, TX
10. Chicago, IL 10. Tampa/St. Petersburg, FL 10. PHOENIX, AZ
11. Minneapolis/St. Paul, MN
12. DENVER/BOULDER, CO
Source: Emerging Trends Source: Cognetics, Inc. Source: Fortune
(Equitable Real
Estate Management)
</TABLE>
S-23
<PAGE> 24
The majority of the Company's Office Properties are located in Texas and
Colorado. Each of the metropolitan areas of Dallas/Fort Worth, Denver and
Houston contain more than 10% of the Company's Office Properties in terms of net
rentable square feet. The 28 Dallas/Fort Worth, Denver and Houston Office
Properties together represent approximately 74% of the Company's current
portfolio of Office Properties on the basis of net rentable square feet. Upon
completion of the acquisition of the Greenway Plaza Office Portfolio, the 38
Dallas/Fort Worth, Denver and Houston office properties will represent
approximately 81% of the Company's portfolio of Office Properties on the basis
of net rentable square feet.
DALLAS/FORT WORTH METROPOLITAN AREA
The Company believes that the economic base and business profile of
Dallas/Fort Worth have become substantially more diverse since the mid-1980's.
Dallas/Fort Worth currently has a diverse economy with an extensive financial
community and an emphasis on wholesale/retail trade, service industries and
high-technology manufacturing. Management believes that this diversified economy
permitted Dallas/Fort Worth to outperform the national economy in employment
growth through the recession of the early 1990's. According to the Texas
Workforce Commission, during 1995, employment growth in this area was 3.4%, with
an increase of approximately 75,500 jobs in non-farm employment. Dallas/Fort
Worth is the dominant transportation and distribution hub of the South Central
region of the United States as a result of its location, its extensive
infrastructure, the prominence of the Dallas/Fort Worth International Airport
and the development of the new Alliance Airport. The area is expected to benefit
substantially from the North American Free Trade Agreement as a primary trade
conduit with, and exporter to, Mexico. Many major corporations have relocated
their headquarters to the Dallas/Fort Worth area in recent years, including J.C.
Penney Company, Inc., GTE Telephone Operations and Exxon Corporation. More
recently, Countrywide Funding Corporation, TIG Holdings, a former division of
Transamerica Corporation, and Pepsico, Inc. have moved major facilities to
Dallas/Fort Worth, creating an estimated 1,300 to 1,650 new jobs. Pepsico, Inc.
is the sole tenant of The Aberdeen Office Property. Management believes that
these relocations both demonstrate and contribute to the vitality of the
Dallas/Fort Worth metropolitan area.
DALLAS/FORT WORTH OFFICE PROPERTIES
The following graph provides information regarding vacancy levels and
average quoted market rental rates at year end for each of the years from 1990
through 1995, and at June 30, 1996, for Class A office properties in the Dallas
metropolitan area.
OVERALL CLASS A OFFICE
VACANCY AND AVERAGE QUOTED MARKET RENT
DALLAS, TX
<TABLE>
<CAPTION>
MEASUREMENT PERIOD
(FISCAL YEAR COVERED) RENT VACANCY
<S> <C> <C>
1990 $17.34 18.9%
1991 $16.83 19.6%
1992 $15.80 20.8%
1993 $15.25 18.4%
1994 $15.87 13.6%
1995 $17.41 11.2%
6/30/96 $18.89 9.2%
</TABLE>
- ---------------
Source: M/PF Research, Inc.
S-24
<PAGE> 25
The Company has focused its acquisition efforts in the Dallas area on five
submarkets that management believes have benefited and will continue to benefit
from the growth in demand for office space. These five submarkets accounted for
46% of the total Class A office space in the Dallas metropolitan area as of June
30, 1996.
Far North Dallas. Four of the Company's Office Properties, Spectrum
Center, The Aberdeen, Stanford Corporate Centre and Liberty Plaza I & II, are
located in the Far North Dallas submarket. Commercial office buildings in the
Far North Dallas submarket are primarily located along or near the Dallas North
Tollway, which provides direct access to both the Dallas CBD submarket and the
LBJ Freeway submarket. Although the Far North Dallas submarket has 12% of the
total Dallas area Class A office space, this submarket accounted for 33% of
total market absorption during 1995.
Las Colinas/Irving. Three of the Company's Office Properties, Waterside
Commons, Caltex House and MacArthur Center I & II, and one of the Company's
Retail Properties, Las Colinas Plaza, are located in the Las Colinas/Irving
submarket. Las Colinas is a 12,000-acre master-planned office, retail, hotel and
residential community located in Irving, Texas, approximately 10 minutes from
the Dallas/Fort Worth International Airport and approximately 15 and 25 minutes
from downtown Dallas and downtown Fort Worth, respectively.
Uptown. One of the Company's Office Properties, The Crescent Office
Towers, and one of the Company's Retail Properties, The Crescent Atrium, are
located in the Uptown submarket. In addition to office buildings and other
commercial properties, the area has a varied mix of housing, a number of
freestanding shops and some of the region's best restaurants, including the Beau
Nash in the Hotel Crescent Court, located between The Crescent Office Towers and
The Crescent Atrium. This submarket is continuing to benefit from the relocation
of tenants from the Dallas CBD submarket, including firms such as KPMG Peat
Marwick U.S., Goldman, Sachs & Co. and The Bear, Stearns Companies Inc., all of
whom are tenants in The Crescent Office Towers.
LBJ/North Central Expressway. One of the Company's Office Properties,
12404 Park Central, is located in the LBJ/North Central Expressway submarket.
The intersection of the east/west LBJ Freeway and the north/south North Central
Expressway is the focal point of this submarket. Management believes that this
submarket will benefit greatly from completion of the North Central Expressway
expansion project currently underway. Completed sections of the expressway have
already improved access to the buildings in the Park Central complex, in which
12404 Park Central is located, and additional sections are scheduled to be
constructed through the year 2000.
Oak Lawn. One of the Company's Office Properties, 3333 Lee Parkway, is
located in the Oak Lawn submarket. This submarket borders the northwest portion
of the Uptown submarket and closely mirrors the Uptown submarket in amenities,
including specialty shops and restaurants. The Oak Lawn submarket is immediately
adjacent to the Park Cities, two upscale residential areas, and is easily
accessible from the north/south Dallas North Tollway and the east/west Woodall
Rodgers Freeway. The increase in vacancy during 1995 and the first six months of
1996 was primarily the result of the relinquishment of approximately 200,000
square feet of space (approximately 8% of the total Class A office space in the
submarket) by a savings and loan association and, subsequently, by a government
agency.
S-25
<PAGE> 26
The following graphs provide information regarding vacancy levels and
average quoted market rental rates at year end for each of the years from 1990
through 1995, and at June 30, 1996, for Class A office properties in the five
Dallas submarkets in which the Company has invested.
FAR NORTH DALLAS CLASS A OFFICE
VACANCY AND AVERAGE QUOTED MARKET RENT
DALLAS, TX
<TABLE>
<CAPTION>
MEASUREMENT PERIOD
(FISCAL YEAR COVERED) RENT VACANCY
<S> <C> <C>
1990 $14.06 28.0%
1991 $13.77 27.9%
1992 $13.84 26.4%
1993 $13.62 19.5%
1994 $14.68 12.7%
1995 $16.79 5.2%
6/30/96 $18.51 5.3%
</TABLE>
LAS COLINAS/IRVING CLASS A OFFICE
VACANCY AND AVERAGE QUOTED MARKET RENT
DALLAS, TX
<TABLE>
<CAPTION>
MEASUREMENT PERIOD
(FISCAL YEAR COVERED) RENT VACANCY
<S> <C> <C>
1990 $15.22 13.4%
1991 $15.67 15.8%
1992 $15.61 15.4%
1993 $14.72 10.2%
1994 $16.39 6.9%
1995 $19.21 6.0%
6/30/96 $20.59 6.0%
</TABLE>
UPTOWN CLASS A OFFICE
VACANCY AND AVERAGE QUOTED MARKET RENT
DALLAS, TX
<TABLE>
<CAPTION>
MEASUREMENT PERIOD
(FISCAL YEAR COVERED) RENT VACANCY
<S> <C> <C>
1990 $18.90 25.1%
1991 $18.63 22.8%
1992 $17.89 20.1%
1993 $16.87 20.0%
1994 $17.38 12.8%
1995 $19.51 8.6%
6/30/96 $21.17 7.3%
</TABLE>
LBJ/NORTH CENTRAL EXPRESSWAY CLASS A OFFICE
VACANCY AND AVERAGE QUOTED MARKET RENT
DALLAS, TX
<TABLE>
<CAPTION>
MEASUREMENT PERIOD
(FISCAL YEAR COVERED) RENT VACANCY
<S> <C> <C>
1990 $14.30 21.2%
1991 $13.75 22.1%
1992 $13.57 18.4%
1993 $13.18 16.5%
1994 $13.94 9.3%
1995 $16.08 7.3%
6/30/96 $17.43 4.9%
</TABLE>
OAK LAWN CLASS A OFFICE
VACANCY AND AVERAGE QUOTED MARKET RENT
DALLAS, TX
<TABLE>
<CAPTION>
MEASUREMENT PERIOD
(FISCAL YEAR COVERED) RENT VACANCY
<S> <C> <C>
1990 $15.19 17.3%
1991 $15.12 15.4%
1992 $14.95 12.1%
1993 $14.44 13.1%
1994 $15.46 9.9%
1995 $17.25 14.6%
6/30/96 $18.19 20.9%
</TABLE>
- -------------
Source: M/PF Research, Inc.
S-26
<PAGE> 27
Fort Worth CBD. One of the Company's Office Properties, Continental Plaza,
is located in the Fort Worth CBD submarket, which contained 50% of the city's
approximately 5.0 million square feet of Class A office space as of June 30,
1996. Management believes that the Class A office market in the Fort Worth CBD
submarket will improve during the next five years. More than 25% of all new jobs
created in Fort Worth during 1995 were service-related, and job growth of this
type is expected to continue. Office tenants are primarily service-related
businesses. In addition, employment is increasing in Fort Worth, and the
revitalization of downtown Fort Worth is continuing with the addition of new
housing developments, restaurants, night clubs, retail shops and movie theaters.
The Fort Worth CBD submarket has recently received a further economic boost,
with construction commencing on a $60 million, privately funded, downtown
performing arts center and a new retail and entertainment center, as well as the
recently completed renovation of an enclosed downtown mall.
The following graph provides information regarding vacancy levels and
average quoted market rental rates at year end for each of the years from 1990
through 1995, and at June 30, 1996, for Class A office properties in the Fort
Worth CBD submarket.
CBD CLASS A OFFICE
VACANCY AND AVERAGE QUOTED MARKET RENT
FORT WORTH, TX
<TABLE>
<CAPTION>
MEASUREMENT PERIOD
(FISCAL YEAR COVERED) RENT VACANCY
<S> <C> <C>
1990 $17.95 14.5%
1991 $18.50 11.1%
1992 $17.83 11.8%
1993 $17.72 12.3%
1994 $17.54 12.9%
1995 $16.95 10.0%
6/30/96 $17.43 15.0%
</TABLE>
- ---------------
Source: M/PF Research, Inc.
DENVER METROPOLITAN AREA
Like Dallas/Fort Worth, Denver has a diverse economic base that has
outperformed the national economy in terms of job growth in recent years. With
approximately 50% more college graduates, on a per capita basis, than the
national average, the city has one of the most highly educated workforces in the
nation, allowing it to attract the service and technology companies that draw on
the skills of this group. During the last decade, the city has become a center
for high-technology firms, especially those in the telecommunications industry.
Furthermore, Denver ranks as an important distribution center for the Western
and Central United States, and the 1995 opening of the Denver International
Airport has improved the city's standing as an air transportation hub with
respect to both passenger and freight traffic.
S-27
<PAGE> 28
DENVER OFFICE PROPERTIES
The following graph provides information regarding vacancy levels and
average quoted market rental rates at year end for each of the years from 1990
through 1995, and at June 30, 1996, for Class A office properties in the Denver
metropolitan area.
OVERALL CLASS A OFFICE
VACANCY AND AVERAGE QUOTED MARKET RENT
DENVER, CO
<TABLE>
<CAPTION>
MEASUREMENT PERIOD
(FISCAL YEAR COVERED) RENT VACANCY
<S> <C> <C>
1990 $12.65 15.1%
1991 $12.75 14.3%
1992 $14.18 13.1%
1993 $14.67 9.6%
1994 $15.46 6.5%
1995 $17.06 8.4%
6/30/96 $17.13 9.0%
</TABLE>
- ---------------
Source: Cushman & Wakefield of Colorado, Inc.
The increase in vacancy during 1995 was primarily the result of the
relinquishment of space in the Denver CBD submarket by government agencies and
certain major accounting firms. The Company believes that this increase in
vacancy will be relatively short-term given the low average quoted market rental
rates in the Denver CBD submarket as compared to other Denver submarkets, the
relative lack of immediately available blocks of Class A office space in the
surrounding submarkets and the continuing population and employment growth
trends of the metropolitan Denver area.
The Company has focused its acquisition efforts in the Denver area on three
submarkets which management believes have benefited and will continue to benefit
from the growth in demand for office space in the Denver metropolitan area.
These three submarkets accounted for 82% of the total Class A office space in
the Denver metropolitan area as of June 30, 1996.
Denver CBD. One of the Company's Office Properties, MCI Tower, and one of
the Company's Hotel Properties, the Denver Marriott City Center, are located (in
a single building) in the Denver CBD submarket. With over 10.0 million square
feet of Class A office space as of June 30, 1996, the Denver CBD submarket
contained 51% of the city's total Class A office space. The $175 million Coors
Field baseball stadium is located on the west edge of the Denver CBD submarket,
and a new $67 million central library has been constructed at the city's center.
A recently constructed light rail system offers ease of commuter access from
southern Denver to the downtown area. The Denver CBD submarket has low lease
rates in comparison to other Denver locations and large blocks of Class A office
space are available in the Denver CBD submarket. As a result of these factors
and the limited space available in the other Denver submarkets, the Denver CBD
submarket has become the only area within Denver that can immediately
accommodate a major Class A tenant.
Cherry Creek. Two of the Company's Office Properties, The Citadel and
Ptarmigan Place, are located in the Cherry Creek submarket. With approximately
2.1 million square feet of Class A office space, Cherry Creek is the third
largest of Denver's submarkets. Located three miles southeast of the Denver CBD
submarket, the area includes some of the most prestigious single-family homes in
the city, the Denver Country Club, the $100 million Cherry Creek Mall and
high-rise residential projects. The decline in the Class A quoted market rental
rate within
S-28
<PAGE> 29
the Cherry Creek submarket during the first six months of 1996 resulted
primarily from the reclassification of two buildings formerly classified as
Class B office space as Class A office space.
Denver Technology Center ("DTC"). One of the Company's Properties, Regency
Plaza One, is located in the DTC submarket. This submarket has excellent access
to all parts of Denver, and many of Denver's prime residential communities are
located within five to 15 minutes of the area. Class A office space in the DTC
submarket totals approximately 4.0 million square feet, which is second in size
only to the Denver CBD submarket. As of June 30, 1996, Class A office space in
the DTC submarket's was 95% leased, the highest such rate for any significant
submarket in the Denver metropolitan area.
The following graphs provide information regarding vacancy levels and
average quoted market rental rates at year end for each of the years from 1990
through 1995, and at June 30, 1996, for Class A office properties in the three
Denver submarkets in which the Company has invested.
CBD CLASS A OFFICE
VACANCY AND AVERAGE QUOTED MARKET RENT
DENVER, CO
<TABLE>
<CAPTION>
MEASUREMENT PERIOD
(FISCAL YEAR COVERED) RENT VACANCY
<S> <C> <C>
1990 $12.31 17.3%
1991 $12.17 16.3%
1992 $14.07 8.9%
1993 $14.52 8.1%
1994 $15.80 5.8%
1995 $16.23 9.8%
6/30/96 $16.19 11.2%
</TABLE>
CHERRY CREEK CLASS A OFFICE
VACANCY AND AVERAGE QUOTED MARKET RENT
DENVER, CO
<TABLE>
<CAPTION>
MEASUREMENT PERIOD
(FISCAL YEAR COVERED) RENT VACANCY
<S> <C> <C>
1990 $12.52 20.9%
1991 $13.52 17.8%
1992 $13.53 21.7%
1993 $12.55 9.9%
1994 $14.03 10.3%
1995 $17.11 11.1%
6/30/96 $16.31 11.4%
</TABLE>
DTC CLASS A OFFICE
VACANCY AND AVERAGE QUOTED MARKET RENT
DENVER, CO
<TABLE>
<CAPTION>
MEASUREMENT PERIOD
(FISCAL YEAR COVERED) RENT VACANCY
<S> <C> <C>
1990 $14.08 6.8%
1991 $14.97 7.7%
1992 $16.29 9.8%
1993 $16.14 7.6%
1994 $16.44 4.2%
1995 $19.95 5.6%
6/30/96 $20.87 5.2%
</TABLE>
- ---------------
Source: Cushman & Wakefield of Colorado, Inc.
HOUSTON METROPOLITAN AREA
The nation's fourth largest city and the largest in the Southwest, Houston
currently has a population of approximately 3.5 million, with a workforce of
approximately 1.8 million non-agricultural, wage and salaried workers. Houston
is central to the domestic petroleum industry's production, processing and
distribution network, and, according to the University of Houston Center for
Public Policy, slightly over one-half of the city's primary
S-29
<PAGE> 30
employment base is tied to the oil and gas industry. During the 1980s and early
1990s, the city's economy stagnated as a result of the sharp decline in oil
prices and cutbacks and consolidations in the petroleum and other industries.
Since 1991, however, job growth has increased at an average annual rate of 1.9%
per year, according to the U.S. Bureau of Labor Statistics. In 1995, job growth
increased to 3.1% with the creation of 53,300 jobs and is projected by the
University of Houston Center for Public Policy to continue to increase at a rate
of 2.0% to 3.0% for the next several years. Although the petroleum industry
remains essential to the Houston economy, the city is also known as a major port
for worldwide shipping of non-petroleum products and in 1995 was the second
largest U.S. port in terms of foreign tonnage shipped. Houston is also home to
the National Aeronautics and Space Administration (NASA) and Johnson Space
Center, the 600-acre Texas Medical Center and the Astrodome sports complex. Non-
energy related industries that are major contributors to the Houston economy
include aerospace manufacturing, data processing, telecommunications and
computer software development.
HOUSTON OFFICE PROPERTIES
The following graphs provide information regarding vacancy levels and
average quoted market rental rates at year end for each of the years from 1990
through 1995, and at June 30, 1996, for Class A and Class B office properties in
the Houston metropolitan area.
OVERALL CLASS A OFFICE
VACANCY AND AVERAGE QUOTED MARKET RENT
HOUSTON, TX
<TABLE>
<CAPTION>
MEASUREMENT PERIOD
(FISCAL YEAR COVERED) RENT VACANCY
<S> <C> <C>
1990 $14.97 12.8%
1991 $15.03 12.0%
1992 $14.72 12.1%
1993 $14.17 12.7%
1994 $14.08 9.9%
1995 $14.04 9.6%
6/30/96 $14.05 9.3%
</TABLE>
OVERALL CLASS B OFFICE
VACANCY AND AVERAGE QUOTED MARKET RENT
HOUSTON, TX
<TABLE>
<CAPTION>
MEASUREMENT PERIOD
(FISCAL YEAR COVERED) RENT VACANCY
<S> <C> <C>
1990 $10.90 21.5%
1991 $11.10 19.8%
1992 $11.07 19.7%
1993 $10.93 20.0%
1994 $10.96 20.0%
1995 $11.18 19.2%
6/30/96 $11.08 18.6%
</TABLE>
- ----------
Source: Company compiled from Baca Landata, Inc., The Woodlands Corporation and
Cushman & Wakefield of Texas, Inc.
The Company has focused its acquisition efforts in the Houston area on
three submarkets that management believes will benefit from growth in demand for
office space. As of June 30, 1996, these three submarkets accounted for 12% of
the total Class A office space, and 14% of the total Class B office space, in
the Houston metropolitan area.
Richmond-Buffalo Speedway. The Greenway Plaza Office Portfolio (10 office
properties) contains a majority of the total Class A and Class B office space in
the Richmond-Buffalo Speedway submarket. Virtually all of the office buildings
in the submarket that have in excess of 250,000 net rentable square feet are
located in or adjacent to Greenway Plaza. The submarket consists of 10.4 million
net rentable square feet of office space, of which 3.9 million net rentable
square feet are Class A office space and 3.7 million net rentable square feet
are Class B office space. The Company expects to acquire the Greenway Plaza
Office Portfolio in October 1996.
The Woodlands. Twelve of the Company's Office Properties are located in
The Woodlands submarket. The Woodlands submarket is a master-planned community,
located 27 miles north of Houston, that contains a shopping mall, retail
centers, office buildings, a hospital, club facilities, a community college, a
performance pavilion and numerous other amenities targeting a population with
high earnings. The Woodlands Corporation maintains control over all development
within the community. The Company, through its 75% limited partner interest in
the partnership that owns the Office Properties in The Woodlands, has the option
to participate with The Woodlands Corporation in certain future office
development within The Woodlands.
S-30
<PAGE> 31
Katy Freeway. One of the Company's Office Properties, Three Westlake Park,
is located in the Katy Freeway submarket, which is approximately eight miles
west of downtown Houston. A number of the world's largest oil companies,
including Exxon Corporation, Amoco Production Company and British Petroleum, are
located in this submarket, which is also known as the "Energy Corridor." The
Company owns the principal economic interest in Three Westlake Park through its
ownership of the Three Westlake Note.
The following graphs provide information regarding vacancy levels and
average quoted market rental rates at year end for each of the years from 1990
through 1995, and at June 30, 1996, for Class A and Class B office properties in
the Richmond-Buffalo Speedway submarket, for all classes of competitive office
properties in The Woodlands submarket and for Class A office properties in the
Katy Freeway submarket.
RICHMOND-BUFFALO SPEEDWAY CLASS A OFFICE
VACANCY AND AVERAGE QUOTED MARKET RENT
HOUSTON, TX
<TABLE>
<CAPTION>
MEASUREMENT PERIOD
(FISCAL YEAR COVERED) RENT VACANCY
<S> <C> <C>
1990 $12.29 12.1%
1991 $12.66 10.1%
1992 $13.26 8.2%
1993 $13.12 6.4%
1994 $12.92 6.3%
1995 $13.46 6.5%
6/30/96 $13.37 5.5%
</TABLE>
RICHMOND-BUFFALO SPEEDWAY CLASS B OFFICE
VACANCY AND AVERAGE QUOTED MARKET RENT
HOUSTON, TX
<TABLE>
<CAPTION>
MEASUREMENT PERIOD
(FISCAL YEAR COVERED) RENT VACANCY
<S> <C> <C>
1990 $12.32 9.3%
1991 $12.37 10.2%
1992 $12.35 10.9%
1993 $12.55 13.5%
1994 $12.47 14.2%
1995 $12.47 22.8%
6/30/96 $12.62 31.8%
</TABLE>
THE WOODLANDS OFFICE
VACANCY AND AVERAGE QUOTED MARKET RENT(1)
HOUSTON, TX
<TABLE>
<CAPTION>
MEASUREMENT PERIOD
(FISCAL YEAR COVERED) RENT VACANCY
<S> <C> <C>
1990 $11.45 44.6%
1991 $ 8.54 31.5%
1992 $11.20 14.2%
1993 $12.11 14.4%
1994 $12.83 11.5%
1995 $12.87 13.6%
6/30/96 $13.81 10.0%
</TABLE>
KATY FREEWAY (ENERGY CORRIDOR) CLASS A OFFICE
VACANCY AND AVERAGE QUOTED MARKET RENT
HOUSTON, TX
<TABLE>
<CAPTION>
MEASUREMENT PERIOD
(FISCAL YEAR COVERED) RENT VACANCY
<S> <C> <C>
1990 $14.48 7.1%
1991 $15.83 5.9%
1992 $15.10 6.5%
1993 $15.10 5.4%
1994 $15.23 2.2%
1995 $15.42 2.9%
6/30/96 $15.26 2.1%
</TABLE>
- -------------
(1) Represents an average of the market rental rate per square foot quoted for
all classes of competitive office properties within The Woodlands submarket,
adjusted based on management estimates, to a full-service equivalent rental
rate.
Source: Baca Landata, Inc., The Woodlands Corporation and Cushman & Wakefield of
Texas, Inc.
S-31
<PAGE> 32
LEASE EXPIRATIONS OF OFFICE PROPERTIES AND RETAIL PROPERTIES
The following table sets forth a schedule of lease expirations for leases
in place as of June 30, 1996, for each of the 10 years beginning with the
remainder of 1996, for the Office Properties and Retail Properties, on an
aggregate basis by submarket, assuming that none of the tenants exercises
renewal options and excluding an aggregate of 1,101,528 square feet of unleased
space.
<TABLE>
<CAPTION>
OFFICE PROPERTIES
(STATE, CITY, SUBMARKET) 1996 1997 1998 1999 2000 2001 2002
- ------------------------------------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Texas
DALLAS
Far North Dallas... Sq. Ft.(1) 168,356 233,611 63,015 83,364 192,079 47,953 78,356
% Sq. Ft.(2) 12.7% 17.6% 4.7% 6.3% 14.5% 3.6% 5.9%
Annual Rent(3) $2,682,118 $2,936,643 $916,321 $1,255,892 $2,800,114 $885,121 $1,014,710
No. of Tenants 19 13 13 11 6 2 1
Rent per Sq. Ft.(3) $15.93 $12.57 $14.54 $15.07 $14.58 $18.46 $12.95
Company Quoted $18.88
Rental Rate per
Sq. Ft.(4)
Las
Colinas/Irving.... Sq. Ft.(1) 7,988 47,096 102,164 58,236 267,970 37,083 278,796
% Sq. Ft.(2) 0.7% 4.1% 8.8% 5.0% 23.2% 3.2% 24.1%
Annual Rent(3) $78,585 $674,252 $1,467,436 $893,172 $4,336,916 $734,127 $5,939,141
No. of Tenants 5 10 19 8 14 4 2
Rent per Sq. Ft.(3) $9.84 $14.32 $14.36 $15.34 $16.18 $19.80 $21.30
Company Quoted $19.03
Rental Rate per
Sq. Ft.(4)
Uptown............. Sq. Ft.(1) 77,855 117,244 165,926 57,079 -- 323,124 157,098
% Sq. Ft.(2) 7.0% 10.5% 14.9% 5.1% 0.0% 29.0% 14.1%
Annual Rent(3) $1,389,368 $2,500,062 $4,025,849 $1,246,084 -- $7,672,852 $4,068,424
No. of Tenants 18 19 23 6 -- 12 5
Rent per Sq. Ft.(3) $17.85 $21.32 $24.26 $21.83 -- $23.75 $25.90
Company Quoted $29.00
Rental Rate per
Sq. Ft.(4)
LBJ/North Central
Expressway........ Sq. Ft.(1) -- 208,613 27,128 -- -- -- --
% Sq. Ft. (2) 0.0% 88.5% 11.5% 0.0% 0.0% 0.0% 0.0%
Annual Rent(3) -- $2,910,151 $324,993 -- -- -- --
No. of Tenants -- 7 1 -- -- -- --
Rent per Sq. Ft.(3) -- $13.95 $11.98 -- -- -- --
Company Quoted $19.00
Rental Rate per
Sq. Ft.(4)
Oak Lawn........... Sq. Ft.(1) 97,160 2,852 -- 30,000 -- 10,883 --
% Sq. Ft.(2) 69.0% 2.0% 0.0% 21.3% 0.0% 7.7% 0.0%
Annual Rent(3) $1,369,851 $38,645 -- $465,000 -- $175,216 --
No. of Tenants 5 1 -- 1 -- 1 --
Rent per Sq. Ft.(3) $14.10 $13.55 -- $15.50 -- $16.10 --
Company Quoted $18.00
Rental Rate per
Sq. Ft.(4)
FORT WORTH
CBD................ Sq. Ft.(1) 177,415 98,484 75,057 112,854 199,362 84,039 53,376
% Sq. Ft.(2) 22.2% 12.3% 9.4% 14.1% 24.9% 10.5% 6.6%
Annual Rent(3) $2,693,106 $1,181,565 $1,144,090 $1,722,462 $3,358,901 $1,263,874 $532,868
No. of Tenants 21 11 7 3 5 2 3
Rent per Sq. Ft.(3) $15.18 $12.00 $15.24 $15.26 $16.85 $15.04 $9.98
Company Quoted $16.50
Rental Rate per
Sq. Ft.(4)
<CAPTION>
OFFICE PROPERTIES 2006 &
(STATE, CITY, SUBMARKET) 2003 2004 2005 BEYOND
- ------------------------ ---------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Texas
DALLAS
Far North Dallas........ 119,500 9,320 320,629 11,937
9.0% 0.7% 24.1% 0.9%
$1,549,915 $144,833 $5,049,907 $274,551
1 1 1 1
$12.97 $15.54 $15.75 $23.10
Las
Colinas/Irving......... -- -- 356,319 --
0.0% 0.0% 30.9% 0.0%
-- -- $2,921,816 --
-- -- 1 --
-- -- $8.20 --
Uptown.................. 126,486 47,651 41,130 --
11.4% 4.3% 3.7% 0.0%
$3,059,116 $1,071,988 $836,680 --
3 1 2 --
$24.19 $22.50 $20.34 --
LBJ/North Central
Expressway............. -- -- -- --
0.0% 0.0% 0.0% 0.0%
-- -- -- --
-- -- -- --
-- -- -- --
Oak Lawn................ -- -- -- --
0.0% 0.0% 0.0% 0.0%
-- -- -- --
-- -- -- --
-- -- -- --
FORT WORTH
CBD..................... -- -- -- --
0.0% 0.0% 0.0% 0.0%
-- -- -- --
-- -- -- --
-- -- -- --
</TABLE>
S-32
<PAGE> 33
<TABLE>
<CAPTION>
OFFICE PROPERTIES
(STATE, CITY, SUBMARKET) 1996 1997 1998 1999 2000 2001 2002
- ------------------------------------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
HOUSTON
The Woodlands(5)... Sq. Ft.(1) 28,952 116,233 101,587 159,192 34,255 29,093 54,591
% Sq. Ft.(2) 4.0% 15.9% 13.9% 21.8% 4.7% 3.9% 7.5%
Annual Rent(3) $347,541 $1,182,176 $1,177,548 $1,823,752 $449,231 $345,683 $791,902
No. of Tenants 8 21 21 19 5 5 2
Rent per Sq. Ft.(3) $12.00 $10.17 $11.59 $11.46 $13.11 $11.88 $14.51
Company Quoted $13.50
Rental Rate per
Sq. Ft.(4)
Katy Freeway(6).... Sq. Ft.(1) -- 895 -- 1,817 411,539 -- --
% Sq. Ft.(2) 0.0% 0.2% 0.0% .5% 99.3% 0.0% 0.0%
Annual Rent(3) -- $2,627 -- $2,217 $2,992,761 -- --
No. of Tenants -- 1 -- 1 1 -- --
Rent per Sq. Ft.(3) -- $2.94 -- $1.22 $7.27 -- --
Company Quoted $9.10
Rental Rate per
Sq. Ft.(4)
AUSTIN
CBD................ Sq. Ft.(1) 22,178 16,352 140,243 32,667 66,841 14,342 --
% Sq. Ft.(2) 6.2% 4.6% 39.3% 9.2% 18.8% 4.0% 0.0%
Annual Rent(3) $179,501 $189,792 $2,501,167 $419,315 $1,355,809 $172,921 --
No. of Tenants 4 3 7 4 2 3 --
Rent per Sq. Ft.(3) $8.09 $11.61 $17.83 $12.84 $20.28 $12.06 --
Company Quoted $11.50
Rental Rate per
Sq. Ft.(4)
Northwest.......... Sq. Ft.(1) 2,486 12,656 -- 110,817 -- -- --
% Sq. Ft.(2) 2.0% 10.0% 0.0% 88.0% 0.0% 0.0% 0.0%
Annual Rent(3) $39,776 $208,824 -- $1,812,748 -- -- --
No. of Tenants 1 1 -- 3 -- -- --
Rent per Sq. Ft.(3) $16.00 $16.50 -- $16.36 -- -- --
Company Quoted $20.50
Rental Rate per
Sq. Ft.(4)
Southwest.......... Sq. Ft.(1) 2,430 7,070 5,674 4,703 16,287 14,407 2,800
% Sq. Ft.(2) 2.8% 8.2% 6.5% 5.4% 18.8% 16.6% 3.2%
Annual Rent (3) $30,983 $112,849 $87,947 $81,370 $301,310 $290,143 $56,000
No. of Tenants 1 2 2 3 3 2 1
Rent per Sq. Ft.(3) $12.75 $15.96 $15.50 $17.30 $18.50 $20.14 $20.00
Company Quoted $20.50
Rental Rate per
Sq. Ft.(4)
Colorado
DENVER
CBD................ Sq. Ft.(1) 2,709 3,366 -- 55,650 51,922 -- 419,194
% Sq. Ft.(2) 0.5% 0.6% 0.0% 10.5% 9.7% 0.0% 78.7%
Annual Rent(3) $59,472 $40,333 -- $1,024,153 $648,987 -- $6,789,494
No. of Tenants 1 1 -- 2 1 -- 1
Rent per Sq. Ft.(3) $21.95 $11.98 -- $18.40 $12.50 -- $16.20
Company Quoted $16.00
Rental Rate per
Sq. Ft.(4)
Cherry Creek....... Sq. Ft.(1) 69,052 52,610 64,269 129,493 32,212 24,674 16,235
% Sq. Ft.(2) 17.5% 13.3% 16.3% 32.8% 8.2% 6.3% 4.1%
Annual Rent(3) $1,018,086 $695,140 $996,643 $1,805,412 $529,990 $398,961 $285,607
No. of Tenants 15 9 21 11 9 7 2
Rent per Sq. Ft.(3) $14.74 $13.21 $15.51 $13.94 $16.45 $16.17 $17.59
Company Quoted $18.57
Rental Rate per
Sq. Ft.(4)
<CAPTION>
OFFICE PROPERTIES 2006 &
(STATE, CITY, SUBMARKET) 2003 2004 2005 BEYOND
- ------------------------ ---------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
HOUSTON
The Woodlands(5)........ 28,415 91,131 71,000 16,299
3.9% 12.5% 9.7% 2.2%
$434,750 $1,636,237 $545,990 $225,415
1 3 1 1
$15.30 $17.95 $7.69 $13.83
Katy Freeway(6)......... -- -- -- --
0.0% 0.0% 0.0% 0.0%
-- -- -- --
-- -- -- --
-- -- -- --
AUSTIN
CBD..................... 16,097 1,258 46,259 --
4.5% 0.4% 13.0% 0.0%
$225,358 $21,386 $619,520 --
1 1 2 --
$14.00 $17.00 $13.39 --
Northwest............... -- -- -- --
0.0% 0.0% 0.0% 0.0%
-- -- -- --
-- -- -- --
-- -- -- --
Southwest............... -- -- -- 33,439
0.0% 0.0% 0.0% 38.5%
-- -- -- $786,151
-- -- -- 1
-- -- -- $23.51
Colorado
DENVER
CBD..................... -- -- -- --
0.0% 0.0% 0.0% 0.0%
-- -- -- --
-- -- -- --
-- -- -- --
Cherry Creek............ 6,116 -- -- --
1.5% 0.0% 0.0% 0.0%
$95,715 -- -- --
1 -- -- --
$15.65 -- -- --
</TABLE>
S-33
<PAGE> 34
<TABLE>
<CAPTION>
OFFICE PROPERTIES
(STATE, CITY, SUBMARKET) 1996 1997 1998 1999 2000 2001 2002
- ------------------------------------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
DTC................ Sq. Ft.(1) 40,863 54,104 49,993 13,364 27,928 8,216 --
% Sq. Ft.(2) 13.5% 17.8% 16.5% 4.4% 9.2% 2.7% 0.0%
Annual Rent(3) $686,388 $893,387 $892,784 $221,966 $526,332 $180,752 --
No. of Tenants 9 8 4 4 3 1 --
Rent per Sq. Ft.(3) $16.80 $16.51 $17.86 $16.61 $18.85 $22.00 --
Company Quoted $24.00
Rental Rate per
Sq. Ft.(4)
COLORADO SPRINGS... Sq. Ft.(1) -- 23,395 23,433 82,066 1,098 120,691 --
% Sq. Ft.(2) 0.0% 9.3% 9.4% 32.7% 0.4% 48.2% 0.0%
Annual Rent(3) -- $228,594 $182,288 $750,920 $11,529 $1,473,939 --
No. of Tenants -- 3 3 3 1 2 --
Rent per Sq. Ft.(3) -- $9.77 $7.78 $9.15 $10.50 $12.21 --
Company Quoted $11.40
Rental Rate per
Sq. Ft.(4)
Arizona
PHOENIX
CBD................ Sq. Ft.(1) 700 -- 988 20,957 61,239 77,307 38,363
% Sq. Ft.(2) 0.2% 0.0% 0.3% 6.0% 17.5% 22.2% 11.0%
Annual Rent(3) $16,940 -- $15,901 $369,662 $1,470,815 $1,520,666 $667,843
No. of Tenants 1 -- 2 3 4 5 2
Rent per Sq. Ft.(3) $24.20 -- $16.09 $17.64 $24.02 $19.67 $17.41
Company Quoted $20.00
Rental Rate per
Sq. Ft.(4)
Camelback
Corridor.......... Sq. Ft.(1) 84,460 -- -- -- -- -- --
% Sq. Ft.(2) 100.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
Annual Rent(3) $1,013,520 -- -- -- -- -- --
No. of Tenants 1 -- -- -- -- -- --
Rent per Sq. Ft.(3) $12.00 -- -- -- -- -- --
Company Quoted $12.25
Rental Rate per
Sq. Ft.(4)
Louisiana
NEW ORLEANS
CBD(6)............. Sq. Ft.(1) -- -- -- 7,792 -- 10,202 --
% Sq. Ft.(2) 0.0% 0.0% 0.0% 2.2% 0.0% 2.8% 0.0%
Annual Rent(3) -- -- -- $98,803 -- $110,506 --
No. of Tenants -- -- -- 3 -- 2 --
Rent per Sq. Ft.(3) -- -- -- $12.68 -- $10.83 --
Company Quoted $15.00
Rental Rate per
Sq. Ft.(4)
Nebraska
OMAHA
CBD................ Sq. Ft.(1) 8,387 65,647 3,983 15,565 392 67,421 177,280
% Sq. Ft.(2) 2.1% 16.3% 1.0% 3.9% 0.1% 16.8% 44.1%
Annual Rent(3) $93,181 $993,175 $42,250 $238,116 $7,840 $1,034,862 $2,151,081
No. of Tenants 3 3 2 2 1 1 4
Rent per Sq. Ft.(3) $11.11 $15.13 $10.61 $15.30 $20.00 $15.35 $12.13
Company Quoted $19.00
Rental Rate per
Sq. Ft.(4)
<CAPTION>
OFFICE PROPERTIES 2006 &
(STATE, CITY, SUBMARKET) 2003 2004 2005 BEYOND
- ------------------------ ---------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
DTC..................... -- 108,932 -- --
0.0% 35.9% 0.0% 0.0%
-- $2,069,708 -- --
-- 1 -- --
-- $19.00 -- --
COLORADO SPRINGS........ -- -- -- --
0.0% 0.0% 0.0% 0.0%
-- -- -- --
-- -- -- --
-- -- -- --
Arizona
PHOENIX
CBD..................... 12,273 137,172 -- --
3.5% 39.3% 0.0% 0.0%
$235,049 $3,893,162 -- --
2 2 -- --
$19.15 $28.38 -- --
Camelback
Corridor............... -- -- -- --
0.0% 0.0% 0.0% 0.0%
-- -- -- --
-- -- -- --
-- -- -- --
Louisiana
NEW ORLEANS
CBD(6).................. -- 310,591 26,452 3,183
0.0% 86.7% 7.4% .9%
-- $5,123,725 $424,555 $53,315
2 1 1
-- $16.50 $16.05 $16.75
Nebraska
OMAHA
CBD..................... 63,078 -- -- --
15.7% 0.0% 0.0% 0.0%
$966,355 -- -- --
1 -- -- --
$15.32 -- -- --
</TABLE>
S-34
<PAGE> 35
<TABLE>
<CAPTION>
OFFICE PROPERTIES
(STATE, CITY, SUBMARKET) 1996 1997 1998 1999 2000 2001 2002
- ------------------------------------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
New Mexico
ALBUQUERQUE
CBD................ Sq. Ft.(1) 932 4,455 13,049 19,360 15,552 27,347 2,986
% Sq. Ft.(2) 0.3% 1.4% 4.1% 6.1% 4.9% 8.6% 0.9%
Annual Rent(3) $17,472 $71,589 $239,198 $358,127 $261,770 $581,205 $64,886
No. of Tenants 1 3 6 5 5 2 1
Rent per Sq. Ft.(3) $18.75 $16.07 $18.33 $18.50 $16.83 $21.25 $21.73
Company Quoted $18.00
Rental Rate per
Sq. Ft.(4)
TOTAL.............. Sq. Ft.(1) 791,923 1,064,683 836,509 994,976 1,378,676 896,782 1,279,075
% Sq. Ft.(2) 8.4% 11.2% 8.8% 10.5% 14.6% 9.5% 13.5%
Annual Rent(3) $11,715,888 $14,859,804 $14,014,415 $14,589,171 $19,052,305 $16,840,828 $22,361,956
No. of Tenants 113 116 131 92 60 51 24
Rent per Sq. Ft.(3) $14.79 $13.96 $16.75 $14.66 $13.82 $18.78 $17.48
Company Quoted $18.40
Rental Rate per
Sq. Ft.(4)
<CAPTION>
OFFICE PROPERTIES 2006 &
(STATE, CITY, SUBMARKET) 2003 2004 2005 BEYOND
- ------------------------ ---------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
New Mexico
ALBUQUERQUE
CBD..................... -- 41,906 192,153 --
0.0% 13.2% 60.5% 0.0%
-- $689,354 $4,008,908 --
-- 1 2 --
-- $16.45 $20.86 --
TOTAL................... 371,965 747,961 1,053,942 64,858
4.0% 7.8% 11.1% 0.6%
$6,566,258 $14,650,393 $14,407,376 $1,339,432
10 12 10 4
$17.65 $19.59 $13.67 $20.65
</TABLE>
<TABLE>
<CAPTION>
RETAIL PROPERTIES
(STATE, CITY, SUBMARKET) 1996 1997 1998 1999 2000 2001 2002
- ------------------------------------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Texas
DALLAS
Uptown............. Sq. Ft.(1) 2,535 5,334 14,044 2,817 899 -- 8,622
% Sq. Ft.(2) 3.4% 7.1% 18.7% 3.8% 1.2% 0.0% 11.5%
Annual Rent(3) $37,794 $74,638 $88,682 $26,818 $16,182 -- $109,241
No. of Tenants 2 2 3 1 1 -- 1
Rent per Sq. Ft.(3) $14.91 $13.99 $6.31 $9.52 $18.00 -- $12.67
Company Quoted $17.00
Rental Rate per
Sq. Ft.(4)
Las
Colinas/Irving.... Sq. Ft.(1) 9,395 26,781 14,748 6,611 58,734 8,227 --
% Sq. Ft.(2) 7.2% 20.5% 11.3% 5.1% 45.1% 6.3% 0.0%
Annual Rent(3) $139,946 $378,219 $239,752 $106,821 $267,690 $118,336 --
No. of Tenants 6 8 7 3 3 3 --
Rent per Sq. Ft.(3) $14.90 $14.12 $16.26 $16.16 $4.56 $14.38 --
Company Quoted $18.00
Rental Rate per
Sq. Ft.(4)
TOTAL.............. Sq. Ft.(1) 11,930 32,115 28,792 9,428 59,633 8,227 8,622
% Sq. Ft.(2) 5.8% 15.6% 14.0% 4.6% 29.0% 4.0% 4.2%
Annual Rent(3) $177,740 $452,857 $328,434 $133,639 $283,872 $118,336 $109,241
No. of Tenants 8 10 10 4 4 3 1
Rent per Sq. Ft.(3) $14.90 $14.10 $11.41 $14.17 $4.76 $14.38 $12.67
Company Quoted $17.80
Rental Rate per
Sq. Ft.(4)
<CAPTION>
RETAIL PROPERTIES 2006 &
(STATE, CITY, SUBMARKET) 2003 2004 2005 BEYOND
- ------------------------ ---------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Texas
DALLAS
Uptown.................. 40,769 -- -- --
54.3% 0.0% 0.0% 0.0%
$815,380 -- -- --
1 -- -- --
$20.00 -- -- --
Las
Colinas/Irving......... 1,159 4,736 -- --
0.9% 3.6% 0.0% 0.0%
$20,862 $94,720 -- --
1 1 -- --
$18.00 $20.00 -- --
TOTAL................... 41,928 4,736 -- --
20.4% 2.3% 0.0% 0.0%
$836,242 $94,720 -- --
2 1 -- --
$19.94 $20.00 -- --
</TABLE>
- ---------------
(1) Total net rentable square feet represented by expiring leases.
(2) Percentage of total net rentable square feet represented by expiring leases.
(3) Based on base rent payable as of the expiration day of the lease, for net
rentable square feet expiring, without giving effect to free rent or
scheduled rent increases that would be taken into account under generally
accepted accounting principles and excluding (i) any operating costs (such
as utilities, real estate taxes and/or insurance) payable by the tenants and
(ii) any expense reimbursements received from the tenants.
(4) Represents weighted average rental rates per square foot quoted by the
Company as of August 31, 1996, based on total net rentable square feet of
Company Properties in the submarket. These rates have not been adjusted to a
full-service equivalent rate in markets in which the Company's rates are not
quoted on a full-service basis.
(5) Includes two of the Company's Properties in this submarket which were
acquired subsequent to June 30, 1996.
(6) Includes one Property in this submarket which was acquired subsequent to
June 30, 1996.
S-35
<PAGE> 36
HISTORICAL RECURRING OFFICE AND RETAIL PROPERTY
CAPITAL EXPENDITURES, TENANT IMPROVEMENT AND LEASING COSTS
The following table sets forth annual and per square foot recurring capital
expenditures (excluding those expenditures which are recoverable from tenants)
and tenant improvement and leasing costs for the period from May 4, 1994
(inception of operations) to December 31, 1994, for the year ended December 31,
1995 and for the six months ended June 30, 1996, attributable to leases that
commenced (i.e., the renewal or replacement tenant began to pay rent) for the
Office and Retail Properties consolidated in the Company's financial statements
during each of the periods presented. Tenant improvement and leasing costs for
commenced leases during a particular period do not equal the cash paid for
tenant improvement and leasing costs during such period, due to the timing of
payments. The following results for the interim period are not necessarily
indicative of the results that may be expected for a full fiscal year.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
1994 1995 JUNE 30, 1996
----- ------ -------------
<S> <C> <C> <C>
CAPITAL EXPENDITURES:
Capital Expenditures (in thousands).................... $ 147 $ 941 $ 309
Per square foot........................................ $ .04 $ .14 $ .03
TENANT IMPROVEMENT AND LEASING COSTS:(1)
Tenant Improvement Costs (in thousands)................ $ 521 $1,901 $2,310
Per square foot leased................................. $6.50 $ 5.64 $ 6.82
Tenant Leasing Costs (in thousands).................... $ 55 $1,039 $1,339
Per square foot leased................................. $ .69 $ 3.08 $ 3.95
Total per square foot............................. $7.19 $ 8.72 $10.77
Total per square foot per year.................... $2.17 $ 1.33 $ 1.77
</TABLE>
- ---------------
(1) Excludes leasing activity for leases that have less than a one-year term
(i.e., storage and temporary space).
Capital expenditures may fluctuate in any given period subject to the
nature, extent and timing of improvements required to be made in the Company's
Property portfolio. The Company maintains an active preventive maintenance
program in order to minimize required capital improvements. In addition, capital
improvement costs are recoverable from tenants in many instances.
Tenant improvement and leasing costs also may fluctuate in any given period
depending upon factors such as the term of the lease, the type of lease (renewal
or replacement tenant), the involvement of external leasing agents and overall
competitive market conditions. Management believes that, as its markets continue
to recover, the level of tenant improvement and leasing costs incurred by the
Company will decrease on a per square foot basis.
S-36
<PAGE> 37
MORTGAGE FINANCING
The existing mortgage indebtedness on the Properties that were owned by the
Company as of June 30, 1996 and consolidated for financial statement purposes is
set forth in the table below:
<TABLE>
<CAPTION>
BALANCE
INTEREST EXPIRATION OUTSTANDING AT
MORTGAGE INDEBTEDNESS RATE DATE JUNE 30, 1996
----------------------------------------- -------- --------------- ---------------
(IN THOUSANDS)
<S> <C> <C> <C>
Nomura Note I(1)......................... 7.83% August 2027 $239,000
Nomura Note II(2)........................ 7.79% March 2028 161,000
CIGNA Note(3)............................ 7.47% December 2002 63,500
Metropolitan Life Note(4)................ 8.88% September 2001 12,553
--------
Total.......................... $476,053
========
</TABLE>
- ---------------
(1) The note has a seven-year period during which only interest is payable
(through August 2002), followed by five years of principal amortization
based on a 25-year amortization schedule through maturity. At the end of 12
years (August 2007), the interest rate increases, and the Company is
required to remit, in addition to the monthly debt service payment, excess
property cash flow, as defined, to be applied first against principal until
the note is paid in full and, thereafter, against accrued excess interest,
as defined. It is the Company's intention to repay the note in full at such
time (August 2007) by making a final payment of approximately $220 million.
Nomura Note I is secured by The Aberdeen, The Avallon, Caltex House, The
Citadel, Continental Plaza, The Crescent Atrium, The Crescent Office Towers,
Regency Plaza One and Waterside Commons.
(2) The note has a seven-year period during which only interest is payable
(through March 2003), followed by three years of principal amortization
based on a 25-year amortization schedule through maturity. At the end of 10
years (March 2006), the interest rate increases, and the Company is required
to remit, in addition to the monthly debt service payment, excess property
cash flow, as defined, to be applied first against principal until the note
is paid in full and, thereafter, against accrued excess interest, as
defined. It is the Company's intention to repay the note in full at such
time (March 2006) by making a final payment of approximately $154 million.
Nomura Note II is secured by Albuquerque Plaza, Barton Oaks Plaza One,
Briargate Office and Research Center, Hyatt Regency Albuquerque, Hyatt
Regency Beaver Creek, Las Colinas Plaza, Liberty Plaza I & II, MacArthur
Center I & II, Ptarmigan Place, Stanford Corporate Centre, Two Renaissance
Square and 12404 Park Central.
(3) The note requires payments of interest only during its term, with a final
payment due in December 2002 of approximately $63.5 million. The CIGNA Note
is secured by MCI Tower and the Denver Marriott City Center.
(4) The note requires monthly payments of principal and interest and is secured
by five of the Office Properties within The Woodlands.
HOTEL PROPERTY MARKET INFORMATION
The U.S. hotel industry is experiencing a resurgence in profitability from
its downturn in the early 1990s. Increased demand for luxury and destination
resort hotel rooms has been met with virtually no increase in the supply of such
rooms, resulting in increasing occupancies and room rates. According to Smith
Travel Research, average occupancies for hotel rooms rose from 60.2% in 1991 to
65.5% in 1995, the highest level in more than a decade. Average hotel room
rental rates grew 4.8% in each of 1994 and 1995, with the 1994 figure outpacing
inflation for the first time in eight years. Within the luxury/resort and
full-service segments of the industry, average occupancy increased approximately
9.7% and 8.2%, respectively, between 1991 and 1995, while average room rental
rates increased approximately 14.7% and 12.5%, respectively, during the same
period.
Business and convention travel accounts for about two-thirds of room demand
and has risen along with the improving economy and increased corporate profits.
Domestic leisure travel has also increased, especially among the "baby boomers"
who are not only at the prime age for leisure travel but also have a greater
tendency to travel than previous generations. A healthier, more active senior
population is also contributing to the increase in travel.
Increased travel from abroad has led to a further increase in hotel room
demand. As reported by Bankers Trust Research, during 1994, approximately 11% of
U.S. hotel room nights and 15% of U.S. hotel room revenues were from
international travelers who on average stay about twice as long at hotels and
use hotels twice as frequently as the domestic traveler.
With the aging of the "baby boomer" generation and the growing interest in
quality of life activities, the resort/spa industry also is experiencing
significant growth in the United States.
S-37
<PAGE> 38
Among the various classes of hotels, room demand at the full-service and
the luxury and destination resort classes of hotels, in which the Company has
invested, is currently outpacing other sectors of the industry. The average
annual growth rates in revenue per available room ("REVPAR"), from 1990 through
1995, for the full-service and luxury/resort hotel segments were 4.1% and 4.2%,
respectively, well ahead of mid-priced hotels at 3.7%, according to Smith Travel
Research. This demand comes not only from the business and convention sector,
but also from the leisure traveler who vacations increasingly at higher-end
hotels.
HOTEL REVPAR BY PRICE SEGMENT
<TABLE>
<CAPTION>
AVERAGE
ANNUAL
1990 1991 1992 1993 1994 1995 GROWTH RATE
------ ------ ------ ------ ------ ------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Luxury/Resort(1)............. $69.71 $67.92 $70.61 $74.23 $80.42 $85.44
% Change................... -2.6% 4.0% 5.1% 8.3% 6.2% 4.2%
Full-Service................. $45.13 $45.21 $46.80 $49.11 $52.57 $55.06
% Change................... 0.2% 3.5% 4.9% 7.0% 4.7% 4.1%
Mid-Priced................... $33.99 $33.38 $33.90 $35.08 $38.39 $40.67
% Change................... -1.8% 1.6% 3.5% 9.4% 5.9% 3.7%
Economy...................... $26.35 $25.26 $25.50 $26.59 $28.01 $29.76
% Change................... -4.1% 1.0% 4.3% 5.3% 6.2% 2.5%
Budget....................... $20.51 $19.18 $19.23 $19.98 $21.08 $22.52
% Change................... -6.5% 0.3% 3.9% 5.5% 6.8% 1.9%
</TABLE>
- ---------------
(1) Does not include destination health and fitness resorts such as the Canyon
Ranch resorts.
Source: Smith Travel Research
HOTEL PROPERTIES
Hyatt Regency Beaver Creek. The Hyatt Regency Beaver Creek is a 295-room
luxury hotel prominently anchoring the Village core of Beaver Creek ski resort,
adjoining Avon, Colorado. Opened in December 1989, the hotel, which is the only
luxury hotel permitted to operate in the Beaver Creek Village, is a
ski-in/ski-out facility with superb access to air and ground transportation. Two
ski lifts immediately adjacent to the hotel provide quick access to 1,125 acres
of skiable terrain. Other facilities include a fully equipped spa and health
club with a 17-meter, indoor/outdoor, year-round lap pool, approximately 23,000
square feet of retail space and an additional approximately 23,000 square feet
of meeting and banquet facilities. An agreement with the Beaver Creek Golf
Course gives the hotel approximately 35% of the available tee times on the only
golf course within the Beaver Creek resort.
Denver Marriott City Center. The newly renovated 613-room Denver Marriott
City Center, adjoining the MCI Tower, is a full-service hotel that is the second
largest hotel in downtown Denver. The hotel has over 25,000 square feet of
meeting space, a restaurant and lounge and a complete health club, including an
indoor swimming pool, a whirlpool, saunas and aerobic exercise areas. It is
adjacent to the 16th Street Mall and three blocks from the Colorado Convention
Center. In 1994, over $6 million was spent on a major renovation of the hotel,
including the complete renovation of two ballrooms, all guest rooms and meeting
rooms, and the restaurant and lounge. The Denver Marriott City Center serves as
headquarters for many major conventions in Denver. The number of city-wide
conventions booked in Denver for 1996 represents an increase of approximately
28% from 1995 levels, according to the Denver Metro Convention and Visitors
Bureau. These figures do not include conventions booked at individual hotels.
Hyatt Regency Albuquerque. The 20-story Hyatt Regency Albuquerque is a
395-room full-service hotel located in downtown Albuquerque, immediately across
from the recently renovated and expanded Albuquerque Convention Center. It is
the leading convention hotel in New Mexico, with approximately 20,000 square
feet devoted to convention space. Approximately 65% of the hotel's business is
derived from the group/convention trade. The hotel contains a restaurant,
lounges, meeting rooms, a pool and a health club with an aerobics area, a sauna
and specialized exercise equipment. It also offers floors with special amenities
for business travelers, including fax machines and conference rooms.
S-38
<PAGE> 39
Canyon Ranch-Tucson. Canyon Ranch-Tucson is an award-winning, destination
health and fitness resort located in Tucson, Arizona. The resort can accommodate
240 guests on a daily basis and 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. More detailed information is set
forth under "Recent Developments -- Completed Investments."
HOTEL AND DESTINATION RESORT OCCUPANCY RATES, ADR AND REVPAR
The following table sets forth the average occupancy rate, the average
daily rate ("ADR") per room and the average REVPAR for the Hotel Properties for
each of the years ended December 31, 1991 through 1995 and for the six months
ended June 30, 1995 and 1996. The information for the Hotel Properties is based
on available rooms, except for Canyon Ranch-Tucson, which is a destination
health and fitness resort that measures its performance based on available guest
nights.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE
YEAR ENDED DECEMBER 31, 30,
---------------------------------------- -------------
HOTEL PROPERTY(1) 1991 1992 1993 1994 1995 1995 1996
-------------------------- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Hyatt Regency Beaver Creek
Average Occupancy
Rate................. 63% 68% 72% 69% 72% 70% 68%
ADR..................... $145 $160 $169 $180 $183 $220 $241
REVPAR.................. $ 92 $102 $114 $127 $137 $160 $173
Denver Marriott City
Center
Average Occupancy
Rate................. 64% 66% 70% 70% 77% 78% 81%
ADR..................... $ 87 $ 86 $ 90 $ 92 $ 98 $ 97 $104
REVPAR.................. $ 56 $ 57 $ 63 $ 65 $ 76 $ 76 $ 84
Hyatt Regency Albuquerque
Average Occupancy
Rate................. 64% 73% 77% 75% 74% 77% 78%
ADR..................... $ 71 $ 74 $ 77 $ 83 $ 87 $ 85 $ 93
REVPAR.................. $ 45 $ 55 $ 54 $ 62 $ 64 $ 66 $ 72
Canyon Ranch-Tucson(2)
Average Occupancy
Rate(3).............. -- 76% 82% 80% 77% 80% 85%
ADR(4).................. -- $396 $422 $458 $477 $509 $503
REVPAR(5)............... -- $284 $329 $350 $348 $395 $413
</TABLE>
- ---------------
(1) The Company cannot, consistent with its status as a REIT for federal income
tax purposes, operate the Hotel Properties directly and, accordingly, has
leased the Hotel Properties to lessees pursuant to long-term leases. See
"-- Hotel Leases," below.
(2) Canyon Ranch-Tucson, a destination health and fitness resort acquired
subsequent to June 30, 1996, operates on the basis of "all-inclusive" guest
packages that include meals and activities and, accordingly, measures its
performance based on available guest nights rather than on available rooms.
(3) The occupancy rate equals the number of paying and complimentary guests for
the period, divided by the maximum number of available guest nights for the
period (43,440 guest nights for the six months ended June 30, 1995 and
43,680 guest nights for the six months ended June 30, 1996, based on a
maximum of 240 guests per night).
(4) ADR equals the average daily "all-inclusive" guest package charges for the
period, divided by the average daily number of paying guests for the period.
(5) REVPAR equals the total "all-inclusive" guest package charges for the
period, divided by the maximum number of available guest nights for the
period.
HOTEL LEASES
The Company cannot, consistent with its status as a REIT for federal income
tax purposes, operate the Hotel Properties directly. See "Federal Income Tax
Considerations -- Taxation of Crescent Equities -- Income Tests." It
S-39
<PAGE> 40
has leased the Hyatt Regency Beaver Creek and the Hyatt Regency Albuquerque to a
Texas limited liability company and has leased the Denver Marriott City Center
to a separate Texas limited liability company (collectively, the "Hotel
Lessees"). The Hotel Lessees are owned, directly or indirectly, 4.5% by each of
John C. Goff and Gerald W. Haddock, each of whom is an officer and director of
the Company, and 91% by the asset manager of the Hotel Lessees. The Company has
leased Canyon Ranch-Tucson to an affiliate of the former owners until December
1996, at which time one of the Hotel Lessees has the option, which it is
expected to exercise, to acquire the affiliate for a nominal amount. Under the
leases, each having a term of 10 years, the lessee of the Hotel Properties has
assumed the rights and obligations of the property owner under the management
agreement with the Hyatt Corporation, Marriott International, Inc. or Canyon
Ranch Management L.L.C. (an entity owned and controlled by the former owners of
Canyon Ranch-Tucson), as the case may be, as well as the obligation to pay all
property taxes and any other charges against the Property. As part of each of
the lease agreements for the Hyatt Regency Beaver Creek, the Denver Marriott
City Center and the Hyatt Regency Albuquerque, the Company has agreed to fund
all capital expenditures relating to furniture, fixtures and equipment reserves
required under the applicable management agreement. The lessee of Canyon
Ranch-Tucson owns all furniture, fixtures and equipment associated with the
Property and will fund all related capital expenditures. Each of the leases
provides for the payment by the lessee of the Hotel Property of (i) base rent,
with periodic rent increases, (ii) percentage rent based on a percentage of
gross room revenues above a specified amount, and (iii) a percentage of gross
food and beverage sales above a specified amount. Management believes that the
arrangements with the lessees of the Hotel Properties are comparable to those
that could be obtained from an unaffiliated lessee.
RESIDENTIAL DEVELOPMENT PROPERTIES
The Company owns economic interests in three Residential Development
Corporations through the Residential Development Property Mortgages and the
non-voting common stock in these Residential Development Corporations. The
Residential Development Corporations in turn, through joint ventures or
partnership arrangements, own interests in the nine Residential Development
Properties. The Residential Development Corporations are responsible for the
continued development and the day-to-day operations of the Residential
Development Properties. The Residential Development Properties are Mira Vista,
Falcon Point, Spring Lakes, The Highlands, The Reserve at Frisco, Whitehawk
Ranch, One Beaver Creek, Cresta and Market Square.
USE OF PROCEEDS
The Company intends to use the net proceeds of the Offering, estimated at
$380 million after estimated expenses payable by the Company, to repay an
aggregate of approximately $160 million of indebtedness outstanding as of August
31, 1996, consisting of approximately $148 million outstanding under the $175
million Credit Facility and approximately $12 million outstanding under a
short-term financing arrangement with The First National Bank of Boston. The
indebtedness to be repaid was incurred in connection with the acquisition of 301
Congress Avenue, Central Park Plaza, The Woodlands (two office buildings),
Canyon Ranch-Tucson, Three Westlake Park and 1615 Poydras. Net proceeds of
approximately $160 million will be used to fund a portion of the purchase price
of the Greenway Plaza Portfolio and Canyon Ranch-Lenox. Of this amount,
approximately $19 million is expected to be used to fund the cash portion of the
purchase price of Canyon Ranch-Lenox, approximately $66 million to fund the cash
portion of the purchase price of the Greenway Plaza Portfolio and approximately
$75 million to prepay a portion of the indebtedness to be assumed in connection
with the acquisition of the Greenway Plaza Portfolio. The remaining net proceeds
of approximately $60 million will be used to fund future acquisitions.
If the Underwriters' overallotment option is exercised, the additional net
proceeds (which are estimated to be $57 million if the overallotment option is
exercised in full) will be used to fund future acquisitions.
Advances under both the Credit Facility and the short-term financing
arrangement currently bear interest at the Eurodollar rate plus 240 basis
points. As of August 31, 1996, the weighted average interest rate of the
indebtedness to be repaid was 7.81%. The maturity date of the Credit Facility is
March 18, 1997, subject to extension until March 18, 1999, and the maturity date
of the short-term financing arrangement is October 15, 1996. The loan to be
assumed in connection with the acquisition of the Greenway Plaza Portfolio has a
principal balance of approximately $115 million and bears interest at the 30-day
LIBOR rate plus an average rate of 2.135% (7.60% at August 31, 1996). The loan
is subject to a rate cap agreement which caps the overall interest rate at 10%
through
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<PAGE> 41
maturity in July 1999. The loan may be prepaid in whole or in part subject to
certain prepayment conditions and penalties.
DEBT STRUCTURE
The Company had an aggregate of approximately $657 million of outstanding
debt as of August 31, 1996. Included in this amount is a $181 million principal
balance under the Credit Facility and certain short term borrowings, $21 million
of which the Company intends to maintain outstanding under the Credit Facility
throughout its term. On a pro forma basis, assuming completion of the Offering,
the Company's total market capitalization (based on the closing stock price on
September 26, 1996 of $40.875 per share of Common Stock, after the full
conversion of all Units and including total indebtedness and minority interest
in joint ventures) will be approximately $2.3 billion, and the Company's debt
will represent approximately 29% of its total market capitalization.
The Company intends to maintain a conservative capital structure with total
debt targeted at approximately 40% of total market capitalization. The Company,
however, consistently seeks to optimize its use of debt and other sources of
financing to create a flexible capital structure that will allow the Company to
continue its opportunistic investment strategy and maximize the returns to its
stockholders.
PRICE RANGE OF COMMON STOCK AND DISTRIBUTIONS
The Common Stock has been traded on the New York Stock Exchange ("NYSE")
under the symbol "CEI" since the Initial Offering. For each calendar quarter
indicated, the following table reflects the high and low sales prices for the
Common Stock and the distributions paid by the Company with respect to each such
quarter.
<TABLE>
<CAPTION>
PRICE
------------
HIGH LOW DISTRIBUTIONS
---- ---- -------------
<S> <C> <C> <C>
1994
May 5 to June 30.............................................. $28 3/8 $26 $.29(1)
Third Quarter................................................. $30 $25 1/4 $.50
Fourth Quarter................................................ $28 3/4 $24 5/8 $.50
1995
First Quarter................................................. $29 1/4 $25 $.50
Second Quarter................................................ $32 $27 7/8 $.50
Third Quarter................................................. $32 3/8 $29 3/4 $.55
Fourth Quarter................................................ $35 7/8 $30 1/4 $.55
1996
First Quarter................................................. $34 7/8 $32 1/8 $.55
Second Quarter................................................ $38 1/8 $33 3/8 $.55
Third Quarter through September 26............................ $42 3/8 $35 (2)
</TABLE>
- ---------------
(1) On August 2, 1994, the Company paid a $0.29 distribution (the proration for
the period May 5, 1994, the date of the formation of the Company, to June
30, 1994, based on a $0.46 quarterly distribution) on each share of Common
Stock outstanding at July 18, 1994.
(2) The record date for the distribution for the third quarter of 1996, which
has not yet been determined, will follow the closing of the Offering and,
accordingly, holders of shares of Common Stock purchased in the Offering
will be eligible to receive the distribution (as long as they continue to be
holders on the record date).
The last reported sale price of the Common Stock on the NYSE on September
26, 1996, was $40.875. As of August 31, 1996, there were approximately 215
holders of record of the Common Stock.
The Company's current quarterly distribution is $.55 per share, an
indicated annualized distribution of $2.20 per share. 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 indicated annualized distribution
of $2.44 per share.
The actual results of operations of the Company and the amounts actually
available for distribution will be affected by a number of factors, including
revenues received from the Properties and any additional properties
S-41
<PAGE> 42
acquired in the future, the operating and interest expenses of the Company, the
ability of tenants to meet their rent obligations, general leasing activity in
the markets in which the Office Properties and Retail Properties are located,
consumer preferences relating to the Hotel Properties, the general condition of
the United States economy, federal, state and local taxes payable by the
Company, capital expenditure requirements and the adequacy of reserves. In
addition, the Credit Facility limits distributions to the partners of the
Operating Partnership for any four successive quarters to an amount that will
not exceed the lesser of 90% of funds from operations for such period or 100% of
funds available for distribution for such period.
Future distributions by the Company will be at the discretion of the Board
of Directors. The Board of Directors has indicated that it will review the
adequacy of the Company's distribution rate on a quarterly basis.
Under the Internal Revenue Code of 1986, as amended (the "Code"), REITs are
subject to numerous organizational and operational requirements, including the
requirement to distribute at least 95% of taxable income. Pursuant to this
requirement, the Company was required to distribute $13.1 million and $44.2
million for 1994 and 1995, respectively. Actual distributions by the Company
were $17.8 million and $52.8 million for 1994 and 1995, respectively. The 1994
distributions exceeded net income for the period May 5, 1994 through December
31, 1994 by $9.5 million. The 1995 distributions exceeded 1995 net income by
$25.4 million.
Distributions by the Company to the extent of its current and accumulated
earnings and profits for federal income tax purposes generally will be taxable
to a stockholder as ordinary dividend income. Distributions in excess of current
and accumulated earnings and profits will be treated as a nontaxable reduction
of the stockholder's basis in such stockholder's shares of Common Stock, to the
extent thereof, and thereafter as taxable gain. Distributions that are treated
as a reduction of the stockholder's basis in its shares of Common Stock will
have the effect of deferring taxation until the sale of the stockholder's
shares. The Company has determined that, for federal income tax purposes, none
of the quarterly distributions made for 1994, and 10% of the quarterly
distributions made for 1995, represented a return of capital to stockholders.
Given the dynamic nature of the Company's acquisition strategy and the extent to
which any future acquisitions would alter this calculation, no assurances can be
given regarding what portion, if any, of distributions for 1996 or subsequent
years will constitute a return of capital for federal income tax purposes.
S-42
<PAGE> 43
CAPITALIZATION
The following table sets forth the capitalization of the Company as of June
30, 1996 (i) on an historical basis and (ii) on a pro forma basis assuming the
acquisition of the Properties acquired subsequent to June 30, 1996, the
completion of the Pending Investments (excluding the Class A office building to
be developed) and the completion of the Offering and application of the net
proceeds therefrom as described in "Use of Proceeds" as if they had occurred on
June 30, 1996. Such information should be read in conjunction with the financial
statements and notes thereto incorporated by reference into the accompanying
Prospectus, including the pro forma financial information contained in 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.
AS OF JUNE 30, 1996
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
---------- ----------
<S> <C> <C>
Indebtedness
Credit Facility............................................... $ 58,355 $ 21,000
Mortgage Indebtedness......................................... 476,053 524,053
Minority interest
Operating Partnership......................................... 69,887 96,887
Investment in Joint Venture................................... 31,820 34,549
Stockholders' equity
Common Stock, $0.01 par value, 250,000,000 shares authorized,
23,588,040 historical and 34,208,207 pro forma shares issued
and outstanding.............................................. 236(1) 342(1)
Preferred Stock, no par value, 100,000,000 shares
authorized................................................... -- --
Paid-in capital............................................... 424,652 829,397
Deferred compensation restricted shares....................... (364) (364)
Retained deficit.............................................. (29,376) (29,376)
---------- ----------
Total capitalization............................................... $1,031,263 $1,476,488
========== ==========
</TABLE>
- ---------------
(1) Does not include 6,033,966 shares of Common Stock reserved for issuance upon
exercise of Exchange Rights for the exchange of Units for shares of Common
Stock.
S-43
<PAGE> 44
SELECTED FINANCIAL DATA
The following table sets forth certain financial information for the
Company on a consolidated pro forma and historical basis and for the Rainwater
Property Group (the Company's predecessor) on a combined historical basis, which
consists of the combined financial statements of the entities that contributed
Properties in exchange for Units or shares of Common Stock in connection with
the formation of the Company. Such information should be read in conjunction
with the financial statements and notes thereto incorporated by reference into
the accompanying Prospectus.
The pro forma information for the year ended December 31, 1995 assumes
completion of (i) the April 1995 Offering and Mr. Rainwater's concurrent $31
million investment in the Operating Partnership and the use of the net proceeds
therefrom to repay approximately $167 million of indebtedness secured by certain
of the Properties (ii) the Offering and the use of the net proceeds therefrom to
repay approximately $160 million of indebtedness, to pay approximately $160
million of the acquisition cost of two Pending Investments and to invest the
remaining proceeds of approximately $60 million in short-term marketable
securities and (iii) the acquisition of the Properties acquired during 1995 and
1996 and the completion of the Pending Investments (excluding the Class A office
building to be developed), in each case as of January 1, 1995, in determining
operating and other data.
The pro forma information for the six months ended June 30, 1996 assumes
completion of (i) the Offering and the use of the net proceeds therefrom to
repay approximately $160 million of indebtedness, to pay approximately $160
million of the acquisition cost of two Pending Investments and to invest the
remaining proceeds of approximately $60 million in short-term marketable
securities and (ii) the acquisition of the Properties acquired during 1996 and
the completion of the Pending Investments (excluding the Class A office building
to be developed), in each case as of January 1, 1996, in determining operating
and other data, and the acquisition of the Properties acquired subsequent to
June 30, 1996 and the completion of the Pending Investments (excluding the Class
A office building to be developed), in each case as of June 30, 1996 in
determining balance sheet data.
S-44
<PAGE> 45
CRESCENT REAL ESTATE EQUITIES, INC.
CONSOLIDATED PRO FORMA AND HISTORICAL FINANCIAL DATA AND
RAINWATER PROPERTY GROUP COMBINED HISTORICAL FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
COMPANY
-----------------------------------------------------------------------------------------
SIX MONTHS ENDED FOR THE
JUNE 30, PERIOD FROM
----------------------------------------- PRO FORMA MAY 5,
HISTORICAL YEAR ENDED YEAR ENDED 1994 TO
PRO FORMA -------------------------- DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1996 1995 1995 1995 1994
----------- ----------- ----------- ------------ ------------ ------------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Revenue --
Rental property................. $ 129,592 $ 85,549 $ 51,285 $ 256,600 $ 123,489 $ 49,075
Interest and other income....... 4,301 2,510 3,898 9,999 6,471 1,268
Residential developments(1)..... -- -- -- -- -- --
Operating expenses --
Rental property operating(2).... 49,082 31,098 19,416 98,303 45,949 18,993
Corporate general and
administrative................ 2,299 2,299 1,745 4,600 3,812 1,815
Residential developments(1)..... -- -- -- -- -- --
Interest expense................. 20,448 19,018 6,273 39,597 18,781 3,493
Depreciation and amortization.... 23,502 18,281 12,264 44,827 28,060 14,255
Amortization of deferred
financing costs................. 1,320 1,320 1,092 3,063 2,500 923
Writedown of investment
property........................ -- -- -- -- -- --
----------- ----------- ----------- ----------- ----------- -----------
Operating income (loss).......... 37,242 16,043 14,393 76,209 30,858 10,864
Reorganization costs............. -- -- -- -- 1,900
Equity in net income of
residential developments(1)..... 2,175 2,175 1,939 5,500 5,500 3,631
----------- ----------- ----------- ----------- ----------- -----------
Income (loss) before minority
interests and extraordinary
item............................ $ 39,417 $ 18,218 $ 16,332 $ 81,709 $ 36,358 $ 12,595
=========== =========== =========== =========== =========== ===========
Income per share before
extraordinary item.............. $ .96 $ .62 $ .65 $ 1.96 $ 1.31 $ .56
BALANCE SHEET DATA (AT PERIOD
END):
Real estate, before accumulated
depreciation.................... $ 1,465,016 $ 1,098,901 $ 767,423 -- $ 1,006,706 $ 557,675
Total assets..................... 1,498,591 1,053,366 703,211 -- 964,171 538,354
Mortgages and notes payable...... 524,053 476,053 -- -- 424,528 --
Credit Facility.................. 21,000 58,355 199,000 -- 20,000 194,642
Minority interest in Operating
Partnership..................... 96,887 69,887 110,956 -- 71,925 93,192
Stockholders' equity............. 799,999 395,148 378,497 -- 406,531 235,262
OTHER DATA:
Funds from Operations before
minority interests(3)........... $ 62,618 $ 36,728 $ 29,884 $ 124,600 $ 64,475 $ 32,723
Total distributions
declared(4)..................... -- 31,781 25,670 -- 57,374 29,053
Weighted average shares of Common
Stock and Units outstanding..... 40,230,886 28,876,941 25,348,191 40,174,267 27,091,003 22,498,855
Cash flow provided by (used in):
Operating activities............ --(5) $ 29,676 $ 26,467 --(5) $ 62,107 $ 33,716
Investing activities............ --(5) (90,566) (188,987) --(5) (418,502) (272,740)
Financing activities............ --(5) 55,640 142,170 --(5) 343,079 265,608
Number of Properties (at period
end):
Office Properties............... 48 33 15 48 30 10
Hotel Properties................ 5 3 2 5 3 0
Retail Properties............... 2 2 2 2 2 2
Residential Development
Properties.................... 9 9 4 9 9 4
<CAPTION>
RAINWATER PROPERTY GROUP
-------------------------------------------------
PERIOD FROM
JANUARY 1,
1994 TO YEAR ENDED DECEMBER 31,
MAY 4, ----------------------------------
1994 1993 1992 1991
----------- -------- --------- ---------
<S> <C> <C> <C> <C>
OPERATING DATA:
Revenue --
Rental property................. $ 18,550 $ 48,232 $ 41,946 $ 43,365
Interest and other income....... 42 605 425 846
Residential developments(1)..... 2,593 8,331 7,215 --
Operating expenses --
Rental property operating(2).... 8,696 21,230 20,104 20,193
Corporate general and
administrative................ -- -- -- --
Residential developments(1)..... 1,428 4,077 5,714 --
Interest expense................. 4,867 29,226 36,245 48,091
Depreciation and amortization.... 7,793 18,081 18,190 17,803
Amortization of deferred
financing costs................. -- -- -- --
Writedown of investment
property........................ -- 37,578 5,945 --
--------- -------- --------- ---------
Operating income (loss).......... (1,599) (53,024) (36,612) (41,876)
Reorganization costs............. -- -- -- --
Equity in net income of
residential developments(1)..... -- -- -- --
--------- -------- --------- ---------
Income (loss) before minority
interests and extraordinary
item............................ $ (1,599) $(53,024) $ (36,612) $ (41,876)
========= ======== ========= =========
Income per share before
extraordinary item.............. -- -- -- --
BALANCE SHEET DATA (AT PERIOD
END):
Real estate, before accumulated
depreciation.................... -- $358,400 $ 336,923 $ 328,897
Total assets..................... -- 290,869 296,291 300,702
Mortgages and notes payable...... -- 278,060 548,517 550,878
Credit Facility.................. -- -- -- --
Minority interest in Operating
Partnership..................... -- -- -- --
Stockholders' equity............. -- 2,941 (328,240) (308,827)
OTHER DATA:
Funds from Operations before
minority interests(3)........... -- -- -- --
Total distributions
declared(4)..................... -- -- -- --
Weighted average shares of Common
Stock and Units outstanding..... -- -- -- --
Cash flow provided by (used in):
Operating activities............ $ 2,455 $ 9,313 $ (640) $ (7,294)
Investing activities............ (2,379) (20,572) (8,924) (6,094)
Financing activities............ (21,310) 28,861 14,837 14,061
Number of Properties (at period
end):
Office Properties............... 4 4 3 3
Hotel Properties................ 0 0 0 0
Retail Properties............... 2 2 2 2
Residential Development
Properties.................... 3 2 1 0
</TABLE>
(Footnotes on following page.)
S-45
<PAGE> 46
- ---------------
(1) The Company accounts for its investments in the Residential Development
Property Mortgages and non-voting common stock of the Residential
Development Corporations under the equity method of accounting as a result
of the noncontrolling interests held after the formation of the Company.
(2) Includes real estate taxes, repairs and maintenance and other rental
property operating expenses, including property-level general and
administrative expenses.
(3) FFO, based on the revised definition adopted by the Board of Governors of
NAREIT and as used herein, means net income (loss), determined in accordance
with generally accepted accounting principles ("GAAP"), excluding gains (or
losses) from debt restructuring and sales of property, plus depreciation and
amortization of real estate assets, and after adjustments for unconsolidated
partnerships and joint ventures. FFO was developed by NAREIT as a relative
measure of performance and liquidity of an equity REIT in order to recognize
that income-producing real estate historically has not depreciated on the
basis determined under GAAP. The Company considers FFO an appropriate
measure of performance of an equity REIT. However, FFO (i) does not
represent cash generated from operating activities determined in accordance
with GAAP (which, unlike FFO, generally reflects all cash effects of
transactions and other events that enter into the determination of net
income), (ii) is not necessarily indicative of cash flow available to fund
cash needs and (iii) should not be considered as an alternative to net
income determined in accordance with GAAP as an indication of the Company's
operating performance, or to cash flow from operating activities determined
in accordance with GAAP as a measure of either liquidity or the Company's
ability to make distributions. The Company has historically distributed an
amount less than FFO, primarily due to reserves required for capital
expenditures, including leasing costs. An increase in FFO does not
necessarily result in an increase in aggregate distributions because the
Company's Board of Directors is not required to increase distributions
unless necessary in order to enable the Company to maintain REIT status.
Because the Company must distribute 95% of its real estate investment trust
taxable income (as defined in the Code), however, a significant increase in
FFO will generally require an increase in distributions to stockholders and
unitholders although not necessarily on a proportionate basis. Accordingly,
the Company believes that in order to facilitate a clear understanding of
the consolidated historical operating results of the Company, FFO should be
considered in conjunction with the Company's net income (loss) and cash
flows as reported in the consolidated financial statements and notes thereto
incorporated by reference into the accompanying Prospectus. However, the
Company's measure of FFO may not be comparable to similarly titled measures
for other REITs because these REITs may not apply the modified definition of
FFO in the same manner as the Company.
(4) For 1994, distributions were taxable as ordinary dividend income.
Distributions in 1994 were paid on 22,521,680 outstanding shares and Units.
For 1995, 90% of the distributions were taxable as ordinary dividend income,
with the remainder treated as a return of capital. Distributions in 1995
were paid on 22,521,680, 28,818,321, 28,822,782 and 28,820,281 outstanding
shares and Units for the first, second, third and fourth quarters,
respectively.
(5) Pro forma information relating to operating, investing and financing
activities has not been included because management believes that the
information would not be meaningful due to the number of assumptions
required in order to calculate this information.
S-46
<PAGE> 47
MANAGEMENT
Set forth below is information with respect to the members of the Board of
Directors and the executive officers of the Company, all of whom joined the
Company in their current capacities in 1994 (except James M. Eidson, Jr. and
Joseph D. Ambrose III who became executive officers of the Company in 1995 and
1996, respectively).
<TABLE>
<CAPTION>
NAME TERM EXPIRES AGE POSITION
- --------------------------------- ------------ --- -----------------------------------------------
<S> <C> <C> <C>
Richard E. Rainwater 1997 52 Chairman of the Board of Directors
John C. Goff 1996 41 Chief Executive Officer and Member, Board of
Directors
Gerald W. Haddock 1998 48 President, Chief Operating Officer and Member,
Board of Directors
Dallas E. Lucas N/A 34 Senior Vice President, Chief Financial and
Accounting Officer
James S. Wassel N/A 45 Senior Vice President, Asset Management
David M. Dean N/A 35 Senior Vice President, Law, and Secretary
James M. Eidson, Jr. N/A 42 Senior Vice President, Acquisitions
Bruce A. Picker N/A 32 Treasurer
Joseph D. Ambrose III N/A 45 Vice President, Administration
Anthony M. Frank 1997 64 Member, Board of Directors
Morton H. Meyerson 1998 57 Member, Board of Directors
William F. Quinn 1997 48 Member, Board of Directors
Paul E. Rowsey, III 1996 41 Member, Board of Directors
</TABLE>
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.
S-47
<PAGE> 48
<TABLE>
<CAPTION>
OPERATING
FUNDING I FUNDING II PARTNERSHIP
- --------- ---------- -----------
<S> <C> <C>
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>
- ---------------
(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.
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 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.
S-48
<PAGE> 49
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 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
S-49
<PAGE> 50
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 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 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
S-50
<PAGE> 51
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 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
S-51
<PAGE> 52
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 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
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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).
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
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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.
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
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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 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.
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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 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%
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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 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
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"-- 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.
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.
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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 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
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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.
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.
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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.
UNDERWRITING
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 INITIAL SHARES
----------- --------------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated............................................................ 2,150,000
Dean Witter Reynolds Inc. ........................................................... 2,150,000
PaineWebber Incorporated............................................................. 2,150,000
Smith Barney Inc. ................................................................... 2,150,000
Alex. Brown & Sons Incorporated...................................................... 100,000
CS First Boston Corporation.......................................................... 100,000
Donaldson, Lufkin & Jenrette Securities Corporation.................................. 100,000
A.G. Edwards & Sons, Inc. ........................................................... 100,000
Furman Selz LLC...................................................................... 100,000
NatWest Securities Limited........................................................... 100,000
Salomon Brothers Inc ................................................................ 100,000
Southwest Securities, Inc. .......................................................... 100,000
UBS Securities LLC................................................................... 100,000
EVEREN Securities, Inc. ............................................................. 50,000
Friedman, Billings, Ramsey & Co., Inc. .............................................. 50,000
Hanifen, Imhoff Inc. ................................................................ 50,000
Harris Webb & Garrison, Inc. ........................................................ 50,000
Edward D. Jones & Co., L.P. ......................................................... 50,000
Legg Mason Wood Walker, Incorporated................................................. 50,000
Principal Financial Securities, Inc. ................................................ 50,000
Rauscher Pierce Refsnes, Inc. ....................................................... 50,000
Raymond James & Associates, Inc. .................................................... 50,000
Sutro & Co. Incorporated............................................................. 50,000
----------
Total................................................................... 10,000,000
==========
</TABLE>
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
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Common Stock are purchased. Under certain circumstances, the commitments of
nondefaulting Underwriters may be increased.
The Representatives have advised the Company that the Underwriters propose
initially to offer the shares of Common Stock to the public at the price per
share set forth on the cover page of this Prospectus Supplement and to certain
dealers at such price less a concession not in excess of $1.30 per share. The
Underwriters may allow, and such dealers may re-allow, a discount not in excess
of $.10 per share on sales to certain other dealers. After the date of this
Prospectus Supplement, the initial price per share to the public and concession
and discount may be changed by the Representatives.
The Company has granted an option to the Underwriters, exercisable during
the 30-day period after the date of this Prospectus Supplement, to purchase up
to 1,500,000 additional shares of Common Stock solely to cover over-allotments,
if any, at the initial price per share to the public set forth on the cover page
of this Prospectus Supplement, less the underwriting discount set forth on the
cover of this Prospectus Supplement. To the extent that the Underwriters
exercise this option, each Underwriter will have a firm commitment, subject to
certain conditions, to purchase approximately the same percentage thereof which
the number of shares of Common Stock to be purchased by it shown in the
foregoing table bears to the shares of Common Stock initially offered hereby.
In the Purchase Agreement, the Company has agreed to indemnify the several
Underwriters against certain civil liabilities, including liabilities under 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
Commission, such indemnification is against public policy as expressed in the
Securities Act and therefore is unenforceable.
In connection with the Offering, each of the officers and directors of the
Company has agreed not to offer, sell, contract to sell or otherwise dispose of
any capital stock of the Company or Units for a period of 90 days after the
closing of the Offering without the prior written consent of Merrill Lynch,
Pierce, Fenner & Smith Incorporated and the Company.
The Common Stock is listed on the NYSE under the symbol "CEI."
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 Securities and Exchange Commission (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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GLOSSARY
"ADR" means average daily rate.
"April 1995 Offering" means the public offering of shares of Common Stock
that closed on April 4, 1995.
"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.
"Commission" means the United States Securities and Exchange Commission.
"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.
"Greenway Plaza Office Portfolio" means the 10 suburban office properties
with an aggregate of 4.3 million net rentable square feet located in Houston,
Texas.
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"Greenway Plaza Portfolio" means the property portfolio located in Houston,
Texas that consists primarily of the Greenway Plaza Office Portfolio, the
389-room full-service Renaissance Hotel and the Houston City Club building.
"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.
"Hotel Lessees" means the Texas limited liability companies in which each
of Messrs. Goff and Haddock directly or indirectly owns a 4.5% interest, one of
which is the lessee of the Hyatt Regency Beaver Creek and the Hyatt Regency
Albuquerque and the other of which is the lessee of the Denver Marriott City
Center.
"Hotel Properties" means the Hyatt Regency Beaver Creek, the Denver
Marriott City Center, the Hyatt Regency Albuquerque and Canyon Ranch-Tucson.
"Initial Offering" means the initial public offering of shares of Common
Stock that closed on May 5, 1994.
"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.
"Marriott International" means Marriott International, Inc.
"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.
"NAREIT" means the National Association of Real Estate Investment Trusts.
"Non-U.S. Stockholder(s)" means one or more nonresident alien individual,
foreign corporation, foreign partnership or other foreign stockholder of the
Company.
"Offering" means the offering of 10,000,000 shares of Common Stock offered
hereby, assuming no exercise of the overallotment option.
"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.
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"Original Properties" means The Crescent Office Towers, The Crescent
Atrium, MacArthur Center I & II, Caltex House, Continental Plaza, Las Colinas
Plaza, The Citadel, and the Mira Vista, Falcon Point and Spring Lakes
Residential Development Properties.
"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 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.
"Pending Investments" means the approximately $244 million of pending real
estate investments as of September 10, 1996, consisting of the Greenway Plaza
Portfolio, one destination health and fitness resort (Canyon Ranch-Lenox) and
one office building to be developed.
"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.
"Rainwater Property Group" means RRCC Limited Partnership, 777 Main
Operating, Ltd., MacArthur Center Partnership, Ltd., Mira Vista Investors, L.P.,
RainAm Investment Properties Ltd., and Rosewood Property Company.
"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.
"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.
"REVPAR" means revenue per available room.
"Securities Act" means the Securities Act of 1933, as amended.
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"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 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 "Underwriting."
"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.
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PROSPECTUS
$500,000,000
[CRESCENT LOGO]
PREFERRED STOCK, COMMON STOCK AND COMMON STOCK WARRANTS
------------------------
Crescent Real Estate Equities, Inc. may from time to time offer in one or
more series, (i) shares of preferred stock ("Preferred Stock"), (ii) shares of
common stock, par value .01 per share ("Common Stock"), and (iii) warrants
exercisable for Common Stock ("Common Stock Warrants"), with an aggregate public
offering price of up to $500,000,000 in amounts, at prices and on terms to be
determined at the time of offering. The Preferred Stock, Common Stock and Common
Stock Warrants (collectively, the "Securities") may be offered, separately or
together, in separate series in amounts, at prices and on terms to be described
in one or more supplements to this Prospectus (each, a "Prospectus Supplement").
The specific terms of the Securities in respect of which this Prospectus is
being delivered will be set forth in the applicable Prospectus Supplement and
will include, where applicable: (i) in the case of Preferred Stock, the specific
title and stated value, any dividend, liquidation, redemption, conversion,
voting and other rights, and any initial public offering price; (ii) in the case
of Common Stock, any public offering price; and (iii) in the case of Common
Stock Warrants, the specific title and aggregate number, and the issue price and
the exercise price. In addition, such specific terms may include limitations on
direct or beneficial ownership and restrictions on transfer of the Securities,
in each case as may be appropriate to preserve the status of the Company as a
real estate investment trust for federal income tax purposes.
The applicable Prospectus Supplement also will contain information as to
all material U.S. federal income tax considerations relevant to an investment
in, and any listing on a securities exchange of, the Securities covered by such
Prospectus Supplement.
The Securities may be offered directly, through agents designated from time
to time, or to or through underwriters or dealers. If any agents or underwriters
are involved in the sale of any of the Securities, their names, and any
applicable purchase price, fee, commission or discount arrangement with, between
or among them, will be set forth, or will be calculable from the information set
forth, in an accompanying Prospectus Supplement. See "Plan of Distribution." No
Securities may be sold without delivery of a Prospectus Supplement describing
the method and terms of the offering of such class or series of Securities.
SEE "RISK FACTORS" AT PAGE 4 OF THIS PROSPECTUS FOR CERTAIN FACTORS
RELEVANT TO AN INVESTMENT IN THE SECURITIES.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR
HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
THE 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.
------------------------
The date of this Prospectus is June 18, 1996.
<PAGE> 68
AVAILABLE INFORMATION
The Company is subject to the information requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith, files reports and other information with the Securities and Exchange
Commission (the "Commission"). Such reports, proxy statements and other
information can be inspected at the Public Reference Section maintained by the
Commission at Judiciary Plaza, Room 1024, 450 Fifth Street, N.W., Washington,
D.C. 20549 and the following regional offices of the Commission: Northwestern
Plaza, Suite 1400, 500 West Madison Street, Chicago, Illinois 60661-2511 and
Seven World Trade Center, 13th Floor, New York, New York 10048. Copies of such
material can be obtained from the Public Reference Section of the Commission at
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates. In addition, the Company's Common Stock is listed on the New York Stock
Exchange and such reports, proxy statements and other information concerning the
Company can be inspected at the offices of the New York Stock Exchange, 20 Broad
Street, New York, New York 10005.
The Company has filed with the Commission a registration statement on Form
S-3 (the "Registration Statement"), of which this Prospectus is a part, under
the Securities Act of 1933, as amended (the "Securities Act"), with respect to
the Securities offered hereby. This Prospectus does not contain all of the
information set forth in the Registration Statement, certain portions of which
have been omitted as permitted by the rules and regulations of the Commission.
Statements contained in this Prospectus as to the contents of any contract or
other documents are not necessarily complete, and in each instance, reference is
made to the copy of such contract or documents filed as an exhibit to the
Registration Statement, each such statement being qualified in all respects by
such reference and the exhibits and schedules thereto. For further information
regarding the Company and the Securities, reference is hereby made to the
Registration Statement and such exhibits and schedules which may be obtained
from the Commission at its principal office in Washington, D.C. upon payment of
the fees prescribed by the Commission.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The documents listed below have been filed under the Exchange Act by the
Company (Exchange Act file number 1-13038) with the Commission and are
incorporated herein by reference:
1. The Company's Registration Statement on Form 8-A filed on April 18, 1994
registering the Common Stock under Section 12(b) of the Exchange Act.
2. The Proxy Statement in connection with the Company's 1996 Annual Meeting
of Stockholders.
3. The Company's Annual Report on Form 10-K for the year ended December 31,
1995, as amended on April 29, 1996.
4. The Company's Quarterly Report on Form 10-Q for the quarter ended March
31, 1996.
5. The Company's Current Report on Form 8-K dated August 2, 1994 and filed
January 9, 1996, as amended on February 2, 1996 and February 15, 1996.
6. The Company's Current Report on Form 8-K dated October 3, 1994 and filed
January 9, 1996, as amended on February 2, 1996 and February 15, 1996.
7. The Company's Current Report on Form 8-K dated December 19, 1995 and
filed January 3, 1996, as amended on February 2, 1996 and February 15,
1996.
8. The Company's Current Report on Form 8-K dated April 18, 1996 and filed
June 5, 1996.
All documents filed subsequent to the date of this Prospectus pursuant to
Section 13(a), 13(c), 14 or 15(d) of the Exchange Act and prior to termination
of the offering of all Securities to which this Prospectus relates shall be
deemed to be incorporated by reference in this Prospectus and shall be part
hereof from the date of filing of such document.
Any statement contained herein or in a document incorporated or deemed to
be incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained in this
Prospectus (in the case of a statement in a previously filed document
incorporated or deemed to be incorporated by reference herein), in any
accompanying Prospectus Supplement relating to a specific offering of Securities
or in any other subsequently filed document that is also incorporated or deemed
to be incorporated by reference herein, modifies or supersedes such statement.
Any such statement so
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modified or superseded shall not be deemed, except as so modified or superseded,
to constitute a part of this Prospectus or any accompanying Prospectus
Supplement. Subject to the foregoing, all information appearing in this
Prospectus and each accompanying Prospectus Supplement is qualified in its
entirety by the information appearing in the documents incorporated by
reference.
The Company undertakes to provide without charge to each person to whom a
copy of this Prospectus has been delivered, upon the written or oral request of
any such person, a copy of any or all of the documents incorporated by reference
in this Prospectus (other than exhibits and schedules thereto, unless such
exhibits or schedules are specifically incorporated by reference into the
information that this Prospectus incorporates). Written or telephonic requests
for copies should be directed to Crescent Real Estate Equities, Inc., 900 Third
Avenue, Suite 1800, New York, New York 10022, Attention: Corporate Secretary
(telephone number: (212) 836-4216).
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THE COMPANY
Crescent Real Estate Equities, Inc. (collectively with its subsidiaries,
the "Company") is a fully integrated real estate company operating as a real
estate investment trust (a "REIT"), which succeeded to the real estate
investment and operating businesses affiliated with Mr. Richard E. Rainwater,
Chairman of the Board of Directors of the Company. As of May 31, 1996, the
Company owned a real estate portfolio located primarily in 17 metropolitan
submarkets in Texas, Colorado, Arizona and New Mexico including 32 office
properties (the "Office Properties") with an aggregate of approximately 9.2
million net rentable square feet, three hotels (the "Hotel Properties") with a
total of 1,303 rooms, two retail properties (the "Retail Properties") with an
aggregate of approximately .2 million net rentable square feet and real estate
mortgages and non-voting common stock in three residential development
corporations (the "Residential Development Corporations") that own all or a
portion of six single-family residential land developments and three prospective
condominium/townhome developments (the "Residential Development Properties"). In
addition, the Company owns one mortgage note secured by a Class A office
property. The Office Properties, the Hotel Properties, the Retail Properties and
the Residential Development Properties are hereafter collectively referred to as
the "Properties."
The Company, as a fully integrated real estate company, provides
management, leasing and development services with respect to certain of its
Properties. The Company conducts all of its business directly or indirectly
through Crescent Real Estate Equities Limited Partnership (the "Operating
Partnership") and its other subsidiaries and indirectly through the Residential
Development Corporations. As of May 31, 1996, the Company had approximately 200
employees and its eight officers had over 100 years of combined experience in
the real estate industry.
RISK FACTORS
Prospective investors should carefully consider the following summary
information in conjunction with the other information contained in this
Prospectus and the more detailed information on risks of investment contained in
the applicable Prospectus Supplement relating thereto before purchasing
Securities.
CONCENTRATION OF ASSETS
A significant portion of the Company's assets and revenues are derived from
Properties located in the Dallas-Fort Worth and Denver metropolitan areas. Due
to this geographic concentration, any deterioration in economic conditions in
the Dallas-Fort Worth and Denver metropolitan areas or other geographic markets
in which the Company in the future may acquire substantial assets could have a
substantial effect on the financial condition and results of operations of the
Company.
RISKS ASSOCIATED WITH THE ACQUISITION OF SUBSTANTIAL NEW ASSETS
From the closing of the Company's second public offering in April 1995
through the date of this Prospectus, the Company has experienced rapid growth,
increasing its portfolio of Office Properties, on the basis of rentable square
feet, by more than 75 percent. There can be no assurance either that the Company
will be able to manage its growth effectively or that the Company will be able
to maintain its current rate of growth in the future.
PURCHASES FROM FINANCIALLY DISTRESSED SELLERS
Implementation of the Company's strategy of investing in real estate assets
in distressed circumstances has resulted in the acquisition of certain
Properties from owners that were in poor financial condition, and such strategy
is expected to result in the purchase of additional properties under similar
circumstances in the future. In addition to general real estate risks,
properties acquired in distress situations present risks related to inadequate
maintenance, negative market perception and continuation of circumstances which
precipitated the distress originally.
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RELIANCE ON KEY PERSONNEL
The Company is dependent on the efforts of Mr. Richard E. Rainwater,
Chairman of the Board of Directors, and other senior management personnel. While
the Company believes that it could find replacements for these key executives,
the loss of their services could have an adverse effect on the operations of the
Company. Mr. Rainwater has no employment agreement with the Company and,
therefore, is not obligated to remain with the Company for any specified term.
John C. Goff, Chief Executive Officer and Director, and Gerald W. Haddock,
President, Chief Operating Officer and Director, have entered into employment
agreements with the Company, and Messrs. Rainwater, Goff and Haddock each has
entered into a noncompetition agreement with the Company. The Company has not
obtained key-man insurance for any of its senior management personnel.
RISKS RELATING TO QUALIFICATION AND OPERATION AS A REIT
The Company intends to continue to operate in a manner so as to qualify as
a REIT under the Internal Revenue Code of 1986, as amended (the "Code"). A
qualified REIT generally is not taxed at the corporate level on income it
currently distributes to its stockholders, so long as it distributes at least 95
percent of its taxable income currently and satisfies certain other highly
technical and complex requirements. Unlike many REITs, which tend to make only
one or two types of real estate investment, the Company invests in a broad range
of real estate products, and certain of its investments are more complicated
than those of other REITs. As a result, the Company is likely to encounter a
greater number of interpretative issues under the REIT qualification rules, and
more such issues which lack clear guidance, than are other REITs. The Company,
as a matter of policy, regularly consults with outside tax counsel in
structuring its new investments. The Company has received an opinion from Shaw,
Pittman, Potts and Trowbridge ("Tax Counsel") that the Company qualified as a
REIT under the Code for its taxable years ending on or before December 31, 1995,
is organized in conformity with the requirements for qualification as a REIT
under the Code and its proposed manner of operation will enable it to continue
to meet the requirements for qualification as a REIT. However, this opinion is
based upon certain representations made by the Company and the Operating
Partnership and upon existing law, which is subject to change, both
retroactively and prospectively, and to possibly different interpretations.
Furthermore, Tax Counsel's opinion is not binding upon either the Internal
Revenue Service or the courts. Because the Company's qualification as a REIT in
its current and future taxable years depends upon its meeting the requirements
of the Code in future periods, no assurance can be given that the Company will
continue to qualify as a REIT in the future. If, in any taxable year, the
Company were to fail to qualify as a REIT for federal income tax purposes, it
would not be allowed a deduction for distributions to stockholders in computing
taxable income and would be subject to federal income tax (including any
applicable alternative minimum tax) on its taxable income at regular corporate
rates. In addition, unless entitled to relief under certain statutory
provisions, the Company would be disqualified from treatment as a REIT for
federal income tax purposes for the four taxable years following the year during
which qualification were lost. The additional tax liability resulting from the
failure to so qualify would significantly reduce the amount of funds available
for distribution to stockholders. The applicable Prospectus Supplement will
contain information, where applicable, as to all material U.S. federal income
tax considerations relevant to an investment in, and any listing on a securities
exchange of, the Securities covered by such Prospectus Supplement.
RISKS RELATING TO DEBT
The Company's organizational documents do not limit the level or amount of
debt that it may incur. It is the Company's current policy to pursue a strategy
of conservative use of leverage, generally with a ratio of debt to total market
capitalization of 50 percent or less, although this policy is subject to
reevaluation and modification by the Company and could be increased above 50
percent. The Company has based its debt policy on the relationship between its
debt and its total market capitalization, rather than the book value of its
assets or other historical measures that typically have been employed by
publicly traded REITs, because management believes that market capitalization
more accurately reflects the Company's ability to borrow money and meet its debt
service requirements. Market capitalization is, however, more variable than book
value of assets or other historical measures. There can be no assurance that the
ratio of indebtedness to market capitalization (or any other measure of asset
value) or the incurrence of debt at any particular level would not adversely
affect the financial condition and results of operations of the Company.
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RISKS RELATING TO CONTROL OF THE COMPANY
Ability to Change Policies and Acquire Assets without Stockholder Approval.
The Company's operating and financial policies, including its policies with
respect to acquisitions, growth, operations, indebtedness, capitalization and
distributions, will be determined by the Operating Partnership. The Company
generally may revise these policies, from time to time, without stockholder
approval. Changes in the Company's policies could adversely affect the Company's
financial condition and results of operations. In addition, the Company has the
right and intends to acquire additional real estate assets pursuant to and
consistent with its investment strategies and policies without stockholder
approval.
Hotel Risks. The Company has leased the Hotel Properties and the lessee of
the Hotel Properties, rather than the Company, are entitled to exercise all
rights of the owner of the respective hotel. The Company will receive both base
rent and a percentage of gross sales above a certain minimum level pursuant to
the leases, which expire in 2004 or 2005. As a result, the Company will
participate in the economic operations of the Hotel only through its indirect
participation in gross sales. To the extent that operations of the Hotel
Properties may affect the ability of the lessee of the Hotel Properties to pay
rent, the Company also may indirectly bear the risks associated with any
increases in expenses. Each of the Hotel Properties is managed pursuant to a
management agreement with either Hyatt Corporation or Marriott International.
The Company, therefore, will be dependent upon the lessee and managers of the
Hotel Properties to manage the operations of the Hotel Properties successfully.
As a result, the amount of rent payable to the Company under the leases with
respect to the Hotel Properties will depend on the ability of the lessee and
managers of the Hotel Properties to maintain and increase revenues from the
Hotel Properties. Accordingly, the Company's results of operations will be
affected by such factors as changes in general economic conditions, the level of
demand for rooms and related services at the Hotel Properties, the ability of
the lessee and managers of the Hotel Properties to maintain and increase gross
revenues at the Hotel Properties, competition in the hotel industry and other
factors relating to the operation of the Hotel Properties.
Lack of Control of Residential Development Corporations. The Company is not
able to elect the boards of directors of the Residential Development
Corporations, and does not have the authority to control the management and
operation of the Residential Development Corporations. As a result, the Company
does not have the right to control the timing or amount of dividends paid by the
Residential Development Corporations and, therefore, does not have the authority
to require that funds be distributed to it by any of these entities.
Possible Adverse Consequences of Ownership Limit. The limitation on
ownership of shares of Common Stock set forth in the Company's Articles of
Incorporation, as well as the provisions of the MGCL, could have the effect of
discouraging offers to acquire the Company and of inhibiting or impeding a
change in control and, therefore, could adversely affect the stockholders'
ability to realize a premium over the then-prevailing market price for the
Common Stock in connection with such a transaction. See "Description of Common
Stock -- Ownership Limits and Restrictions on Transfer."
GENERAL REAL ESTATE RISKS
Uncontrollable Factors Affecting Performance and Value. The economic
performance and value of the Company's real estate assets will be subject to all
of the risks incident to the ownership and operation of real estate. These
include the risks normally associated with changes in general national, regional
and local economic and market conditions. Such local real estate market
conditions may include excess supply and competition for tenants, including
competition based on rental rates, attractiveness and location of the property
and quality of maintenance, insurance and management services. In addition,
other factors may affect the performance and value of a property adversely,
including changes in laws and governmental regulations (including those
governing usage, zoning and taxes), changes in interest rates (including the
risk that increased interest rates may result in decreased sales of lots in the
Residential Development Properties) and the availability of financing. The
success of the Hotel Properties, for example, will be highly dependent upon
their ability to compete in such features as access, location, quality of
accommodations, room rate structure and, to a lesser extent, the quality and
scope of other amenities such as food and beverage facilities.
Illiquidity of Real Estate Investments. Because real estate investments are
relatively illiquid, the Company's ability to vary its portfolio promptly in
response to economic or other conditions will be limited. In addition, certain
significant expenditures, such as debt service (if any), real estate taxes, and
operating and
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maintenance costs, generally are not reduced in circumstances resulting in a
reduction in income from the investment. The foregoing and any other factor or
event that would impede the ability of the Company to respond to adverse changes
in the performance of its investments could have an adverse effect on the
Company's financial condition and results of operations.
Environmental Matters. Under various federal, state and local laws,
ordinances and regulations, an owner or operator of real property may become
liable for the costs of removal or remediation of certain hazardous or toxic
substances released on or in its property, as well as certain other costs
relating to hazardous or toxic substances. Such liability may be imposed without
regard to whether the owner or operator knew of, or was responsible for, the
release of such substances. The presence of, or the failure to remediate
properly, such substances, when released, may adversely affect the owner's
ability to sell the affected real estate or to borrow using such real estate as
collateral. Such costs or liabilities could exceed the value of the affected
real estate. The Company has not been notified by any governmental authority of
any non-compliance, liability or other claim in connection with any of the
Properties and the Company is not aware of any other environmental condition
with respect to any of the Properties that management believes would have a
material adverse effect on the Company's business, assets or results of
operations. Prior to the Company's acquisition of its Properties, independent
environmental consultants conducted or updated Phase I environmental assessments
(which generally do not involve invasive techniques such as soil or ground water
sampling) on the Properties. None of these Phase I assessments or updates
revealed any materially adverse environmental condition not known to the Company
or the independent consultants preparing the assessments. There can be no
assurance, however, that environmental liabilities have not developed since such
environmental assessments were prepared, or that future uses or conditions
(including, without limitation, changes in applicable environmental laws and
regulations) will not result in imposition of environmental liability.
REAL ESTATE RISKS SPECIFIC TO THE COMPANY'S BUSINESS
Acquisition, Lease and Development Risks. There can be no assurance that
the Company will be able to implement its investment strategies successfully or
that its Property portfolio will expand at all, or at any specified rate or to
any specified size. For example, the Company is subject to the risks that, upon
expiration, leases for space in the Office Properties and Retail Properties may
not be renewed, the space may not be re-leased, or the terms of renewal or
re-lease (including the cost of required renovations or concessions to tenants)
may be less favorable than current lease terms. In addition, the Company intends
to continue to pursue development activities with respect to the Residential
Development Properties and, in the future, may elect to engage in other
development activities.
Risks of Joint Ownership of Assets. The Company has the right to invest in
properties and assets jointly with other persons or entities. Joint ownership of
properties, under certain circumstances, may involve risks not otherwise
present, including the possibility that the Company's partners or co-investors
might become bankrupt, that such partners or co-investors might at any time have
economic or other business interests or goals which are inconsistent with the
business interests or goals of the Company, and that such partners or co-
investors may be in a position to take action contrary to the instructions or
the requests of the Company or contrary to the Company's policies or objectives,
including the Company's policy with respect to maintaining its qualification as
a REIT.
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USE OF PROCEEDS
Unless otherwise specified in the applicable Prospectus Supplement, the
Company intends to invest, contribute or otherwise transfer the net proceeds of
any sale of Securities to the Operating Partnership, which would use such net
proceeds for general business purposes, including the acquisition and
development of additional properties and other acquisition transactions, the
payment of certain outstanding debt and improvements to certain properties in
the Company's portfolio.
RATIOS OF EARNINGS TO COMBINED
FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
The Company's ratio of earnings to fixed charges for the year ended
December 31, 1994 was 3.85, for the year ended December 31, 1995 was 2.60 and
for the three months ended March 31, 1996 was 1.82. There was no preferred stock
outstanding for any of the periods shown above. Accordingly, the ratio of
earnings to fixed charges and preferred stock dividends is identical to the
ratio of earnings to fixed charges.
Prior to completion of the Company's initial public offering in May 1994,
the Company's predecessors, which consisted of a group of affiliated entities
owned and controlled by Mr. Rainwater, utilized traditional single asset
mortgage loans and construction loans as their principal source of outside
capital. In connection with completion of the initial public offering, the
Company reorganized the predecessor entities into a single consolidated entity
and substantially deleveraged their asset base. As a result of these factors,
the Company does not consider information relating to the ratio of earnings to
fixed charges for the periods prior to the completion of the initial public
offering to be meaningful.
For the purposes of computing these ratios, earnings have been calculated
by adding fixed charges (excluding capitalized interest) to income (loss) before
taxes and extraordinary items. Fixed charges consist of interest costs, whether
expensed or capitalized, and amortization of debt expense and discount or
premium relating to any indebtedness, whether expensed or capitalized.
DESCRIPTION OF PREFERRED STOCK
GENERAL
The Articles of Incorporation of the Company authorize the Board of
Directors to issue up to 100,000,000 shares of Preferred Stock, no par value
(the "Preferred Stock"). See "Certain Provisions of the Articles of
Incorporation, Bylaws and Maryland Law -- Preferred Stock." The Articles of
Incorporation also authorize the issuance of up to an aggregate of 100,000,000
shares of Excess Stock issuable in exchange for Preferred Stock as described
below at "Description of Common Stock -- Ownership Limits and Restrictions on
Transfer."
Under the Company's Articles of Incorporation, the Board of Directors may
from time to time establish and issue one or more series of Preferred Stock
without stockholder approval. The Board of Directors may classify or reclassify
any unissued Preferred Stock by setting or changing the number, designation,
preference, conversion or other rights, voting powers, restrictions, limitations
as to dividends, qualifications and terms or conditions of redemption of such
series. Because the Board of Directors has the power to establish the
preferences and rights of each series of Preferred Stock, it may afford the
holders of any series of Preferred Stock preferences, powers and rights, voting
or otherwise, senior to the rights of holders of Common Stock. Shares of
Preferred Stock will, when issued, be fully paid and nonassessable.
The following description of Preferred Stock sets forth certain general
terms and provisions of Preferred Stock to which any Prospectus Supplement may
relate. The statements below describing Preferred Stock are in all respects
subject to and qualified in their entirety by reference to the applicable
provisions of the Company's Articles of Incorporation and the Company's amended
and restated bylaws (the "Bylaws").
The Prospectus Supplement relating to any Preferred Stock offered thereby
will contain the specific terms thereof, including, without limitation: (i) the
title and stated value of such Preferred Stock; (ii) the number of shares of
such Preferred Stock offered, the liquidation preference per share and the
offering price of such Preferred Stock; (iii) the dividend rate(s), period(s)
and/or payment date(s) or method(s) of
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calculation thereof applicable to such Preferred Stock; (iv) the date from which
dividends on such Preferred Stock shall accumulate, if applicable; (v) the
procedures for any auction and remarketing, if any, for such Preferred Stock;
(vi) the provision for a sinking fund, if any, for such Preferred Stock; (vii)
the provision for redemption, if applicable, of such Preferred Stock; (viii) any
listing of such Preferred Stock on any securities exchange; (ix) the terms and
conditions, if applicable, upon which such Preferred Stock will be convertible
into Common Stock of the Company, including the conversion price (or manner of
calculation thereof); (x) any other specific terms, preferences, rights,
limitations or restrictions of such Preferred Stock; (xi) a discussion of
federal income tax considerations applicable to such Preferred Stock; (xii) the
relative ranking and preferences of such Preferred Stock as to dividend rights
and rights upon liquidation, dissolution or winding up of the affairs of the
Company; (xiii) any limitations on issuance of any series of Preferred Stock
ranking senior to or on a parity with such series of Preferred Stock as to
dividend rights and rights upon liquidation, dissolution or winding up of the
affairs of the Company; and (xiv) any limitations on direct or beneficial
ownership and restrictions on transfer, in each case as may be appropriate to
preserve the status of the Company as a REIT.
RANK
Unless otherwise specified in the Prospectus Supplement, shares of
Preferred Stock will, with respect to dividend rights and rights upon
liquidation, dissolution or winding up of the Company, rank (i) senior to all
classes or series of Common Stock of the Company, and to all equity securities
ranking junior to such Preferred Stock, (ii) on a parity with all equity
securities issued by the Company the terms of which specifically provide that
such equity securities rank on a parity with Preferred Stock; and (iii) junior
to all equity securities issued by the Company the terms of which specifically
provide that such equity securities rank senior to Preferred Stock. The term
"equity securities" does not include convertible debt securities.
DIVIDENDS
Holders of shares of Preferred Stock of each series will be entitled to
receive, when, as and if declared by the Board of Directors of the Company, out
of assets of the Company legally available for payment, cash dividends (or
dividends in kind or in other property if expressly permitted and described in
the applicable Prospectus Supplement) at such rates and on such dates as will be
set forth in the applicable Prospectus Supplement. Each such dividend shall be
payable to holders of record as they appear on the share transfer books of the
Company on such record dates as shall be fixed by the Board of Directors of the
Company.
Dividends on any series of Preferred Stock may be cumulative or
non-cumulative, as provided in the applicable Prospectus Supplement. Dividends,
if cumulative, will be cumulative from and after the date set forth in the
applicable Prospectus Supplement. If the Board of Directors of the Company fails
to declare a dividend payable on a dividend payment date on any series of
Preferred Stock for which dividends are non-cumulative, then the holders of such
series of Preferred Stock will have no right to receive a dividend in respect of
the dividend period ending on such dividend payment date, and the Company will
have no obligation to pay the dividend accrued for such period, whether or not
dividends on such series are declared payable on any future dividend payment
date.
Unless otherwise specified in the Prospectus Supplement, if any shares of
Preferred Stock of any series are outstanding, no full dividends shall be
declared or paid or set apart for payment on any capital shares of the Company
of any other series ranking, as to dividends, on a parity with or junior to the
Preferred Stock of such series for any period unless (i) if such series of
Preferred Stock has a cumulative dividend, full cumulative dividends have been
or contemporaneously are declared and paid or declared and a sum sufficient for
the payment thereof set apart for such payment on the Preferred Stock of such
series for all past dividend periods and the then current dividend period or
(ii) if such series of Preferred Stock does not have a cumulative dividend, full
dividends for the then current dividend period have been or contemporaneously
are declared and paid or declared and a sum sufficient for the payment thereof
set apart for such payment on the Preferred Stock of such series. When dividends
are not paid in full (or a sum sufficient for such full payment is not so set
apart) upon Preferred Stock of any series and the shares of any other series of
Preferred Stock ranking on a parity as to dividends with the Preferred Stock of
such series, all dividends declared upon Preferred Stock of such series and any
other series of Preferred Stock ranking on a parity as to dividends with such
Preferred Stock shall be declared pro rata so that the amount of dividends
declared per share of Preferred Stock of such
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series and such other series of Preferred Stock shall in all cases bear to each
other the same ratio that accrued dividends per share on the Preferred Stock of
such series (which shall not include any accumulation in respect of unpaid
dividends for prior dividend periods if such Preferred Stock does not have a
cumulative dividend) and such other series of Preferred Stock bear to each
other. No interest, or sum of money in lieu of interest, shall be payable in
respect of any dividend payment or payments on Preferred Stock of such series
which may be in arrears.
Except as provided in the immediately preceding paragraph, unless (i) if
such series of Preferred Stock has a cumulative dividend, full cumulative
dividends on the Preferred Stock of such series have been or contemporaneously
are declared and paid or declared and a sum sufficient for the payment thereof
set apart for payment for all past dividend periods and the then current
dividend period, and (ii) if such series of Preferred Stock does not have a
cumulative dividend, full dividends on the Preferred Stock of such series have
been or contemporaneously are declared and paid or declared and a sum sufficient
for the payment thereof set apart for payment for the then current dividend
period, no dividends (other than in Common Stock or other capital shares ranking
junior to the Preferred Stock of such series as to dividends and upon
liquidation) shall be declared or paid or set aside for payment or other
distribution upon the Common Stock, or any other capital shares of the Company
ranking junior to or on a parity with the Preferred Stock of such series as to
dividends or upon liquidation, nor shall any Common Stock, or any other capital
shares of the Company ranking junior to or on a parity with the Preferred Stock
of such series as to dividends or upon liquidation be redeemed, purchased or
otherwise acquired for any consideration (or any moneys be paid to or made
available for a sinking fund for the redemption of any such shares) by the
Company (except by conversion into or exchange for other capital shares of the
Company ranking junior to the Preferred Stock of such series as to dividends and
upon liquidation).
REDEMPTION
If so provided in the applicable Prospectus Supplement, any series of
Preferred Stock will be subject to mandatory redemption or redemption at the
option of the Company, in whole or in part, in each case upon the terms, at the
times and at the redemption prices set forth in such Prospectus Supplement.
The Prospectus Supplement relating to a series of Preferred Stock that is
subject to mandatory redemption will specify the number of such shares of
Preferred Stock that shall be redeemed by the Company in each year commencing
after a date to be specified, at a redemption price per share to be specified,
together with an amount equal to all accrued and unpaid dividends thereon (which
shall not, if such shares of Preferred Stock do not have a cumulative dividend,
include any accumulation in respect of unpaid dividends for prior dividend
periods) to the date of redemption. The redemption price may be payable in cash
or other property, as specified in the applicable Prospectus Supplement. If the
redemption price for shares of Preferred Stock of any series is payable only
from the net proceeds of the issuance of capital shares of the Company, the
terms of such Preferred Stock may provide that, if no such capital shares shall
have been issued or to the extent the net proceeds from any issuance are
insufficient to pay in full the aggregate redemption price then due, such
Preferred Stock shall automatically and mandatorily be converted into the
applicable capital shares of the Company pursuant to conversion provisions
specified in the applicable Prospectus Supplement.
Notwithstanding the foregoing, unless (i) if such series of Preferred Stock
has a cumulative dividend, full cumulative dividends on all Preferred Stock of
any series shall have been or contemporaneously are declared and paid or
declared and a sum sufficient for the payment thereof set apart for payment for
all past dividend periods and the current dividend period and (ii) if such
series of Preferred Stock does not have a cumulative dividend, full dividends of
the Preferred Stock of any series have been or contemporaneously are declared
and paid or declared and a sum sufficient for the payment thereof set apart for
payment for the then current dividend period, no shares of Preferred Stock of
any series shall be redeemed unless all outstanding shares of Preferred Stock of
such series are simultaneously redeemed; provided, however, that the foregoing
shall not prevent the purchase or acquisition of Preferred Stock of such series
to preserve the REIT status of the Company or pursuant to a purchase or exchange
offer made on the same terms to holders of all outstanding shares of Preferred
Stock of such series. In addition, unless (i) if such series of Preferred Stock
has a cumulative dividend, full cumulative dividends on all outstanding shares
of any series of Preferred Stock have been or contemporaneously are declared and
paid or declared and a sum sufficient for the payment thereof set apart for
payment for all past dividends periods and the then current dividend period, and
(ii) if such series of
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Preferred Stock does not have a cumulative dividend, full dividends on the
Preferred Stock of any series have been or contemporaneously are declared and
paid or declared and a sum sufficient for the payment thereof set apart for
payment for the then current dividend period, the Company shall not purchase or
otherwise acquire directly or indirectly any Preferred Stock of such series
(except by conversion into or exchange for capital shares of the Company ranking
junior to the Preferred Stock of such series as to dividends and upon
liquidation); provided, however, that the foregoing shall not prevent the
purchase or acquisition of Preferred Stock of such series to preserve the REIT
status of the Company or pursuant to a purchase or exchange offer made on the
same terms to holders of all outstanding Preferred Stock of such series.
If fewer than all of the outstanding shares of Preferred Stock of any
series are to be redeemed, the number of shares to be redeemed will be
determined by the Company and such shares may be redeemed pro rata from the
holders of record of such shares in proportion to the number of such shares held
or for which redemption is requested by such holder (with adjustments to avoid
redemption of fractional shares) or by lot in a manner determined by the
Company.
Notice of redemption will be mailed at least 30 days but not more than 60
days before the redemption date to each holder of record of Preferred Stock of
any series to be redeemed at the address shown on the share transfer books of
the Company. Each notice shall state: (i) the redemption date; (ii) the number
of shares and the series of Preferred Stock to be redeemed; (iii) the redemption
to be surrendered for payment of the redemption price; (iv) that dividends on
the shares to be redeemed will cease to accrue on such redemption date; and (v)
the date upon which the holder's conversion rights, if any, as to such shares
shall terminate. If fewer than all of the shares of Preferred Stock of any
series are to be redeemed, the notice mailed to each such holder thereof shall
also specify the number of shares of Preferred Stock to be redeemed from each
such holder. If notice of redemption of any shares of Preferred Stock has been
given and if the funds necessary for such redemption have been set aside by the
Company in trust for the benefit of the holders of any shares of Preferred Stock
so called for redemption, then from and after the redemption date dividends will
cease to accrue on such shares of Preferred Stock, and all rights of the holders
of such shares will terminate, except the right to receive the redemption price.
LIQUIDATION PREFERENCE
Upon any voluntary or involuntary liquidation, dissolution or winding up of
the affairs of the Company, then, before any distribution or payment shall be
made to the holders of any Common Stock or any other class or series of capital
shares of the Company ranking junior to the Preferred Stock in the distribution
of assets upon any liquidation, dissolution or winding up of the Company, the
holders of each series of Preferred Stock shall be entitled to receive out of
assets of the Company legally available for distribution to shareholders
liquidating distributions in the amount of the liquidation preference per share
(set forth in the applicable Prospectus Supplement), plus an amount equal to all
dividends accrued and unpaid thereon (which shall not include any accumulation
in respect of unpaid dividends for prior dividend periods if such Preferred
Stock do not have a cumulative dividend). After payment of the full amount of
the liquidating distributions to which they are entitled, the holders of
Preferred Stock will have no right or claim to any of the remaining assets of
the Company. In the event that, upon any such voluntary or involuntary
liquidation, dissolution or winding up, the available assets of the Company are
insufficient to pay the amount of the liquidating distributions on all
outstanding Preferred Stock and the corresponding amounts payable on all shares
of other classes or series of capital shares of the Company ranking on a parity
with the Preferred Stock in the distribution of assets, then the holders of the
Preferred Stock and all other such classes or series of capital shares shall
share ratably in any such distribution of assets in proportion to the full
liquidating distributions to which they would otherwise be respectively
entitled.
If liquidating distributions shall have been made in full to all holders of
Preferred Stock, the remaining assets of the Company shall be distributed among
the holders of any other classes or series of capital shares ranking junior to
the Preferred Stock upon liquidation, dissolution or winding up, according to
their respective rights and preferences and in each case according to their
respective number of shares. For such purposes, the consolidation or merger of
the Company with or into any other corporation, trust or entity, or the sale,
lease or conveyance of all or substantially all of the property or business of
the Company, shall not be deemed to constitute a liquidation, dissolution or
winding up of the Company.
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VOTING RIGHTS
Holders of shares of Preferred Stock will not have any voting rights,
except as set forth below or as otherwise from time to time required by law or
as indicated in the applicable Prospectus Supplement.
Whenever dividends on any series of Preferred Stock shall be in arrears for
six or more consecutive quarterly periods, the holders of shares of such series
of Preferred Stock (voting separately as a class with all other series of
Preferred Stock upon which like voting rights have been conferred and are
exercisable) will be entitled to vote for the election of two additional
Directors of the Company at a special meeting called by the holders of record of
at least ten percent (10%) of any series of Preferred Stock so in arrears
(unless such request is received less than 90 days before the date fixed for the
next annual or special meeting of the shareholders) or at the next annual
meeting of shareholders, and at each subsequent annual meeting until (i) if such
series of Preferred Stock has a cumulative dividend, all dividends accumulated
on such series of Preferred Stock for the past dividend periods and the then
current dividend period shall have been fully paid or declared and a sum
sufficient for the payment thereof set aside for payment or (ii) if such series
of Preferred Stock does not have a cumulative dividend, four consecutive
quarterly dividends shall have been fully paid or declared and a sum sufficient
for the payment thereof set aside for payment. In such case, the entire Board of
Directors of the Company will be increased by two Directors.
Unless provided otherwise for any series of Preferred Stock, so long as any
shares of Preferred Stock remain outstanding, the Company will not, without the
affirmative vote or consent of the holders of at least two-thirds of each series
of Preferred Stock outstanding at the time, given in person or by proxy, either
in writing or at a meeting (such series voting separately as a class), (i)
authorize or create, or increase the authorized or issued amount of, any class
or series of capital shares ranking senior to such series of Preferred Stock
with respect to the payment of dividends or the distribution of assets upon
liquidation, dissolution or winding up or reclassify any authorized capital
shares of the Company into such shares, or create, authorize or issue any
obligation or security convertible into or evidencing the right to purchase any
such shares; or (ii) amend, alter or repeal the provisions of the Company's
Articles of Incorporation or the designating amendment for such series of
Preferred Stock, whether by merger, consolidation or otherwise (an "Event"), so
as to materially and adversely affect any right, preference, privilege or voting
power of such series of Preferred Stock or the holders thereof, provided,
however, with respect to the occurrence of any of the Events set forth in (ii)
above, so long as the shares of Preferred Stock remain outstanding with the
terms thereof materially unchanged, taking into account that upon the occurrence
of an Event, the Company may not be the surviving entity, the occurrence of any
such Event shall not be deemed to materially and adversely affect such rights,
preferences, privileges or voting power of holders of Preferred Stock and
provided further that (x) any increase in the amount of the authorized Preferred
Stock or the creation or issuance of any other series of Preferred Stock, or (y)
any increase in the amount of authorized shares of such series or any other
series of Preferred Stock, in each case ranking on a parity with or junior to
the Preferred Stock of such series with respect to payment of dividends or the
distribution of assets upon liquidation, dissolution or winding up, shall not be
deemed to materially and adversely affect such rights, preferences, privileges
or voting powers.
The foregoing voting provisions will not apply if, at or prior to the time
when the act with respect to which such vote would otherwise be required shall
be effected, all outstanding shares of Preferred Stock of such series shall have
been redeemed or called for redemption and sufficient funds shall have been
deposited in trust to effect such redemption.
CONVERSION RIGHTS
The terms and conditions, if any, upon which any series of Preferred Stock
is convertible into Common Stock will be set forth in the applicable Prospectus
Supplement relating thereto. Such terms will include the number of shares of
Common Stock into which the shares of Preferred Stock are convertible, the
conversion price (or manner of calculation thereof), the conversion period,
provisions as to whether conversion will be at the option of the holders of
Preferred Stock or the Company, the events requiring an adjustment of the
conversion price and provisions affecting conversion in the event of the
redemption of such series of Preferred Stock.
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STOCKHOLDER LIABILITY
Applicable Maryland law provides that no stockholder, including holders of
shares of Preferred Stock, shall be personally liable for the acts and
obligations of the Company and that the funds and property of the Company shall
be the only recourse for such acts or obligations.
RESTRICTIONS ON OWNERSHIP
As discussed below under "Description of Common Stock -- Ownership Limits
and Restrictions on Transfer," for the Company to qualify as a REIT under the
Code, not more than 50% in value of its outstanding equity securities of all
classes may be owned, directly or indirectly, by five or fewer individuals (as
defined in the Code to include certain entities) during the last half of a
taxable year. To assist the Company in meeting this requirement, the Company may
take certain actions to limit the beneficial ownership, directly or indirectly,
by a single person of the Company's outstanding equity securities, including any
Preferred Stock of the Company. Therefore, the designating amendment for each
series of Preferred Stock may contain provisions restricting the ownership and
transfer of Preferred Stock.
REGISTRAR AND TRANSFER AGENT
The Registrar and Transfer Agent for the Preferred Stock will be set forth
in the applicable Prospectus Supplement.
DESCRIPTION OF COMMON STOCK
GENERAL
The Articles of Incorporation of the Company authorize the Board of
Directors to issue up to 250,000,000 shares of Common Stock, par value .01 per
share, as well as 250,000,000 shares of Excess Stock, par value .01 per share,
issuable in exchange for Common Stock as described below at "-- Ownership Limits
and Restrictions on Transfer." The Common Stock is listed on the New York Stock
Exchange under the symbol "CEI."
Subject to such preferential rights as may be granted by the Board of
Directors in connection with the future issuance of Preferred Stock, holders of
Common Stock are entitled to one vote per share on all matters to be voted on by
shareholders and are entitled to receive ratably such dividends as may be
declared on the Common Stock by the Board of Directors in its discretion from
funds legally available therefor. In the event of the liquidation, dissolution
or winding up of the Company, holders of Common Stock are entitled to share
ratably in all assets remaining after payment of all debts and other liabilities
and any liquidation preference of the holders of Preferred Stock. Holders of
Common Stock have no subscription, redemption, conversion or preemptive rights.
Matters submitted for stockholder approval generally require a majority vote of
the shares present and voting thereon.
OWNERSHIP LIMITS AND RESTRICTIONS ON TRANSFER
For the Company to qualify as a REIT under the Code (i) not more than 50%
in value of outstanding equity securities of all classes ("Equity Securities")
may be owned, directly or indirectly, by five or fewer individuals (as defined
in the Code to include certain entities) during the last half of a taxable year;
(ii) the Equity Securities must be beneficially owned by 100 or more persons
during at least 335 days of a taxable year of 12 months or during a
proportionate part of a shorter taxable year; and (iii) certain percentages of
the Company's gross income must come from certain activities.
To ensure that five or fewer individuals do not own more than 50% in value
of the outstanding Equity Securities, the Company's Articles of Incorporation
provide generally that no holder may own, or be deemed to own by virtue of
certain attribution provisions of the Code, more than 8.0% of the issued and
outstanding shares of Common Stock or more than 9.9% of the issued and
outstanding shares of any series of Preferred Stock, except that Mr. Rainwater
and certain related persons together may own, or be deemed to own, by virtue of
certain attribution provisions of the Code, up to 17.9% (the "Rainwater
Ownership Limit") of the issued and outstanding shares of Common Stock and up to
9.9% of the issued and outstanding shares of any
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series of Preferred Stock (collectively, the "Ownership Limit"). The Board of
Directors, upon receipt of a ruling from the IRS, an opinion of counsel, or
other evidence satisfactory to the Board of Directors, in its sole discretion,
may waive or change, in whole or in part, the application of the Ownership Limit
with respect to any person that is not an individual (as defined in Section
542(a)(2) of the Code). In connection with any such waiver or change, the Board
of Directors may require such representations and undertakings from such person
or affiliates and may impose such other conditions, as the Board deems
necessary, advisable or prudent, in its sole discretion, to determine the
effect, if any, of the proposed transaction or ownership of Equity Securities on
the Company's status as a REIT. The Board of Directors may reduce the Rainwater
Ownership Limit, with the written consent of Mr. Rainwater, after any transfer
permitted by the Articles of Incorporation. The Board of Directors may from time
to time increase the Common Stock Ownership Limit, except that (i) the Ownership
Limit may not be increased and no additional limitations may be created if,
after giving effect thereto, the Company would be "closely held" within the
meaning of Section 856(h) of the Code, (ii) neither the Common Stock Ownership
Limit nor the Preferred Stock Ownership Limit may be increased to a percentage
that is greater than 9.9%, (iii) the Rainwater Ownership Limit may not be
increased, and (iv) prior to any modification of the Ownership Limit or the
Rainwater Ownership Limit with respect to any person, the Board of Directors may
require such opinions of counsel, affidavits, undertakings or agreements as it
may deem necessary, advisable or prudent, in its sole discretion, in order to
determine or ensure the Company's status as a REIT.
The Ownership Limit will not be automatically removed even if the REIT
provisions of the Code are changed so as to no longer contain any ownership
concentration limitation or if the ownership concentration limit is increased.
In addition to preserving the Company's status as a REIT for federal income tax
purposes, the Ownership Limit may prevent any person or small group of persons
from acquiring control of the Company.
If an issuance, transfer or acquisition of Equity Securities would result
in a holder exceeding the Ownership Limit, would cause the Company to be
beneficially owned by less than 100 persons, would result in the Company being
"closely held" within the meaning of Section 856(h) of the Code or would
otherwise result in the Company failing to qualify as a REIT for federal income
tax purposes, such issuance, transfer or acquisition shall be null and void to
the intended transferee or holder, and the intended transferee or holder will
acquire no rights to the shares. Equity Securities owned, transferred or
proposed to be transferred in excess of the Ownership Limit or which would
otherwise jeopardize the Company's status as a REIT under the Code will
automatically be converted to shares of Excess Stock. A holder of Excess Stock
is not entitled to distributions, voting rights and other benefits with respect
to such shares except the right to payment of the purchase price for the shares
and the right to certain distributions upon liquidation. Any dividend or
distribution paid to a proposed transferee on Excess Stock pursuant to the
Company's Articles of Incorporation shall be repaid to the Company upon demand.
Excess Stock will be subject to repurchase by the Company at its election. The
purchase price of any Excess Stock will be equal to the lesser of (a) the price
in such proposed transaction or (b) either (i) if the shares are then listed on
the New York Stock Exchange, the fair market value of such shares reflected in
the average closing sales prices for the shares on the 10 trading days
immediately preceding the date on which the Company or its designee determines
to exercise its repurchase right; or (ii) if the shares are not then so listed,
such price for the shares on the principal exchange (including the National
Market System of the Nasdaq Stock Market on which the shares are listed; or
(iii) if the shares are not then listed on a national securities exchange, the
latest quoted price for the shares; or (iv) if not quoted, the average of the
high bid and low asked prices if the shares are then traded over-the-counter, as
reported by the Nasdaq Stock Market; or (v) if such system is no longer in use,
the principal automated quotation system then in use; or (vi) if the shares are
not quoted on such system, the average of the closing bid and asked prices as
furnished by a professional market maker making a market in the shares; or (vii)
if there is no such market maker or such closing prices otherwise are
unavailable, the fair market value, as determined by the Board of Directors in
good faith, on the last trading day immediately preceding the day on which
notice of such proposed purchase is sent by the Company. If the foregoing
transfer restrictions are determined to be void or invalid by virtue of any
legal decision, statute, rule or regulation, then the intended transferee of any
Excess Stock may be deemed, at the option of the Company, to have acted as an
agent on behalf of the Company in acquiring such Excess Stock and to hold such
Excess Stock on behalf of the Company.
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The Company has the authority at any time to waive the requirement that
Excess Stock be issued or be deemed outstanding in accordance with the
provisions of the Articles of Incorporation if the issuance of such Excess Stock
or the fact that such Excess Stock is deemed to be outstanding would, in the
opinion of nationally recognized tax counsel, jeopardize the status of the
Company as a REIT for federal income tax purposes.
All certificates representing Equity Securities will bear a legend
referring to the restrictions described above.
The Articles of Incorporation of the Company provide that all persons who
own, directly or by virtue of the attribution provisions of the Code, more than
5.0% of the outstanding Equity Securities (or such lower percentage as may be
set by the Board of Directors), must file an affidavit with the Company
containing information specified in the Articles of Incorporation no later than
January 31 of each year. In addition, each stockholder shall, upon demand, be
required to disclose to the Company in writing such information with respect to
the direct, indirect and constructive ownership of shares as the directors deem
necessary to comply with the provisions of the Code, as applicable to a REIT, or
to comply with the requirements of an authority or governmental agency.
The ownership limitations described above may have the effect of precluding
acquisitions of control of the Company by a third party. See "Certain Provisions
of the Articles of Incorporation, Bylaws and Maryland Law."
REGISTRAR AND TRANSFER AGENT
The Registrar and Transfer Agent for the Common Stock is The First National
Bank of Boston.
DESCRIPTION OF COMMON STOCK WARRANTS
The Company may issue Common Stock Warrants for the purchase of Common
Stock. Common Stock Warrants may be issued independently or together with any
other Securities offered by any Prospectus Supplement and may be attached to or
separate from such Securities. Each series of Common Stock Warrants will be
issued under a separate warrant agreement (each, a "Warrant Agreement") to be
entered into between the Company and a warrant agent specified in the applicable
Prospectus Supplement (the "Warrant Agent"). The Warrant Agent will act solely
as an agent of the Company in connection with the Common Stock Warrants of such
series and will not assume any obligation or relationship of agency or trust for
or with any holders or beneficial owners of Common Stock Warrants. The following
sets forth certain general terms and provisions of the Common Stock Warrants
offered hereby. Further terms of the Common Stock Warrants and the applicable
Warrant Agreements will be set forth in the applicable Prospectus Supplement.
The applicable Prospectus Supplement will describe the terms of the Common
Stock Warrants in respect of which this Prospectus is being delivered,
including, where applicable, the following: (i) the title of such Common Stock
Warrants; (ii) the aggregate number of such Common Stock Warrants; (iii) the
price or prices at which such Common Stock Warrants will be issued; (iv) the
number of shares of Common Stock purchasable upon exercise of such Common Stock
Warrants; (v) the designation and terms of any other Securities offered thereby
with which such Common Stock Warrants are to be issued and the number of such
Common Stock Warrants issued with each such Security offered thereby; (vi) the
date, if any, on and after which such Common Stock Warrants and the related
Common Stock will be separately transferable; (vii) the price at which the
shares of Common Stock purchasable upon exercise of such Common Stock Warrants
may be purchased; (viii) the date on which the right to exercise such Common
Stock Warrants shall commence and the date on which such right shall expire;
(ix) the minimum or maximum number of such Common Stock Warrants which may be
exercised at any one time; (x) information with respect to book entry
procedures, if any; (xi) any limitations on the acquisition or ownership of such
Common Stock Warrants which may be required in order to maintain the status of
the Company as a REIT; (xii) a discussion of certain federal income tax
considerations; and (xiii) any other terms of such Common Stock Warrants,
including terms, procedures and limitations relating to the exchange and
exercise of such Common Stock Warrants.
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Reference is made to the section captioned "Description of Common Stock"
for a general description of the Common Stock to be acquired upon the exercise
of the Common Stock Warrants, including a description of certain restrictions on
the ownership of Common Stock.
CERTAIN PROVISIONS OF THE ARTICLES OF INCORPORATION,
BYLAWS AND MARYLAND LAW
The Articles of Incorporation and the Bylaws of the Company contain certain
provisions that may inhibit or impede acquisition or attempted acquisition of
control of the Company by means of a tender offer, a proxy contest or otherwise.
These provisions are expected to discourage certain types of coercive takeover
practices and inadequate takeover bids and to encourage persons seeking to
acquire control of the Company to negotiate first with the Board of Directors.
The Company believes that these provisions increase the likelihood that
proposals initially will be on more attractive terms than would be the case in
their absence and increase the likelihood of negotiations, which might outweigh
the potential disadvantages of discouraging such proposals because, among other
things, negotiation of such proposals might result in improvement of terms. The
description set forth below is a summary only, and is qualified in its entirety
by reference to the Articles of Incorporation and the Bylaws which have been
filed as exhibits to the Registration Statement of which this Prospectus is a
part. See "Description of Common Stock -- Ownership Limits and Restrictions on
Transfer."
STAGGERED BOARD OF DIRECTORS
The Articles of Incorporation and the Bylaws provide that the Board of
Directors will be divided into three classes of directors, each class
constituting approximately one-third of the total number of directors, with the
classes serving staggered three-year terms. The classification of the Board of
Directors will have the effect of making it more difficult for stockholders to
change the composition of the Board of Directors, because only a minority of the
directors are up for election, and may be replaced by vote of the stockholders,
at any one time. The Company believes however, that the longer terms associated
with the classified Board of Directors will help to ensure continuity and
stability of the Company's management and policies.
The classification provisions also could have the effect of discouraging a
third party from accumulating a large block of the Company's stock or attempting
to obtain control of the Company, even though such an attempt might be
beneficial to the Company and some, or a majority, of its stockholders.
Accordingly, under certain circumstances stockholders could be deprived of
opportunities to sell their shares of Common Stock at a higher price than might
otherwise be available.
NUMBER OF DIRECTORS; REMOVAL; FILLING VACANCIES
The Articles of Incorporation provide that, subject to any rights of
holders of Preferred Stock to elect additional directors under specified
circumstances ("Preferred Holders' Rights"), the number of directors will be
fixed by the Bylaws. See "Description of Preferred Stock -- Voting Rights." The
Bylaws provide that, subject to any Preferred Holders' Rights, the number of
directors will be fixed by the Board of Directors, but must not be more than 25
nor less than three. In addition, the Bylaws provide that, subject to any
Preferred Holders' Rights, and unless the Board of Directors otherwise
determines, any vacancies (other than vacancies created by an increase in the
total number of directors) will be filled by the affirmative vote of a majority
of the remaining directors, though less than a quorum, and any vacancies created
by an increase in the total number of directors may be filled by a majority of
the entire Board of Directors. Accordingly, the Board of Directors could
temporarily prevent any stockholder from enlarging the Board of Directors and
then filling the new directorship with such stockholder's own nominees.
The Articles of Incorporation and the Bylaws provide that, subject to any
Preferred Holders' Rights, directors may be removed only for cause upon the
affirmative vote of holders of at least 80% of the entire voting power of all
the then-outstanding shares of stock entitled to vote generally in the election
of directors, voting together as a single class.
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RELEVANT FACTORS TO BE CONSIDERED BY THE BOARD OF DIRECTORS
The Articles of Incorporation provide that, in determining what is in the
best interest of the Company in evaluating a "business combination," "change in
control" or other transaction, a director of the Company shall consider all of
the relevant factors, which may include (i) the immediate and long-term effects
of the transaction on the Company's stockholders, including stockholders, if
any, who do not participate in the transaction; (ii) the social and economic
effects of the transaction on the Company's employees, suppliers, creditors and
customers and others dealing with the Company and on the communities in which
the Company operates and is located; (iii) whether the transaction is
acceptable, based on the historical and current operating results and financial
condition of the Company; (iv) whether a more favorable price would be obtained
for the Company's stock or other securities in the future; (v) the reputation
and business practices of the other party or parties to the proposed
transaction, including its or their management and affiliates, as they would
affect employees of the Company; (vi) the future value of the Company's
securities; (vii) any legal or regulatory issues raised by the transaction; and
(viii) the business and financial condition and earnings prospects of the other
party or parties to the proposed transaction including, without limitation, debt
service and other existing financial obligations, financial obligations to be
incurred in connection with the transaction, and other foreseeable financial
obligations of such other party or parties. Pursuant to this provision, the
Board of Directors may consider subjective factors affecting a proposal,
including certain nonfinancial matters, and, on the basis of these
considerations, may oppose a business combination or other transaction which,
evaluated only in terms of its financial merits, might be attractive to some, or
a majority, of the Company's stockholders.
ADVANCE NOTICE PROVISIONS FOR STOCKHOLDER NOMINATIONS AND STOCKHOLDER PROPOSALS
The Bylaws establish an advance notice procedure for stockholders to make
nominations of candidates for directors or bring other business before an annual
meeting of stockholders of the Company (the "Stockholder Notice Procedure").
The Stockholder Notice Procedure provides that (i) only persons who are
nominated by, or at the direction of, the Board of Directors, or by a
stockholder who has given timely written notice containing specified information
to the Secretary of the Company prior to the meeting at which directors are to
be elected, will be eligible for election as directors of the Company and (ii)
at an annual meeting, only such business may be conducted as has been brought
before the meeting by, or at the direction of the Chairman or the Board of
Directors or by a stockholder who has given timely written notice to the
Secretary of the Company of such stockholder's intention to bring such business
before such meeting. In general, for notice of stockholder nominations or
proposed business to be conducted at an annual meeting to be timely, such notice
must be received by the Company not less than 70 days nor more than 90 days
prior to the first anniversary of the previous year's annual meeting.
The purpose of requiring stockholders to give the Company advance notice of
nominations and other business is to afford the Board of Directors a meaningful
opportunity to consider the qualifications of the proposed nominees or the
advisability of the other proposed business and, to the extent deemed necessary
or desirable by the Board of Directors, to inform stockholders and make
recommendations about such nominees or business, as well as to ensure an orderly
procedure for conducting meetings of stockholders. Although the Bylaws do not
give the Board of Directors power to block stockholder nominations for the
election of directors or proposal for action, they may have the effect of
discouraging a stockholder from proposing nominees or business, precluding a
contest for the election of directors or the consideration of stockholder
proposals if procedural requirements are not met, and deterring third parties
from soliciting proxies for a non-management slate of directors or proposal,
without regard to the merits of such slate or proposal.
PREFERRED STOCK
The Articles of Incorporation authorize the Board of Directors to establish
one or more series of Preferred Stock and to determine, with respect to any
series of Preferred Stock, the preferences, rights and other terms of such
series. See "Description of Preferred Stock." The Company believes that the
ability of the Board of Directors to issue one or more series of Preferred Stock
will provide the Company with increased flexibility in structuring possible
future financings and acquisitions, and in meeting other corporate needs. The
authorized shares of Preferred Stock, as well as shares of Common Stock, will be
available for issuance without further
17
<PAGE> 84
action by the Company's stockholders, unless such action is required by
applicable law or the rules of any stock exchange or automated quotation system
on which the Company's securities may be listed or traded. Although the Board of
Directors has no present intention to do so, it could, in the future, issue a
series of Preferred Stock which, due to its terms, could impede a merger, tender
offer or other transaction that some, or a majority, of the Company's
stockholders might believe to be in their best interests or in which
stockholders might receive a premium over then prevailing market prices for
their shares of Common Stock.
AMENDMENT OF ARTICLES OF INCORPORATION
The Articles of Incorporation may be amended only by the affirmative vote
of the holders of not less than that percentage (currently two-thirds) of the
votes entitled to be cast as would be required to amend the Articles of
Incorporation pursuant to the Maryland General Corporation Law, as amended (the
"MGCL").
RIGHTS TO PURCHASE SECURITIES AND OTHER PROPERTY
The Articles of Incorporation authorize the Board of Directors to create
and issue rights entitling the holders thereof to purchase from the Company
shares of capital stock or other securities or property. The times at which and
terms upon which such rights are to be issued are within the discretion of the
Board of Directors. This provision is intended to confirm the Board of
Director's authority to issue share purchase rights which could have terms that
would impede a merger, tender offer or other takeover attempt, or other rights
to purchase securities of the Company or any other entity.
BUSINESS COMBINATIONS
The MGCL establishes special requirements with respect to "business
combinations" (including a merger, consolidation, share exchange, or, in certain
circumstances, an asset transfer or issuance of reclassification of equity
securities) between a Maryland corporation and any person who beneficially owns,
directly or indirectly, 10% or more of the voting power of the corporation's
shares is (an "Interested Stockholder"), subject to certain exemptions. In
general, an Interested Stockholder or any affiliate thereof may not engage in a
"business combination" with the corporation for a period of five years following
the date he becomes an Interested Stockholder. Thereafter, such transactions
must be (i) approved by the Board of Directors of such corporation and (ii)
approved by the affirmative vote of at least 80% of the votes entitled to be
cast by holders of voting shares other than voting shares held by the Interested
Stockholder with whom the business combination is to be effected, unless, among
other things, the corporation's common stockholders receive a minimum price (as
defined in the statute) for their shares and the consideration is received in
cash or in the same form as previously paid by the Interested Stockholder for
his shares. These provisions of the MGCL do not apply, however, to business
combinations that are approved or exempted by the board of directors of such
corporation prior to the time that the Interested Stockholder becomes an
Interested Stockholder.
CONTROL SHARE ACQUISITIONS
The MGCL provides that "control shares" of a Maryland corporation acquired
in a control share acquisition have no voting rights except to the extent
approved by a vote of two-thirds of the votes entitled to be cast by
stockholders, excluding shares owned by the acquiror and officers and directors
who are employees of the corporation. "Control shares" are shares which, if
aggregated with all other shares previously acquired which the person is
entitled to vote, would entitle the acquiror to vote (i) 20% or more but less
than one-third; (ii) one-third or more but less than a majority; or (iii) a
majority of the outstanding shares. Control shares do not include shares that
the acquiring person is entitled to vote on the basis of prior stockholder
approval. A "control share acquisition" means the acquisition of control shares
subject to certain exemptions.
A person who has made or proposed to make a control share acquisition and
who has obtained a definitive financing agreement with a responsible financial
institution providing for any amount of financing not to be provided by the
acquiring person may compel the Board of Directors of the corporation to call a
special meeting of stockholders to be held within 50 days of demand to consider
the voting rights of the shares. If no request for a meeting is made, the
corporation may itself present the question at any stockholders' meeting.
18
<PAGE> 85
If voting rights are not approved at a stockholders' meeting or if the
acquiring person does not deliver an acquiring person statement as required by
statute, then, subject to certain conditions and limitations, the corporation
may redeem any or all of the control shares, except those for which voting
rights have previously been approved, for fair value determined, without regard
to voting rights, as of the date of the last control share acquisition or of any
meeting of stockholders at which the voting rights of such shares are considered
and not approved. If voting rights for control shares are approved at a
stockholders' meeting and the acquiror is entitled to vote a majority of the
shares entitled to vote, all other stockholders may exercise appraisal rights.
The fair value of the shares for purposes of such appraisal rights may not be
less than the highest price per share in the control share acquisition, and
certain limitations and restrictions otherwise applicable to the exercise of
dissenters' rights do not apply.
The control share acquisition statute does not apply to shares acquired in
a merger, consolidation or share exchange if the corporation is a party to the
transaction, or if the acquisition is approved or excepted by the Articles of
Incorporation or Bylaws of the corporation prior to a control share acquisition.
OWNERSHIP LIMIT
The limitation on ownership of shares of Common Stock set forth in the
Company's Articles of Incorporation, as well as the provisions of the MGCL,
could have the effect of discouraging offers to acquire the Company and of
increasing the difficulty of consummating any such offer. See "Description of
Common Stock -- Ownership Limits and Restrictions on Transfer."
ERISA CONSIDERATIONS
The following is a summary of material considerations arising under the
Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and the
prohibited transaction provisions of Section 4975 of the Code that may be
relevant to prospective investors. This discussion does not purport to deal with
all aspects of ERISA or the Code that may be relevant to particular investors in
light of their particular circumstances. A PROSPECTIVE INVESTOR THAT IS AN
EMPLOYEE BENEFIT PLAN SUBJECT TO ERISA, A TAX QUALIFIED RETIREMENT PLAN, AN IRA
OR A GOVERNMENTAL, CHURCH OR OTHER PLAN THAT IS EXEMPT FROM ERISA IS ADVISED TO
CONSULT ITS OWN LEGAL ADVISOR REGARDING THE SPECIFIC CONSIDERATIONS ARISING
UNDER APPLICABLE PROVISIONS OF ERISA, THE CODE AND STATE LAW WITH RESPECT TO THE
PURCHASE, OWNERSHIP, OR SALE OF THE SECURITIES BY SUCH PLAN OR IRA.
FIDUCIARY DUTIES AND PROHIBITED TRANSACTIONS
A fiduciary of a pension, profit-sharing, retirement or other employee
benefit plan subject to ERISA (an "ERISA Plan") should consider the fiduciary
standards under ERISA in the context of the ERISA Plan's particular
circumstances before authorizing an investment of any portion of the ERISA
Plan's assets in the Securities. Accordingly, such fiduciary should consider (i)
whether the investment satisfies the diversification requirements of Section
404(a)(1)(C) of ERISA; (ii) whether the investment is in accordance with the
documents and instruments governing the ERISA Plan as required by Section
404(a)(1)(D) of ERISA; (iii) whether the investment is prudent under Section
404(a)(1)(B) of ERISA; and (iv) whether the investment is solely in the
interests of the ERISA Plan participants and beneficiaries and for the exclusive
purpose of providing benefits to the ERISA Plan participants and beneficiaries
and defraying reasonable administrative expenses of the ERISA Plan as required
by Section 404(a)(1)(A) of ERISA.
In addition to the imposition of fiduciary standards, ERISA and Section
4975 of the Code prohibit a wide range of transactions between an ERISA Plan, an
IRA or certain other plans (collectively, a "Plan") and persons who have certain
specified relationships to the Plan ("parties in interest" within the meaning of
ERISA and "disqualified persons" within the meaning of the Code). Thus, a Plan
fiduciary or person making an investment decision for a Plan also should
consider whether the acquisition or the continued holding of the Securities
might constitute or give rise to a direct or indirect prohibited transaction.
19
<PAGE> 86
PLAN ASSETS
The prohibited transactions rules of ERISA and the Code apply to
transactions with a Plan and also to transactions with the "plan assets" of a
Plan. The "plan assets" of a Plan include the Plan's interest in an entity in
which the Plan invests and, in certain circumstances, the assets of the entity
in which the Plan holds such interest. The term "plan assets" is not
specifically defined in ERISA or the Code, nor, as of the date hereof, has it
been interpreted definitively by the courts in litigation. On November 13, 1986,
the United States Department of Labor, the governmental agency primarily
responsible for administering ERISA, adopted a final regulation (the "DOL
Regulation") setting out the standards it will apply in determining whether an
equity investment in an entity will cause the assets of such entity to
constitute "plan assets." The DOL Regulation applies for purposes of both ERISA
and Section 4975 of the Code.
Under the DOL Regulation, if a Plan acquires an equity interest in an
entity, which equity interest is not a "publicly-offered security," the Plan's
assets generally would include both the equity interest and an undivided
interest in each of the entity's underlying assets unless certain specified
exceptions apply. The DOL Regulation defines a publicly-offered security as a
security that is "widely held," "freely transferable," and either part of a
class of securities registered under Section 12(b) or 12(g) of the Exchange Act,
or sold pursuant to an effective registration statement under the Securities Act
(provided the securities are registered under the Exchange Act within 120 days
after the end of the fiscal year of the issuer during which the offering
occurred). The Securities will be sold in an offering registered under the
Securities Act and registered under Section 12(b) of the Exchange Act.
The DOL Regulation provides that a security is "widely held" only if it is
part of a class of securities that is owned by 100 or more investors independent
of the issuer and of one another. However, a class of securities will not fail
to be "widely held" solely because the number of independent investors falls
below 100 subsequent to the initial public offering as a result of events beyond
the issuer's control. The Company expects the Securities to be "widely held"
upon completion of any offering.
The DOL Regulation provides that whether a security is "freely
transferable" is a factual question to be determined on the basis of all the
relevant facts and circumstances. The DOL Regulation further provides that when
a security is part of an offering in which the minimum investment is $10,000 or
less, as will be the case with any offering, certain restrictions ordinarily
will not affect, alone or in combination, the finding that such securities are
freely transferable. The Company believes that the restrictions imposed under
the Articles of Incorporation on the transfer of the Securities are limited to
restrictions on transfer generally permitted under the DOL Regulation and are
not likely to result in the failure of the Securities to be "freely
transferable." See "Common Stock -- Ownership Limits and Restrictions on
Transfer." The Company also believes that the restrictions that apply to the
Common Stock to be held by members of the Rainwater Group and that derive from
contractual arrangements requested by the underwriters in connection with the
initial public offering of the Company are unlikely to result in the failure of
the Securities to be "freely transferable." The DOL Regulation only establishes
a presumption in favor of a finding of free transferability and, therefore, no
assurance can be given that the Department of Labor and the U.S. Treasury
Department would not reach a contrary conclusion with respect to the Securities.
Any additional transfer restrictions imposed on the transfer of the Securities
will be discussed in the applicable Prospectus Supplement.
Assuming that the Securities will be "widely held" and "freely
transferable," the Company believes that the Securities will be publicly-offered
securities for purposes of the DOL Regulation and that the assets of the Company
will not be deemed to be "plan assets" of any plan that invests in the
Securities.
20
<PAGE> 87
PLAN OF DISTRIBUTION
The Company may sell the Securities to one or more underwriters for public
offering and sale by them or may sell the Securities to investors directly or
through agents. Any such underwriter or agent involved in the offer and sale of
the Securities will be named in the applicable Prospectus Supplement.
Underwriters may offer and sell the Securities at a fixed price or prices,
which may be changed, related to the prevailing market prices at the time of
sale, or at negotiated prices. The Company also may, from time to time,
authorize underwriters acting as the Company's agents to offer and sell the
Securities upon the terms and conditions set forth in an applicable Prospectus
Supplement. In connection with the sale of Securities, underwriters may be
deemed to have received compensation from the Company in the form of
underwriting discounts or commissions and may also receive commissions from
purchasers of Securities for whom they may act as agent. Underwriters may sell
the Securities to or through dealers, and such dealers may receive compensation
in the form of discounts, concessions from the underwriters or commissions from
the purchasers for whom they may act as agent.
Any underwriting compensation paid by the Company to underwriters or agents
in connection with the offering of Securities and any discounts, concessions or
commissions allowed by underwriters to participating dealers will be set forth
in the applicable Prospectus Supplement. Underwriters, dealers and agents
participating in the distribution of the Securities may be deemed to be
underwriters, and any discounts and commissions received by them and any profit
realized by them on resale of the Securities may be deemed to be underwriting
discounts and commissions under the Securities Act. Underwriters, dealers and
agents may be entitled, under agreements entered into with the Company, to
indemnification against and contribution toward certain civil liabilities,
including liabilities under the Securities Act.
If so indicated in the applicable Prospectus Supplement, the Company will
authorize dealers acting as the Company's agents to solicit offers by certain
institutions to purchase Securities from the Company at the public offering
price set forth in such Prospectus Supplement pursuant to delayed delivery
contracts ("Contracts") providing for payment and delivery on the date or dates
stated in such Prospectus Supplement. Each Contract will be for an amount not
less than, and the aggregate principal amount of Securities sold pursuant to
Contracts shall be not less or more than, the respective amounts stated in the
applicable Prospectus Supplement. Institutions with whom Contracts, when
authorized, may be made include commercial and savings banks, insurance
companies, pension funds, investment companies, educational and charitable
institutions, and other institutions, but will in all cases be subject to the
approval of the Company. Contracts will not be subject to any conditions except
(i) the purchase by an institution of the Securities covered by its Contracts
shall not at the time of delivery be prohibited under the laws of any
jurisdiction in the United States to which such institution is subject and (ii)
if the Securities are being sold to underwriters, the Company shall have sold to
such underwriters the total principal amount of the Securities less the
principal amount thereof covered by Contracts.
Certain of the underwriters and their affiliates may be customers of,
engage in transactions with and perform services for the Company and its
subsidiaries in the ordinary course of business.
Subject to the approval of the stockholders, the Company may also offer and
sell directly to Mr. Richard E. Rainwater, the Chairman of the Board of
Directors of the Company, and entities owned by him (collectively "Rainwater")
up to 19.73% of any Securities offered pursuant to this Prospectus, at the same
price and on the same terms as the Securities are otherwise offered, in order to
permit Rainwater to maintain the same current percentage ownership level in the
Company. The Company also may offer and sell to Rainwater, in lieu of such
Securities, but on equivalent terms, units of ownership interest in the
Operating Partnership ("Units") that are exchangeable for Common Stock on a
one-for-one basis. No underwriting compensation will be paid by the Company to
underwriters or agents in connection with any offer and sale of Securities or
Units to Rainwater. The offer of Securities or Units to Rainwater in connection
with any offering of Securities will be disclosed in the applicable Prospectus
Supplement.
21
<PAGE> 88
EXPERTS
The financial statements and schedule incorporated in this Prospectus by
reference to the Company's Annual Report on Form 10-K for the year ended
December 31, 1995, as amended, 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 said firm as
experts in accounting and auditing. The report of Arthur Andersen LLP with
respect to the combined financial statements and schedules of the Rainwater
Property Group (as defined in the financial statements and schedule incorporated
by reference herein) is based in part on the report of KPMG Peat Marwick LLP,
independent public accountants, on the combined statement of operations, owners'
deficit, and cash flows of The Crescent property and in reliance upon the
authority of KPMG Peat Marwick LLP as experts in accounting and auditing.
The financial statements incorporated in this Prospectus by reference to
the Company's Current Reports on Form 8-K (i) dated August 2, 1994 and filed on
January 9, 1996, as amended on February 2, 1996 and February 15, 1996, (ii)
dated October 3, 1994 and filed on January 9, 1996, as amended on February 2,
1996 and February 15, 1996, and (iii) dated April 18, 1996 and filed on June 5,
1996, respectively, relating to the Caltex House, Regency Plaza One, Two
Renaissance Square, Waterside Commons, Stanford Corporate Centre, MCI Tower,
Denver Marriott City Center, Ptarmigan Place, Albuquerque Facility, the Hyatt
Regency Albuquerque and 301 Congress properties and for East-West Properties,
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 said firm as experts in giving said reports. The
financial statements incorporated in this Prospectus by reference to the
Company's Current Report on Form 8-K dated October 3, 1994 and filed on January
9, 1996, as amended on February 2, 1996 and February 15, 1996, relating to
Spectrum Center have been audited by Huselton & Morgan, independent public
accountants, as indicated in its report with respect thereto, and are included
herein in reliance upon their authority as experts in accounting and auditing.
LEGAL MATTERS
The legality of the issuance of the Securities will be passed upon for the
Company by Shaw, Pittman, Potts & Trowbridge. Certain legal matters relating to
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.
22
<PAGE> 89
The inside back cover displays two pictures of Properties owned by the
Company. The pictures are (i) Albuquerque Plaza and the Hyatt Regency
Albuquerque in Albuquerque, New Mexico and (ii) 3333 Lee Parkway in Dallas,
Texas.
<PAGE> 90
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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.
----------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PROSPECTUS SUPPLEMENT
Prospectus Supplement Summary.......... S-3
The Company............................ S-10
Recent Developments.................... S-12
Properties............................. S-18
Use of Proceeds........................ S-40
Debt Structure......................... S-41
Price Range of Common Stock and
Distributions........................ S-41
Capitalization......................... S-43
Selected Financial Data................ S-44
Management............................. S-47
Structure of the Company............... S-47
Federal Income Tax Considerations...... S-48
Underwriting........................... S-61
Experts................................ S-62
Legal Matters.......................... S-62
Additional Available Information....... S-62
Glossary............................... S-63
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>
10,000,000 SHARES
[CRESCENT LOGO]
COMMON STOCK
-------------------------------
PROSPECTUS SUPPLEMENT
-------------------------------
MERRILL LYNCH & CO.
DEAN WITTER REYNOLDS INC.
PAINEWEBBER INCORPORATED
SMITH BARNEY INC.
SEPTEMBER 27, 1996
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