<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): April 22, 1997
CRESCENT REAL ESTATE EQUITIES COMPANY
(Exact name of Registrant as specified in its Charter)
Texas 1-13038 52-1862813
(State of Organization) (Commission File Number) (IRS Employer
Identification Number)
777 Main Street, Suite 2100
Fort Worth, Texas 76102
(Address of Principal Executive Offices) (Zip Code)
(817) 877-0477
(Registrant's telephone number, including area code)
<PAGE> 2
Item 7. Financial Statements and Exhibits.
(c) Exhibits
The exhibits listed in the following index relate to the Registration
Statement on Form S-3 (No. 333-21905), as amended, of the registrant and are
filed herewith for incorporation by reference in such Registration Statement.
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C>
1.01 U.S. Purchase Agreement, dated as of April 22, 1997 by
and among the registrant, Crescent Real Estate Equities
Limited Partnership and certain underwriters named
therein
1.02 U.S. Terms Agreement, dated as of April 22, 1997
between the registrant and certain underwriters named
therein
1.03 Agreement Among Managers, dated as of April 22, 1997 by
and among the registrant, Crescent Real Estate
Equities Limited Partnership and certain international
managers named therein
1.04 International Terms Agreement, dated as of April 22,
1997 between the registrant and certain international
managers named therein
5.01 Opinion of Shaw, Pittman, Potts & Trowbridge as to the
legality of the securities being registered by the
registrant
8.01 Opinion of Shaw, Pittman, Potts & Trowbridge regarding
certain material tax issues relating to the registrant
8.02 Opinion of Locke Purnell Rain Harrell (A Professional
Corporation) regarding certain Texas franchise tax
matters
23.01 Consent of Shaw, Pittman, Potts & Trowbridge (included
in its opinions filed as Exhibits 5.01 and 8.01)
23.02 Consent of Locke Purnell Rain Harrell (A Professional
Corporation) (included in its opinion filed as Exhibit
8.02)
</TABLE>
<PAGE> 3
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned hereunto duly authorized.
Dated: April 22, 1997 CRESCENT REAL ESTATE EQUITIES COMPANY
By: /s/ DALLAS E. LUCAS
-----------------------
Dallas E. Lucas
Senior Vice President and
Chief Financial Officer
<PAGE> 4
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C>
1.01 U.S. Purchase Agreement, dated as of April 22, 1997 by
and among the registrant, Crescent Real Estate Equities
Limited Partnership and certain underwriters named
therein
1.02 U.S. Terms Agreement, dated as of April 22, 1997
between the registrant and certain underwriters named
therein
1.03 Agreement Among Managers, dated as of April 22, 1997 by
and among the registrant, Crescent Real Estate
Equities Limited Partnership and certain international
managers named therein
1.04 International Terms Agreement, dated as of April 22,
1997 between the registrant and certain international
managers named therein
5.01 Opinion of Shaw, Pittman, Potts & Trowbridge as to the
legality of the securities being registered by the
registrant
8.01 Opinion of Shaw, Pittman, Potts & Trowbridge regarding
certain material tax issues relating to the registrant
8.02 Opinion of Locke Purnell Rain Harrell (A Professional
Corporation) regarding certain Texas franchise tax
matters
23.01 Consent of Shaw, Pittman, Potts & Trowbridge (included
in its opinions filed as Exhibits 5.01 and 8.01)
23.02 Consent of Locke Purnell Rain Harrell (A Professional
Corporation) (included in its opinion filed as Exhibit
8.02)
</TABLE>
<PAGE> 1
EXHIBIT 1.01
CRESCENT REAL ESTATE EQUITIES COMPANY
(a Texas real estate investment trust)
Preferred Shares of Beneficial Interest,
Common Shares of Beneficial Interest,
and Common Share Warrants
U.S. PURCHASE AGREEMENT
April 22, 1997
MERRILL LYNCH & CO.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
Merrill Lynch World Headquarters
World Financial Center
North Tower
New York, New York 10281-1305
Ladies and Gentlemen:
Crescent Real Estate Equities Company, a Texas real estate investment
trust (the "COMPANY"), proposes to issue and sell its preferred shares of
beneficial interest, $.01 par value per share ("PREFERRED SHARES"), common
shares of beneficial interest, $.01 par value per share ("COMMON SHARES"), and
warrants for the purchase of Common Shares ("WARRANTS"), from time to time in
one or more offerings on terms to be determined at the time of sale. Each
series of Preferred Shares may vary as to the specific number of shares in the
series, title, stated value, liquidation preference, issuance price, ranking,
dividend rate or rates (or method of calculation), dividend payment dates, any
redemption or sinking fund requirements, any conversion provisions and any
other variable terms as set forth in the Company's Restated Declaration of
Trust (the "DECLARATION OF TRUST") or any articles supplementary to the
Company's Declaration of Trust establishing the preferences and rights of such
series of Preferred Shares. Each series of Warrants also may vary as to the
exercise time and price and other variable terms as set forth in the applicable
Warrant Agreement. As used herein, "you" and "your," unless the context
otherwise requires, means the parties to whom this Purchase Agreement (the
"AGREEMENT") is addressed together with the other parties, if any, identified
in the applicable U.S. Terms Agreement (as hereinafter defined) as additional
co-managers with respect to U.S. Underwritten Securities (as hereinafter
defined) purchased pursuant hereto.
<PAGE> 2
At such time, if any, as the Company determines to make an offering of
Preferred Shares, Common Shares or Warrants through you or through an
underwriting syndicate managed by you, the Company will enter into an agreement
(the "U.S. TERMS AGREEMENT") substantially in the form of Exhibit A hereto
providing for the sale of such securities (the "U.S. UNDERWRITTEN SECURITIES")
to, and the purchase and offering thereof by, you and such other underwriters,
if any, as are selected by you that have authorized you to enter into such U.S.
Terms Agreement on their behalf (the "U.S. UNDERWRITERS," which term shall
include you, whether acting alone in the sale of the U.S. Underwritten
Securities or as a member of an underwriting syndicate, and any U.S.
Underwriter substituted pursuant to Section 10 hereof). The U.S. Terms
Agreement relating to an offering of U.S. Underwritten Securities shall specify
the number of U.S. Underwritten Securities of each class or series to be
initially issued (the "INITIAL U.S. SECURITIES"), the names of the U.S.
Underwriters participating in the offering (subject to substitution as provided
in Section 10 hereof), the number of Initial U.S. Securities that each U.S.
Underwriter severally agrees to purchase, the names of the U.S. Underwriters
acting as co-managers, if any, in connection with the offering, the price at
which the Initial U.S. Securities are to be purchased by the U.S. Underwriters
from the Company, the initial public offering price, if any, of the Initial
U.S. Securities, the time and place of delivery and payment, any delayed
delivery arrangements and any other variable terms of the Initial U.S.
Securities (including, but not limited to, current ratings, designations,
liquidation preferences, conversion, exchange or exercise provisions,
redemption provisions, sinking fund requirements and exercise prices and
dates). In addition, each U.S. Terms Agreement shall specify whether the
Company has agreed to grant to the U.S. Underwriters an option to purchase
additional U.S. Underwritten Securities to cover over-allotments, if any, and
the number of U.S. Underwritten Securities subject to such option (the "U.S.
OPTION SECURITIES"). As used herein, the term "U.S. UNDERWRITTEN SECURITIES"
includes the Initial U.S. Securities and any U.S. Option Securities agreed to
be purchased by the U.S. Underwriters as provided in the applicable U.S. Terms
Agreement. The U.S. Terms Agreement shall be substantially in the form of
Exhibit A hereto, but may take the form of an exchange of any standard form of
written communication between you and the Company. Each offering of U.S.
Underwritten Securities through you or through an underwriting syndicate
managed by you will be governed by this Agreement, as supplemented by the
applicable U.S. Terms Agreement, and such U.S. Terms Agreement shall inure to
the benefit of and be binding upon each U.S. Underwriter participating in the
offering of such U.S. Underwritten Securities.
It is understood that the Company is concurrently entering into an
agreement dated the date hereof (the "INTERNATIONAL PURCHASE AGREEMENT")
providing for the sale by the Company of Securities (the "INTERNATIONAL
SECURITIES") through arrangements with certain underwriters outside the United
States (the "INTERNATIONAL UNDERWRITERS") for whom Merrill Lynch International
("MLI") and such other parties, if any, as are identified in the applicable
International Terms Agreement (as hereinafter defined) as additional
co-managers
-2-
<PAGE> 3
with respect to the International Securities are acting as lead managers, and
the grant by the Company to the International Underwriters of an option to
purchase additional International Securities (the "INTERNATIONAL OPTION
SECURITIES") solely to cover over-allotments. The initial public offering price
and the purchase price with respect to the International Securities to be
initially issued (the "INITIAL INTERNATIONAL SECURITIES") are to be set forth
in a separate instrument (the "INTERNATIONAL TERMS AGREEMENT"), the form of
which is to be attached to the International Purchase Agreement. It is
understood that the Company is not obligated to sell, and the U.S. Underwriters
are not obligated to purchase, any Initial U.S. Securities unless all of the
Initial International Securities are contemporaneously purchased by the
International Underwriters.
The U.S. Underwriters and the International Underwriters are
hereinafter collectively referred to as the "UNDERWRITERS." The Initial U.S.
Securities and the Initial International Securities are hereinafter
collectively referred to as the "INITIAL SECURITIES." The U.S. Option
Securities and the International Option Securities are hereinafter collectively
referred to as the "OPTION SECURITIES." The U.S. Underwritten Securities and
the International Securities are hereinafter collectively referred to as the
"SECURITIES."
The Company understands that the U.S. Underwriters and the
International Underwriters will enter into an Intersyndicate Agreement (the
"INTERSYNDICATE AGREEMENT") providing for the coordination of certain
transactions among the U.S. Underwriters and the International Underwriters
under the direction of Merrill Lynch, Pierce, Fenner & Smith Incorporated with
respect to any concurrent offering of U.S. Underwritten Securities and
International Securities. The Company further understands that, except as
otherwise may be agreed by the U.S. Underwriters and the International
Underwriters in connection with any particular offering of Securities, it is
understood that the U.S. Underwriters may offer and sell Securities pursuant to
a U.S. Terms Agreement outside of the United States and Canada.
The Company has filed with the U.S. Securities and Exchange Commission
(the "COMMISSION") a registration statement on Form S-3 (No. 333-21905) for the
registration of certain Preferred Shares, Common Shares and Warrants
(collectively, the "REGISTERED SECURITIES") under the Securities Act of 1933,
as amended (the "1933 ACT"), and the offering thereof from time to time in
accordance with Rule 415 of the rules and regulations of the Commission under
the 1933 Act (the "1933 ACT REGULATIONS"), and the Company has filed such
amendment or amendments thereto as may have been required prior to the
execution of the applicable U.S. Terms Agreement. Such registration statement,
as amended, has been declared effective by the Commission. Two prospectuses
are to be used in connection with the offering and sale of the Registered
Securities, one relating to the U.S. Underwritten Securities (the "U.S.
PROSPECTUS") and one relating to the International Securities (the
"INTERNATIONAL PROSPECTUS"). Such registration statement and the two
prospectuses constituting parts thereof
-3-
<PAGE> 4
(including, in each case, any information deemed to be a part thereof pursuant
to Rule 430A(b) of the 1933 Act Regulations and any prospectus supplement
relating to the offering of the Registered Securities pursuant to Rule 415 of
the 1933 Act regulations (a "PROSPECTUS SUPPLEMENT")), as from time to time
amended or supplemented pursuant to the 1933 Act or otherwise, are hereinafter
referred to as the "REGISTRATION STATEMENT," the "U.S. PROSPECTUS" and the
"INTERNATIONAL PROSPECTUS," respectively, and the U.S. Prospectus and
International Prospectus are hereinafter collectively referred to as the
"PROSPECTUSES," and each individually as a "PROSPECTUS," except that if any
revised prospectus shall be provided to the U.S. Underwriters or the
International Underwriters by the Company for use in connection with the
offering of Registered Securities that differs from the Prospectus on file at
the Commission at the time the Registration Statement became effective (whether
or not such revised prospectus is required to be filed by the Company pursuant
to Rule 424(b) of the 1933 Act Regulations), the terms "U.S. PROSPECTUS" and
"INTERNATIONAL PROSPECTUS" shall refer to each such revised prospectus from and
after the time it is first provided to the U.S. Underwriters or the
International Underwriters, as the case may be, for such use; and except
further that a Prospectus Supplement shall be deemed to have supplemented a
Prospectus only with respect to the offering of Registered Securities to which
it relates. All references in this Agreement to financial statements and
schedules and other information that are "contained," "included" or "stated" in
the Registration Statement or a Prospectus (and all other references of like
import) shall be deemed to mean and include all such financial statements and
schedules and other information that are or are deemed to be incorporated by
reference in the Registration Statement or the Prospectus, as the case may be;
and all references in this Agreement to amendments or supplements to the
Registration Statement or a Prospectus shall be deemed to mean and include the
filing of any document under the 1934 Act that is or is deemed to be
incorporated by reference in the Registration Statement or the Prospectus, as
the case may be. If the Company elects to rely on Rule 434 under the 1933 Act
Regulations, all references to a Prospectus shall be deemed to include, without
limitation, the form of prospectus and the abbreviated term sheet, taken
together, provided to the U.S. Underwriters or the International Underwriters
by the Company in reliance on Rule 434 under the 1933 Act (the "RULE 434
PROSPECTUS"). If the Company files a registration statement to register a
portion of its Common Shares issuable upon exercise of Warrants (the "WARRANT
SHARES") and relies on Rule 462(b) for such registration to become effective
upon filing with the Commission (the "RULE 462 REGISTRATION STATEMENT"), then
any reference to "Registration Statement" herein shall be deemed to be to both
the registration statement referred to above (No. 333-21905) and the Rule 462
Registration Statement, as each such registration statement may be amended
pursuant to the 1933 Act.
-4-
<PAGE> 5
SECTION 1. REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE
OPERATING PARTNERSHIP.
(a) The Company and Crescent Real Estate Equities Limited
Partnership, a Delaware limited partnership (the "OPERATING PARTNERSHIP"),
jointly and severally, represent and warrant to you as of the date hereof and
to you and each of the other U.S. Underwriters named in the applicable U.S.
Terms Agreement as of the date thereof (in each case, a "U.S. REPRESENTATION
DATE"), as follows:
(i) The Registration Statement and the U.S. Prospectus,
at the time the Registration Statement became effective, complied, and
at each U.S. Representation Date will comply, in all material
respects, with the requirements of the 1933 Act and the 1933 Act
Regulations; the Registration Statement, at the time the Registration
Statement became effective, did not, and as of each U.S.
Representation Date will not, contain an untrue statement of a
material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein not misleading.
The U.S. Prospectus, as of the date hereof does, and as of each U.S.
Representation Date (unless the term "Prospectus" refers to a
prospectus that has been provided to the U.S. Underwriters by the
Company for use in connection with the offering of Registered
Securities that differs from a Prospectus on file at the Commission at
the time the Registration Statement became effective, in which case at
the time it is first provided to the U.S. Underwriters for such use)
and at Closing Time and each Date of Delivery referred to in Sections
2(b) and 2(c) hereof, will comply in all material respects with the
requirements of the 1933 Act and the 1933 Act Regulations and, as of
the date hereof does not, and as of each U.S. Representation Date will
not, contain an untrue statement of a material fact or omit to state a
material fact necessary in order to make the statements therein, in
the light of the circumstances under which they were made, not
misleading; provided, however, that the representations and warranties
in this paragraph shall not apply to statements in or omissions from
the Registration Statement or the U.S. Prospectus made in reliance
upon and in conformity with written information furnished to the
Company through you specifically for inclusion in the Registration
Statement or the U.S. Prospectus.
(ii) No stop order suspending the effectiveness of the
Registration Statement or any part thereof has been issued, and no
proceeding for that purpose has been instituted or, to the knowledge
of the Company or the Operating Partnership, threatened by the
Commission or by the state securities authority of any jurisdiction.
No order preventing or suspending the use of the U.S. Prospectus has
been issued, and no proceeding for that purpose has been instituted
or, to the knowledge of the Company or the Operating Partnership,
threatened by the Commission or by the state securities authority of
any jurisdiction.
-5-
<PAGE> 6
(iii) Each of Arthur Andersen LLP, the accounting firm
whose report on the financial statements and supporting schedule of
the Company is included in the Registration Statement, and any other
accounting firm whose report on financial statements is included in
the Registration Statement, is an independent public accountant as
required by the 1933 Act and the 1933 Act Regulations.
(iv) The financial statements (including the notes
thereto) included in the Registration Statement and the U.S.
Prospectus present fairly the financial position of the respective
entity or entities presented therein at the respective dates indicated
and the results of their operations for the respective periods
specified, and except as otherwise stated in the Registration
Statement, said financial statements have been prepared in conformity
with generally accepted accounting principles applied on a consistent
basis. The supporting schedule included in the Registration Statement
presents fairly the information required to be stated therein. The
financial information and data included in the Registration Statement
and the U.S. Prospectus present fairly the information included
therein and have been prepared on a basis consistent with that of the
financial statements included in the Registration Statement and the
U.S. Prospectus and the books and records of the respective entities
presented therein. The pro forma financial information included in
the U.S. Prospectus has been prepared in accordance with the
applicable requirements of Rules 11-01 and 11-02 of Regulation S-X
under the 1933 Act and other 1933 Act Regulations and American
Institute of Certified Public Accountants ("AICPA") guidelines with
respect to pro forma financial information and includes all
adjustments necessary to present fairly the pro forma financial
position of the respective entity or entities presented therein at the
respective dates indicated and the results of their operations for the
respective periods specified. Other than the historical and pro forma
financial statements (and schedule) included therein, no other
historical or pro forma financial statements (or schedules) are
required by the 1933 Act or the 1933 Act Regulations to be included in
the Registration Statement. Except as reflected or disclosed in the
financial statements included in the Registration Statement or
otherwise set forth in the Prospectus, none of the Company, the
Operating Partnership, any of the Subsidiaries or the Residential
Development Corporations (as such terms are hereinafter defined) is
subject to any material indebtedness, obligation, or liability,
contingent or otherwise.
(v) Since the respective dates as of which information is
given in the Registration Statement and the U.S. Prospectus, except as
otherwise stated therein, (A) there has been no material adverse
change in the condition, financial or otherwise, or in the earnings,
assets, business affairs or business prospects of the Company, the
Operating Partnership, the Subsidiaries and the Residential
Development Corporations, considered as one enterprise, whether or not
arising in the ordinary course of business,
-6-
<PAGE> 7
(B) no material casualty loss or material condemnation or other
material adverse event with respect to any real property or
improvements thereon owned or leased by any of the Company, the
Operating Partnership, any of its Subsidiaries or any of the
Residential Development Corporations, including any property
underlying indebtedness held by the Company (each individually a
"PROPERTY" and collectively, the "PROPERTIES"), the Operating
Partnership, any of the Subsidiaries or any of the Residential
Development Corporations, has occurred that is material to the
Company, the Operating Partnership, the Subsidiaries and the
Residential Development Corporations considered as one enterprise, (C)
there have been no acquisitions or other transactions entered into by
the Company, the Operating Partnership, any Subsidiary or any
Residential Development Corporation other than those in the ordinary
course of business that are material with respect to such entities,
considered as one enterprise, or would result in any inaccuracy in the
representations contained in Section 1(a)(iv) above, (D) except as
described in the U. S. Prospectus and except for regular quarterly
dividends or distributions on the Common Shares, there has been no
dividend or distribution of any kind declared, paid or made by the
Company, or by the Operating Partnership with respect to its
partnership interests, and (E) there has been no change in the capital
stock of the Company or its Subsidiaries or the Residential
Development Corporations or the partnership interests of the Operating
Partnership, or any increase in the indebtedness of the Company, the
Operating Partnership, the Subsidiaries or the Residential Development
Corporations that is material to such entities, considered as one
enterprise.
(vi) The Company has been duly formed as a real estate
investment trust under the laws of the State of Texas with power and
authority to own, lease and operate its properties, to conduct the
business in which it is engaged or proposes to engage as described in
the U.S. Prospectus and to enter into and perform its obligations
under this Agreement. According to the County Clerk of Tarrant
County, Texas, the Restated Declaration of Trust of the Company is
recorded in Volume 12645, beginning at Page 1811, in the records of
the County Clerk. The Restated Declaration of Trust is in effect, and
no dissolution, revocation or forfeiture proceedings regarding the
Company have been commenced. The Company is duly qualified as a
foreign organization to transact business and is in good standing in
each jurisdiction in which such qualification is required, whether by
reason of the ownership or leasing of property or the conduct of
business, except where the failure to so qualify would not have a
material adverse effect on the condition, financial or otherwise, or
the earnings, assets, business affairs or business prospects of the
Company, the Operating Partnership, the Subsidiaries and the
Residential Development Corporations considered as one enterprise.
(vii) The Operating Partnership has been duly formed and is
validly existing as a limited partnership in good standing under the
Delaware Revised Uniform Limited Partnership Act (the "DELAWARE ACT")
with
-7-
<PAGE> 8
partnership power and authority to own, lease and operate its
properties, to conduct the business in which it is engaged or proposes
to engage as described in the Prospectus and to enter into and perform
its obligations under this Agreement. The Operating Partnership is
duly qualified or registered as a foreign partnership and is in good
standing in each jurisdiction in which such qualification or
registration is required, whether by reason of the ownership or
leasing of property or the conduct of business, except where the
failure to so qualify or register would not have a material adverse
effect on the condition, financial or otherwise, or the earnings,
assets, business affairs or business prospects of the Company, the
Operating Partnership, the Subsidiaries and the Residential
Development Corporations considered as one enterprise. The First
Amended and Restated Agreement of Limited Partnership of the Operating
Partnership, as amended (the "PARTNERSHIP AGREEMENT"), is a valid and
binding agreement enforceable in accordance with its terms. At
Closing Time (as hereinafter defined), Crescent Real Estate Equities,
Ltd., a Delaware corporation ("CGP, INC."), a wholly owned subsidiary
of the Company, will be the sole general partner of the Operating
Partnership and will be the holder of one percent (1%) of the
interests in the Operating Partnership. Entities in which the Company
directly or indirectly has a majority ownership interest are
hereinafter referred to as the "SUBSIDIARIES," and each, individually,
as a "SUBSIDIARY." Houston Area Development Corp., a Texas
corporation, Mira Vista Development Corp., a Texas corporation, and
Crescent Development Management Corp., a Delaware corporation, in
which the Company owns no voting securities, and as to which the
Company does not have the right to exercise control, are referred to
herein collectively as the "RESIDENTIAL DEVELOPMENT CORPORATIONS."
(viii) Each of the Subsidiaries and the Residential
Development Corporations has been duly organized and is validly
existing as a corporation, limited partnership, or limited liability
company, as the case may be, in good standing under the laws of its
respective state of organization, with full power and authority to
own, lease and operate its properties, to conduct the business in
which it is engaged or proposes to engage as described in the U.S.
Prospectus. Each of the Subsidiaries and the Residential Development
Corporations is duly qualified as a foreign corporation, limited
partnership, or limited liability company, as the case may be, to
transact business and is in good standing in each jurisdiction in
which such qualification is required, whether by reason of the
ownership or leasing of property or the conduct of business, except
where the failure to so qualify would not have a material adverse
effect on the condition, financial or otherwise, or the earnings,
assets, business affairs or business prospects of the Company, the
Operating Partnership, the Subsidiaries and the Residential
Development Corporations considered as one enterprise. Each of the
partnership agreements, limited liability company agreements, or
other, similar instruments to which the Company or any of its
Subsidiaries is a party has been duly authorized,
-8-
<PAGE> 9
executed and delivered by the parties thereto and constitutes the
valid agreement thereof, enforceable in accordance with its terms.
All of the issued and outstanding shares of capital stock of each of
the corporate Subsidiaries and the Residential Development
Corporations have been duly authorized and validly issued and are
fully paid and non-assessable. The ownership by the Company, the
Operating Partnership or the Subsidiaries of the shares of capital
stock or limited partnership or equity interests, as the case may be,
of each of the Subsidiaries and the Residential Development
Corporations is as described in the Prospectus and all of such shares
or limited partnership or equity interests, or other, similar
instruments owned by the Company, the Operating Partnership or the
Subsidiaries are free and clear of all liens, charges and
encumbrances.
(ix) The authorized, issued and outstanding beneficial
interests in the Company are as set forth in the Prospectus (except
for subsequent issuances, if any, pursuant to clauses (A) and (B)
below); and all of such beneficial interests have been duly
authorized, are validly issued, fully paid and non-assessable and have
been offered and sold in compliance with all applicable laws
(including, without limitation, federal securities laws). No shares
of capital stock of the Company are reserved for any purpose except in
connection with: (A) the incentive compensation plans of the Company
as described in the Prospectus and (B) the possible issuance of Common
Shares upon the exchange of units of ownership interest in the
Operating Partnership (the "UNITS") pursuant to the Partnership
Agreement, for which sufficient Common Shares have been reserved for
possible future issuance. Except for Units and Common Shares issuable
upon the exercise of options as described in the Prospectus, there are
no outstanding securities convertible into or exchangeable for any
beneficial interests in the Company and no outstanding options, rights
(preemptive or otherwise) or warrants to purchase or to subscribe for
such interests or any other securities of the Company.
(x) The U.S. Underwritten Securities have been duly
authorized for issuance and sale to the U.S. Underwriters pursuant to
this Agreement and the applicable U.S. Terms Agreement and, when
issued and delivered by the Company pursuant to such Agreements
against payment of the consideration set forth in the U.S. Terms
Agreement will be validly issued, fully paid and non-assessable. Upon
payment of the purchase price and delivery of the U.S. Underwritten
Securities in accordance with this Agreement and the applicable U.S.
Terms Agreement, each of the U.S. Underwriters will receive good,
valid and marketable title to the U.S. Underwritten Securities, free
and clear of all security interests, mortgages, pledges, liens,
encumbrances and claims. The U.S. Underwritten Securities will be
offered and sold at Closing Time, or the Date of Delivery, as the case
may be, in compliance with all applicable laws (including, without
limitation, federal securities laws). The terms of the Common Shares
conform to all statements and descriptions
-9-
<PAGE> 10
related thereto contained in the Prospectuses. The form of the
certificate used to evidence any Common Shares, Preferred Shares, and
Warrants included in the U.S. Underwritten Securities is in due and
proper form and complies with all applicable legal requirements. The
issuance of the U.S. Underwritten Securities is not subject to any
preemptive or other similar rights and, except as summarized in the
U.S. Prospectus and set forth in the Company's Declaration of Trust or
Bylaws, there are no restrictions on the voting or transfer of the
Common Shares pursuant to the Company's Declaration of Trust or Bylaws
or any agreement or other instrument.
(xi) If applicable, the Warrants have been duly authorized
and, when issued and delivered pursuant to this Agreement and
countersigned by the Warrant Agent as provided in the Warrant
Agreement, will have been duly executed, countersigned, issued and
delivered and will constitute valid and legally binding obligations of
the Company entitled to the benefits provided by the Warrant Agreement
under which they are to be issued; the issuance of the Warrant Shares
upon exercise of the Warrants will not be subject to preemptive or
other similar rights; and the Warrants conform in all material
respects to all statements relating thereto contained in the U.S.
Prospectus.
(xii) If applicable, the Common Shares issuable upon
conversion of the Preferred Shares or the Common Shares issuable upon
exercise of the Warrants will have been duly and validly authorized
and reserved for issuance upon such conversion or exercise by all
necessary corporate action and such shares, when issued upon such
conversion or exercise, will be duly authorized and validly issued and
will be fully paid and non- assessable, and the issuance of such
shares upon conversion or exercise will not be subject to preemptive
or other similar rights; the Common Shares issuable upon conversion of
the Preferred Shares or the Common Shares issuable upon exercise of
the Warrants conform in all material respects to all statements
relating thereto contained in the U.S. Prospectus.
(xiii) If applicable, the Warrant Agreement will have been
duly authorized, executed and delivered by the Company prior to the
issuance of the Warrants, and each Warrant Agreement constitutes a
valid and legally binding agreement of the Company enforceable in
accordance with its terms, except as enforcement thereof may be
limited by bankruptcy, insolvency or other similar laws relating to or
affecting creditors' rights generally and by general equity principles
(regardless of whether enforcement is considered in a proceeding in
equity or at law); and the Warrant Agreement conforms in all material
respects to all statements relating thereto contained in the U.S.
Prospectus.
(xiv) The authorized, issued and outstanding Units are as
set forth in the U.S. Prospectus except to the extent of changes due
to the conversion of
-10-
<PAGE> 11
Units to Common Shares or the exercise of existing options to acquire
Units. All of the Units outstanding at Closing Time were duly
authorized for issuance by the Operating Partnership and are validly
issued and fully paid. The Units were offered and sold in compliance
with all applicable laws (including, without limitation, federal and
state securities laws). Except as summarized in the U.S. Prospectus
or set forth in the Partnership Agreement, there are no preemptive or
other rights to subscribe for or to purchase, nor any restriction upon
the voting or transfer of, any Units pursuant to the Partnership
Agreement or any other instrument. The terms of the Units conform to
all statements and descriptions related thereto contained in the U.S.
Prospectus.
(xv) None of the Company, the Operating Partnership, any
Subsidiary or any Residential Development Corporation is in violation
of its declaration of trust, charter, by-laws, certificate of limited
partnership, partnership agreement, or limited liability company
agreement, as the case may be, and none of the Company, the Operating
Partnership, any Subsidiary or any Residential Development Corporation
is in default in the performance or observance of any obligation,
agreement, covenant or condition contained in any contract, indenture,
mortgage, loan agreement, note, lease or other instrument to which
such entity is a party or by which such entity may be bound, or to
which any of the property or assets of such entity is subject, except
where a default thereunder would not have a material adverse effect on
the condition, financial or otherwise, or the earnings, assets,
business affairs or business prospects of the Company, the Operating
Partnership, the Subsidiaries and the Residential Development
Corporations considered as one enterprise.
(xvi) The execution and delivery of this Agreement, the
applicable U.S. Terms Agreement or any applicable Warrant Agreement,
the performance of the obligations set forth herein or therein, and
the consummation of the transactions contemplated hereby or thereby or
in the U.S. Prospectus by the Company, the Operating Partnership, the
Subsidiaries and the Residential Development Corporations, as
applicable, will not conflict with or constitute a breach or violation
by such party of, or default under, (A) any material contract,
indenture, mortgage, loan agreement, note, lease, joint venture or
partnership agreement or other instrument or agreement to which the
Company, the Operating Partnership, any Subsidiary or any Residential
Development Corporation is a party or by which they, any of them, any
of their respective assets or any Property may be bound or subject;
(B) the declaration of trust, charter, by-laws, certificate of limited
partnership, partnership agreement, or limited liability company
agreement, as the case may be, of the Company, the Operating
Partnership, any Subsidiary or any Residential Development
Corporation; or (C) any applicable law, rule, order, administrative
regulation or administrative or court decree.
-11-
<PAGE> 12
(xvii) The Company has full right, power and authority under
its organizational documents to enter into this Agreement, the
applicable U.S. Terms Agreement and any Delayed Delivery Contracts (as
hereinafter defined), and this Agreement has been, and as of each
Representative Date, the applicable U.S. Terms Agreement and the
Delayed Delivery Contracts, if any, will have been duly authorized,
executed and delivered by the Company
(xviii) The Operating Partnership has full right, power and
authority under its organizational documents to enter into this
Agreement and this Agreement has been duly authorized, executed and
delivered by the Operating Partnership.
(xix) There is no action, suit or proceeding before or by
any court or governmental agency or body, domestic or foreign, now
pending, or, to the knowledge of the Company or the Operating
Partnership, threatened against or affecting the Company, the
Operating Partnership, any Subsidiary, any Residential Development
Corporation, any Property, or any property underlying indebtedness
held by the Company, the Operating Partnership, any of the
Subsidiaries or any of the Residential Development Corporations, or
any officer or trust manager of the Company that is required to be
disclosed in the Registration Statement (other than as disclosed
therein) or that, if determined adversely to the Company, the
Operating Partnership, any Subsidiary, any Residential Development
Corporation, any Property, including any property underlying
indebtedness held by the Company, the Operating Partnership, any of
the Subsidiaries and any of the Residential Development Corporations,
or any such officer or trust manager, might (A) result in any material
adverse change in the condition, financial or otherwise, or in the
earnings, assets, business affairs or business prospects of the
Company, the Operating Partnership, the Subsidiaries and the
Residential Development Corporations considered as one enterprise or
(B) materially and adversely affect the consummation of the
transactions contemplated by this Agreement. There is no pending
legal or governmental proceeding to which the Company, the Operating
Partnership, any Subsidiary or any Residential Development Corporation
is a party or of which any of their respective properties or assets or
any Property, including any property underlying indebtedness held by
the Company, the Operating Partnership, any of the Subsidiaries or any
of the Residential Development Corporations, is the subject, including
ordinary routine litigation incidental to the business, that is,
considered in the aggregate, material to the condition, financial or
otherwise, or the earnings, assets, business affairs or business
prospects of the Company, the Operating Partnership, the Subsidiaries
and the Residential Development Corporations considered as one
enterprise. There are no contracts or documents that are required to
be filed as exhibits to the Registration Statement by the 1933 Act or
by the 1933 Act Regulations which have not been filed as exhibits to
the Registration Statement or to a document incorporated therein by
reference.
-12-
<PAGE> 13
(xx) The Company qualified as a real estate investment
trust under the Internal Revenue Code of 1986, as amended (the
"CODE"), with respect to its taxable years ended December 31, 1994,
December 31, 1995 and December 31, 1996 and is organized in conformity
with the requirements for qualification as a real estate investment
trust, and its manner of operation has enabled it to meet the
requirements for qualification as a real estate investment trust as of
the date of the U.S. Prospectus, and its proposed manner of operation
will enable it to meet the requirements for qualification as a real
estate investment trust in the future.
(xxi) None of the Company, the Operating Partnership, any
Subsidiary or any Residential Development Corporation is, or at
Closing Time will be, required to be registered under the Investment
Company Act of 1940, as amended (the "1940 ACT").
(xxii) None of the Company, the Operating Partnership, any
Subsidiary or any Residential Development Corporation is required to
own or possess any trademarks, service marks, trade names or
copyrights (collectively, "PROPRIETARY RIGHTS") not now lawfully owned
or possessed in order to conduct the business now operated by such
entity or as proposed to be operated by it as described in the U.S.
Prospectus and no such entity has received any notice or is otherwise
aware of any infringement of or conflict with asserted rights of
others with respect to any proprietary rights.
(xxiii) All authorizations, approvals and consents of any
court or governmental authority or agency that are necessary in
connection with the offering, issuance or sale of the U.S.
Underwritten Securities hereunder have been obtained, except such as
may be required under the 1933 Act or the 1933 Act Regulations or
state securities or real estate syndication laws.
(xxiv) Each of the Company, the Operating Partnership, the
Subsidiaries and the Residential Development Corporations possesses
such certificates, authorizations or permits issued by the appropriate
state, federal or foreign regulatory agencies or bodies necessary to
conduct the business now conducted by it, or proposed to be conducted
by it, as described in the U.S. Prospectus, and none of the Company,
the Operating Partnership, any Subsidiary or any Residential
Development Corporation has received any notice of proceedings
relating to the revocation or modification of any such certificate,
authorization or permit which, singly or in the aggregate, if the
subject of an unfavorable decision, ruling or finding, would
materially and adversely affect the condition, financial or otherwise,
or the earnings, assets, business affairs or business prospects of the
Company, the Operating Partnership, the Subsidiaries and the
Residential Development Corporations considered as one enterprise.
-13-
<PAGE> 14
(xxv) The documents incorporated or deemed to be
incorporated by reference in the U.S. Prospectus, at the time it was
or hereafter is filed with the Commission, complied and will comply in
all material respects with the requirements of the 1934 Act and the
rules and regulations of the Commission under the 1934 Act (the "1934
ACT REGULATIONS"), and, when read together with the other information
in the U. S. Prospectus, at the time the Registration Statement became
effective and as of each U.S. Representation Date or during the period
specified in Section 3(f) hereof, did not and will not include an
untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements
therein, in the light of the circumstances under which they were made,
not misleading.
(xxvi) No labor dispute with the employees of the Company,
the Operating Partnership, any Subsidiary or any Residential
Development Corporation exists or, to the knowledge of the Company or
the Operating Partnership, is imminent.
(xxvii) Except as otherwise described in the U. S.
Prospectus, (A) each of the Company, the Operating Partnership, the
Subsidiaries, and each Residential Development Corporation, as the
case may be, has good and marketable title in fee simple to all real
property owned by such entity and good and marketable title to the
improvements, if any, thereon and all other assets that are required
for the effective operation of such real property in the manner in
which they currently are operated except where the failure to own real
property or improvements thereon in fee simple would not have a
material adverse effect on the condition, financial or otherwise, or
on the earnings, assets, business affairs or business prospects of or
with respect to the Company, the Operating Partnership, the
Subsidiaries and the Residential Development Corporations considered
as one enterprise; (B) any real property and buildings held under
lease by the Company, the Operating Partnership, any Subsidiary or any
Residential Development Corporation are in full force and effect, and
such entity is not in default in respect of any of the terms or
provisions of such leases and such entity has not received notice of
the assertion of any claim by anyone adverse to the Operating
Partnership's rights as lessee under such leases, or affecting or
questioning the Operating Partnership's right to the continued
possession or use of the real property and buildings held under such
leases or of a default under such leases, in each case with such
exceptions as would not have a material adverse impact on the
condition, financial or otherwise, or on the earnings, assets,
business affairs or business prospects of or with respect to the
Company, the Operating Partnership, the Subsidiaries and the
Residential Development Corporations considered as one enterprise; (C)
all liens, charges, encumbrances, claims, or restrictions on or
affecting any of the Properties, including any property underlying
indebtedness held by the Company, the Operating Partnership, any of
the Subsidiaries or any of the
-14-
<PAGE> 15
Residential Development Corporations, and the assets of the Company,
the Operating Partnership, any Subsidiary or any Residential
Development Corporation which are required to be disclosed in the U.S.
Prospectus are disclosed therein; (D) none of the Company, the
Operating Partnership, any of the Subsidiaries, any of the Residential
Development Corporations or any tenant of any of the Properties is in
default under any of the leases pursuant to which the Operating
Partnership, as lessor, leases its Property (and neither the Company
nor the Operating Partnership knows of any event which, but for the
passage of time or the giving of notice, or both, would constitute a
default under any of such leases) other than such defaults that would
not have a material adverse effect on the condition, financial or
otherwise, or on the earnings, assets, business affairs or business
prospects of or with respect to the Operating Partnership, any
Subsidiary or any Residential Development Corporation or any Property;
(E) except as described in the U. S Prospectus, no person has an
option or right of first refusal to purchase all or part of any
Property or any interest therein, other than such options or rights of
first refusal which would not have a material adverse effect on the
condition, financial or otherwise, or on the earnings, assets,
business affairs or business prospects of or with respect to the
Company, the Operating Partnership, the Subsidiaries and the
Residential Development Corporations, considered as one enterprise;
(F) each of the Properties complies with all applicable codes, laws
and regulations (including, without limitation, building and zoning
codes, laws and regulations and laws relating to access to the
Properties), except if and to the extent disclosed in the U. S.
Prospectus and except for such failures to comply that would not
individually or in the aggregate have a material adverse impact on the
condition, financial or otherwise, or on the earnings, assets,
business affairs or business prospects of such Property or the
Operating Partnership; (G) there are in effect for the Properties,
including, to the knowledge of the Company, any property underlying
indebtedness held by the Company, the Operating Partnership, any of
the Subsidiaries and any of the Residential Development Corporations,
and the other assets of the Company, the Operating Partnership, the
Subsidiaries and the Residential Development Corporations, insurance
policies covering risks and in amounts that are commercially
reasonable for the assets owned by them and that are consistent with
the types and amounts of insurance typically maintained by present
owners of similar types of properties; and (H) neither the Company nor
the Operating Partnership has knowledge of any pending or threatened
condemnation proceedings, zoning change, or other proceeding or action
that will in any manner affect the size of, use of, improvements on,
construction on or access to the Properties, including any property
underlying indebtedness held by the Company, the Operating
Partnership, any of the Subsidiaries or any Residential Development
Corporation, except such proceedings or actions that would not have a
material adverse effect on the condition, financial or otherwise, or
on the earnings, assets, business affairs or business prospects of the
Operating Partnership or with respect to such
-15-
<PAGE> 16
Property, including any property underlying indebtedness held by the
Company, the Operating Partnership, any of the Subsidiaries or any
Residential Development Corporation.
(xxviii) Except as disclosed in the U.S. Prospectus,
(A) each Property, including, without limitation, the Environment (as
defined below) associated with such Property, is free of any Hazardous
Substance (as defined below), except for Hazardous Substances that
would not have a material adverse effect on the condition, financial
or otherwise, or on the earnings, assets, business affairs or business
prospects of or with respect to the Company, the Operating
Partnership, the Subsidiaries and the Residential Development
Corporations considered as one enterprise; (B) none of the Company,
the Operating Partnership, any Subsidiary or any Residential
Development Corporation has caused or suffered to occur any Release
(as defined below) of any Hazardous Substance into the Environment on,
in, under or from any Property, and no condition exists on, in, under
or, to the knowledge of the Company and the Operating Partnership,
adjacent to any Property that is reasonably likely to result in the
incurrence of material liabilities or any material violations of any
Environmental Law (as defined below), give rise to the imposition of
any Lien (as defined below) under any Environmental Law, or cause or
constitute a health, safety or environmental hazard to any property,
person or entity; (C) none of the Company, the Operating Partnership,
any Subsidiary or any Residential Development Corporation intends to
use the properties or assets described in the U.S. Prospectus or any
other real property for the purpose of handling, burying, storing,
retaining, refining, transporting, processing, manufacturing,
generating, producing, spilling, seeping, leaking, escaping, leaching,
pumping, pouring, emitting, emptying, discharging, injecting, dumping,
transferring or otherwise disposing of or dealing with a Hazardous
Substance, except for materials utilized in the ordinary course of
business of the properties, provided such use would not, in the
ordinary course of business, give rise to liability under any
Environmental Law; (D) none of the Company, the Operating Partnership,
any Subsidiary or any Residential Development Corporation has received
any notice of a claim under or pursuant to any Environmental Law or
under common law pertaining to Hazardous Substances on or originating
from any Property; (E) none of the Company, the Operating Partnership,
any Subsidiary or any Residential Development Corporation has received
any notice from any Governmental Authority (as defined below) claiming
any violation of any Environmental Law; (F) no Property is included
or, to the knowledge of the Company and the Operating Partnership,
proposed for inclusion on the National Priorities List issued pursuant
to CERCLA (as defined below) by the United States Environmental
Protection Agency (the "EPA") or on the Comprehensive Environmental
Response, Compensation, and Liability Information System database
maintained by the EPA, and has not otherwise been identified by the
EPA as a potential CERCLA removal, remedial or response site or
included or, to the
-16-
<PAGE> 17
knowledge of the Company and the Operating Partnership, proposed for
inclusion on, any similar list of potentially contaminated sites
pursuant to any other Environmental Law and (G) there are no
underground storage tanks located on or in any Property except where
the presence thereof would not have a material adverse effect on the
condition, financial or otherwise, or the earnings, assets or business
affairs or business prospects of the Company, the Operating
Partnership, the Subsidiaries and the Residential Development
Corporations considered as one enterprise.
As used herein, "HAZARDOUS SUBSTANCE" shall include, without
limitation, any hazardous substance, hazardous waste, toxic substance,
pollutant, solid waste or similarly designated materials, including,
without limitation, oil, petroleum or any petroleum-derived substance
or waste, asbestos or asbestos-containing materials, PCBs, pesticides,
explosives, radioactive materials, dioxins, urea formaldehyde
insulation or any constituent of any such substance, pollutant or
waste, including any such substance, pollutant or waste identified or
regulated under any Environmental Law (including, without limitation,
materials listed in the United States Department of Transportation
Optional Hazardous Material Table, 49 C.F.R. Section 172.101, as the
same may now or hereafter be amended, or in the EPA's List of
Hazardous Substances and Reportable Quantities, 40 C.F.R. Part 302, as
the same may now or hereafter be amended); "ENVIRONMENT" shall mean
any surface water, drinking water, ground water, land surface,
subsurface strata, river sediment, buildings, structures, and ambient,
workplace and indoor air; "ENVIRONMENTAL LAW" shall mean the
Comprehensive Environmental Response, Compensation and Liability Act
of 1980, as amended (42 U.S.C. Section 9601 et seq.) ("CERCLA"), the
Resource Conservation and Recovery Act of 1976, as amended (42 U.S.C.
Section 6901 et seq.), the Clean Air Act, as amended (42 U.S.C.
Section 7401 et seq.), the Clean Water Act, as amended (33 U.S.C.
Section 1251 et seq.), the Toxic Substances Control Act, as amended
(15 U.S.C. Section 2601 et seq.), the Occupational Safety and Health
Act of 1970, as amended (29 U.S.C. Section 651 et seq.), the
Hazardous Materials Transportation Act, as amended (49 U.S.C. Section
1801 et seq.), and all other federal, state and local laws,
ordinances, regulations, rules, orders, decisions and permits relating
to the protection of the environment or of human health from
environmental effects; "GOVERNMENTAL AUTHORITY" shall mean any
federal, state or local governmental office, agency or authority
having the duty or authority to promulgate, implement or enforce any
Environmental Law; "LIEN" shall mean, with respect to any Property,
any mortgage, deed of trust, pledge, security interest, lien,
encumbrance, penalty, fine, charge, assessment, judgment or other
liability in, on or affecting such Property; and "RELEASE" shall mean
any spilling, leaking, pumping, pouring, emitting, emptying,
discharging, injecting, escaping, leaching, dumping, emanating or
disposing of any Hazardous Substance into the Environment, including,
without limitation, the abandonment or discard of barrels, containers,
tanks (including, without limitation, underground
-17-
<PAGE> 18
storage tanks) or other receptacles containing or previously
containing any Hazardous Substance or any release, emission, discharge
or similar term, as those terms are defined or used in any
Environmental Law.
(xxix) Each of the Company, the Operating Partnership, the
Subsidiaries and the Residential Development Corporations has filed
all federal, state, local and foreign income tax returns which have
been required to be filed (except in any case in which the failure to
so file would not have a material adverse effect on the condition,
financial or otherwise, or the earnings, assets, business affairs or
business prospects of such entities considered as one enterprise) and
has paid all taxes required to be paid and any other assessment, fine
or penalty levied against it, to the extent that any of the foregoing
is due and payable, except, in all cases, for any such tax,
assessment, fine or penalty that is being contested in good faith.
(xxx) None of the Company, the Subsidiaries, the
Residential Development Corporations or the Operating Partnership, nor
any of their trust managers, directors, officers or controlling
persons, has taken or will take, directly or indirectly, any action
resulting in a violation of Regulation M under the 1934 Act, or
designed to cause or result under the 1934 Act or otherwise in, or
which has constituted or which reasonably might be expected to
constitute, the unlawful stabilization or manipulation of the price of
any security of the Company or facilitation of the sale or resale of
the U.S. Underwritten Securities.
(b) Any certificate signed by any officer of the Company
or the Operating Partnership and delivered to you or to counsel for the U.S.
Underwriters shall be deemed a representation and warranty by such entity to
each U.S. Underwriter as to the matters covered thereby.
SECTION 2. PURCHASE AND SALE.
(a) (a) The several commitments of the U.S.
Underwriters to purchase the U.S. Underwritten Securities pursuant to the
applicable U.S. Terms Agreement shall be deemed to have been made on the basis
of the representations and warranties herein contained and shall be subject to
the terms and conditions set forth herein or in the applicable U.S. Terms
Agreement.
(b) In addition, on the basis of the representations and
warranties herein contained and subject to the terms and conditions herein set
forth, the Company may grant, if so provided in the applicable U.S. Terms
Agreement relating to the Initial U.S. Securities, an option to the U.S.
Underwriters named in such U.S. Terms Agreement, severally and not jointly, to
purchase up to the number of U.S. Option Securities set forth therein at the
same price per Option Security as is applicable to the Initial U.S. Securities.
Such option, if granted, will
-18-
<PAGE> 19
expire 30 days or such lesser number of days as may be specified in the
applicable U.S. Terms Agreement after the U.S. Representation Date relating to
the Initial U.S. Securities, and may be exercised in whole or in part from time
to time only for the purpose of covering over-allotments which may be made in
connection with the offering and distribution of the Initial U.S. Securities
upon notice by you to the Company setting forth the number of U.S. Option
Securities as to which the several U.S. Underwriters are then exercising the
option and the time and date of payment and delivery for such U.S. Option
Securities. Any such time and date of delivery (a "DATE OF DELIVERY") shall be
determined by you, but shall not be later than seven full business days and not
be earlier than two full business days after the exercise of said option,
unless otherwise agreed upon by you and the Company. If the option is
exercised as to all or any portion of the U.S. Option Securities, each of the
U.S. Underwriters, acting severally and not jointly, will purchase that
proportion of the total number of U.S. Option Securities then being purchased
which the number of Initial U.S. Securities each such Underwriter has agreed
to purchase as set forth in the applicable U.S. Terms Agreement bears to the
total number of Initial U.S. Securities, subject to such adjustments as you in
your discretion shall make to eliminate any sales or purchases of fractional
Initial U.S. Securities.
(c) Payment of the purchase price for, and delivery of, the U.S.
Underwritten Securities to be purchased by the U.S. Underwriters shall be made
at the offices of Hogan & Hartson L.L.P., Columbia Square, 555 Thirteenth
Street, N.W., Washington, D.C. 20004-1109, or at such other place as shall be
agreed upon by you and the Company, at 9:00 A.M., New York City time, on the
third business day (unless postponed in accordance with the provisions of
Section 10 hereof) following the date of the applicable U.S. Terms Agreement
or, if pricing takes place after 4:30 P.M. New York City time on the date of
the applicable U.S. Terms Agreement, on the fourth business day (unless
postponed in accordance with the provisions of Section 10 hereof) following the
date of the applicable U.S. Terms Agreement, or at such other time as shall be
agreed upon by you and the Company (each such time and date being referred to
as a "CLOSING TIME"). In addition, if any or all of the U.S. Option Securities
are purchased by the U.S. Underwriters, payment of the purchase price for, and
delivery of certificates representing, such U.S. Option Securities, shall be
made at the above-mentioned offices of Hogan & Hartson L.L.P., or at such other
place as shall be agreed upon by you and the Company, on each Date of Delivery
as specified in the notice from you to the Company. Unless otherwise specified
in the applicable U.S. Terms Agreement, payment shall be made to the Company by
wire transfer or by certified or official bank check or checks in federal or
similar same-day funds payable to the order of the Company against delivery to
you for the respective accounts of the U.S. Underwriters of the U.S.
Underwritten Securities to be purchased by them. The U.S. Underwritten
Securities shall be in such authorized denominations and registered in such
names as you may request in writing at least two business days prior to the
applicable Closing Time or Date of Delivery, as the case may be. The U.S.
Underwritten Securities, which may be in temporary form, will be made
-19-
<PAGE> 20
available for examination and packaging by you on or before the first business
day prior to the applicable Closing Time or Date of Delivery, as the case may
be.
If authorized by the applicable U.S. Terms Agreement, the U.S.
Underwriters named therein may solicit offers to purchase U.S. Underwritten
Securities from the Company pursuant to delayed delivery contracts ("DELAYED
DELIVERY CONTRACTS") substantially in the form of Exhibit B hereto with such
changes therein as the Company may approve. As compensation for arranging
Delayed Delivery Contracts, the Company will pay to you at Closing Time, for
the respective accounts of the U.S. Underwriters, a fee specified in the
applicable U.S. Terms Agreement for each of the U.S. Underwritten Securities
for which Delayed Delivery Contracts are made at the applicable Closing Time as
is specified in the applicable U.S. Terms Agreement. Any Delayed Delivery
Contracts are to be with institutional investors of the types described in the
Prospectus. At the applicable Closing Time, the Company will enter into
Delayed Delivery Contracts (for not less than the minimum number of U.S.
Underwritten Securities per Delayed Delivery Contract specified in the
applicable U.S. Terms Agreement) with all purchasers proposed by the U.S.
Underwriters and previously approved by the Company as provided below, but not
for an aggregate number of U.S. Underwritten Securities in excess of that
specified in the applicable U.S. Terms Agreement. The U.S. Underwriters will
not have any responsibility for the validity or performance of Delayed Delivery
Contracts.
You shall submit to the Company, at least three business days prior
to the applicable Closing Time, the names of any institutional investors with
which it is proposed that the Company will enter into Delayed Delivery
Contracts and the number of U.S. Underwritten Securities to be purchased by
each of them, and the Company will advise you, at least two business days prior
to the applicable Closing Time, of the names of the institutional investors
with which the making of Delayed Delivery Contracts is approved by the Company
and the number of U.S. Underwritten Securities to be covered by each such
Delayed Delivery Contract.
The number of U.S. Underwritten Securities agreed to be purchased by
the several U.S. Underwriters pursuant to the applicable U.S. Terms Agreement
shall be reduced by the number of U.S. Underwritten Securities covered by
Delayed Delivery Contracts, as to each Underwriter as set forth in a written
notice delivered by you to the Company; provided, however, that the total
number of U.S. Underwritten Securities to be purchased by all U.S. Underwriters
shall be the total number of U.S. Underwritten Securities covered by the
applicable U.S. Terms Agreement, less the number of U.S. Underwritten
Securities covered by Delayed Delivery Contracts.
-20-
<PAGE> 21
SECTION 3. COVENANTS OF THE COMPANY AND THE OPERATING PARTNERSHIP.
Each of the Company and the Operating Partnership covenants with each
U.S. Underwriter as follows:
(a) (a) Immediately following the execution of the applicable
U.S. Terms Agreement, the Company will prepare a Prospectus Supplement setting
forth the number of U.S. Underwritten Securities covered thereby and their
terms not otherwise specified in the Prospectus pursuant to which the U.S.
Underwritten Securities are being issued, the names of the U.S. Underwriters
participating in the offering and the number of U.S. Underwritten Securities
which each severally has agreed to purchase, the names of the U.S. Underwriters
acting as co-managers in connection with the offering, the price at which the
U.S. Underwritten Securities are to be purchased by the U.S. Underwriters from
the Company, the initial public offering price, if any, the selling concession
and reallowance, if any, any delayed delivery arrangements, and such other
information as you and the Company deem appropriate in connection with the
offering of the U.S. Underwritten Securities; and the Company will promptly
transmit copies of the Prospectus Supplement to the Commission for filing
pursuant to Rule 424(b) of the 1933 Act Regulations within the time period
required by such Rule and will furnish to the U.S. Underwriters named therein
as many copies of the Prospectus and such Prospectus Supplement as you shall
reasonably request. If the Company elects to rely on Rule 434 under the 1933
Act Regulations, the Company will prepare an abbreviated term sheet that
complies with the requirements of Rule 434 under the 1933 Act Regulations and
will provide the U.S. Underwriters with copies of the form of Rule 434
Prospectus, in such number as the U.S. Underwriters may reasonably request,
and file or transmit for filing with the Commission the form of Prospectus
complying with Rule 434(c)(2) of the 1933 Act Regulations in accordance with
Rule 424(b) of the 1933 Act Regulations by the close of business in New York on
the business day immediately succeeding the date of the applicable U.S. Terms
Agreement.
(b) The Company will notify you immediately, and confirm such
notice in writing, of (i) the effectiveness of any amendment to the
Registration Statement relating to or affecting the offering of the U.S.
Underwritten Securities, (ii) the transmittal to the Commission for filing of
any Prospectus Supplement or other supplement or amendment to the Prospectus or
any document to be filed pursuant to the 1934 Act relating to or affecting the
offering of the U.S. Underwritten Securities, (iii) the receipt of any comments
from the Commission relating to or affecting the offering of the U.S.
Underwritten Securities, (iv) any request by the Commission for any amendment
to the Registration Statement or any amendment or supplement to the U.S.
Prospectus or for additional information relating to or affecting the offering
of the U.S. Underwritten Securities, and (v) the issuance by the Commission of
any stop order suspending the effectiveness of the Registration Statement
relating to or affecting the offering of the U.S. Underwritten Securities or
the initiation of any proceedings for that purpose; and the Company
-21-
<PAGE> 22
will make every reasonable effort to prevent the issuance of any such stop
order and, if any stop order is issued, to obtain the lifting thereof at the
earliest possible moment.
(c) At any time when the U.S. Prospectus is required to be
delivered under the 1933 Act or the 1934 Act in connection with sales of the
U.S. Underwritten Securities, the Company will give you notice of its intention
to file or prepare any amendment to the Registration Statement or any amendment
or supplement to the U.S. Prospectus (including any revised prospectus which
the Company proposes for use by you in connection with the offering of U.S.
Underwritten Securities which differs from the prospectus on file at the
Commission at the time the Registration Statement became effective, whether or
not such revised prospectus is required to be filed pursuant to Rule 424(b) of
the 1933 Act Regulations), whether pursuant to the 1933 Act, 1934 Act or
otherwise, and will furnish you with copies of any such amendment or supplement
a reasonable amount of time prior to such proposed filing or preparation, as
the case may be, and will not file or prepare any such amendment or supplement
or other documents in a form to which you or counsel for the U.S. Underwriters
shall reasonably object.
(d) The Company will deliver to each U.S. Underwriter, as soon as
available, as many signed and conformed copies of the Registration Statement as
originally filed and of each amendment thereto (including exhibits filed
therewith or incorporated by reference therein) as the U.S. Underwriters may
reasonably request.
(e) The Company will furnish to each U.S. Underwriter, from time
to time during the period when the U.S. Prospectus is required to be delivered
under the 1933 Act or the Exchange Act, such number of copies of the U.S.
Prospectus (as amended or supplemented) as such U.S. Underwriter may reasonably
request for the purposes contemplated by the 1933 Act or the 1934 Act or the
respective applicable rules and regulations of the Commission thereunder.
(f) If any event shall occur as a result of which it is necessary,
in the opinion of counsel for the U.S. Underwriters or counsel for the
Company, to amend or supplement the U.S. Prospectus in order to make the U.S.
Prospectus not contain any untrue statement of a material fact or omit to state
a material fact necessary in order to make the statements therein, in the light
of the circumstances existing at the time it is delivered to a purchaser, not
misleading, or if it shall be necessary, in the opinion of either such counsel,
at any such time to amend or supplement the Registration Statement or the U.S.
Prospectus in order to comply with the 1933 Act or the 1934 Act, the Company
will forthwith prepare an amendment of or supplement to the Registration
Statement or the U.S. Prospectus (in form and substance satisfactory to counsel
for the U.S. Underwriters), whether by filing documents pursuant to the 1933
Act, the 1934 Act or otherwise, which will amend or supplement the U.S.
Prospectus so that it will not contain an untrue
-22-
<PAGE> 23
statement of a material fact or omit to state a material fact necessary in
order to make the statements therein, in the light of the circumstances
existing at the time it is delivered to a purchaser, not misleading, or to make
the Registration Statement and U.S. Prospectus comply with such requirements,
and the Company will furnish to the U.S. Underwriters a reasonable number of
copies of such amendment or supplement.
(g) The Company will endeavor, in cooperation with the U.S.
Underwriters, to qualify the U.S. Underwritten Securities, the Warrant Shares,
if any, and any securities issuable upon conversion of the Preferred Shares for
offering and sale under the applicable securities laws and real estate
syndication laws of such states and other jurisdictions of the United States as
the U.S. Underwriters may designate. In each jurisdiction in which the U.S.
Underwritten Securities, the Warrant Shares, if any, and the securities
issuable upon conversion of the Preferred Shares have been so qualified, the
Company will file such statements and reports as may be required by the laws of
such jurisdiction to continue such qualification in effect for a period of not
less than one year from the effective date of the Registration Statement.
(h) With respect to each sale of U.S. Underwritten Securities, the
Company will make generally available to its security holders as soon as
practicable, but not later than 90 days after the close of the period covered
thereby, an earnings statement (in form complying with the provisions of Rule
158 of the 1933 Act Regulations) covering a 12- month period beginning not
later than the first day of the Company's fiscal quarter next following the
"effective date of the registration statement" (as defined in such Rule 158).
(i) The Company, during the period when the U.S. Prospectus is
required to be delivered under the 1933 Act or the 1934 Act in connection with
sales of the U.S. Underwritten Securities, will file all documents required to
be filed with the Commission pursuant to Section 13, 14 or 15 of the 1934 Act
within the time periods prescribed by the 1934 Act and the 1934 Act
Regulations.
(j) If applicable, the Company will use the net proceeds received
by it from the sale of the U.S. Underwritten Securities in the manner
specified in the Prospectus under the caption "Use of Proceeds."
(k) If requested by you, the Company will use its best efforts to
effect the listing of the U.S. Underwritten Securities on the New York Stock
Exchange or such other national securities exchange on which securities of the
Company are then listed.
(l) During the period from the date of the applicable U.S. Terms
Agreement until 90 days after Closing Time, the Company and the Operating
Partnership will not, without your prior written consent, directly or
indirectly, sell, offer to sell, grant any option for the sale of, or otherwise
dispose of, any Common Shares or Units or any other security convertible into
or exchangeable into or
-23-
<PAGE> 24
exercisable for the Common Shares, otherwise than in accordance with this
Agreement or as contemplated in the Prospectus except for (i) options granted
under the incentive plans of the Company, (ii) Common Shares issued in exchange
for Units and (iii) Common Shares or Units issued in connection with the
acquisition of real property or interests therein.
(m) The Company will use its best efforts to meet the requirements
to continue to qualify as a "real estate investment trust" under the Code.
(n) If requested by you, the Company and the Operating Partnership
will cause, or have caused, the officers and trust managers of the Company to
enter into lock-up agreements in form and substance reasonably satisfactory to
you and each of the Company and the Operating Partnership acknowledges that the
U.S. Underwriters are or will be intended third party beneficiaries of such
agreements.
(o) If any Preferred Shares or Warrants included in the U.S.
Underwritten Securities are convertible into or exercisable for, as applicable,
Common Shares, the Company will reserve and keep available at all times, free
of preemptive or other similar rights, a sufficient number of Common Shares for
the purpose of enabling the Company to satisfy any obligations to issue such
shares upon conversion of such Preferred Shares, or upon exercise of such
Warrants.
(p) If any Preferred Shares or Warrants included in the U.S.
Underwritten Securities are convertible into or exercisable for, as applicable,
Common Shares, the Company will use its best efforts to list the Common Shares
issuable on conversion of such Preferred Shares or upon exercise of such
Warrants on the New York Stock Exchange or such other national securities
exchange on which the Common Shares are then listed.
(q) Except for the authorization of actions permitted to be taken
by the Underwriters as contemplated herein or in the Prospectuses, neither the
Company nor the Operating Partnership will (i) take, directly or indirectly,
any action designed to cause or to result in, or that might reasonably be
expected to constitute, the stabilization or manipulation of the price of any
security of the Company to facilitate the sale or resale of the U.S.
Underwritten Securities, (ii) sell, bid for or purchase the U.S. Underwritten
Securities or pay any person any compensation for soliciting purchases of the
U.S. Underwritten Securities or (iii) pay or agree to pay to any person any
compensation for soliciting another to purchase any other securities of the
Company.
(r) During the period from Closing Time until five years after
Closing Time, the Company will deliver to you, (i) promptly upon their becoming
available, copies of all current, regular and periodic reports of the Company
mailed to its stockholders or filed with any securities exchange or with the
Commission or any governmental authority succeeding to any of the Commission's
functions, and (ii) such other information concerning the Company, the
Operating Partnership,
-24-
<PAGE> 25
any Subsidiary or any Residential Development Corporation as you may reasonably
request.
(s) Prior to Closing Time and if not described in the U.S.
Prospectus, the Company and the Operating Partnership will notify you in
writing immediately if any event occurs that renders any of the
representations and warranties of the Company and the Operating Partnership
contained herein inaccurate or incomplete in any respect.
(t) If at any time during the 25-day period after any amendment to
the Registration Statement becomes effective or during the period prior to the
final Date of Delivery, any rumor, publication or event relating to or
affecting the Company shall occur as a result of which in your opinion the
market price of the U.S. Underwritten Securities has been or is likely to be
materially affected (regardless of whether such rumor, publication or event
necessitates supplements to or amendments of the Prospectuses), the Company
will, after written notice from you advising the Company to that effect,
promptly prepare, consult with you concerning the substance of, and disseminate
a press release or other public statement, reasonably satisfactory to you,
responding to or commenting on such rumor, publication or event.
(u) From the date hereof until notice of termination pursuant to
Section 9(a) hereof is received by you, the Company shall furnish to you and
your counsel, within two days after filing, copies of any document filed with
the Commission pursuant to Section 13, 14 or 15 of the 1934 Act.
SECTION 4. PAYMENT OF FEES AND EXPENSES.
The Company will pay all expenses incident to the performance of its
obligations under this Agreement and the applicable U.S. Terms Agreement,
including (i) the printing and filing of the Registration Statement as
originally filed and of each amendment thereto, (ii) the printing of this
Agreement and the applicable U.S. Terms Agreement and other documents related
hereto, (iii) the preparation, issuance and delivery of the certificates for
the U.S. Underwritten Securities to the U.S. Underwriters, (iv) the fees and
other charges of the Company's counsel and accountants, (v) the qualification
of the U.S. Underwritten Securities and the Warrant Shares and securities
issuable upon conversion of the Preferred Shares, if any, under securities laws
and real estate syndication laws in accordance with the provisions of Section
3(g) hereof, including filing fees and the fees and other charges of counsel
for the U.S. Underwriters in connection therewith and in connection with the
preparation of a blue sky memorandum (the "BLUE SKY MEMORANDUM"), (vi) the
printing and delivery to the U.S. Underwriters of copies of the Registration
Statement as originally filed and of each amendment thereto, of the preliminary
prospectus, and of the U.S. Prospectus and any amendments or supplements
thereto, (vii) the printing (and reproduction) and delivery to the U.S.
Underwriters of copies of the Blue Sky Memorandum, (viii) the printing and
-25-
<PAGE> 26
delivery to the U.S. Underwriters of copies of the Warrant Agreement, if any,
(ix) any fees charged by nationally recognized statistical rating organizations
for the rating of the U.S. Underwritten Securities, (x) the fees and expenses,
if any, incurred with respect to the listing of the U.S. Underwritten
Securities, the Warrant Shares or the securities issuable on conversion of the
Preferred Shares, if any, on any national securities exchange, and (xi) the fee
of the National Association of Securities Dealers, Inc. (the "NASD"), including
the fees and other charges of counsel for the U.S. Underwriters in connection
with the NASD's review of the proposed public offering of the U.S. Underwritten
Securities.
If the applicable U.S. Terms Agreement is canceled or terminated by
you in accordance with the provisions of Section 5 or Section 9 hereof, the
Company also shall reimburse the U.S. Underwriters for all of their
out-of-pocket expenses, including the reasonable fees and other charges of
counsel for the U.S. Underwriters.
SECTION 5. CONDITIONS OF U.S. UNDERWRITERS' OBLIGATIONS.
The obligations of the U.S. Underwriters hereunder and under the
applicable U.S. Terms Agreement are subject to the accuracy, as of the date
hereof and at Closing Time, of the representations and warranties of the
Company and the Operating Partnership herein contained, to the performance by
the Company and the Operating Partnership of their respective obligations
hereunder, and to the following further conditions:
(a) At the applicable Closing Time (i) no stop order suspending
the effectiveness of the Registration Statement shall have been issued under
the 1933 Act or proceedings therefor initiated or threatened by the Commission,
(ii) the rating assigned by any nationally recognized statistical rating
organization to any Preferred Shares of the Company and any indebtedness of the
Company or the Operating Partnership as of the date of the applicable U.S.
Terms Agreement shall not have been lowered since such date nor shall any such
rating organization have publicly announced that it has placed any Preferred
Shares of the Company and any indebtedness of the Company or the Operating
Partnership on what is commonly termed a "watch list" for possible downgrading,
and (iii) there shall not have come to your attention any facts that would
cause you to believe that the U.S. Prospectus, together with the applicable
Prospectus Supplement, at the time it was required to be delivered to
purchasers of the U.S. Underwritten Securities, included an untrue statement of
a material fact or omitted to state a material fact necessary in order to make
the statements therein, in light of the circumstances existing at such time,
not misleading.
(b) At Closing Time, you shall have received:
-26-
<PAGE> 27
(i) The favorable opinions, dated as of Closing
Time, of Shaw, Pittman, Potts & Trowbridge, counsel for each of the
Company, the Operating Partnership, the Subsidiaries and the
Residential Development Corporations, and Locke Purnell Rain Harrell
(A Professional Corporation), special Texas tax counsel for the
Subsidiaries that are Texas entities (collectively with the
Residential Development Corporations, the "TEXAS ENTITIES"), each in
form and substance satisfactory to counsel for the U.S. Underwriters,
to the effect that:
(A) The Company has been duly formed as a real
estate investment trust under the laws of the State of Texas.
The Company has power and authority to own, lease and operate
its properties, to conduct the business in which it is engaged
or proposes to engage as described in the U.S. Prospectus, and
to enter into and perform its obligations under this
Agreement, the Partnership Agreement, the applicable U.S.
Terms Agreement and the Warrant Agreement, if any
(collectively, the "LISTED AGREEMENTS"). According to the
County Clerk of Tarrant County, Texas, the Restated
Declaration of Trust of the Company is recorded in Volume
12645, beginning at Page 1811, in the records of the County
Clerk. The Restated Declaration of Trust is in effect, and no
dissolution, revocation or forfeiture proceedings regarding
the Company have been commenced. The Company is duly
qualified as a foreign organization to transact business and
is in good standing in New York and each other jurisdiction in
which such qualification is required, whether by reason of the
ownership or leasing of property or the conduct of business,
except where the failure to so qualify would not have a
material adverse effect on the condition, financial or
otherwise, or the earnings, assets, business affairs or
business prospects of the Company, the Operating Partnership,
the Subsidiaries and the Residential Development Corporations
considered as one enterprise.
(B) The Operating Partnership has been duly
formed and is validly existing as a limited partnership in
good standing under the Delaware Act. The Operating
Partnership has full partnership power and authority to own,
lease and operate its properties, to conduct the business in
which it is engaged or proposes to engage as described in the
U.S. Prospectus and to enter into and perform its obligations
under this Agreement and the Listed Agreements to which it is
a party. The Operating Partnership is duly qualified or
registered as a foreign partnership and is in good standing in
Texas, Colorado, Arizona, New Mexico, Louisiana, Nebraska and
each other jurisdiction in which such qualification or
registration is required, whether by reason of the ownership
or leasing of property or the conduct of business, except
where the failure to so qualify or register would not have a
material adverse effect on the condition, financial or
otherwise, or the earnings,
-27-
<PAGE> 28
assets, business affairs or business prospects of the Company,
the Operating Partnership, the Subsidiaries and the
Residential Development Corporations considered as one
enterprise. CGP, Inc., a wholly owned subsidiary of the
Company, is the sole general partner of the Operating
Partnership.
(C) Each of Crescent Real Estate Funding I, L.P.,
Crescent Real Estate Funding II, L.P., Crescent Real Estate
Funding III, L.P., Crescent Real Estate Funding IV, L.P.,
Crescent Real Estate Funding V, L.P., Crescent Real Estate
Funding VI, L.P. and any other Subsidiary that would be
considered a "Significant Subsidiary" as defined in Article 1,
Rule 1--02 of Regulation S-X promulgated pursuant to the 1933
Act (collectively, the "Significant Subsidiaries") has been
organized and is validly existing as a corporation, limited
partnership or limited liability company, as the case may be,
in good standing under the laws of its respective state of
organization, with full corporate, partnership or limited
liability company (as the case may be) power and authority to
own, lease and operate its properties, to conduct the business
in which it is engaged or proposes to engage as described in
the U.S. Prospectus, and to enter into and perform its
obligations under any Listed Agreements to which it is a
party. Each of the Significant Subsidiaries and the
Residential Development Corporations is duly qualified as a
foreign corporation, limited partnership or limited liability
company, as the case may be, to transact business and is in
good standing in each jurisdiction in which such qualification
is required, whether by reason of the ownership or leasing of
property or the conduct of business, except where the failure
to so qualify would not have a material adverse effect on the
condition, financial or otherwise, or the earnings, assets,
business affairs or business prospects of the Company, the
Operating Partnership, the Significant Subsidiaries and the
Residential Development Corporations considered as one
enterprise. All of the issued and outstanding shares of
capital stock of each of the corporate Significant
Subsidiaries have been duly authorized and validly issued and
are fully paid and non-assessable. The ownership by the
Company, the Operating Partnership and the Significant
Subsidiaries of the shares of capital stock or limited
partnership or equity interests, as the case may be, of each
of the Significant Subsidiaries is as described in the U.S.
Prospectus and such ownership is free and clear of any
security interest, mortgage, pledge, lien, encumbrance, claim
or equity.
(D) The authorized, issued and outstanding shares
of beneficial interest of the Company are as set forth in the
U.S. Prospectus. All of such shares of beneficial interest
are validly issued, fully paid and non-assessable and have
been offered and sold in compliance with all applicable laws
(including, without limitation,
-28-
<PAGE> 29
federal securities laws). No shares of beneficial interest of
the Company are reserved for any purpose except in connection
with (i) the option plans of the Company as described in the
U.S. Prospectus and (ii) the possible issuance of Common
Shares upon the exchange of Units pursuant to the Partnership
Agreement. Except for Units, Common Shares issuable upon the
exercise of options and Units issuable upon the exercise of
options, there are no outstanding securities convertible into
or exchangeable for any shares of beneficial interest of the
Company and no outstanding options, rights (preemptive or
otherwise) or warrants to purchase or to subscribe for shares
of beneficial interest or any other securities of the Company.
(E) The U.S. Securities have been duly authorized
for issuance and sale to the U.S. Underwriters pursuant to
this Agreement and, when issued and delivered by the Company
pursuant thereto and pursuant to the applicable U.S. Terms
Agreement against payment of the consideration set forth
therein and any applicable Delayed Delivery Contract, will be
validly issued, fully paid and non- assessable. Upon payment
of the purchase price and delivery of the U.S. Securities in
accordance herewith and with the International Purchase
Agreement, each of the Underwriters is receiving good, valid
and marketable title to the U.S. Securities, free and clear of
all security interests, mortgages, pledges, liens,
encumbrances and claims. The U.S. Securities will be offered
and sold at Closing Time, or the Date of Delivery, as the case
may be, in compliance with all applicable laws (including,
without limitation, federal securities laws). The terms of
the U.S. Securities and the Common Shares, Preferred Shares
and Warrants conform to all statements and descriptions
related thereto contained in the U.S. Prospectus. The form of
stock certificate evidencing Common Shares, Preferred Shares
and Warrants, as applicable, is in due and proper form and
complies with all applicable legal requirements. The issuance
of the U.S. Securities is not subject to any preemptive or
other similar rights and, except as set forth in the U.S.
Prospectus, there are no restrictions on the voting or
transfer of Common Shares, Preferred Shares or Warrants, as
applicable, pursuant to the Company's Declaration of Trust or
Bylaws or any agreement or other instrument known to such
counsel.
(F) If applicable, the Warrants have been duly
authorized and, when issued and delivered pursuant to this
Agreement and the International Purchase Agreement and
countersigned by the Warrant Agent as provided in the Warrant
Agreement, will have been duly executed, countersigned, issued
and delivered and will constitute valid and legally binding
obligations of the Company entitled to the benefits provided
by the Warrant Agreement under which they are to be issued.
-29-
<PAGE> 30
(G) If applicable, the securities issuable upon
conversion of the Preferred Shares and the securities issuable
upon exercise of the Warrants have been duly and validly
authorized and reserved for issuance upon such conversion or
exercise by all necessary action on the part of the Company
and such shares, when issued upon such conversion or exercise
in accordance with the Declaration of Trust, the Warrant
Agreement, or the Delayed Delivery Contract, as the case may
be, will be duly authorized, validly issued, fully paid and
non-assessable, and the issuance of such securities upon such
conversion or exercise will not be subject to preemptive or
other similar rights arising by operation of law or otherwise.
(H) Any applicable Warrant Agreement has been
duly authorized, executed and delivered by the Company and,
assuming due authorization, execution and delivery by the
Warrant Agent, constitutes a valid and legally binding
agreement of the Company enforceable in accordance with its
terms; and the Warrant Agreement, if any, conforms in all
material respects to all statements relating thereto contained
in the Prospectuses.
(I) If applicable, the relative rights,
preferences, interests and powers of the Preferred Shares, as
the case may be, are as set forth in a statement of
designation filed for record with the County Clerk of Tarrant
County, Texas and all such provisions are valid under Texas
law.
(J) At Closing Time, the number of authorized,
issued and outstanding Units will be as set forth in the U.S.
Prospectus, except to the extent of changes due to either the
conversion of Units to Common Shares or the exercise of
existing options to acquire Units. All of the Units
outstanding at Closing Time were duly authorized for issuance
by the Operating Partnership and are validly issued and fully
paid. To our knowledge, the Units were offered and sold in
compliance with all applicable laws (including, without
limitation, federal securities laws). Except as summarized in
the U.S. Prospectus or as set forth in the Partnership
Agreement, there are no preemptive or other rights to
subscribe for or to purchase, or any restriction upon the
voting or transfer of, any Units pursuant to the Partnership
Agreement or any other instrument known to such counsel. The
terms of the Units conform to all statements and descriptions
related thereto contained in the U.S. Prospectus.
(K) Each of this Agreement, the applicable U.S.
Terms Agreement, and any Delayed Delivery Contract has been
duly authorized, executed and delivered by each of the Company
and the Operating Partnership, as applicable.
-30-
<PAGE> 31
(L) None of the Company, the Operating
Partnership or any Significant Subsidiary is in violation of
its declaration of trust, charter, by-laws, certificate of
limited partnership, partnership agreement, limited liability
company agreement or similar instrument, as the case may be,
and, to the knowledge of counsel, none of the Company, the
Operating Partnership or any Significant Subsidiary is in
default in the performance or observance of any obligation,
agreement, covenant or condition contained in any contract,
indenture, mortgage, loan agreement, note, lease or other
instrument filed as an exhibit to the Registration Statement
or any document incorporated therein by reference or as
otherwise identified by the Company as material in an
officer's certificate to which such entity is a party or by
which such entity is bound, or to which any of the property or
assets of such entity is subject, except where a default
thereunder would not have a material adverse effect on the
condition, financial or otherwise, or the earnings, assets,
business affairs or business prospects of the Company, the
Operating Partnership, the Subsidiaries and the Residential
Development Corporations considered as one enterprise.
(M) Each of the Listed Agreements was duly and
validly authorized, executed and delivered by the Company and
the Operating Partnership, as applicable, and, assuming due
authorization, execution and delivery by any other party
thereto, is a valid and binding agreement, enforceable in
accordance with its terms, except as such enforceability may
be (1) limited by bankruptcy, insolvency, reorganization,
liquidation, moratorium and other similar laws affecting the
rights and remedies of creditors generally and (2) subject to
general principles of equity (regardless of whether such
enforceability is considered in a proceeding in equity or at
law).
(N) The execution and delivery of the Listed
Agreements, the performance of the obligations set forth in
each of the Listed Agreements, and the consummation of the
transactions contemplated thereby or in the U.S. Prospectus by
the Company, the Operating Partnership and the Significant
Subsidiaries as applicable, will not conflict with or
constitute a breach or violation of, or default under: (1) to
the knowledge of counsel, any material contract, indenture,
mortgage, loan agreement, note, lease, joint venture or
partnership agreement or other instrument or agreement filed
as an exhibit to the Registration Statement or any document
incorporated therein by reference or as otherwise identified
by the Company as material in an officer's certificate to
which the Company, the Operating Partnership or any
Significant Subsidiary is a party or by which they or any of
them or any of their respective properties or other assets or
any Property may be bound or subject; (2) the declaration of
trust, charter, by-laws, certificate of limited partnership,
partnership agreement, or
-31-
<PAGE> 32
limited liability company agreement, or similar instrument, as
the case may be, of the Company, the Operating Partnership or
any Significant Subsidiary; or (3) any federal or Texas law.
The descriptions of the Listed Agreements, if any, contained
in the U.S. Prospectus are correct and complete in all
material respects.
(O) To the knowledge of counsel, there is no
action, suit or proceeding before or by any court or
governmental agency or body, domestic or foreign, now pending
or threatened against or affecting the Company, the Operating
Partnership or any Significant Subsidiary, any Property, any
property underlying indebtedness held by the Company, the
Operating Partnership or any of the Significant Subsidiaries
or any officer or trust manager of the Company that is
required to be disclosed in the Registration Statement (other
than as disclosed therein) or that, if determined adversely to
the Company, the Operating Partnership, any Significant
Subsidiary, any Property, including any property underlying
indebtedness held by the Company, the Operating Partnership,
any of the Significant Subsidiaries or any such officer or
trust manager, would reasonably be expected to (1) result in
any material adverse change in the condition, financial or
otherwise, or in the earnings, assets, business affairs or
business prospects of the Company, the Operating Partnership,
the Subsidiaries and the Residential Development Corporations,
considered as one enterprise, or (2) materially and adversely
affect the consummation of the transactions contemplated by
this Agreement. To the knowledge of counsel, there is no
pending legal or governmental proceeding to which the Company,
the Operating Partnership or any Significant Subsidiary is a
party or of which any of their respective properties or assets
or any Property, including any property underlying
indebtedness held by the Company, the Operating Partnership,
or any of the Significant Subsidiaries is the subject,
including ordinary routine litigation incidental to the
business, that is, considered in the aggregate, material to
the condition, financial or otherwise, or the earnings,
assets, business affairs or business prospects of the Company,
the Operating Partnership, the Subsidiaries and the
Residential Development Corporations, considered as one
enterprise. To the knowledge of counsel, there are no
contracts or documents of the Company, the Operating
Partnership, or the Significant Subsidiaries which are
required to be filed as exhibits to the Registration Statement
by the 1933 Act or by the 1933 Act Regulations which have not
been filed or incorporated by reference as exhibits to the
Registration Statement.
(P) The Company qualified as a real estate
investment trust under the Code with respect to its taxable
years ending on or before December 31, 1996 and is organized
in conformity with the
-32-
<PAGE> 33
requirements for qualification as a real estate investment
trust, its manner of operation has enabled it to meet the
requirements for qualification as a real estate investment
trust as of the date of the Prospectus Supplement, and its
proposed manner of operation will enable it to meet the
requirements for qualification as a real estate investment
trust in the future. In connection therewith, you are
entitled to rely on the opinions of Shaw, Pittman, Potts &
Trowbridge filed as Exhibit 8.01 to the Registration
Statement, the opinions attached to such opinions as exhibits
thereto, and any other opinions rendered to the Company with
respect to tax matters and described in the U.S. Prospectus,
all as if rendered to you on the date of Closing.
(Q) None of the Company, the Operating
Partnership or any Significant Subsidiary is required to be
registered under the 1940 Act.
(R) All authorizations, approvals and consents of
any court or governmental authority or agency that are
necessary in connection with the offering, issuance or sale of
the U.S. Securities under this Agreement have been obtained,
except such as may be required under the 1933 Act or the 1933
Act Regulations or the securities and real estate syndication
laws of any U.S. state or other jurisdiction with respect to
the Securities.
(S) The Registration Statement has been declared
effective under the 1933 Act and, to the knowledge of counsel,
no stop order suspending the effectiveness of the Registration
Statement has been issued under the 1933 Act or proceedings
therefor initiated or threatened by the Commission.
(T) The Registration Statement and the U.S.
Prospectus (other than the financial statements and supporting
schedules included therein, as to which no opinion need be
rendered) as of their respective effective or issue dates at
the U.S. Representation Date complied as to form in all
material respects with the requirements of the 1933 Act and
the 1933 Act Regulations. Each document filed pursuant to the
1934 Act (other than the financial statements and supporting
schedules, included therein as to which no opinion need be
rendered) and incorporated or deemed to be incorporated by
reference in the U.S. Prospectus complied when so filed or
incorporated or deemed to be incorporated as to form in all
material respects with the 1934 Act and the 1934 Act
Regulations.
(U) The information in the Registration Statement
under the captions "Description of Preferred Shares,"
"Description of Common Shares," "Description of Common Share
Warrants," "Certain Provisions of the Declaration of Trust,
Bylaws and Texas Law" and
-33-
<PAGE> 34
"ERISA Considerations," to the extent applicable to the
offering of the U.S. Underwritten Securities and to the extent
that it constitutes matters of law or legal conclusions, has
been reviewed by such counsel, is correct and presents fairly
the information required to be disclosed therein.
(V) The information in the Prospectus Supplement
under the caption "Federal Income Tax Considerations" and in
the U.S. Prospectus under the caption "Risks Relating to
Qualification and Operation as a REIT" fairly summarizes the
federal income tax considerations that are likely to be
material to a holder of U.S. Underwritten Securities and, to
the extent that they constitute matters of law or legal
conclusions, they have been reviewed by such counsel, they are
correct and present fairly the information required to be
disclosed therein.
In giving the opinions required by this Section
5(b)(i), such counsel shall in addition provide the opinions
referenced in the Prospectus Supplement under the caption
"Federal Income Tax Consequences."
In giving the opinions required by this Section
5(b)(i), such counsel shall additionally state (which shall
not constitute an opinion) that nothing has come to the
attention of such counsel that causes it to believe that the
Registration Statement or any post-effective amendment thereto
(except for financial statements and schedules and other
financial data included therein or omitted therefrom, as to
which counsel need make no statement), at the time such
Registration Statement became effective under the 1933 Act or
at the time an Annual Report on Form 10 K or the latest
Quarterly Report on Form 10 Q was filed by the Company with
the Commission (whichever is later) or at the date of the
applicable U.S. Terms Agreement, at the U.S. Representation
Date or as of the date such opinions are given, contained an
untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary to
make the statements therein not misleading, or the U.S.
Prospectus or any Prospectus Supplement (except for financial
statements and schedules and other financial data included
therein, as to which counsel need make no statement), as of
the date of the applicable U.S. Terms Agreement, at the U.S.
Representation Date or as of the date of such opinion,
included an untrue statement of a material fact or omitted to
state a material fact necessary in order to make the
statements therein, in light of the circumstances under which
they were made, not misleading.
-34-
<PAGE> 35
In giving the opinions required by this Section
5(b)(i), Shaw, Pittman, Potts & Trowbridge and Locke Purnell
Rain Harrell (A Professional Corporation) may rely, (A) as to
all matters of fact, upon certificates and written statements
of officers and employees of and accountants for each of the
Company, the Operating Partnership, the Subsidiaries or the
Residential Development Corporations; (B) as to the continued
existence of the Company, upon a certificate of an officer of
the Company, and as to the qualification and good standing of
each of the Operating Partnership or a Significant Subsidiary
to do business in any jurisdiction, upon certificates of
appropriate government officials or opinions of counsel in
such jurisdictions; and (C) as to all Texas franchise tax
matters, upon the opinion, dated as of Closing Time, of Locke
Purnell Rain Harrell (A Professional Corporation).
The opinion of Locke Purnell Rain Harrell (A
Professional Corporation) shall be limited to the laws of the
State of Texas.
(ii) The favorable opinion, dated as of Closing
Time, of Locke Purnell Rain Harrell (A Professional Corporation),
counsel to each of the Company and the Operating Partnership, that it
has reviewed the discussion in the Prospectus Supplement under the
caption "Federal Income Tax Considerations - State and Local Taxes"
with respect to Texas franchise matters and is of the opinion that it
accurately summarizes the Texas franchise tax matters expressly
described therein.
(iii) The favorable opinion, dated as of Closing
Time, of Hogan & Hartson L.L.P., counsel for the U.S. Underwriters,
with respect to the matters set forth in (A) (first sentence only),
(B) (first sentence only), (E) (first and fourth sentences only), (F),
(G), (H), (I), (K) (with respect to this Agreement and the U.S. Terms
Agreement only), (S) and (T) (first sentence only) of Section 5(b)(i)
and a statement (which shall not constitute an opinion) similar to the
statement referred to in the third to last paragraph of Section
5(b)(i) above. In giving its opinion, Hogan & Hartson L.L.P. may
rely, (A) as to all matters of fact, upon certificates and written
statements of officers and employees of and accountants for each of
the Company, the Operating Partnership, the Subsidiaries or the
Residential Development Corporations, (B) as to the qualification and
good standing of each of the Company, the Operating Partnership, or
the Significant Subsidiaries to do business in any state or
jurisdiction, upon certificates of appropriate government officials or
opinions of counsel in such jurisdictions, which opinions shall be in
form and substance satisfactory to counsel for the U.S. Underwriters,
and (C) as to certain matters of law, upon the opinion of Shaw,
Pittman, Potts & Trowbridge given pursuant to Section 5(b)(i) above.
(c) At Closing Time, (i) there shall not have been, since
the respective dates as of which information is given in the Registration
Statement and
-35-
<PAGE> 36
the U.S. Prospectus, any material adverse change in the condition, financial or
otherwise, or in the earnings, assets, business affairs or business prospects
of the Company, the Operating Partnership, the Subsidiaries, the Residential
Development Corporations and the Properties considered as one enterprise,
whether or not arising in the ordinary course of business, (ii) no proceedings
shall be pending or, to the knowledge of the Company or the Operating
Partnership, threatened against such entity before or by any federal, state or
other commission, board or administrative agency wherein an unfavorable
decision, ruling or finding might result in a material adverse change in the
condition, financial or otherwise, or in the earnings, assets, business affairs
or business prospects of the Company, the Operating Partnership, the
Subsidiaries, the Residential Development Corporations and the Properties
considered as one enterprise other than as set forth in the U.S. Prospectus,
(iii) no stop order suspending the effectiveness of the Registration Statement
or any part thereof shall have been issued and no proceedings for that purpose
shall have been instituted or, to the knowledge of the Company or the Operating
Partnership, threatened by the Commission or by the state securities authority
of any jurisdiction, and (iv) you shall have received, at Closing Time, a
Certificate of the Chief Executive Officer of the Company and the Operating
Partnership, and the chief financial or chief accounting officer of each such
entity, dated as of Closing Time, evidencing compliance with the provisions of
this subsection (c), stating that the representations and warranties set forth
in Section 1(a) hereof are accurate as though expressly made at and as of
Closing Time, and stating that the conditions precedent set forth in this
Section 5 have been satisfied or waived. As used in this Section 5(c), the
term "U.S. Prospectus" means the U.S. Prospectus in the form first used to
confirm sales of the U.S. Underwritten Securities.
(d) At the time of execution of the applicable U.S. Terms
Agreement, you shall have received from Arthur Andersen LLP a letter dated such
date, in form and substance satisfactory to you, to the effect that: (i) they
are independent public accountants with respect to the Company and the
Rainwater Property Group (as defined in the financial statements included in
the Registration Statement) as required by the 1933 Act and the 1933 Act
Regulations; (ii) it is their opinion that the financial statements and
supporting schedule included in the Registration Statement and covered by their
opinions therein comply as to form in all material respects with the applicable
accounting requirements of the 1933 Act and the 1933 Act Regulations; (iii)
they have performed limited procedures, not constituting an audit, including a
reading of the latest available consolidated interim financial statements of
the Company, a reading of the minute books of the Company, inquiries of
officials of the Company responsible for financial and accounting matters and
such other inquiries and procedures as may be specified in such letter, and on
the basis of such limited review and procedures nothing came to their attention
that caused them to believe that (A) the unaudited financial statements and
supporting schedules of the Rainwater Property Group included in the
Registration Statement do not comply as to form in all material respects with
-36-
<PAGE> 37
the applicable accounting requirements of the 1933 Act and the 1933 Act
Regulations or are not in conformity with generally accepted accounting
principles applied on a basis substantially consistent with that of the audited
financial statements included in the Registration Statement, (B) the unaudited
operating data and balance sheet data of the Company set forth in the
Prospectuses under the caption "Selected Financial Information" were not
determined on a basis substantially consistent with that used in determining
the corresponding amounts in the audited financial statements included in the
Registration Statement (C) the pro forma financial information included in the
Registration Statement was not prepared in accordance with the applicable
accounting requirements of the 1933 Act and the 1933 Act Regulations with
respect to pro forma financial information or was not determined on a basis
substantially consistent with that of the audited financial statements included
in the Registration Statement or (D) at a specified date not more than three
days prior to the date of the applicable U.S. Terms Agreement, there has been
any change in the shareholders' equity or debt of the Company or any increase
in the debt of the Company or any decrease in the net assets of the Company, as
compared with the amounts shown in the most recent consolidated balance sheet
of the Company included in the Registration Statement or, during the period
from most recent consolidated statement of operations included in the
Registration Statement to a specified date not more than three days prior to
the date of the applicable U.S. Terms Agreement, there were any decreases, as
compared with the corresponding period in the preceding year, in revenues, net
income or funds from operations of the Company, except in all instances for
changes, increases or decreases which the Registration Statement and the
Prospectus disclose have occurred or may occur; and (iv) in addition to the
examination referred to in their opinions and the limited procedures referred
to in clause (iii) above, they have carried out certain specified procedures,
not constituting an audit, with respect to certain amounts, percentages and
financial and statistical information which are included in the Registration
Statement and U.S. Prospectus and which are specified by you, and have found
such amounts, percentages and financial and statistical information to be in
agreement with the relevant accounting, financial and other records of the
Company identified in such letter.
(e) At Closing Time, you shall have received from Arthur
Andersen LLP a letter dated as of Closing Time to the effect that they reaffirm
the statements made in the letter furnished pursuant to subsection (d) of this
Section 5, except that the "specified date" referred to shall be a date not
more than three days prior to Closing Time and, if the Company has elected to
rely upon Rule 430A of the 1933 Act Regulations, to the further effect that
they have carried out procedures as specified in clause (iv) of subsection (d)
of this Section 5 with respect to certain amounts, percentages and financial
information specified by you and deemed to be a part of the Registration
Statement pursuant to Rule 430A(b) and have found such amounts, percentages and
financial information to be in agreement with the records specified in such
clause (iv).
-37-
<PAGE> 38
(f) At Closing Time, counsel for the U.S. Underwriters
shall have been furnished with such documents and opinions as they may
reasonably require for the purpose of enabling them to pass upon the issuance
and sale of the U.S. Securities as herein contemplated and related proceedings,
or in order to evidence the accuracy of any of the representations or
warranties, or the fulfillment of any of the conditions, herein contained, and
all proceedings taken by the Company in connection with the issuance and sale
of the U.S. Underwritten Securities as contemplated in the applicable U.S.
Terms Agreement shall be satisfactory in form and substance to you and counsel
for the U.S. Underwriters.
(g) In the event the U.S. Underwriters exercise their
option provided in a U.S. Terms Agreement as set forth in Section 2(b) hereof
to purchase all or any portion of the U.S. Option Securities, the
representations and warranties of the Company and the Operating Partnership
contained herein and the statements in any certificates furnished by the
Company and the Operating Partnership hereunder shall be true and correct as of
each Date of Delivery, and you shall have received:
(i) A certificate of the Chief Executive Officer
or the President and Chief Operating Officer, of the Company and the
Operating Partnership and the chief financial or chief accounting
officer of each such entity, dated such Date of Delivery, confirming
that the certificate delivered at Closing Time pursuant to Section
5(c) hereof remains true and correct as of such Date of Delivery.
(ii) The favorable opinions of Shaw, Pittman,
Potts & Trowbridge, counsel for each of the Company, the Operating
Partnership and the Significant Subsidiaries and Locke Purnell Rain
Harrell (A Professional Corporation), special counsel for the Texas
Entities, each in form and substance satisfactory to counsel for the
U.S. Underwriters, dated such Date of Delivery, relating to the U.S.
Option Securities and otherwise to the same effect as the opinion and
statement required by Section 5(b)(i) hereof.
(iii) The favorable opinion of Locke Purnell Rain
Harrell (A Professional Corporation), counsel to each of the Company
and the Operating Partnership, dated such Date of Delivery, with
respect to all Texas franchise tax matters and otherwise to the same
effect as the opinion required by Section 5(b)(ii) hereof.
(iv) The favorable opinion of Hogan & Hartson
L.L.P., counsel for the U.S. Underwriters, dated such Date of
Delivery, relating to the U.S. Option Securities and otherwise to the
same effect as the opinion and statement required by Section 5(b)(iii)
hereof.
(v) A letter from Arthur Andersen LLP, in form
and substance satisfactory to you, dated such Date of Delivery,
substantially the
-38-
<PAGE> 39
same in scope and substance as the letter furnished to you pursuant to
Section 5(e) hereof, except that the "specified date" in the letter
furnished pursuant to this Section 5(g)(iv) shall be a date not more
than three days prior to such Date of Delivery.
If any condition specified in this Section 5 shall not have
been fulfilled when and as required to be fulfilled, the applicable U.S. Terms
Agreement may be terminated by you by notice to the Company at any time at or
prior to Closing Time, and such termination shall be without liability of any
party to any other party or Date of Delivery, as the case may be, except as
provided in Section 4 hereof.
SECTION 6. INDEMNIFICATION.
(a) Each of the Company and the Operating Partnership
agrees, jointly and severally, to indemnify and hold harmless each Underwriter
and each person, if any, who controls any Underwriter within the meaning of
section 15 of the 1933 Act, and any director, officer, employee or affiliate
thereof, as follows:
(i) against any and all loss, liability, claim,
damage and expense whatsoever, as incurred, arising out of any untrue
statement or alleged untrue statement of a material fact contained in
the Registration Statement (or any amendment thereto), including the
information deemed to be part of the Registration Statement pursuant
to Rule 430A(b) of the 1933 Act Regulations, if applicable, or the
omission or alleged omission therefrom of a material fact required to
be stated therein or necessary to make the statements therein not
misleading or arising out of any untrue statement or alleged untrue
statement of a material fact contained in any preliminary prospectus
or the U.S. Prospectus or the omission or alleged omission therefrom
of a material fact necessary in order to make the statements therein,
in the light of the circumstances under which they were made, not
misleading; provided, however, that neither the Company nor the
Operating Partnership shall be required under this subsection (i) to
indemnify any Underwriter with respect to any loss, liability, claim,
damage or expense to the extent such loss, liability, claim, damage or
expense arises out of any untrue statement or omission or alleged
untrue statement or omission made in reliance upon and in conformity
with written information furnished to the Company by you specifically
for inclusion in the Registration Statement or the U.S. Prospectus;
(ii) against any and all loss, liability, claim,
damage and expense whatsoever, as incurred, to the extent of the
aggregate amount paid in settlement of any litigation or of any
investigation or proceeding by any governmental agency or body,
commenced or threatened, or of any claim whatsoever for which
indemnification is provided under subsection (i) above,
-39-
<PAGE> 40
if such settlement is effected with the written consent of the Company
and the Operating Partnership; and
(iii) against any and all expense whatsoever
(including, without limitation, the fees and other charges of counsel
chosen by you) reasonably incurred in investigating, preparing or
defending against any litigation, or any investigation or proceedings
by any governmental agency or body, commenced or threatened, or any
claim whatsoever for which indemnification is provided under
subsection (i) above, to the extent that any such expense is not paid
under subsection (i) or (ii) above.
(b) Each U.S. Underwriter severally agrees to indemnify
and hold harmless the Company and the Operating Partnership, and each person,
if any, who controls the Company or the Operating Partnership within the
meaning of Section 15 of the 1933 Act, and any trust manager, director,
officer, employee or affiliate thereof, against any and all loss, liability,
claim, damage and expense described in the indemnity contained in subsection
(a) of this Section 6, as incurred, but only with respect to untrue statements
or omissions, or alleged untrue statements or omissions, made in the
Registration Statement (or any amendment thereto) or any preliminary prospectus
or the U.S. Prospectus (or any amendment or supplement thereto) in reliance
upon and in conformity with written information furnished to the Company by you
specifically for inclusion in the Registration Statement or the U.S.
Prospectus.
(c) Each indemnified party shall give notice as promptly
as reasonably practicable to each indemnifying party of any action commenced
against it in respect of which indemnity may be sought hereunder, but failure
to so notify an indemnifying party shall not relieve such indemnifying party
from any liability hereunder to the extent it is not materially prejudiced as a
result thereof and in any event shall not relieve it from any liability which
it may have otherwise than on account of this indemnity agreement. An
indemnifying party may participate at its own expense in the defense of such
action. If it so elects within a reasonable time after receipt of such notice,
an indemnifying party, jointly with any other indemnifying parties receiving
such notice, may assume the defense of such action with counsel chosen by it
and approved by the indemnified parties defendant in such action, unless such
indemnified parties reasonably object to such assumption on the ground that the
named parties to any such action (including any impleaded parties) include both
such indemnified parties and an indemnifying party, and such indemnified
parties reasonably believe that there may be legal defenses available to them
which are different from or in addition to those available to such indemnifying
party. If an indemnifying party assumes the defense of such action, the
indemnifying parties shall not be liable for any fees and expenses of counsel
for the indemnified parties incurred thereafter in connection with such action.
In no event shall the indemnifying parties be liable for fees and expenses of
more than one counsel (in addition to any local counsel) separate from their
own counsel for all
-40-
<PAGE> 41
indemnified parties in connection with any one action or separate but similar
or related actions in the same jurisdiction arising out of the same general
allegations or circumstances. No indemnifying party shall, without the prior
written consent of the indemnified parties, settle or compromise or consent to
the entry of any judgment with respect to any litigation, or any investigation
or proceeding by any governmental agency or body, commenced or threatened, or
any claim whatsoever in respect of which indemnification or contribution could
be sought under this Section 6 or Section 7 hereof (whether or not the
indemnified parties are actual or potential parties thereto), unless such
settlement, compromise or consent (i) includes an unconditional release of each
indemnified party from all liability arising out of such litigation,
investigation, proceeding or claim and (ii) does not include a statement as to
or an admission of fault, culpability or a failure to act by or on behalf of
any indemnified party.
(d) If at any time an indemnified party shall have requested an
indemnifying party to reimburse the indemnified party for fees and expenses of
counsel, such indemnifying party agrees that it shall be liable for any
settlement of the nature contemplated by Section 6(a)(ii) effected without its
written consent if (i) such settlement is entered into more than 45 days after
receipt by such indemnifying party of the aforesaid request, (ii) such
indemnifying party shall have received notice of the terms of such settlement
at least 30 days prior to such settlement being entered into and (iii) such
indemnifying party shall not have reimbursed such indemnified party in
accordance with such request prior to the date of such settlement.
SECTION 7. CONTRIBUTION.
If the indemnification provided for in Section 6 hereof is for any
reasons unavailable to or insufficient to hold harmless an indemnified party in
respect of any losses, liabilities, claims, damages or expenses referred to
therein, then each indemnifying party shall contribute to the aggregate amount
of such losses, liabilities, claims, damages and expenses incurred by such
indemnified party, as incurred, (i) in such proportion as is appropriate to
reflect the relative benefits received by the Company, on the one hand, and the
U.S. Underwriters, on the other hand, from the offering of the U.S.
Underwritten Securities pursuant to the applicable U.S. Terms Agreement or (ii)
if the allocation provided by clause (i) is not permitted by applicable law, in
such proportion as is appropriate to reflect not only the relative benefits
referred to in clause (i) above but also the relative fault of the Company, on
the one hand, and of the U.S. Underwriters, on the other hand, in connection
with the statements or omissions which resulted in such losses, liabilities,
claims, damages or expenses, as well as any other relevant equitable
considerations.
The relative benefits received by the Company, on the one hand, and
the U.S. Underwriters, on the other hand, in connection with the offering of
the U.S. Underwritten Securities pursuant to the applicable U.S. Terms
Agreement
-41-
<PAGE> 42
shall be deemed to be in the same respective proportions as the total net
proceeds from the offering of such U.S. Underwritten Securities (before
deducting expenses) received by the Company and the total underwriting discount
received by the U.S. Underwriters, in each case as set forth on the cover of
the U.S. Prospectus, or, if Rule 434 is used, the corresponding location on the
U.S. Term Sheet bear to the aggregate initial public offering price of such
U.S. Underwritten Securities as set forth on such cover.
The relative fault of the Company, on the one hand, and the U.S.
Underwriters, on the other hand, shall be determined by reference to, among
other things, whether any such untrue statement of a material fact or omission
or alleged omission to state a material fact relates to information and
opportunity to correct or prevent such statement or omission.
The Company and the U.S. Underwriters agree that it would not be just
and equitable if contribution pursuant to this Section 7 were determined by pro
rata allocation (even if the U.S. Underwriters were treated as one entity for
such purpose) or by any other method of allocation which does not take account
of the equitable considerations referred to above in this Section 7. The
aggregate amount of losses, liabilities, claims, damages and expenses incurred
by an indemnified party and referred to above in this Section 7 shall be deemed
to include any legal or other expenses reasonably incurred by such indemnified
party in investigating, preparing or defending against any litigation, or any
investigation or proceeding by any governmental agency or body, commenced or
threatened, or any claim whatsoever based upon any such untrue or alleged
untrue statement or omission or alleged omission.
Notwithstanding the provisions of this Section 7, no U.S. Underwriter
shall be required to contribute any amount in excess of the amount by which the
total price at which the U.S. Underwritten Securities underwritten by it and
distributed to the public were offered to the public exceeds the amount of any
damages which such U.S. Underwriter has otherwise been required to pay by
reason of any such untrue or alleged untrue statement or omission or alleged
omission.
No person guilty of fraudulent misrepresentation (within the meaning
of Section 11(f) of the 1933 Act) shall be entitled to contribution from any
person who was not guilty of such fraudulent misrepresentation.
For purposes of this Section 7, each person, if any, who controls a
U.S. Underwriter within the meaning of Section 15 of the 1933 Act or Section 20
of the 1934 Act shall have the same rights to contribution as such U.S.
Underwriter, and each director of the Company, each officer of the Company who
signed the Registration Statement, and each person, if any, who controls the
Company within the meaning of Section 15 of the 1933 Act or Section 20 of the
1934 Act shall have the same rights to contribution as the Company. The U.S.
Underwriters' respective
-42-
<PAGE> 43
obligations to contribute pursuant to this Section 7 are several in proportion
to the number or aggregate principal amount, as the case may be, of Initial
U.S. Underwritten Securities set forth opposite their respective names in the
applicable U.S. Terms Agreement, and not joint.
SECTION 8. REPRESENTATIONS, WARRANTIES AND AGREEMENTS TO SURVIVE DELIVERY.
All representations, warranties and agreements contained in this
Agreement and the U.S. Terms Agreement, or contained in certificates of
officers of the Company or the Operating Partnership submitted pursuant hereto,
shall remain operative and in full force and effect, regardless of any
investigation made by or on behalf of any U.S. Underwriter or any controlling
person, or by or on behalf of the Company or the Operating Partnership or any
controlling persons, and shall survive delivery of the U.S. Underwritten
Securities to the U.S. Underwriters.
SECTION 9. TERMINATION OF AGREEMENT.
(a) This Agreement (excluding the applicable U.S. Terms
Agreement) may be terminated for any reason at any time by the Company or by
you upon the giving of 30 days' written notice of such termination to the other
party hereto, provided that the continued effectiveness of this Agreement shall
not in any way limit or prohibit the Company's right to offer any or all of the
Securities through any other underwriter or pursuant to any other selling
arrangement.
(b) You may also terminate the applicable U.S. Terms
Agreement, by notice to the Company, at any time at or prior to Closing Time,
(i) if there has been, since the date of such U.S. Terms Agreement or since the
respective dates as of which information is given in the U.S. Prospectus, any
material adverse change in the condition, financial or otherwise, or in the
earnings, assets, business affairs or business prospects of the Company, the
Operating Partnership, the Subsidiaries and the Residential Development
Corporations considered as one enterprise, whether or not arising in the
ordinary course of business, (ii) if there has occurred any material adverse
change in the financial markets in the United States or any outbreak of
hostilities or other calamity or crisis or escalation of any existing
hostilities, or any change or development involving a prospective change in
national or international political, financial or economic conditions, in each
case the effect of which is such as to make it, in your judgment, impracticable
to market the U.S. Underwritten Securities or enforce contracts for the sale of
the U.S. Underwritten Securities, (iii) if trading in any of the securities of
the Company has been suspended or limited by the Commission or on any exchange
or any over-the-counter market, or if trading generally on either the New York
Stock Exchange or the American Stock Exchange or in the NASDAQ Stock Market's
National Market
-43-
<PAGE> 44
has been suspended or limited, or minimum or maximum prices for trading have
been fixed, or maximum ranges for prices for securities have been required, by
either of said exchanges or by order of the Commission or any other
governmental authority, or if a banking moratorium has been declared by federal
or New York authorities, (iv) if the rating assigned by any nationally
recognized statistical rating organization to any Preferred Shares of the
Company or any indebtedness of the Company or the Operating Partnership as of
the date of the applicable U.S. Terms Agreement shall have been lowered since
such date or if any such rating organization shall have publicly announced that
it has placed any Preferred Shares of the Company or any indebtedness of the
Company or the Operating Partnership on what is commonly termed a "watch list"
for possible downgrading, (v) a banking moratorium has been declared by either
Federal or New York authorities, or (vi) pursuant to Section 10(b) below. As
used in this Section 9(b), the term "Prospectus" means the Prospectus in the
form first used to confirm sales of the U.S. Underwritten Securities.
(c) In the event of any such termination, (x) the
covenants set forth in Section 3 hereof with respect to any offering of U.S.
Underwritten Securities shall remain in effect so long as any Underwriter owns
any such U.S. Underwritten Securities purchased from the Company pursuant to
the applicable U.S. Terms Agreement and (y) the covenant set forth in Section
3(h) hereof, the provisions of Section 4 hereof, the indemnity and contribution
agreements set forth in Sections 6 and 7 hereof, and the provisions of Sections
8 and 13 hereof shall remain in effect.
SECTION 10. DEFAULT BY ONE OR MORE OF THE U.S. UNDERWRITERS.
If one or more of the U.S. Underwriters shall fail at Closing Time to
purchase the U.S. Underwritten Securities which it or they are obligated to
purchase under the applicable U.S. Terms Agreement (the "DEFAULTED SHARES"),
then you shall have the right, within 24 hours thereafter, to make arrangements
for one or more of the non-defaulting U.S. Underwriters, or any other U.S.
Underwriters, to purchase all, but not less than all, of the Defaulted Shares
in such amounts as may be agreed upon and upon the terms herein set forth; if,
however, you shall not have completed such arrangements within such 24-hour
period, then:
(a) if the number of Defaulted Shares does not exceed ten
percent (10%) of the Initial U.S. Securities to be purchased pursuant to the
U.S. Terms Agreement, the non-defaulting U.S. Underwriters named in such U.S.
Terms Agreement shall be obligated to purchase the full amount thereof in the
proportions that their respective underwriting obligations hereunder bear to
the underwriting obligations of all non-defaulting U.S. Underwriters; or
(b) if the number of Defaulted Shares exceeds ten percent
(10%) of the Initial U.S. Securities to be purchased pursuant to the U.S. Terms
Agreement,
-44-
<PAGE> 45
the applicable U.S. Terms Agreement shall terminate without liability on the
part of any non-defaulting Underwriter.
No action taken pursuant to this Section 10 shall relieve any
defaulting U.S. Underwriter from liability in respect of its default.
In the event of any such default which does not result in a
termination of this Agreement, you and the Company each shall have the right to
postpone Closing Time for a period not exceeding seven days in order to effect
any required changes in the Registration Statement or Prospectuses or in any
other documents or arrangements.
SECTION 11. NOTICES.
All notices and other communications hereunder shall be in writing and
shall be deemed to have been duly given if mailed or transmitted by any
standard form of telecommunication. Notices to the U.S. Underwriters shall be
directed c/o Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith
Incorporated, at Merrill Lynch World Headquarters, North Tower, World Financial
Center, New York, New York 10281-1305, attention of Michael F. Profenius,
Managing Director; notices to either the Company or the Operating Partnership
shall be directed to each of them, c/o the Operating Partnership at 777 Main
Street, Suite 2100, Fort Worth, Texas, 76102, attention of John C. Goff, Chief
Executive Officer of the Operating Partnership.
SECTION 12. PARTIES.
This Agreement and the applicable U.S. Terms Agreement shall each
inure to the benefit of and be binding upon the parties hereto and thereto and
their respective successors. Nothing expressed or mentioned in this Agreement
or the applicable U.S. Terms Agreement is intended or shall be construed to
give any person, firm or corporation, other than those referred to in Sections
6 and 7 hereof and their successors, heirs and legal representatives, any legal
or equitable right, remedy or claim under or in respect of this Agreement or
the applicable U.S. Terms Agreement or any provision herein or therein
contained. This Agreement and the applicable U.S. Terms Agreement and all
conditions and provisions hereof and thereof are intended to be for the sole
and exclusive benefit of the parties hereto and thereto and their respective
successors and said controlling persons and officers, directors and trust
managers and their heirs and legal representatives, and for the benefit of no
other person, firm or corporation. No purchaser of U.S. Underwritten
Securities from any U.S. Underwriter shall be deemed to be a successor by
reason merely of such purchase.
-45-
<PAGE> 46
SECTION 13. GOVERNING LAW AND TIME.
This Agreement and the applicable U.S. Terms Agreement shall be
governed by and construed in accordance with the laws of the State of New York
applicable to agreements made and to be performed in said State. Specified
times of day refer to New York City time.
-46-
<PAGE> 47
If the foregoing is in accordance with your understanding of our
agreement please sign and return to the Company a counterpart hereof, whereupon
this instrument, along with all counterparts, will become a binding agreement
among the U.S. Underwriters, the Company and the Operating Partnership in
accordance with its terms.
Very truly yours,
CRESCENT REAL ESTATE EQUITIES COMPANY
By: /s/ GERALD W. HADDOCK
-------------------------------------
CRESCENT REAL ESTATE EQUITIES LIMITED
PARTNERSHIP
By: Crescent Real Estate Equities, Ltd.
General Partner
By: /s/ GERALD W. HADDOCK
-------------------------------------
CONFIRMED AND ACCEPTED,
as of the date first above written:
MERRILL LYNCH & CO.
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
By: Merrill Lynch, Pierce, Fenner & Smith
Incorporated
By: /s/ MICHAEL F. PROFENIUS
------------------------------
Michael F. Profenius
Managing Director
-47-
<PAGE> 48
CRESCENT REAL ESTATE EQUITIES COMPANY
(a Texas real estate investment trust)
[Title of Securities]
FORM OF U.S. TERMS AGREEMENT
Dated: ____________ __, 1997
To: CRESCENT REAL ESTATE EQUITIES COMPANY
777 Main Street
Fort Worth, Texas 76102
Attention:
Ladies and Gentlemen:
We (the "Representatives") understand that Crescent Real Estate
Equities Company ("the Company") proposes to issue and sell the number of its
[Preferred Shares of Beneficial Interest, $.01 par value per share (the
"Preferred Shares")] [Common Shares of Beneficial Interest, $.01 par value per
share (the "Common Shares")] [Warrants to purchase Common Shares of the Company
(the "Warrants")] (such [Preferred Shares] [Common Shares] [Warrants] being
collectively hereinafter referred to as the "U.S. Underwritten Securities").
Subject to the terms and conditions set forth or incorporated by reference
herein, the U.S. Underwriters named below (the "U.S. Underwriters") offer to
purchase, severally and not jointly, the respective numbers of Initial U.S.
Securities (as defined in the U.S. Purchase Agreement referred to below) set
forth below opposite their respective names, and a proportionate share of U.S.
Option Securities (as defined in the U.S. Purchase Agreement referred to below)
to the extent any are purchased, at the purchase price set forth below.
<TABLE>
<CAPTION>
Number of Shares of Initial
Underwriter U.S. Underwritten Securities
----------- ----------------------------------
<S> <C>
-------------------
Total $
==================
</TABLE>
<PAGE> 49
The U.S. Underwritten Securities shall have the following terms:
[Preferred Shares] [Common Shares] [Warrants]
Title of Securities:
Number of Shares:
[Current Ratings:]
[Dividend Rate: [$ ] [ %], Payable:]
[Stated Value:]
[Liquidation Preference:]
[Ranking:]
Public offering price per share: $ [, plus accumulated dividends, if any,
from , 19 .]
Purchase price per share: $ [, plus accumulated dividends, if any, from
, 19 .]
[Conversion provisions:]
[Redemption provisions:]
[Sinking fund requirements:]
Number of U.S. Option Securities, if any, that may be purchased by the U.S.
Underwriters:
Delayed Delivery Contracts: [authorized] [not authorized]
[Date of Delivery:
Minimum Contract:
Maximum number of Shares:
Fee:
Additional co-managers, if any:
Other terms:
Closing date and location:
[Warrants]
Number of Warrants to be issued:
Warrant Agent:
Issuable jointly with Common Shares [yes] [no]
[Number of Warrants issued with each Common Share of beneficial
interest:]
[Detachable data:]
Date from which Warrants are exercisable:
Date on which Warrants expire:
Exercise Price(s) of Warrants:
Initial public offering price: $
Purchase price: $
Title of Warrant Securities:
Principal amount purchasable upon exercise of one Warrant:
-2-
<PAGE> 50
Interest rate: Payable:
Date of maturity:
Redemption provisions:
Sinking fund requirements:
[Delayed Delivery Contracts: [authorized] [not authorized]
[Date of delivery:
Minimum contract:
Maximum aggregate principal amount:
Fee: %]
Other terms:
[Closing date and location:]
All the provisions contained in the document attached as Annex
A hereto entitled "Crescent Real Estate Equities Company--Preferred Shares of
Beneficial Interest, Common Shares of Beneficial Interest, and Common Share
Warrants--Purchase Agreement" are hereby incorporated by reference in their
entirety herein and shall be deemed to be a part of this U.S. Terms Agreement
to the same extent as if such provisions had been set forth in full herein.
Terms defined in such document are used herein as therein defined.
-3-
<PAGE> 51
Please accept this offer no later than ________ o'clock P.M. (New York City
time) on ______________ by signing a copy of this U.S. Terms Agreement in the
space set forth below and returning the signed copy to us.
Very truly yours
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
By:
-------------------------------------------
Michael F. Profenius
Managing Director
Acting on behalf of itself and the other
named U.S. Underwriters.
Accepted:
By: CRESCENT REAL ESTATE EQUITIES COMPANY
By:
---------------------------------------
Name:
Title:
-4-
<PAGE> 52
CRESCENT REAL ESTATE EQUITIES COMPANY
(a Texas real estate investment trust)
[Title of Securities]
DELAYED DELIVERY CONTRACT
Dated: ____________ __, 1997
To: CRESCENT REAL ESTATE EQUITIES COMPANY
900 Third Avenue, Suite 1800
New York, New York 10022
Attention: ___________________
Ladies and Gentlemen:
The undersigned hereby agrees to purchase from Crescent Real Estate
Equities, Inc. ("the Company"), and the Company agrees to sell to the
undersigned on ___________ ___, 19__ (the "Delivery Date"),
_____________________________ of the Company's [insert title of security] (the
"Securities"), offered by the Company's Prospectus dated ____________ ___,
19__, as supplemented by its Prospectus Supplement dated ___________ _____,
19__, receipt of which is hereby acknowledged, at a purchase price of [$
_________] to the Delivery Date and on the further terms and conditions set
forth in this contract.
Payment for the Securities which the undersigned has agreed to
purchase on the Delivery Date shall be made to the Company or its order by
[certified or official bank check in New York Clearing House] [same day] funds
at the office of ____________________________________________________, on the
Delivery Date, upon delivery to the undersigned of the Securities to be
purchased by the undersigned in definitive form and in such denominations and
registered in such names as the undersigned may designate by written or
telegraphic communication addressed to the Company not less than five full
business days prior to the Delivery Date.
The obligation of the undersigned to take delivery of and make payment
for Securities on the Delivery Date shall be subject only to the conditions
that (1) the purchase of Securities to be made by the undersigned shall not on
the Delivery Date be prohibited under the laws of the jurisdiction to which the
undersigned is subject and (2) the Company, on or before _________ __, 19__,
shall have sold to the U.S. Underwriters of the Securities (the "U.S.
Underwriters") such
<PAGE> 53
principal amount of the Securities as is to be sold to them pursuant to the
U.S. Terms Agreement dated ____________, 19__ between the Company and the U.S.
Underwriters. The obligation of the undersigned to take delivery of and make
payment for Securities shall not be affected by the failure of any purchaser to
take delivery of and make payments for Securities pursuant to other contracts
similar to this contract. The undersigned represents and warrants to you that
its investment in the Securities is not, as of the date hereof, prohibited
under the laws of any jurisdiction to which the undersigned is subject and
which govern such investment.
Promptly after completion of the sale to the U.S. Underwriters, the
Company will mail or deliver to the undersigned at its address set forth below
notice to such effect, accompanied by a copy of the opinions of counsel for the
Company delivered to the U.S. Underwriters in connection therewith.
By the execution hereof, the undersigned represents and warrants to
the Company that all necessary corporate action for the due execution and
delivery of this contract and the payment for and purchase of the Securities
has been taken by it and no further authorization or approval of any
governmental or other regulatory authority is required for such execution,
delivery, payment or purchase, and that, upon acceptance hereof by the Company
and mailing or delivery of a copy as provided below, this contract will
constitute a valid and binding agreement of the undersigned in accordance with
its terms.
This contract will inure to the benefit of and be binding upon the
parties hereto and their respective successors, but will not be assignable by
either party hereto without the written consent of the other.
It is understood that the Company will not accept Delayed Delivery
Contracts for a number of Securities in excess of ______ and that the
acceptance of any Delayed Delivery Contract is in the Company's sole discretion
and, without limiting the foregoing, need not be on a first-come, first-served
basis. If this contract is acceptable to the Company, it is requested that the
Company sign the form of acceptance on a copy hereof and mail or deliver a
signed copy hereof to the undersigned at its address set forth below. This
will become a binding contract between the Company and the undersigned when
such copy is so mailed or delivered.
-2-
<PAGE> 54
This Agreement shall be governed by the laws of the State of New York.
Yours very truly,
---------------------------------------------------
(Name of Purchaser)
By:
------------------------------------------------
Title:
---------------------------------------------
---------------------------------------------------
---------------------------------------------------
(Address)
Accepted as of the date first above written.
Crescent Real Estate Equities Company
By:
-----------------------------------
Name:
Title:
PURCHASER--PLEASE COMPLETE AT TIME OF SIGNING
The name and telephone number of the representative of the Purchaser with
whom details of delivery on the Delivery Date may be discussed are as follows:
(Please print.)
<TABLE>
<CAPTION>
Telephone No.
Name (including Area Code)
---- ---------------------
<S> <C>
-------------------- -------------------------------
</TABLE>
-3-
<PAGE> 1
EXHIBIT 1.02
CRESCENT REAL ESTATE EQUITIES COMPANY
(a Texas real estate investment trust)
COMMON SHARES OF BENEFICIAL INTEREST
(Par Value $.01 Per Share)
U.S. TERMS AGREEMENT
Dated: April 22, 1997
To: CRESCENT REAL ESTATE EQUITIES COMPANY
777 Main Street
Fort Worth, Texas 76102
Attention:
Ladies and Gentlemen:
We (the "Representatives") understand that Crescent Real
Estate Equities Company (the "Company") proposes to issue and sell its Common
Shares of Beneficial Interest, $.01 par value per share (the "Common Shares")
(such Common Shares being hereinafter referred to as the "U.S. Underwritten
Securities"). Subject to the terms and conditions set forth or incorporated by
reference herein, the U.S. Underwriters named below (the "U.S. Underwriters")
offer to purchase, severally and not jointly, the respective numbers of Initial
U.S. Securities (as defined in the U.S. Purchase Agreement referred to below)
set forth below opposite their respective names, and a proportionate share of
U.S. Option Securities (as defined in the U.S. Purchase Agreement referred to
below) to the extent any are purchased, at the purchase price set forth below.
<PAGE> 2
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
NUMBER OF SHARES OF INITIAL
UNDERWRITER U.S. UNDERWRITTEN SECURITIES
- --------------------------------------------------------------------------------
<S> <C>
Merrill Lynch , Pierce, Fenner & Smith
Incorporated 2,033,335
- --------------------------------------------------------------------------------
Bear, Stearns & Co. Inc. 2,033,333
- --------------------------------------------------------------------------------
Donaldson, Lufkin & Jenrette Securities
Corporation 2,033,333
- --------------------------------------------------------------------------------
Morgan Stanley & Co. Incorporated 2,033,333
- --------------------------------------------------------------------------------
PaineWebber Incorporated 2,033,333
- --------------------------------------------------------------------------------
Smith Barney Inc. 2,033,333
- --------------------------------------------------------------------------------
Alex. Brown & Sons Incorporated 200,000
- --------------------------------------------------------------------------------
BT Securities Corporation 200,000
- --------------------------------------------------------------------------------
Credit Suisse First Boston Corporation 200,000
- --------------------------------------------------------------------------------
Dillon, Read & Co. Inc. 200,000
- --------------------------------------------------------------------------------
A.G. Edwards & Sons, Inc. 200,000
- --------------------------------------------------------------------------------
Furman Selz LLC 200,000
- --------------------------------------------------------------------------------
Goldman, Sachs & Co. 200,000
- --------------------------------------------------------------------------------
Lazard Freres & Co. LLC 200,000
- --------------------------------------------------------------------------------
Lehman Brothers Inc. 200,000
- --------------------------------------------------------------------------------
Prudential Securities Incorporated 200,000
- --------------------------------------------------------------------------------
Salomon Brothers Inc 200,000
- --------------------------------------------------------------------------------
UBS Securities LLC 200,000
- --------------------------------------------------------------------------------
Sanford C. Bernstein & Co., Inc. 100,000
- --------------------------------------------------------------------------------
EVEREN Securities, Inc. 100,000
- --------------------------------------------------------------------------------
Fahnestock & Co. Inc. 100,000
- --------------------------------------------------------------------------------
Friedman, Billings, Ramsey & Co., Inc. 100,000
- --------------------------------------------------------------------------------
Genesis Merchant Group Securities 100,000
- --------------------------------------------------------------------------------
Hampshire Securities Corporation 100,000
- --------------------------------------------------------------------------------
Hanifen, Imhoff Inc. 100,000
- --------------------------------------------------------------------------------
Harris Webb & Garrison, Inc. 100,000
- --------------------------------------------------------------------------------
Janney Montgomery Scott Inc. 100,000
- --------------------------------------------------------------------------------
Edward D. Jones & Co., L.P. 100,000
- --------------------------------------------------------------------------------
Legg Mason Wood Walker, Incorporated 100,000
- --------------------------------------------------------------------------------
McDonald & Company Securities, Inc. 100,000
- --------------------------------------------------------------------------------
Principal Financial Securities, Inc. 100,000
- --------------------------------------------------------------------------------
Rauscher Pierce Refsnes, Inc. 100,000
- --------------------------------------------------------------------------------
Raymond James & Associates, Inc. 100,000
- --------------------------------------------------------------------------------
Roney & Co., LLC 100,000
- --------------------------------------------------------------------------------
Sands Brothers & Co., Ltd. 100,000
- --------------------------------------------------------------------------------
Southwest Securities, Inc. 100,000
- --------------------------------------------------------------------------------
Stifel, Nicolaus & Company, Incorporated 100,000
- --------------------------------------------------------------------------------
Sutro & Co. Incorporated 100,000
- --------------------------------------------------------------------------------
Tucker Anthony Incorporated 100,000
- --------------------------------------------------------------------------------
Wheat, First Securities, Inc. 100,000
----------
- --------------------------------------------------------------------------------
Total 16,800,000 Shares
==========
- --------------------------------------------------------------------------------
</TABLE>
2
<PAGE> 3
The U.S. Underwritten Securities shall have the following terms:
Title of Securities: Common Shares of Beneficial Interest, par value $.01 per
share
Number of Shares: 16,800,000
Public offering price per share: $25.375
Purchase price per share: $24.165
Number of U.S. Option Securities, if any, that may be purchased by the U.S.
Underwriters: 2,520,000
Delayed Delivery Contracts: not authorized
Additional co-managers, if any: Bear, Stearns & Co. Inc., Donaldson,
Lufkin & Jenrette Securities
Corporation, Morgan Stanley & Co.
Incorporated, PaineWebber
Incorporated and Smith Barney Inc.
Closing date and location: April 28, 1997, Hogan & Hartson L.L.P.,
Columbia Square, 555 Thirteenth Street,
N.W., Washington, D.C. 20004-1109
All the provisions contained in the document attached as Annex
A hereto entitled "Crescent Real Estate Equities Company--Preferred Shares of
Beneficial Interest, Common Shares of Beneficial Interest, and Common Share
Warrants--U.S. Purchase Agreement" are hereby incorporated by reference in
their entirety herein and shall be deemed to be a part of this U.S. Terms
Agreement to the same extent as if such provisions had been set forth in full
herein. Terms defined in such document are used herein as therein defined.
<PAGE> 4
Please accept this offer no later than ten o'clock P.M. (New York City time) on
April 22, 1997 by signing a copy of this U.S. Terms Agreement in the space set
forth below and returning the signed copy to us.
Very truly yours
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
By: /s/ MICHAEL F. PROFENIUS
----------------------------------
Michael F. Profenius
Managing Director
Acting on behalf of itself and the
other named U.S. Underwriters.
Accepted:
By: CRESCENT REAL ESTATE EQUITIES COMPANY
By: /s/ GERALD W. HADDOCK
------------------------------------
Name: Gerald W. Haddock
Title: President and Chief Executive
Officer
4
<PAGE> 1
EXHIBIT 1.03
CRESCENT REAL ESTATE EQUITIES COMPANY
(a Texas real estate investment trust)
Preferred Shares of Beneficial Interest,
Common Shares of Beneficial Interest,
and Common Share Warrants
INTERNATIONAL PURCHASE AGREEMENT
April 22, 1997
MERRILL LYNCH INTERNATIONAL
20 Farringdon Road
London EC1M 3NH
England
Ladies and Gentlemen:
Crescent Real Estate Equities Company, a Texas real estate investment
trust (the "COMPANY"), proposes to issue and sell its preferred shares of
beneficial interest, $.01 par value per share ("PREFERRED SHARES"), common
shares of beneficial interest, $.01 par value per share ("COMMON SHARES"), and
warrants for the purchase of Common Shares ("WARRANTS"), from time to time in
one or more offerings on terms to be determined at the time of sale. Each
series of Preferred Shares may vary as to the specific number of shares in the
series, title, stated value, liquidation preference, issuance price, ranking,
dividend rate or rates (or method of calculation), dividend payment dates, any
redemption or sinking fund requirements, any conversion provisions and any
other variable terms as set forth in the Company's Restated Declaration of
Trust (the "DECLARATION OF TRUST") or any articles supplementary to the
Company's Declaration of Trust establishing the preferences and rights of such
series of Preferred Shares. Each series of Warrants also may vary as to the
exercise time and price and other variable terms as set forth in the applicable
Warrant Agreement. As used herein, "you" and "your," unless the context
otherwise requires, means the parties to whom this Purchase Agreement (the
"AGREEMENT") is addressed together with the other parties, if any, identified
in the applicable International Terms Agreement (as hereinafter defined) as
additional co-managers with respect to International Securities (as hereinafter
defined) purchased pursuant hereto.
At such time, if any, as the Company determines to make an offering of
Preferred Shares, Common Shares or Warrants through you or through an
<PAGE> 2
underwriting syndicate managed by you, the Company will enter into an agreement
(the "INTERNATIONAL TERMS AGREEMENT") substantially in the form of Annex A
hereto providing for the sale of such securities (the "INTERNATIONAL
SECURITIES") to, and the purchase and offering thereof by, you and such other
underwriters, if any, as are selected by you that have authorized you to enter
into such International Terms Agreement on their behalf (the "INTERNATIONAL
UNDERWRITERS," which term shall include you, whether acting alone in the sale
of the International Securities or as a member of an underwriting syndicate,
and any International Underwriter substituted pursuant to Section 10 hereof).
The International Terms Agreement relating to an offering of International
Securities shall specify the number of International Securities of each class
or series to be initially issued (the "INITIAL INTERNATIONAL SECURITIES"), the
names of the International Underwriters participating in the offering (subject
to substitution as provided in Section 10 hereof), the number of Initial
International Securities that each International Underwriter severally agrees
to purchase, the names of the International Underwriters acting as co-managers,
if any, in connection with the offering, the price at which the Initial
International Securities are to be purchased by the International Underwriters
from the Company, the initial public offering price, if any, of the Initial
International Securities, the time and place of delivery and payment, any
delayed delivery arrangements and any other variable terms of the Initial
International Securities (including, but not limited to, current ratings,
designations, liquidation preferences, conversion, exchange or exercise
provisions, redemption provisions, sinking fund requirements and exercise
prices and dates). In addition, each International Terms Agreement shall
specify whether the Company has agreed to grant to the International
Underwriters an option to purchase additional International Securities to cover
over-allotments, if any, and the number of International Securities subject to
such option (the "INTERNATIONAL OPTION SECURITIES"). As used herein, the term
"INTERNATIONAL SECURITIES" includes the Initial International Securities and
any International Option Securities agreed to be purchased by the International
Underwriters as provided in the applicable International Terms Agreement. The
International Terms Agreement shall be substantially in the form of Exhibit A
hereto, but may take the form of an exchange of any standard form of written
communication between you and the Company. Each offering of International
Securities through you or through an underwriting syndicate managed by you will
be governed by this Agreement, as supplemented by the applicable International
Terms Agreement, and such International Terms Agreement shall inure to the
benefit of and be binding upon each International Underwriter participating in
the offering of such International Securities.
It is understood that the Company is concurrently entering into an
agreement dated the date hereof (the "U.S. PURCHASE AGREEMENT") providing for
the sale by the Company of Securities (the "U.S. UNDERWRITTEN SECURITIES")
through arrangements with certain underwriters in the United States (the "U.S.
UNDERWRITERS") for whom Merrill Lynch, Pierce, Fenner & Smith Incorporated
-2-
<PAGE> 3
("MLPFS") and such other parties, if any, as are identified in the applicable
U.S. Terms Agreement (as hereinafter defined) as additional co-managers with
respect to the U.S. Underwritten Securities are acting as such, and the grant
by the Company to the U.S. Underwriters of an option to purchase additional
U.S. Underwritten Securities (the "U.S. OPTION SECURITIES") solely to cover
over-allotments. The initial public offering price and the purchase price with
respect to the U.S. Underwritten Securities to be initially issued (the
"INITIAL U.S. SECURITIES") are to be set forth in a separate instrument (the
"U.S. TERMS AGREEMENT"), the form of which is to be attached to the U.S.
Purchase Agreement. It is understood that the Company is not obligated to
sell, and the International Underwriters are not obligated to purchase, any
Initial International Securities unless all of the Initial U.S. Securities are
contemporaneously purchased by the U.S. Underwriters.
The International Underwriters and the U.S. Underwriters are hereinafter
collectively referred to as the "Underwriters." The Initial International
Securities and the Initial U.S. Securities are hereinafter collectively
referred to as the "Initial Securities." The International Option Securities
and the U.S. Option Securities are hereinafter collectively referred to as the
"Option Securities." The International Securities and the U.S. Underwritten
Securities are hereinafter collectively referred to as the "Securities."
The Company understands that the International Underwriters and the U.S.
Underwriters will enter into an Intersyndicate Agreement (the "INTERSYNDICATE
AGREEMENT") providing for the coordination of certain transactions among the
International Underwriters and the U.S. Underwriters under the direction of
MLPFS with respect to any concurrent offering of U.S. Underwritten Securities
and International Securities. The Company further understands that, except as
otherwise may be agreed by the U.S. Underwriters and the International
Underwriters in connection with any particular offering of Securities, it is
understood that the U.S. Underwriters may offer and sell Securities pursuant to
a U.S. Terms Agreement outside of the United States and Canada.
The Company has filed with the United States Securities and Exchange
Commission (the "COMMISSION") a registration statement on Form S-3 (No. 333-
21905) for the registration of certain Preferred Shares, Common Shares and
Warrants (collectively, the "REGISTERED SECURITIES") under the Securities Act
of 1933, as amended (the "1933 ACT"), and the offering thereof from time to
time in accordance with Rule 415 of the rules and regulations of the Commission
under the 1933 Act (the "1933 ACT REGULATIONS"), and the Company has filed such
amendment or amendments thereto as may have been required prior to the
execution of the applicable International Terms Agreement. Such registration
statement, as amended, has been declared effective by the Commission. Two
prospectuses are to be used in connection with the offering and sale of the
Registered Securities, one relating to the International Securities (the
-3-
<PAGE> 4
"INTERNATIONAL PROSPECTUS") and one relating to the U.S. Underwritten
Securities (the "U.S. PROSPECTUS"). Such registration statement and the two
prospectuses constituting parts thereof (including, in each case, any
information deemed to be a part thereof pursuant to Rule 430A(b) of the 1933
Act Regulations and any prospectus supplement relating to the offering of the
Registered Securities pursuant to Rule 415 of the 1933 Act regulations (a
"PROSPECTUS SUPPLEMENT")), as from time to time amended or supplemented
pursuant to the 1933 Act or otherwise, are hereinafter referred to as the
"REGISTRATION STATEMENT," the "INTERNATIONAL PROSPECTUS" and the "U.S.
PROSPECTUS," respectively, and the International Prospectus and U.S. Prospectus
are hereinafter collectively referred to as the "PROSPECTUSES," and each
individually as a "PROSPECTUS," except that if any revised prospectus shall be
provided to the International Underwriters or the U.S. Underwriters by the
Company for use in connection with the offering of Registered Securities that
differs from the Prospectus on file at the Commission at the time the
Registration Statement became effective (whether or not such revised prospectus
is required to be filed by the Company pursuant to Rule 424(b) of the 1933 Act
Regulations), the terms "INTERNATIONAL PROSPECTUS" and "U.S. PROSPECTUS" shall
refer to each such revised prospectus from and after the time it is first
provided to the International Underwriters or the U.S. Underwriters, as the
case may be, for such use; and except further that a Prospectus Supplement
shall be deemed to have supplemented a Prospectus only with respect to the
offering of Registered Securities to which it relates. All references in this
Agreement to financial statements and schedules and other information that are
"contained," "included" or "stated" in the Registration Statement or a
Prospectus (and all other references of like import) shall be deemed to mean
and include all such financial statements and schedules and other information
that are or are deemed to be incorporated by reference in the Registration
Statement or the Prospectus, as the case may be; and all references in this
Agreement to amendments or supplements to the Registration Statement or a
Prospectus shall be deemed to mean and include the filing of any document under
the 1934 Act that is or is deemed to be incorporated by reference in the
Registration Statement or the Prospectus, as the case may be. If the Company
elects to rely on Rule 434 under the 1933 Act Regulations, all references to a
Prospectus shall be deemed to include, without limitation, the form of
prospectus and the abbreviated term sheet, taken together, provided to the
International Underwriters or the U.S. Underwriters by the Company in reliance
on Rule 434 under the 1933 Act (the "RULE 434 PROSPECTUS"). If the Company
files a registration statement to register a portion of its Common Shares
issuable upon exercise of Warrants (the "WARRANT SHARES") and relies on Rule
462(b) for such registration to become effective upon filing with the
Commission (the "RULE 462 REGISTRATION STATEMENT"), then any reference to
"Registration Statement" herein shall be deemed to be to both the registration
statement referred to above (No. 333-21905) and the Rule 462 Registration
Statement, as each such registration statement may be amended pursuant to the
1933 Act.
-4-
<PAGE> 5
SECTION 1. REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE OPERATING
PARTNERSHIP.
(a) The Company and Crescent Real Estate Equities Limited
Partnership, a Delaware limited partnership (the "OPERATING
PARTNERSHIP"), jointly and severally, represent and warrant to you as of
the date hereof and to you and each of the other International
Underwriters named in the applicable International Terms Agreement as of
the date thereof (in each case, an "INTERNATIONAL REPRESENTATION DATE"),
as follows:
(i) The Registration Statement and the International
Prospectus, at the time the Registration Statement became
effective, complied, and at each International Representation
Date will comply, in all material respects, with the requirements
of the 1933 Act and the 1933 Act Regulations; the Registration
Statement, at the time the Registration Statement became
effective, did not, and as of each International Representation
Date will not, contain an untrue statement of a material fact or
omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading. The
International Prospectus, as of the date hereof does, and as of
each International Representation Date (unless the term
"Prospectus" refers to a prospectus that has been provided to the
International Underwriters by the Company for use in connection
with the offering of Registered Securities that differs from a
Prospectus on file at the Commission at the time the Registration
Statement became effective, in which case at the time it is first
provided to the International Underwriters for such use) and at
Closing Time and each Date of Delivery referred to in Sections
2(b) and 2(c) hereof, will comply in all material respects with
the requirements of the 1933 Act and the 1933 Act Regulations
and, as of the date hereof does not, and as of each International
Representation Date will not, contain an untrue statement of a
material fact or omit to state a material fact necessary in order
to make the statements therein, in the light of the circumstances
under which they were made, not misleading; provided, however,
that the representations and warranties in this paragraph shall
not apply to statements in or omissions from the Registration
Statement or the International Prospectus made in reliance upon
and in conformity with written information furnished to the
Company through you specifically for inclusion in the
Registration Statement or the International Prospectus.
-5-
<PAGE> 6
(ii) No stop order suspending the effectiveness of the
Registration Statement or any part thereof has been issued, and
no proceeding for that purpose has been instituted or, to the
knowledge of the Company or the Operating Partnership, threatened
by the Commission or by the state securities authority of any
jurisdiction. No order preventing or suspending the use of the
International Prospectus has been issued, and no proceeding for
that purpose has been instituted or, to the knowledge of the
Company or the Operating Partnership, threatened by the
Commission or by the state securities authority of any
jurisdiction.
(iii) Each of Arthur Andersen LLP, the accounting firm
whose report on the financial statements and supporting schedule
of the Company is included in the Registration Statement, and any
other accounting firm whose report on financial statements is
included in the Registration Statement, is an independent public
accountant as required by the 1933 Act and the 1933 Act
Regulations.
(iv) The financial statements (including the notes
thereto) included in the Registration Statement and the
International Prospectus present fairly the financial position of
the respective entity or entities presented therein at the
respective dates indicated and the results of their operations
for the respective periods specified, and except as otherwise
stated in the Registration Statement, said financial statements
have been prepared in conformity with generally accepted
accounting principles applied on a consistent basis. The
supporting schedule included in the Registration Statement
presents fairly the information required to be stated therein.
The financial information and data included in the Registration
Statement and the International Prospectus present fairly the
information included therein and have been prepared on a basis
consistent with that of the financial statements included in the
Registration Statement and the International Prospectus and the
books and records of the respective entities presented therein.
The pro forma financial information included in the International
Prospectus has been prepared in accordance with the applicable
requirements of Rules 11-01 and 11-02 of Regulation S-X under the
1933 Act and other 1933 Act Regulations and American Institute of
Certified Public Accountants ("AICPA") guidelines with respect to
pro forma financial information and includes all adjustments
necessary to present fairly the pro forma financial position of
the respective
-6-
<PAGE> 7
entity or entities presented therein at the respective dates
indicated and the results of their operations for the respective
periods specified. Other than the historical and pro forma
financial statements (and schedule) included therein, no other
historical or pro forma financial statements (or schedules) are
required by the 1933 Act or the 1933 Act Regulations to be
included in the Registration Statement. Except as reflected or
disclosed in the financial statements included in the
Registration Statement or otherwise set forth in the
International Prospectus, none of the Company, the Operating
Partnership, any of the Subsidiaries or the Residential
Development Corporations (as such terms are hereinafter defined)
is subject to any material indebtedness, obligation, or
liability, contingent or otherwise.
(v) Since the respective dates as of which information
is given in the Registration Statement and the International
Prospectus, except as otherwise stated therein, (A) there has
been no material adverse change in the condition, financial or
otherwise, or in the earnings, assets, business affairs or
business prospects of the Company, the Operating Partnership, the
Subsidiaries and the Residential Development Corporations,
considered as one enterprise, whether or not arising in the
ordinary course of business, (B) no material casualty loss or
material condemnation or other material adverse event with
respect to any real property or improvements thereon owned or
leased by any of the Company, the Operating Partnership, any of
its Subsidiaries or any of the Residential Development
Corporations), including any property underlying indebtedness
held by the Company, (each individually a "PROPERTY" and
collectively, the "PROPERTIES"), the Operating Partnership, any
of the Subsidiaries or any of the Residential Development
Corporations, has occurred that is material to the Company, the
Operating Partnership, the Subsidiaries and the Residential
Development Corporations considered as one enterprise, (C) there
have been no acquisitions or other transactions entered into by
the Company, the Operating Partnership, any Subsidiary or any
Residential Development Corporation other than those in the
ordinary course of business that are material with respect to
such entities, considered as one enterprise, or would result in
any inaccuracy in the representations contained in Section
1(a)(iv) above, (D) except as described in the International
Prospectus and except for regular quarterly dividends or
distributions on the Common Shares, there has been no dividend or
distribution of any kind declared, paid or
-7-
<PAGE> 8
made by the Company, or by the Operating Partnership with respect
to its partnership interests, and (E) there has been no change in
the capital stock of the Company or its Subsidiaries or the
Residential Development Corporations or the partnership interests
of the Operating Partnership, or any increase in the indebtedness
of the Company, the Operating Partnership, the Subsidiaries or
the Residential Development Corporations that is material to such
entities, considered as one enterprise.
(vi) The Company has been duly formed as a real estate
investment trust under the laws of the State of Texas with power
and authority to own, lease and operate its properties, to
conduct the business in which it is engaged or proposes to engage
as described in the International Prospectus and to enter into
and perform its obligations under this Agreement. According to
the County Clerk of Tarrant County, Texas, the Restated
Declaration of Trust of the Company is recorded in Volume 12645,
beginning at Page 1811, in the records of the County Clerk. The
Restated Declaration of Trust is in effect, and no dissolution,
revocation or forfeiture proceedings regarding the Company have
been commenced. The Company is duly qualified as a foreign
organization to transact business and is in good standing in each
jurisdiction in which such qualification is required, whether by
reason of the ownership or leasing of property or the conduct of
business, except where the failure to so qualify would not have a
material adverse effect on the condition, financial or otherwise,
or the earnings, assets, business affairs or business prospects
of the Company, the Operating Partnership, the Subsidiaries and
the Residential Development Corporations considered as one
enterprise.
(vii) The Operating Partnership has been duly formed and
is validly existing as a limited partnership in good standing
under the Delaware Revised Uniform Limited Partnership Act (the
"DELAWARE ACT") with partnership power and authority to own,
lease and operate its properties, to conduct the business in
which it is engaged or proposes to engage as described in the
Prospectus and to enter into and perform its obligations under
this Agreement. The Operating Partnership is duly qualified or
registered as a foreign partnership and is in good standing in
each jurisdiction in which such qualification or registration is
required, whether by reason of the ownership or leasing of
property or the conduct of business, except where the failure to
so qualify or register would not have a material adverse effect
on the condition, financial or otherwise, or the earnings,
assets,
-8-
<PAGE> 9
business affairs or business prospects of the Company, the
Operating Partnership, the Subsidiaries and the Residential
Development Corporations considered as one enterprise. The First
Amended and Restated Agreement of Limited Partnership of the
Operating Partnership, as amended (the "PARTNERSHIP AGREEMENT"),
is a valid and binding agreement enforceable in accordance with
its terms. At Closing Time (as hereinafter defined), Crescent
Real Estate Equities, Ltd., a Delaware corporation ("CGP, INC."),
a wholly owned subsidiary of the Company, will be the sole
general partner of the Operating Partnership and will be the
holder of one percent (1%) of the interests in the Operating
Partnership. Entities in which the Company directly or
indirectly has a majority ownership interest are hereinafter
referred to as the "SUBSIDIARIES," and each, individually, as a
"SUBSIDIARY." Houston Area Development Corp., a Texas
corporation, Mira Vista Development Corp., a Texas corporation,
and Crescent Development Management Corp., a Delaware
corporation, in which the Company owns no voting securities, and
as to which the Company does not have the right to exercise
control, are referred to herein collectively as the "RESIDENTIAL
DEVELOPMENT CORPORATIONS."
(viii) Each of the Subsidiaries and the Residential
Development Corporations has been duly organized and is validly
existing as a corporation, limited partnership, or limited
liability company, as the case may be, in good standing under the
laws of its respective state of organization, with full power and
authority to own, lease and operate its properties, to conduct
the business in which it is engaged or proposes to engage as
described in the International Prospectus. Each of the
Subsidiaries and the Residential Development Corporations is duly
qualified as a foreign corporation, limited partnership, or
limited liability company, as the case may be, to transact
business and is in good standing in each jurisdiction in which
such qualification is required, whether by reason of the
ownership or leasing of property or the conduct of business,
except where the failure to so qualify would not have a material
adverse effect on the condition, financial or otherwise, or the
earnings, assets, business affairs or business prospects of the
Company, the Operating Partnership, the Subsidiaries and the
Residential Development Corporations considered as one
enterprise. Each of the partnership agreements, limited
liability company agreements, or other, similar instruments to
which the Company or any of its Subsidiaries is a party has
-9-
<PAGE> 10
been duly authorized, executed and delivered by the parties
thereto and constitutes the valid agreement thereof, enforceable
in accordance with its terms. All of the issued and outstanding
shares of capital stock of each of the corporate Subsidiaries and
the Residential Development Corporations have been duly
authorized and validly issued and are fully paid and non-
assessable. The ownership by the Company, the Operating
Partnership or the Subsidiaries of the shares of capital stock or
limited partnership or equity interests, as the case may be, of
each of the Subsidiaries and the Residential Development
Corporations is as described in the Prospectus and all of such
shares or limited partnership or equity interests, or other,
similar instruments owned by the Company, the Operating
Partnership or the Subsidiaries are free and clear of all liens,
charges and encumbrances.
(ix) The authorized, issued and outstanding beneficial
interests in the Company are as set forth in the Prospectus
(except for subsequent issuances, if any, pursuant to clauses (A)
and (B) below); and all of such beneficial interests have been
duly authorized, are validly issued, fully paid and non-
assessable and have been offered and sold in compliance with all
applicable laws (including, without limitation, federal
securities laws). No shares of capital stock of the Company are
reserved for any purpose except in connection with: (A) the
incentive compensation plans of the Company as described in the
Prospectus and (B) the possible issuance of Common Shares upon
the exchange of units of ownership interest in the Operating
Partnership (the "UNITS") pursuant to the Partnership Agreement,
for which sufficient Common Shares have been reserved for
possible future issuance. Except for Units and Common Shares
issuable upon the exercise of options as described in the
Prospectus, there are no outstanding securities convertible into
or exchangeable for any beneficial interests in the Company and
no outstanding options, rights (preemptive or otherwise) or
warrants to purchase or to subscribe for such interests or any
other securities of the Company.
(x) The International Securities have been duly
authorized for issuance and sale to the International
Underwriters pursuant to this Agreement and the applicable
International Terms
-10-
<PAGE> 11
Agreement and, when issued and delivered by the Company pursuant
to such Agreements against payment of the consideration set forth
in the International Terms Agreement, will be validly issued,
fully paid and non-assessable. Upon payment of the purchase
price and delivery of the Securities in accordance with this
Agreement and the applicable International Terms Agreement, each
of the International Underwriters will receive good, valid and
marketable title to the Securities, free and clear of all
security interests, mortgages, pledges, liens, encumbrances and
claims. The International Securities will be offered and sold at
Closing Time, or the Date of Delivery, as the case may be, in
compliance with all applicable laws (including, without
limitation, federal securities laws). The terms of the Common
Shares conform to all statements and descriptions related thereto
contained in the International Prospectus. The form of the
certificate used to evidence any Common Shares, Preferred Shares,
and Warrants included in the International Securities is in due
and proper form and complies with all applicable legal
requirements. The issuance of the Securities is not subject to
any preemptive or other similar rights and, except as summarized
in the International Prospectus and set forth in the Company's
Declaration of Trust or Bylaws, there are no restrictions on the
voting or transfer of the Common Shares pursuant to the Company's
Declaration of Trust or Bylaws or any agreement or other
instrument.
(xi) If applicable, the Warrants have been duly
authorized and, when issued and delivered pursuant to this
Agreement and countersigned by the Warrant Agent as provided in
the Warrant Agreement, will have been duly executed,
countersigned, issued and delivered and will constitute valid and
legally binding obligations of the Company entitled to the
benefits provided by the Warrant Agreement under which they are
to be issued; the issuance of the Warrant Shares upon exercise of
the Warrants will not be subject to preemptive or other similar
rights; and the Warrants conform in all material respects to all
statements relating thereto contained in the International
Prospectus.
(xii) If applicable, the Common Shares issuable upon
conversion of the Preferred Shares or the Warrant Shares issuable
upon exercise of the Warrants will have been duly and validly
authorized and reserved for issuance upon such conversion
-11-
<PAGE> 12
or exercise by all necessary corporate action and such shares,
when issued upon such conversion or exercise, will be duly
authorized and validly issued and will be fully paid and non-
assessable, and the issuance of such shares upon conversion or
exercise will not be subject to preemptive or other similar
rights; the Common Shares issuable upon conversion of the
Preferred Shares or the Warrant Shares issuable upon exercise of
the Warrants conform in all material respects to all statements
relating thereto contained in the International Prospectus.
(xiii) If applicable, the Warrant Agreement will have been
duly authorized, executed and delivered by the Company prior to
the issuance of the Warrants, and each Warrant Agreement
constitutes a valid and legally binding agreement of the Company
enforceable in accordance with its terms, except as enforcement
thereof may be limited by bankruptcy, insolvency or other similar
laws relating to or affecting creditors' rights generally and by
general equity principles (regardless of whether enforcement is
considered in a proceeding in equity or at law); and the Warrant
Agreement conforms in all material respects to all statements
relating thereto contained in the International Prospectus.
(xiv) The authorized, issued and outstanding Units are as
set forth in the International Prospectus except to the extent of
changes due to the conversion of Units to Common Shares or the
exercise of existing options to acquire Units. All of the Units
outstanding at Closing Time were duly authorized for issuance by
the Operating Partnership and are validly issued and fully paid.
The Units were offered and sold in compliance with all applicable
laws (including, without limitation, federal and state securities
laws). Except as summarized in the International Prospectus or
set forth in the Partnership Agreement, there are no preemptive
or other rights to subscribe for or to purchase, nor any
restriction upon the voting or transfer of, any Units pursuant to
the Partnership Agreement or any other instrument. The terms of
the Units conform to all statements and descriptions related
thereto contained in the International Prospectus.
(xv) None of the Company, the Operating Partnership, any
Subsidiary or any Residential Development Corporation is in
violation of its declaration of trust, charter, by-laws,
certificate of limited partnership, partnership agreement, or
limited liability company agreement, as the case may be, and none
of the Company, the Operating Partnership, any Subsidiary or any
Residential Development Corporation is in default in the
performance or observance of any obligation,
-12-
<PAGE> 13
agreement, covenant or condition contained in any contract,
indenture, mortgage, loan agreement, note, lease or other
instrument to which such entity is a party or by which such
entity may be bound, or to which any of the property or assets of
such entity is subject, except where a default thereunder would
not have a material adverse effect on the condition, financial or
otherwise, or the earnings, assets, business affairs or business
prospects of the Company, the Operating Partnership, the
Subsidiaries and the Residential Development Corporations
considered as one enterprise.
(xvi) The execution and delivery of this Agreement, the
applicable International Terms Agreement or any applicable
Warrant Agreement, the performance of the obligations set forth
herein or therein, and the consummation of the transactions
contemplated hereby or thereby or in the International Prospectus
by the Company, the Operating Partnership, the Subsidiaries and
the Residential Development Corporations, as applicable, will not
conflict with or constitute a breach or violation by such party
of, or default under, (A) any material contract, indenture,
mortgage, loan agreement, note, lease, joint venture or
partnership agreement or other instrument or agreement to which
the Company, the Operating Partnership, any Subsidiary or any
Residential Development Corporation is a party or by which they,
any of them, any of their respective assets or any Property may
be bound or subject; (B) the declaration of trust, charter, by-
laws, certificate of limited partnership, partnership agreement,
or limited liability company agreement, as the case may be, of
the Company, the Operating Partnership, any Subsidiary or any
Residential Development Corporation; or (C) any applicable law,
rule, order, administrative regulation or administrative or court
decree.
(xvii) The Company has full right, power and authority
under its organizational documents to enter into this Agreement,
the applicable International Terms Agreement and any Delayed
Delivery Contracts (as hereinafter defined), and this Agreement
has been, and as of each Representative Date, the applicable
International Terms Agreement and the Delayed Delivery Contracts,
if any, will have been duly authorized, executed and delivered by
the Company
(xviii) The Operating Partnership has full right, power and
authority under its organizational documents to enter into
-13-
<PAGE> 14
this Agreement and this Agreement has been duly authorized,
executed and delivered by the Operating Partnership.
(xix) There is no action, suit or proceeding before or by
any court or governmental agency or body, domestic or foreign,
now pending, or, to the knowledge of the Company or the Operating
Partnership, threatened against or affecting the Company, the
Operating Partnership, any Subsidiary, any Residential
Development Corporation, any Property, or any property underlying
indebtedness held by the Company, the Operating Partnership, any
of the Subsidiaries or any of the Residential Development
Corporations, or any officer or trust manager of the Company that
is required to be disclosed in the Registration Statement (other
than as disclosed therein) or that, if determined adversely to
the Company, the Operating Partnership, any Subsidiary, any
Residential Development Corporation, any Property, including any
property underlying indebtedness held by the Company, the
Operating Partnership, any of the Subsidiaries and any of the
Residential Development Corporations, or any such officer or
trust manager, might (A) result in any material adverse change in
the condition, financial or otherwise, or in the earnings,
assets, business affairs or business prospects of the Company,
the Operating Partnership, the Subsidiaries and the Residential
Development Corporations considered as one enterprise or (B)
materially and adversely affect the consummation of the
transactions contemplated by this Agreement. There is no pending
legal or governmental proceeding to which the Company, the
Operating Partnership, any Subsidiary or any Residential
Development Corporation is a party or of which any of their
respective properties or assets or any Property, including any
property underlying indebtedness held by the Company, the
Operating Partnership, any of the Subsidiaries or any of the
Residential Development Corporations, is the subject, including
ordinary routine litigation incidental to the business, that is,
considered in the aggregate, material to the condition, financial
or otherwise, or the earnings, assets, business affairs or
business prospects of the Company, the Operating Partnership, the
Subsidiaries and the Residential Development Corporations
considered as one enterprise. There are no contracts or
documents that are required to be filed as exhibits to the
Registration Statement by the 1933 Act or by the 1933 Act
Regulations which have not been filed as exhibits to the
Registration Statement or to a document incorporated therein by
reference.
-14-
<PAGE> 15
(xx) The Company qualified as a real estate investment
trust under the Internal Revenue Code of 1986, as amended (the
"CODE"), with respect to its taxable years ended December 31,
1994, December 31, 1995 and December 31, 1996 and is organized in
conformity with the requirements for qualification as a real
estate investment trust, and its manner of operation has enabled
it to meet the requirements for qualification as a real estate
investment trust as of the date of the International Prospectus,
and its proposed manner of operation will enable it to meet the
requirements for qualification as a real estate investment trust
in the future.
(xxi) None of the Company, the Operating Partnership, any
Subsidiary or any Residential Development Corporation is, or at
Closing Time will be, required to be registered under the
Investment Company Act of 1940, as amended (the "1940 ACT").
(xxii) None of the Company, the Operating Partnership, any
Subsidiary or any Residential Development Corporation is required
to own or possess any trademarks, service marks, trade names or
copyrights (collectively, "PROPRIETARY RIGHTS") not now lawfully
owned or possessed in order to conduct the business now operated
by such entity or as proposed to be operated by it as described
in the International Prospectus and no such entity has received
any notice or is otherwise aware of any infringement of or
conflict with asserted rights of others with respect to any
proprietary rights.
(xxiii) All authorizations, approvals and consents
of any court or governmental authority or agency that are
necessary in connection with the offering, issuance or sale of
the International Securities hereunder have been obtained, except
such as may be required under the 1933 Act or the 1933 Act
Regulations or state securities or real estate syndication laws.
(xxiv) Each of the Company, the Operating Partnership, the
Subsidiaries and the Residential Development Corporations
possesses such certificates, authorizations or permits issued by
the appropriate state, federal or foreign regulatory agencies or
bodies necessary to conduct the business now conducted by it, or
proposed to be conducted by it, as described in the International
Prospectuses, and none of the Company, the Operating Partnership,
any Subsidiary or any Residential Development Corporation has
received any notice of proceedings relating to the revocation or
modification of any such certificate,
-15-
<PAGE> 16
authorization or permit which, singly or in the aggregate, if the
subject of an unfavorable decision, ruling or finding, would
materially and adversely affect the condition, financial or
otherwise, or the earnings, assets, business affairs or business
prospects of the Company, the Operating Partnership, the
Subsidiaries and the Residential Development Corporations
considered as one enterprise.
(xxv) The documents incorporated or deemed to be
incorporated by reference in the International Prospectus, at the
time it was or hereafter is filed with the Commission, complied
and will comply in all material respects with the requirements of
the 1934 Act and the rules and regulations of the Commission
under the 1934 Act (the "1934 ACT REGULATIONS"), and, when read
together with the other information in the International
Prospectus, at the time the Registration Statement became
effective and as of each International Representation Date or
during the period specified in Section 3(f) hereof, did not and
will not include an untrue statement of a material fact or omit
to state a material fact required to be stated therein or
necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading.
(xxvi) No labor dispute with the employees of the
Company, the Operating Part nership, any Subsidiary or any
Residential Development Corporation exists or, to the knowledge
of the Company or the Operating Partnership, is imminent.
(xxvii) Except as otherwise described in the
International Prospectus, (A) each of the Company, the Operating
Partnership, the Subsidiaries, and each Residential Development
Corporation, as the case may be, has good and marketable title in
fee simple to all real property owned by such entity and good and
marketable title to the improvements, if any, thereon and all
other assets that are required for the effective operation of
such real property in the manner in which they currently are
operated, except where the failure to own real property or
improvements thereon in fee simple would not have a material
adverse effect on the condition, financial or otherwise, or on
the earnings, assets, business affairs or busi-ness prospects of
or with respect to the Company, the Operating Partnership, the
Subsidiaries and the Residential Development Corporations
considered as one enterprise; (B) any real property and buildings
held under lease by the Company, the Operating Partnership, any
Subsidiary or any Residential Development Corporation are in full
force and effect, and such entity is not in default in respect of
any of the terms or provisions of such leases and such entity has
not received notice of the assertion of any claim by anyone
adverse to the Operating Partnership's rights as lessee under
such leases, or affecting or questioning the Operating
Partnership's right to the continued possession or use of the
real property and buildings held under such leases or of a
default under such leases, in each case with such exceptions as
would not have a material adverse impact on the condition,
financial or otherwise, or on the earnings, assets, business
affairs or business prospects of or with respect to the Company,
the Operating Partnership, the Subsidiaries and the Residential
Development Corporations considered as one enterprise; (C) all
liens, charges, encumbrances, claims, or restrictions on or
affecting any of the Properties, including any property
underlying indebtedness held by the Company, the Operating
Partnership, any of the Subsidiaries or any of the Residential
Development Corporations, and the assets of the Company, the
Operating
-16-
<PAGE> 17
Partnership, any Subsidiary or any Residential Development
Corporation which are required to be disclosed in the
International Prospectus are disclosed therein; (D) none of the
Company, the Operating Partnership, any of the Subsidiaries, any
of the Residential Development Corporations or any tenant of any
of the Properties is in default under any of the leases pursuant
to which the Operating Partnership, as lessor, leases its
Property (and neither the Company nor the Operating Partnership
knows of any event which, but for the passage of time or the
giving of notice, or both, would constitute a default under any
of such leases) other than such defaults that would not have a
material adverse effect on the condition, financial or otherwise,
or on the earnings, assets, business affairs or business
prospects of or with respect to the Operating Partnership, any
Subsidiary or any Residential Development Corporation or any
Property; (E) except as described in the International
Prospectus, no person has an option or right of first refusal to
purchase all or part of any Property or any interest therein,
other than such options or rights of first refusal which would
not have a material adverse effect on the condition, financial or
otherwise, or on the earnings, assets, business affairs or
business prospects of or with respect to the Company, the
Operating Partnership, the Subsidiaries and the Residential
Development Corporations, considered as one enterprise; (F) each
of the Properties complies with all applicable codes, laws and
regulations (including, without limitation, building
-17-
<PAGE> 18
and zoning codes, laws and regulations and laws relating to
access to the Properties), except if and to the extent disclosed
in the International Prospectus and except for such failures to
comply that would not individually or in the aggregate have a
material adverse impact on the condition, financial or otherwise,
or on the earnings, assets, business affairs or business
prospects of such Property or the Operating Partnership; (G)
there are in effect for the Properties, including, to the
knowledge of the Company, any property underlying indebtedness
held by the Company, the Operating Partnership, any of the
Subsidiaries and any of the Residential Development Corporations,
and the other assets of the Company, the Operating Partnership,
the Subsidiaries and the Residential Development Corporations,
insurance policies covering risks and in amounts that are
commercially reasonable for the assets owned by them and that are
consistent with the types and amounts of insurance typically
maintained by present owners of similar types of properties; and
(H) neither the Company nor the Operating Partnership has
knowledge of any pending or threatened condemnation proceedings,
zoning change, or other proceeding or action that will in any
manner affect the size of, use of, improvements on, construction
on or access to the Properties, including any property underlying
indebtedness held by the Company, the Operating Partnership, any
of the Subsidiaries or any Residential Development Corporation,
except such proceedings or actions that would not have a material
adverse effect on the condition, financial or otherwise, or on
the earnings, assets, business affairs or business prospects of
the Operating Partnership or with respect to such Property,
including any property underlying indebtedness held by the
Company, the Operating Partnership, any of the Subsidiaries or
any Residential Development Corporation.
(xxviii) Except as disclosed in the International
Prospectus, (A) each Property, including, without limitation, the
Environment (as defined below) associated with such Property, is
free of any Hazardous Substance (as defined below), except for
Hazardous Substances that would not have a material adverse
effect on the condition, financial or otherwise, or on the
earnings, assets, business affairs or business prospects of or
with respect to the Company, the Operating Partnership, the
Subsidiaries and the Residential Development Corporations
considered as one enterprise; (B) none of the Company, the
Operating Partnership, any Subsidiary or any Residential
Development Corporation has caused or suffered to occur any
-18-
<PAGE> 19
Release (as defined below) of any Hazardous Substance into the
Environment on, in, under or from any Property, and no condition
exists on, in, under or, to the knowledge of the Company and the
Operating Partnership, adjacent to any Property that is
reasonably likely to result in the incurrence of material
liabilities or any material violations of any Environmental Law
(as defined below), give rise to the imposition of any Lien (as
defined below) under any Environmental Law, or cause or
constitute a health, safety or environmental hazard to any
property, person or entity; (C) none of the Company, the
Operating Partnership, any Subsidiary or any Residential
Development Corporation intends to use the properties or assets
described in the International Prospectus or any other real
property for the purpose of handling, burying, storing,
retaining, refining, transporting, processing, manufacturing,
generating, producing, spilling, seeping, leaking, escaping,
leaching, pumping, pouring, emitting, emptying, discharging,
injecting, dumping, transferring or otherwise disposing of or
dealing with a Hazardous Substance, except for materials utilized
in the ordinary course of business of the properties, provided
such use would not, in the ordinary course of business, give rise
to liability under any Environmental Law; (D) none of the
Company, the Operating Partnership, any Subsidiary or any
Residential Development Corporation has received any notice of a
claim under or pursuant to any Environmental Law or under common
law pertaining to Hazardous Substances on or originating from any
Property; (E) none of the Company, the Operating Partnership, any
Subsidiary or any Residential Development Corporation has
received any notice from any Governmental Authority (as defined
below) claiming any violation of any Environmental Law; (F) no
Property is included or, to the knowledge of the Company and the
Operating Partnership, proposed for inclusion on the National
Priorities List issued pursuant to CERCLA (as defined below) by
the United States Environmental Protection Agency (the "EPA") or
on the Comprehensive Environmental Response, Compensation, and
Liability Information System database maintained by the EPA, and
has not otherwise been identified by the EPA as a potential
CERCLA removal, remedial or response site or included or, to the
knowledge of the Company and the Operating Partnership, proposed
for inclusion on, any similar list of potentially contaminated
sites pursuant to any other Environmental Law and (G) there are
no underground storage tanks located on or in any Property except
where the presence
-19-
<PAGE> 20
thereof would not have a material adverse effect on the
condition, financial or otherwise, or the earnings, assets or
business affairs or business prospects of the Company, the
Operating Partnership, the Subsidiaries and the Residential
Development Corporations considered as one enterprise.
As used herein, "HAZARDOUS SUBSTANCE" shall include, without
limitation, any hazardous substance, hazardous waste, toxic substance,
pollutant, solid waste or similarly designated materials, including,
without limitation, oil, petroleum or any petroleum-derived substance or
waste, asbestos or asbestos-containing materials, PCBs, pesticides,
explosives, radioactive materials, dioxins, urea formaldehyde insulation
or any constituent of any such substance, pollutant or waste, including
any such substance, pollutant or waste identified or regulated under any
Environmental Law (including, without limitation, materials listed in
the United States Department of Transportation Optional Hazardous
Material Table, 49 C.F.R. Section 172.101, as the same may now or
hereafter be amended, or in the EPA's List of Hazardous Substances and
Reportable Quantities, 40 C.F.R. Part 302, as the same may now or
hereafter be amended); "ENVIRONMENT" shall mean any surface water,
drinking water, ground water, land surface, subsurface strata, river
sediment, buildings, structures, and ambient, workplace and indoor air;
"ENVIRONMENTAL LAW" shall mean the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended (42 U.S.C. Section
9601 et seq.) ("CERCLA"), the Resource Conservation and Recovery Act of
1976, as amended (42 U.S.C. Section 6901 et seq.), the Clean Air Act,
as amended (42 U.S.C. Section 7401 et seq.), the Clean Water Act, as
amended (33 U.S.C. Section 1251 et seq.), the Toxic Substances Control
Act, as amended (15 U.S.C. Section 2601 et seq.), the Occupational
Safety and Health Act of 1970, as amended (29 U.S.C. Section 651 et
seq.), the Hazardous Materials Transportation Act, as amended (49 U.S.C.
Section 1801 et seq.), and all other federal, state and local laws,
ordinances, regulations, rules, orders, decisions and permits relating
to the protection of the environment or of human health from
environmental effects; "GOVERNMENTAL AUTHORITY" shall mean any federal,
state or local governmental office, agency or authority having the duty
or authority to promulgate, implement or enforce any Environmental Law;
"LIEN" shall mean, with respect to any Property, any mortgage, deed of
trust, pledge, security interest, lien, encumbrance, penalty, fine,
charge, assessment, judgment or other liability in, on or affecting such
Property; and "RELEASE" shall mean any spilling, leaking, pumping,
pouring, emitting, emptying, discharging, injecting, escaping, leaching,
dumping, emanating or disposing of any Hazardous Substance into the
Environment, including, without limitation, the abandonment or discard
of barrels, containers, tanks (including, without limitation,
underground storage tanks) or other receptacles containing or previously
containing any
-20-
<PAGE> 21
Hazardous Substance or any release, emission, discharge or similar term,
as those terms are defined or used in any Environmental Law.
(xxix) Each of the Company, the Operating Partnership, the
Subsidiaries and the Residential Development Corporations has
filed all federal, state, local and foreign income tax returns
which have been required to be filed (except in any case in which
the failure to so file would not have a material adverse effect
on the condition, financial or otherwise, or the earnings,
assets, business affairs or business prospects of such entities
considered as one enterprise) and has paid all taxes required to
be paid and any other assessment, fine or penalty levied against
it, to the extent that any of the foregoing is due and payable,
except, in all cases, for any such tax, assessment, fine or
penalty that is being contested in good faith.
(xxx) None of the Company, the Subsidiaries, the
Residential Development Corporations or the Operating
Partnership, nor any of their trust managers, directors, officers
or controlling persons, has taken or will take, directly or
indirectly, any action resulting in a violation of Regulation M
under the 1934 Act, or designed to cause or result under the 1934
Act or otherwise in, or which has constituted or which reasonably
might be expected to constitute, the unlawful stabilization or
manipulation of the price of any security of the Company or
facilitation of the sale or resale of the International
Securities.
(b) Any certificate signed by any officer of the Company or the
Operating Partnership and delivered to you or to counsel for the International
Underwriters shall be deemed a representation and warranty by such entity to
each International Underwriter as to the matters covered thereby.
SECTION 2. PURCHASE AND SALE.
(a) The several commitments of the International Underwriters to
purchase the International Securities pursuant to the applicable International
Terms Agreement shall be deemed to have been made on the basis of the
representations and warranties herein contained and shall be subject to the
terms and conditions set forth herein or in the applicable International Terms
Agreement.
(b) In addition, on the basis of the representations and warranties
herein contained and subject to the terms and conditions herein set forth, the
Company may grant, if so provided in the applicable International Terms
-21-
<PAGE> 22
Agreement relating to the Initial International Securities, an option to the
International Underwriters named in such International Terms Agreement,
severally and not jointly, to purchase up to the number of International Option
Securities set forth therein at the same price per Option Security as is
applicable to the Initial International Securities. Such option, if granted,
will expire 30 days or such lesser number of days as may be specified in the
applicable International Terms Agreement after the International Representation
Date relating to the Initial International Securities, and may be exercised in
whole or in part from time to time only for the purpose of covering over-
allotments which may be made in connection with the offering and distribution
of the Initial International Securities upon notice by you to the Company
setting forth the number of International Option Securities as to which the
several International Underwriters are then exercising the option and the time
and date of payment and delivery for such International Option Securities. Any
such time and date of delivery (a "DATE OF DELIVERY") shall be determined by
you, but shall not be later than seven full business days and not be earlier
than two full business days after the exercise of said option, unless otherwise
agreed upon by you and the Company. If the option is exercised as to all or
any portion of the International Option Securities, each of the International
Underwriters, acting severally and not jointly, will purchase that proportion
of the total number of International Option Securities then being purchased
which the number of Initial International Securities each such Underwriter has
agreed to purchase as set forth in the applicable International Terms Agreement
bears to the total number of Initial International Securities, subject to such
adjustments as you in your discretion shall make to eliminate any sales or
purchases of fractional Initial International Securities.
(c) Payment of the purchase price for, and delivery of, the
International Securities to be purchased by the International Underwriters
shall be made at the offices of Hogan & Hartson L.L.P., Columbia Square, 555
Thirteenth Street, N.W., Washington, D.C. 20004-1109, or at such other place
as shall be agreed upon by you and the Company, at 9:00 A.M., New York City
time, on the third business day (unless postponed in accordance with the
provisions of Section 10 hereof) following the date of the applicable
International Terms Agreement or, if pricing takes place after 4:30 P.M. New
York City time on the date of the applicable International Terms Agreement, on
the fourth business day (unless postponed in accordance with the provisions of
Section 10 hereof) following the date of the applicable International Terms
Agreement, or at such other time as shall be agreed upon by you and the Company
(each such time and date being referred to as a "CLOSING TIME"). In addition,
if any or all of the International Option Securities are purchased by the
International Underwriters, payment of the purchase price for, and delivery of
certificates representing, such International Option Securities, shall be made
at the above-mentioned offices of Hogan & Hartson L.L.P., or at such other
place as shall be agreed upon by you and the Company, on each Date of Delivery
as specified in the notice from you to the Company. Unless otherwise specified
in the applicable International Terms
-22-
<PAGE> 23
Agreement, payment shall be made to the Company by wire transfer or by
certified or official bank check or checks in federal or similar same-day funds
payable to the order of the Company against delivery to you for the respective
accounts of the International Underwriters of the International Securities to
be purchased by them. The International Securities shall be in such authorized
denominations and registered in such names as you may request in writing at
least two business days prior to the applicable Closing Time or Date of
Delivery, as the case may be. The International Securities, which may be in
temporary form, will be made available for examination and packaging by you on
or before the first business day prior to the applicable Closing Time or Date
of Delivery, as the case may be.
If authorized by the applicable International Terms Agreement, the
International Underwriters named therein may solicit offers to purchase
International Securities from the Company pursuant to delayed delivery
contracts ("DELAYED DELIVERY CONTRACTS") substantially in the form of Annex B
hereto with such changes therein as the Company may approve. As compensation
for arranging Delayed Delivery Contracts, the Company will pay to you at
Closing Time, for the respective accounts of the International Underwriters, a
fee specified in the applicable International Terms Agreement for each of the
International Securities for which Delayed Delivery Contracts are made at the
applicable Closing Time as is specified in the applicable International Terms
Agreement. Any Delayed Delivery Contracts are to be with institutional
investors of the types described in the Prospectuses. At the applicable
Closing Time, the Company will enter into Delayed Delivery Contracts (for not
less than the minimum number of International Securities per Delayed Delivery
Contract specified in the applicable International Terms Agreement) with all
purchasers proposed by the International Underwriters and previously approved
by the Company as provided below, but not for an aggregate number of
International Securities in excess of that specified in the applicable
International Terms Agreement. The International Underwriters will not have
any responsibility for the validity or performance of Delayed Delivery
Contracts.
You shall submit to the Company, at least three business days prior
to the applicable Closing Time, the names of any institutional investors with
which it is proposed that the Company will enter into Delayed Delivery
Contracts and the number of International Securities to be purchased by each of
them, and the Company will advise you, at least two business days prior to the
applicable Closing Time, of the names of the institutional investors with which
the making of Delayed Delivery Contracts is approved by the Company and the
number of International Securities to be covered by each such Delayed Delivery
Contract.
The number of International Securities agreed to be purchased by the
several International Underwriters pursuant to the applicable International
Terms Agreement shall be reduced by the number of International Securities
covered by Delayed Delivery Contracts, as to each Underwriter as set forth in a
-23-
<PAGE> 24
written notice delivered by you to the Company; provided, however, that the
total number of International Securities to be purchased by all International
Underwriters shall be the total number of International Securities covered by
the applicable International Terms Agreement, less the number of International
Securities covered by Delayed Delivery Contracts.
SECTION 3. COVENANTS OF THE COMPANY AND THE OPERATING PARTNERSHIP.
Each of the Company and the Operating Partnership covenants with each
International Underwriter as follows:
(a) Immediately following the execution of the applicable international
Terms Agreement, the Company will prepare a Prospectus Supplement setting forth
the number of International Securities covered thereby and their terms not
otherwise specified in the Prospectus pursuant to which the International
Securities are being issued, the names of the International Underwriters
participating in the offering and the number of International Securities which
each severally has agreed to purchase, the names of the International
Underwriters acting in connection with the offering, the price at which the
International Securities are to be purchased by the International Underwriters
from the Company, the initial public offering price, if any, the selling
concession and reallowance, if any, any delayed delivery arrangements, and such
other information as you and the Company deem appropriate in connection with
the offering of the International Securities; and the Company will promptly
transmit copies of the Prospectus Supplement to the Commission for filing
pursuant to Rule 424(b) of the 1933 Act Regulations within the time period
required by such Rule and will furnish to the International Underwriters named
therein as many copies of the International Prospectus and such Prospectus
Supplement as you shall reasonably request. If the Company elects to rely on
Rule 434 under the 1933 Act Regulations, the Company will prepare an
abbreviated term sheet that complies with the requirements of Rule 434 under
the 1933 Act Regulations and will provide the International Underwriters with
copies of the form of Rule 434 Prospectus, in such number as the International
Underwriters may reasonably request, and file or transmit for filing with the
Commission the form of International Prospectus complying with Rule 434(c)(2)
of the 1933 Act Regulations in accordance with Rule 424(b) of the 1933 Act
Regulations by the close of business in New York on the business day
immediately succeeding the date of the applicable International Terms
Agreement.
(b) The Company will notify you immediately, and confirm such notice
in writing, of (i) the effectiveness of any amendment to the Registration
Statement relating to or affecting the offering of the International
Securities, (ii) the transmittal to the Commission for filing of any Prospectus
Supplement or
-24-
<PAGE> 25
other supplement or amendment to the International Prospectus or any document
to be filed pursuant to the 1934 Act relating to or affecting the offering of
the International Securities, (iii) the receipt of any comments from the
Commission relating to or affecting the offering of the International
Securities, (iv) any request by the Commission for any amendment to the
Registration Statement or any amendment or supplement to the International
Prospectus or for additional information relating to or affecting the offering
of the International Securities, and (v) the issuance by the Commission of any
stop order suspending the effectiveness of the Registration Statement relating
to or affecting the offering of the International Securities or the initiation
of any proceedings for that purpose; and the Company will make every reasonable
effort to prevent the issuance of any such stop order and, if any stop order is
issued, to obtain the lifting thereof at the earliest possible moment.
(c) At any time when the International Prospectus is required to be
delivered under the 1933 Act or the 1934 Act in connection with sales of the
International Securities, the Company will give you notice of its intention to
file or prepare any amendment to the Registration Statement or any amendment or
supplement to the International Prospectus (including any revised prospectus
which the Company proposes for use by you in connection with the offering of
International Securities which differs from the International Prospectus on
file at the Commission at the time the Registration Statement became effective,
whether or not such revised prospectus is required to be filed pursuant to Rule
424(b) of the 1933 Act Regulations), whether pursuant to the 1933 Act, 1934 Act
or otherwise, and will furnish you with copies of any such amendment or
supplement a reasonable amount of time prior to such proposed filing or
preparation, as the case may be, and will not file or prepare any such
amendment or supplement or other documents in a form to which you or counsel
for the International Underwriters shall reasonably object.
(d) The Company will deliver to each International Underwriter as
many signed and conformed copies of the Registration Statement as originally
filed and of each amendment thereto, of each amendment thereto (including
exhibits filed therewith or incorporated by reference therein) as the
International Underwriters may reasonably request.
(e) The Company will furnish to each International Underwriter, from
time to time during the period when the International Prospectus is required to
be delivered under the 1933 Act or the Exchange Act, such number of copies of
the International Prospectus (as amended or supplemented) as such International
Underwriter may reasonably request for the purposes contemplated by the 1933
Act or the 1934 Act or the respective applicable rules and regulations of the
Commission thereunder.
-25-
<PAGE> 26
(f) If any event shall occur as a result of which it is necessary, in
the opinion of counsel for the International Underwriters or counsel for the
Company, to amend or supplement the International Prospectus in order to make
the International Prospectus not contain any untrue statement of a material
fact or omit to state a material fact necessary in order to make the statements
therein, in the light of the circumstances existing at the time it is delivered
to a purchaser, not misleading, or if it shall be necessary, in the opinion of
either such counsel, at any such time to amend or supplement the Registration
Statement or the International Prospectus in order to comply with the 1933 Act
or the 1934 Act, the Company will forthwith prepare an amendment of or
supplement to the Registration Statement or the International Prospectus (in
form and substance satisfactory to counsel for the International Underwriters),
whether by filing documents pursuant to the 1933 Act, the 1934 Act or
otherwise, which will amend or supplement the International Prospectus so that
it will not contain an untrue statement of a material fact or omit to state a
material fact necessary in order to make the statements therein, in the light
of the circumstances existing at the time it is delivered to a purchaser, not
misleading, or to make the Registration Statement and International Prospectus
comply with such requirements, and the Company will furnish to the
International Underwriters a reasonable number of copies of such amendment or
supplement.
(g) The Company will endeavor, in cooperation with the International
Underwriters and their counsel, to qualify the International Securities, the
Warrant Shares, if any, and any securities issuable upon conversion of the
Preferred Shares for offering and sale under the applicable securities laws and
real estate syndication laws of such jurisdictions as you may designate. In
each jurisdiction in which the International Securities, the Warrant Shares, if
any, and the securities issuable upon conversion of the Preferred Shares have
been so qualified, the Company will file such statements and reports as may be
required by the laws of such jurisdiction to continue such qualification in
effect for a period of not less than one year from the effective date of the
Registration Statement.
(h) With respect to each sale of International Securities, the
Company will make generally available to its security holders as soon as
practicable, but not later than 90 days after the close of the period covered
thereby, an earnings statement (in form complying with the provisions of Rule
158 of the 1933 Act Regulations) covering a 12-month period beginning not later
than the first day of the Company's fiscal quarter next following the
"effective date of the registration statement" (as defined in such Rule 158).
(i) The Company, during the period when the International Prospectus
is required to be delivered under the 1933 Act or the 1934 Act in connection
with sales of the International Securities, will file all documents required to
be filed with the Commission pursuant to Section 13, 14 or 15 of the 1934 Act
within the time periods prescribed by the 1934 Act and the 1934 Act
Regulations.
-26-
<PAGE> 27
(j) If applicable, the Company will use the net proceeds received by
it from the sale of the International Securities in the manner specified in the
International Prospectus under the caption "Use of Proceeds."
(k) If requested by you, the Company will use its best efforts to
effect the listing of the International Securities on the New York Stock
Exchange or such other national securities exchange on which securities of the
Company are then listed.
(l) During the period from the date of the applicable International
Terms Agreement until 90 days after Closing Time, the Company and the Operating
Partnership will not, without your prior written consent, directly or
indirectly, sell, offer to sell, grant any option for the sale of, or otherwise
dispose of, any Common Shares or Units or any other security convertible into
or exchangeable into or exercisable for the Common Shares, otherwise than in
accordance with this Agreement or as contemplated in the International
Prospectus except for (i) options granted under the incentive plans of the
Company, (ii) Common Shares issued in exchange for Units and (iii) Common
Shares or Units issued in connection with the acquisition of real property or
interests therein.
(m) The Company will use its best efforts to meet the requirements to
continue to qualify as a "real estate investment trust" under the Code.
(n) If requested by you, the Company and the Operating Partnership
will cause, or have caused, the officers and trust managers of the Company to
enter into lock-up agreements in form and substance reasonably satisfactory to
you, and each of the Company and the Operating Partnership acknowledges that
the International Underwriters are or will be intended third party
beneficiaries of such agreements.
(o) If any Preferred Shares or Warrants included in the International
Securities are convertible into or exercisable for, as applicable, Common
Shares, the Company will reserve and keep available at all times, free of
preemptive or other similar rights, a sufficient number of Common Shares for
the purpose of enabling the Company to satisfy any obligations to issue such
shares upon conversion of such Preferred Shares, or upon exercise of such
Warrants.
(p) If any Preferred Shares or Warrants included in the International
Securities are convertible into or exercisable for, as applicable, Common
Shares, the Company will use its best efforts to list the Common Shares
issuable on conversion of such Preferred Shares or upon exercise of such
Warrants on the New York Stock Exchange or such other national securities
exchange on which the Common Shares are then listed.
(q) Except for the authorization of actions permitted to be taken by
the Underwriters as contemplated herein or in the Prospectuses, neither the
-27-
<PAGE> 28
Company nor the Operating Partnership will (i) take, directly or indirectly,
any action designed to cause or to result in, or that might reasonably be
expected to constitute, the stabilization or manipulation of the price of any
security of the Company to facilitate the sale or resale of the International
Securities, (ii) sell, bid for or purchase the International Securities or pay
any person any compensation for soliciting purchases of the International
Securities or (iii) pay or agree to pay to any person any compensation for
soliciting another to purchase any other securities of the Company.
(r) During the period from Closing Time until five years after
Closing Time, the Company will deliver to you, (i) promptly upon their becoming
available, copies of all current, regular and periodic reports of the Company
mailed to its stockholders or filed with any securities exchange or with the
Commission or any governmental authority succeeding to any of the Commission's
functions, and (ii) such other information concerning the Company, the
Operating Partnership, any Subsidiary or any Residential Development
Corporation as you may reasonably request.
(s) Prior to Closing Time and if not described in the International
Prospectus, the Company and the Operating Partnership will notify you in
writing immediately if any event occurs that renders any of the representations
and warranties of the Company and the Operating Partnership contained herein
inaccurate or incomplete in any respect.
(t) If at any time during the 25-day period after any amendment to
the Registration Statement becomes effective or during the period prior to the
final Date of Delivery, any rumor, publication or event relating to or
affecting the Company shall occur as a result of which in your opinion the
market price of the International Securities has been or is likely to be
materially affected (regardless of whether such rumor, publication or event
necessitates supplements to or amendments of the Prospectuses), the Company
will, after written notice from you advising the Company to that effect,
promptly prepare, consult with you concerning the substance of, and disseminate
a press release or other public statement, reasonably satisfactory to you,
responding to or commenting on such rumor, publication or event.
(u) From the date hereof until notice of termination pursuant to
Section 9(a) hereof is received by you, the Company shall furnish to you and
your counsel, within two days after filing, copies of any document filed with
the Commission pursuant to Section 13, 14 or 15 of the 1934 Act.
SECTION 4. PAYMENT OF FEES AND EXPENSES.
The Company will pay all expenses incident to the performance of its
obligations under this Agreement and the applicable International Terms
-28-
<PAGE> 29
Agreement, including (i) the printing and filing of the Registration Statement
as originally filed and of each amendment thereto, (ii) the printing of this
Agreement and the applicable International Terms Agreement and other documents
related hereto, (iii) the preparation, issuance and delivery of the
certificates for the International Securities to the International
Underwriters, (iv) the fees and other charges of the Company's counsel and
accountants, (v) the qualification of the International Securities and the
Warrant Shares and securities issuable upon conversion of the Preferred Shares,
if any, under securities laws and real estate syndication laws in accordance
with the provisions of Section 3(g) hereof, including filing fees and the fees
and other charges of counsel for the International Underwriters in connection
therewith and in connection with the preparation of a blue sky memorandum (the
"BLUE SKY MEMORANDUM"), (vi) the printing and delivery to the International
Underwriters of copies of the Registration Statement as originally filed and of
each amendment thereto, of the preliminary prospectus, and of the International
Prospectus and any amendments or supplements thereto, (vii) the printing (and
reproduction) and delivery to the International Underwriters of copies of the
Blue Sky Memorandum, (viii) the printing and delivery to the International
Underwriters of copies of the Warrant Agreement, if any, (ix) any fees charged
by nationally recognized statistical rating organizations for the rating of the
International Securities, (x) the fees and expenses, if any, incurred with
respect to the listing of the International Securities, the Warrant Shares or
the securities issuable on conversion of the Preferred Shares, if any, on any
national securities exchange, and (xi) the fee of the National Association of
Securities Dealers, Inc. (the "NASD"), including the fees and other charges of
counsel for the International Underwriters in connection with the NASD's review
of the proposed public offering of the International Securities.
If the applicable International Terms Agreement is canceled or
terminated by you in accordance with the provisions of Section 5 or Section 9
hereof, the Company also shall reimburse the International Underwriters for all
of their out-of-pocket expenses, including the reasonable fees and other
charges of counsel for the International Underwriters.
SECTION 5. CONDITIONS OF INTERNATIONAL
UNDERWRITERS' OBLIGATIONS.
The obligations of the International Underwriters hereunder and under
the applicable International Terms Agreement are subject to the accuracy, as of
the date hereof and at Closing Time, of the representations and warranties of
the Company and the Operating Partnership herein contained, to the performance
by the Company and the Operating Partnership of their respective obligations
hereunder, and to the following further conditions:
-29-
<PAGE> 30
(a) At the applicable Closing Time (i) no stop order suspending the
effectiveness of the Registration Statement shall have been issued under the
1933 Act or proceedings therefor initiated or threatened by the Commission,
(ii) the rating assigned by any nationally recognized statistical rating
organization to any Preferred Shares of the Company and any indebtedness of the
Company or the Operating Partnership as of the date of the applicable
International Terms Agreement shall not have been lowered since such date nor
shall any such rating organization have publicly announced that it has placed
any Preferred Shares of the Company and any indebtedness of the Company or the
Operating Partnership on what is commonly termed a "watch list" for possible
downgrading, and (iii) there shall not have come to your attention any facts
that would cause you to believe that the International Prospectus, together
with the applicable Prospectus Supplement, at the time it was required to be
delivered to purchasers of the International Securities, included an untrue
statement of a material fact or omitted to state a material fact necessary in
order to make the statements therein, in light of the circumstances existing at
such time, not misleading.
(b) At Closing Time, you shall have received:
(i) The favorable opinions, dated as of Closing Time, of Shaw,
Pittman, Potts & Trowbridge, counsel for each of the Company, the
Operating Partnership, the Subsidiaries and the Residential Development
Corporations, and Locke Purnell Rain Harrell (A Professional
Corporation), special Texas tax counsel for the Subsidiaries that are
Texas entities (collectively with the Residential Development
Corporations, the "TEXAS ENTITIES"), each in form and substance
satisfactory to counsel for the International Underwriters, to the
effect that:
(A) The Company has been duly formed as a real estate
investment trust under the laws of the State of Texas. The Company
has power and authority to own, lease and operate its properties, to
conduct the business in which it is engaged or proposes to engage as
described in the International Prospectus, and to enter into and
perform its obligations under this Agreement, the Partnership
Agreement, the applicable International Terms Agreement and the
Warrant Agreement, if any (collectively, the "LISTED AGREEMENTS").
According to the County Clerk of Tarrant County, Texas, the Restated
Declaration of Trust of the Company is recorded in Volume 12645,
beginning at Page 1811, in the records of the County Clerk. The
Restated Declaration of Trust is in effect, and no dissolution,
revocation or forfeiture proceedings regarding the Company have been
commenced. The Company is duly qualified as a foreign organization
to transact business and is in good standing in each jurisdiction in
which such qualification is required, whether by reason of the
ownership or leasing of property or the conduct of business, except
-30-
<PAGE> 31
where the failure to so qualify would not have a material adverse effect
on the condition, financial or otherwise, or the earnings, assets,
business affairs or business prospects of the Company, the Operating
Partnership, the Subsidiaries and the Residential Development
Corporations considered as one enterprise.
(B) The Operating Partnership has been duly formed and is
validly existing as a limited partnership in good standing under the
Delaware Act. The Operating Partnership has full partnership power and
authority to own, lease and operate its properties, to conduct the
business in which it is engaged or proposes to engage as described in
the International Prospectus and to enter into and perform its
obligations under this Agreement and the Listed Agreements to which it
is a party. The Operating Partnership is duly qualified or registered
as a foreign partnership and is in good standing in Texas, Colorado,
Arizona, New Mexico, Louisiana, Nebraska and each other jurisdiction in
which such qualification or registration is required, whether by reason
of the ownership or leasing of property or the conduct of business,
except where the failure to so qualify or register would not have a
material adverse effect on the condition, financial or otherwise, or the
earnings, assets, business affairs or business prospects of the Company,
the Operating Partnership, the Subsidiaries and the Residential
Development Corporations considered as one enterprise. CGP, Inc., a
wholly owned subsidiary of the Company, is the sole general partner of
the Operating Partnership.
(C) Each of Crescent Real Estate Funding I, L.P., Crescent Real
Estate Funding II, L.P., Crescent Real Estate Funding III, L.P.,
Crescent Real Estate Funding IV, L.P., Crescent Real Estate Funding V,
L.P., Crescent Real Estate Funding VI, L.P. and any other Subsidiary
that would be considered a "Significant Subsidiary" as defined in
Article 1, Rule 1-02 of Regulation S-X promulgated pursuant to the 1933
Act (collectively, the "Significant Subsidiaries") has been organized
and is validly existing as a corporation, limited partnership or limited
liability company, as the case may be, in good standing under the laws
of its respective state of organization, with full corporate,
partnership or limited liability company (as the case may be) power and
authority to own, lease and operate its properties, to conduct the
business in which it is engaged or proposes to engage as described in
the International Prospectus, and to enter into and perform its
obligations under any Listed Agreements to which it is a party. Each of
the Significant Subsidiaries and the Residential Development
Corporations is duly qualified as a foreign corporation, limited
partnership or limited liability company, as the case may be, to
transact business and is in good standing in each jurisdiction in which
-31-
<PAGE> 32
such qualification is required, whether by reason of the ownership or
leasing of property or the conduct of business, except where the failure
to so qualify would not have a material adverse effect on the condition,
financial or otherwise, or the earnings, assets, business affairs or
business prospects of the Company, the Operating Partnership, the
Significant Subsidiaries and the Residential Development Corporations
considered as one enterprise. All of the issued and outstanding shares
of capital stock of each of the corporate Significant Subsidiaries have
been duly authorized and validly issued and are fully paid and non-
assessable. The ownership by the Company, the Operating Partnership and
the Significant Subsidiaries of the shares of capital stock or limited
partnership or equity interests, as the case may be, of each of the
Significant Subsidiaries is as described in the International Prospectus
and such ownership is free and clear of any security interest, mortgage,
pledge, lien, encumbrance, claim or equity.
(D) The authorized, issued and outstanding shares of beneficial
interest of the Company are as set forth in the International
Prospectus. All of such shares of beneficial interest are validly
issued, fully paid and non-assessable and have been offered and sold in
compliance with all applicable laws (including, without limitation,
federal securities laws). No shares of beneficial interest of the
Company are reserved for any purpose except in connection with (i) the
option plans of the Company as described in the International Prospectus
and (ii) the possible issuance of Common Shares upon the exchange of
Units pursuant to the Partnership Agreement. Except for Units, Common
Shares issuable upon the exercise of options and Units issuable upon the
exercise of options, there are no outstanding securities convertible
into or exchangeable for any shares of beneficial interest of the
Company and no outstanding options, rights (preemptive or otherwise) or
warrants to purchase or to subscribe for shares of beneficial interest
or any other securities of the Company.
(E) The International Securities have been duly authorized for
issuance and sale to the International Underwriters pursuant to this
Agreement and when issued and delivered by the Company pursuant thereto
and pursuant to the applicable International Terms Agreement against
payment of the consideration set forth therein and in any applicable
Delayed Delivery Contract, will be validly issued, fully paid and non-
assessable. Upon payment of the purchase price and delivery of the
International Securities in accordance herewith each of the
International Underwriters is receiving good, valid and marketable title
to the International Securities, free and clear of all security
interests, mortgages, pledges, liens, encumbrances and claims. The
International Securities will be offered and sold at Closing Time,
-32-
<PAGE> 33
or the Date of Delivery, as the case may be, in compliance with all
applicable laws (including, without limitation, the federal and
international securities laws). The terms of the International
Securities and the Common Shares, Preferred Shares and Warrants conform
to all statements and descriptions related thereto contained in the
International Prospectus. The form of stock certificate evidencing
Common Shares, Preferred Shares and Warrants, as applicable, is in due
and proper form and complies with all applicable legal requirements.
The issuance of the International Securities is not subject to any
preemptive or other similar rights and, except as set forth in the
International Prospectus, there are no restrictions on the voting or
transfer of Common Shares, Preferred Shares or Warrants, as applicable,
pursuant to the Company's Declaration of Trust or Bylaws or any
agreement or other instrument known to such counsel.
(F) If applicable, the Warrants have been duly authorized and,
when issued and delivered pursuant to this Agreement and the U.S.
Purchase Agreement and countersigned by the Warrant Agent as provided in
the Warrant Agreement, will have been duly executed, countersigned,
issued and delivered and will constitute valid and legally binding
obligations of the Company entitled to the benefits provided by the
Warrant Agreement under which they are to be issued.
(G) If applicable, the securities issuable upon conversion of
the Preferred Shares and the securities issuable upon exercise of the
Warrants have been duly and validly authorized and reserved for issuance
upon such conversion or exercise by all necessary action on the part of
the Company and such shares, when issued upon such conversion or
exercise in accordance with the Declaration of Trust, the Warrant
Agreement, or the Delayed Delivery Contract, as the case may be, will be
duly authorized, validly issued, fully paid and non-assessable, and the
issuance of such securities upon such conversion or exercise will not be
subject to preemptive or other similar rights arising by operation of
law or otherwise.
(H) Any applicable Warrant Agreement has been duly authorized,
executed and delivered by the Company and, assuming due authorization,
execution and delivery by the Warrant Agent, constitutes a valid and
legally binding agreement of the Company enforceable in accordance with
its terms; and the Warrant Agreement conforms in all material respects
to all statements relating thereto contained in the International
Prospectus.
-33-
<PAGE> 34
(I) If applicable, the relative rights, preferences, interests
and powers of the Preferred Shares, as the case may be, are as set forth
in a statement of designation filed for record with the County Clerk of
Tarrant County, Texas, and all such provisions are valid under Texas
law.
(J) At Closing Time, the number of authorized, issued and
outstanding Units will be as set forth in the International Prospectus,
except to the extent of changes due to either the conversion of Units to
Common Shares or the exercise of existing options to acquire Units. All
of the Units outstanding at Closing Time were duly authorized for
issuance by the Operating Partnership and are validly issued and fully
paid. To our knowledge, the Units were offered and sold in compliance
with all applicable laws (including, without limitation, federal
securities laws). Except as summarized in the International Prospectus
or as set forth in the Partnership Agreement, there are no preemptive or
other rights to subscribe for or to purchase, or any restriction upon
the voting or transfer of, any Units pursuant to the Partnership
Agreement or any other instrument known to such counsel. The terms of
the Units conform to all statements and descriptions related thereto
contained in the International Prospectus.
(K) Each of this Agreement, the applicable International Terms
Agreement, and any Delayed Delivery Contract has been duly authorized,
executed and delivered by each of the Company and the Operating
Partnership, as applicable.
(L) None of the Company, the Operating Partnership or any
Significant Subsidiary is in violation of its declaration of trust,
charter, by-laws, certificate of limited partnership, partnership
agreement, limited liability company agreement or similar instrument, as
the case may be, and, to the knowledge of counsel, none of the Company,
the Operating Partnership or any Significant Subsidiary is in default in
the performance or observance of any obligation, agreement, covenant or
condition contained in any contract, indenture, mortgage, loan
agreement, note, lease or other instrument filed as an exhibit to the
Registration Statement or any document incorporated therein by reference
or as otherwise identified by the Company as material in an officer's
certificate to which such entity is a party or by which such entity is
bound, or to which any of the property or assets of such entity is
subject, except where a default thereunder would not have a material
adverse effect on the condition, financial or otherwise, or the
earnings, assets, business affairs or business prospects of the Company,
the Operating Partnership, the Subsidiaries and the Residential
Development Corporations considered as one enterprise.
-34-
<PAGE> 35
(M) Each of the Listed Agreements was duly and validly
authorized, executed and delivered by the Company and the Operating
Partnership, as applicable, and, assuming due authorization, execution
and delivery by any other party thereto, is a valid and binding
agreement, enforceable in accordance with its terms, except as such
enforceability may be (1) limited by bankruptcy, insolvency,
reorganization, liquidation, moratorium and other similar laws affecting
the rights and remedies of creditors generally and (2) subject to
general principles of equity (regardless of whether such enforceability
is considered in a proceeding in equity or at law).
(N) The execution and delivery of the Listed Agreements, the
performance of the obligations set forth in each of the Listed
Agreements, and the consummation of the transactions contemplated
thereby or in the International Prospectus by the Company, the Operating
Partnership and the Significant Subsidiaries as applicable, will not
conflict with or constitute a breach or violation of, or default under:
(1) to the knowledge of counsel, any material contract, indenture,
mortgage, loan agreement, note, lease, joint venture or partnership
agreement or other instrument or agreement filed as an exhibit to the
Registration Statement or any document incorporated therein by reference
or as otherwise identified by the Company as material in an officer's
certificate to which the Company, the Operating Partnership or any
Significant Subsidiary is a party or by which they or any of them or any
of their respective properties or other assets or any Property may be
bound or subject; (2) the declaration of trust, charter, by-laws,
certificate of limited partnership, partnership agreement, or limited
liability company agreement, or similar instrument, as the case may be,
of the Company, the Operating Partnership or any Significant Subsidiary;
or (3) any federal or Texas law. The descriptions of the Listed
Agreements, if any, contained in the International Prospectus are
correct and complete in all material respects.
(O) To the knowledge of counsel, there is no action, suit or
proceeding before or by any court or governmental agency or body,
domestic or foreign, now pending or threatened against or affecting the
Company,
-35-
<PAGE> 36
the Operating Partnership or any Significant Subsidiary, any Property,
any property underlying indebtedness held by the Company, the Operating
Partnership or any of the Significant Subsidiaries, or any officer or
trust manager of the Company that is required to be disclosed in the
Registration Statement (other than as disclosed therein) or that, if
determined adversely to the Company, the Operating Partnership, any
Significant Subsidiary, any Property, including any property underlying
indebtedness held by the Company, the Operating Partnership, any of the
Significant Subsidiaries, or any such officer or trust manager, would
reasonably be expected to (1) result in any material adverse change in
the condition, financial or otherwise, or in the earnings, assets,
business affairs or business prospects of the Company, the Operating
Partnership, the Subsidiaries and the Residential Development
Corporations, considered as one enterprise, or (2) materially and
adversely affect the consummation of the transactions contemplated by
this Agreement. To the knowledge of counsel, there is no pending legal
or governmental proceeding to which the Company, the Operating
Partnership or any Significant Subsidiary is a party or of which any of
their respective properties or assets or any Property, including any
property underlying indebtedness held by the Company, the Operating
Partnership or any of the Significant Subsidiaries is the subject,
including ordinary routine litigation incidental to the business, that
is, considered in the aggregate, material to the condition, financial or
otherwise, or the earnings, assets, business affairs or business
prospects of the Company, the Operating Partnership, the Subsidiaries
and the Residential Development Corporations, considered as one
enterprise. To the knowledge of counsel, there are no contracts or
documents of the Company, the Operating Partnership or the Significant
Subsidiaries which are required to be filed as exhibits to the
Registration Statement by the 1933 Act or by the 1933 Act Regulations
which have not been filed or incorporated by reference as exhibits to
the Registration Statement.
(P) The Company qualified as a real estate investment trust
under the Code with respect to its taxable years ending on or before
December 31, 1996 and is organized in conformity with the requirements
for qualification as a real estate investment trust, its manner of
operation has enabled it to meet the requirements for qualification as a
real estate investment trust as of the date of the Prospectus
Supplement, and its proposed manner of operation will enable it to meet
the requirements for qualification as a real estate investment trust in
the future. In connection therewith, you are entitled to rely on the
opinions of Shaw, Pittman, Potts & Trowbridge filed as Exhibit 8.01 to
the Registration Statement, the opinions attached to such opinions as
exhibits thereto, and any other opinions rendered to the Company with
respect to tax matters and described in the International Prospectus,
all as if rendered to you on the date of Closing.
(Q) None of the Company, the Operating Partnership or any
Significant Subsidiary is required to be registered under the 1940 Act.
-36-
<PAGE> 37
(R) All authorizations, approvals and consents of any court or
governmental authority or agency that are necessary in connection with
the offering, issuance or sale of the International Securities under
this Agreement have been obtained, except such as may be required under
the 1933 Act or the 1933 Act Regulations or the securities and real
estate syndication laws of any U.S. state or other jurisdiction with
respect to the Securities.
(S) The Registration Statement has been declared effective under
the 1933 Act and, to the knowledge of counsel, no stop order suspending
the effectiveness of the Registration Statement has been issued under
the 1933 Act or proceedings therefor initiated or threatened by the
Commission.
(T) The Registration Statement and the International Prospectus
(other than the financial statements and supporting schedules included
therein, as to which no opinion need be rendered) as of their respective
effective or issue dates at the International Representation Date
complied as to form in all material respects with the requirements of
the 1933 Act and the 1933 Act Regulations. Each document filed pursuant
to the 1934 Act (other than the financial statements and supporting
schedules, included therein as to which no opinion need be rendered) and
incorporated or deemed to be incorporated by reference in the
International Prospectus complied when so filed or incorporated or
deemed to be incorporated as to form in all material respects with the
1934 Act and the 1934 Act Regulations.
(U) The information in the Registration Statement under the
captions "Description of Preferred Shares," "Description of Common
Shares," "Description of Common Share Warrants," "Certain Provisions of
the Declaration of Trust, Bylaws and Texas Law" and "ERISA
Considerations," to the extent applicable to the offering of the
International Securities and to the extent that it constitutes matters
of law or legal conclusions, has been reviewed by such counsel, is
correct and presents fairly the information required to be disclosed
therein.
(V) The information in the Prospectus Supplement under the
caption "Federal Income Tax Considerations" and in the International
Prospectus under the caption "Risks Relating to Qualification and
Operation as a REIT" fairly summarizes the federal income tax
considerations that are likely to be material to a holder of
International Securities and, to the extent that they constitute matters
of law or legal conclusions, they have been reviewed by such counsel,
-37-
<PAGE> 38
they are correct and present fairly the information required to be
disclosed therein.
In giving the opinions required by this Section 5(b)(i), such counsel
shall in addition provide the opinions referenced in the Prospectus Supplement
under the caption "Federal Income Tax Consequences."
In giving the opinions required by this Section 5(b)(i), such counsel
shall additionally state (which shall not constitute an opinion) that nothing
has come to the attention of such counsel that causes it to believe that the
Registration Statement or any post-effective amendment thereto (except for
financial statements and schedules and other financial data included therein or
omitted therefrom, as to which counsel need make no statement), at the time
such Registration Statement became effective under the 1933 Act, at the time an
Annual Report on Form 10-K or the latest Quarterly Report on Form 10-Q was
filed by the Company with the Commission (whichever is later), or at the date
of the applicable International Terms Agreement, at the International
Representation Date or as of the date such opinions are given, contained an
untrue statement of a material fact or omitted to state a material fact
required to be stated therein or necessary to make the statements therein not
misleading, or the International Prospectus or any Prospectus Supplement
(except for financial statements and schedules and other financial data
included therein, as to which counsel need make no statement), as of the date
of the applicable International Terms Agreement, at the International
Representation Date or as of the date of such opinion, included an untrue
statement of a material fact or omitted to state a material fact necessary in
order to make the statements therein, in light of the circumstances under which
they were made, not misleading.
In giving the opinions required by this Section 5(b)(i), Shaw, Pittman,
Potts & Trowbridge and Locke Purnell Rain Harrell (A Professional Corporation)
may rely, (A) as to all matters of fact, upon certificates and written
statements of officers and employees of and accountants for each of the
Company, the Operating Partnership, the Subsidiaries or the Residential
Development Corporations; (B) as to the continued existence of the Company,
upon a certificate of an officer of the Company, and as to the qualification
and good standing of each of the Operating Partnership or a Significant
Subsidiary to do business in any jurisdiction, upon certificates of appropriate
government officials or opinions of counsel in such jurisdictions; and (C) as
to all Texas franchise tax matters, upon the opinion, dated as of Closing Time,
of Locke Purnell Rain Harrell (A Professional Corporation).
The opinion of Locke Purnell Rain Harrell (A Professional Corporation)
shall be limited to the laws of the State of Texas.
-38-
<PAGE> 39
(ii) The favorable opinion, dated as of Closing Time, of Locke Purnell
Rain Harrell (A Professional Corporation), counsel to each of the
Company and the Operating Partnership, that it has reviewed the
discussion in the Prospectus Supplement under the caption
"Federal Income Tax Considerations - State and Local Taxes" with
respect to Texas franchise matters and is of the opinion that it
accurately summarizes the Texas franchise tax matters expressly
described therein.
(ii) The favorable opinion, dated as of Closing Time, of Hogan &
Hartson L.L.P., counsel for the International Underwriters, with
respect to the matters set forth in (A) (first sentence only),
(B) (first sentence only), (E) (first and fourth sentences only),
(F), (G), (H), (I), (K) (with respect to this Agreement and the
International Terms Agreement only), (S) and (T) (first sentence
only) of Section 5(b)(i) and a statement (which shall not
constitute an opinion) similar to the statement referred to in
the third to last paragraph of Section 5(b)(i) above. In giving
its opinion, Hogan & Hartson L.L.P. may rely, (A) as to all
matters of fact, upon certificates and written statements of
officers and employees of and accountants for each of the
Company, the Operating Partnership, the Subsidiaries or the
Residential Development Corporations, (B) as to the qualification
and good standing of each of the Company, the Operating
Partnership, or the Significant Subsidiaries to do business in
any state or jurisdiction, upon certificates of appropriate
government officials or opinions of counsel in such
jurisdictions, which opinions shall be in form and substance
satisfactory to counsel for the International Underwriters, and
(C) as to certain matters of law, upon the opinion of Shaw,
Pittman, Potts & Trowbridge given pursuant to Section 5(b)(i)
above.
(c) At Closing Time, (i) there shall not have been, since the
respective dates as of which information is given in the Registration
Statement and the International Prospectus, any material adverse change in
the condition, financial or otherwise, or in the earnings, assets, business
affairs or business prospects of the Company, the Operating Partnership,
the Subsidiaries, the Residential Development Corporations and the
Properties considered as one enterprise, whether or not arising in the
ordinary course of business, (ii) no proceedings shall be pending or, to
the knowledge of the Company or the Operating Partnership, threatened
against such entity before or by any federal, state or other commission,
board or administrative agency wherein an unfavorable decision, ruling or
finding might result in a material adverse change in the condition,
financial or otherwise, or in the
-39-
<PAGE> 40
earnings, assets, business affairs or business prospects of the Company,
the Operating Partnership, the Subsidiaries, the Residential Development
Corporations and the Properties considered as one enterprise other than
as set forth in the International Prospectus, (iii) no stop order
suspending the effectiveness of the Registration Statement or any part
thereof shall have been issued and no proceedings for that purpose shall
have been instituted or, to the knowledge of the Company or the
Operating Partnership, threatened by the Commission or by the state
securities authority of any jurisdiction, and (iv) you shall have
received, at Closing Time, a Certificate of the Chief Executive Officer
of the Company and the Operating Partnership, and the chief financial or
chief accounting officer of each such entity, dated as of Closing Time,
evidencing compliance with the provisions of this subsection (c),
stating that the representations and warranties set forth in Section
1(a) hereof are accurate as though expressly made at and as of Closing
Time, and stating that the conditions precedent set forth in this
Section 5 have been satisfied or waived. As used in this Section 5(c),
the term "International Prospectus" means the International Prospectus
in the form first used to confirm sales of the International Securities.
(d) At the time of execution of the applicable International
Terms Agreement, you shall have received from Arthur Andersen LLP a
letter dated such date, in form and substance satisfactory to you, to
the effect that: (i) they are independent public accountants with
respect to the Company and the Rainwater Property Group (as defined in
the financial statements included in the Registration Statement) as
required by the 1933 Act and the 1933 Act Regulations; (ii) it is their
opinion that the financial statements and supporting schedule included
in the Registration Statement and covered by their opinions therein
comply as to form in all material respects with the applicable
accounting requirements of the 1933 Act and the 1933 Act Regulations;
(iii) they have performed limited procedures, not constituting an audit,
including a reading of the latest available consolidated interim
financial statements of the Company, a reading of the minute books of
the Company, inquiries of officials of the Company responsible for
financial and accounting matters and such other inquiries and procedures
as may be specified in such letter, and on the basis of such limited
review and procedures nothing came to their attention that caused them
to believe that (A) the unaudited financial statements and supporting
schedules of the Rainwater Property Group included in the Registration
Statement do not comply as to form in all material respects with the
applicable accounting requirements of the 1933 Act and the 1933 Act
Regulations or are not in conformity with generally accepted accounting
principles applied on a basis substantially consistent with that of the
audited financial statements included in the Registration Statement, (B)
the unaudited operating data and balance sheet data of the Company set
forth in the Prospectuses under
-40-
<PAGE> 41
the caption "Selected Financial Information" were not determined on a
basis substantially consistent with that used in determining the
corresponding amounts in the audited financial statements included in
the Registration Statement, (C) the pro forma financial information
included in the Registration Statement was not prepared in accordance
with the applicable accounting requirements of the 1933 Act and the 1933
Act Regulations with respect to pro forma financial information or was
not determined on a basis substantially consistent with that of the
audited financial statements included in the Registration Statement or
(D) at a specified date not more than three days prior to the date of
the applicable International Terms Agreement, there has been any change
in the shareholders' equity or debt of the Company or any increase in
the debt of the Company or any decrease in the net assets of the
Company, as compared with the amounts shown in the most recent
consolidated balance sheet of the Company included in the Registration
Statement or, during the period from most recent consolidated statement
of operations included in the Registration Statement to a specified date
not more than three days prior to the date of the applicable
International Terms Agreement, there were any decreases, as compared
with the corresponding period in the preceding year, in revenues, net
income or funds from operations of the Company, except in all instances
for changes, increases or decreases which the Registration Statement and
the Prospectus disclose have occurred or may occur; and (iv) in addition
to the examination referred to in their opinions and the limited
procedures referred to in clause (iii) above, they have carried out
certain specified procedures, not constituting an audit, with respect to
certain amounts, percentages and financial and statistical information
which are included in the Registration Statement and the International
Prospectus and which are specified by you, and have found such amounts,
percentages and financial and statistical information to be in agreement
with the relevant accounting, financial and other records of the Company
identified in such letter.
(e) At Closing Time, you shall have received from Arthur
Andersen LLP a letter dated as of Closing Time to the effect that they
reaffirm the statements made in the letter furnished pursuant to
subsection (d) of this Section 5, except that the "specified date"
referred to shall be a date not more than three days prior to Closing
Time and, if the Company has elected to rely upon Rule 430A of the 1933
Act Regulations, to the further effect that they have carried out
procedures as specified in clause (iv) of subsection (d) of this Section
5 with respect to certain amounts, percentages and financial information
specified by you and deemed to be a part of the Registration Statement
pursuant to Rule 430A(b) and have found such amounts, percentages and
financial information to be in agreement with the records specified in
such clause (iv).
-41-
<PAGE> 42
(f) At Closing Time, counsel for the International Underwriters shall
have been furnished with such documents and opinions as they may reasonably
require for the purpose of enabling them to pass upon the issuance and sale
of the International Securities as herein contemplated and related
proceedings, or in order to evidence the accuracy of any of the
representations or warranties, or the fulfillment of any of the conditions,
herein contained, and all proceedings taken by the Company in connection
with the issuance and sale of the International Securities as contemplated
in the applicable International Terms Agreement shall be satisfactory in
form and substance to you and counsel for the International Underwriters.
(g) In the event the International Underwriters exercise their option
provided in a International Terms Agreement as set forth in Section 2(b)
hereof to purchase all or any portion of the International Option
Securities, the representations and warranties of the Company and the
Operating Partnership contained herein and the statements in any
certificates furnished by the Company and the Operating Partnership
hereunder shall be true and correct as of each Date of Delivery, and you
shall have received:
(i) A certificate of the Chief Executive Officer or the President and
Chief Operating Officer, of the Company and the Operating
Partnership and the chief financial or chief accounting officer
of each such entity, dated such Date of Delivery, confirming that
the certificate delivered at Closing Time pursuant to Section
5(c) hereof remains true and correct as of such Date of Delivery.
(ii) The favorable opinions of Shaw, Pittman, Potts & Trowbridge,
counsel for each of the Company, the Operating Partnership and
the Significant Subsidiaries and Locke Purnell Rain Harrell (A
Professional Corporation), special counsel for the Texas
Entities, each in form and substance satisfactory to counsel for
the International Underwriters, dated such Date of Delivery,
relating to the International Option Securities and otherwise to
the same effect as the opinion and statement required by Section
5(b)(i) hereof.
(iii) The favorable opinion of Locke Purnell Rain Harrell (A
Professional Corporation), counsel to each of the Company and the
Operating Partnership, dated such Date of Delivery, with respect
to all Texas franchise tax matters and otherwise to the same
effect as the opinion required by Section 5(b)(ii) hereof.
(iv) The favorable opinion of Hogan & Hartson L.L.P., counsel for the
International Underwriters, dated such Date of Delivery,
-42-
<PAGE> 43
relating to the International Option Securities and otherwise to
the same effect as the opinion and statement required by Section
5(b)(iii) hereof.
(v) A letter from Arthur Andersen LLP, in form and substance
satisfactory to you, dated such Date of Delivery, substantially
the same in scope and substance as the letter furnished to you
pursuant to Section 5(e) hereof, except that the "specified date"
in the letter furnished pursuant to this Section 5(g)(iv) shall
be a date not more than three days prior to such Date of
Delivery.
If any condition specified in this Section 5 shall not have been
fulfilled when and as required to be fulfilled, the applicable International
Terms Agreement may be terminated by you by notice to the Company at any time
at or prior to Closing Time, and such termination shall be without liability of
any party to any other party or Date of Delivery, as the case may be, except as
provided in Section 4 hereof.
SECTION 6. INDEMNIFICATION.
(a) Each of the Company and the Operating Partnership agrees, jointly
and severally, to indemnify and hold harmless each Underwriter and each person,
if any, who controls any Underwriter within the meaning of section 15 of the
1933 Act, and any director, officer, employee or affiliate thereof, as follows:
(i) against any and all loss, liability, claim, damage and
expense whatsoever, as incurred, arising out of any untrue
statement or alleged untrue statement of a material fact
contained in the Registration Statement (or any amendment
thereto), including the information deemed to be part of the
Registration Statement pursuant to Rule 430A(b) of the 1933
Act Regulations, if applicable, or the omission or alleged
omission therefrom of a material fact required to be stated
therein or necessary to make the statements therein not
misleading or arising out of any untrue statement or alleged
untrue statement of a material fact contained in any
preliminary prospectus or the International Prospectus or
the omission or alleged omission therefrom of a material
fact necessary in order to make the statements therein, in
the light of the circumstances under which they were made,
not misleading; provided, however, that neither the Company
nor the Operating Partnership shall be required under this
subsection (i) to indemnify any Underwriter with respect to
any loss, liability, claim, damage or expense to the extent
such loss, liability, claim, damage or expense arises out of
any untrue
-43-
<PAGE> 44
statement or omission or alleged untrue statement or
omission made in reliance upon and in conformity with
written information furnished to the Company by you
specifically for inclusion in the Registration Statement or
the International Prospectus;
(ii) against any and all loss, liability, claim, damage and
expense whatsoever, as incurred, to the extent of the
aggregate amount paid in settlement of any litigation or of
any investigation or proceeding by any governmental agency
or body, commenced or threatened, or of any claim whatsoever
for which indemnification is provided under subsection (i)
above, if such settlement is effected with the written
consent of the Company and the Operating Partnership; and
(iii) against any and all expense whatsoever (including, without
limitation, the fees and other charges of counsel chosen by
you) reasonably incurred in investigating, preparing or
defending against any litigation, or any investigation or
proceedings by any governmental agency or body, commenced or
threatened, or any claim whatsoever for which
indemnification is provided under subsection (i) above, to
the extent that any such expense is not paid under
subsection (i) or (ii) above.
(b) Each International Underwriter severally agrees to indemnify and
hold harmless the Company and the Operating Partnership, and each person, if
any, who controls the Company or the Operating Partnership within the meaning
of Section 15 of the 1933 Act, and any trust manager, director, officer,
employee or affiliate thereof, against any and all loss, liability, claim,
damage and expense described in the indemnity contained in subsection (a) of
this Section 6, as incurred, but only with respect to untrue statements or
omissions, or alleged untrue statements or omissions, made in the Registration
Statement (or any amendment thereto) or any preliminary prospectus or the
International Prospectus (or any amendment or supplement thereto) in reliance
upon and in conformity with written information furnished to the Company by you
specifically for inclusion in the Registration Statement or the International
Prospectus.
(c) Each indemnified party shall give notice as promptly as reasonably
practicable to each indemnifying party of any action commenced against it in
respect of which indemnity may be sought hereunder, but failure to so notify an
indemnifying party shall not relieve such indemnifying party from any liability
hereunder to the extent it is not materially prejudiced as a result thereof and
in any event shall not relieve it from any liability which it may have
otherwise than on account of this indemnity agreement. An indemnifying party
may participate at its
-44-
<PAGE> 45
own expense in the defense of such action. If it so elects within a reasonable
time after receipt of such notice, an indemnifying party, jointly with any
other indemnifying parties receiving such notice, may assume the defense of
such action with counsel chosen by it and approved by the indemnified parties
defendant in such action, unless such indemnified parties reasonably object to
such assumption on the ground that the named parties to any such action
(including any impleaded parties) include both such indemnified parties and an
indemnifying party, and such indemnified parties reasonably believe that there
may be legal defenses available to them which are different from or in addition
to those available to such indemnifying party. If an indemnifying party
assumes the defense of such action, the indemnifying parties shall not be
liable for any fees and expenses of counsel for the indemnified parties
incurred thereafter in connection with such action. In no event shall the
indemnifying parties be liable for fees and expenses of more than one counsel
(in addition to any local counsel) separate from their own counsel for all
indemnified parties in connection with any one action or separate but similar
or related actions in the same jurisdiction arising out of the same general
allegations or circumstances. No indemnifying party shall, without the prior
written consent of the indemnified parties, settle or compromise or consent to
the entry of any judgment with respect to any litigation, or any investigation
or proceeding by any governmental agency or body, commenced or threatened, or
any claim whatsoever in respect of which indemnification or contribution could
be sought under this Section 6 or Section 7 hereof (whether or not the
indemnified parties are actual or potential parties thereto), unless such
settlement, compromise or consent (i) includes an unconditional release of each
indemnified party from all liability arising out of such litigation,
investigation, proceeding or claim and (ii) does not include a statement as to
or an admission of fault, culpability or a failure to act by or on behalf of
any indemnified party.
(d) If at any time an indemnified party shall have requested an
indemnifying party to reimburse the indemnified party for fees and expenses of
counsel, such indemnifying party agrees that it shall be liable for any
settlement of the nature contemplated by Section 6(a)(ii) effected without its
written consent if (i) such settlement is entered into more than 45 days after
receipt by such indemnifying party of the aforesaid request, (ii) such
indemnifying party shall have received notice of the terms of such settlement
at least 30 days prior to such settlement being entered into and (iii) such
indemnifying party shall not have reimbursed such indemnified party in
accordance with such request prior to the date of such settlement.
SECTION 7. CONTRIBUTION.
If the indemnification provided for in Section 6 hereof is for any
reasons unavailable to or insufficient to hold harmless an indemnified party in
respect of any losses, liabilities, claims, damages or expenses referred to
therein,
-45-
<PAGE> 46
then each indemnifying party shall contribute to the aggregate amount of such
losses, liabilities, claims, damages and expenses incurred by such indemnified
party, as incurred, (i) in such proportion as is appropriate to reflect the
relative benefits received by the Company, on the one hand, and the
International Underwriters, on the other hand, from the offering of the
International Securities pursuant to the applicable International Terms
Agreement or (ii) if the allocation provided by clause (i) is not permitted by
applicable law, in such proportion as is appropriate to reflect not only the
relative benefits referred to in clause (i) above but also the relative fault
of the Company, on the one hand, and of the International Underwriters, on the
other hand, in connection with the statements or omissions which resulted in
such losses, liabilities, claims, damages or expenses, as well as any other
relevant equitable considerations.
The relative benefits received by the Company, on the one hand, and the
International Underwriters, on the other hand, in connection with the offering
of the International Securities pursuant to the applicable International Terms
Agreement shall be deemed to be in the same respective proportions as the total
net proceeds from the offering of such International Securities (before
deducting expenses) received by the Company and the total underwriting discount
received by the International Underwriters, in each case as set forth on the
cover of the International Prospectus, or, if Rule 434 is used, the
corresponding location on the International Term Sheet bear to the aggregate
initial public offering price of such International Securities as set forth on
such cover.
The relative fault of the Company, on the one hand, and the
International Underwriters, on the other hand, shall be determined by reference
to, among other things, whether any such untrue statement of a material fact or
omission or alleged omission to state a material fact relates to information
and opportunity to correct or prevent such statement or omission.
The Company and the International Underwriters agree that it would not
be just and equitable if contribution pursuant to this Section 7 were
determined by pro rata allocation (even if the International Underwriters were
treated as one entity for such purpose) or by any other method of allocation
which does not take account of the equitable considerations referred to above
in this Section 7. The aggregate amount of losses, liabilities, claims,
damages and expenses incurred by an indemnified party and referred to above in
this Section 7 shall be deemed to include any legal or other expenses
reasonably incurred by such indemnified party in investigating, preparing or
defending against any litigation, or any investigation or proceeding by any
governmental agency or body, commenced or threatened, or any claim whatsoever
based upon any such untrue or alleged untrue statement or omission or alleged
omission.
Notwithstanding the provisions of this Section 7, no International
Underwriter shall be required to contribute any amount in excess of the amount
by
-46-
<PAGE> 47
which the total price at which the International Securities underwritten by it
and distributed to the public were offered to the public exceeds the amount of
any damages which such International Underwriter has otherwise been required to
pay by reason of any such untrue or alleged untrue statement or omission or
alleged omission.
No person guilty of fraudulent misrepresentation (within the meaning of
Section 11(f) of the 1933 Act) shall be entitled to contribution from any
person who was not guilty of such fraudulent misrepresentation.
For purposes of this Section 7, each person, if any, who controls an
International Underwriter within the meaning of Section 15 of the 1933 Act or
Section 20 of the 1934 Act shall have the same rights to contribution as such
International Underwriter, and each director of the Company, each officer of
the Company who signed the Registration Statement, and each person, if any, who
controls the Company within the meaning of Section 15 of the 1933 Act or
Section 20 of the 1934 Act shall have the same rights to contribution as the
Company. The International Underwriters' respective obligations to contribute
pursuant to this Section 7 are several in proportion to the number or aggregate
principal amount, as the case may be, of Initial International Securities set
forth opposite their respective names in the applicable International Terms
Agreement, and not joint.
SECTION 8. REPRESENTATIONS, WARRANTIES AND AGREEMENTS TO SURVIVE DELIVERY.
All representations, warranties and agreements contained in this
Agreement and the International Terms Agreement, or contained in certificates
of officers of the Company or the Operating Partnership submitted pursuant
hereto, shall remain operative and in full force and effect, regardless of any
investigation made by or on behalf of any International Underwriter or any
controlling person, or by or on behalf of the Company or the Operating
Partnership or any controlling persons, and shall survive delivery of the
International Securities to the International Underwriters.
SECTION 9. TERMINATION OF AGREEMENT.
(a) This Agreement (excluding the applicable International Terms
Agreement) may be terminated for any reason at any time by the
Company or by you upon the giving of 30 days' written notice of
such termination to the other party hereto, provided that the
continued effectiveness of this Agreement shall not in any way
limit or prohibit the Company's right to offer any or all of the
Securities through any other underwriter or pursuant to any other
selling arrangement.
-47-
<PAGE> 48
(b) You may also terminate the applicable International Terms
Agreement, by notice to the Company, at any time at or prior to
Closing Time, (i) if there has been, since the date of such
International Terms Agreement or since the respective dates as of
which information is given in the International Prospectus, any
material adverse change in the condition, financial or otherwise,
or in the earnings, assets, business affairs or business
prospects of the Company, the Operating Partnership, the
Subsidiaries and the Residential Development Corporations
considered as one enterprise, whether or not arising in the
ordinary course of business, (ii) if there has occurred any
material adverse change in the financial markets in the United
States or any outbreak of hostilities or other calamity or crisis
or escalation of any existing hostilities, or any change or
development involving a prospective change in national or
international political, financial or economic conditions, in
each case the effect of which is such as to make it, in your
judgment, impracticable to market the International Securities or
enforce contracts for the sale of the International Securities,
(iii) if trading in any of the securities of the Company has been
suspended or limited by the Commission or on any exchange or any
over-the-counter market, or if trading generally on either the
New York Stock Exchange or the American Stock Exchange or in the
NASDAQ Stock Market's National Market has been suspended or
limited, or minimum or maximum prices for trading have been
fixed, or maximum ranges for prices for securities have been
required, by either of said exchanges or by order of the
Commission or any other governmental authority, or if a banking
moratorium has been declared by federal or New York authorities,
(iv) if the rating assigned by any nationally recognized
statistical rating organization to any Preferred Shares of the
Company or any indebtedness of the Company or the Operating
Partnership as of the date of the applicable International Terms
Agreement shall have been lowered since such date or if any such
rating organization shall have publicly announced that it has
placed any Preferred Shares of the Company or any indebtedness of
the Company or the Operating Partnership on what is commonly
termed a "watch list" for possible downgrading, (v) a banking
moratorium has been declared by either Federal or New York
authorities, or (vi) pursuant to Section 10(b) below. As used in
this Section 9(b), the term "Prospectus" means the Prospectus in
the form first used to confirm sales of the International
Securities.
(c) In the event of any such termination, (x) the covenants set forth
in Section 3 hereof with respect to any offering of International
Securities shall remain in effect so long as any International
Underwriter owns any International Securities purchased from the
Company pursuant to
-48-
<PAGE> 49
the applicable International Terms Agreement and (y) the covenant
set forth in Section 3(h) hereof, the provisions of Section 4
hereof, the indemnity and contribution agreements set forth in
Sections 6 and 7 hereof, and the provisions of Sections 8 and 13
hereof shall remain in effect.
SECTION 10. DEFAULT BY ONE OR MORE OF THE INTERNATIONAL UNDERWRITERS.
If one or more of the International Underwriters shall fail at
Closing Time to purchase the International Securities which it or they are
obligated to purchase under the applicable International Terms Agreement (the
"DEFAULTED SHARES"), then you shall have the right, within 24 hours thereafter,
to make arrangements for one or more of the non-defaulting International
Underwriters, or any other International Underwriters, to purchase all, but not
less than all, of the Defaulted Shares in such amounts as may be agreed upon
and upon the terms herein set forth; if, however, you shall not have completed
such arrangements within such 24-hour period, then:
(a) if the number of Defaulted Shares does not exceed ten percent
(10%) of the Initial International Securities to be purchased
pursuant to the International Terms Agreement, the non-defaulting
International Underwriters named in such International Terms
Agreement shall be obligated to purchase the full amount thereof
in the proportions that their respective underwriting obligations
hereunder bear to the underwriting obligations of all non-
defaulting International Underwriters; or
(b) if the number of Defaulted Shares exceeds ten percent (10%) of
the Initial International Securities to be purchased pursuant to
the International Terms Agreement, the applicable International
Terms Agreement shall terminate without liability on the part of
any non-defaulting Underwriter.
No action taken pursuant to this Section 10 shall relieve any
defaulting International Underwriter from liability in respect of its default.
In the event of any such default which does not result in a
termination of this Agreement, you and the Company each shall have the right to
postpone Closing Time for a period not exceeding seven days in order to effect
any required changes in the Registration Statement or Prospectuses or in any
other documents or arrangements.
-49-
<PAGE> 50
SECTION 11. NOTICES.
All notices and other communications hereunder shall be in writing and
shall be deemed to have been duly given if mailed or transmitted by any
standard form of telecommunication. Notices to the International Underwriters
shall be directed to Merrill Lynch International, 20 Farringdon Road, London
EC1M 3NH England; notices to either the Company or the Operating Partnership
shall be directed to each of them, c/o the Operating Partnership at 777 Main
Street, Suite 2100, Fort Worth, Texas, 76102, attention of John C. Goff, Chief
Executive Officer of the Operating Partnership.
SECTION 12. PARTIES.
This Agreement and the applicable International Terms Agreement shall
each inure to the benefit of and be binding upon the parties hereto and thereto
and their respective successors, heirs and legal representatives. Nothing
expressed or mentioned in this Agreement or the applicable International Terms
Agreement is intended or shall be construed to give any person, firm or
corporation, other than those referred to in Sections 6 and 7 hereof and their
successors, heirs and legal representatives, any legal or equitable right,
remedy or claim under or in respect of this Agreement or the applicable
International Terms Agreement or any provision herein or therein contained.
This Agreement and the applicable International Terms Agreement and all
conditions and provisions hereof and thereof are intended to be for the sole
and exclusive benefit of the parties hereto and thereto and their respective
successors, and said controlling persons and officers, directors and trust
managers and their heirs and legal representatives, and for the benefit of no
other person, firm or corporation. No purchaser of International Securities
from any International Underwriter shall be deemed to be a successor by reason
merely of such purchase.
SECTION 13. GOVERNING LAW AND TIME.
This Agreement and the applicable International Terms Agreement shall be
governed by and construed in accordance with the laws of the State of New York
applicable to agreements made and to be performed in said State. Specified
times of day refer to New York City time.
-50-
<PAGE> 51
If the foregoing is in accordance with your understanding of our
agreement please sign and return to the Company a counterpart hereof, whereupon
this instrument, along with all counterparts, will become a binding agreement
among the International Underwriters, the Company and the Operating Partnership
in accordance with its terms.
Very truly yours,
CRESCENT REAL ESTATE EQUITIES
COMPANY
By:
---------------------------------
CRESCENT REAL ESTATE EQUITIES
LIMITED PARTNERSHIP
By: Crescent Real Estate Equities, Ltd.
General Partner
By:
--------------------------
CONFIRMED AND ACCEPTED,
as of the date first above written:
MERRILL LYNCH INTERNATIONAL
By: Merrill Lynch International
By:
----------------------------
Michael F. Profenius
Managing Director
-51-
<PAGE> 52
CRESCENT REAL ESTATE EQUITIES COMPANY
(a Texas real estate investment trust)
[Title of Securities]
FORM OF INTERNATIONAL TERMS AGREEMENT
Dated: ____________ __, 1997
To: CRESCENT REAL ESTATE EQUITIES COMPANY
777 Main Street
Fort Worth, Texas 76102
Attention:
Ladies and Gentlemen:
We (the "International Underwriters") understand that Crescent Real
Estate Equities Company ("the Company") proposes to issue and sell the number
of its [Preferred Shares of Beneficial Interest, $.01 par value per share (the
"Preferred Shares")] [Common Shares of Beneficial Interest, $.01 par value per
share (the "Common Shares")] [Warrants to purchase Common Shares of the Company
(the "Warrants")] (such [Preferred Shares] [Common Shares] [Warrants] being
collectively hereinafter referred to as the "International Securities").
Subject to the terms and conditions set forth or incorporated by reference
herein, the International Underwriters named below offer to purchase, severally
and not jointly, the respective numbers of Initial International Securities (as
defined in the International Purchase Agreement referred to below) set forth
below opposite their respective names, and a proportionate share of
International Option Securities (as defined in the International Purchase
Agreement referred to below) to the extent any are purchased, at the purchase
price set forth below.
<TABLE>
<CAPTION>
Number of Shares of Initial
International Underwriter International Securities
------------------------- ------------------------------
<S> <C>
------------------
Total $
==================
</TABLE>
<PAGE> 53
The International Securities shall have the following terms:
[Preferred Shares] [Common Shares] [Warrants]
Title of Securities:
Number of Shares:
[Current Ratings:]
[Dividend Rate: [$ ] [ %], Payable:]
[Stated Value:]
[Liquidation Preference:]
[Ranking:]
Public offering price per share: $ [, plus accumulated dividends, if any,
from , 19 .]
Purchase price per share: $ [, plus accumulated dividends, if any, from
, 19 .]
[Conversion provisions:]
[Redemption provisions:]
[Sinking fund requirements:]
Number of International Option Securities, if any, that may be purchased by the
International Underwriters:
Delayed Delivery Contracts: [authorized] [not authorized]
[Date of Delivery:
Minimum Contract:
Maximum number of Shares:
Fee:
Additional co-managers, if any:
Other terms:
Closing date and location:
[Warrants]
Number of Warrants to be issued:
Warrant Agent:
Issuable jointly with Common Shares [yes] [no]
[Number of Warrants issued with each Common Share of beneficial
interest:]
[Detachable data:]
Date from which Warrants are exercisable:
Date on which Warrants expire:
Exercise Price(s) of Warrants:
Initial public offering price: $
Purchase price: $
Title of Warrant Securities:
Principal amount purchasable upon exercise of one Warrant:
-2-
<PAGE> 54
Interest rate: Payable:
Date of maturity:
Redemption provisions:
Sinking fund requirements:
[Delayed Delivery Contracts: [authorized] [not authorized]
[Date of delivery:
Minimum contract:
Maximum aggregate principal amount:
Fee: %]
Other terms:
[Closing date and location:]
All the provisions contained in the document attached as Exhibit
A hereto entitled "Crescent Real Estate Equities Company--Preferred Shares of
Beneficial Interest, Common Shares of Beneficial Interest, and Common Share
Warrants--Purchase Agreement" are hereby incorporated by reference in their
entirety herein and shall be deemed to be a part of this International Terms
Agreement to the same extent as if such provisions had been set forth in full
herein. Terms defined in such document are used herein as therein defined.
- 3 -
<PAGE> 55
Please accept this offer no later than ________ o'clock P.M. (New York City
time) on ______________ by signing a copy of this International Terms Agreement
in the space set forth below and returning the signed copy to us.
Very truly yours
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
By:
---------------------------------------
Acting on behalf of itself and the other
named International Underwriters.
Accepted:
By: CRESCENT REAL ESTATE EQUITIES COMPANY
By:
---------------------------------
Name:
Title:
-4-
<PAGE> 56
CRESCENT REAL ESTATE EQUITIES COMPANY
(a Texas real estate investment trust)
[Title of Securities]
DELAYED DELIVERY CONTRACT
Dated: ____________ __, 1997
To: CRESCENT REAL ESTATE EQUITIES COMPANY
900 Third Avenue, Suite 1800
New York, New York 10022
Attention: ___________________
Ladies and Gentlemen:
The undersigned hereby agrees to purchase from Crescent Real Estate
Equities, Inc. ("the Company"), and the Company agrees to sell to the
undersigned on ___________ ___, 19__ (the "Delivery Date"),
_____________________________ of the Company's [insert title of security] (the
"Securities"), offered by the Company's International Prospectus dated
____________ ___, 19__, as supplemented by its Prospectus Supplement dated
___________ _____, 19__, receipt of which is hereby acknowledged, at a
purchase price of [$ _________] to the Delivery Date and on the further terms
and conditions set forth in this contract.
Payment for the Securities which the undersigned has agreed to purchase
on the Delivery Date shall be made to the Company or its order by [certified or
official bank check in New York Clearing House] [same day] funds at the office
of ____________________________________________________, on the Delivery Date,
upon delivery to the undersigned of the Securities to be purchased by the
undersigned in definitive form and in such denominations and registered in such
names as the undersigned may designate by written or telegraphic communication
addressed to the Company not less than five full business days prior to the
Delivery Date.
The obligation of the undersigned to take delivery of and make payment
for Securities on the Delivery Date shall be subject only to the conditions
that (1) the purchase of Securities to be made by the undersigned shall not on
the Delivery Date be prohibited under the laws of the jurisdiction to which the
undersigned is subject and (2) the Company, on or before _________ __, 19__,
shall have sold to the International Underwriters of the Securities (the
"International
<PAGE> 57
Underwriters") such principal amount of the Securities as is to be sold to them
pursuant to the International Terms Agreement dated ____________, 19__ between
the Company and the International Underwriters. The obligation of the
undersigned to take delivery of and make payment for Securities shall not be
affected by the failure of any purchaser to take delivery of and make payments
for Securities pursuant to other contracts similar to this contract. The
undersigned represents and warrants to you that its investment in the
Securities is not, as of the date hereof, prohibited under the laws of any
jurisdiction to which the undersigned is subject and which govern such
investment.
Promptly after completion of the sale to the International Underwriters,
the Company will mail or deliver to the undersigned at its address set forth
below notice to such effect, accompanied by a copy of the opinions of counsel
for the Company delivered to the International Underwriters in connection
therewith.
By the execution hereof, the undersigned represents and warrants to the
Company that all necessary corporate action for the due execution and delivery
of this contract and the payment for and purchase of the Securities has been
taken by it and no further authorization or approval of any governmental or
other regulatory authority is required for such execution, delivery, payment or
purchase, and that, upon acceptance hereof by the Company and mailing or
delivery of a copy as provided below, this contract will constitute a valid and
binding agreement of the undersigned in accordance with its terms.
This contract will inure to the benefit of and be binding upon the
parties hereto and their respective successors, but will not be assignable by
either party hereto without the written consent of the other.
It is understood that the Company will not accept Delayed Delivery
Contracts for a number of Securities in excess of ______ and that the
acceptance of any Delayed Delivery Contract is in the Company's sole discretion
and, without limiting the foregoing, need not be on a first-come, first-served
basis. If this contract is acceptable to the Company, it is requested that the
Company sign the form of acceptance on a copy hereof and mail or deliver a
signed copy hereof to the undersigned at its address set forth below. This
will become a binding contract between the Company and the undersigned when
such copy is so mailed or delivered.
2
<PAGE> 58
This Agreement shall be governed by the laws of the State of New York.
Yours very truly,
---------------------------------------
(Name of Purchaser)
By:
------------------------------------
Title:
---------------------------------
---------------------------------------
---------------------------------------
(Address)
Accepted as of the date first above written.
Crescent Real Estate Equities Company
By:
-------------------------------------
Name:
Title:
PURCHASER--PLEASE COMPLETE AT TIME OF SIGNING
The name and telephone number of the representative of the Purchaser
with whom details of delivery on the Delivery Date may be discussed are as
follows: (Please print.)
<TABLE>
<CAPTION>
Telephone No.
Name (including Area Code)
---- ---------------------
<S> <C>
- ----------------------------------- -----------------------------
</TABLE>
3
<PAGE> 1
EXHIBIT 1.04
CRESCENT REAL ESTATE EQUITIES COMPANY
(a Texas real estate investment trust)
COMMON SHARES OF BENEFICIAL INTEREST
(Par Value $.01 Per Share)
INTERNATIONAL TERMS AGREEMENT
Dated: April 22, 1997
To: CRESCENT REAL ESTATE EQUITIES COMPANY
777 Main Street
Fort Worth, Texas 76102
Attention:
Ladies and Gentlemen:
We (the "International Underwriters") understand that Crescent
Real Estate Equities Company (the "Company") proposes to issue and sell its
Common Shares of Beneficial Interest, $.01 par value per share (the "Common
Shares") (such Common Shares being hereinafter referred to as the
"International Securities"). Subject to the terms and conditions set forth or
incorporated by reference herein, the International Underwriters named below
offer to purchase, severally and not jointly, the respective numbers of Initial
International Securities (as defined in the International Purchase Agreement
referred to below) set forth below opposite their respective names, and a
proportionate share of International Option Securities (as defined in the
International Purchase Agreement referred to below) to the extent any are
purchased, at the purchase price set forth below.
<PAGE> 2
<TABLE>
<CAPTION>
Number of Shares of Initial
International Underwriter International Securities
------------------------- ---------------------------
<S> <C>
Merrill Lynch International 700,000
Bear, Stearns International Limited 700,000
Donaldson, Lufkin & Jenrette Securities 700,000
Corporation
Morgan Stanley & Co. International Limited 700,000
PaineWebber International (UK) Ltd. 700,000
Smith Barney Inc. 700,000
----------
Total $4,200,000
==========
</TABLE>
2
<PAGE> 3
The International Securities shall have the following terms:
Title of Securities: Common Shares of Beneficial Interest, par value $.01 per
share
Number of Shares: 4,200,000
Public offering price per share: $25.375
Purchase price per share: $24.165
Number of International Option Securities, if any, that may be purchased by the
International Underwriters: 630,000
Delayed Delivery Contracts: not authorized
Additional co-managers, if any: Bear, Stearns International Limited,
Donaldson, Lufkin & Jenrette Securities
Corporation, Morgan Stanley & Co.
International Limited, PaineWebber
International (U.K.) Ltd. and Smith
Barney Inc.
Closing date and location: April 28, 1997, Hogan & Hartson L.L.P., Columbia
Square, 555 Thirteenth Street, N.W., Washington,
D.C. 20004-1109
All the provisions contained in the document attached as
Exhibit A hereto entitled "Crescent Real Estate Equities Company--Preferred
Shares of Beneficial Interest, Common Shares of Beneficial Interest, and Common
Share Warrants--International Purchase Agreement" are hereby incorporated by
reference in their entirety herein and shall be deemed to be a part of this
International Terms Agreement to the same extent as if such provisions had been
set forth in full herein. Terms defined in such document are used herein as
therein defined.
3
<PAGE> 4
Please accept this offer no later than ten o'clock P.M. (New York City time) on
April 22, 1997 by signing a copy of this International Terms Agreement in the
space set forth below and returning the signed copy to us.
Very truly yours
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
By: /s/ MICHAEL F. PROFENIUS
----------------------------------
Michael F. Profenius
Managing Director
Acting on behalf of itself and the
other named International
Underwriters.
Accepted:
By: CRESCENT REAL ESTATE EQUITIES COMPANY
By: /s/ GERALD W. HADDOCK
------------------------------------
Name: Gerald W. Haddock
Title: President and Chief Executive
Officer
4
<PAGE> 1
EXHIBIT 5.01
[LETTERHEAD OF SHAW, PITTMAN, POTTS & TROWBRIDGE]
April 22, 1997
Crescent Real Estate Equities Company
777 Main Street, Suite 2100
Fort Worth, Texas 76102
Ladies and Gentlemen:
We have acted as counsel to Crescent Real Estate Equities Company, a
Texas real estate investment trust (the "Company"), in connection with the
registration of up to 24,150,000 shares (including the underwriters'
overallotment option, if exercised) of common shares of beneficial interest of
the Company, par value $0.01 per share (the "Shares"), pursuant to a
Registration Statement on Form S-3 (Registration No. 333-21905), including the
prospectus, the prospectus supplements and all amendments, exhibits and
documents related thereto (collectively, the "Registration Statement"), under
the Securities Act of 1933, as amended, and with the proposed sale of the
Shares to the public through certain underwriters.
Based upon our examination of the originals or copies of such
documents, corporate records, certificates of officers of the Company and other
instruments as we have deemed necessary and upon the laws as presently in
effect, we are of the opinion that the Shares have been duly authorized for
issuance by the Company, and that, upon issuance and delivery in accordance
with the purchase agreements and related terms agreements referred to in the
Registration Statement, the Shares will be validly issued, fully paid and
nonassessable.
We hereby consent to the incorporation by reference of this opinion as
an exhibit to the Registration Statement. We also consent to the reference to
Shaw, Pittman, Potts & Trowbridge under the caption "Legal Matters" in the
prospectus and the prospectus supplements.
Very truly yours,
/s/ SHAW, PITTMAN, POTTS & TROWBRIDGE
-------------------------------------
SHAW, PITTMAN, POTTS & TROWBRIDGE
<PAGE> 1
EXHIBIT 8.01
April 22, 1997
Crescent Real Estate Equities Company
777 Main Street
Suite 2100
Fort Worth, Texas 76102
Ladies and Gentlemen:
On March 25, 1997, Crescent Real Estate Equities Company ("Crescent
Equities") filed a registration statement on Form S-3, No. 333-21905, with the
Securities and Exchange Commission, which was declared effective on March 26,
1997. Such registration statement (the "Registration Statement") includes a
prospectus supplement to be filed on April 24, 1997 to the prospectus contained
in the Registration Statement (together, the "Prospectus"). In connection with
the filing of the prospectus supplement filed April 24, 1997, you have asked us
to render certain opinions regarding the application of the U.S. federal income
tax laws to Crescent Equities, (1) Crescent Real Estate Equities Limited
Partnership (the "Operating Partnership") and certain partnerships and limited
liability companies in which the Operating Partnership has an ownership
interest (the "Subsidiary Partnerships"). The Subsidiary Partnerships currently
include Crescent Real Estate Funding I, L.P. ("Funding I"), Crescent Real
Estate Funding II, L.P. ("Funding II"), Crescent Real Estate Funding III, L.P.
("Funding III"), Crescent Real Estate Funding IV, L.P. ("Funding IV"), Crescent
Real Estate Funding V, L.P. ("Funding V"), Crescent Real Estate Funding VI,
L.P. ("Funding VI"), CresCal Properties, L.P. ("CresCal"), CresTex Development,
L.L.C. ("CresTex"), Waterside Commons Limited Partnership ("Waterside"), G/C
Waterside Associates LLC ("Associates"), Woodlands Office Equities-'95 Limited
(the "Woodlands Partnership"), Woodlands Retail Equities-'96 Limited ("WRE"),
301 Congress Avenue, L.P. (301 Congress"), Crescent/301, L.L.C.
("Crescent/301"), Spectrum Mortgage Associates, L.P. ("SMA") and Crescent
Commercial Realty Holdings, L.P. ("CCRH"). Capitalized terms used hereunder but
not defined have the meaning ascribed to them in the Prospectus, unless
otherwise noted.
<PAGE> 2
Crescent Real Estate Equities Company
April 22, 1997
Page 2
Specifically, you have requested that we render opinions addressing
the following:
1. Whether Crescent Equities qualified as a REIT under sections 856
through 860 of the Internal Revenue Code of 1986, as amended (the
"Code"), with respect to its taxable years ending on or before
December 31, 1996, whether Crescent Equities is organized in
conformity with the requirements for qualification as a REIT, whether
its manner of operation enabled it to meet the requirements for
qualification as a REIT as of the date of the Registration Statement,
and whether Crescent Equities' proposed manner of operation, as set
forth in the Registration Statement, will enable it to meet the
requirements for qualification as a REIT in the future;
2. Whether the Residential Development Properties will be treated for
federal income tax purposes as owned by the Residential Development
Corporations;(2)
3. Whether 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
percent and 95 percent gross income tests of section 856(c) of the
Code;
4. Whether the Residential Development Property Mortgages constitute
debt for federal income tax purposes, (3)
5. Whether contingent interest derived by the Operating Partnership from
the Residential Development Corporations under the terms of certain of
the Residential Development Property Mortgages will be treated as
being based on a fixed percentage of sales, and therefore all interest
derived therefrom will qualify
<PAGE> 3
Crescent Real Estate Equities Company
April 22, 1997
Page 3
as interest paid on mortgages on real property for purposes of the 75
percent and 95 percent gross income tests of section 856(c) of the
Code;
6. Whether the subordinate note secured by the Ritz-Carlton Hotel will
constitute debt for federal income tax purposes and whether the
Operating Partnership will be construed as owning at any time a
partnership interest in Manalapan Hotel Partners for federal income
tax purposes.
7. Whether the leases of the Hotel Properties will be treated as leases
for federal income tax purposes and whether the rent payable
thereunder will qualify as "rents from real property" for purposes of
the 75 percent and 95 percent gross income tests of section 856(c) of
the Code;
8. Whether Crescent Equities will be considered to own any of the voting
securities of the Residential Development Corporations for purposes of
section 856(c)(5)(B) of the Code;
9. Whether the Operating Partnership and each of the Subsidiary
Partnerships will be classified for federal income tax purposes as
partnerships and not as (a) associations taxable as corporations or
(b) publicly traded partnerships; and
10. Whether the material under the heading "Federal Income Tax
Considerations" in the Prospectus is accurate and summarizes the
material federal income tax considerations to a prospective holder of
Common Shares.
The opinions set forth herein are based upon the existing provisions
of the Code, Treasury Regulations, and the reported interpretations thereof by
the Internal Revenue Service ("IRS") and by the courts in effect as of the date
hereof, all of which are subject to change, both retroactively or
prospectively, and to possibly different interpretations. We assume no
obligation to update the opinions set forth in this letter. We believe that the
conclusions expressed herein, if challenged by the IRS, would be sustained in
court. Because our opinions are not binding upon the IRS or the courts,
however, there can be no assurance that contrary positions may not be
successfully asserted by the IRS.
I. Documents and Representations
For the purpose of rendering these opinions, we have examined and
relied on originals, or copies certified or otherwise identified to our
satisfaction, of the following: (1) the Restated Declaration of Trust of
Crescent Real Estate Equities Company (the "Declaration of Trust"); (2)
<PAGE> 4
Crescent Real Estate Equities Company
April 22, 1997
Page 4
the First Amended and Restated Agreement of Limited Partnership of Crescent
Real Estate Equities Limited Partnership, as amended (the "Operating
Partnership Agreement"); (3) the First Amended and Restated Agreement of
Limited Partnership of Crescent Real Estate Funding I, L.P. (the "Funding I
Agreement"); (4) the First Amended and Restated Agreement of Limited
Partnership of Crescent Real Estate Funding II, L.P., as amended (the "Funding
II Agreement"); (5) the First Amended and Restated Agreement of Limited
Partnership of Crescent Real Estate Funding III, L.P., as amended (the "Funding
III Agreement"); (6) the First Amended and Restated Agreement of Limited
Partnership of Crescent Real Estate Funding IV, L.P., as amended (the "Funding
IV Agreement"); (7) the First Amended and Restated Agreement of Limited
Partnership of Crescent Real Estate Funding V, L.P., as amended (the "Funding V
Agreement"); (8) the First Amended and Restated Agreement of Limited
Partnership of Crescent Real Estate Funding VI, L.P. (the "Funding VI
Agreement"); (9) the Agreement of Limited Partnership of CresCal Properties,
L.P., as amended by the First Amendment to the Agreement of Limited Partnership
of CresCal Properties, L.P. (the "CresCal Agreement"); (10) the Limited
Liability Company Agreement of CresTex Development, L.L.C. (the "CresTex
Agreement"); (11) the Limited Partnership Agreement of Waterside Commons
Limited Partnership, as amended by the First Amendment to the Limited
Partnership Agreement of Waterside Commons Limited Partnership, dated August
23, 1995 (the "Waterside Agreement"); (12) the Articles of Organization of G/C
Waterside Associates LLC (the "Associates Articles"); (13) the Regulations of
G/C Waterside Associates, LLC (the "Associates Regulations"); (14) the Amended
and Restated Agreement of Limited Partnership of Woodlands Office Equities -
'95 Limited (the "Woodlands Partnership Agreement"); (15) the Amended and
Restated Agreement of Limited Partnership of Woodlands Retail Equities - '96
Limited (the "WRE Agreement"); (16) the Limited Partnership Agreement of 301
Congress Avenue, L.P. (the "301 Congress Partnership Agreement"); (17) the
Limited Liability Company Agreement of Crescent/301, L.L.C. (the "Crescent/301
Agreement"); (18) the Amended and Restated Agreement of Limited Partnership of
Spectrum Mortgage Associates, L.P. (the "SMA Agreement"); (19) the Agreement of
Limited Partnership of Crescent Realty Investments, LLP (the "CCRH Agreement");
(20) copies of all existing leases (including amendments) entered into as of
the date hereof with respect to property owned or probably to be acquired by
the Operating Partnership or the Subsidiary Partnerships; (21) copies of the
Residential Development Property Mortgages; (22) the Registration Statement, as
amended through the date hereof; (23) the Prospectus; and (24) such other
documents or information as we have deemed necessary for the opinions set forth
below. In our examination, we have assumed the genuineness of all signatures,
the legal capacity of natural persons, the authenticity of all documents
submitted to us as originals, the conformity to original documents of all
documents submitted to us as certified or photostatic copies, and the
authenticity of the originals of such copies.
In addition, these opinions are conditioned upon certain
representations made by Crescent Equities and the Operating Partnership as to
factual and other matters as set forth in a
<PAGE> 5
Crescent Real Estate Equities Company
April 22, 1997
Page 5
letter submitted to us and in the discussion of "Federal Income Tax
Considerations" in the Prospectus. These opinions are also based on the
assumptions that (i) the Operating Partnership will be operated in accordance
with the terms and provisions of the Operating Partnership Agreement, (ii) each
of the Subsidiary Partnerships will be operated in accordance with the terms
and provisions of its organizational documents, (iii) Crescent Equities will be
operated in accordance with the terms and provisions of its Restated
Declaration of Trust, and (iv) the various elections, procedural steps, and
other actions by Crescent Equities or the Operating Partnership described in
the discussion of "Federal Income Tax Considerations" in the Prospectus will be
completed in a timely fashion or otherwise carried out as so described.
Unless facts material to the opinions expressed herein are
specifically stated to have been independently established or verified by us,
we have relied as to such facts solely upon the representations made by
Crescent Equities and the Operating Partnership. We are not, however, aware of
any facts or circumstances contrary to or inconsistent with the
representations. To the extent the representations are with respect to matters
set forth in the Code or Treasury Regulations, we have reviewed with the
individuals making such representations the relevant provisions of the Code,
the Treasury Regulations and published administrative interpretations.
II. Opinions
1. Qualification of Crescent Real Estate Equities, Inc. as a REIT
Based on the foregoing, it is our opinion that (i) Crescent Equities
qualified as a REIT under sections 856 through 860 of the Code with respect to
its taxable years ending on or before December 31, 1996, (ii) Crescent Equities
is organized in conformity with the requirements for qualification as a REIT
and its manner of operation has enabled it to meet the requirements for
qualification as a REIT as of the date of the Registration Statement, and (iii)
Crescent Equities' proposed manner of operation will enable it to meet the
requirements for qualification as a REIT in the future.
2. Ownership of the Residential Development Properties and Treatment
of Amounts Derived by the Operating Partnership with Respect to the Stock of
the Residential Development Corporations
If the Residential Development Corporations are not respected for tax
purposes, then the Operating Partnership would be treated for tax purposes as
directly owning certain of the Residential Development Properties. In such a
case, the income from the sales of the Residential Development Properties
treated as directly owned by the Operating Partnership would not qualify under
the 75 percent and 95 percent gross income tests and would count as gain from
the
<PAGE> 6
Crescent Real Estate Equities Company
April 22, 1997
Page 6
sale of assets for purposes of the 30 percent of gross income limitation. In
addition, such income would be considered "net income from prohibited
transactions" and thus would be subject to a 100 percent tax. Moreover, to the
extent that the Operating Partnership would be treated as directly owning
HBCLP's limited partner interest in Hudson Bay Partners, L.P. ("HB Partners"),
the Operating Partnership would be treated as owning any securities held by HB
Partners, and such deemed ownership could cause Crescent Equities to be treated
as owning more than 10 percent of the voting securities of one or more issuers
in violation of section 856(c)(5)(B). As a general rule, however, corporations,
as long as they have a business purpose or carry on any business activity, are
not disregarded for federal income tax purposes. Moline Properties, Inc. v.
Commissioner, 319 U.S. 436, 438-439 (1943).
The Residential Development Corporations are not mere formalities
created for tax purposes. Crescent Equities and the Operating Partnership have
represented that each of the Residential Development Companies will have their
own employees (except HBCLP, which will have no employees), will act
independently in owning, developing, and selling the Residential Development
Properties, and will not act as agents of the Operating Partnership or Crescent
Equities. Moreover, Mira Vista Development Corporation ("MVDC") and Houston
Area Development Corporation ("HADC") should shield the Operating Partnership
against any liabilities generated by their respective property development
businesses, while Crescent Development Management Corporation ("CDMC") and
HBCLP should shield the Operating Partnership from any liabilities generated by
any future business conducted directly by CDMC and HBCLP, respectively.
Therefore, it is our opinion that for federal income tax purposes the
Operating Partnership will not be treated as owning the Residential Development
Properties held directly by the Residential Development Corporations and,
consequently, all amounts derived by the Operating Partnership with respect to
the stock of the Residential Development Corporations will be characterized as
distributions on stock (i.e., as dividends, a return of capital, or capital
gain, depending on the circumstances) for purposes of the 75 percent and 95
percent gross income tests.
3. Characterization of the Residential Development Property Mortgages
as Debt and Treatment of Amounts Paid Pursuant to Residential Development
Property Mortgages
a. Characterization as Debt. Debt instruments, especially
instruments that are held by persons related to the debtor, may under
certain circumstances be characterized for income tax purposes as
equity, rather than as debt. The characterization of an instrument as
debt or equity is a question of fact to be determined from all
surrounding facts and circumstances, no one of which is conclusive.
See Kingbay v. Commissioner, 46 T.C. 147 (1966); Hambuechen v.
<PAGE> 7
Crescent Real Estate Equities Company
April 22, 1997
Page 7
Commissioner, 43 T.C. 90 (1964). Among the criteria that have been
found relevant in characterizing such instruments are: (1) the intent
of the parties, (2) the extent of participation in management by the
holder of the instrument, (3) the ability of the corporation to obtain
funds from outside sources, (4) the "thinness" of the capital
structure in relation to debt, (5) the risk involved, (6) the formal
indicia of the arrangement, (7) the relative position of the obligees
as to other creditors regarding payment of interest and principal, (8)
the voting power of the holder of the instrument, (9) the provision of
a fixed rate of interest, (10) the contingency of the obligation to
repay, (11) the source of the interest payments, (12) the presence or
absence of a fixed maturity date, (13) a provision for redemption by
the corporation, (14) a provision for redemption at the option of the
holder, and (15) the timing of the advance with reference to the
organization of the corporation. Fin Hay Realty Co. v. United States,
398 F.2d 694 (3d Cir. 1968).
Although the Residential Development Property Mortgages are held by
the Operating Partnership, which owns all of the nonvoting stock of the
Residential Development Corporations, and an approximately 19 percent indirect
equity interest in Whitehawk Development Group, LLC, these mortgages possess a
number of attributes weighing in favor of debt treatment. For instance, each of
the Residential Development Property Mortgages is clearly denominated as debt,
has a fixed term of seven or more years (except the HBCLP Note which has a term
of five years), provides for the return of a fixed principal amount plus
interest, and is secured by the Residential Development Properties (or in the
case of the CDMC Mortgage, secured by an interest in a limited partnership
which holds indirect interests in several Residential Development Properties,
or in the case of the HBCLP Note, secured by HBCLP's interest in HB Partners).
The interest on the Residential Development Property Mortgages accrues at
either a fixed rate or, in the case of the Whitehawk Note, at the prime rate
plus one percent per annum (not including any additional interest based on
gross sales proceeds). In addition, the Residential Development Property
Mortgages are not subordinated to other indebtedness of the Residential
Development Corporations. Crescent Equities and the Operating Partnership have
represented that at the time that each of the Residential Development Property
Mortgages were acquired by the Operating Partnership, the outstanding principal
amount of such mortgages did not exceed approximately 80 percent of the fair
market value of the Residential Development Properties (or in the case of the
three notes secured by the Houston Area Properties, that the combined principal
amount of the three loans did not exceed approximately 85 percent of the fair
market value of the Houston Area Properties, or in the case of the HBCLP Note,
Crescent Equities and the Operating Partnership have represented that at the
time the HBCLP Note was acquired by the Operating Partnership the maximum
amount that could be drawn under the line of credit under such note did not
exceed 50 percent of the fair market value of HBCLP's interest in HB Partners)
and that the interest to be charged, including any contingent interest,
represents a commercially reasonable rate of interest. In addition, based on
our experience and an examination of the
<PAGE> 8
Crescent Real Estate Equities Company
April 22, 1997
Page 8
Residential Development Property Mortgages, the interest appears to represent a
commercially reasonable rate of interest.
Based on the foregoing, it is our opinion that each of the Residential
Development Property Mortgages constitutes debt for federal income tax
purposes.
b. Treatment of Amounts Paid Pursuant to Residential
Development Property Mortgages. Section 856(f) of the Code defines "interest"
for the purposes of section 856(c)'s gross income tests to include contingent
interest that is based on a fixed percentage of any person's receipts or sales.
On the other hand, contingent interest provisions that are based on a specified
portion of the gain realized on the sale of the real property securing a
mortgage (or any gain that would be realized if such property were sold on a
specified date) may be characterized as "shared appreciation provisions" under
section 856(j) of the Code. If the properties underlying such a provision are
primarily held for sale to customers in the ordinary course of business, any
income derived from such a provision would be treated as income from prohibited
transactions. Such income would not satisfy the 75 percent and 95 percent gross
income tests and would be subject to a 100 percent tax on "net income from
prohibited transactions."
Any contingent interest payable under the terms of the mortgage in the
principal amount of $14.4 million secured by the Mira Vista Residential
Development Property (the "Mira Vista Mortgage") will qualify as interest on an
obligation secured by a mortgage on real property, rather than income derived
from a shared appreciation provision, because such contingent interest will be
based on a percentage of the gross receipts derived from any sale of portions
of the Mira Vista Residential Development Property, as opposed to a portion of
the gain realized on such sales. Similarly, any contingent interest payable
under the terms of 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 (the "Houston Area Development
Properties") (the "Houston Area Mortgages") will qualify as interest on
obligations secured by mortgages on real property, rather than income derived
from shared appreciation provisions, because such contingent interest will be
based on a percentage of the gross receipts derived from any sale of portions
of the Houston Area Development Properties, as opposed to a portion of the gain
realized on such sales.
<PAGE> 9
Crescent Real Estate Equities Company
April 22, 1997
Page 9
The fact that the contingent interest provided for by the Mira Vista
Mortgage and the Houston Area Mortgages is based on gross receipts, rather than
gain, could have economic significance with respect to the return received by a
holder of such mortgages. For example, if the value of the Houston Area
Development Properties were to increase, but few lots were sold, the Operating
Partnership, as holder of the Houston Area Mortgages would not accrue any
contingent interest. On the other hand, the Operating Partnership would accrue
contingent interest if numerous lot sales were made at the Houston Area
Development Properties, even if such sales were made at a loss.
Based on the foregoing, it is our opinion that any contingent interest
derived from the Mira Vista Mortgage and the Houston Area Mortgages will be
treated as being based on a fixed percentage of sales and therefore such
interest will constitute interest received from real estate mortgages for
purposes of the 75 percent and 95 percent gross income tests, and that,
consequently, all amounts derived by the Operating Partnership from the
Residential Development Corporations under the terms of the Residential
Development Property Mortgages (other than the HBCLP Note) will be
characterized as interest or principal, as the case may be, paid on mortgages
on real property for purposes of the 75 percent and 95 percent gross income
tests. It is our opinion that all amounts derived by the Operating Partnership
from the HBCLP Note will be characterized as interest or principal, as the case
may be for purposes of the 95 percent gross income test.
4. Characterization of Ritz-Carlton Mortgage as Debt and Treatment of
Amounts Paid Pursuant to Ritz-Carlton Mortgage
a. Background. Manalapan Hotel Partners ("Manalapan") is a
Florida general partnership. The three original partners of Manalapan were as
follows: Siquille Developers, Inc., which held and still holds a 50 percent
interest; SCP (Palm Beach) Inc., as successor to Shimizu Land Corporation
("SCP"), which held and still holds a 25 percent interest; and AIT Manalapan
Limited Partnership ("AIT"), which also held a 25 percent interest. In 1989, in
order to construct The Ritz-Carlton Hotel in Palm Beach, Florida, Manalapan
entered into three different loan agreements with three different entities.
Each note is secured by the Ritz-Carlton Hotel and the land thereunder (the "RC
Property"). The senior note in the amount of $75 million is held by The Nippon
Credit Bank, New York Branch ("Nippon"). The two subordinate notes, each in the
initial principal amount of $9 million and due on June 22, 2004, were held by
SCP and by State Street Bank and Trust Company, as trustee of Ameritech Pension
Trust ("Ameritech"). As of February 28, 1997, the unpaid principal balance of
the senior note was $71,428,757.91, together with accrued interest of
$360,960.67; the unpaid principal balance of the note held by SCP was
$8,849,244.17, plus accrued interest of $1,526,548.60; and the unpaid principal
balance of Ameritech's note was $8,849,244.17, plus accrued interest of
$1,527,677.71.
<PAGE> 10
Crescent Real Estate Equities Company
April 22, 1997
Page 10
On December 22, 1996, the Operating Partnership entered into an
agreement to purchase Ameritech's subordinate note (the "RC Note") for
$6,490,000 and an option to purchase AIT's interest in Manalapan (the
"Option"). The purchase price of the Option was $10,000; its exercise price was
$100,000. On February 27, 1997, the Operating Partnership transferred the
Option to CDMC. The Operating Partnership closed on the Loan Purchase and Sale
Agreement on March 5, 1997, purchasing the RC Note. On the same day, CDMC
exercised the Option and purchased the partnership interest in Manalapan.(4)
CDMC has the consent of the other Manalapan partners to transfer its interest
to a not-yet-formed corporation ("New Crescent") that, if it is formed, will be
spun off by the Operating Partnership and Crescent Equities.
b. Characterization as Debt. Debt instruments, especially
instruments that are held by persons related to the debtor, may under
certain circumstances be characterized for income tax purposes as equity,
rather than as debt. The characterization of an instrument as debt or equity is
a question of fact to be determined from all surrounding facts and
circumstances, no one of which is conclusive. See Kingbay v. Commissioner, 46
T.C. 147 (1966); Hambuechen v. Commissioner, 43 T.C. 90 (1964). Among the
criteria that have been found relevant in characterizing such instruments are
the following: (1) the intent of the parties, (2) the extent of participation
in management by the holder of the instrument, (3) the ability of the
corporation to obtain funds from outside sources, (4) the "thinness" of the
capital structure in relation to debt, (5) the risk involved, (6) the formal
indicia of the arrangement, (7) the relative position of the obligees as to
other creditors regarding payment of interest and principal, (8) the voting
power of the holder of the instrument, (9) the provision of a fixed rate of
interest, (10) the contingency of the obligation to repay, (11) the source of
the interest payments, (12) the presence or absence of a fixed maturity date,
(13) a provision for redemption by the corporation, (14) a provision for
redemption at the option of the holder, and (15) the timing of the advance with
reference to the organization of the corporation. Fin Hay Realty Co. v. United
States, 398 F.2d 694 (3d Cir. 1968).
Although the purchase price of the RC Note reflects a significant
discount from its outstanding balance, this price does not establish that the
RC Property was in fact "under water." Rather, it indicates Ameritech's
reluctance to continue to bear the financing risk associated with the loan. In
addition, the RC Note possesses a number of attributes weighing in favor of
debt treatment. For instance, the RC Note is clearly denominated as debt, has a
fixed maturity date of June 22, 2004, provides for the return of interest on
the principal amount at a rate of 12 percent per annum, some of which already
has been paid, and is secured by the RC Property. As far as we are aware, the
RC Note was issued at a time when the fair market value of the RC Property
exceeded all debts that it secured, has never been in default, and has never
been modified. In addition, neither of the two subordinate notes was pro rata
among the owners of the partnership's
<PAGE> 11
Crescent Real Estate Equities Company
April 22, 1997
Page 11
equity; both were held only by two minority partners. Also, the purchase by
CDMC of the joint venture interest indicates CDMC's belief that the equity
interest had some value at the time of the purchase. Furthermore, Crescent
Equities and the Operating Partnership have represented that the value of the
RC Property exceeds the combined outstanding balance of the RC Note and the
notes held by Nippon and SCP. Crescent Equities and the Operating Partnership
have also represented that the interest provided for under the RC Note
represents a commercially reasonable rate of interest. In addition, based on
our experience and an examination of the RC Note, the interest appears to
represent a commercially reasonable rate of interest.
Based on the foregoing, it is our opinion that the RC Note constitutes
debt for federal income tax purposes. Further, it is our opinion that amounts
designated as interest by the RC Note will be treated as interest for purposes
of the 75 percent and 95 percent gross income tests of section 856(c).
c. Option to Purchase Partnership Interest
The Operating Partnership's purchase of the Option and subsequent
transfer of it to CDMC, as well as CDMC's exercise of the option, raises two
issues of concern to the Operating Partnership. The first issue is whether
ownership of the Option by the Operating Partnership was tantamount to
ownership of the joint venture interest. The second issue is whether CDMC will
be treated as an agent of the Operating Partnership.
The IRS, in Revenue Ruling 82-150, 1982-2 C.B. 110, held that where a
taxpayer purchases an option to purchase an asset and the price paid for
acquiring the option is relatively high compared to the fair market value of
the asset, the doctrine of "substance over form" will be applied to the
transaction, and the taxpayer will be considered to have assumed ownership of
the asset through purchase of the option. The $10,000 price paid by the
Operating Partnership to purchase the Option, however, was relatively
insignificant compared to the exercise price and is not likely to be considered
a purchase of the joint venture interest.
Also relevant is the Tax Court's decision in Penn-Dixie Steel
Corporation v. Commissioner, 69 T.C. 837 (1978). The court addressed the issue
of whether a transaction between two parties that entered into a joint venture
agreement providing for a put and a call should be construed as a sale of one
company's interest with payment of a portion of the purchase price deferred
until the put or the call was exercised. The court explained that, despite the
likelihood of the companies exercising either the put or the call, the put and
call arrangement did not legally, or as a practical matter, impose mutual
obligations upon one company to sell and the other to buy. Id. at 844. Under
the Penn-Dixie rationale, enough contingencies were present
<PAGE> 12
Crescent Real Estate Equities Company
April 22, 1997
Page 12
when the Operating Partnership purchased the Option to prevent the purchase of
the Option from being construed as purchase of the joint venture interest.
Based on the foregoing, it is our opinion that the Operating
Partnership's purchase of the Option will not be construed as ownership of a
partnership interest in Manalapan.
The second issue that must be addressed is whether CDMC could be
regarded as an agent for the Operating Partnership. In Commissioner v.
Bollinger, the Supreme Court discussed the tax treatment of corporations
purporting to be agents for their shareholders. 485 U.S. 340 (1988). The Court
enumerated three factors that will lead to the finding of an agency
relationship with respect to an asset: (1) the corporation acquires the asset
with a written agency agreement in place; (2) the corporation functions as an
agent and not as a principal; and (3) the corporation is held out to third
parties as an agent. Id. at 349-50.
CDMC has not and will not hold itself out as an agent for the
Operating Partnership. In addition, there are no agreements between Crescent
Equities and the Voting Shareholders, whether written or oral, that control the
manner in which the Voting Shareholders exercise the voting rights inherent in
the voting stock of CDMC or that restrict the ability of the Voting
Shareholders to alienate such stock. There will be no such agreements between
Crescent Equities and the Voting Shareholders in the future. Moreover, the
voting stock of CDMC owned by the Voting Shareholders is registered in the
names of such Voting Shareholders, and all dividends accruing on stock are
delivered to the addresses of such Voting Shareholders. No evidence exists to
indicate that CDMC did not act independently and in the best interests of its
shareholders when investing in the partnership interest in Manalapan, which has
significant potential for appreciation.
Although CDMC has the right to transfer its interest in Manalapan to
New Crescent, it is under no legal obligation to complete such a transfer. No
agreement, written or unwritten, to transfer the Manalapan interest to New
Crescent exists between the Operating Partnership and CDMC. Crescent Equities
has also represented that to the best of its knowledge the Board of Directors
of CDMC has not yet made a decision regarding the possible contribution to New
Crescent, will continue to act independently with regard to this matter, and
will take whatever actions it determines are in the best interest of CDMC at
such time, if any, as there is an opportunity to transfer the partnership
interest to New Crescent. In addition, the possibility remains that the
spin-off transaction will not occur and New Crescent will not be formed.
In our view, an application of the Bollinger inquiry to these facts is
unlikely to result in a characterization of the relationship between CDMC and
the Operating Partnership as one
<PAGE> 13
Crescent Real Estate Equities Company
April 22, 1997
Page 13
between agent and principal, especially because CDMC and the Operating
Partnership will not hold themselves out to the public as principal and agent.
Finally, it is unlikely that the Operating Partnership will be
considered the owner of the partnership interest because, should the value of
the partnership interest depreciate, CDMC bears the risk of loss. CDMC also
will be the entity that benefits should the interest appreciate.
Based on the foregoing, it is our opinion that the Operating
Partnership's purchase of the Option will not be construed as ownership of a
partnership interest in Manalapan.
5. Characterization of the Leases of the Hotel Properties and the
Treatment of Amounts Paid Pursuant To Such Leases as "Rents From Real Property"
On January 3, 1995, we provided the Operating Partnership with a
memorandum (a copy of which is attached hereto) in which we expressed our
opinion that, based on certain assumptions, that the lease of the Hyatt Regency
Beaver Creek would be treated as a lease for federal income tax purposes and
that the rent payable thereunder would qualify as "rents from real property."
On April 1, 1996, we provided the Operating Partnership with a letter (a copy
of which is attached hereto) in which we updated the facts relating to the
lease of the Hyatt Regency Beaver Creek as expressed in our January 3, 1995
memorandum and affirmed the opinions expressed in that memorandum.
On June 30, 1995, we provided the Operating Partnership with a
memorandum (a copy of which is attached hereto) in which we expressed our
opinion that, based on certain assumptions, that the lease of the Denver
Marriott City Center would be treated as a lease for federal income tax
purposes and that the rent payable thereunder would qualify as "rents from real
property." On September 27, 1996, we provided the Operating Partnership with a
letter (a copy of which is attached hereto) in which we affirmed the opinions
expressed in our June 30, 1995 memorandum.
On December 19, 1995, we provided the Operating Partnership with a
memorandum (a copy of which is attached hereto) in which we expressed our
opinion that, based on certain assumptions, that the lease of the Hyatt Regency
Albuquerque Plaza would be treated as a lease for federal income tax purposes
and that the rent payable thereunder would qualify as "rents from real
property." On April 1, 1996, we provided the Operating Partnership with a
letter (a copy of which is attached hereto) in which we updated the facts
relating to the lease of the Hyatt Regency Albuquerque Plaza as expressed in
our December 19, 1995 memorandum and affirmed the opinions expressed in that
memorandum.
<PAGE> 14
Crescent Real Estate Equities Company
April 22, 1997
Page 14
On July 26, 1996, we provided the Operating Partnership with a
memorandum (a copy of which is attached hereto) in which we expressed our
opinion that, based on certain assumptions, that the lease of the Canyon Ranch
Tucson resort would be treated as a lease for federal income tax purposes and
that the rent payable thereunder would qualify as "rents from real property."
On December 11, 1996 we provided the Operating Partnership with a
letter (a copy of which is attached hereto) in which we expressed our opinion
that, based on certain assumptions, that the lease of the Canyon Ranch Lenox
resort would be treated as a lease for federal income tax purposes and that the
rent payable thereunder would qualify as "rents from real property."
We hereby affirm the opinions expressed in our January 3, 1995, June
30, 1995, December 19, 1995 and July 26, 1996 memoranda, as updated by our
letters dated April 1, 1996, September 27, 1996 and December 11, 1996, and
authorize you to rely upon those opinions in connection with the preparation of
the Registration Statement.
6. Ownership of Residential Development Company Voting Stock
Section 856(c)(5) restricts the types of assets that can be held by an
entity seeking to qualify as a REIT. Specifically, section 856(c)(5)(B)
provides that at the close of each quarter of the taxable year, a REIT must
hold no more than 10 percent of the outstanding voting securities of any one
issuer.
The term "voting securities" as used in section 856(c)(5)(B) is not
defined in the Code. However, section 856(c)(6)(F) provides that terms not
defined in sections 856 through 859 shall have the same meaning as when used in
the Investment Company Act of 1940, as amended (the "ICA"). Section 2(a)(42) of
the ICA defines "voting security" as "any security presently entitling the
owner or holder thereof to vote for the election of directors of a company."
The IRS has not issued any revenue rulings discussing what constitutes
"voting securities" for purposes of section 856(c)(5)(B). However, the IRS has
issued one revenue ruling discussing what constitutes "voting securities" for
the purposes of section 851(b), which provides rules for qualification as a
regulated investment company (a "RIC"). (The RIC qualification provisions, like
section 856(c)(5)(B), incorporate the definition of "voting securities" found
in the ICA.) In Rev. Rul. 66-339, 1966-2 C.B. 274, the IRS held that a
shareholders' voting agreement was not a voting security for purposes of
section 851(b)(4). The taxpayer in the ruling was a small business investment
company which had made a loan to a corporation. Under the terms of the loan
agreement, a shareholders' agreement was executed, which required the election
of one director designated by the taxpayer during the term of the loan and,
thereafter, as long as the taxpayer owned or had the right to acquire at least
10 percent of the outstanding stock of the
<PAGE> 15
Crescent Real Estate Equities Company
April 22, 1997
Page 15
corporation. The IRS held that the shareholders' agreement was not a voting
security because the enforceability the taxpayer's rights under the agreement
depended upon the taxpayer's status as a party to the agreement, rather than as
a shareholder.
The IRS has not been entirely comfortable with Rev. Rul. 66-339,
however. In G.C.M. 36823, 1976 IRS GCM Lexis 114 (Aug. 24, 1976), which dealt
with the definition of "voting securities" for purposes of the REIT provisions,
the IRS recommended that Rev. Rul. 66-339 be modified to reflect the
interpretation of the term "voting security" as expressed in an opinion of the
chief counsel of the Securities and Exchange Commission ("SEC"). This opinion
held that "unless there are compelling considerations to the contrary in a
particular case, the definition of 'voting security' in the ICA should
generally be interpreted to include not only the formal legal right to vote for
the election of directors pursuant to the provisions of the law of the state of
incorporation and the corporation's charter and by-laws but also the de facto
power, based on all the surrounding facts and circumstances, to determine, or
influence the determination of, the identity of a corporation's directors." Id.
Despite this recommendation of G.C.M. 36823, however, Rev. Rul. 66-339 has
never been modified and would therefore continue to constitute good authority.
Since the issuance of G.C.M. 36823, the IRS has issued several private
letter rulings in which it has not treated a REIT as owning "voting securities"
of other corporations for purposes of section 856(c)(5)(B), despite the fact
that such securities were actually owned either by officers or shareholders of
the REIT. P.L.R. 8825112 (Mar. 30, 1988); P.L.R. 9340056 (July 13, 1993);
P.L.R. 9428033 (April 20, 1994); P.L.R. 9436025 (June 8, 1994). In each of
these rulings, the REIT either directly or indirectly held substantial amounts
of the other corporation's nonvoting stock. None of these rulings makes any
mention of either Rev. Rul. 66-339 or the de facto voting power issue raised by
the IRS in G.C.M. 36823.
Although private letter rulings like those mentioned above were issued
by the IRS until June 8, 1994, the IRS subsequently announced that, for the
indefinite future, it would no longer issue private letter rulings with regard
to fact situations involving corporations the voting stock of which is held by
relatives of principal REIT shareholders and/or REIT employees. The IRS has not
provided an explanation for this "no ruling" policy. Nonetheless, the policy
could indicate that the IRS is reconsidering its position on the treatment of
fact situations similar to those involving Crescent Equities and the
Residential Development Corporations.
Crescent Equities does not directly or indirectly own any of the
voting stock of any of the Residential Development Corporations. In the case of
MVDC, the voting stock is owned by James Bartlett, Nick Hackstock, Tom
Nezworski, John C. Goff and Gerald W. Haddock (together, the "MVDC Voting
Shareholders"). In the case of HADC, the voting stock is owned
<PAGE> 16
Crescent Real Estate Equities Company
April 22, 1997
Page 16
by Sam Yager, John C. Goff and Gerald W. Haddock (together, the "HADC Voting
Shareholders"). In the case of CDMC, the voting stock is owned by Harry
Frampton, John C. Goff and Gerald W. Haddock (together, the "CDMC Voting
Shareholders"). In the case of HBCLP, such stock is owned by K-Holdings Co. and
David Lesser (together, the "HBCLP Voting Shareholders" and together with the
MVDC Voting Shareholders, the HADC Voting Shareholders and the CDMC Voting
Shareholders, the "Voting Shareholders"). Moreover, the voting stock of the
Residential Development Corporations owned by the Voting Shareholders is
registered in the names of such Voting Shareholders, and all dividends accruing
on stock are delivered to the addresses of such Voting Shareholders. Therefore,
unless Crescent Equities is deemed to own some of the shares of voting stock of
the Residential Development Corporations actually held by the Voting
Shareholders, it will not own more than 10 percent of the voting securities of
any of the Residential Development Corporations in violation of section
856(c)(5)(B).
The IRS could argue that the ownership of some or all of the voting
stock actually held by the Voting Shareholders should be attributed to Crescent
Equities under two possible theories: (1) a "nominee" or "de facto ownership"
theory or (2) a constructive ownership theory. There is no authority indicating
that the Service could successfully assert either of these theories in a fact
situation similar to that involving Crescent Equities and the Residential
Development Corporations, however. Therefore, it is our opinion that Crescent
Equities will not be deemed to be the owner of the voting stock of the
Residential Development Corporations held by the Voting Shareholders for
purposes of section 856(c)(5)(B). In connection with this opinion we note that
both John C. Goff and Gerald W. Haddock are presently officers and trust
managers of Crescent Equities and officers of some of Crescent Equities'
subsidiaries, while David H. Lesser was an employee of Crescent Equities prior
to his acquiring voting stock in HBCLP.
a. "Nominee" or "De Facto Ownership" Theory. Under a
"nominee" or "de facto ownership" theory, the IRS could attribute ownership of
the Residential Development Company voting stock from the Voting Shareholders
to Crescent Equities for tax purposes, based on the "effective control" that
Crescent Equities exercises over the Voting Shareholders. The IRS has only
applied a "nominee" or "de facto ownership" theory in situations where there
was a written or oral agreement transferring "effective control" of the stock
away from the record owner, however. No such agreement exists between Crescent
Equities and the Voting Shareholders.
For example, in G.C.M. 36823, discussed above, the IRS based its
determination that a taxpayer was the "true owner" of another corporation's
voting stock for purposes of section 856(c)(5)(B) on the fact that the actual
owner of such stock had executed a written agreement giving the taxpayer a
proxy to vote the stock in a number of key situations. Under the agreement, the
taxpayer was given a proxy to vote all of the borrower's voting stock in the
event
<PAGE> 17
Crescent Real Estate Equities Company
April 22, 1997
Page 17
the borrower proposed (1) a merger or reorganization, (2) a liquidation and
dissolution, (3) any substantial change in business, (4) a sale or disposition
of all or substantially all of its assets, (5) any amendment to the certificate
of incorporation, (6) the organization of any significant subsidiary, or (7)
any substantial investment in any other corporation, partnership, or joint
venture. The proxy did not give the taxpayer the right to vote for the
borrower's directors, however. Nonetheless, the IRS concluded that the taxpayer
should be deemed to own the borrower's voting stock for purposes of section
856(c)(5)(B), because the agreement with the actual owner of the borrower's
voting stock provided the taxpayer "with the type of control over directors'
decisions that is usually reserved to those having the power to elect
directors, that is, the owners of voting stock." 1976 IRS GCM Lexis 114.
In contrast, the IRS has never attributed ownership of voting
securities to a taxpayer for purposes of section 856(c)(5)(B) in situations
where no agreement regarding how such securities were to be voted existed
between the taxpayer and the actual owners of the securities. For example, in a
series of private letter rulings issued after the issuance of G.C.M. 36823, the
IRS ignored the "effective control" that taxpayers might exercise over voting
stock in situations where such stock was held by the taxpayer's officers and
shareholders. Id.
Similarly, outside the context of section 856(c)(5)(B), the IRS has
treated the actual owners of corporate stock as mere nominees only in
situations where there was a written or oral agreement that provided another
party with effective control over such stock. For example, in Rev. Rul. 84-79,
1984-1 C.B. 190, the IRS found that the grantor and sole beneficiary of a
revocable voting trust "directly" owned stock for purposes of section 1504(a),
despite the fact that it had transferred the stock to the voting trust. The IRS
reached this conclusion because the voting trust agreement effectively allowed
the grantor to retain control over the stock, permitting it to revoke the trust
or replace the trustee without cause at any time. See also, Rev. Rul. 70-469,
1970-2 C.B. 179; Miami National Bank v. Commissioner, 67 T.C. 793 (1977). In
contrast, the IRS has not found that corporations retained effective control of
stock for purposes of section 1504(a)(4) in situations where they transferred
such stock to their shareholders, in the absence of a voting trust agreement.
See, e.g., T.A.M. 9206005 (Oct. 24, 1991); T.A.M. 9137003 (May 20, 1991).
The IRS has also refused to treat purchasers of corporate stock as
mere nominees when applying the "solely for voting stock" requirement for
section 368(a)(1)(B) reorganizations. For example, in Rev. Rul. 68-562, 1968-2
C.B. 157, the IRS found that an acquisition of all the stock of one corporation
("Y") by another corporation ("X"), in exchange for X corporation voting stock
qualified as a section 368(a)(1)(B) reorganization. The IRS reached this
conclusion despite the fact that an individual who owned 90 percent of X's
voting stock had purchased 50 percent of Y's stock for cash two months before
the such acquisition. The IRS did not attribute this
<PAGE> 18
Crescent Real Estate Equities Company
April 22, 1997
Page 18
purchase of Y stock to X, because the actual purchaser, even though he was X's
principal shareholder, was under no obligation to surrender such stock to X.
Id. See also, Rev. Rul. 72-354, 1972-2 C.B. 216 (acquiring corporation
satisfied "solely for voting stock" requirement for a section 368(a)(1)(B)
reorganization when it sold stock in the target corporation that it had
recently purchased for cash to a third party with no commitment on the part of
the third party to surrender such stock in subsequent reorganization). In
contrast, the IRS has attributed third-party purchases of corporate stock to
the acquiring party in a 368(a)(1)(B) reorganization in situations where a
third-party purchaser had previously agreed to transfer the purchased stock to
the acquiring party. See, e.g., G.C.M. 36041, 1974 IRS GCM Lexis 73.
Moreover, under the three-factor test for nominee status set forth by
the Supreme Court in Commissioner v. Bollinger, none of the Voting Shareholders
qualifies as a nominee of Crescent Equities with respect to the Residential
Development Corporation voting stock. 485 U.S. 340 (1988). Bollinger involved
partnerships that developed apartment complexes in Kentucky. In order to avoid
Kentucky's usury laws, which limited the annual interest rate for noncorporate
borrowers, the partnerships entered into agreements with a corporation wholly
owned by an individual that was a partner in each of the partnerships. Pursuant
to the agreements, the corporation was to hold title to the apartment complexes
as the partnerships' nominee and agent solely to secure financing. The
agreements also provided that the partnerships were to have sole control of and
responsibility for the complexes, and the partnerships were to be the principal
and owner of the property during financing, construction, and operation. All
parties who had contact with the complexes, if they were aware of the
corporation at all, regarded the partnerships as the owners and knew the
corporation was merely the partnerships' agent. Income and losses from the
complexes were reported on the partnerships' tax returns, and the partners each
reported their distributive share of such income and losses on their individual
returns. The IRS challenged the inclusion of the complexes' losses on the
partners' individual returns on the ground that the losses were attributable to
the corporation as the record owner of the complexes. The IRS argued that in
order for the partners to demonstrate that the corporation was acting merely as
an agent or nominee, they must give evidence of arms-length dealing between the
partnerships and the corporation and the payment of an agency fee. However, the
Supreme Court held that only three factors needed to be present to assure the
genuineness of an agency relationship: (1) the corporation must execute a
written agreement at the time the asset is acquired setting forth the
corporation's agency with respect to the asset, (2) the corporation must
function as an agent and not as a principal with respect to the asset for all
purposes, and (3) the corporation must be held out to be an agent and not a
principal in all dealings with third parties relating to the asset. Id.
Although Bollinger expressly dealt with situations where corporations
were acting as nominees for their shareholders, its three-factor test appears
to be relevant in determining the genuineness of all purported agency
relationships for federal income tax purposes. Therefore, if
<PAGE> 19
Crescent Real Estate Equities Company
April 22, 1997
Page 19
the IRS were to assert that the Voting Shareholders are holding the voting
stock of the Residential Development Corporations as mere nominees of Crescent
Equities, Bollinger's three-factor test should apply in evaluating the
relationship between Crescent Equities and the Voting Shareholders.
When Bollinger's three-factor test is applied to Crescent Equities'
relationship to the Voting Shareholders, it becomes apparent that the Voting
Shareholders are not acting as Crescent Equities' nominees with respect to
their ownership of the voting stock of the Residential Development
Corporations. First, in contrast to the situation in Bollinger, where there was
a written agreement between the corporation and the partnerships setting forth
the corporation's rights and duties as agent, here there is and will be no
written (or oral) agreement between Crescent Equities and the Voting
Shareholders regarding the Voting Shareholders' rights and duties with respect
to the voting stock of the Residential Development Corporations. Crescent
Equities has no control over the ability of the Voting Shareholders to alienate
the voting stock and vote such stock as they choose. Second, unlike the
situation in Bollinger, where the corporation functioned as an agent rather
than a principal with respect to the apartment complexes, here the Voting
Shareholders function as principals with respect to the voting stock. As noted
above, the Voting Shareholders make their own decisions about alienating the
voting stock and how to exercise their voting power, and they are independently
obligated to make their shares of any additional capital contributions. Third,
unlike the situation in Bollinger, where the corporation was clearly held out
to all third parties as a mere agent of the partnerships, here the Voting
Shareholders have been and will be held out to third parties as the true owners
of the voting stock in all respects. For example, the voting stock is
registered in the name of the Voting Shareholders, and all corporate notices
and dividends, if any, are delivered to the addresses of the Voting
Shareholders.
b. Constructive Ownership Theory. Under a "constructive
ownership theory," the IRS could attempt to attribute ownership of the voting
stock of the Residential Development Corporations from the Voting Shareholders
to Crescent Equities for purposes of applying section 856(c)(5)(B). The absence
of any relevant constructive ownership provision should defeat such a position,
however.
Although the Code contains several constructive ownership provisions,
such as sections 267(c), 318(a), 544(a), 554(a) and 1563(e), section 318(a) is
the only one that could possibly operate to attribute ownership of the voting
stock of the Residential Development Corporations from the Voting Shareholders
to Crescent Equities. This is because section 318(a) is the only constructive
ownership provision that provides for attribution of stock ownership to
corporations. All of the other constructive ownership provisions provide only
for attribution of stock ownership away from corporations.
<PAGE> 20
Crescent Real Estate Equities Company
April 22, 1997
Page 20
The IRS should not be successful in attributing ownership of the
voting stock of the Residential Development Corporations to Crescent Equities
under section 318(a), because that section applies only to other Code sections
that expressly provide for its application. There is no indication in the Code
or Treasury Regulations that taxpayers are to apply the constructive ownership
rules of section 318(a) in determining ownership of voting securities for
purposes of section 856(c)(5)(B).
Furthermore, the IRS and the courts have rejected all attempts to
apply section 318(a) to Code sections other than those to which it is expressly
made applicable. Thus, for example, in Brams v. Commissioner, 734 F.2d 290 (6th
Cir. 1984), the Sixth Circuit affirmed a decision of the Tax Court holding that
a transfer of property by a taxpayer to a corporation did not qualify for
nonrecognition treatment under section 351. Section 351 offers nonrecognition
treatment to persons who transfer property to corporations in exchange for
stock, only if such persons are in control of the corporation immediately after
the exchange. Section 368(c) defines "control" for this purpose as ownership of
80 percent of the total combined voting power of all classes of stock entitled
to vote and at least 80 percent of the total number of shares of all other
classes of stock. In Brams, the Sixth Circuit determined that the taxpayer
directly owned only 31.6 percent of the outstanding stock of the corporation
immediately after the transaction, and it refused to apply section 318(a) to
attribute to the taxpayer the ownership of an additional 52.6 percent of the
outstanding stock of the corporation held by the taxpayer's sons. Id. See also
Yamamoto v. Commissioner, 51 T.C.M. 1560 (1986) (Section 351 does not apply to
a transfer where the taxpayer owned part of the transferee's stock directly and
owned 100% of the stock of a second corporation which owned the balance of the
transferee corporation's stock).
Similarly, the IRS has refused to apply any attribution rules in
interpreting "control" for the purposes of interpreting the reorganization
provisions of section 368. For example, in Rev. Rul. 56-613, 1956-2 C.B. 212,
the IRS did not treat a corporation as satisfying the control requirement of
section 368(a)(1)(B) of the Code when it acquired 100 percent of one class of
shares of a target corporation, despite the fact that all the other shares of
the target corporation were owned by the acquiring corporation's wholly owned
subsidiary. See also Berghash v. Commissioner, 43 T.C. 743 (1965), aff'd, 361
F.2d 257 (2d Cir. 1966) (the option attribution rules of section 318(a) do not
apply in determining whether the control requirement of section 368(a)(1)(D) is
satisfied); Rev. Rul. 76-36, 1976-1 C.B. 105 (section 318(a) has no application
in determining "changes in ownership" under pre-1987 section 382).
Moreover, even if section 318(a) of the Code were applicable to the
determination of ownership of voting securities for purposes of section
856(c)(5)(B), it would not operate to attribute ownership of the voting stock
of the Residential Development Corporations from the Voting Shareholders to
Crescent Equities. Section 318(a)(3)(C) provides that stock ownership is
<PAGE> 21
Crescent Real Estate Equities Company
April 22, 1997
Page 21
to be attributed from a shareholder to a corporation only if the shareholder
owns, directly or indirectly, 50 percent or more of the value of the stock of
such corporation. The Declaration of Trust currently contains limitations on
stock ownership that will prevent any shareholder, other than Richard E.
Rainwater, from owning, actually or constructively, more than 8.0 percent of
the value of Crescent Equities common shares. The Declaration of Trust also
prevents Richard E. Rainwater from owning, actually or constructively, more
than 9.5 percent of the value of Crescent Equities' common shares. Therefore,
unless these ownership limitations are waived, no person can possibly own,
actually or constructively, the 50 percent of the value of Crescent Equities'
common shares required for the application of section 318(a)(3)(C).
Consequently, it is our opinion that Crescent Equities will not be treated for
federal income tax purposes as owning any of the voting stock of any of the
Residential Development Corporations.
7. Characterization of the Operating Partnership for U.S. Federal
Income Tax Purposes
a. Classification for Periods on or after January 1, 1997
Section 301.7701-2(a) of the Treasury Regulations provides that a
business entity formed on or after January 1, 1997 with two or more members
will be classified for federal tax purposes as either a corporation or a
partnership, unless it is otherwise subject to special treatment under the
Code. Under sections 301.7701-2(b)(1), (3), (4), (5), (6), (7) and (8) of the
Treasury Regulations, a corporation includes business entities denominated as
such under applicable law, as well as joint-stock companies, insurance
companies, entities that conduct certain banking activities, entities wholly
owned by a state or any political subdivision thereof, entities that are
taxable as corporations under a provision of the Code other than section
7701(a)(3), and certain entities formed under the laws of a foreign
jurisdiction. Section 301.7701-3(a) of the Treasury Regulations provides that a
business entity with two or more members that is not classified as a
corporation under section 301.7701-2(b)(1), (3), (4), (5), (6), (7) or (8) of
the Treasury Regulations (an "Eligible Entity") can elect its classification
for federal income tax purposes. Section 301.7701-3(b)(1) of the Treasury
Regulations provides that a domestic Eligible Entity formed on or after January
1, 1997 will be classified as a partnership unless it elects otherwise. Under
section 301.7701-3(b)(3) of the Treasury Regulations, a domestic Eligible
Entity in existence prior to January 1, 1997 will have the same classification
that the entity claimed under sections 301.7701-1 through 301.7701-3 of the
Treasury Regulations as in effect prior to January 1, 1997 (the "Prior
Regulations"), unless it elects otherwise.
The Operating Partnership was duly organized as a limited partnership
prior to January 1, 1997. The Operating Partnership is not a corporation as
defined under section 301.7701-2(b)(1), (3), (4), (5), (6), (7) or (8) of the
Treasury Regulations. Accordingly, the Operating Partnership is an Eligible
Entity that can elect its classification for federal income tax purposes for
all periods
<PAGE> 22
Crescent Real Estate Equities Company
April 22, 1997
Page 22
on or after January 1, 1997. You have represented that the Operating
Partnership will claim classification as a partnership under the Prior
Regulations, as reflected on a federal income tax return to be filed by the
Operating Partnership for the tax year ending December 31, 1996. You have also
represented that the Operating Partnership will not file an election to be
treated as a corporation. Based on the foregoing, it is our opinion that the
Operating Partnership will be treated as a partnership for federal income tax
purposes as defined in Code sections 7701(a)(2) and 761(a) and not as an
association taxable as a corporation for all periods on or after January 1,
1997.
b. Classification for Periods Prior to January 1, 1997.
Section 301.7701-3(f)(2) of the Treasury Regulations provides that the claimed
classification of a business entity that is not described in section
301.7701-2(b)(1), (3), (4), (5), (6), (7) or (8) of the Treasury Regulations
and that was in existence prior to January 1, 1997 generally will be respected
for all periods prior to January 1, 1997 if the entity had a reasonable basis
for its claimed classification, and neither the entity nor any member thereof
was notified in writing on or before May 8, 1996 that the classification of the
entity was under examination.
Section 301.7701-2(a) of the Prior Regulations provided that an entity
that has associates and an objective to carry on a business for joint profit
will be treated as a partnership, and not as an association taxable as a
corporation, if it has not more than two of the following four characteristics
of a corporation: (i) continuity of life; (ii) centralization of management;
(iii) limited liability; and (iv) free transferability of interests. The entity
must also have no other characteristics that are significant in determining its
classification. Generally, other factors are considered only insofar as they
relate to the determination of the presence or absence of the foregoing
corporate characteristics. See Rev. Rul. 79-106, 1979-1 C.B. 448.
Revenue Procedure 89-12, 1989-1 C.B. 798, specified the conditions to
be satisfied for an entity to receive a favorable advanced ruling that it would
be classified as a partnership for federal income tax purposes. The Operating
Partnership may not have met all of the requirements necessary to obtain such a
ruling. Such requirements were applicable only in determining whether rulings
will be issued, however, and were not intended as substantive rules for the
determination of partnership status.
i. Limited Liability. Under section 301.7701-2(d)
of the Prior Regulations, an entity lacks the corporate characteristic
of limited liability if there is at least one member who is personally liable
for the debts of or claims against the partnership. In the case of a limited
partnership, a general partner of a limited partnership is personally liable
under the Prior Regulations if (i) it has substantial assets other than its
interest in the partnership or (ii) it is not a dummy acting as the agent of
the limited partners. As general partner of the Operating
<PAGE> 23
Crescent Real Estate Equities Company
April 22, 1997
Page 23
Partnership, Crescent Real Estate Equities, Ltd. ("CREE") is personally liable
for all the debts and obligations of the Operating Partnership and owns a
general partnership interest therein of approximately one percent. However,
section 856(i) of the Code provides that qualified REIT subsidiaries are
treated as the same entity as their REIT parent for federal income tax
purposes. Therefore, Crescent Equities will be treated as directly owning
CREE's one percent general partnership interest in the Operating Partnership.
Furthermore, Crescent Equities and the Operating Partnership have represented
that CREE will act independently of the Operating Partnership's limited
partners. Therefore, the Operating Partnership may have lacked the corporate
characteristic of limited liability.
ii. Continuity of Life. Section 301.7701-2(b) of
the Prior Regulations provided that if the bankruptcy, retirement,
resignation, expulsion, or other event of withdrawal of a general partner of a
limited partnership causes a dissolution of the partnership, continuity of life
does not exist, even if dissolution may be avoided by the remaining general
partners or by at least a majority in interest of all remaining partners
agreeing to continue the partnership. Under Section 13.1.B of the Operating
Partnership Agreement, the withdrawal of CREE and the bankruptcy of Crescent
Equities cause the Operating Partnership to terminate, unless a majority in
interest of the remaining partners consent to continue the Partnership and
appoint a new general partner. Accordingly, the Operating Partnership lacked
the corporate characteristic of continuity of life.
iii. Centralization of Management. Section
301.7701-2(c)(4) of the Prior Regulations provided that centralization of
management ordinarily will be found to exist in a limited partnership
in which substantially all of the partnership interests are held by the limited
partners, and that it may exist where the limited partners have a substantially
unrestricted right to remove the general partner. As noted above, under section
856(i) of the Code, Crescent Equities will be treated as owning a one percent
general partner interest and an approximately 84 percent limited partnership
interest in the Operating Partnership. Furthermore, Section 7.1.A of the
Operating Partnership Agreement provides that the limited partners may not
remove CREE as general partner. Therefore, the Operating Partnership lacked the
corporate characteristic of centralization of management.
iv. Free Transferability of Interests.
Section 301.7701-2(e) of the Prior Regulations provided that free
transferability of interests exists if the members owning all or substantially
all of the interests in an organization may substitute for themselves without
the consent of the other members a person who is not a member of the
organization. Section 11.4.A of the Operating Partnership Agreement provides
that if a limited partner transfers its interest in the Operating Partnership,
the transferee (unless it falls within certain enumerated categories of
transferees) will not become a substituted limited partner without the prior
consent of CREE.
<PAGE> 24
Crescent Real Estate Equities Company
April 22, 1997
Page 24
Accordingly, the Operating Partnership may have lacked the corporate
characteristic of free transferability of interests.
v. Summary. In sum, because the Operating
Partnership did not have the corporate characteristics of continuity
of life and centralization of management and may have lacked limited liability
and free transferability, it is our opinion that the Operating Partnership had
a reasonable basis for claiming partnership classification under the Prior
Regulations. Based on the foregoing, it is our opinion that the Operating
Partnership will be treated as a partnership as defined in sections 7701(a)(2)
and 761(a) of the Code and not as an association taxable as a corporation for
all periods prior to January 1, 1997.
c. Publicly Traded Partnership Status.
Section 7704 of the Code provides that certain publicly traded
partnerships may be taxed as corporations even though they otherwise meet all
of the relevant tests for treatment as partnerships for federal income tax
purposes. A partnership is considered to be a publicly traded partnership if
interests in the partnership are (or become) (i) traded on an established
securities market or (ii) readily tradable on a secondary market or the
substantial equivalent thereof. Treasury Regulations issued under section
7704(b) of the Code provide that interests in a partnership will not be treated
as readily tradable on a secondary market or the substantial equivalent thereof
if (i) all interests in the partnership were issued in a transaction that was
not registered under the Securities Act of 1933, and (ii) the partnership does
not have more than 100 partners at any time during its taxable year. For
purposes of determining the number of partners in the partnership, persons
owning an interest through a flow-through entity are treated as partners in the
partnership only if (i) substantially all of the value of the flow-through
entity is attributable to the lower-tier partnership interest, and (ii) a
principal purpose for the tiered arrangement is to permit the partnership to
satisfy the 100 partner requirement.
Based upon the structure and capitalization of the Operating
Partnership and representations of the Operating Partnership regarding its
current ownership, it is our opinion that the Operating Partnership will not
constitute a publicly traded partnership for purposes of section 7704 of the
Code.
8. Characterization of the Subsidiary Partnerships for U.S. Federal
Income Tax Purposes
a. Classification of Periods on or After January 1, 1997. As
previously discussed, under section 301.7701-3(b)(3) of the Treasury
Regulations, a domestic Eligible Entity in existence prior to January 1, 1997
will have the same classification that the entity claimed under sections
301.7701-1 through 301.7701-3 of the Prior Regulations, unless it elects
otherwise. The
<PAGE> 25
Crescent Real Estate Equities Company
April 22, 1997
Page 25
Subsidiary Partnerships were duly organized as limited partnerships prior to
January 1, 1997. The Subsidiary Partnerships are not corporations as defined
under section 301.7701-2(b)(1), (3), (4), (5), (6), (7) or (8) of the Treasury
Regulations. Accordingly, each of the Subsidiary Partnerships is an Eligible
Entity that can elect its classification for federal income tax purposes for
all periods after January 1, 1997. Crescent Equities has represented to us that
each of the Subsidiary Partnerships will claim classification as a partnership
under the Prior Regulations, as reflected on federal income tax returns to be
filed by each Subsidiary Partnership for the tax year ending December 31, 1996.
Crescent Equities has also represented that none of the Subsidiary Partnerships
will file an election to be treated as a corporation. Based on the foregoing,
it is our opinion that the Subsidiary Partnerships will be treated as
partnerships for federal income tax purposes as defined in sections 7701(a)(2)
and 761(a) of the Code and not as associations taxable as corporations for all
periods on or after January 1, 1997.
b. Classification for Periods Prior to January 1, 1997
i. Funding I. The Operating Partnership owns a 99.6
percent interest in Funding I as a limited partner, while the
remaining 0.4 percent general partner's interest is owned by CRE Management I
Corp., a wholly owned subsidiary of CREE. (However, with respect to the
Waterside Commons property, which is held by Funding I, Waterside Commons
Limited Partnership owns a 99 percent interest in Funding I as a limited
partner, while the remaining 1 percent general partner's interest is owned by
CRE Management I Corp.)
The Funding I Agreement provides in Sections 13.1.B and 13.1.D that
the dissolution, insolvency, bankruptcy or other event of withdrawal of the
general partner will cause the partnership to terminate, unless a majority in
interest of the remaining partners consent to continue the partnership and
appoint a new general partner. Accordingly, Funding I lacked the corporate
characteristic of continuity of life.
The Funding I Agreement provides in Section 11.1.B that no partner may
transfer all or any portion of its interest in the partnership. Accordingly,
Funding I lacked the corporate characteristic of free transferability of
interests.
Based on the continued organization and operation of Funding I in
accordance with its partnership agreement and the Delaware Revised Uniform
Limited Partnership Act (the "Act"), Funding I lacked the corporate
characteristics of continuity of life and free transferability of interests.
Accordingly, it is our opinion that Funding I had a reasonable basis for
claiming partnership classification under the Prior Regulations. Based on the
foregoing, it is our opinion that Funding I will be treated as a partnership as
defined in sections 7701(a)(2) and 761(e) of the Code and not as an association
taxable as a corporation for all periods prior to January 1, 1997.
<PAGE> 26
Crescent Real Estate Equities Company
April 22, 1997
Page 26
In addition, based upon the structure and capitalization of Funding I
and representations of the Operating Partnership regarding Funding I's current
ownership, it is our opinion that Funding I will not constitute a publicly
traded partnership for purposes of section 7704 of the Code.(5)
ii. Funding II. The Operating Partnership owns a
99.8 percent interest in Funding II as a limited partner, while the
remaining 0.2 percent general partner's interest is owned by CRE Management II
Corp., a wholly owned subsidiary of CREE.
The Funding II Agreement provides in Sections 13.1.B and 13.1.D that
the dissolution, insolvency, bankruptcy or other event of withdrawal of the
general partner will cause Funding II to terminate, unless a majority in
interest of the remaining partners consent to continue the partnership and
appoint a new general partner. Accordingly, Funding II lacked the corporate
characteristic of continuity of life.
In addition, the Funding II Agreement provides in Section 11.1.B that
no partner may transfer all or any portion of its interest in the partnership.
Accordingly, Funding II lacked the corporate characteristic of free
transferability of interests.
Based on the continued organization and operation of Funding II in
accordance with its partnership agreement and the Act, Funding II lacked the
corporate characteristics of continuity of life and free transferability of
interests. Accordingly, it is our opinion that Funding II had a reasonable
basis for claiming partnership classification under the Prior Regulations.
Based on the foregoing, it is our opinion that Funding II will be treated as a
partnership as defined in sections 7701(a)(2) and 761(e) of the Code and not as
an association taxable as a corporation for all periods prior to January 1,
1997.
In addition, based upon the structure and capitalization of Funding II
and representations of the Operating Partnership regarding Funding II's current
ownership , it is our opinion that
<PAGE> 27
Crescent Real Estate Equities Company
April 22, 1997
Page 27
Funding II will not constitute a publicly traded partnership for
purposes of section 7704 of the Code.(6)
iii. Funding III, Funding IV and Funding V. The
Operating Partnership owns a 99 percent interest in each of Funding III,
Funding IV and Funding V as a limited partner. Nine Greenway, Ltd. owns a 0.1%
limited partnership interest in each of Funding III, Funding IV and Funding V.
The remaining 0.9 percent general partner's interest in Funding III is owned by
CRE Management III Corp., CRE Management IV Corp. owns a 0.9 percent general
partner interest in Funding IV, and CRE Management V Corp. owns a 0.9 percent
general partner interest in Funding V. CRE Management III Corp., CRE Management
IV Corp. and CRE Management V Corp. are each wholly owned subsidiaries of CREE.
The Funding III Agreement, the Funding IV Agreement and the Funding V Agreement
(together, the "Funding Agreements") are substantially identical with respect
to the terms discussed herein.
Each of the Funding Agreements provides in Paragraph 18 that the
partnership shall dissolve and be wound up upon the occurrence of any of the
following events: (i) the expiration of the term of the partnership on December
31, 2096 (unless terminated earlier); (ii) the sale or disposition of
substantially all of the assets of the partnership; (iii) the written election
of all of the partners to dissolve the partnership; and (iv) unless, the
limited partner elects within ninety days to continue the partnership, upon the
dissolution of the general partner or if the general partner (a) makes a
general assignment for the benefit of creditors, (b) is adjudicated bankrupt or
insolvent, or (c) files a voluntary petition in bankruptcy or in the event
there is an order for relief entered against the general partner under the
Federal Bankruptcy Code of 1978, as amended (or a similar order under a
successor statute). Accordingly, Funding III, Funding IV and Funding V each
lacked the corporate characteristic of continuity of life.
In addition, each of the Funding Agreements provides in Paragraph 14
that no partner may transfer all or any portion of its interest in the
partnership and that any purported transfer of a partnership interest will be
null and void. Accordingly, Funding III, Funding IV and Funding V each lacked
the corporate characteristic of free transferability of interests.
Based on the continued organization and operation of each of Funding
III, Funding IV and Funding V in accordance with its partnership agreement and
the Act, Funding III, Funding IV and Funding V each lacked the corporate
characteristics of continuity of life and free
<PAGE> 28
Crescent Real Estate Equities Company
April 22, 1997
Page 28
transferability of interests. Accordingly, it is our opinion that Funding III,
Funding IV and Funding V each had a reasonable basis for claiming partnership
classification under the Prior Regulations. Based on the foregoing, it is our
opinion that each will be treated as a partnership as defined in sections
7701(a)(2) and 761(e) of the Code and not as an association taxable as a
corporation for all periods prior to January 1, 1997.
In addition, based upon the structure and capitalization of Funding
III, Funding IV and Funding V and representations of the Operating Partnership
regarding the current ownership of Funding III, Funding IV and Funding V, it
is our opinion that neither Funding III, Funding IV nor Funding V will
constitute a publicly traded partnership for purposes of section 7704 of the
Code.(7)
iv. Funding VI.
The Operating Partnership owns a 99 percent interest in Funding VI as
a limited partner, while the remaining one percent general partner's interest
is owned by CRE Management VI Corp., a wholly owned subsidiary of CREE.
The Funding VI Agreement provides in Section 13.1 that the
dissolution, insolvency, bankruptcy or other event of withdrawal of the general
partner will cause Funding VI to terminate, unless a majority in interest of
the remaining partners consent to continue the partnership and appoint a new
general partner. Accordingly, Funding VI lacked the corporate characteristic of
continuity of life.
In addition, the Funding VI Agreement provides in Section 11.1 that no
partner may transfer all or any portion of its interest in the partnership.
Accordingly, Funding VI lacked the corporate characteristic of free
transferability of interests.
Based on the continued organization and operation of Funding VI in
accordance with its partnership agreement and the Act, Funding VI lacked the
corporate characteristics of continuity of life and free transferability of
interests. Accordingly, it is our opinion that Funding VI had a reasonable
basis for claiming partnership classification under the Prior Regulations.
Based on the foregoing, it is our opinion that Funding VI will be treated as a
partnership as defined in
<PAGE> 29
Crescent Real Estate Equities Company
April 22, 1997
Page 29
sections 7701(a)(2) and 761(e) of the Code and not as an association taxable as
a corporation for all periods prior to January 1, 1997.
In addition, based upon the structure and capitalization of Funding VI
and representations of the Operating Partnership regarding Funding VI's current
ownership , it is our opinion that Funding VI will not constitute a publicly
traded partnership for purposes of section 7704 of the Code.(8)
v. CresCal. The Operating Partnership owns a 99 percent
interest in CresCal as a limited partner, while the remaining one percent
general partner's interest is owned by CresCal Properties, Inc., a wholly owned
subsidiary of CREE.
The CresCal Agreement provides in Section 15(a) that the dissolution,
insolvency, bankruptcy or other event of withdrawal of the general partner will
cause CresCal to terminate, unless a majority in interest of the remaining
partners consent to continue the partnership and appoint a new general partner.
Accordingly, CresCal lacked the corporate characteristic of continuity of life.
In addition, the CresCal Agreement provides in Section 14 that no
partner may transfer all or any portion of its interest in the partnership.
Accordingly, CresCal lacked the corporate characteristic of free
transferability of interests.
Based on the continued organization and operation of CresCal in
accordance with its partnership agreement and the Act, CresCal lacked the
corporate characteristics of continuity of life and free transferability of
interests. Accordingly, it is our opinion that CresCal had a reasonable basis
for claiming partnership classification under the Prior Regulations. Based on
the foregoing, it is our opinion that CresCal will be treated as a partnership
as defined in sections 7701(a)(2) and 761(e) of the Code and not as an
association taxable as a corporation for all periods prior to January 1, 1997.
In addition, based upon the structure and capitalization of CresCal
and representations of the Operating Partnership regarding CresCal's current
ownership , it is our opinion that CresCal will not constitute a publicly
traded partnership for purposes of section 7704 of the Code.(9)
<PAGE> 30
Crescent Real Estate Equities Company
April 22, 1997
Page 30
vi. CresTex. The Operating Partnership owns a 99
percent interest in CresTex, while the remaining one percent interest
is owned by CresCal Properties, Inc. The IRS has applied the same four-factor
test, described above, in determining whether limited liability companies, like
CresTex, which have been formed under the Delaware Limited Liability Company
Act, are treated as partnerships for federal income tax purposes.(10)
As noted above, under section 301.7701-2(b)(3) of the Prior
Regulations, an organization will be treated as possessing the corporate
characteristic of continuity of life, even if the agreement organizing an
entity provides that it is to continue only for a stated period, unless a
member has the power to dissolve the organization at an earlier time. Section
18-801 of the Delaware Limited Liability Company Act provides that a limited
liability company dissolves upon the first to occur of the following: (1) at
the time specified in an LLC agreement or 30 years from the date of formation
of the LLC if no time is set forth in the LLC agreement, (2) upon the happening
of events specified in an LLC agreement, (3) by the written consent of all
members, (4) by the death, retirement, resignation, expulsion, bankruptcy, or
dissolution of a member or the occurrence of any other event which terminates
the continued membership of a member in the LLC, unless the business of the LLC
is continued by the consent of all the remaining members within 90 days
following the occurrence of any terminating event or pursuant to a right to
continue stated in the LLC agreement, or (5) by the entry of a decree of
judicial dissolution under the Delaware Limited Liability Company Act. Section
1.04 of the CresTex Agreement provides that the duration of CresTex is until
the close of business on December 31, 2050, or until its earlier dissolution
upon an "Event of Dissolution" in accordance with Section 12.01 of the CresTex
Agreement. Section 12.01 of the CresTex Agreement provides that CresTex shall
be dissolved prior to December 31, 2050 upon the following "Events of
Dissolution": (1) the mutual consent of all members, (2) the withdrawal, death,
retirement, resignation, expulsion, bankruptcy, legal incapacity or dissolution
of any member, (3) a sale by CresTex of its assets, or (4) a decree of
judicial dissolution. Section 12.05 of the CresTex Agreement, however, provides
that if any Event of Dissolution occurs with respect to CresCal Properties,
Inc., the business of CresTex will be continued if, within ninety days, the
remaining members unanimously decide to continue the business and to approve
the admission of a new member,
<PAGE> 31
Crescent Real Estate Equities Company
April 22, 1997
Page 31
effective immediately before the dissolution event. Accordingly,
CresTex lacked the corporate characteristic of continuity of life.
Section 18-702(a) of the Delaware Limited Liability Company Act
provides, in part, that unless otherwise provided by the company's LLC
agreement, a membership interest is assignable in whole or in part; an
assignment of a member's interest does not entitle the assignee to participate
in the management of the business and affairs of the LLC. Section 18-704(a) of
the Delaware Limited Liability Company Act provides, in part, that an assignee
of a membership interest may become a member if and to the extent that the
company's LLC agreement so provides, or all members consent. Section 10.02 of
the CresTex Agreement provides that no member may withdraw from CresTex or
transfer all or any part of its interest in CresTex and that any purported
transfer of an interest in CresTex shall be null and void. Accordingly, CresTex
lacked the corporate characteristic of free transferability of interests.
In sum, because CresTex lacked the corporate characteristics of
continuity of life and free transferability of interests, it is our opinion
that CresTex had a reasonable basis for claiming partnership classification
under the Prior Regulations. Based on the foregoing, it is our opinion that
CresTex will be treated as a partnership as defined in sections 7701(a)(2) and
761(a) of the Code and not as an association taxable as a corporation for all
periods prior to January 1, 1997.
In addition, based upon the structure and capitalization of CresTex
and representations of the Operating Partnership regarding the current
ownership of CresTex, it is our opinion that CresTex will not constitute a
publicly traded partnership for purposes of section 7704 of the code.(11)
vii. Waterside. The Operating Partnership owns an
89 percent interest in Waterside as a general partner, while the
remaining 11 percent limited partner's interest is owned by Associates (1
percent) and CW #1 Limited Partnership (10 percent).
The Waterside Agreement provides in Section 7.1(c) that the bankruptcy
or other event of withdrawal of the general partner will cause the partnership
to terminate. Accordingly, Waterside lacked the corporate characteristic of
continuity of life.
<PAGE> 32
Crescent Real Estate Equities Company
April 22, 1997
Page 32
As the general partner of Waterside, the Operating Partnership will be
personally liable for all the debts and obligations of Waterside and, as noted
above, the Operating Partnership will own an 89 percent interest in Waterside.
In addition, the Operating Partnership has represented that it will act
independently of CW #1 Limited Partnership in managing Waterside. Therefore,
Waterside lacked the corporate characteristics of limited liability and
centralization of management.
Based on the continued organization and operation of Waterside in
accordance with its partnership agreement and the Act, Waterside lacked the
corporate characteristics of continuity of life, limited liability and
centralization of management. Accordingly, it is our opinion that Waterside had
a reasonable basis for claiming partnership classification under the Prior
Regulations. Based on the foregoing, it is our opinion that Waterside will be
treated as a partnership as defined in sections 7701(a)(2) and 761(e) and not
as an association taxable as a corporation for all periods prior to January 1,
1997.
In addition, based upon the structure and capitalization of Waterside
and representations of the Operating Partnership regarding Waterside's current
ownership, it is our opinion that Waterside will not constitute a publicly
traded partnership for purposes of section 7704 of the code.(12)
viii. Associates. The Operating Partnership owns a
90 percent interest in Associates, while the remaining 10 percent
interest is owned by CREE, Ltd.. The IRS has applied the same four-factor test,
described above, in determining whether limited liability companies, like
Associates, which have been formed under the Texas Limited Liability Company
Act, are treated as partnerships for federal income tax purposes.(13)
Article 6.01 of the Texas Limited Liability Company Act provides, in
part, that except as otherwise provided in the company's regulations, a limited
liability company shall be dissolved upon the death, retirement, resignation,
expulsion, bankruptcy, or dissolution of a member or the occurrence of any
other event which terminates the continued membership of a member in the
<PAGE> 33
Crescent Real Estate Equities Company
April 22, 1997
Page 33
limited liability company, unless there is at least one remaining member and
the business of the limited liability company is continued by the consent by
the number of members or class thereof stated in the articles of organization
or regulations of the limited liability company or of not so stated, by all
remaining members. Article 2 of the Associates Articles provides that the
duration of Associates is until the close of business on December 31, 2014, or
until its earlier dissolution in accordance with the provisions of the Act or
the Associates Regulations. Article 10.2(a)(iii) of the Associates Regulations
provides, in part, that Associates shall be dissolved upon the withdrawal,
death, retirement, resignation, expulsion, bankruptcy, legal incapacity or
dissolution of any member, unless the business of Associates is continued by
the consent of all the remaining members within ninety days. Accordingly,
Associates lacked the corporate characteristic of continuity of life.
Article 4.05 of the Texas Limited Liability Company Act provides, in
part, that unless otherwise provided by the company's regulations, a membership
interest is assignable in whole or in part; an assignment of a member's
interest does not entitle the assignee to become, or to exercise rights or
powers of a member; and until the assignee becomes a member, the assignor
member continues to be a member and to have the power to exercise any rights or
powers of a member, except to the extent those rights or powers are assigned.
Article 4.07 of the Texas Limited Liability Company Act provides, in part, that
an assignee of a membership interest may become a member if and to the extent
that the company's regulations so provide, or all members consent. Article 9.1
of the Associates Regulations, as amended by the First Amendment to the
Associates Regulations, provides that no member shall have the right to
withdraw from Associates or transfer all or any portion of its interest in
Associates. Accordingly, Associates lacked the corporate characteristic of free
transferability of interests.
In sum, because Associates lacked the corporate characteristics of
continuity of life and free transferability of interests, it is our opinion
that Associates had a reasonable basis for claiming partnership classification
under the Prior Regulations. Based on the foregoing, it is our opinion that
Associates will be treated as a partnership as defined in sections 7701(a)(2)
and 761(a) of the Code and not as an association taxable as a corporation for
all periods prior to January 1, 1997.
In addition, based upon the structure and capitalization of Associates
and representations of the Operating Partnership regarding Associates current
ownership , it is our opinion that Associates will not constitute a publicly
traded partnership for purposes of section 7704 of the code.(14)
<PAGE> 34
Crescent Real Estate Equities Company
April 22, 1997
Page 34
ix. Woodlands Partnership. The Operating
Partnership owns a 75 percent interest in the Woodlands Partnership as
a limited partner, while the remaining 25 percent general partner's interest is
owned by The Woodlands Office Equities, Inc., a wholly owned subsidiary of The
Woodlands Corporation ("TWC Sub").
The Woodlands Partnership Agreement provides in Articles 10.1 and 10.2
that the Woodlands Partnership will terminate upon any event affecting the
general partner that would cause the dissolution of a limited partnership under
the Texas Revised Limited Partnership Act, unless the limited partner consents
to continue the partnership and appoint a new general partner. Accordingly, the
Woodlands Partnership lacked the corporate characteristic of continuity of
life.
Article 7.2.1 of the Woodlands Partnership Agreement provides for
certain circumstances in which a partner may transfer its interest in the
Woodlands Partnership beginning after the eighth anniversary of the
Contribution Date. Article 7.2.2 of the Woodlands Partnership Agreement,
however, provides that a person to whom an interest in the Woodlands
Partnership is transferred shall not be admitted to the Woodlands Partnership
without the prior written consent of the other partner, which consent may be
granted or withheld at the sole discretion of the other partner. Accordingly,
the Woodlands Partnership lacked the corporate characteristic of free
transferability of interests.
As noted above, the general partner of the Woodlands Partnership, TWC
Sub, owns a 25 percent interest in the Woodlands Partnership. Furthermore,
Article 9.3 of the Woodlands Partnership Agreement provides that the limited
partner may not remove TWC Sub as general partner, except upon the occurrence
of specified events of default. Accordingly, the Woodlands Partnership lacked
the corporate characteristic of centralization of management.
In sum, because the Woodlands Partnership lacked the corporate
characteristics of continuity of life, free transferability of interests and
centralization of management, it is our opinion that the Woodlands Partnership
had a reasonable basis for claiming partnership classification under the Prior
Regulations. Based on the foregoing, it is our opinion that the Woodlands
Partnership will be treated as a partnership as defined in sections 7701(a)(2)
and 761(a) of the Code and not as an association taxable as a corporation for
all periods prior to January 1, 1997.
In addition, based upon the structure and capitalization of the
Woodlands Partnership and representations of the Operating Partnership
regarding the current ownership of the Woodlands
<PAGE> 35
Crescent Real Estate Equities Company
April 22, 1997
Page 35
Partnership, it is our opinion that the Woodlands Partnership will not
constitute a publicly traded partnership for purposes of section 7704 of the
code.(15)
x. WRE. The Operating Partnership owns a 75 percent
interest in WRE as a limited partner, while the remaining 25 percent
general partner's interest is owned by The Woodlands Office Equities, Inc., a
wholly owned subsidiary of The Woodlands Corporation ("TWC Sub").
The WRE Agreement provides in Articles 10.1 and 10.2 that WRE will
terminate upon any event affecting the general partner that would cause the
dissolution of a limited partnership under the Texas Revised Limited
Partnership Act, unless the limited partner consents to continue the
partnership and appoint a new general partner. Accordingly, WRE lacked the
corporate characteristic of continuity of life.
Article 7.2.1 of the WRE Agreement provides for certain circumstances
in which a partner may transfer its interest in WRE beginning after the eighth
anniversary of the Contribution Date. Article 7.2.2 of the WRE Agreement,
however, provides that a person to whom an interest in WRE is transferred shall
not be admitted to WRE without the prior written consent of the other partner,
which consent may be granted or withheld at the sole discretion of the other
partner. Accordingly, WRE lacked the corporate characteristic of free
transferability of interests.
As noted above, the general partner of WRE, TWC Sub, owns a 25 percent
interest WRE. Furthermore, Article 9.3 of the WRE Agreement provides that the
limited partner may not remove TWC Sub as general partner, except upon the
occurrence of specified events of default. Accordingly, WRE lacked the
corporate characteristic of centralization of management.
In sum, because WRE lacked the corporate characteristics of continuity
of life, free transferability of interests and centralization of management, it
is our opinion that WRE had a reasonable basis for claiming partnership
classification under the Prior Regulations. Based on the foregoing, it is our
opinion that WRE will be treated as a partnership as defined in sections
7701(a)(2) and 761(a) of the Code and not as an association taxable as a
corporation for all periods prior to January 1, 1997.
<PAGE> 36
Crescent Real Estate Equities Company
April 22, 1997
Page 36
In addition, based upon the structure and capitalization of WRE and
representations of the Operating Partnership regarding the current ownership of
WRE, it is our opinion that WRE will not constitute a publicly traded
partnership for purposes of section 7704 of the Code.(16)
xi. 301 Congress. The Operating Partnership owns a
49 percent limited partner interest in 301 Congress, a Delaware limited
partnership. The one percent general partner interest in 301 Congress
is owned by Crescent/301, a Delaware limited liability company that is wholly
owned by Operating Partnership and CREE, Ltd., and the remaining 50 percent
limited partner interest in 301 Congress is owned by Aetna Life Insurance
Company ("Aetna").
The 301 Congress Partnership Agreement provides in Section 2.6 that
301 Congress will terminate seven years from the effective date of the 301
Congress Partnership Agreement, unless dissolved earlier under Article X of
such agreement. Article X of the 301 Congress Partnership Agreement provides
that 301 Congress will be dissolved upon the first to occur of the following:
(1) the expiration of seven years from the effective date of the 301 Congress
Partnership Agreement; (2) the sale, transfer or other disposition of the 301
Congress assets; (3) the acquisition by one partner of all of the interests in
301 Congress; (4) the occurrence of any "Event of Withdrawal" with respect to
the general partner under the Delaware Limited Partnership Act, unless a
majority of the remaining partners consent within 90 days to continue the
partnership and appoint a new general partner, effective as of the date of the
Event of Withdrawal; (5) the decision of all partners to dissolve 301 Congress;
(6) the election of a non-defaulting partner to dissolve 301 Congress upon a
default of another partner under Section 9.5 of the 301 Congress Partnership
Agreement; or (7) the entry of a judicial decree of dissolution. Accordingly,
301 Congress lacked the corporate characteristic of continuity of life.
Section 9.2 of the 301 Congress Partnership Agreement provides that no
partner shall have the right, without the express written consent of each other
partner, to transfer an interest in 301 Congress Avenue, with the exception of
certain transfers between Aetna, Crescent/301 and the Operating Partnership and
their respective affiliates. However, in the case of transfers between Aetna,
Crescent/301 and the Operating Partnership and their respective affiliates,
Section 9.2 of the 301 Congress Partnership Agreement provides that the
transferee shall not be admitted as a substitute partner without the consent of
all other partners. Accordingly, 301 Congress lacked the corporate
characteristic of free transferability of interests.
<PAGE> 37
Crescent Real Estate Equities Company
April 22, 1997
Page 37
In sum, because 301 Congress lacked the corporate characteristics of
continuity of life and free transferability of interests, it is our opinion
that 301 Congress had a reasonable basis for claiming partnership
classification under the Prior Regulations. Based on the foregoing, it is our
opinion that 301 Congress will be treated as a partnership as defined in
sections 7701(a)(2) and 761(a) of the Code and not as an association taxable as
a corporation for all periods prior to January 1, 1997.
In addition, based upon the structure and capitalization of 301
Congress and representations of the Operating Partnership regarding the current
ownership of 301 Congress , it is our opinion that 301 Congress will not
constitute a publicly traded partnership for purposes of section 7704 of the
code.(17)
xii. Crescent/301. As noted above, the Operating
Partnership owns its general partner interest in 301 Congress through
Crescent/301, a Delaware limited liability company that is wholly owned by
Operating Partnership and CREE, Ltd. The IRS has applied the same four-factor
test, described above, in determining whether limited liability companies, like
Crescent/301, which have been formed under the Delaware Limited Liability
Company Act, are treated as partnerships for federal income tax purposes.(18)
As noted above, under section 301.7701-2(b)(3) of the Prior
Regulations, an organization will be treated as possessing the corporate
characteristic of continuity of life, even if the agreement organizing an
entity provides that it is to continue only for a stated period, unless a
member has the power to dissolve the organization at an earlier time. Section
18-801 of the Delaware Limited Liability Company Act provides that a limited
liability company dissolves upon the first to occur of the following: (1) at
the time specified in an LLC agreement or 30 years from the date of formation
of the LLC if no time is set forth in the LLC agreement, (2) upon the happening
of events specified in an LLC agreement, (3) by the written consent of all
members, (4) by the death, retirement, resignation, expulsion, bankruptcy, or
dissolution of a member or the occurrence of any other event which terminates
the continued membership of a member in
<PAGE> 38
Crescent Real Estate Equities Company
April 22, 1997
Page 38
the LLC, unless the business of the LLC is continued by the consent of all the
remaining members within 90 days following the occurrence of any terminating
event or pursuant to a right to continue stated in the LLC agreement, or (5) by
the entry of a decree of judicial dissolution under the Delaware Limited
Liability Company Act. Section 1.04 of the Crescent/301 Agreement provides that
the duration of Crescent/301 is until the close of business on December 31,
2050, or until its earlier dissolution upon an "Event of Dissolution" in
accordance with Section 12.01 of the Crescent/301 Agreement. Section 12.01 of
the Crescent/301 Agreement provides that Crescent/301 shall be dissolved prior
to December 31, 2050 upon the following "Events of Dissolution": (1) the mutual
consent of all members, (2) the withdrawal, death, retirement, resignation,
expulsion, bankruptcy, legal incapacity or dissolution of any member, (3) a
sale by Crescent/301 of its assets, or (4) a decree of judicial dissolution.
However, Section 12.05 of the Crescent/301 Agreement provides that if any Event
of Dissolution occurs with respect to CREE, Ltd., the business of Crescent/301
will be continued if, within ninety days, the remaining members unanimously
decide to continue the business and to approve the admission of a new member,
effective immediately before the dissolution event. Accordingly, Crescent/301
lacked the corporate characteristic of continuity of life.
Section 18-702(a) of the Delaware Limited Liability Company Act
provides, in part, that unless otherwise provided by the company's LLC
agreement, a membership interest is assignable in whole or in part; an
assignment of a member's interest does not entitle the assignee to participate
in the management of the business and affairs of the LLC. Section 18-704(a) of
the Delaware Limited Liability Company Act provides, in part, that an assignee
of a membership interest may become a member if and to the extent that the
company's LLC agreement so provides, or all members consent. Section 10.02 of
the Crescent/301 Agreement provides that no member may withdraw from
Crescent/301 or transfer all or any part of its interest in Crescent/301 and
that any purported transfer of an interest in Crescent/301 shall be null and
void. Accordingly, Crescent/301 lacked the corporate characteristic of free
transferability of interests.
In sum, because Crescent/301 lacked the corporate characteristics of
continuity of life and free transferability of interests, it is our opinion
that Crescent/301 had a reasonable basis for claiming partnership
classification under the Prior Regulations. Based on the foregoing, it is our
opinion that Crescent/301 will be treated as a partnership as defined in
sections 7701(a)(2) and 761(a) of the Code and not as an association taxable as
a corporation for all periods prior to January 1, 1997.
In addition, based upon the structure and capitalization of
Crescent/301 and representations of the Operating Partnership regarding the
current ownership of Crescent/301 , it is our opinion that Crescent/301 will
not constitute a publicly traded partnership for purposes of section 7704 of
the code.(19)
<PAGE> 39
Crescent Real Estate Equities Company
April 22, 1997
Page 39
xiii. SMA. The Operating Partnership owns an
interest in SMA as a general partner. Section 9.1 of the SMA Agreement
provides that the dissolution or adjudication of bankruptcy or any other
occurrence which would constitute an event of withdrawal by the Operating
Partnership as general partner (or, if there is more than one general partner,
by the last remaining general partner) causes a dissolution of SMA. Section 9.2
of the SMA Agreement provides that in the event of a dissolution under section
9.1, SMA may be reconstituted and its business continued only if Spectrum
Dallas Associates, L.P. ("SDA") and other limited partners with partnership
interests totaling more than 50% of the partnership interests of all limited
partners affirmatively elect to reconstitute SMA, agree on the identity of a
new general partner and execute an instrument affirming such facts.
Accordingly, SMA lacked the corporate characteristic of continuity of life.
The Operating Partnership, as general partner of SMA, owns a large
majority of the partnership interests in SMA and therefore should be viewed as
managing SMA on its own behalf. Moreover, section 7.1 of the SMA Agreement
provides that the limited partners have no power or authority with respect to
SMA except as specifically provided in the SMA Agreement, which does not
provide the limited partners with the power to remove the general partner of
SMA. Therefore, SMA lacked the corporate characteristic of centralization of
management.
As the general partner of SMA, the Operating Partnership will be
personally liable for all the debts and obligations of SMA. Moreover, the
Operating Partnership has substantial assets other than its general partner
interest in SMA. Furthermore, Crescent Equities has represented that the
Operating Partnership will act independently of the limited partners in SMA.
Therefore, SMA lacked the corporate characteristic of limited liability.
In sum, because SMA lacked the corporate characteristics of continuity
of life, centralization of management, and limited liability, it is our opinion
that SMA had a reasonable basis for claiming partnership classification under
the Prior Regulations. Based on the foregoing, it is our opinion that SMA will
be treated as a partnership as defined in sections 7701(a)(2) and 761(a) of the
Code and not as an association taxable as a corporation for all periods prior
to January 1, 1997.
<PAGE> 40
Crescent Real Estate Equities Company
April 22, 1997
Page 40
In addition, based upon the structure and capitalization of SMA and
representations of the Operating Partnership regarding SMA's current ownership,
it is our opinion that sma will not constitute a publicly traded partnership
for purposes of section 7704 of the code.(20)
xiv. CCRH. The Operating Partnership owns a 99.9
percent interest in CCRH as a limited partner, while the remaining 0.1 percent
general partner's interest is owned by Crescent Commercial Realty
Corp., a wholly owned subsidiary of CREE.
The CCRH Agreement provides in Section 15(a) that the dissolution,
insolvency, bankruptcy or other event of withdrawal of the general partner will
cause CCRH to terminate, unless a majority in interest of the remaining
partners consent to continue the partnership and appoint a new general partner.
Accordingly, CCRH lacked the corporate characteristic of continuity of life.
In addition, the CCRH Agreement provides in Section 14 that no partner
may transfer all or any portion of its interest in the partnership.
Accordingly, CCRH lacked the corporate characteristic of free transferability
of interests.
Based on the continued organization and operation of CCRH in
accordance with its partnership agreement and the Act, CCRH lacked the
corporate characteristics of continuity of life and free transferability of
interests. Accordingly, it is our opinion that CCRH had a reasonable basis for
claiming partnership classification under the Prior Regulations. Based on the
foregoing, it is our opinion that CCRH will be treated as a partnership as
defined in sections 7701(a)(2) and 761(e) of the Code and not as an association
taxable as a corporation for all periods prior to January 1, 1997.
In addition, based upon the structure and capitalization of CCRH and
representations of the Operating Partnership regarding CCRH's current
ownership, it is our opinion that CCRH will not constitute a publicly traded
partnership for purposes of section 7704 of the code.(21)
<PAGE> 41
Crescent Real Estate Equities Company
April 22, 1997
Page 41
9. Accuracy of the Matters Described under the Heading "Federal Income
Tax Considerations" in the Prospectus.
It is our opinion that the description of the federal income tax
considerations discussed under the heading "Federal Income Tax Considerations"
in the Prospectus is accurate and fairly summarizes the federal income tax
considerations that are likely to be material to a holder of Common Shares.
III. Additional Limitations
The foregoing opinions are limited to the specific matters covered
thereby and should not be interpreted to imply that the undersigned has offered
its opinion on any other matter. Moreover, Crescent Equities' ability to
achieve and maintain qualification and taxation as a REIT depends upon Crescent
Equities' ability to meet certain diversity of stock ownership requirements
and, through actual annual operating results, certain requirements under the
Code regarding its income, assets and distribution levels. No assurance can be
given that the actual ownership of Crescent Equities' shares and its actual
operating results and distributions for any taxable year will satisfy the tests
necessary to achieve and maintain its status as a REIT.
<PAGE> 42
Crescent Real Estate Equities Company
April 22, 1997
Page 42
IV. Consent to Filing
These opinions are furnished to you solely for use in connection with
the Registration Statement. We hereby consent to the incorporation by reference
of this letter as an exhibit to the Registration Statement and to the use of
our name under the captions "Legal Matters" and "Federal Income Tax
Considerations" in the Prospectus.
Very truly yours,
SHAW, PITTMAN, POTTS & TROWBRIDGE
/s/ CHARLES B. TEMKIN, P.C.
--------------------------------------
By: Charles B. Temkin, P.C.
Attachments
- ---------------------------
(1) Unless otherwise noted, all references to Crescent Equities herein
refer to Crescent Equities and its wholly owned subsidiaries, Crescent
Real Estate Equities, Ltd. ("CREE"), CRE Management I Corp., CRE
Management II Corp., CRE Management III Corp., CRE Management IV
Corp., CRE Management V Corp., CRE Management VI Corp., CresCal
Properties, Inc., and Crescent Commercial Realty Corp.
(2) For purposes of this letter, the term "Residential Development
Properties" will be deemed to include any assets of HBCLP, Inc.
("HBCLP"), unless otherwise noted, and the term "Residential
Development Corporations" will be deemed to include HBCLP, unless
otherwise noted.
(3) For purposes of this letter, the term "Residential Development
Property Mortgages" will be deemed to include the $25,000,000 line of
credit secured by HBCLP, Inc.'s limited partner interest in Hudson Bay
Partners, L.P. (the "HBCLP Note"), unless otherwise noted.
(4) This series of transactions discussed in this paragraph will
hereinafter be referred to as the "Transactions."
(5) For purposes of this opinion, we have assumed that Funding I will
not be treated as having more than four partners (Management II, the
Operating Partnership, Gerald Haddock and CW #1 Limited Partnership)
for purposes of section 1.7704-1(h) of the Treasury Regulations.
Although the Operating Partnership and CW #1 Limited Partnership are
flow-through entities for purposes of section 1.7704-1(h)(3), we have
assumed that the partners in the Operating Partnership and CW #1
Limited Partnership will not be treated as partners in Funding I for
purposes of the 100 partner requirement, based upon your
representation that Funding I will not represent substantially all of
the assets of either the Operating Partnership or CW #1 Limited
Partnership.
(6) For purposes of this opinion, we have assumed that Funding II will
not be treated as having more than two partners (Management II and the
Operating Partnership) for purposes of section 1.7704-1(h) of the
Treasury Regulations. Although the Operating Partnership is a
flow-through entity for purposes of section 1.7704-1(h)(3), we have
assumed that the partners in the Operating Partnership will not be
treated as partners in Funding II for purposes of the 100 partner
requirement, based upon your representation that Funding II will not
represent substantially all of the assets of the Operating
Partnership.
(7) For purposes of this opinion, we have assumed that each of Funding
III, Funding IV and Funding V will be treated as having no more than
three partners for purposes of section 1.7704-1(h) of the Treasury
Regulations. Although the Operating Partnership is a flow-through
entity for purposes of section 1.7704-1(h)(3), we have assumed that
the partners in the Operating Partnership will not be treated as
partners in Funding III, Funding IV or Funding V for purposes of the
100 partner requirement, based upon your representation that neither
Funding III, Funding IV nor Funding V will represent substantially all
of the assets of the Operating Partnership.
(8) For purposes of this opinion, we have assumed that Funding VI will
not be treated as having more than two partners (Management VI and the
Operating Partnership) for purposes of section 1.7704-1(h) of the
Treasury Regulations. Although the Operating Partnership is a
flow-through entity for purposes of section 1.7704-1(h)(3), we have
assumed that the partners in the Operating Partnership will not be
treated as partners in Funding VI for purposes of the 100 partner
requirement, based upon your representation that Funding VI will not
represent substantially all of the assets of the Operating
Partnership.
(9) For the purposes of this opinion we have assumed that CresCal will
not be treated as having more than two partners for purposes of
section 1.7704-1(h) of the Treasury Regulation (CresCal Properties,
Inc. and Crescent Real Estate Equities Limited Partnership (the
"Operating Partnership")). Although the Operating Partnership is a
flow-through entity for purposes of section 1.7704-1(h)(2), we have
assumed that the partners in the Operating Partnership will not be
treated as partners in CresCal for purposes of the 100 partner
requirement, based upon your representation that CresCal will not
represent substantially all of the assets of the Operating
Partnership.
(10) See, e.g., Rev. Rul. 93-38, 1993-21 I.R.B. 4, P.L.R. 9602012
(October 6, 1995) and P.L.R. 9507004 (November 8, 1994).
(11) For purposes of this opinion, we have assumed that CresTex will
not be treated as having more than two partners for purposes of
section 1.7704-1(h) of the Treasury Regulations (CresCal Properties,
Inc. and the Operating Partnership). Although the Operating
Partnership is a flow-through entity for purposes of section
1.7704-1(h)(3), we have assumed that the partners in the Operating
Partnership will not be treated as members of CresTex for purposes of
the 100 partner requirement, based upon your representation that
CresTex will not represent substantially all of the assets of the
Operating Partnership.
(12) For purposes of this opinion, we have assumed that Waterside will
not be treated as having more than three partners (CW #1 Limited
Partnership, CREE, Ltd. and the Operating Partnership) for purposes of
section 1.7704-1(h) of the Treasury Regulations. Although the
Operating Partnership and CW #1 Limited Partnership are flow-through
entities for purposes of section 1.7704-1(h)(3), we have assumed that
the partners in the Operating Partnership and CW #1 Limited
Partnership will not be treated as partners in Waterside for purposes
of the 100 partner requirement, based upon your representation that
Waterside will not represent substantially all of the assets of either
the Operating Partnership or CW #1 Limited Partnership.
(13) See, e.g., P.L.R. 9242025 (July 22, 1992) and P.L.R. 9218078
(January 31, 1992).
(14) For purposes of this opinion, we have assumed that Associates
will not be treated as having more than two partners for purposes of
section 1.7704-1(h) of the Treasury Regulations (CREE, Ltd. and the
Operating Partnership). Although the Operating Partnership is a
flow-through entity for purposes of section 1.7704-1(h)(3), we have
assumed that the partners in the Operating Partnership will not be
treated as partners in Associates for purposes of the 100 partner
requirement, based upon your representation that Associates will not
represent substantially all of the assets of the Operating
Partnership.
(15) For purposes of this opinion, we have assumed that the Woodlands
Partnership will not be treated as having more than two partners (TWC
Sub and the Operating Partnership) for purposes of section 1.7704-1(h)
of the Treasury Regulations. Although the Operating Partnership is a
flow-through entity for purposes of section 1.7704-1(h)(3), we have
assumed that the partners in the Operating Partnership will not be
treated as partners in the Woodlands Partnership for purposes of the
100 partner requirement, based upon your representation that the
Woodlands Partnership will not represent substantially all of the
assets of the Operating Partnership.
(16) For purposes of this opinion, we have assumed that WRE will not
be treated as having more than two partners (TWC Sub and the Operating
Partnership) for purposes of section 1.7704-1(h) of the Treasury
Regulations. Although the Operating Partnership is a flow-through
entity for purposes of section 1.7704-1(h)(3), we have assumed that
the partners in the Operating Partnership will not be treated as
partners in WRE for purposes of the 100 partner requirement, based
upon your representation that WRE will not represent substantially all
of the assets of the Operating Partnership.
(17) For purposes of this opinion, we have assumed that 301 Congress
will not be treated as having more than three partners (CREE, Ltd.,
the Operating Partnership and Aetna) for purposes of section
1.7704-1(h) of the Treasury Regulations. Although the Crescent/301 is
a flow-through entity for purposes of section 1.7704-1(h)(3), we have
treated Crescent/301 as having only two members, CREE, Ltd. and the
Operating Partnership. The partners in the Operating Partnership will
not be treated as members of Crescent/301 for purposes of the 100
partner requirement, based upon your representation that the Operating
Partnership's investment in 301 Congress, through Crescent/301, will
not represent substantially all of the assets of the Operating
Partnership.
(18) See, e.g., Rev. Rul. 93-38, 1993-21 I.R.B. 4, P.L.R. 9602012
(October 6, 1995) and P.L.R. 9507004 (November 8, 1994).
(19) For purposes of this opinion, we have assumed that Crescent/301
will not be treated as having more than two partners for purposes of
section 1.7704-1(h) of the Treasury Regulations (CREE, Ltd. and the
Operating Partnership). Although the Operating Partnership is a
flow-through entity for purposes of section 1.7704-1(h)(3), we have
assumed that the partners in the Operating Partnership will not be
treated as members of Crescent/301 for purposes of the 100 partner
requirement, based upon your representation that Crescent/301 will not
represent substantially all of the assets of the Operating
Partnership.
(20) For purposes of this opinion, we have assumed that SMA will not
be treated as having more than eighty partners for purposes of section
1.7704-1(h) of the Treasury Regulations. Although the Operating
Partnership is a flow-through entity for purposes of section
1.7704-1(h)(3), we have assumed that the partners in the Operating
Partnership will not be treated as members of SMA for purposes of the
100 partner requirement, based upon your representation that SMA will
not represent substantially all of the assets of the Operating
Partnership.
(21) For the purposes of this opinion we have assumed that CCRH will
not be treated as having more than two partners for purposes of
section 1.7704-1(h) of the Treasury Regulation (Crescent Commercial
Realty Corp., Inc. and Crescent Real Estate Equities Limited
Partnership (the "Operating Partnership")). Although the Operating
Partnership is a flow-through entity for purposes of section
1.7704-1(h)(2), we have assumed that the partners in the Operating
Partnership will not be treated as partners in CCRH for purposes of
the 100 partner requirement, based upon your representation that CCRH
will not represent substantially all of the assets of the Operating
Partnership.
<PAGE> 43
MEMORANDUM
TO: David Dean
FROM: Charles B. Temkin
Michael A. Jacobs
DATE: January 3, 1995
RE: Characterization of Income Derived from Hyatt Regency Beaver
Creek
I. OVERVIEW
Crescent Real Estate Equities Limited Partnership (the "Operating
Partnership") is about to purchase the Hyatt Regency Beaver Creek (the "Hotel
Property") from East West Properties (the "Current Owner"). Crescent Real
Estate Equities, Inc. (the "Company") is currently the sole shareholder of two
corporations, one of which is the sole general partner of and one of which is a
limited partner of the Operating Partnership. These two corporations
constitute qualified REIT subsidiaries within the meaning of section 856(i).(1)
This memorandum analyzes the impact that a purchase of the Hotel
Property will have on the ability of the Company to continue to qualify as a
real estate investment trust (a "REIT") under section 856(c). More
specifically, it analyzes whether the income the Operating Partnership will
derive from the Hotel Property will be treated as "qualifying income" for
purposes of the 75 percent and 95 percent gross income tests for REIT
qualification. This memorandum concludes that, subject to certain assumptions,
in our opinion (i) all of the income that the Operating Partnership derives
from the Hotel Property will be treated as "qualifying income" for purposes of
the 95 percent test and (ii) all of the income the Operating Partnership
derives from the Hotel Property, with the exception of certain interest income,
will be treated as "qualifying income" for purposes of the 75 percent test.
II. FACTS AND ASSUMPTIONS
- ----------------------------------
(1) All section references herein are to the Internal Revenue Code of 1986, as
amended (the "Code"), or to the regulations issued thereunder, unless otherwise
noted.
<PAGE> 44
The Current Owner has contracted with Hyatt Corporation ("Hyatt") to
operate the Hotel Property. Under the terms of the agreement between the
Current Owner and Hyatt dated December 11, 1987, as amended on September 12,
1988, February 15, 1990 and October 1, 1994 (the "Management Agreement"), Hyatt
is obligated to provide all services in relation to the operation of the Hotel
Property and collect all hotel receipts. In exchange for these services, Hyatt
is reimbursed for the costs of operating the Hotel Property and paid a
management fee. This fee is paid out of hotel receipts; it is based in part on
the gross hotel receipts and in part on the profits, if any, from operation of
the Hotel Property.
Section 15.2 of the Management Agreement requires that all
assignments of the Management Agreement be approved by Hyatt and that any
assignees expressly assume the obligations of the Current Owner under the
Management Agreement. Therefore, in connection with its purchase of the Hotel
Property, the Operating Partnership will assume all of the obligations of the
Current Owner under the Management Agreement.
When the Operating Partnership purchases the Hotel Property, it will
immediately lease it to Mogul Management LLC ("Mogul") pursuant to a Lease
Agreement dated January 3, 1995 (the "Lease"). Pursuant to Article 2 of the
Lease, the Operating Partnership will assign its interest in the Management
Agreement to Mogul; and pursuant to Section 15.2 of the Management Agreement,
Mogul will assume all of the Operating Partnership's obligations thereunder.
However, as a condition of its approval of the Lease, Hyatt will require that
the Operating Partnership remain liable for all obligations of the Operating
Partnership under the Management Agreement assumed by Mogul.
Currently, Walter P. Sprunt and Richard W. Adkisson each own a 45.5
percent interest in the assets and net profits of Mogul, while Gerald W.
Haddock and John C. Goff, the managers of Mogul, each own a 4.5 percent
interest in its assets and net profits.
For purposes of this memorandum, we have examined and relied upon (1)
the Management Agreement, (2) the Lease, (3) the Articles of Organization of
Mogul Management LLC (the "Mogul Articles"), (4) the Regulations of Mogul
Management LLC (the "Mogul Regulations"), (5) the First Amended and Restated
Articles of Incorporation of Crescent Real Estate Equities, Inc. (the "Crescent
Articles"), (6) the Contract of Sale between the Current Owner and the
Operating Partnership, (7) the Consent and Assumption Agreement between Hyatt
and the Operating Partnership, and (8) such other documents or information as
we deemed necessary for the opinions set forth below. In our examination, we
have assumed the genuineness of all signatures, the legal capacity of natural
persons, the authenticity of all documents submitted to us as originals, the
conformity to original documents of all documents submitted to us as certified
or photostatic copies, and the authenticity of the originals of such copies.
-2-
<PAGE> 45
This memorandum is based upon existing provisions of the Code,
Treasury regulations, and the reported interpretations thereof by the Internal
Revenue Service ("IRS") and by the courts in effect (or, in the case of certain
proposed regulations, proposed) as of the date hereof, all of which are subject
to change, both retroactively or prospectively, and to possibly different
interpretations. We assume no obligation to update the opinions set forth in
this memorandum. We believe that the conclusions expressed herein, if
challenged by the IRS, would be sustained in court. However, because our
opinions are not binding upon the IRS or the courts, there can be no assurance
that contrary positions may not be successfully asserted by the IRS.
In addition, this memorandum is based on various assumptions and is
conditioned upon certain representations made by the Operating Partnership and
its sole general partner, Crescent Real Estate Equities, Ltd., as to factual
and other matters as set forth in the attached letter.
III. LEGAL BACKGROUND
A. 75 Percent and 95 Percent Tests
In order to qualify as a REIT for tax purposes, the Company must
satisfy certain tests with respect to the composition of its gross income on an
annual basis. First, at least 75 percent of the Company's gross income
(excluding gross income from certain prohibited transactions) for each taxable
year must consist of temporary investment income or of certain defined
categories of income derived directly or indirectly from investments relating
to real property or mortgages on real property. These categories include,
subject to various limitations, rents from real property, interest on mortgages
on real property, gains from the sale or other disposition of real property
(including interests in real property and 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.(2) Second, at least 95 percent of the Company's gross income
(excluding gross income from certain prohibited transactions) for each taxable
year must be derived from income qualifying under the 75 percent 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.(3)
In applying these income tests, REITs that are partners in a
partnership are required to include in their gross income their proportionate
share of the partnership's gross income. In addition, such REITs are to treat
this partnership gross income as retaining the same character as the items of
gross income of the partnership for purposes of section 856.(4) Thus, the
character of any
- ----------------------------------
(2) Section 856(c)(3).
(3) Section 856(c)(2).
(4) Treas. Reg. Section 1.856-3(g).
-3-
<PAGE> 46
income derived by the Operating Partnership from the Hotel Property will affect
the ability of the Company to qualify as a REIT.
B. Rents from Real Property
Rents from real property satisfy both the 75 percent and 95 percent
tests for REIT qualification 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.(5) 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 percent or more of the REIT, directly
or constructively, owns 10 percent or more of such tenant (a "Related Party
Tenant").(6) Third, if rent attributable to personal property leased in
connection with a lease of real property is greater than 15 percent 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."(7)
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. However, rents will be qualified as "rents
from real property" if a REIT directly performs services in connection with the
lease of the property, if those services are "usually or customarily rendered"
in connection with the rental of space for occupancy, and such services are not
considered to be rendered to the occupant of the property.(8)
C. Income from Foreclosure Property
Income from foreclosure property is treated as "qualifying income" for
purposes of the 75 percent and 95 percent tests (although any net income from
foreclosure property is taxed at the maximum corporate rate). Foreclosure
property is any real property, and any personal property incident to such real
property, acquired by a REIT through default under a mortgage or a lease. A
REIT may elect to treat such property as foreclosure property for a grace
period of up to two years.(9) However, such property will cease to qualify as
foreclosure property if it is used by the REIT in a trade or business more than
90 days after it is acquired and it is not operated through
- ----------------------------------
(5) Section 856(d)(2)(A).
(6) Section 856(d)(2)(B).
(7) Section 856(d)(1)(C).
(8) Sections 856(d)(1)(B), 856(d)(2)(C).
(9) Section 856(e).
-4-
<PAGE> 47
an independent contractor from whom the REIT does not derive or receive any
income.(10) Moreover, property is not eligible to be treated as foreclosure
property if the lease is entered into with an intent to evict or foreclose, or
if the REIT knows or has reason to know that default would occur.(11)
I. DISCUSSION
A. Lease Will be Treated as a Lease for Federal Income Tax Purposes
In order for any income derived by the Operating Partnership from the
Hotel Property to constitute either "rents from real property," or in the case
of a default under the Lease, "gross income from foreclosure property," the
Lease must be treated as a lease for federal income tax purposes and not be
treated as a service contract, management contract or other type of
arrangement. This determination depends on an analysis of all the surrounding
facts and circumstances. In making this determination, courts have considered
a variety of factors, including the following: (i) the intent of the parties,
(ii) the form of the agreement, (iii) the degree of control over the business
conducted at the property that is provided to the lessee (e.g., whether the
lessee has substantial rights of control over the operation of the property and
its business), (iv) the extent to which the lessee has the risk of loss from
operations of the business conducted as the property (e.g., whether the lessee
bears the risk of increases in operating expenses and of decreases in
revenues), and (v) the extent to which the lessee has the opportunity to
benefit from operations of the business conducted at the property (e.g.,
whether the lessee benefits from decreased operating expenses or increased
revenues).(12)
In addition, section 7701(e) provides that a contract that purports to
be a service contract, partnership agreement, or another type of arrangement
will be treated instead as a lease of property if the contract is properly
treated as such, taking into account all relevant factors, including whether or
not: (i) the service recipient is in physical possession of the property, (ii)
the service recipient controls the property, (iii) the service recipient has a
significant economic or possessory interest in the property (e.g., the
property's use is likely to be dedicated to the service recipient for a
substantial portion of the useful life of the property, the recipient shares
the risk that the property will decline in value, the recipient shares in any
appreciation in the value of the property, the recipient shares in any savings
in the property's operating costs or the recipient bears the risk of damage to
or loss of the property), (iv) the service provider does not bear any risk of
substantially diminished receipts or substantially increased expenditures if
there is nonperformance under the contract, (v) the service provider does not
use the property concurrently to provide significant
- ----------------------------------
(10) Section 856(e)(4).
(11) Treas. Reg. Section 1.856-6(b)(3).
(12) See, e.g., Xerox Corp. v. U.S., 80-2 USTC Paragraph 9530 (Ct. Cl. Tr. Div.
1980), aff'd per curiam, 656 F.2d 659 (Ct. Cl. 1981).
-5-
<PAGE> 48
services to entities unrelated to the service recipient and (vi) the total
contract price does not substantially exceed the rental value of the property
for the contract period. Since the determination of whether a service
contract, partnership agreement, or some other type of arrangement should be
treated as a lease is inherently factual, the presence or absence of any single
factor may not be dispositive in every case.(13)
We have concluded that the Lease will be treated as a lease for
Federal income tax purposes, rather than a service contract, management
contract or other type of arrangement. This conclusion is based, in part, on
the following facts: (i) the Operating Partnership and Mogul intend their
relationship to be that of lessor and lessee (as evidenced by the terms of the
Lease), (ii) Mogul will have the right to exclusive possession, use and quiet
enjoyment of the Hotel Property during the term of the Lease and the right to
uninterrupted control in the operation of and business conducted at the Hotel
Property (subject to its assumption of the Management Agreement), (iii) Mogul
will bear the cost of, and be responsible for, capital expenditures, including
maintenance and repair of the Hotel Property, and will dictate how the Hotel
Property is maintained and improved, (iv) Mogul will bear all the costs and
expenses of operating the Hotel Property, (v) Mogul will benefit from any
savings in the costs of operating the Hotel Property during the term of the
Lease, (vi) in the event of damage or destruction to the Hotel Property, Mogul
will be at economic risk because its obligation to make rental payments will
not abate, (vii) Mogul will indemnify the Operating Partnership against all
liabilities imposed on the Operating Partnership during the term of the Lease
by reason of injury to persons or damage to property occurring at the Hotel
Property or Mogul's use, management, maintenance or repair of the Hotel
Property, (viii) Mogul is obligated to pay substantial fixed rent for the
period of use of the Hotel Property, regardless of whether its revenues exceed
its costs and expenses, and (ix) Mogul stands to incur substantial losses (or
derive substantial profits) depending on how successfully it operates the Hotel
Property.
We do not believe that our conclusion that the Lease of the Hotel
Property will be treated as a lease for Federal income tax purposes is affected
by the fact that Mogul will enter the Lease subject to its assumption of the
Operating Partnership's obligations under the preexisting Management Agreement.
The Management Agreement gives Hyatt control over the day-to-day operation of
the Hotel Property and will allow Hyatt to share with Mogul in the benefits of
any increases in revenues or cost savings in the operation of the Hotel
Property. However, Hyatt's operation of the Hotel Property will not be
controlled by the Operating Partnership, and the Management Agreement does not
affect the fact that Mogul bears most of the risk of loss if the Hotel Property
is not successful. Moreover, the IRS has issued a private letter ruling in
which it treated leases of several hotel properties as producing "rents from
real property" in a situation where the lessees had contracted with a third
party to conduct the day-to-day operations of the hotels.(14) This ruling
- ----------------------------------
(13) P.L.R. 8918012 (January 24, 1989).
(14) See, P.L.R. 8117036 (January 27, 1981).
-6-
<PAGE> 49
suggests that the IRS will respect a lease of a hotel for federal income tax
purposes even if the hotel is operated by an independent contractor rather than
by the lessee.
B. Percentage Rent Provision is not Profit-Based
Pursuant to the Lease, Mogul will be obligated to pay the Operating
Partnership base rent and percentage rent. Under the regulations, percentage
rent based on a percentage of gross receipts or sales in excess of a floor
amount, which is how the percentage rent is structured under the Lease, will
not qualify as "rents from real property" unless (i) such floor amount does
not depend in whole or in part on the income or profits of the lessee, (ii) the
percentage and the floor amount are fixed at the time the lease is entered
into, (iii) the percentage and the floor amount are not renegotiated during the
term of the lease in a manner that has the effect of basing the percentage rent
on income or profits, and (iv) the percentage and the floor amount conform with
normal business practice.(15)
Under the terms of Article 4.2 of the Lease, Mogul will pay percentage
rent equal on an annual basis to the sum of (i) 17.5 percent of the excess of
annual gross receipts from room rentals over $9,300,000 and (ii) 2.5 percent of
the excess of annual gross receipts from the food and beverage facilities at
the Hotel Property over $3,000,000. This formula will effectively reward Mogul
for any increases in gross receipts from rooms and from other sources over the
threshold amounts. This type of formula does not base the percentage rent on
Mogul's income or profits, and similar formulas have been treated by the IRS as
generating "rents from real property."(16) Moreover, the Operating Partnership
has represented that (i) the floor amounts used to compute the percentage rent
under the Lease will not depend in whole or in part on the income or profits of
any person, (ii) the percentage rent provision of the Lease will not be
renegotiated during the term of the Lease or at the expiration or earlier
termination of the Lease in a manner that has the effect of basing the rent on
income or profits, and (iii) the percentage rent provision of the Lease
conforms with normal business practice. In addition, based on our experience
and an examination of the Lease and the Hotel Property projections, the Lease
appears to conform with normal business practice.
- -----------------------------------
(15) Treas. Reg. Section 1.866-4(b)(3).
(16) See, e.g., P.L.R. 8803007 (September 23, 1987) (percentage rent based on
gross revenues in excess of gross revenues for a base year treated as "rents
from real property"); cf. P.L.R. 9104018 (October 26, 1990) (interest based on
gross revenues in excess of a floor amount treated as qualifying interest under
section 856(f)).
-7-
<PAGE> 50
C. Mogul is not a "Related Party Tenant"
Rents received from Mogul will not qualify as "rents from real
property" if Mogul is a "related party tenant." Mogul will be a "related party
tenant" if the Company, or an owner of 10 percent or more of the Company,
directly or constructively owns 10 percent or more of the assets or net profits
of Mogul.(17) Constructive ownership is determined for purposes of this test
by applying the rules of section 318(a) as modified by section 856(d)(5).
Those rules generally provide that if 10 percent or more in value of the stock
of the Company is owned, directly or indirectly, by or for any person, the
Company is considered as owning the stock owned, directly or indirectly, by or
for such person.
Mogul will not be treated as a "related party tenant" because two
individuals, Walter P. Sprunt and Richard W. Adkisson, currently each own a
45.5 percent interest in its assets and net profits. In reaching this
conclusion we recognize that Mr. Sprunt and Mr. Adkisson are the owners of
Greenbriar Associates, Inc., which is a 10 percent member of G/C Waterside
Associates, LLC, which is a 1 percent partner of Waterside Commons Limited
Partnership, a partnership whose 89 percent partner is the Operating
Partnership.(18) The Operating Partnership has represented that (i) neither
Mr. Sprunt nor Mr. Adkisson owns more than 10 percent of the value of the
Company's stock, (ii) neither Mr. Sprunt nor Mr. Adkisson is expected to own
more than 10 percent of the value of the Company's stock in the future and
(iii) neither the Operating Partnership nor the Company intends to acquire,
directly or constructively, an interest of 10 percent or more in the assets or
net profits of Mogul at any time in the future. Moreover, Article 37.5 of the
Lease limits the ability of Mogul and its members and managers to acquire,
directly or constructively, a 10 percent stock interest in the Company, and
Section 6.4 of the First Amended and Restated Articles of Incorporation of the
Company prevents Mogul and its members and managers from acquiring more than 8
percent of the Company's stock.
The conclusion that Mogul will not be treated as a "related party
tenant" is based on the assumption that Mogul will be treated as a partnership
for federal income tax purposes. If Mogul is not treated as a partnership for
federal income tax purposes, but is instead treated as an association taxable
as a corporation, then it is likely that Mogul will be treated as a "related
party tenant" and the rents derived under the terms of the Lease will not be
treated as "rents from real property." This is because, if Mogul were treated
as a corporation for federal income tax purposes, Gerald W. Haddock and John C.
Goff would likely be deemed to own all of its voting stock, because of the
extensive powers that they are granted as managers under the Mogul
- ----------------------------------
(17) Section 856(d)(2)(B)(ii).
(18) See Rev. Rul. 73-194, 1973-1 C.B. 355 (management company treated as an
independent contractor with respect to a REIT, where an affiliate of the
management company and the REIT were partners).
-8-
<PAGE> 51
Regulations. If this were the case, the ownership of such voting stock would
be attributed to the Company under the constructive ownership rules described
above.(19)
An entity which has associates and an objective to carry on a business
for joint profit will be treated as a partnership for federal income tax
purposes, and not as an association taxable as a corporation, if it has not
more than two of the following four characteristics of a corporation: (i)
continuity of life; (ii) centralization of management; (iii) limited liability;
and (iv) free transferability of interests.(20) The entity must also have no
other characteristics which are significant in determining its classification.
Generally, other factors are considered only insofar as they relate to the
determination of the presence or absence of the foregoing corporate
characteristics.(21) The IRS has applied this four-factor test in determining
whether limited liability companies formed under the Texas Limited Liability
Company Act (the "Act") are partnerships for federal income tax purposes.(22)
The IRS has issued Rev. Proc. 95-10, which specifies conditions which
must be satisfied for a limited liability company to receive a favorable
advanced ruling that it will be classified as a partnership for federal income
tax purposes.(23) Mogul should satisfy these conditions. However, such
conditions are applicable only in determining whether rulings will be issued
and are not intended as substantive rules for determination of partnership
status.
An organization will be treated as possessing the corporate
characteristic of continuity of life, even if the agreement organizing an
entity provides that it is to continue only for a stated period, unless a
member has the power to dissolve the organization at an earlier time.(24)
Article 6.01 of the Act provides, in part, that except as otherwise provided in
the company's regulations, a limited liability company shall be dissolved upon
the death, retirement, resignation, expulsion,
- ----------------------------------
(19) Richard Rainwater, Gerald Haddock and John Goff are each partners in
FW-Irving Partners, Ltd. (and apparently they are partners in other
partnerships as well). Richard Rainwater also owns more than 10 percent of the
value of the stock of the Company. Thus, assuming that the ownership interests
in Mogul held by Gerald Haddock and John Goff constitute stock, such interests,
along with Richard Rainwater's stock interest in the Company, will be
attributed to FW-Irving Partners, Ltd. pursuant to section 318(a)(3)(A), which
provides that stock owned, directly or indirectly, by or for a partners shall
be considered as owned by the partnership. Then, FW-Irving Partners, Ltd.'s
deemed interest in Mogul would be attributed to the Company pursuant to section
318(a)(3)(C) (as modified by section 856(d)(5)), which provides that stock
owned by any person that owns 10 percent or more of the value of the stock in a
corporation shall be considered owned by the corporation.
(20) Treas. Reg. Section 301.7701-2(a).
(21) See Rev. Rul. 79-106, 1979-1 C.B. 448.
(22) See, e.g., P.L.R. 9242025 (July 22, 1992) and P.L.R. 9218078 (January 31,
1992).
(23) 1995-3 I.R.B [ ] .
(24) Treas. Reg. Section 301.7701-2(b)(3).
-9-
<PAGE> 52
bankruptcy, or dissolution of a member or the occurrence of any other event
which terminates the continued membership of a member in the limited liability
company, unless there is at least one remaining member and the business of the
limited liability company is continued by the consent by the number of members
or class thereof stated in the articles of organization or regulations of the
limited liability company or of not so stated, by all remaining members.
Article 2 of the Mogul Articles provides that the duration of Mogul is until
the close of business on December 31, 2015, or until its earlier dissolution in
accordance with the provisions of the Act or the Regulations. Article 10.2 of
the Mogul Regulations provides, in part, that Mogul shall be dissolved upon the
withdrawal, death, retirement, resignation, expulsion, bankruptcy, legal
incapacity or dissolution of any member, unless the business of Mogul is
continued by the consent of all the remaining members within ninety days.
Accordingly, Mogul will lack the corporate characteristic of continuity of
life.
An organization will be treated as possessing the corporate
characteristic of free transferability of interests if the members owning all
or substantially all of the interests in an organization may substitute for
themselves without the consent of the other members a person who is not a
member of the organization.(25) Article 4.05 of the Act provides, in part,
that unless otherwise provided by the company's regulations, a membership
interest is assignable in whole or in part; an assignment of a member's
interest does not entitle the assignee to become, or to exercise rights or
powers of a member; and until the assignee becomes a member, the assignor
member continues to be a member and to have the power to exercise any rights or
powers of a member, except to the extent those rights or powers are assigned.
Article 4.07 of the Act provides, in part, that an assignee of a membership
interest may become a member if and to the extent that the company's
regulations so provide, or all members consent. Article 9.3 of the Mogul
Regulations provides, in part, that no member shall have the right to
substitute in its place a transferee unless consent is given by the Managers
and a majority of the other members, which consent may be withheld in the
discretion of the Managers or the other members. Accordingly, Mogul will lack
the corporate characteristic of free transferability of interests. Because
Mogul will lack the corporate characteristics of continuity of life and free
transferability of interests, it will be treated as partnership for federal
income tax purposes.
D. Incidental Personal Property
1. Rents Attributable to Personal Property Will Be Treated as
"Rents from Real Property"
As noted above, the rents attributable to the Operating Partnership's
personal property leased under or in connection with the Lease must not be
greater than 15 percent of the rents received under the Lease. The rent
attributable to personal property leased under or in connection with a lease of
real property is the amount that bears the same ratio to total rent for the
taxable
- ----------------------------------
(25) Treas. Reg. Section 301.7701-2(e).
-10-
<PAGE> 53
year as (i) the average of the adjusted bases of the personal property leased
under or in connection with a lease of real property at the beginning and at
the end of the taxable year bears to (ii) the average of the aggregate adjusted
bases of the real and personal property subject to the lease at the beginning
and at the end of such taxable year (the "Adjusted Basis Ratio").(26) The
Operating Partnership has represented that the adjusted tax basis of the
personal property leased under or in connection with the Lease will not
represent more than 15 percent of the aggregate adjusted tax basis of the Hotel
Property at any time.
2. Payments Attributable to Mogul's Acquisition of Certain
Personal Property Will Not Be Treated as "Rents from Real
Property"
Article 4.7 of the Lease provides that Mogul will be deemed to have
acquired all of the furniture, fixtures and operating equipment associated with
the Hotel Property (the "FF & E") with the proceeds of a loan from the
Operating Partnership. It further provides that Mogul is to make payments of
principal and interest on this deemed loan.
The payments that the Operating Partnership receives with regard to
the FF & E under the terms of Article 4.7 of the Lease will not qualify as
"rents from real property." Instead, such payments will be treated for federal
income tax purposes as payments of principal and interest resulting from the
Operating Partnership's deemed financing of Mogul's purchase of the FF & E. In
reaching this conclusion we have relied on the representations of the Operating
Partnership that (i) the useful life of the FF & E will be less than the term
of the Lease, (ii) the residual value of the FF & E at the end of the term of
the Lease will generally be less than 20 percent of the value of the FF & E at
the beginning of the term of the Lease, and (iii) the Operating Partnership and
Mogul will treat Mogul as the owner of the FF & E for federal income tax
purposes.
The payments pursuant to this "deemed financing," to the extent they
constitute interest, will be "qualifying income" for purposes of the 75 percent
test. However, because the deemed financing will be secured by personal,
rather than real property, such interest will not be qualifying income for
purposes of the 95 percent test.
E. Provision of Services by the Operating Partnership
1. Income Derived under the Terms of the Lease
Although the Operating Partnership may treat charges for services
customarily furnished or rendered in connection with the rental of the Hotel
Property as "rents from real property," any services rendered to the occupants
of the Hotel Property must be furnished or rendered by an
- ----------------------------------
(26) Section 856(d)(1)(C).
-11-
<PAGE> 54
independent contractor from whom the Company does not derive or receive any
income.(27) Moreover, to the extent that any independent contractors provide
noncustomary services to the occupants of the Hotel Property, the cost of such
services must not be borne by the Operating Partnership.(28)
Under the terms of the Lease, the Operating Partnership will not be
required to provide any services, customary or noncustomary, in connection with
the rental of the Hotel Property. Instead, all services relating to the
operation of the Hotel Property will be provided by Hyatt under the terms of
the Management Agreement. The Operating Partnership has represented that Hyatt
is an independent contractor within the meaning of section 856(d)(3), from
which the Company and the Operating Partnership will not derive or receive any
income. The Operating Partnership will not bear the cost of any of the
services provided by Hyatt. Instead, such costs will be borne by Mogul when it
assumes the Operating Partnership's Obligations under the Management Agreement.
Based on the foregoing, we believe that the provision of any
noncustomary services to the occupants of the Hotel Property by Hyatt will have
no effect on the qualification of the income derived from the Hotel Property as
"rents from real property." In fact, the IRS has issued a private letter
ruling in which it has treated the income derived from several leases of hotel
properties as "rents from real property" in a situation where the lessees had
contracted with a third-party to conduct the day to day operations of the
hotels.(29) Our conclusion is not altered by the fact that the Operating
Partnership will remain liable for any obligations arising under the Management
Agreement, to the extent that they are not satisfied by the Tenant. The
Operating Partnership should not be treated as bearing the cost of the services
provided by Hyatt merely because it is liable for Mogul's obligations under the
Management Agreement. The Operating Partnership is not retaining this liability
in an attempt to provide services to Mogul. Instead, it is retaining this
liability only as an accommodation, in order to gain Hyatt's consent to its
purchase of the Hotel Property. Moreover, the Operating Partnership believes
that it is highly unlikely that it will ever be required to reimburse Hyatt for
the costs and expenses of operating the Hotel Property. This is because (i)
the Hotel Property is projected to generate enough gross income to cover the
payments to Hyatt under the Management Agreement, (ii) in connection with the
Lease, Mogul will represent that it has a net worth of at least $400,000 , and
(iii) in the view of the Operating Partnership, Mogul's capitalization is
adequate to allow Mogul to assume Mogul's obligations under the Lease.
- ----------------------------------
(27) Sections 856(d)(1), 856(d)(2)(C); Treas. Reg. Section 1.512(b)-1(c)(5).
(28) Treas. Reg. Section 1.856-4(b)(5).
(29) See, P.L.R. 8117036 (January 27, 1981).
-12-
<PAGE> 55
2. Income Derived in the Case of a Default under the Lease
If the Operating Partnership were required to reimburse Hyatt for the
costs of operating the Hotel Property because of a default by Mogul under the
terms of the Management Agreement, we have concluded that the income derived by
the Operating Partnership from the Hotel Property would be treated as
"qualifying income" for purposes of the 75 percent and 95 percent tests. This
is because, if the Operating Partnership were required to reimburse Hyatt for
the cost of operating the Hotel Property, this would constitute an event of
default under Article 16.1(c) of the Lease, allowing the Operating Partnership
to terminate Mogul's leasehold interest in the Hotel Property. As a result of
such a termination of the Lease, any income derived by the Operating
Partnership from the Hotel Property after the default would be treated as
income from foreclosure property.
The Operating Partnership would be able to continue to operate the
Hotel Property after any default under the Lease, without affecting its status
as foreclosure property, because Hyatt, an independent contractor, from whom
the Company will not derive any income, will provide all services relating to
its operation. As noted above, a REIT can use foreclosure property in the
conduct of an active trade or business, as long as this is done through the use
of an independent contractor, from whom the REIT does not derive or receive any
income.(30)
As noted above, real property acquired upon default under a lease is
not eligible to be treated as foreclosure property if the lease is entered into
with an intent to evict or foreclose, or if the REIT knows or has reason to
know that default would occur.(31) This is not the case in the present
situation because (i) the Hotel Property is projected to generate enough gross
income to produce a profit for Mogul, (ii) in connection with the Lease, Mogul
will represent that it has a net worth of at $400,000, and (iii) in the view of
the Operating Partnership, Mogul's capitalization is adequate to allow Mogul to
assume Mogul's obligations under the Lease.
The Hotel Property would in any event qualify as foreclosure property
only for a period of up to two years, beginning of the date of its acquisition
by the Operating Partnership, unless the Operating Partnership obtains an
extension of the grace period from the IRS.(32) Therefore, in the event the
Operating Partnership takes possession of the Hotel Property as a result of a
default under the lease, presumably the Operating Partnership will sell the
Hotel Property or within two years rent it to another tenant under a lease
that will produce "rents from real property."
- ----------------------------------
(30) Section 856(e)(4)(C). (The IRS clearly intended for REITs to be able to
treat hotels operated by independent contractors as foreclosure property. For
instance, the Treasury regulations defining foreclosure property refer to hotel
properties twice. See, Treas. Reg. Sections 1.856-6(b)(2), 1.856-6(d)(2). In
addition, the IRS has also recently issued a private letter ruling in which it
treated income received from hotels acquired pursuant to a bankruptcy petition
as income from foreclosure property, where the hotels were operated by third
party managers. P.L.R. 9420013 (2/15/94).)
(31) Treas. Reg. Section 1.856-6(b)(3).
(32) Section 856(e)(2).
-13-
<PAGE> 56
CONCLUSION
Based on the assumptions stated above, it is our opinion that (i) all
of the income that the Operating Partnership derives from the Hotel Property
will be treated as "qualifying income" for purposes of the 95 percent test and
(ii) all of the income the Operating Partnership derives from the Hotel
Property, with the exception of the interest income attributable to the deemed
financing of Mogul's acquisition of the FF & E, will be treated as "qualifying
income" for purposes of the 75 percent test.
-14-
<PAGE> 57
April 1, 1996
Crescent Real Estate Equities, Inc.
900 Third Avenue, Suite 1800
New York New York 10022
Ladies and Gentlemen:
On January 3, 1995 we provided you with a memorandum analyzing the
impact of the purchase of the Hyatt Regency Beaver Creek (the "Hotel Property")
by Crescent Real Estate Equities Limited Partnership (the "Operating
Partnership") would have on the ability of Crescent Real Estate Equities, Inc.
(the "Company") to continue to qualify as a real estate investment trust (a
"REIT") under section 856(c).(1) That memorandum concluded that, subject to
certain assumptions, in our opinion (i) all of the income that the Operating
Partnership derived from the Hotel Property would be treated as "qualifying
income" for purposes of the 95 percent gross income test for REIT qualification
under section 856(c)(2) (the "95 percent test") and (ii) all of the income that
the Operating Partnership derived from the Hotel Property, with the exception
of certain interest income, would be treated as "qualifying income" for
purposes of the 75 percent gross income test for REIT qualification under
section 856(c)(3) (the "75 percent test"). The January 3, 1995 memorandum was
based upon, among other items, our review of a Lease Agreement between dated
January 3, 1995 between the Operating Partnership, as lessor, and Mogul
Management LLC ("Mogul"), as lessee, dated January 3, 1995 (the "Original
Lease").
On October 6, 1995, the Original Lease was amended to provide for the
subordination of the leasehold estate created by the Original Lease to any lien
or encumbrance placed against all or any part of the Hotel Property and to
provide for the approval by the Operating Partnership of a proposed merger of
Mogul into RoseStar Management, LLC, a Texas limited liability company
("RoseStar"). Currently, Sanjay Varma owns a 91 percent interest in the assets
and net profits of RoseStar, while Gerald W. Haddock and John C. Goff, the
managers of RoseStar, each own a 4.5 percent interest in its assets and net
profits.
Also on October 6, 1995, the Operating Partnership conveyed all of its
interest as lessor under the Original Lease to Crescent Real Estate Funding II,
L.P., a Delaware limited
- ----------------------------------
(1) All section references are to the Internal Revenue Code of 1986, as
amended (the "Code"), or to the regulations issued thereunder, unless
otherwise noted.
<PAGE> 58
Crescent Real Estate Equities, Inc.
April 1, 1996
Page 2
Partnership ("Funding II"). Funding II assumed all of the Operating
Partnership's liabilities and obligations under the Original Lease.
On January 1, 1996, the Funding II, Mogul and Rose Star executed an
Amended and Restated Lease Agreement for the Hotel Property (hereinafter the
Original Lease as amended and restated is referred to as the "Lease").
On February 9, 1996, Mogul was merged with and into RoseStar and
RoseStar succeeded Mogul as lessee under the Lease.
On March 29, 1996, pursuant to an Assignment and Assumption of
Leasehold Estate, RoseStar sold and assigned all of its interest and estate as
lessee under the Lease to RoseStar Southwest, LLC, a Delaware limited liability
company ("Southwest"). RoseStar owns a 99 percent interest in Southwest, while
the remaining one percent interest is owned by RSSW Corp., a Delaware
corporation.
On April 1, 1996, the Lease was amended to provide that, among other
things, (1) at all times during the term of the Lease, Southwest and RoseStar
would maintain a cumulative net worth equal to $200,000; and (2) Southwest
would retain all of the income it earned with respect to the Hotel Property
(except distributions to its beneficial owners in an amount sufficient to pay
their federal and state income taxes on the income) until such time as
Southwest and any affiliate of Southwest (including RoseStar) which has entered
into a long-term lease of a hotel with Funding II or any affiliate of Funding
II (including the Operating Partnership) have accumulated and are holding in
reserve funds in the aggregate which are sufficient to enable Southwest and any
affiliated entities to pay at least one monthly payment of base rent under each
lease between Southwest (or any affiliated entities) and Funding II or an
affiliate of Funding II.
This letter is intended to update the opinions expressed in our
January 3, 1995 memorandum to reflect the changes in the Lease Agreement and
the substitution of new parties as lessor and lessee of the Hotel Property.
The opinions set forth herein are based upon the existing provisions of the
Code, and the reported interpretations thereof by the IRS and by the courts in
effect as of the date hereof, all of which are subject to change, both
retroactively or prospectively, and to possibly different interpretations. We
assume no obligation to update the opinions set forth in this letter. We
believe that the conclusions expressed herein, if challenged by the IRS, would
be sustained in court. However, because our opinions are not binding upon the
IRS or the courts, there can be no assurance that contrary positions may not be
successfully asserted by the IRS.
<PAGE> 59
Crescent Real Estate Equities, Inc.
April 1, 1996
Page 3
I. Documents and Representations
For the purpose of rendering this opinion, we have examined
and relied on originals, or copies certified or otherwise identified to our
satisfaction, of the following: (1) the Original Lease; (2) the Amendment to
Lease Agreement between the Operating Partnership and Mogul dated October 6,
1995; (3) the Lease; (4) the Assignment and Assumption of Leasehold Estate by
and between RoseStar and Southwest dated March 29, 1996; (5) the First
Amendment to the Lease dated April 1, 1996; (6) the Limited Guaranty Agreement
by Gerald Haddock, John Goff and Sanjay Varma, as guarantors in favor of
Funding II (the "Guaranty); (7) the Articles of Organization of RoseStar
Management, LLC (the "RoseStar Articles"); (8) the Regulations of RoseStar
Management, LLC (the "RoseStar Regulations"); (9) the Operating Agreement of
RoseStar Southwest, LLC; (10) the First Amended and Restated Articles of
Incorporation of Crescent Real Estate Equities, Inc. (the "Crescent Articles");
and (11) such other documents or information as we have deemed necessary for
the opinion set forth below. In our examination, we have assumed the
genuineness of all signatures, the legal capacity of natural persons, the
authenticity of all documents submitted to us as originals, the conformity to
original documents of all documents submitted to us as certified or photostatic
copies, and the authenticity of the originals of such copies.
For the purpose of rendering this opinion, we have also assumed that
all statements of facts and assumptions described in our January 3, 1995
memorandum remain correct, unless otherwise noted.
II. Opinions
A. Lease Will be Treated as a Lease for Federal Income Tax Purposes
In order for any income derived by Funding II from the Hotel Property
to constitute either "rents from real property," or in the case of a default
under the Lease, "gross income from foreclosure property," the Lease must be
treated as a lease for federal income tax purposes and not be treated as a
service contract, management contract or other type of arrangement. This
determination depends on an analysis of all the surrounding facts and
circumstances. In making this determination, courts have considered a variety
of factors, including the following: (i) the intent of the parties, (ii) the
form of the agreement, (iii) the degree of control over the business conducted
at the property that is provided to the lessee (e.g., whether the lessee has
substantial rights of control over the operation of the property and its
business), (iv) the extent to which the lessee has the risk of loss from
operations of the business conducted as the property (e.g., whether the lessee
bears the risk of increases in operating expenses and of decreases in
revenues), and (v) the extent to which the lessee has
<PAGE> 60
Crescent Real Estate Equities, Inc.
April 1, 1996
Page 4
the opportunity to benefit from operations of the business conducted at the
property (e.g., whether the lessee benefits from decreased operating expenses
or increased revenues).(2)
In addition, section 7701(e) provides that a contract that purports to
be a service contract, partnership agreement, or another type of arrangement
will be treated instead as a lease of property if the contract is properly
treated as such, taking into account all relevant factors, including whether or
not: (i) the service recipient is in physical possession of the property, (ii)
the service recipient controls the property, (iii) the service recipient has a
significant economic or possessory interest in the property (e.g., the
property's use is likely to be dedicated to the service recipient for a
substantial portion of the useful life of the property, the recipient shares
the risk that the property will decline in value, the recipient shares in any
appreciation in the value of the property, the recipient shares in any savings
in the property's operating costs or the recipient bears the risk of damage to
or loss of the property), (iv) the service provider does not bear any risk of
substantially diminished receipts or substantially increased expenditures if
there is nonperformance under the contract, (v) the service provider does not
use the property concurrently to provide significant services to entities
unrelated to the service recipient and (vi) the total contract price does not
substantially exceed the rental value of the property for the contract period.
Since the determination of whether a service contract, partnership agreement,
or some other type of arrangement should be treated as a lease is inherently
factual, the presence or absence of any single factor may not be dispositive in
every case.(3)
We have concluded that the Lease will be treated as a lease for
Federal income tax purposes, rather than a service contract, management
contract or other type of arrangement. This conclusion is based, in part, on
the following facts: (i) Funding II and Southwest intend their relationship to
be that of lessor and lessee (as evidenced by the terms of the Lease), (ii)
Southwest has the right to exclusive possession, use and quiet enjoyment of the
Hotel Property during the term of the Lease and the right to uninterrupted
control in the operation of and business conducted at the Hotel Property
(subject to its assumption of the Management Agreement), (iii) Southwest will
bear the cost of, and be responsible for, capital expenditures, including
maintenance and repair of the Hotel Property, and will dictate how the Hotel
Property is maintained and improved (with the exception that Funding II, as
lessor, is responsible for the cost of certain capital expenditures in
situations where the funds available to Southwest are insufficient for such
expenditures), (iv) Southwest will bear all the costs and expenses of operating
the Hotel Property (with the exception of the costs of replacing certain
- ----------------------------------
(2) See, e.g., Xerox Corp. v. U.S., 80-2 USTC Paragraph 9530 (Ct. Cl. Tr.
Div. 1980), aff'd per curiam, 656 F.2d 659 (Ct. Cl. 1981).
(3) P.L.R. 8918012 (January 24, 1989).
<PAGE> 61
Crescent Real Estate Equities, Inc.
April 1, 1996
Page 5
FF & E associated with the Hotel Property, which is to be funded by Funding
II), (v) Southwest will benefit from any savings in the costs of operating the
Hotel Property during the term of the Lease, (vi) in the event of damage or
destruction to the Hotel Property, Southwest will be at economic risk because
its obligation to make rental payments will not abate, (vii) Southwest will
indemnify Funding II against all liabilities imposed on Funding II during the
term of the Lease by reason of injury to persons or damage to property
occurring at the Hotel Property or Southwest's use, management, maintenance or
repair of the Hotel Property, (viii) Southwest is obligated to pay substantial
fixed rent for the period of use of the Hotel Property, regardless of whether
its revenues exceed its costs and expenses, and (ix) Southwest stands to incur
substantial losses (or derive substantial profits) depending on how
successfully it operates the Hotel Property.
We do not believe that our conclusion that the Lease of the Hotel
Property will be treated as a lease for Federal income tax purposes is affected
by the fact that Southwest assumed RoseStar's rights and obligations as lessor
under the Lease subject to its assumption of Funding II's obligations under the
preexisting Management Agreement. The Management Agreement gives Hyatt control
over the day-to-day operation of the Hotel Property and will allow Hyatt to
share with Southwest in the benefits of any increases in revenues or cost
savings in the operation of the Hotel Property. However, Hyatt's operation of
the Hotel Property is not controlled by Funding II, and the Management
Agreement does not affect the fact that Southwest bears most of the risk of
loss if the Hotel Property is not successful. Moreover, the IRS has issued a
private letter ruling in which it treated leases of several hotel properties as
producing "rents from real property" in a situation where the lessees had
contracted with a third party to conduct the day-to-day operations of the
hotels.(4) This ruling suggests that the IRS will respect a lease of a hotel
for federal income tax purposes even if the hotel is operated by an independent
contractor rather than by the lessee.
The Lease is currently structured in form so that Funding II retains
ownership of all the personal property leased to Southwest in connection with
Southwest's lease of the Hotel Property (the "FF&E"). However, if the term of
the Lease equals or exceeds the useful life of some or all of the FF&E, it is
possible that the Lease could be treated for federal income tax purposes as a
financing arrangement. In such a case, Southwest would be treated as having
acquired ownership of the FF&E for federal income tax purposes in exchange for
an obligation to make future payments of principal and interest to Funding II.
Nonetheless, we do not believe that the recharacterization of the Lease as a
financing arrangement with respect to the FF&E would have a material effect on
the ability of the Company to satisfy the requirements for taxation as a REIT.
We reach this conclusion on the basis that, if a portion of the payments made
by Southwest under the Lease were characterized as interest on
- ------------------------------------
(4) See, P.L.R. 8117036 (January 27, 1981).
<PAGE> 62
Crescent Real Estate Equities, Inc.
April 1, 1996
Page 6
indebtedness secured by the FF&E, rather than rents from real property, that
portion would still satisfy the 95 percent gross income test (although it would
not satisfy the 75% gross income test).(5)
B. Percentage Rent Provision is not Profit-Based
Pursuant to the Lease, Southwest will be obligated to pay Funding II
base rent and percentage rent. Under the regulations, percentage rent based on
a percentage of gross receipts or sales in excess of a floor amount, which is
how the percentage rent is structured under the Lease, will not qualify as
"rents from real property" unless (i) such floor amount does not depend in
whole or in part on the income or profits of the lessee, (ii) the percentage
and the floor amount are fixed at the time the lease is entered into, (iii) the
percentage and the floor amount are not renegotiated during the term of the
lease in a manner that has the effect of basing the percentage rent on income
or profits, and (iv) the percentage and the floor amount conform with normal
business practice.(6)
Under the terms of Article 4.2 of the Lease, Southwest will pay
percentage rent equal on an annual basis to the sum of (i) 17.5 percent of the
excess of annual gross receipts from room rentals over $9,300,000 and (ii) 2.5
percent of the excess of annual gross receipts from the food and beverage
facilities at the Hotel Property over $3,000,000. This formula is unchanged
from the formula in the Original Lease between the Operating Partnership and
Mogul. It will effectively reward Southwest for any increases in gross
receipts from rooms and from other sources over the threshold amounts. This
type of formula does not base the percentage rent on Southwest's income or
profits, and similar formulas have been treated by the IRS as generating "rents
from real property."(7) Moreover, Funding II has represented that (i) the floor
amounts used to compute the percentage rent under the Lease do not depend in
whole or in part on the income or profits of any person, (ii) the percentage
rent provision of the Lease has not been and will not be renegotiated during
the term of the Lease or at the expiration or earlier termination of the Lease
in a manner that has the effect of basing the rent
- -----------------------------------
(5) If the Lease were recharacterized as a financing arrangement with
respect to the FF&E, it also might result in some minor timing
differences with respect to the Company's recognition of
income. These differences would result from (a) the
recharacterization of a portion Soutwest's payments under the Lease as
a return of principal and (b) the Company's loss of any depreciation
deductions attributable to the FF&E.
(6) Treas. Reg. Section 1.866-4(b)(3).
(7) See, e.g., P.L.R. 8803007 (September 23, 1987) (percentage rent based
on gross revenues in excess of gross revenues for a base year
treated as "rents from real property"); cf. P.L.R. 9104018 (October
26, 1990) (interest based on gross revenues in excess of a floor
amount treated as qualifying interest under section 856(f)).
<PAGE> 63
Crescent Real Estate Equities, Inc.
April 1, 1996
Page 7
on income or profits, and (iii) the percentage rent provision of the Lease
conforms with normal business practice. In addition, based on our experience
and an examination of the Lease and the Hotel Property projections, the Lease
appears to conform with normal business practice.
C. Southwest is not a "Related Party Tenant"
Rents received from Southwest will not qualify as "rents from real
property" if Southwest is a "related party tenant." Southwest will be a
"related party tenant" if the Company, or an owner of 10 percent or more of the
Company, directly or constructively owns 10 percent or more of the assets or
net profits of Southwest.(8) Constructive ownership is determined for purposes
of this test by applying the rules of section 318(a) as modified by section
856(d)(5). Those rules generally provide that if 10 percent or more in value
of the stock of the Company is owned, directly or indirectly, by or for any
person, the Company is considered as owning the stock owned, directly or
indirectly, by or for such person.
Southwest will not be treated as a "related party tenant" because a 99
percent interest in Southwest's assets and net profits will be owned by
RoseStar, with the remaining one percent interest owned by RSSW Corp. An
individual, Sanjay Varma, currently owns a 91 percent interest in the assets
and net profits of RoseStar and RSSW Corp. In reaching this conclusion, we
recognize that Sanjay Varma owns certain Units of the Operating Partnership.(9)
Funding II has represented that (i) Sanjay Varma does not own more than 10
percent of the value of the Company's stock, (ii) Sanjay Varma is not expected
to own more than 10 percent of the value of the Company's stock in the future,
and (iii) neither the Funding II nor the Company intends to acquire, directly
or constructively, an interest of 10 percent or more in the assets or net
profits of RoseStar at any time in the future. Moreover, Article 7.8 of the
Lease limits the ability of Southwest or any person owning an interest in
Southwest (including RoseStar) to acquire, directly or constructively, a 6
percent stock interest in the Company, and Section 6.4 of the First Amended and
Restated Articles of Incorporation of the Company prevents RoseStar and its
members and managers from acquiring more than 8 percent of the Company's stock.
The conclusion that Southwest will not be treated as a "related party
tenant" is based on the assumption that its member RoseStar will be treated as
a partnership for federal income tax purposes. If RoseStar is not treated as a
partnership for federal income tax purposes, but
- ----------------------------------
(8) Section 856(d)(2)(B)(ii).
(9) See Rev. Rul. 73-194, 1973-1 C.B. 355 (management company treated as
an independent contractor with respect to a REIT, where an
affiliate of the management company and the REIT were partners).
<PAGE> 64
Crescent Real Estate Equities, Inc.
April 1, 1996
Page 8
is instead treated as an association taxable as a corporation, then it is
possible that Southwest would be treated as a "related party tenant" and the
rents derived under the terms of the Lease would not be treated as "rents from
real property." This is because, if RoseStar were treated as a corporation for
federal income tax purposes, Gerald W. Haddock and John C. Goff would likely be
deemed to own all of its voting stock, because of the extensive powers that
they are granted as managers under the RoseStar Regulations. If this were the
case, the ownership of such voting stock (and ownership of Southwest) might be
attributed to the Company under a literal reading of the constructive ownership
rules described above.(10)
An entity which has associates and an objective to carry on a business
for joint profit will be treated as a partnership for federal income tax
purposes, and not as an association taxable as a corporation, if it has not
more than two of the following four characteristics of a corporation: (i)
continuity of life; (ii) centralization of management; (iii) limited liability;
and (iv) free transferability of interests.(11) The entity must also have no
other characteristics which are significant in determining its classification.
Generally, other factors are considered only insofar as they relate to the
determination of the presence or absence of the foregoing corporate
characteristics.(12) The IRS has applied this four-factor test in determining
whether limited liability companies formed under the Texas Limited Liability
Company Act (the "Act") are partnerships for federal income tax purposes.(13)
The IRS has issued Rev. Proc. 95-10, which specifies conditions which must be
satisfied for a limited liability company to receive a favorable advanced
ruling that it will be classified as a partnership for federal income tax
purposes.(14) RoseStar should satisfy these conditions. However, such
conditions are
- ----------------------------------
(10) Richard Rainwater, Gerald Haddock and John Goff are each partners in
FW-Irving Partners, Ltd. (and apparently they are partners in
other partnerships as well). Richard Rainwater also owns more than 10
percent of the value of the stock of the Company. Thus, assuming that
the ownership interests in RoseStar held by Gerald Haddock and John
Goff constitute stock, such interests, along with Richard Rainwater's
stock interest in the Company, will be attributed to FW-Irving
Partners, Ltd. pursuant to section 318(a)(3)(A), which provides that
stock owned, directly or indirectly, by or for a partners shall be
considered as owned by the partnership. Then, FW-Irving Partners,
Ltd.'s deemed interest in RoseStar would be attributed to the Company
pursuant to section 318(a)(3)(C) (as modified by section 856(d)(5)),
which provides that stock owned by any person that owns 10 percent or
more of the value of the stock in a corporation shall be considered
owned by the corporation. As you are aware, however, we have opined
to you in a similar context that we do not believe that these
attribution rules should be read literally.
(11) Treas. Reg. Section 301.7701-2(a).
(12) See Rev. Rul. 79-106, 1979-1 C.B. 448.
(13) See, e.g., P.L.R. 9242025 (July 22, 1992) and P.L.R. 9218078 (January
31, 1992).
(14) 1995-3 I.R.B. 20.
<PAGE> 65
Crescent Real Estate Equities, Inc.
April 1, 1996
Page 9
applicable only in determining whether rulings will be issued and are not
intended as substantive rules for determination of partnership status.
An organization will be treated as possessing the corporate
characteristic of continuity of life, even if the agreement organizing an
entity provides that it is to continue only for a stated period, unless a
member has the power to dissolve the organization at an earlier time.(15)
Article 6.01 of the Act provides, in part, that except as otherwise provided in
the company's regulations, a limited liability company shall be dissolved upon
the death, retirement, resignation, expulsion, bankruptcy, or dissolution of a
member or the occurrence of any other event which terminates the continued
membership of a member in the limited liability company, unless there is at
least one remaining member and the business of the limited liability company is
continued by the consent by the number of members or class thereof stated in
the articles of organization or regulations of the limited liability company or
of not so stated, by all remaining members. Article 2 of the RoseStar Articles
provides that the duration of RoseStar is until the close of business on
December 31, 2015, or until its earlier dissolution in accordance with the
provisions of the Act or the Regulations. Article 10.2 of the RoseStar
Regulations provides, in part, that RoseStar shall be dissolved upon the
withdrawal, death, retirement, resignation, expulsion, bankruptcy, legal
incapacity or dissolution of any member, unless the business of RoseStar is
continued by the consent of all the remaining members within ninety days.
Accordingly, RoseStar will lack the corporate characteristic of continuity of
life.
An organization will be treated as possessing the corporate
characteristic of free transferability of interests if the members owning all
or substantially all of the interests in an organization may substitute for
themselves without the consent of the other members a person who is not a
member of the organization.(16) Article 4.05 of the Act provides, in part,
that unless otherwise provided by the company's regulations, a membership
interest is assignable in whole or in part; an assignment of a member's
interest does not entitle the assignee to become, or to exercise rights or
powers of a member; and until the assignee becomes a member, the assignor
member continues to be a member and to have the power to exercise any rights or
powers of a member, except to the extent those rights or powers are assigned.
Article 4.07 of the Act provides, in part, that an assignee of a membership
interest may become a member if and to the extent that the company's
regulations so provide, or all members consent. Article 9.3 of the RoseStar
Regulations provides, in part, that no member shall have the right to
substitute in its place a transferee unless consent is given by the Managers
and a majority of the other members, which consent may be withheld in the
discretion of the Managers or the
- ----------------------------------
(15) Treas. Reg. Section 301.7701-2(b)(3).
(16) Treas. Reg. Section 301.7701-2(e).
<PAGE> 66
Crescent Real Estate Equities, Inc.
April 1, 1996
Page 10
other members. Accordingly, RoseStar will lack the corporate characteristic of
free transferability of interests. Because RoseStar will lack the corporate
characteristics of continuity of life and free transferability of interests, in
our opinion it will be treated as partnership for federal income tax purposes.
D. Incidental Personal Property
1. Rents Attributable to Personal Property Will Be Treated as
"Rents from Real Property"
The rents attributable to Funding II's personal property leased under
or in connection with the Lease must not be greater than 15 percent of the
rents received under the Lease. The rent attributable to personal property
leased under or in connection with a lease of real property is the amount that
bears the same ratio to total rent for the taxable year as (i) the average of
the adjusted bases of the personal property leased under or in connection with
a lease of real property at the beginning and at the end of the taxable year
bears to (ii) the average of the aggregate adjusted bases of the real and
personal property subject to the lease at the beginning and at the end of such
taxable year (the "Adjusted Basis Ratio").(17) Funding II has represented that
the adjusted tax basis of the personal property leased under or in connection
with the Lease (including, for the period beginning on January 1, 1996, any
furniture, fixtures or equipment formerly treated as owned by Mogul, as
described below) has not represented and will not represent more than 15
percent of the aggregate adjusted tax basis of the Hotel Property at any time.
2. Payments Attributable to Mogul's Deemed Acquisition of Certain
Personal Property Will Not Be Treated as "Rents from Real
Property"
Article 4.7 of the Original Lease provided that Mogul was to be deemed
to have acquired all of the furniture, fixtures and operating equipment
associated with the Hotel Property (the "FF & E") with the proceeds of a loan
from the Operating Partnership. It further provided that Mogul was to make
payments of principal and interest on this deemed loan. Pursuant to Funding
II's assumption of all of the Operating Partnership's liabilities and
obligations under the Original Lease, after October 6, 1995, all payments of
principal and interest on this deemed loan were accrued by Funding II. On
January 1, 1996, in connection with the execution of the Lease, Article 4.7 of
the Original Lease ceased to be effective and the parties ceased to treat the
FF & E as owned by Mogul. Instead, beginning on January 1, 1996, the FF & E
has been treated by all parties as if it had been conveyed by Mogul to
- ----------------------------------
(17) Section 856(d)(1)(C).
<PAGE> 67
Crescent Real Estate Equities, Inc.
April 1, 1996
Page 11
Funding II in exchange for the cancellation the balance owed by Mogul under the
deemed financing arrangement established under the Original Lease.
The payments that the Operating Partnership and Funding II received
with regard to the FF & E under the terms of Article 4.7 of the Original Lease
prior to January 1, 1996 did not qualify as "rents from real property."
Instead, such payments were treated for federal income tax purposes as payments
of principal and interest resulting from a deemed financing of Mogul's purchase
of the FF & E.
The payments pursuant to this "deemed financing," to the extent they
constituted interest, were "qualifying income" for purposes of the 75 percent
test. However, because the deemed financing was secured by personal, rather
than real property, such interest was not qualifying income for purposes of the
95 percent test.
E. Provision of Services by the Funding II
1. Income Derived under the Terms of the Lease
Although Funding II may treat charges for services customarily
furnished or rendered in connection with the rental of the Hotel Property as
"rents from real property," any services rendered to the occupants of the Hotel
Property must be furnished or rendered by an independent contractor from whom
the Company does not derive or receive any income.(18) Moreover, to the extent
that any independent contractors provide noncustomary services to the occupants
of the Hotel Property, the cost of such services must not be borne by Funding
II.(19)
Under the terms of the Lease, Funding II will not be required to
provide any services, customary or noncustomary, in connection with the rental
of the Hotel Property. Instead, all services relating to the operation of the
Hotel Property will be provided by Hyatt under the terms of the Management
Agreement. Funding II has represented that Hyatt is an independent contractor
within the meaning of section 856(d)(3), from which the Company and Funding II
will not derive or receive any income. Funding II will not bear the cost of
any of the services provided by Hyatt. Instead, such costs are borne by
Southwest, because it has assumed Funding II's obligations, as owner, under the
Management Agreement.
- ----------------------------------
(18) Sections 856(d)(1), 856(d)(2)(C); Treas. Reg. Section 1.512(b)-1(c)(5).
(19) Treas. Reg. Section 1.856-4(b)(5).
<PAGE> 68
Crescent Real Estate Equities, Inc.
April 1, 1996
Page 12
Based on the foregoing, we believe that the provision of any
noncustomary services to the occupants of the Hotel Property by Hyatt will have
no effect on the qualification of the income derived from the Hotel Property as
"rents from real property." In fact, the IRS has issued a private letter
ruling in which it has treated the income derived from several leases of hotel
properties as "rents from real property" in a situation where the lessees had
contracted with a third-party to conduct the day to day operations of the
hotels.(20) Our conclusion is not altered by the fact that Funding II will
remain liable for any obligations arising under the Management Agreement, to
the extent that they are not satisfied by Southwest. Funding II should not be
treated as bearing the cost of the services provided by Hyatt merely because it
is liable for Southwest's obligations under the Management Agreement. Funding
II is not retaining this liability in an attempt to provide services to
Southwest. Instead, it is retaining this liability only as an accommodation to
Hyatt. Moreover, Funding II believes that it is highly unlikely that it will
ever be required to reimburse Hyatt for the costs and expenses of operating the
Hotel Property. This is because (i) the Hotel Property is projected to
generate enough gross income to cover the payments to Hyatt under the
Management Agreement, (ii) in connection with Section 7.7 the Lease, as
amended, Southwest has represented that it has a net worth of at least
$200,000, (iii) in connection with Section 7.9 of the Lease, as amended,
Southwest has agreed to retain all of the income it earns from the Hotel
Property (except distributions to its beneficial owners in an amount sufficient
to pay their federal and state income taxes on such income) until such time as
Southwest and any affiliate of Southwest (including RoseStar) which has entered
into a long-term lease of a hotel with Funding II or any affiliate of Funding
II (including the Operating Partnership) have accumulated and are holding in
reserve funds in the aggregate which are sufficient to enable Southwest and any
affiliated entities to pay at least one monthly payment of base rent under each
lease between Southwest and any such affiliated entities and Funding II or an
affiliate of Funding II, (iv) pursuant to the Guaranty, RoseStar's individual
members have guaranteed RoseStar's obligations under the Lease, and (v) in the
view of Funding II, Southwest's capitalization is adequate to allow Southwest
to assume its obligations as lessee under the Lease.
2. Income Derived in the Case of a Default under the Lease
If Funding II were required to reimburse Hyatt for the costs of
operating the Hotel Property because of a default by Southwest under the terms
of the Management Agreement, we have concluded that the income derived by
Funding II from the Hotel Property would be treated as "qualifying income" for
purposes of the 75 percent and 95 percent tests. This is because, if Funding
II were required to reimburse Hyatt for the cost of operating the Hotel
Property, this would constitute an event of default under Article 16.1(c) of
the Lease, allowing Funding II to terminate Southwest's leasehold interest in
the Hotel Property. As a
- ----------------------------------
(20) See, P.L.R. 8117036 (January 27, 1981).
<PAGE> 69
Crescent Real Estate Equities, Inc.
April 1, 1996
Page 13
result of such a termination of the Lease, any income derived by Funding II
from the Hotel Property after the default would be treated as income from
foreclosure property.
Funding II would be able to continue to operate the Hotel Property
after any default under the Lease, without affecting its status as foreclosure
property, because Hyatt, an independent contractor, from whom the Company will
not derive any income, will provide all services relating to its operation. A
REIT can use foreclosure property in the conduct of an active trade or
business, as long as this is done through the use of an independent contractor,
from whom the REIT does not derive or receive any income.(21)
Real property acquired upon default under a lease is not eligible to
be treated as foreclosure property if the lease is entered into with an intent
to evict or foreclose, or if the REIT knows or has reason to know that default
would occur.(22) This is not the case in the present situation because (i) the
Hotel Property is projected to generate enough gross income to cover the
payments to Hyatt under the Management Agreement, (ii) in connection with
Section 7.7 the Lease, as amended, Southwest has represented that it has a net
worth of at least $200,000, (iii) in connection with Section 7.9 of the Lease,
as amended, Southwest has agreed to retain all of the income it earns from the
Hotel Property (except distributions to its beneficial owners in an amount
sufficient to pay their federal and state income taxes on such income) until
such time as Southwest and any affiliate of Southwest (including RoseStar)
which has entered into a long-term lease of a hotel with Funding II or any
affiliate of Funding II (including the Operating Partnership) have accumulated
and are holding in reserve funds in the aggregate which are sufficient to
enable Southwest and any affiliated entities to pay at least one monthly
payment of base rent under each lease between Southwest and any such affiliated
entities and Funding II or an affiliate of Funding II, (iv) pursuant to the
Guaranty, RoseStar's individual members have guaranteed RoseStar's obligations
under the Lease, and (v) in the view of Funding II, Southwest's capitalization
is adequate to allow Southwest to assume its obligations as lessee under the
Lease.
The Hotel Property would in any event qualify as foreclosure property
only for a period of up to two years, beginning of the date of its acquisition
by Funding II, unless
- ----------------------------------
(21) Section 856(e)(4)(C). (The IRS clearly intended for REITs to be able
to treat hotels operated by independent contractors as
foreclosure property. For instance, the Treasury regulations defining
foreclosure property refer to hotel properties twice. See, Treas.
Reg. Sections 1.856-6(b)(2), 1.856-6(d)(2). In addition, the IRS has
also recently issued a private letter ruling in which it treated
income received from hotels acquired pursuant to a bankruptcy petition
as income from foreclosure property, where the hotels were operated by
third party managers. P.L.R. 9420013 (2/15/94).)
(22) Treas. Reg. Section 1.856-6(b)(3).
<PAGE> 70
Crescent Real Estate Equities, Inc.
April 1, 1996
Page 14
Funding II obtains an extension of the grace period from the IRS.(23)
Therefore, in the event Funding II takes possession of the Hotel Property as a
result of a default under the Lease, presumably Funding II will sell the Hotel
Property or, within two years, rent it to another tenant under a lease that
will produce "rents from real property."
F. Conclusions
Based on the assumptions and representations stated above, it is our
opinion that (i) all of the income that Funding II derives from the Hotel
Property will be treated as "qualifying income" for purposes of the 95 percent
test and (ii) all of the income that Funding II derives from the Hotel
Property, will be treated as "qualifying income" for purposes of the 75 percent
test. However, we note that certain interest income accrued prior to January
1, 1996 and attributable to the deemed financing of Mogul's acquisition of the
FF & E under Section 4.7 of the Original Lease has properly been treated by the
Operating Partnership and Funding II as qualifying income for purposes of the
95 percent test, but not for purposes of the 75 percent test.
III. Additional Limitations
The foregoing opinions are limited to the specific matters covered
thereby and should not be interpreted to imply that the undersigned has offered
its opinion on any other matter.
Very truly yours,
SHAW, PITTMAN, POTTS & TROWBRIDGE
By: /s/ CHARLES B. TEMKIN
--------------------------------
Charles B. Temkin, P.C.
- --------------------------------
(23) Section 856(e)(2).
<PAGE> 71
MEMORANDUM
TO: David Dean
FROM: Charles B. Temkin
Michael A. Jacobs
DATE: June 30, 1995
RE: Characterization of Income Derived from Denver Marriott City
Center
I. OVERVIEW
Crescent Real Estate Equities Limited Partnership (the "Operating
Partnership") is scheduled to purchase the Denver Marriott City Center (the
"Denver Marriott") from the Prudential Insurance Company of America
("Prudential"), the successor to the Denver Energy Center Hotel Partnership
(the "Original Owner"), on June 30, 1995. Crescent Real Estate Equities, Inc.
(the "Company") is currently the sole shareholder of two corporations, one of
which is the sole general partner of and one of which is a limited partner of
the Operating Partnership. These two corporations constitute qualified REIT
subsidiaries within the meaning of section 856(i).(1)
This memorandum analyzes the impact that the purchase of the Denver
Marriott will have on the ability of the Company to continue to qualify as a
real estate investment trust (a "REIT") under section 856(c). More
specifically, it analyzes whether the income the Operating Partnership will
derive from the Denver Marriott will be "qualifying income" for purposes of the
75 percent and 95 percent gross income tests for REIT qualification. This
memorandum concludes that, subject to certain assumptions, in our opinion (i)
all of the income that the Operating Partnership will derive from the Denver
Marriott will be treated as "qualifying income" for purposes of the 95 percent
test and (ii) all of the income the Operating Partnership will derive from the
Denver Marriott, with the exception of certain interest income, will be treated
as "qualifying income" for purposes of the 75 percent test.
- -------------------
(1)All section references herein are to the Internal Revenue Code of 1986, as
amended (the "Code"), or to the regulations issued thereunder, unless otherwise
noted.
<PAGE> 72
II. FACTS AND ASSUMPTIONS
The Original Owner contracted with Marriott Corporation to operate
the Denver Marriott. Under the terms of the agreement between the Original
Owner and Marriott Corporation dated January 10, 1979, as amended on January
10, 1979, February 16, 1979, May 11, 1979, July 27, 1979, March 25, 1980,
December 18, 1980, July 15, 1981, January 4, 1982, and November 19, 1993. (the
"Management Agreement"), Marriott Corporation is obligated to provide all
services in relation to the operation of the Denver Marriott and collect all
hotel receipts. In exchange for these services, Marriott Corporation is to be
reimbursed for the costs of operating the Denver Marriott and paid a management
fee. This fee is paid out of hotel receipts; it is based on the profits, if
any, from operation of the Denver Marriott. Marriott International, Inc.
("Marriott") is currently operating the Denver Marriott as the successor to
Marriott Corporation.
Article 18.01 of the Management Agreement requires that all
assignments of the Management Agreement be approved by Marriott and that any
assignees expressly assume the obligations of the owner under the Management
Agreement. Therefore, in connection with its purchase of the Denver Marriott,
the Operating Partnership will assume all of the obligations of Prudential
under the Management Agreement.
When the Operating Partnership purchases the Denver Marriott, it will
lease it to RoseStar Management, LLC ("RoseStar") pursuant to a Lease Agreement
dated June 30, 1995, as amended and restated by an Amended and Restated Lease
Agreement dated June 30, 1995 (as amended and restated, the "Lease"). Pursuant
to Article 2 of the Lease, the Operating Partnership will assign its interest
in the Management Agreement to RoseStar; and pursuant to Article 18.01 of the
Management Agreement, RoseStar will assume all of the Operating Partnership's
obligations thereunder. However, as a condition of its approval of the Lease,
Marriott will require that the Operating Partnership remain liable for all
obligations of the Operating Partnership under the Management Agreement that
will be assumed by RoseStar.
Currently, Sanjay Varma owns a 91 percent interest in the assets and
net profits of RoseStar, while Gerald W. Haddock and John C. Goff, the
managers of RoseStar, each own a 4.5 percent interest in its assets and net
profits.
For purposes of this memorandum, we have examined and relied upon (1)
the Management Agreement, (2) the Lease, (3) the Articles of Organization of
RoseStar Management, LLC (the "RoseStar Articles"), (4) the Regulations of
RoseStar Management, LLC (the "RoseStar Regulations"), (5) the First Amended
and Restated Articles of Incorporation of Crescent Real Estate Equities, Inc.
(the "Crescent Articles"), (6) the Purchase and Sale Agreement between
Prudential and the Operating Partnership, (7) the Consent Agreement between
Marriott and the Operating Partnership, and (8) such other documents or
information as we deemed necessary for the opinions set forth below. In our
examination, we have assumed the genuineness of all
-2-
<PAGE> 73
signatures, the legal capacity of natural persons, the authenticity of all
documents submitted to us as originals, the conformity to original documents of
all documents submitted to us as certified or photostatic copies, and the
authenticity of the originals of such copies.
This memorandum is based upon existing provisions of the Code,
Treasury regulations, and the reported interpretations thereof by the Internal
Revenue Service ("IRS") and by the courts in effect (or, in the case of certain
proposed regulations, proposed) as of the date hereof, all of which are subject
to change, both retroactively or prospectively, and to possibly different
interpretations. We assume no obligation to update the opinions set forth in
this memorandum. We believe that the conclusions expressed herein, if
challenged by the IRS, would be sustained in court. However, because our
opinions are not binding upon the IRS or the courts, there can be no assurance
that contrary positions may not be successfully asserted by the IRS.
In addition, this memorandum is based on various assumptions and is
conditioned upon certain representations made by the Operating Partnership and
its sole general partner, Crescent Real Estate Equities, Ltd., as to factual
and other matters as set forth in the attached letter.
III. LEGAL BACKGROUND
A. 75 Percent and 95 Percent Tests
In order to qualify as a REIT for tax purposes, the Company must
satisfy certain tests with respect to the composition of its gross income on an
annual basis. First, at least 75 percent of the Company's gross income
(excluding gross income from certain prohibited transactions) for each taxable
year must consist of temporary investment income or of certain defined
categories of income derived directly or indirectly from investments relating
to real property or mortgages on real property. These categories include,
subject to various limitations, rents from real property, interest on mortgages
on real property, gains from the sale or other disposition of real property
(including interests in real property and 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.(2) Second, at least 95 percent of the Company's gross income
(excluding gross income from certain prohibited transactions) for each taxable
year must be derived from income qualifying under the 75 percent 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.(3)
In applying these income tests, REITs that are partners in a
partnership are required to include in their gross income their proportionate
share of the partnership's gross income. In
- --------------------
(2)Section 856(c)(3).
(3)Section 856(c)(2).
-3-
<PAGE> 74
addition, such REITs are to treat this partnership gross income as retaining
the same character as the items of gross income of the partnership for purposes
of section 856.(4) Thus, the character of any income derived by the Operating
Partnership from the Denver Marriott will affect the ability of the Company to
qualify as a REIT.
B. Rents from Real Property
Rents from real property satisfy both the 75 percent and 95 percent
tests for REIT qualification 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.(5) 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 percent or more of the REIT, directly
or constructively, owns 10 percent or more of such tenant (a "Related Party
Tenant").(6) Third, if rent attributable to personal property leased in
connection with a lease of real property is greater than 15 percent 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."(7)
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. However, rents will be qualified as "rents
from real property" if a REIT directly performs services in connection with the
lease of the property, if those services are "usually or customarily rendered"
in connection with the rental of space for occupancy, and such services are not
considered to be rendered to the occupant of the property.(8)
C. Income from Foreclosure Property
Income from foreclosure property is treated as "qualifying income" for
purposes of the 75 percent and 95 percent tests (although any net income from
foreclosure property is taxed at the maximum corporate rate). Foreclosure
property is any real property, and any personal property incident to such real
property, acquired by a REIT through default under a mortgage or a lease. A
REIT may elect to treat such property as foreclosure property for a grace
period of up to two
- --------------------
(4)Treas. Reg. Section 1.856-3(g).
(5)Section 856(d)(2)(A).
(6)Section 856(d)(2)(B).
(7)Section 856(d)(1)(C).
(8)Sections 856(d)(1)(B), 856(d)(2)(C).
-4-
<PAGE> 75
years.(9) However, such property will cease to qualify as foreclosure property
if it is used by the REIT in a trade or business more than 90 days after it is
acquired and it is not operated through an independent contractor from whom the
REIT does not derive or receive any income.(10) Moreover, property is not
eligible to be treated as foreclosure property if the lease is entered into
with an intent to evict or foreclose, or if the REIT knows or has reason to
know that default would occur.(11)
IV. DISCUSSION
A. Lease Will be Treated as a Lease for Federal Income Tax Purposes
In order for any income derived by the Operating Partnership from the
Denver Marriott to constitute either "rents from real property," or in the case
of a default under the Lease, "gross income from foreclosure property," the
Lease must be treated as a lease for federal income tax purposes and not be
treated as a service contract, management contract or other type of
arrangement. This determination depends on an analysis of all the surrounding
facts and circumstances. In making this determination, courts have considered
a variety of factors, including the following: (i) the intent of the parties,
(ii) the form of the agreement, (iii) the degree of control over the business
conducted at the property that is provided to the lessee (e.g., whether the
lessee has substantial rights of control over the operation of the property and
its business), (iv) the extent to which the lessee has the risk of loss from
operations of the business conducted as the property (e.g., whether the lessee
bears the risk of increases in operating expenses and of decreases in
revenues), and (v) the extent to which the lessee has the opportunity to
benefit from operations of the business conducted at the property (e.g.,
whether the lessee benefits from decreased operating expenses or increased
revenues).(12)
In addition, section 7701(e) provides that a contract that purports to
be a service contract, partnership agreement, or another type of arrangement
will be treated instead as a lease of property if the contract is properly
treated as such, taking into account all relevant factors, including whether or
not: (i) the service recipient is in physical possession of the property, (ii)
the service recipient controls the property, (iii) the service recipient has a
significant economic or possessory interest in the property (e.g., the
property's use is likely to be dedicated to the service recipient for a
substantial portion of the useful life of the property, the recipient shares
the risk that the property will decline in value, the recipient shares in any
appreciation in the value of the property, the
- --------------------
(9)Section 856(e).
(10)Section 856(e)(4).
(11)Treas. Reg. Section 1.856-6(b)(3).
(12)See, e.g., Xerox Corp. v. U.S., 80-2 USTC Paragraph 9530 (Ct. Cl. Tr. Div.
1980), aff'd per curiam, 656 F.2d 659 (Ct. Cl. 1981).
-5-
<PAGE> 76
recipient shares in any savings in the property's operating costs or the
recipient bears the risk of damage to or loss of the property), (iv) the
service provider does not bear any risk of substantially diminished receipts or
substantially increased expenditures if there is nonperformance under the
contract, (v) the service provider does not use the property concurrently to
provide significant services to entities unrelated to the service recipient and
(vi) the total contract price does not substantially exceed the rental value of
the property for the contract period. Since the determination of whether a
service contract, partnership agreement, or some other type of arrangement
should be treated as a lease is inherently factual, the presence or absence of
any single factor may not be dispositive in every case.(13)
We have concluded that the Lease will be treated as a lease for
Federal income tax purposes, rather than a service contract, management
contract or other type of arrangement. This conclusion is based, in part, on
the following facts: (i) the Operating Partnership and RoseStar intend their
relationship to be that of lessor and lessee (as evidenced by the terms of the
Lease), (ii) RoseStar will have the right to exclusive possession, use and
quiet enjoyment of the Denver Marriott during the term of the Lease and the
right to uninterrupted control in the operation of the business conducted at
the Denver Marriott (subject to its assumption of the Management Agreement),
(iii) RoseStar will dictate how the Denver Marriott is maintained and improved,
(iv) Rose-Star will bear all the costs and expenses of operating the Denver
Marriott (with the exception of the cost of replacing certain FF & E, which is
to be funded by the Operating Partnership pursuant to Article 7.5 of the
Lease), (v) RoseStar will benefit from any savings in the costs of operating
the Denver Marriott during the term of the Lease, (vi) in the event of damage
or destruction to the Denver Marriott, RoseStar will be at economic risk
because its obligation to make rental payments will not abate, (vii) RoseStar
will indemnify the Operating Partnership against all liabilities imposed on the
Operating Partnership during the term of the Lease by reason of injury to
persons or damage to property occurring at the Denver Marriott or RoseStar's
use, management, maintenance or repair of the Denver Marriott, (viii) RoseStar
is obligated to pay substantial fixed rent for the period of use of the Denver
Marriott, regardless of whether its revenues exceed its costs and expenses, and
(ix) RoseStar stands to incur substantial losses (or derive substantial
profits) depending on how successfully it operates the Denver Marriott.
We do not believe that our conclusion that the Lease of the Denver
Marriott will be treated as a lease for Federal income tax purposes is affected
by the fact that RoseStar entered the Lease subject to its assumption of the
Operating Partnership's obligations under the preexisting Management Agreement.
The Management Agreement gives Marriott control over the d ay-to-day operation
of the Denver Marriott and allows Marriott to share with RoseStar in the
benefits of any increases in revenues or cost savings in the operation of the
Denver Marriott. However, Marriott's operation of the Denver Marriott will not
be controlled by the Operating Partnership, and the Management Agreement does
not affect the fact that RoseStar bears most of the risk of loss if the Denver
Marriott is not successful. Moreover, the IRS has issued a private letter
ruling
- --------------------
(13)P.L.R. 8918012 (January 24, 1989).
-6-
<PAGE> 77
in which it treated leases of several hotel properties as producing "rents from
real property" in a situation where the lessees had contracted with a third
party to conduct the d ay-to-day operations of the hotels.(14) This ruling
suggests that the IRS will respect a lease of a hotel for federal income tax
purposes even if the hotel is operated by an independent contractor rather than
by the lessee.
The Lease is structured in form so that the Operating Partnership
retains ownership of all the personal property leased to RoseStar in connection
with RoseStar's lease of the Denver Marriott (the "FF&E"). However, if the
term of the Lease equals or exceeds the useful life of some or all of the FF&E,
it is possible that the Lease could be treated for federal income tax purposes
as a financing arrangement. In such a case, RoseStar would be treated as
having acquired ownership of the FF&E for federal income tax purposes in
exchange for an obligation to make future payments of principal and interest to
the Operating Partnership. Nonetheless, we do not believe that the
recharacterization of the Lease as a financing arrangement with respect to the
FF&E would have a material effect on the ability of the Company to satisfy the
requirements for taxation as a REIT. This is because, if a portion the of the
payments made by RoseStar under the Lease were characterized as interest on
indebtedness secured by the FF&E, rather than rents from real property, that
portion would still satisfy the 95 percent gross income test (although it would
not satisfy the 75% gross income test).(15)
B. Percentage Rent Provision is not Profit-Based
Pursuant to the Lease, RoseStar will be obligated to pay the Operating
Partnership base rent and percentage rent. Under the regulations, percentage
rent based on a percentage of gross receipts or sales in excess of a floor
amount, which is how the percentage rent is structured under the Lease, will
not qualify as "rents from real property" unless (i) such floor amount does
not depend in whole or in part on the income or profits of the lessee, (ii) the
percentage and the floor amount are fixed at the time the lease is entered
into, (iii) the percentage and the floor amount are not renegotiated during the
term of the lease in a manner that has the effect of basing the percentage rent
on income or profits, and (iv) the percentage and the floor amount conform with
normal business practice.(16)
Under the terms of Article 4.2 of the Lease, RoseStar will pay
percentage rent equal on an annual basis to the sum of (i) 22.5 percent of the
excess of annual gross receipts from room rentals over $9,800,000 and (ii) 4.0
percent of the excess of annual gross receipts from the food and
- --------------------
(14)See, P.L.R. 8117036 (January 27, 1981).
(15)If the Lease were recharacterized as a financing arrangement with respect
to the FF&E, it also might result in some minor timing differences with respect
to the Company's recognition of income. These differences would result from
(a) the recharacterization of a portion RoseStar's payments under the Lease as
a return of principal and (b) the Company's loss of any depreciation
deductions attributable to the FF&E.
(16)Treas. Reg. Section 1.856-4(b)(3).
-7-
<PAGE> 78
beverage facilities at the Denver Marriott over $4,000,000. This formula
effectively rewards RoseStar for any increases in gross receipts from rooms
and from other sources over the threshold amounts. This type of formula does
not base the percentage rent on RoseStar's income or profits, and similar
formulas have been treated by the IRS as generating "rents from real
property."(17) Moreover, the Operating Partnership has represented that (i) the
floor amounts used to compute the percentage rent under the Lease do not depend
in whole or in part on the income or profits of any person, (ii) the percentage
rent provision of the Lease will not be renegotiated during the term of the
Lease or at the expiration or earlier termination of the Lease in a manner that
has the effect of basing the rent on income or profits, and (iii) the
percentage rent provision of the Lease conforms with normal business practice.
In addition, based on our experience and an examination of the Lease and the
Denver Marriott projections, the Lease appears to conform with normal business
practice.
C. RoseStar is not a "Related Party Tenant"
Rents received from RoseStar will not qualify as "rents from real
property" if RoseStar is a "related party tenant." RoseStar will be a "related
party tenant" if the Company, or an owner of 10 percent or more of the Company,
directly or constructively owns 10 percent or more of the assets or net profits
of RoseStar.(18) Constructive ownership is determined for purposes of this test
by applying the rules of section 318(a) as modified by section 856(d)(5).
Those rules generally provide that if 10 percent or more in value of the stock
of the Company is owned, directly or indirectly, by or for any person, the
Company is considered as owning the stock owned, directly or indirectly, by or
for such person.
RoseStar will not be treated as a "related party tenant" because an
individual, Sanjay Varma, currently owns a 91 percent interest in its assets
and net profits. In reaching this conclusion, we recognize that Sanjay Varma
owns certain Units of the Operating Partnership.(19) The Operating Partnership
has represented that (i) Sanjay Varma does not own more than 10 percent of the
value of the Company's stock, (ii) Sanjay Varma is not expected to own more
than 10 percent of the value of the Company's stock in the future, and (iii)
neither the Operating Partnership nor the Company intends to acquire, directly
or constructively, an interest of 10 percent or more in the assets or net
profits of RoseStar at any time in the future. Moreover, Article 7.8 of the
Lease limits the ability of RoseStar and its members and managers to acquire,
directly or constructively, a 6 percent stock interest in the Company, and
Section 6.4 of the First Amended and
- --------------------
(17)See, e.g., P.L.R. 8803007 (September 23, 1987) (percentage rent based on
gross revenues in excess of gross revenues for a base year treated as "rents
from real property"); cf. P.L.R. 9104018 (October 26, 1990) (interest based on
gross revenues in excess of a floor amount treated as qualifying interest under
section 856(f)).
(18)Section 856(d)(2)(B)(ii).
(19)See Rev. Rul. 73-194, 1973-1 C.B. 355 (management company treated as an
independent contractor with respect to a REIT, where an affiliate of the
management company and the REIT were partners).
-8-
<PAGE> 79
Restated Articles of Incorporation of the Company prevents RoseStar and its
members and managers from acquiring more than 8 percent of the Company's stock.
In concluding that RoseStar will not be treated as a "related party
tenant," we have applied the definition of related party tenant set forth in
section 856(d)(2)(B)(ii), which applies to tenants which are not corporations.
If RoseStar is not treated as a partnership for federal income tax purposes,
but is instead treated as an association taxable as a corporation, then the
applicable definition of related party tenant is the one set forth in section
856(d)(2)(B)(i), which looks to control over voting securities. If RoseStar
were treated as a corporation for federal income tax purposes, Gerald W.
Haddock and John C. Goff would likely be deemed to own all of its voting stock,
because of the extensive powers that they are granted as managers under the
RoseStar Regulations. If this were the case, it would be necessary to consider
whether the ownership of such voting stock could possibly be attributed to the
Company under the constructive ownership rules described above or otherwise.
An entity which has associates and an objective to carry on a business
for joint profit will be treated as a partnership for federal income tax
purposes, and not as an association taxable as a corporation, if it has not
more than two of the following four characteristics of a corporation: (i)
continuity of life; (ii) centralization of management; (iii) limited liability;
and (iv) free transferability of interests.(20) The entity must also have no
other characteristics which are significant in determining its classification.
Generally, other factors are considered only insofar as they relate to the
determination of the presence or absence of the foregoing corporate
characteristics.(21) The IRS has applied this four-factor test in determining
whether limited liability companies formed under the Texas Limited Liability
Company Act (the "Act") are partnerships for federal income tax purposes.(22)
The IRS has issued Rev. Proc. 95-10, which specifies conditions which must be
satisfied for a limited liability company to receive a favorable advanced
ruling that it will be classified as a partnership for federal income tax
purposes.(23) RoseStar should satisfy these conditions. However, such
conditions are applicable only in determining whether rulings will be issued
and are not intended as substantive rules for determination of partnership
status.
An organization will be treated as possessing the corporate
characteristic of continuity of life, even if the agreement organizing an
entity provides that it is to continue only for a stated period, unless a
member has the power to dissolve the organization at an earlier time.(24)
Article 6.01
- --------------------
(20)Treas. Reg. Section 301.7701-2(a).
(21)See Rev. Rul. 79-106, 1979-1 C.B. 448.
(22)See, e.g., P.L.R. 9242025 (July 22, 1992) and P.L.R. 9218078 (January 31,
1992).
(23)1995-3 I.R.B. 20.
(24)Treas. Reg. Section 301.7701-2(b)(3).
-9-
<PAGE> 80
of the Act provides, in part, that except as otherwise provided in the
company's regulations, a limited liability company shall be dissolved upon the
death, retirement, resignation, expulsion, bankruptcy, or dissolution of a
member or the occurrence of any other event which terminates the continued
membership of a member in the limited liability company, unless there is at
least one remaining member and the business of the limited liability company is
continued by the consent by the number of members or class thereof stated in
the articles of organization or regulations of the limited liability company or
of not so stated, by all remaining members. Article 2 of the RoseStar Articles
provides that the duration of RoseStar is until the close of business on
December 31, 2015, or until its earlier dissolution in accordance with the
provisions of the Act or the Regulations. Article 10.2 of the RoseStar
Regulations provides, in part, that RoseStar shall be dissolved upon the
withdrawal, death, retirement, resignation, expulsion, bankruptcy, legal
incapacity or dissolution of any member, unless the business of RoseStar is
continued by the consent of all the remaining members within ninety days.
Accordingly, RoseStar will lack the corporate characteristic of continuity of
life.
An organization will be treated as possessing the corporate
characteristic of free transferability of interests if the members owning all
or substantially all of the interests in an organization may substitute for
themselves without the consent of the other members a person who is not a
member of the organization.(25) Article 4.05 of the Act provides, in part, that
unless otherwise provided by the company's regulations, a membership interest
is assignable in whole or in part; an assignment of a member's interest does
not entitle the assignee to become, or to exercise rights or powers of a
member; and until the assignee becomes a member, the assignor member continues
to be a member and to have the power to exercise any rights or powers of a
member, except to the extent those rights or powers are assigned. Article 4.07
of the Act provides, in part, that an assignee of a membership interest may
become a member if and to the extent that the company's regulations so provide,
or all members consent. Article 9.3 of the RoseStar Regulations provides, in
part, that no member shall have the right to substitute in its place a
transferee unless consent is given by the Managers and a majority of the other
members, which consent may be withheld in the discretion of the Managers or the
other members. Accordingly, RoseStar will lack the corporate characteristic of
free transferability of interests. Because RoseStar will lack the corporate
characteristics of continuity of life and free transferability of interests, in
our opinion it will be treated as partnership for federal income tax purposes.
D. Incidental Personal Property
As noted above, in order for the rent under the Lease to be treated as
"rents from real property," the rents attributable to the Operating
Partnership's personal property leased under or in connection with the Lease
must not be greater than 15 percent of the rents received under the Lease. The
rent attributable to personal property leased under or in connection with a
lease of real property is the amount that bears the same ratio to total rent
for the taxable year as (i) the
- --------------------
(25)Treas. Reg. Section 301.7701-2(e).
-10-
<PAGE> 81
average of the adjusted bases of the personal property leased under or in
connection with a lease of real property at the beginning and at the end of the
taxable year bears to (ii) the average of the aggregate adjusted bases of the
real and personal property subject to the lease at the beginning and at the end
of such taxable year (the "Adjusted Basis Ratio").(26) The Operating
Partnership has represented that the adjusted tax basis of the personal
property leased under or in connection with the Lease will not represent more
than 15 percent of the aggregate adjusted tax basis of the Denver Marriott at
any time. Moreover, in Article 36.2 of the Lease, the parties agreed that the
adjusted tax basis of the personal property leased under or in connection with
the Lease will not represent more than 15 percent of the aggregate adjusted tax
basis of the Denver Marriott at any time.
E. Provision of Services by the Operating Partnership
1. Income Derived under the Terms of the Lease
Although the Operating Partnership may treat charges for services
customarily furnished or rendered in connection with the rental of the Denver
Marriott as "rents from real property," any services rendered to the occupants
of the Denver Marriott must be furnished or rendered by an independent
contractor from whom the Company does not derive or receive any income.(27)
Moreover, to the extent that any independent contractors provide noncustomary
services to the occupants of the Denver Marriott, the cost of such services
must not be borne by the Operating Partnership.(28) Under the terms of the
Lease, the Operating Partnership will not be required to provide any services,
customary or noncustomary, in connection with the rental of the Denver
Marriott. Instead, all services relating to the operation of the Denver
Marriott will be provided by Marriott to RoseStar under the terms of the
Management Agreement. The Operating Partnership will not bear the cost of any
of the services provided by Marriott to RoseStar. Instead, such costs will be
borne by RoseStar pursuant to its assumption of the Operating Partnership's
obligations under the Management Agreement.
Based on the foregoing, we believe that the provision of any
noncustomary services to the occupants of the Denver Marriott by Marriott will
have no effect on the qualification of the income derived from the Denver
Marriott as "rents from real property." In fact, the IRS has issued a private
letter ruling in which it has treated the income derived from several leases of
hotel properties as "rents from real property" in a situation where the lessees
had contracted with a third-party to conduct the day-to-day operations of the
hotels.(29) Our conclusion is not altered by the
- --------------------
(26)Section 856(d)(1)(C).
(27)Sections 856(d)(1), 856(d)(2)(C); Treas. Reg. Section 1.512(b)-1(c)(5).
(28)Treas. Reg. Section 1.856-4(b)(5).
(29)See, P.L.R. 8117036 (January 27, 1981).
-11-
<PAGE> 82
fact that the Operating Partnership will remain liable for any obligations
arising under the Management Agreement, to the extent that they are not
satisfied by the Tenant. The Operating Partnership should not be treated as
bearing the cost of the services provided by Marriott merely because it will be
liable for RoseStar's obligations under the Management Agreement. The Operating
Partnership will not be retaining this liability in an attempt to provide
services to RoseStar. Instead, it will be retaining this liability only as an
accommodation, in order to gain Marriott's consent to its purchase of the
Denver Marriott. Moreover, the Operating Partnership believes that it is
highly unlikely that it will ever be required to reimburse Marriott for the
costs and expenses of operating the Denver Marriott because of a default by
RoseStar under the Management Agreement. This is because (i) the Denver
Marriott is projected to generate enough gross income to cover the payments to
Marriott under the Management Agreement, (ii) in connection with Section 7.7 of
the Lease, RoseStar represents that it has a net worth of at least $200,000,
(iii) in connection with Section 7.9 of the Lease, RoseStar covenants that it
will retain all of the income it earns from the Denver Marriott and shall not
distribute any earnings to its beneficial owners, except as needed for federal
and state income taxes payable on taxable income from the Denver Marriott,
until it has accumulated and is holding in reserve funds which are sufficient
to pay at least one monthly payment of Base Rent under the Lease, plus at least
one monthly payment of Base Rent under all other leases between it and the
Operating Partnership, and (iv) in the view of the Operating Partnership,
RoseStar's capitalization is adequate to allow RoseStar to assume RoseStar's
obligations under the Lease.
2. Income Derived in the Case of a Default under the Lease
If the Operating Partnership were required to reimburse Marriott for
the costs of operating the Denver Marriott because of a default by RoseStar
under the terms of the Management Agreement, we have concluded that the income
derived by the Operating Partnership from the Denver Marriott would be treated
as "qualifying income" for purposes of the 75 percent and 95 percent tests,
assuming that such default does not occur before May 1, 1996. This is because,
if the Operating Partnership were required to reimburse Marriott for the cost
of operating the Denver Marriott, this would constitute an event of default
under Article 16.1 of the Lease, allowing the Operating Partnership to
terminate RoseStar's leasehold interest in the Denver Marriott. As a result of
such a termination of the Lease, any income derived by the Operating
Partnership from the Denver Marriott after the default would be treated as
income from foreclosure property.
The Operating Partnership would be able to continue to operate the
Denver Marriott after any default under the Lease, without affecting its status
as foreclosure property, assuming that any such default does not occur before
May 1, 1996. This is because Marriott will provide all services relating to
the operation of the Denver Marriott and starting on May 1, 1996, Marriott will
qualify as an independent contractor from whom the Company will not derive any
income . As noted above, a REIT can use foreclosure property in the conduct of
an active trade or business, as long
-12-
<PAGE> 83
as this is done through the use of an independent contractor, from whom the
REIT does not derive or receive any income.(30)
As noted above, real property acquired upon default under a lease is
not eligible to be treated as foreclosure property if the lease is entered into
with an intent to evict or foreclose, or if the REIT knows or has reason to
know that default would occur.(31) This is not the case in the present
situation because (i) the Denver Marriott is projected to generate enough gross
income to produce a profit for RoseStar, (ii) in connection with Section 7.7 of
the Lease, RoseStar will represent that it has a net worth of at least
$200,000, (iii) in connection with Section 7.9 of the Lease, RoseStar covenants
that it will retain all of the income it earns from the Denver Marriott and
shall not distribute any earnings to its beneficial owners, except as needed
for federal and state income taxes payable on taxable income from the Denver
Marriott, until it has accumulated and is holding in reserve funds which are
sufficient to pay at least one monthly payment of Base Rent under the Lease,
plus at least one monthly payment of Base Rent under all other leases between
it and the Operating Partnership, and (iv) in the view of the Operating
Partnership, RoseStar's capitalization is adequate to allow RoseStar to assume
RoseStar's obligations under the Lease.
The Denver Marriott would in any event qualify as foreclosure property
only for a period of up to two years, beginning on the date of its acquisition
by the Operating Partnership, unless the Operating Partnership obtains an
extension of the grace period from the IRS.(32) Therefore, in the event the
Operating Partnership takes possession of the Denver Marriott as a result of a
default under the lease, presumably the Operating Partnership will sell the
Denver Marriott or within two years rent it to another tenant under a lease
that will produce "rents from real property."
Prior to May 1, 1996, Crescent may be treated as deriving income from
Marriott, because on April 24, 1995 the Operating Partnership received a
payment of $600,000 and a note in the principal amount of $1,800,000 from
Marriott in connection with its sale of certain contract rights and investments
rights to Marriott. The principal balance of the note and all accrued interest
thereon are to be paid by Marriott in a single payment on April 30, 1996. As a
consequence, prior to May 1, 1996 the Operating Partnership will be treated as
deriving interest income and capital
- --------------------
(30)Section 856(e)(4)(C). The IRS clearly intended for REITs to be able to
treat hotels operated by independent contractors as foreclosure property. For
instance, the Treasury regulations defining foreclosure property refer to hotel
properties twice. See, Treas. Reg. Sections 1.856-6(b)(2), 1.856-6(d)(2). In
addition, the IRS has also recently issued a private letter ruling in which it
treated income received from hotels acquired pursuant to a bankruptcy petition
as income from foreclosure property, where the hotels were operated by third
party managers. P.L.R. 9420013 (2/15/94).
(31)Treas. Reg. Section 1.856-6(b)(3).
(32)Section 856(e)(2).
-13-
<PAGE> 84
gains income from Marriott. Therefore, during the period prior to May 1, 1996,
Marriott will not qualify as an independent contractor from whom the Company
does not derive any income.(33)
V. CONCLUSION
Based on the assumptions stated above, it is our opinion that (i) all
of the income that the Operating Partnership derives from the Denver Marriott
will be treated as "qualifying income" for purposes of the 95 percent test and
(ii) all of the income the Operating Partnership derives from the Denver
Marriott, will be treated as "qualifying income" for purposes of the 75 percent
test.
- --------------------
(33)The fact that the Operating Partnership will derive income from Marriott
at a time prior to any default under the Lease should not have any affect on
the treatment of any income that the Operating Partnership derives from the
Denver Marriott after any default under the Lease. See, Tax Management
Memorandum, p. 7 (November 7, 1975), as cited in Allen and Fisher, 107-5th
T.M., Real Estate Investment Trusts , p. A-77 (the IRS has ruled privately that
an entity should be treated as an independent contractor from whom a REIT
derived no income for the period such entity managed the REIT's rental
properties, despite the fact that the entity purchased foreclosure property
from the REIT immediately after the termination of its management contract).
-14-
<PAGE> 85
September 27, 1996
Crescent Real Estate Equities, Inc.
900 Third Avenue, Suite 1800
New York New York 10022
Ladies and Gentlemen:
On June 30, 1995 we provided you with a memorandum analyzing the
impact of the purchase of the Denver Marriott City Center (the "Hotel
Property") by Crescent Real Estate Equities Limited Partnership (the "Operating
Partnership") would have on the ability of Crescent Real Estate Equities, Inc.
(the "Company") to continue to qualify as a real estate investment trust (a
"REIT") under section 856(c).(1) That memorandum concluded that, subject to
certain assumptions, in our opinion (i) all of the income that the Operating
Partnership derived from the Hotel Property would be treated as "qualifying
income" for purposes of the 95 percent gross income test for REIT qualification
under section 856(c)(2) (the "95 percent test") and (ii) all of the income that
the Operating Partnership derived from the Hotel Property would be treated as
"qualifying income" for purposes of the 75 percent gross income test for REIT
qualification under section 856(c)(3) (the "75 percent test"). The June 30,
1995 memorandum was based upon, among other items, our review of an Amended and
Restated Lease Agreement between dated June 30, 1995 between the Operating
Partnership, as lessor, and RoseStar Management, LLC ("RoseStar"), as lessee
(the "Lease"). The ownership of RoseStar remains the same as described in our
June 30, 1995 memorandum.
This letter is intended to update the opinions expressed in our June
30, 1995 memorandum. The opinions set forth herein are based upon the existing
provisions of the Code, and the reported interpretations thereof by the IRS and
by the courts in effect as of the date hereof, all of which are subject to
change, both retroactively or prospectively, and to possibly different
interpretations. We assume no obligation to update the opinions set forth in
this letter. We believe that the conclusions expressed herein, if challenged
by the IRS, would be sustained in court. However, because our opinions are not
binding upon the IRS or the courts, there can be no assurance that contrary
positions may not be successfully asserted by the IRS.
- --------------------
(1) All section references are to the Internal Revenue Code of 1986, as
amended (the "Code"), or to the regulations issued thereunder, unless
otherwise noted.
<PAGE> 86
Crescent Real Estate Equities, Inc.
September 27, 1996
Page 2
I. Documents and Representations
For the purpose of rendering this opinion, we have examined and
relied on originals, or copies certified or otherwise identified to our
satisfaction, of the following: (1) the Lease; (2) the Limited Guaranty
Agreement by Gerald Haddock, John Goff and Sanjay Varma, as guarantors in favor
of the Operating Partnership (the "Guaranty); (3) the Articles of Organization
of RoseStar Management, LLC (the "RoseStar Articles"), (4) the Regulations of
RoseStar Management, LLC (the "RoseStar Regulations"), (5) the First Amended
and Restated Articles of Incorporation of Crescent Real Estate Equities, Inc.
(the "Crescent Articles"); and (6) such other documents or information as we
have deemed necessary for the opinion set forth below. In our examination, we
have assumed the genuineness of all signatures, the legal capacity of natural
persons, the authenticity of all documents submitted to us as originals, the
conformity to original documents of all documents submitted to us as certified
or photostatic copies, and the authenticity of the originals of such copies.
For the purpose of rendering these opinions, we have also assumed
that all statements of facts and assumptions described in our June 30, 1995
memorandum remain correct, unless otherwise noted.
II. Opinions
Based on the foregoing, it is our opinion that (i) the Lease will be
treated as a lease for federal income tax purposes, (ii) all of the income that
the Operating Partnership derives from the Hotel Property will be treated as
"qualifying income" for purposes of the 95 percent test, and (iii) all of the
income that Operating Partnership derives from the Hotel Property will be
treated as "qualifying income" for purposes of the 75 percent test.
In giving these opinions, we note that Marriott International, Inc.
("Marriott") which operates the Hotel Property as successor to Marriott
Corporation under the terms of the agreement between the Original Owner and
Marriott Corporation dated January 10, 1979, as amended on January 10, 1979,
February 16, 1979, May 11, 1979, July 27, 1979, March 25, 1980, December 18,
1980, July 15, 1981, January 4, 1982, and November 19, 1993 (the "Management
Agreement") is currently subleasing space from Gaskins Real Estate Brokerage,
Inc. ("Gaskins"), a tenant at 301 Congress Avenue, a property in which the
Operating Partnership owns an indirect interest. Under the terms of Gaskins'
prime lease, Gaskins is required make a payment to the lessor (an "excess rent
payment") equal to the amount by which any rents under a sublease exceed the
amount that Gaskins is required to pay to the lessor under the terms of the
lease. Gaskins' sublease to Marriott was entered into before the Operating
Partnership acquired its interest in 301 Congress Avenue and it is scheduled to
<PAGE> 87
Crescent Real Estate Equities, Inc.
September 27, 1996
Page 3
expire at the end of February 1997. Marriott has already vacated the premises
sublet from Gaskins at 301 Congress Avenue and the Operating Partnership will
use its best efforts to prevent any extension or renewal of this sublease. We
do not believe that the existence of the sublease of space in 301 Congress
Avenue by Gaskins to Marriott will affect the opinion expressed in our June 30,
1995 memorandum regarding the treatment of amounts derived from the Hotel
Property in the event of a default under the Lease, to the extent any such
default occurs after the termination of the sublease to Marriott. In our June
30, 1995 memorandum we indicated that amounts derived from the Hotel Property
in the event of a default under the Lease would qualify as income from
foreclosure property, if, among other things, at the time of the default,
Marriott qualifed as an independent contractor from whom the Company did not
derive any income. We do not believe that the Company will be treated as
indirectly deriving income from Marriott as a result of accruing any Excess
Rent Payments under the terms of Gaskins' lease at 301 Congress, and in any
event, even if the Company is treated as indirectly deriving income from
Marriott, it will cease to be treated as derivng such income from Marriott
after the end of February 1996, if Marriott's sublease terminates at that time.
III. Additional Limitations
The foregoing opinions are limited to the specific matters covered
thereby and should not be interpreted to imply that the undersigned has offered
its opinion on any other matter.
Very truly yours,
SHAW, PITTMAN, POTTS & TROWBRIDGE
By: /s/ CHARLES B. TEMKIN
--------------------------------
Charles B. Temkin, P.C.
<PAGE> 88
MEMORANDUM
TO: David Dean
FROM: Charles B. Temkin
Michael A. Jacobs
DATE: December 19, 1995
RE: Characterization of Income Derived from the Hyatt Regency
Albuquerque Plaza
I. OVERVIEW
Crescent Real Estate Equities Limited Partnership (the "Operating
Partnership") purchased the Hyatt Regency Albuquerque Plaza (the "Albuquerque
Hyatt") from Albuquerque Plaza Partners (the "Prior Owner"), on December 19,
1995. Crescent Real Estate Equities, Inc. (the "Company") is currently the
sole shareholder of two corporations, one of which is the sole general partner
of and one of which is a limited partner of the Operating Partnership. These
two corporations constitute qualified REIT subsidiaries within the meaning of
section 856(i).(1)
This memorandum analyzes the impact that the purchase of the
Albuquerque Hyatt will have on the ability of the Company to continue to
qualify as a real estate investment trust (a "REIT") under section 856(c).
More specifically, it analyzes whether the income the Operating Partnership
derives from the Albuquerque Hyatt is "qualifying income" for purposes of the
75 percent and 95 percent gross income tests for REIT qualification. This
memorandum concludes that, subject to certain assumptions, in our opinion (i)
all of the income that the Operating Partnership derives from the Albuquerque
Hyatt will be treated as "qualifying income" for purposes of the 95 percent
test and (ii) all of the income the Operating Partnership derives from the
Albuquerque Hyatt will be treated as "qualifying income" for purposes of the 75
percent test.
- --------------------
(1) All section references herein are to the Internal Revenue Code of 1986, as
amended (the "Code"), or to the regulations issued thereunder, unless otherwise
noted.
<PAGE> 89
II. FACTS AND ASSUMPTIONS
The Prior Owner contracted with Hyatt Corporation ("Hyatt") to operate
the Albuquerque Hyatt. Under the terms of the agreement between the Prior
Owner and Hyatt dated October 11, 1988, as amended on February 14, 1990, and
August 30, 1994 (the "Management Agreement"), Hyatt is obligated to provide all
services in relation to the operation of the Albuquerque Hyatt and collect all
hotel receipts. In exchange for these services, Hyatt is to be reimbursed for
the costs of operating the Albuquerque Hyatt and paid a management fee. This
fee is paid out of hotel receipts; it is based on the profits, if any, from
operation of the Albuquerque Hyatt. Article 15.2 of the Management Agreement
requires that all assignments of the Management Agreement be approved by Hyatt
and that any assignees expressly assume the obligations of the owner under the
Management Agreement. Therefore, in connection with its purchase of the
Albuquerque Hyatt, the Operating Partnership assumed all of the obligations of
the Prior Owner under the Management Agreement.
When the Operating Partnership purchased the Albuquerque Hyatt, it
immediately leased it to RoseStar Management, LLC ("RoseStar") pursuant to a
Lease Agreement dated December 19, 1995 (the "Lease"). Pursuant to Article 2
of the Lease, the Operating Partnership assigned its interest in the Management
Agreement to RoseStar; and pursuant to Article 15.2 of the Management
Agreement, RoseStar assumed all of the Operating Partnership's obligations
thereunder. However, as a condition of its approval of the Lease, Hyatt
required that the Operating Partnership remain liable for all obligations of
the Operating Partnership under the Management Agreement that was assumed by
RoseStar.
Currently, Sanjay Varma owns a 91 percent interest in the assets and
net profits of RoseStar, while Gerald W. Haddock and John C. Goff, the
managers of RoseStar, each own a 4.5 percent interest in its assets and net
profits. RoseStar currently leases another hotel, located in Denver, Colorado
(the "Denver Marriott"), from the Operating Partnership. We have provided you
with a memorandum dated June 30, 1995 regarding the characterization of income
derived by the Operating Partnership from the lease of the Denver Marriott to
RoseStar.
For purposes of this memorandum, we have examined and relied upon (1)
the Management Agreement, (2) the Lease, (3) the Articles of Organization of
RoseStar Management, LLC (the "RoseStar Articles"), (4) the Regulations of
RoseStar Management, LLC (the "RoseStar Regulations"), (5) the First Amended
and Restated Articles of Incorporation of Crescent Real Estate Equities, Inc.
(the "Crescent Articles"), and (6) such other documents or information as we
deemed necessary for the opinions set forth below. In our examination, we have
assumed the genuineness of all signatures, the legal capacity of natural
persons, the authenticity of all documents submitted to us as originals, the
conformity to original documents of all documents submitted to us as certified
or photostatic copies, and the authenticity of the originals of such copies.
-2-
<PAGE> 90
This memorandum is based upon existing provisions of the Code,
Treasury regulations, and the reported interpretations thereof by the Internal
Revenue Service ("IRS") and by the courts in effect as of the date hereof, all
of which are subject to change, both retroactively or prospectively, and to
possibly different interpretations. We assume no obligation to update the
opinions set forth in this memorandum. We believe that the conclusions
expressed herein, if challenged by the IRS, would be sustained in court.
However, because our opinions are not binding upon the IRS or the courts, there
can be no assurance that contrary positions may not be successfully asserted by
the IRS.
In addition, this memorandum is based on various assumptions and is
conditioned upon certain representations made by the Operating Partnership and
its sole general partner, Crescent Real Estate Equities, Ltd., as to factual
and other matters as set forth in the attached letter.
III. LEGAL BACKGROUND
A. 75 Percent and 95 Percent Tests
In order to qualify as a REIT for tax purposes, the Company must
satisfy certain tests with respect to the composition of its gross income on an
annual basis. First, at least 75 percent of the Company's gross income
(excluding gross income from certain prohibited transactions) for each taxable
year must consist of temporary investment income or of certain defined
categories of income derived directly or indirectly from investments relating
to real property or mortgages on real property. These categories include,
subject to various limitations, rents from real property, interest on mortgages
on real property, gains from the sale or other disposition of real property
(including interests in real property and 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.(2) Second, at least 95 percent of the Company's gross income
(excluding gross income from certain prohibited transactions) for each taxable
year must be derived from income qualifying under the 75 percent 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.(3)
In applying these income tests, REITs that are partners in a
partnership are required to include in their gross income their proportionate
share of the partnership's gross income. In addition, such REITs are to treat
this partnership gross income as retaining the same character as the items of
gross income of the partnership for purposes of section 856.(4) Thus, the
character of any
- --------------------
(2)Section 856(c)(3).
(3)Section 856(c)(2).
(4)Treas. Reg. Section 1.856-3(g).
-3-
<PAGE> 91
income derived by the Operating Partnership from the Albuquerque Hyatt will
affect the ability of the Company to qualify as a REIT.
B. Rents from Real Property
Rents from real property satisfy both the 75 percent and 95 percent
tests for REIT qualification 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.(5) 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 percent or more of the REIT, directly
or constructively, owns 10 percent or more of such tenant (a "Related Party
Tenant").(6) Third, if rent attributable to personal property leased in
connection with a lease of real property is greater than 15 percent 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."(7)
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. However, rents will be qualified as "rents
from real property" if a REIT directly performs services in connection with the
lease of the property, if those services are "usually or customarily rendered"
in connection with the rental of space for occupancy, and such services are not
considered to be rendered to the occupant of the property.(8)
C. Income from Foreclosure Property
Income from foreclosure property is treated as "qualifying income" for
purposes of the 75 percent and 95 percent tests (although any net income from
foreclosure property is taxed at the maximum corporate rate). Foreclosure
property is any real property, and any personal property incident to such real
property, acquired by a REIT through default under a mortgage or a lease. A
REIT may elect to treat such property as foreclosure property for a grace
period of up to two years.(9) However, such property will cease to qualify as
foreclosure property if it is used by the REIT in a trade or business more than
90 days after it is acquired and it is not operated through
- --------------------
(5)Section 856(d)(2)(A).
(6)Section 856(d)(2)(B).
(7)Section 856(d)(1)(C).
(8)Sections 856(d)(1)(B), 856(d)(2)(C).
(9)Section 856(e).
-4-
<PAGE> 92
an independent contractor from whom the REIT does not derive or receive any
income.(10) Moreover, property is not eligible to be treated as foreclosure
property if the lease is entered into with an intent to evict or foreclose, or
if the REIT knows or has reason to know that default would occur.(11)
IV. DISCUSSION
A. Lease Will be Treated as a Lease for Federal Income Tax
Purposes
In order for any income derived by the Operating Partnership from the
Albuquerque Hyatt to constitute either "rents from real property," or in the
case of a default under the Lease, "gross income from foreclosure property,"
the Lease must be treated as a lease for federal income tax purposes and not be
treated as a service contract, management contract or other type of
arrangement. This determination depends on an analysis of all the surrounding
facts and circumstances. In making this determination, courts have considered
a variety of factors, including the following: (i) the intent of the parties,
(ii) the form of the agreement, (iii) the degree of control over the business
conducted at the property that is provided to the lessee (e.g., whether the
lessee has substantial rights of control over the operation of the property and
its business), (iv) the extent to which the lessee has the risk of loss from
operations of the business conducted as the property (e.g., whether the lessee
bears the risk of increases in operating expenses and of decreases in
revenues), and (v) the extent to which the lessee has the opportunity to
benefit from operations of the business conducted at the property (e.g.,
whether the lessee benefits from decreased operating expenses or increased
revenues).(12)
In addition, section 7701(e) provides that a contract that purports to
be a service contract, partnership agreement, or another type of arrangement
will be treated instead as a lease of property if the contract is properly
treated as such, taking into account all relevant factors, including whether or
not: (i) the service recipient is in physical possession of the property, (ii)
the service recipient controls the property, (iii) the service recipient has a
significant economic or possessory interest in the property (e.g., the
property's use is likely to be dedicated to the service recipient for a
substantial portion of the useful life of the property, the recipient shares
the risk that the property will decline in value, the recipient shares in any
appreciation in the value of the property, the recipient shares in any savings
in the property's operating costs or the recipient bears the risk of damage to
or loss of the property), (iv) the service provider does not bear any risk of
substantially diminished receipts or substantially increased expenditures if
there is nonperformance under the contract, (v) the service provider does not
use the property concurrently to provide significant
- --------------------
(10)Section 856(e)(4).
(11)Treas. Reg. Section 1.856-6(b)(3).
(12)See, e.g., Xerox Corp. v. U.S., 80-2 USTC Paragraph 9530 (Ct. Cl. Tr. Div.
1980), aff'd per curiam, 656 F.2d 659 (Ct. Cl. 1981).
-5-
<PAGE> 93
services to entities unrelated to the service recipient and (vi) the total
contract price does not substantially exceed the rental value of the property
for the contract period. Since the determination of whether a service
contract, partnership agreement, or some other type of arrangement should be
treated as a lease is inherently factual, the presence or absence of any single
factor may not be dispositive in every case.(13)
We have concluded that the Lease will be treated as a lease for
Federal income tax purposes, rather than a service contract, management
contract or other type of arrangement. This conclusion is based, in part, on
the following facts: (i) the Operating Partnership and RoseStar intend their
relationship to be that of lessor and lessee (as evidenced by the terms of the
Lease), (ii) RoseStar will have the right to exclusive possession, use and
quiet enjoyment of the Albuquerque Hyatt during the term of the Lease and the
right to uninterrupted control in the operation of the business conducted at
the Albuquerque Hyatt (subject to its assumption of the Management Agreement),
(iii) RoseStar will dictate how the Albuquerque Hyatt is maintained and
improved, (iv) RoseStar will bear all the costs and expenses of operating the
Albuquerque Hyatt other than the replacement of furniture, fixtures and
equipment, (v) RoseStar will benefit from any savings in the costs of operating
the Albuquerque Hyatt during the term of the Lease, (vi) in the event of damage
or destruction to the Albuquerque Hyatt, RoseStar will be at economic risk
because its obligation to make rental payments will not abate, (vii) RoseStar
will indemnify the Operating Partnership against all liabilities imposed on the
Operating Partnership during the term of the Lease by reason of injury to
persons or damage to property occurring at the Albuquerque Hyatt or RoseStar's
use, management, maintenance or repair of the Albuquerque Hyatt, (viii)
RoseStar is obligated to pay substantial fixed rent for the period of use of
the Albuquerque Hyatt, regardless of whether its revenues exceed its costs and
expenses, and (ix) RoseStar stands to incur substantial losses (or derive
substantial profits) depending on how successfully it operates the Albuquerque
Hyatt.
We do not believe that our conclusion that the Lease of the
Albuquerque Hyatt will be treated as a lease for Federal income tax purposes is
affected by the fact that RoseStar entered the Lease subject to its assumption
of the Operating Partnership's obligations under the preexisting Management
Agreement. The Management Agreement gives Hyatt control over the day-to-day
operation of the Albuquerque Hyatt and allows Hyatt to share with RoseStar in
the benefits of any increases in revenues or cost savings in the operation of
the Albuquerque Hyatt. However, Hyatt's operation of the Albuquerque Hyatt
will not be controlled by the Operating Partnership, and the Management
Agreement does not affect the fact that RoseStar bears most of the risk of loss
if the Albuquerque Hyatt is not successful. Moreover, the IRS has issued a
private letter ruling in which it treated leases of several hotel properties as
producing "rents from real property" in a situation where the lessees had
contracted with a third party to conduct the day-to-day
- --------------------
(13)P.L.R. 8918012 (January 24, 1989).
-6-
<PAGE> 94
operations of the hotels.(14) This ruling suggests that the IRS will respect a
lease of a hotel for federal income tax purposes even if the hotel is operated
by an independent contractor rather than by the lessee.
The Lease is structured in form so that the Operating Partnership
retains ownership of all the personal property leased to RoseStar in connection
with RoseStar's lease of the Albuquerque Hyatt (the "FF&E"). However, if the
term of the Lease equals or exceeds the useful life of some or all of the FF&E,
it is possible that the Lease could be treated for federal income tax purposes
as a financing arrangement. In such a case, RoseStar would be treated as
having acquired ownership of the FF&E for federal income tax purposes in
exchange for an obligation to make future payments of principal and interest to
the Operating Partnership. Nonetheless, we do not believe that the
recharacterization of the Lease as a financing arrangement with respect to the
FF&E would have a material effect on the ability of the Company to satisfy the
requirements for taxation as a REIT. This is because, if a portion the of the
payments made by RoseStar under the Lease were characterized as interest on
indebtedness secured by the FF&E, rather than rents from real property, that
portion would still satisfy the 95 percent gross income test (although it would
not satisfy the 75% gross income test).(15)
B. Percentage Rent Provision is not Profit-Based
Pursuant to the Lease, RoseStar will be obligated to pay the Operating
Partnership base rent and percentage rent. Under the regulations, percentage
rent based on a percentage of gross receipts or sales in excess of a floor
amount, which is how the percentage rent is structured under the Lease, will
not qualify as "rents from real property" unless (i) such floor amount does not
depend in whole or in part on the income or profits of the lessee, (ii) the
percentage and the floor amount are fixed at the time the lease is entered
into, (iii) the percentage and the floor amount are not renegotiated during the
term of the lease in a manner that has the effect of basing the percentage rent
on income or profits, and (iv) the percentage and the floor amount conform with
normal business practice.(16)
Under the terms of Article 4.2 of the Lease, RoseStar will pay
percentage rent equal on an annual basis to the sum of (i) 17.5 percent of the
excess of annual gross receipts from room rentals over $6,000,000 and (ii) 2.5
percent of the excess of annual gross receipts from the food and beverage
facilities at the Albuquerque Hyatt over $2,000,000. This formula effectively
rewards
- --------------------
(14)See, P.L.R. 8117036 (January 27, 1981).
(15)If the Lease were recharacterized as a financing arrangement with respect
to the FF&E, it also might result in some minor timing differences with respect
to the Company's recognition of income. These differences would result from
(a) the recharacterization of a portion RoseStar's payments under the Lease as
a return of principal and (b) the Company's loss of any depreciation
deductions attributable to the FF&E.
(16)Treas. Reg. Section 1.866-4(b)(3).
-7-
<PAGE> 95
RoseStar for any increases in gross receipts from rooms and from other sources
over the threshold amounts. This type of formula does not base the percentage
rent on RoseStar's income or profits, and similar formulas have been treated by
the IRS as generating "rents from real property."(17) Moreover, the Operating
Partnership has represented that (i) the floor amounts used to compute the
percentage rent under the Lease do not depend in whole or in part on the income
or profits of any person, (ii) the percentage rent provision of the Lease will
not be renegotiated during the term of the Lease or at the expiration or
earlier termination of the Lease in a manner that has the effect of basing the
rent on income or profits, and (iii) the percentage rent provision of the Lease
conforms with normal business practice. In addition, based on our experience
and an examination of the Lease and the Albuquerque Hyatt projections, the
Lease appears to conform with normal business practice.
C. RoseStar is not a "Related Party Tenant"
Rents received from RoseStar will not qualify as "rents from real
property" if RoseStar is a "related party tenant." RoseStar will be a "related
party tenant" if the Company, or an owner of 10 percent or more of the Company,
directly or constructively owns 10 percent or more of the assets or net profits
of RoseStar.(18) Constructive ownership is determined for purposes of this
test by applying the rules of section 318(a) as modified by section 856(d)(5).
Those rules generally provide that if 10 percent or more in value of the stock
of the Company is owned, directly or indirectly, by or for any person, the
Company is considered as owning the stock owned, directly or indirectly, by or
for such person.
RoseStar will not be treated as a "related party tenant" because an
individual, Sanjay Varma, currently owns a 91 percent interest in its assets
and net profits. In reaching this conclusion, we recognize that Sanjay Varma
owns certain Units of the Operating Partnership.(19) The Operating Partnership
has represented that (i) Sanjay Varma does not own more than 10 percent of the
value of the Company's stock, (ii) Sanjay Varma is not expected to own more
than 10 percent of the value of the Company's stock in the future, and (iii)
neither the Operating Partnership nor the Company intends to acquire, directly
or constructively, an interest of 10 percent or more in the assets or net
profits of RoseStar at any time in the future. Moreover, Article 7.8 of the
Lease limits the ability of RoseStar and its members and managers to acquire,
directly or constructively, a 6 percent stock interest in the Company, and
Section 6.4 of the First Amended and
- --------------------
(17)See, e.g., P.L.R. 8803007 (September 23, 1987) (percentage rent based on
gross revenues in excess of gross revenues for a base year treated as "rents
from real property"); cf. P.L.R. 9104018 (October 26, 1990) (interest based on
gross revenues in excess of a floor amount treated as qualifying interest under
section 856(f)).
(18)Section 856(d)(2)(B)(ii).
(19)See Rev. Rul. 73-194, 1973-1 C.B. 355 (management company treated as an
independent contractor with respect to a REIT, where an affiliate of the
management company and the REIT were partners).
-8-
<PAGE> 96
Restated Articles of Incorporation of the Company prevents RoseStar and its
members and managers from acquiring more than 8 percent of the Company's stock.
In concluding that RoseStar will not be treated as a "related party
tenant," we have applied the definition of related party tenant set forth in
section 856(d)(2)(B)(ii), which applies to tenants which are not corporations.
If RoseStar is not treated as a partnership for federal income tax purposes,
but is instead treated as an association taxable as a corporation, then the
applicable definition of related party tenant is the one set forth in section
856(d)(2)(B)(i), which looks to control over voting securities. If RoseStar
were treated as a corporation for federal income tax purposes, Gerald W.
Haddock and John C. Goff would likely be deemed to own all of its voting stock,
because of the extensive powers that they are granted as managers under the
RoseStar Regulations. If this were the case, it would be necessary to consider
whether the ownership of such voting stock could possibly be attributed to the
Company under the constructive ownership rules described above or otherwise.
An entity which has associates and an objective to carry on a business
for joint profit will be treated as a partnership for federal income tax
purposes, and not as an association taxable as a corporation, if it has not
more than two of the following four characteristics of a corporation: (i)
continuity of life; (ii) centralization of management; (iii) limited liability;
and (iv) free transferability of interests.(20) The entity must also have no
other characteristics which are significant in determining its classification.
Generally, other factors are considered only insofar as they relate to the
determination of the presence or absence of the foregoing corporate
characteristics.(21) The IRS has applied this four-factor test in determining
whether limited liability companies formed under the Texas Limited Liability
Company Act (the "Act") are partnerships for federal income tax purposes.(22)
The IRS has issued Rev. Proc. 95-10, which specifies conditions which must be
satisfied for a limited liability company to receive a favorable advanced
ruling that it will be classified as a partnership for federal income tax
purposes.(23) RoseStar should satisfy these conditions. However, such
conditions are applicable only in determining whether rulings will be issued
and are not intended as substantive rules for determination of partnership
status.
An organization will be treated as possessing the corporate
characteristic of continuity of life, even if the agreement organizing an
entity provides that it is to continue only for a stated period, unless a
member has the power to dissolve the organization at an earlier time.(24)
Article 6.01
- --------------------
(20)Treas. Reg. Section 301.7701-2(a).
(21)See Rev. Rul. 79-106, 1979-1 C.B. 448.
(22)See, e.g., P.L.R. 9242025 (July 22, 1992) and P.L.R. 9218078 (January 31,
1992).
(23)1995-3 I.R.B. 20.
(24)Treas. Reg. Section 301.7701-2(b)(3).
-9-
<PAGE> 97
of the Act provides, in part, that except as otherwise provided in the
company's regulations, a limited liability company shall be dissolved upon the
death, retirement, resignation, expulsion, bankruptcy, or dissolution of a
member or the occurrence of any other event which terminates the continued
membership of a member in the limited liability company, unless there is at
least one remaining member and the business of the limited liability company is
continued by the consent by the number of members or class thereof stated in
the articles of organization or regulations of the limited liability company or
of not so stated, by all remaining members. Article 2 of the RoseStar Articles
provides that the duration of RoseStar is until the close of business on
December 31, 2015, or until its earlier dissolution in accordance with the
provisions of the Act or the Regulations. Article 10.2 of the RoseStar
Regulations provides, in part, that RoseStar shall be dissolved upon the
withdrawal, death, retirement, resignation, expulsion, bankruptcy, legal
incapacity or dissolution of any member, unless the business of RoseStar is
continued by the consent of all the remaining members within ninety days.
Accordingly, RoseStar will lack the corporate characteristic of continuity of
life.
An organization will be treated as possessing the corporate
characteristic of free transferability of interests if the members owning all
or substantially all of the interests in an organization may substitute for
themselves without the consent of the other members a person who is not a
member of the organization.(25) Article 4.05 of the Act provides, in part,
that unless otherwise provided by the company's regulations, a membership
interest is assignable in whole or in part; an assignment of a member's
interest does not entitle the assignee to become, or to exercise rights or
powers of a member; and until the assignee becomes a member, the assignor
member continues to be a member and to have the power to exercise any rights or
powers of a member, except to the extent those rights or powers are assigned.
Article 4.07 of the Act provides, in part, that an assignee of a membership
interest may become a member if and to the extent that the company's
regulations so provide, or all members consent. Article 9.3 of the RoseStar
Regulations provides, in part, that no member shall have the right to
substitute in its place a transferee unless consent is given by the Managers
and a majority of the other members, which consent may be withheld in the
discretion of the Managers or the other members. Accordingly, RoseStar will
lack the corporate characteristic of free transferability of interests. Because
RoseStar will lack the corporate characteristics of continuity of life and free
transferability of interests, in our opinion it will be treated as partnership
for federal income tax purposes.
D. Incidental Personal Property
As noted above, the rents attributable to the Operating Partnership's
personal property leased under or in connection with the Lease must not be
greater than 15 percent of the rents received under the Lease. The rent
attributable to personal property leased under or in connection with a lease of
real property is the amount that bears the same ratio to total rent for the
taxable year as (i) the average of the adjusted bases of the personal property
leased under or in connection
- --------------------
(25) Treas. Reg. Section 301.7701-2(e).
-10-
<PAGE> 98
with a lease of real property at the beginning and at the end of the taxable
year bears to (ii) the average of the aggregate adjusted bases of the real and
personal property subject to the lease at the beginning and at the end of such
taxable year (the "Adjusted Basis Ratio").(26) The Operating Partnership has
represented that, assuming that the Lease is not characterized as a financing
arrangement with respect to the FF&E, the adjusted tax basis of the FF&E will
not represent more than 15 percent of the aggregate adjusted tax basis of the
Albuquerque Hyatt at any time.
E. Provision of Services by the Operating Partnership
1. Income Derived under the Terms of the Lease
Although the Operating Partnership may treat charges for services
customarily furnished or rendered in connection with the rental of the
Albuquerque Hyatt as "rents from real property," any services rendered to the
occupants of the Albuquerque Hyatt must be furnished or rendered by an
independent contractor from whom the Company does not derive or receive any
income.(27) Moreover, to the extent that any independent contractors provide
noncustomary services to the occupants of the Albuquerque Hyatt, the cost of
such services must not be borne by the Operating Partnership.(28) Under the
terms of the Lease, the Operating Partnership will not be required to provide
any services, customary or noncustomary, in connection with the rental of the
Albuquerque Hyatt. Instead, all services relating to the operation of the
Albuquerque Hyatt will be provided by Hyatt to RoseStar under the terms of the
Management Agreement. The Operating Partnership will not bear the cost of any
of the services provided by Hyatt to RoseStar. Instead, such costs will be
borne by RoseStar pursuant to its assumption of the Operating Partnership's
obligations under the Management Agreement.
Based on the foregoing, we believe that the provision of any
noncustomary services to the occupants of the Albuquerque Hyatt by Hyatt will
have no effect on the qualification of the income derived from the Albuquerque
Hyatt as "rents from real property." In fact, the IRS has issued a private
letter ruling in which it has treated the income derived from several leases of
hotel properties as "rents from real property" in a situation where the lessees
had contracted with a third-party to conduct the day-to-day operations of the
hotels.(29) Our conclusion is not altered by the fact that the Operating
Partnership will remain liable for any obligations arising under the Management
Agreement, to the extent that they are not satisfied by the Tenant. The
Operating Partnership should not be treated as bearing the cost of the services
provided by Hyatt merely because it will be liable for RoseStar's obligations
under the Management Agreement. The Operating
- --------------------
(26)Section 856(d)(1)(C).
(27)Sections 856(d)(1), 856(d)(2)(C); Treas. Reg. Section 1.512(b)-1(c)(5).
(28)Treas. Reg. Section 1.856-4(b)(5).
(29)See, P.L.R. 8117036 (January 27, 1981).
-11-
<PAGE> 99
Partnership will not be retaining this liability in an attempt to provide
services to RoseStar. Instead, it will be retaining this liability only as an
accommodation, in order to gain Hyatt's consent to its purchase of the
Albuquerque Hyatt. Moreover, the Operating Partnership believes that it is
highly unlikely that it will ever be required to reimburse Hyatt for the costs
and expenses of operating the Albuquerque Hyatt because of a default by
RoseStar under the Management Agreement. This is because (i) the Albuquerque
Hyatt is projected to generate enough gross income to cover the payments to
Hyatt under the Management Agreement, (ii) in the event that the Albuquerque
Hyatt does not generate enough gross income to cover the payments to Hyatt
under the Management Agreement, RoseStar may still be able to make such
payments out of gross income generated by the Denver Marriott, (iii) in
connection with the Lease, RoseStar has represented that it has a net worth of
at least $200,000, (iv) in the view of the Operating Partnership, RoseStar's
capitalization is adequate to allow RoseStar to assume RoseStar's obligations
under the Lease, and (v) in connection with the Lease, RoseStar has agreed to
limit distributions to its members to an amount necessary to pay federal and
state income taxes on income from the Albuquerque Hyatt until RoseStar is
holding sufficient reserves funds to enable it to pay at least one monthly
payment of base rent under the Lease and all other leases between RoseStar and
the Operating Partnership.
2. Income Derived in the Case of a Default under the Lease
If the Operating Partnership were required to reimburse Hyatt for the
costs of operating the Albuquerque Hyatt because of a default by RoseStar under
the terms of the Management Agreement, we have concluded that the income
derived by the Operating Partnership from the Albuquerque Hyatt would be
treated as "qualifying income" for purposes of the 75 percent and 95 percent
tests. This is because, if the Operating Partnership were required to
reimburse Hyatt for the cost of operating the Albuquerque Hyatt, this would
constitute an event of default under Article 16.1 of the Lease, allowing the
Operating Partnership to terminate RoseStar's leasehold interest in the
Albuquerque Hyatt. As a result of such a termination of the Lease, any income
derived by the Operating Partnership from the Albuquerque Hyatt after the
default would be treated as income from foreclosure property.
The Operating Partnership would be able to continue to operate the
Albuquerque Hyatt after any default under the Lease, without affecting its
status as foreclosure property. This is because Hyatt, which will provide all
services relating to the operation of the Albuquerque Hyatt, qualifies as an
independent contractor from whom the Company does not derive any income. As
noted above, a REIT can use foreclosure property in the conduct of an active
trade or business, as long as this is done through the use of an independent
contractor, from whom the REIT does not derive or receive any income.(30)
- --------------------
(30)Section 856(e)(4)(C). The IRS clearly intended for REITs to be able to
treat hotels operated by independent contractors as foreclosure property. For
instance, the Treasury regulations defining foreclosure property refer to hotel
Footnote continued on next page
-12-
<PAGE> 100
As previously noted, real property acquired upon default under a lease
is not eligible to be treated as foreclosure property if the lease is entered
into with an intent to evict or foreclose, or if the REIT knows or has reason
to know that default would occur.(31) This is not the case in the present
situation because (i) the Albuquerque Hyatt is projected to generate enough
gross income to cover the payments to Hyatt under the Management Agreement,
(ii) in the event that the Albuquerque Hyatt does not generate enough gross
income to cover the payments to Hyatt under the Management Agreement, RoseStar
may still be able to make such payments out of gross income generated by the
Denver Marriott, (iii) in connection with the Lease, RoseStar has represented
that it has a net worth of at least $200,000, (iv) in the view of the Operating
Partnership, RoseStar's capitalization is adequate to allow RoseStar to assume
RoseStar's obligations under the Lease, and (v) in connection with the Lease,
RoseStar has agreed to limit distributions to its members to an amount
necessary to pay federal and state income taxes on income from the Albuquerque
Hyatt until RoseStar is holding sufficient reserves funds to enable it to pay
at least one monthly payment of base rent under the Lease and all other leases
between RoseStar and the Operating Partnership.
The Albuquerque Hyatt will in any event qualify as foreclosure
property only for a period of up to two years, beginning on the date of its
acquisition by the Operating Partnership, unless the Operating Partnership
obtains an extension of the grace period from the IRS.(32) Therefore, in the
event the Operating Partnership takes possession of the Albuquerque Hyatt as a
result of a default under the lease, presumably the Operating Partnership will
sell the Albuquerque Hyatt or within two years rent it to another tenant under
a lease that will produce "rents from real property."
V. CONCLUSION
Based on the assumptions stated above, it is our opinion that (i) all
of the income that the Operating Partnership derives from the Albuquerque Hyatt
will be treated as "qualifying income" for purposes of the 95 percent test and
(ii) all of the income the Operating Partnership derives from the Albuquerque
Hyatt will be treated as "qualifying income" for purposes of the 75 percent
test.
- --------------------
Footnote continued from previous page
properties twice. See, Treas. Reg. Sections 1.856-6(b)(2), 1.856-6(d)(2). In
addition, the IRS has also recently issued a private letter ruling in which it
treated income received from hotels acquired pursuant to a bankruptcy petition
as income from foreclosure property, where the hotels were operated by
third-party managers. P.L.R. 9420013 (2/15/94).
(31)Treas. Reg. Section 1.856-6(b)(3).
(32)Section 856(e)(2).
-13-
<PAGE> 101
April 1, 1996
Crescent Real Estate Equities, Inc.
900 Third Avenue, Suite 1800
New York New York 10022
Ladies and Gentlemen:
On December 19, 1995 we provided you with a memorandum analyzing the
impact that the purchase of the Hyatt Regency Albuquerque Plaza (the
"Albuquerque Hyatt") by Crescent Real Estate Equities Limited Partnership (the
"Operating Partnership") would have on the ability of Crescent Real Estate
Equities, Inc. (the "Company") to continue to qualify as a real estate
investment trust (a "REIT") under section 856(c).(1) That memorandum concluded
that, subject to certain assumptions, in our opinion (i) all of the income that
the Operating Partnership derived from the Albuquerque Hyatt would be treated
as "qualifying income" for purposes of the 95 percent gross income test for
REIT qualification and (ii) all of the income that the Operating Partnership
derived from the Albuquerque Hyatt would be treated as "qualifying income" for
purposes of the 75 percent gross income test for REIT qualification. The
December 19, 1995 memorandum was based upon, among other items, our review of a
Lease Agreement between the Operating Partnership, as lessor, and RoseStar
Management, LLC ("RoseStar"), as lessee, dated December 19, 1995 (the "Lease").
On March 11, 1996, the Operating Partnership conveyed all of its
interest as lessor under the Lease to Crescent Real Estate Funding II, L.P., a
Delaware limited Partnership ("Funding II"). Funding II assumed all of the
Operating Partnership's liabilities and obligations under the Original Lease.
On March 29, 1996, pursuant to an Assignment and Assumption of
Leasehold Estate, RoseStar sold and assigned all of its interest and estate as
lessee under the Lease to RoseStar Southwest, LLC, a Delaware limited liability
company ("Southwest"). RoseStar owns a 99 percent interest in Southwest, while
the remaining one percent interest is owned by RSSW Corp., a Delaware
corporation. The ownership of RoseStar is unchanged from December 19, 1995.
- --------------------
(1) All section references are to the Internal Revenue Code of 1986, as
amended (the "Code"), or to the regulations issued thereunder, unless
otherwise noted.
<PAGE> 102
Crescent Real Estate Equities, Inc.
April 1, 1996
Page 2
On April 1, 1996, the Lease was amended to provide that, among other
things, (1) at all times during the term of the Lease, Southwest and RoseStar
would maintain a cumulative net worth equal to $200,000; and (2) Southwest
would retain all of the income it earns from the Albuquerque Hyatt (except
distributions to its beneficial owners in an amount sufficient to pay their
federal and state income taxes on such income) until such time as Southwest and
any affiliate of Southwest (including RoseStar) which has entered into a
long-term lease of a hotel with Funding II or any affiliate of Funding II
(including the Operating Partnership) have accumulated and are holding in
reserve funds in the aggregate which are sufficient to enable Southwest and any
affiliated entities to pay at least one monthly payment of base rent under each
lease between Southwest and any such affiliated entities and Funding II or an
affiliate of Funding II.
This letter is intended to update the opinions expressed in our
December 19, 1995 memorandum to reflect the changes in the Lease and the
substitution of new parties as lessor and lessee of the Albuquerque Hyatt. The
opinions set forth herein are based upon the existing provisions of the Code,
and the reported interpretations thereof by the IRS and by the courts in effect
as of the date hereof, all of which are subject to change, both retroactively
or prospectively, and to possibly different interpretations. We assume no
obligation to update the opinions set forth in this letter. We believe that
the conclusions expressed herein, if challenged by the IRS, would be sustained
in court. However, because our opinions are not binding upon the IRS or the
courts, there can be no assurance that contrary positions may not be
successfully asserted by the IRS.
I. Documents and Representations
For the purpose of rendering this opinion, we have examined and
relied on originals, or copies certified or otherwise identified to our
satisfaction, of the following: (1) the Lease; (2) the Assignment and
Assumption of Leasehold Estate by and between RoseStar and Southwest dated
March 29, 1996; (3) the First Amendment to the Lease dated April 1, 1996; (4)
the Limited Guaranty Agreement by Gerald Haddock, John Goff and Sanjay Varma,
as guarantors in favor of Funding II (the "Guaranty); (5) the Articles of
Organization of RoseStar Management, LLC (the "RoseStar Articles"), (6) the
Regulations of RoseStar Management, LLC (the "RoseStar Regulations"), (7) the
First Amended and Restated Articles of Incorporation of Crescent Real Estate
Equities, Inc. (the "Crescent Articles"); and (8) such other documents or
information as we have deemed necessary for the opinion set forth below. In
our examination, we have assumed the genuineness of all signatures, the legal
capacity of natural persons, the authenticity of all documents submitted to us
as originals, the conformity to original documents of all documents submitted
to us as certified or photostatic copies, and the authenticity of the originals
of such copies.
<PAGE> 103
Crescent Real Estate Equities, Inc.
April 1, 1996
Page 3
For the purpose of rendering this opinion, we have also assumed that
all statements of facts and assumptions described in our December 19, 1995
memorandum remain correct, unless otherwise noted.
II. Opinions
A. Lease Will be Treated as a Lease for Federal Income Tax Purposes
In order for any income derived by Funding II from the Albuquerque
Hyatt to constitute either "rents from real property," or in the case of a
default under the Lease, "gross income from foreclosure property," the Lease
must be treated as a lease for federal income tax purposes and not be treated
as a service contract, management contract or other type of arrangement. This
determination depends on an analysis of all the surrounding facts and
circumstances. In making this determination, courts have considered a variety
of factors, including the following: (i) the intent of the parties, (ii) the
form of the agreement, (iii) the degree of control over the business conducted
at the property that is provided to the lessee (e.g., whether the lessee has
substantial rights of control over the operation of the property and its
business), (iv) the extent to which the lessee has the risk of loss from
operations of the business conducted as the property (e.g., whether the lessee
bears the risk of increases in operating expenses and of decreases in
revenues), and (v) the extent to which the lessee has the opportunity to
benefit from operations of the business conducted at the property (e.g.,
whether the lessee benefits from decreased operating expenses or increased
revenues).(2)
In addition, section 7701(e) provides that a contract that purports
to be a service contract, partnership agreement, or another type of arrangement
will be treated instead as a lease of property if the contract is properly
treated as such, taking into account all relevant factors, including whether or
not: (i) the service recipient is in physical possession of the property, (ii)
the service recipient controls the property, (iii) the service recipient has a
significant economic or possessory interest in the property (e.g., the
property's use is likely to be dedicated to the service recipient for a
substantial portion of the useful life of the property, the recipient shares
the risk that the property will decline in value, the recipient shares in any
appreciation in the value of the property, the recipient shares in any savings
in the property's operating costs or the recipient bears the risk of damage to
or loss of the property), (iv) the service provider does not bear any risk of
substantially diminished receipts or substantially increased expenditures if
there is nonperformance under the contract, (v) the service provider does not
use the property concurrently to provide significant services to entities
unrelated to the service recipient and (vi) the total contract price does not
substantially exceed the rental
- --------------------
(2) See, e.g., Xerox Corp. v. U.S., 80-2 USTC Paragraph 9530 (Ct. Cl. Tr.
Div. 1980), aff'd per curiam, 656 F.2d 659 (Ct. Cl. 1981).
<PAGE> 104
Crescent Real Estate Equities, Inc.
April 1, 1996
Page 4
value of the property for the contract period. Since the determination of
whether a service contract, partnership agreement, or some other type of
arrangement should be treated as a lease is inherently factual, the presence or
absence of any single factor may not be dispositive in every case.(3)
We have concluded that the Lease will be treated as a lease for
Federal income tax purposes, rather than a service contract, management
contract or other type of arrangement. This conclusion is based, in part, on
the following facts: (i) Funding II and Southwest intend their relationship to
be that of lessor and lessee (as evidenced by the terms of the Lease), (ii)
Southwest has the right to exclusive possession, use and quiet enjoyment of the
Albuquerque Hyatt during the term of the Lease and the right to uninterrupted
control in the operation of and business conducted at the Albuquerque Hyatt
(subject to its assumption of the Management Agreement), (iii) Southwest will
bear the cost of, and be responsible for, capital expenditures, including
maintenance and repair of the Albuquerque Hyatt, and will dictate how the
Albuquerque Hyatt is maintained and improved (with the exception that Funding
II, as lessor, is responsible for the cost of certain capital expenditures in
situations where the funds available to Southwest are insufficient for such
expenditures), (iv) Southwest will bear all the costs and expenses of operating
the Albuquerque Hyatt (with the exception of the costs of replacing certain FF
& E associated with the Albuquerque Hyatt, which are to be funded by Funding
II), (v) Southwest will benefit from any savings in the costs of operating the
Albuquerque Hyatt during the term of the Lease, (vi) in the event of damage or
destruction to the Albuquerque Hyatt, Southwest will be at economic risk
because its obligation to make rental payments will not abate, (vii) Southwest
will indemnify Funding II against all liabilities imposed on Funding II during
the term of the Lease by reason of injury to persons or damage to property
occurring at the Albuquerque Hyatt or Southwest's use, management, maintenance
or repair of the Albuquerque Hyatt, (viii) Southwest is obligated to pay
substantial fixed rent for the period of use of the Albuquerque Hyatt,
regardless of whether its revenues exceed its costs and expenses, and (ix)
Southwest stands to incur substantial losses (or derive substantial profits)
depending on how successfully it operates the Albuquerque Hyatt.
We do not believe that our conclusion that the Lease of the
Albuquerque Hyatt will be treated as a lease for Federal income tax purposes is
affected by the fact that Southwest assumed RoseStar's rights and obligations
as lessor under the Lease subject to its assumption of Funding II's obligations
under the preexisting Management Agreement. The Management Agreement gives
Hyatt control over the day-to-day operation of the Albuquerque Hyatt and will
allow Hyatt to share with Southwest in the benefits of any increases in
revenues or cost savings in the operation of the Albuquerque Hyatt. However,
Hyatt's operation of the
- --------------------
(3) P.L.R. 8918012 (January 24, 1989).
<PAGE> 105
Crescent Real Estate Equities, Inc.
April 1, 1996
Page 5
Albuquerque Hyatt is not controlled by Funding II, and the Management Agreement
does not affect the fact that Southwest bears most of the risk of loss if the
Albuquerque Hyatt is not successful. Moreover, the IRS has issued a private
letter ruling in which it treated leases of several hotel properties as
producing "rents from real property" in a situation where the lessees had
contracted with a third party to conduct the day-to-day operations of the
hotels.(4) This ruling suggests that the IRS will respect a lease of a hotel
for federal income tax purposes even if the hotel is operated by an
independent contractor rather than by the lessee.
The Lease is structured in form so that Funding II retains ownership
of all the personal property leased to Southwest in connection with Southwest's
lease of the Albuquerque Hyatt (the "FF&E"). However, if the term of the Lease
equals or exceeds the useful life of some or all of the FF&E, it is possible
that the Lease could be treated for federal income tax purposes as a financing
arrangement. In such a case, Southwest would be treated as having acquired
ownership of the FF&E for federal income tax purposes in exchange for an
obligation to make future payments of principal and interest to Funding II.
Nonetheless, we do not believe that the recharacterization of the Lease as a
financing arrangement with respect to the FF&E would have a material effect on
the ability of the Company to satisfy the requirements for taxation as a REIT.
This is because, if a portion the of the payments made by Southwest under the
Lease were characterized as interest on indebtedness secured by the FF&E,
rather than rents from real property, that portion would still satisfy the 95
percent gross income test (although it would not satisfy the 75% gross income
test).(5)
B. Percentage Rent Provision is not Profit-Based
Pursuant to the Lease, Southwest will be obligated to pay Funding II
base rent and percentage rent. Under the regulations, percentage rent based on
a percentage of gross receipts or sales in excess of a floor amount, which is
how the percentage rent is structured under the Lease, will not qualify as
"rents from real property" unless (i) such floor amount does not depend in
whole or in part on the income or profits of the lessee, (ii) the percentage
and the floor amount are fixed at the time the lease is entered into, (iii) the
percentage and the floor amount are not renegotiated during the term of the
lease in a manner that has the effect
- --------------------
(4) See, P.L.R. 8117036 (January 27, 1981).
(5) If the Lease were recharacterized as a financing arrangement with
respect to the FF&E, it also might result in some minor timing differences
with respect to the Company's recognition of income. These differences
would result from (a) the recharacterization of a portion Southwest's
payments under the Lease as a return of principal and (b) the Company's
loss of any depreciation deductions attributable to the FF&E.
<PAGE> 106
Crescent Real Estate Equities, Inc.
April 1, 1996
Page 6
of basing the percentage rent on income or profits, and (iv) the percentage and
the floor amount conform with normal business practice.(6)
Under the terms of Article 4.2 of the Lease, Southwest will pay
percentage rent equal on an annual basis to the sum of (i) 17.5 percent of the
excess of annual gross receipts from room rentals over $6,000,000 and (ii) 2.5
percent of the excess of annual gross receipts from the food and beverage
facilities at the Albuquerque Hyatt over $2,000,000. It will effectively
reward Southwest for any increases in gross receipts from rooms and from other
sources over the threshold amounts. This type of formula does not base the
percentage rent on Southwest's income or profits, and similar formulas have
been treated by the IRS as generating "rents from real property."(7) Moreover,
Funding II has represented that (i) the floor amounts used to compute the
percentage rent under the Lease do not depend in whole or in part on the income
or profits of any person, (ii) the percentage rent provision of the Lease has
not been and will not be renegotiated during the term of the Lease or at the
expiration or earlier termination of the Lease in a manner that has the effect
of basing the rent on income or profits, and (iii) the percentage rent
provision of the Lease conforms with normal business practice. In addition,
based on our experience and an examination of the Lease and the Albuquerque
Hyatt projections, the Lease appears to conform with normal business practice.
C. Southwest is not a "Related Party Tenant"
Rents received from Southwest will not qualify as "rents from real
property" if Southwest is a "related party tenant." Southwest will be a
"related party tenant" if the Company, or an owner of 10 percent or more of the
Company, directly or constructively owns 10 percent or more of the assets or
net profits of Southwest.(8) Constructive ownership is determined for purposes
of this test by applying the rules of section 318(a) as modified by section
856(d)(5). Those rules generally provide that if 10 percent or more in value
of the stock of the Company is owned, directly or indirectly, by or for any
person, the Company is considered as owning the stock owned, directly or
indirectly, by or for such person.
Southwest will not be treated as a "related party tenant" because a
99 percent interest in Southwest's assets and net profits will be owned by
RoseStar, with the remaining one
- --------------------
(6) Treas. Reg. Section 1.866-4(b)(3).
(7) See, e.g., P.L.R. 8803007 (September 23, 1987) (percentage rent based on
gross revenues in excess of gross revenues for a base year treated as
"rents from real property"); cf. P.L.R. 9104018 (October 26, 1990)
(interest based on gross revenues in excess of a floor amount treated as
qualifying interest under section 856(f)).
(8) Section 856(d)(2)(B)(ii).
<PAGE> 107
Crescent Real Estate Equities, Inc.
April 1, 1996
Page 7
percent interest owned by RSSW, Corp. An individual, Sanjay Varma, currently
owns a 91 percent interest in the assets and net profits of RoseStar and RSSW,
Corp. In reaching this conclusion, we recognize that Sanjay Varma owns certain
Units of the Operating Partnership.(9) Funding II has represented that (i)
Sanjay Varma does not own more than 10 percent of the value of the Company's
stock, (ii) Sanjay Varma is not expected to own more than 10 percent of the
value of the Company's stock in the future, and (iii) neither Funding II nor
the Company intends to acquire, directly or constructively, an interest of 10
percent or more in the assets or net profits of RoseStar at any time in the
future. Moreover, Article 7.8 of the Lease limits the ability of Southwest or
any person owning an interest in Southwest (including RoseStar) to acquire,
directly or constructively, a 6 percent stock interest in the Company, and
Section 6.4 of the First Amended and Restated Articles of Incorporation of the
Company prevents RoseStar and its members and managers from acquiring more than
8 percent of the Company's stock.
The conclusion that Southwest will not be treated as a "related party
tenant" is based on the assumption that its member RoseStar will be treated as
a partnership for federal income tax purposes. If RoseStar is not treated as a
partnership for federal income tax purposes, but is instead treated as an
association taxable as a corporation, then it is possible that Southwest would
be treated as a "related party tenant" and the rents derived under the terms of
the Lease would not be treated as "rents from real property." This is because,
if RoseStar were treated as a corporation for federal income tax purposes,
Gerald W. Haddock and John C. Goff would likely be deemed to own all of its
voting stock, because of the extensive powers that they are granted as managers
under the RoseStar Regulations. If this were the case, the ownership of such
voting stock (and ownership of Southwest) might be attributed to the Company
under a literal reading of the constructive ownership rules described above.(10)
- --------------------
(9) See Rev. Rul. 73-194, 1973-1 C.B. 355 (management company treated as an
independent contractor with respect to a REIT, where an affiliate of the
management company and the REIT were partners).
(10) Richard Rainwater, Gerald Haddock and John Goff are each partners in
FW-Irving Partners, Ltd. (and apparently they are partners in other
partnerships as well). Richard Rainwater also owns more than 10 percent
of the value of the stock of the Company. Thus, assuming that the
ownership interests in RoseStar held by Gerald Haddock and John Goff
constitute stock, such interests, along with Richard Rainwater's stock
interest in the Company, will be attributed to FW-Irving Partners, Ltd.
pursuant to section 318(a)(3)(A), which provides that stock owned,
directly or indirectly, by or for a partners shall be considered as owned
by the partnership. Then, FW-Irving Partners, Ltd.'s deemed interest in
RoseStar would be attributed to the Company pursuant to section
318(a)(3)(C) (as modified by section 856(d)(5)), which provides that stock
owned by any person that owns 10 percent or more of the value of the stock
in a corporation shall be considered owned by the corporation. As you are
aware, however, we have opined to you in a similar context that we do not
believe that these attribution rules should be read literally.
<PAGE> 108
Crescent Real Estate Equities, Inc.
April 1, 1996
Page 8
An entity which has associates and an objective to carry on a
business for joint profit will be treated as a partnership for federal income
tax purposes, and not as an association taxable as a corporation, if it has not
more than two of the following four characteristics of a corporation: (i)
continuity of life; (ii) centralization of management; (iii) limited liability;
and (iv) free transferability of interests.(11) The entity must also have no
other characteristics which are significant in determining its classification.
Generally, other factors are considered only insofar as they relate to the
determination of the presence or absence of the foregoing corporate
characteristics.(12) The IRS has applied this four-factor test in determining
whether limited liability companies formed under the Texas Limited Liability
Company Act (the "Act") are partnerships for federal income tax purposes.(13)
The IRS has issued Rev. Proc. 95-10, which specifies conditions which must be
satisfied for a limited liability company to receive a favorable advanced
ruling that it will be classified as a partnership for federal income tax
purposes.(14) RoseStar should satisfy these conditions. However, such
conditions are applicable only in determining whether rulings will be issued
and are not intended as substantive rules for determination of partnership
status.
An organization will be treated as possessing the corporate
characteristic of continuity of life, even if the agreement organizing an
entity provides that it is to continue only for a stated period, unless a
member has the power to dissolve the organization at an earlier time.(15)
Article 6.01 of the Act provides, in part, that except as otherwise provided in
the company's regulations, a limited liability company shall be dissolved upon
the death, retirement, resignation, expulsion, bankruptcy, or dissolution of a
member or the occurrence of any other event which terminates the continued
membership of a member in the limited liability company, unless there is at
least one remaining member and the business of the limited liability company is
continued by the consent by the number of members or class thereof stated in
the articles of organization or regulations of the limited liability company or
of not so stated, by all remaining members. Article 2 of the RoseStar Articles
provides that the duration of RoseStar is until the close of business on
December 31, 2015, or until its earlier dissolution in accordance with the
provisions of the Act or the Regulations. Article 10.2 of the RoseStar
Regulations provides, in part, that RoseStar shall be dissolved upon the
withdrawal, death, retirement, resignation, expulsion, bankruptcy, legal
incapacity or dissolution of any member, unless the business of RoseStar is
continued by the consent of all the remaining members
- --------------------
(11) Treas. Reg. Section 301.7701-2(a).
(12) See Rev. Rul. 79-106, 1979-1 C.B. 448.
(13) See, e.g., P.L.R. 9242025 (July 22, 1992) and P.L.R. 9218078 (January
31, 1992).
(14) 1995-3 I.R.B. 20.
(15) Treas. Reg. Section 301.7701-2(b)(3).
<PAGE> 109
Crescent Real Estate Equities, Inc.
April 1, 1996
Page 9
within ninety days. Accordingly, RoseStar will lack the corporate
characteristic of continuity of life.
An organization will be treated as possessing the corporate
characteristic of free transferability of interests if the members owning all
or substantially all of the interests in an organization may substitute for
themselves without the consent of the other members a person who is not a
member of the organization.(16) Article 4.05 of the Act provides, in part, that
unless otherwise provided by the company's regulations, a membership interest
is assignable in whole or in part; an assignment of a member's interest does
not entitle the assignee to become, or to exercise rights or powers of a
member; and until the assignee becomes a member, the assignor member continues
to be a member and to have the power to exercise any rights or powers of a
member, except to the extent those rights or powers are assigned. Article 4.07
of the Act provides, in part, that an assignee of a membership interest may
become a member if and to the extent that the company's regulations so provide,
or all members consent. Article 9.3 of the RoseStar Regulations provides, in
part, that no member shall have the right to substitute in its place a
transferee unless consent is given by the Managers and a majority of the other
members, which consent may be withheld in the discretion of the Managers or the
other members. Accordingly, RoseStar will lack the corporate characteristic of
free transferability of interests. Because RoseStar will lack the corporate
characteristics of continuity of life and free transferability of interests, in
our opinion it will be treated as partnership for federal income tax purposes.
D. Incidental Personal Property
As noted in the December 19, 1995 memorandum, in order for the rent
under the Lease to be treated as "rents from real property," the rents
attributable to personal property leased under or in connection with the Lease
must not be greater than 15 percent of the rents received under the Lease. The
rent attributable to personal property leased under or in connection with a
lease of real property is the amount that bears the same ratio to total rent
for the taxable year as (i) the average of the adjusted bases of the personal
property leased under or in connection with a lease of real property at the
beginning and at the end of the taxable year bears to (ii) the average of the
aggregate adjusted bases of the real and personal property subject to the lease
at the beginning and at the end of such taxable year (the "Adjusted Basis
Ratio").(17) Funding II has represented that the adjusted tax basis of the
personal property leased under or in connection with the Lease has not
represented and will not represent more than 15 percent of the aggregate
adjusted tax basis of the Albuquerque
- --------------------
(16) Treas. Reg. Section 301.7701-2(e).
(17) Section 856(d)(1)(C).
<PAGE> 110
Crescent Real Estate Equities, Inc.
April 1, 1996
Page 10
Hyatt at any time. Moreover, in Article 36.2 of the Lease, the parties agreed
that the adjusted tax basis of the personal property leased under or in
connection with the Lease will not represent more than 15 percent of the
aggregate adjusted tax basis of the Albuquerque Hyatt at any time.
E. Provision of Services by the Funding II
1. Income Derived under the Terms of the Lease
Although Funding II may treat charges for services customarily
furnished or rendered in connection with the rental of the Albuquerque Hyatt as
"rents from real property," any services rendered to the occupants of the
Albuquerque Hyatt must be furnished or rendered by an independent contractor
from whom the Company does not derive or receive any income.(18) Moreover, to
the extent that any independent contractors provide noncustomary services to
the occupants of the Albuquerque Hyatt, the cost of such services must not be
borne by the Funding II.(19)
Under the terms of the Lease, Funding II will not be required to
provide any services, customary or noncustomary, in connection with the rental
of the Albuquerque Hyatt. Instead, all services relating to the operation of
the Albuquerque Hyatt will be provided by Hyatt under the terms of the
Management Agreement. Funding II has represented that Hyatt is an independent
contractor within the meaning of section 856(d)(3), from which the Company and
Funding II will not derive or receive any income. Funding II will not bear the
cost of any of the services provided by Hyatt. Instead, such costs are borne
by Southwest, because it has assumed Funding II's obligations, as owner, under
the Management Agreement.
Based on the foregoing, we believe that the provision of any
noncustomary services to the occupants of the Albuquerque Hyatt by Hyatt will
have no effect on the qualification of the income derived from the Albuquerque
Hyatt as "rents from real property." In fact, the IRS has issued a private
letter ruling in which it has treated the income derived from several leases of
hotel properties as "rents from real property" in a situation where the lessees
had contracted with a third-party to conduct the day to day operations of the
hotels.(20) Our conclusion is not altered by the fact that Funding II will
remain liable for any obligations arising under the Management Agreement, to
the extent that they are not satisfied by Southwest. Funding II should not be
treated as bearing the cost of the services provided by
- --------------------
(18) Sections 856(d)(1), 856(d)(2)(C); Treas. Reg. Section 1.512(b)-1(c)(5).
(19) Treas. Reg. Section 1.856-4(b)(5).
(20) See, P.L.R. 8117036 (January 27, 1981).
<PAGE> 111
Crescent Real Estate Equities, Inc.
April 1, 1996
Page 11
Hyatt merely because it is liable for Southwest's obligations under the
Management Agreement. Funding II is not retaining this liability in an attempt
to provide services to Southwest. Instead, it is retaining this liability only
as an accommodation to Hyatt. Moreover, Funding II believes that it is highly
unlikely that it will ever be required to reimburse Hyatt for the costs and
expenses of operating the Albuquerque Hyatt. This is because (i) the
Albuquerque Hyatt is projected to generate enough gross income to cover the
payments to Hyatt under the Management Agreement, (ii) in connection with
Section 7.7 the Lease, as amended, Southwest has represented that it has a net
worth of at least $200,000, (iii) in connection with Section 7.9 of the Lease,
as amended, Southwest has agreed to retain all of the income it earns from the
Albuquerque Hyatt (except distributions to its beneficial owners in an amount
sufficient to pay their federal and state income taxes on such income) until
such time as Southwest and any affiliate of Southwest (including RoseStar)
which has entered into a long-term lease of a hotel with Funding II or any
affiliate of Funding II (including the Operating Partnership) have accumulated
and are holding in reserve funds in the aggregate which are sufficient to
enable Southwest and any affiliated entities to pay at least one monthly
payment of base rent under each lease between Southwest and any such affiliated
entities and Funding II or an affiliate of Funding II, (iv) pursuant to the
Guaranty, RoseStar's individual members have guaranteed RoseStar's obligations
under the Lease, and (v) in the view of Funding II, Southwest's capitalization
is adequate to allow Southwest to assume its obligations as lessee under the
Lease.
2. Income Derived in the Case of a Default under the Lease
If Funding II were required to reimburse Hyatt for the costs of
operating the Albuquerque Hyatt because of a default by Southwest under the
terms of the Management Agreement, we have concluded that the income derived by
Funding II from the Albuquerque Hyatt would be treated as "qualifying income"
for purposes of the 75 percent and 95 percent tests. This is because, if
Funding II were required to reimburse Hyatt for the cost of operating the
Albuquerque Hyatt, this would constitute an event of default under Article
16.1(c) of the Lease, allowing Funding II to terminate Southwest's leasehold
interest in the Albuquerque Hyatt. As a result of such a termination of the
Lease, any income derived by Funding II from the Albuquerque Hyatt after the
default would be treated as income from foreclosure property.
Funding II would be able to continue to operate the Albuquerque Hyatt
after any default under the Lease, without affecting its status as foreclosure
property, because Hyatt, an independent contractor, from whom the Company will
not derive any income, will provide all services relating to its operation. A
REIT can use foreclosure property in the conduct of an
<PAGE> 112
Crescent Real Estate Equities, Inc.
April 1, 1996
Page 12
active trade or business, as long as this is done through the use of an
independent contractor, from whom the REIT does not derive or receive any
income.(21)
Real property acquired upon default under a lease is not eligible to
be treated as foreclosure property if the lease is entered into with an intent
to evict or foreclose, or if the REIT knows or has reason to know that default
would occur.(22) This is not the case in the present situation because (i) the
Albuquerque Hyatt is projected to generate enough gross income to cover the
payments to Hyatt under the Management Agreement, (ii) in connection with
Section 7.7 the Lease, as amended, Southwest has represented that it has a net
worth of at least $200,000, (iii) in connection with Section 7.9 of the Lease,
as amended, Southwest has agreed to retain all of the income it earns from the
Albuquerque Hyatt (except distributions to its beneficial owners in an amount
sufficient to pay their federal and state income taxes on such income) until
such time as Southwest and any affiliate of Southwest (including RoseStar)
which has entered into a long-term lease of a hotel with Funding II or any
affiliate of Funding II (including the Operating Partnership) have accumulated
and are holding in reserve funds in the aggregate which are sufficient to
enable Southwest and any affiliated entities to pay at least one monthly
payment of base rent under each lease between Southwest and any such affiliated
entities and Funding II or an affiliate of Funding II, (iv) pursuant to the
Guaranty, RoseStar's individual members have guaranteed RoseStar's obligations
under the Lease, and (v) in the view of Funding II, Southwest's capitalization
is adequate to allow Southwest to assume its obligations as lessee under the
Lease.
The Albuquerque Hyatt would in any event qualify as foreclosure
property only for a period of up to two years, beginning of the date of its
acquisition by Funding II, unless Funding II obtains an extension of the grace
period from the IRS.(23) Therefore, in the event Funding II takes possession
of the Albuquerque Hyatt as a result of a default under the Lease, presumably
Funding II will sell the Albuquerque Hyatt or, within two years, rent it to
another tenant under a lease that will produce "rents from real property."
- --------------------
(21) Section 856(e)(4)(C). (The IRS clearly intended for REITs to be able to
treat hotels operated by independent contractors as foreclosure property.
For instance, the Treasury regulations defining foreclosure property
refer to hotel properties twice. See, Treas. Reg. Sections 1.856-6(b)(2),
1.856-6(d)(2). In addition, the IRS has also recently issued a private
letter ruling in which it treated income received from hotels acquired
pursuant to a bankruptcy petition as income from foreclosure property,
where the hotels were operated by third party managers. P.L.R.
9420013 (2/15/94).)
(22) Treas. Reg. Section 1.856-6(b)(3).
(23) Section 856(e)(2).
<PAGE> 113
Crescent Real Estate Equities, Inc.
April 1, 1996
Page 13
F. Conclusions
Based on the assumptions and representations stated above, it is our
opinion that (i) all of the income that Funding II derives from the Albuquerque
Hyatt will be treated as "qualifying income" for purposes of the 95 percent
test and (ii) all of the income that Funding II derives from the Albuquerque
Hyatt, will be treated as "qualifying income" for purposes of the 75 percent
test.
III. Additional Limitations
The foregoing opinions are limited to the specific matters covered
thereby and should not be interpreted to imply that the undersigned has offered
its opinion on any other matter.
Very truly yours,
SHAW, PITTMAN, POTTS & TROWBRIDGE
By: /s/ CHARLES B. TEMKIN
---------------------------------
Charles B. Temkin, P.C.
<PAGE> 114
July 26, 1996
Crescent Real Estate Equities, Inc.
900 Third Avenue
Suite 1800
New York, New York 10022
Re: Canyon Ranch
Ladies and Gentlemen:
You have requested certain opinions regarding the application of U.S.
federal income tax laws to Crescent Real Estate Equities, Inc. (the "Company")
and Crescent Real Estate Equities Limited Partnership (the "Operating
Partnership") in connection with the acquisition of Canyon Ranch, a health and
fitness resort located in Tucson, Arizona from Canyon Ranch, Inc. ("CRI").
I. TRANSACTION DOCUMENTS
In rendering the opinions expressed below, we have examined and relied
upon the following documents (collectively, the "Transaction Documents"):
(i) the Contribution Agreement between CRI and the Operating
Partnership, dated July 26, 1996 ("the Contribution
Agreement");
(ii) the Lease Agreement between CRI and Canyon Ranch Leasing,
L.L.C. ("CRL"), dated July 26, 1996 (the "Lease");
(iii) the Management Agreement between CRI and Canyon Ranch
Management, L.L.C. ("CRM"), dated July 26, 1996 (the
"Management Agreement");
(iv) the Assignment and Assumption of Management Agreement between
CRI and the Operating Partnership, dated July 26, 1996 (the
"Assignment and Assumption Agreement");
<PAGE> 115
Crescent Real Estate Equities, Inc.
July 26, 1996
Page 2
(v) the Assignment and Assumption of Master Lease between CRI and
the Operating Partnership, dated July 26, 1996;
(vi) the Assignment and Assumption of Contracts between CRI and
the Operating Partnership, dated July 26, 1996;
(vii) the Assignment and Assumption of Store Leases between CRI and
the Operating Partnership, dated July 26, 1996;
(viii) the Asset Purchase Agreement between CRL, CRI and the
Operating Partnership, dated July 26, 1996 (the "FF & E
Purchase Agreement");
(ix) the Contract of Sale between CRI and CRL, dated July 26, 1996
(the "Life Share Contract");
(x) the Promissory Note for $2,400,000 with CRL as maker and the
Operating Partnership as payee bearing interest at the rate
of 10.75 percent, dated July 26, 1996 (the "Crescent FF & E
Note");
(xi) the Promissory Note in the amount of $648,360 with CRL as
maker and the Operating Partnership as payee bearing interest
at the rate of 10.75 percent per annum, dated July 26, 1996
(the "Life Share Note");
(xii) the Security Agreement between CRL and the Operating
Partnership, dated July 26, 1996 (the "Security Agreement");
(xiii) the Promissory Note in the amount of $162,090 with CRL as
maker and RoseStar Management, L.L.C. ("RoseStar") as payee
bearing interest at the rate of 10.75 percent per annum,
dated July 26, 1996 ("RoseStar Life Share Note");
(xiv) the Guaranty Agreement between RoseStar as GUARANTOR and the
Operating Partnership, dated July 26, 1996 (the "Guaranty");
(xv) the Limited Guaranty Agreement between Gerald Haddock, John
C. Goff and Sanjay Varma, together, as guarantors and the
Operating Partnership, dated July 26, 1996 (the "Limited
Guaranty");
<PAGE> 116
Crescent Real Estate Equities, Inc.
July 26, 1996
Page 3
(xvi) the Agreement Between CRI as Lessee and the Operating
Partnership as Substitute Lessor, dated July 26, 1996;
(xvii) the Option Agreement between Melvin Zuckerman ("Zuckerman")
and RoseStar, dated July 26, 1996 (the "Zuckerman Option
Agreement");
(xviii) the Option Agreement between Jerry Cohen ("Cohen") and RSCR
Arizona Corp., a Delaware Corporation ("RSCR"), dated July
26, 1996 (the "Cohen Option Agreement");
(xix) the Option Agreement between CRL and the Operating
Partnership, dated July 26, 1996 (the "Life Share Option
Agreement");
(xx) the Articles of Organization of RoseStar (the "RoseStar
Articles");
(xxi) the Regulations of RoseStar (the "RoseStar Regulations");
(xxii) the Articles of Organization of CRL (the "CRL Articles");
(xxiii) the Regulations of CRL (the "CRL Regulations");
(xxiv) the Articles of Incorporation of RSCR;
(xxv) the Bylaws of RSCR;
(xxvi) the First Amended and Restated Articles of Incorporation of
Crescent Real Estate Equities, Inc. (the "Crescent
Articles"); and
(xxvii) such other documents or information as we deemed necessary
for the opinions set forth below.
II. BACKGROUND OF TRANSACTION
A. The Management Agreement: Under the Management Agreement, CRI,
as owner of Canyon Ranch, has contracted with CRM to manage and operate Canyon
Ranch, to collect all Canyon Ranch receipts, and to manage certain related
properties and time share programs (as described more fully below). In
addition, CRM has also agreed to honor resort memberships issued to various
persons by CRI. CRM was also granted the right to issue
<PAGE> 117
Crescent Real Estate Equities, Inc.
July 26, 1996
Page 4
additional memberships in the resort in the future. In exchange for these
services, CRM is to be paid a profits-based management fee collected from the
gross receipts of the resort.
Under the Management Agreement, CRI, as owner, is obligated to
establish a capital improvement reserve to be funded from gross receipts from
the resort. CRM, as manager, is entitled to withdraw funds from this reserve
to pay for capital improvements and additions to the furniture, fixtures and
equipment used in connection with the resort.
Section 15.2 of the Management Agreement requires that all assignments
of the Management Agreement (other than certain assignments to permitted
transferees) be approved by CRM and under Section 15.3 of the Management
Agreement any assignees are bound by the obligations of the owner under the
Management Agreement.
B. The Lease: Under the terms of the Lease, CRL leased the
following property (the "Leased Property") from CRI: (i) the land, buildings,
fixtures and other improvements commonly known as Canyon Ranch; (ii) various
contracts entitling persons to use the guest rooms and/or the resort
facilities; (iii) various contracts (excluding employment contracts) relating
to the operation of the resort; (iv) CRI's interest as owner under the
Management Agreement (including the obligation to fund the capital improvement
reserve); (v) CRI's interest under certain Individual Unit Management
Agreements and a Common Element Management Agreement relating to the Canyon
Ranch Casitas (described more fully below); (vi) CRI's interest under certain
Individual Unit Management Agreements relating to the Canyon Ranch Estates
(described more fully below); (vii) CRI's interest under all existing leases of
the resort property; and (viii) certain personal property used in connection
with the resort. The Leased Property does not include certain machinery,
equipment, fixtures, furniture, vehicles, artwork, signage and other decorative
items located in or used in connection with the operation of the resort (the
"FF & E"), which was sold by CRI to CRL (as described more fully below).
C. The Zuckerman and Cohen Option Agreements: Under the
Zuckerman Option Agreement, Zuckerman granted to RoseStar, a Texas limited
liability company, the exclusive option to purchase, on or after December 15,
1996, but not after December 31, 1996, his 99 percent interest in CRL, the
Delaware limited liability company that is lessee under the Lease. In order to
exercise this option, RoseStar must give notice to Zuckerman and pay him $1.00.
In addition, under the Zuckerman Option Agreement, Zuckerman has the right to
require RoseStar to purchase his 99 percent interest in CRL for $1.00 at any
time on or after December 15, 1996, but not after December 31, 1996.
<PAGE> 118
Crescent Real Estate Equities, Inc.
July 26, 1996
Page 5
Currently, Sanjay Varma owns a 91 percent interest in the assets and
net profits of RoseStar, while Gerald W. Haddock and John C. Goff, the managers
of RoseStar, each own a 4.5 percent interest in its assets and net profits.
Under the Cohen Option Agreement, Cohen granted to RSCR the exclusive
option to purchase, on or after December 15, 1996, but not after December 31,
1996, his one percent interest in CRL. In order to exercise this option, RSCR
must give notice to Cohen and pay him $1.00. In addition, under the Cohen
Option Agreement, Cohen has the right to require RSCR to purchase his one
percent interest in CRL for $1.00 at any time on or afterDecember 15, 1996, but
not after December 31, 1996.
Sanjay Varma owns 91 percent of the stock of RSCR. Gerald W. Haddock
and John C. Goff each own 4.5 percent of the stock of RSCR.
D. The Contribution Agreement and the Assignment and Assumption
Agreement: Under the Contribution Agreement, CRI contributed the land,
buildings, fixtures and other improvements commonly known as Canyon Ranch, as
well as certain personal property used in connection with the operation of the
resort to the Operating Partnership, subject to the Lease and the Management
Agreement, in exchange for Units in the Operating Partnership. Under the
Contribution Agreement, the Operating Partnership also acquired CRI's interest
as owner under the Management Agreement and as lessor under the Lease.
Under the Assignment and Assumption Agreement, the Operating
Partnership assumed and agreed to perform all obligations of CRI as owner under
the Management Agreement to the extent that such obligations are not performed
by CRL as lessee under the Lease.
E. FF & E: As noted above, the Operating Partnership did not
acquire any of the FF & E. Instead, CRL purchased the FF & E from CRI under
the Asset Purchase Agreement with the proceeds of a loan. The loan, in the
principal amount of $2,400,000, was made to CRL by the Operating Partnership,
is evidenced by the Crescent FF & E Note, and is secured by the FF & E under
the terms of the Security Agreement.
F. Canyon Ranch Casitas: Adjacent to Canyon Ranch is the Canyon
Ranch Casitas Subdivision, consisting of 47 platted lots. Immediately prior to
the execution of the Contribution Agreement and the Life Share Property
Contract, CRI owned interests in 19 of these lots. The interests owned by CRI
consisted of: (a) the fee interest in 10 developed lots, which are used for
accommodations just like other rooms contained in Canyon Ranch proper, (b) the
fee interest in 6 unimproved lots, and (c) the fee interest in three improved
lots (the
<PAGE> 119
Crescent Real Estate Equities, Inc.
July 26, 1996
Page 6
"Casitas Time Share Lots") dedicated to the Canyon Ranch Casitas time share
program (described more fully below). Under the terms of the Contribution
Agreement, CRI's fee interest in the 10 developed and 6 undeveloped lots in
the Casitas Subdivision was contributed to the Operating Partnership subject to
the Lease and the Management Agreement. As a consequence, CRM will be
responsible for operating these lots for CRL. CRI sold its interest in the
Casitas Time Share Lots to CRL under the terms of the Life Share Property
Contract. CRL borrowed funds pursuant to the Life Share Note to acquire these
lots.
The other 28 lots in the Canyon Ranch Casitas subdivision are not
owned by CRI (one is owned by Zuckerman and the other 27 are owned by third
parties) and have not been contributed to the Operating Partnership. However,
under the terms of the Management Agreement, CRM has assumed the obligation to
manage approximately 20 of these lots under the terms of certain Individual
Unit Management Agreements between CRI and the owners of these lots. CRM has
also assumed CRI's obligation to maintain certain common areas in the Canyon
Ranch Casitas subdivision under the terms of a Common Element Management
Agreement. Under prior agreements, CRI granted third parties using the Casitas
units the right to use the resort facilities in exchange for an additional fee.
Under the terms of the Management Agreement, CRM has assumed CRI's obligations
under these prior agreements.
G. Canyon Ranch Estates: Also adjacent to Canyon Ranch is the
Canyon Ranch Estates Subdivision. Immediately prior to the execution of the
Contribution Agreement, CRI owned interests in five units in the Canyon Ranch
Estates Subdivision. The interests owned by CRI consisted of: (a) the fee
interest in one house in the Canyon Ranch Estates Subdivision used for
accommodations just like other rooms contained in Canyon Ranch proper, and (b)
the fee interest in three improved lots (the "EstatesTime Share Lots")
dedicated to the Canyon Ranch Hacienda time share program (described more fully
below). Under the terms of the Contribution Agreement, CRI's fee interest in
the house in the Canyon Ranch Estates subdivision was contributed to the
Operating Partnership subject to the Lease and the Management Agreement. As a
consequence, CRM will be responsible for operating this unit for CRL. CRI sold
its interest in the Estates Time Share Lots to CRL under the terms of the Life
Share Property Contract. CRL borrowed funds pursuant to the Life Share Note to
acquire these lots.
The other units in the Canyon Ranch Estates Subdivision were not
contributed to the Operating Partnership.
H. Time Share Arrangements: Time share arrangements exist with
respect to the Casitas Time Share Lots and the Estates Time Share Lots.
Purchasers of time share interests
<PAGE> 120
Crescent Real Estate Equities, Inc.
July 26, 1996
Page 7
in these properties ("Interval Owners") entered into agreements with CRI that
allow the Interval Owners to (i) become members of Canyon Ranch, (ii) use the
time share accommodations for a certain period of time each year, and (iii)
receive certain personal health benefits. However, an Interval Owner must pay
to CRI additional fees for use of the spa, for meals and any special services
utilized. Interval Owners must also pay an annual maintenance fee to their
life share association (described more fully below). Under the Management
Agreement, CRM has agreed to perform all duties of CRI, as owner, under these
time share arrangements, to the extent such duties do not arise after the
termination of the Management Agreement. CRM has also agreed not to sell any
more time share interests under any of the above described programs.
III. REQUESTED OPINIONS
You have asked for our opinion concerning the impact that the purchase
of Canyon Ranch will have on the ability of the Company to continue to qualify
as a real estate investment trust (a "REIT") under section 856.(1)
Specifically, you have requested that we render opinions addressing the
following:
1. whether the Lease will be treated as a lease for federal
income tax purposes;
2. whether the income that the Operating Partnership derives from
the Lease will be treated as "qualifying income" for purposes
of the 95 percent and 75 percent gross income tests for REIT
qualification under section 856(c); and
3. whether the income that the Operating Partnership derives from
the Crescent FF & E Note and the Life Share Note will be
treated as "qualifying income" for purposes of the 75 percent
gross income test for REIT qualification under section
856(c)(3).
IV. LEGAL BACKGROUND
A. 75 Percent and 95 Percent Tests
In order to qualify as a REIT for tax purposes, the Company must
satisfy certain tests with respect to the composition of its gross income on an
annual basis. First, at least 75 percent of the Company's gross income
(excluding gross income from certain prohibited
- --------------------
(1) All section references herein are to the Internal Revenue Code of 1986,
as amended (the "Code"), or to the regulations issued thereunder, unless
otherwise noted.
<PAGE> 121
Crescent Real Estate Equities, Inc.
July 26, 1996
Page 8
transactions) for each taxable year must consist of temporary investment income
or of certain defined categories of income derived directly or indirectly from
investments relating to real property or mortgages on real property. These
categories include, subject to various limitations, rents from real property,
interest on mortgages on real property, gains from the sale or other
disposition of real property (including interests in real property and
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.(2) Second, at least 95
percent of the Company's gross income (excluding gross income from certain
prohibited transactions) for each taxable year must be derived from income
qualifying under the 75 percent 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.(3)
In applying these income tests, REITs that are partners in a
partnership are required to include in their gross income their proportionate
share of the partnership's gross income. In addition, such REITs are to treat
this partnership gross income as retaining the same character as the items of
gross income of the partnership for purposes of section 856.(4) Thus, the
character of any income derived by the Operating Partnership from Canyon Ranch
will affect the ability of the Company to qualify as a REIT.
B. Rents from Real Property
Rents from real property satisfy both the 75 percent and 95 percent
tests for REIT qualification 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.(5) 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 percent or more of the REIT, directly
or constructively, owns 10 percent or more of such tenant (a "Related Party
Tenant").(6) Third, if rent attributable to personal property leased in
connection with a lease of real property is greater than 15 percent of the
total rent received under the lease, then the portion of rent attributable to
such personal
- --------------------
(2) Section 856(c)(3).
(3) Section 856(c)(2).
(4) Treas. Reg. Section 1.856-3(g).
(5) Section 856(d)(2)(A).
(6) Section 856(d)(2)(B).
<PAGE> 122
Crescent Real Estate Equities, Inc.
July 26, 1996
Page 9
property will not qualify as "rents from real property."(7) 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. However, rents will be qualified as "rents from real
property" if a REIT directly performs services in connection with the lease of
the property, if those services are "usually or customarily rendered" in
connection with the rental of space for occupancy, and such services are not
considered to be rendered to the occupant of the property.(8)
C. Income from Foreclosure Property
Income from foreclosure property is treated as "qualifying income" for
purposes of the 75 percent and 95 percent tests (although any net income from
foreclosure property is taxed at the maximum corporate rate). Foreclosure
property is any real property, and any personal property incident to such real
property, acquired by a REIT through default under a mortgage or a lease. A
REIT may elect to treat such property as foreclosure property for a grace
period of up to two years.(9) However, such property will cease to qualify as
foreclosure property if it is used by the REIT in a trade or business more than
90 days after it is acquired and it is not operated through an independent
contractor from whom the REIT does not derive or receive any income.(10)
Moreover, property is not eligible to be treated as foreclosure property if the
lease is entered into with an intent to evict or foreclose, or if the REIT
knows or has reason to know that default would occur.(11)
V. OPINIONS
A. Lease Will be Treated as a Lease for Federal Income Tax
Purposes
In order for any income derived by the Operating Partnership from
Canyon Ranch to constitute either "rents from real property," or in the case of
a default under the Lease, "gross income from foreclosure property," the Lease
must be treated as a lease for federal income tax
- --------------------
(7) Section 856(d)(1)(C).
(8) Sections 856(d)(1)(B), 856(d)(2)(C).
(9) Section 856(e).
(10) Section 856(e)(4).
(11) Treas. Reg. Section 1.856-6(b)(3).
<PAGE> 123
Crescent Real Estate Equities, Inc.
July 26, 1996
Page 10
purposes and not be treated as a service contract, management contract or other
type of arrangement. This determination depends on an analysis of all the
surrounding facts and circumstances. In making this determination, courts have
considered a variety of factors, including the following: (i) the intent of the
parties, (ii) the form of the agreement, (iii) the degree of control over the
business conducted at the property that is provided to the lessee (e.g.,
whether the lessee has substantial rights of control over the operation of the
property and its business), (iv) the extent to which the lessee has the risk of
loss from operations of the business conducted at the property (e.g., whether
the lessee bears the risk of increases in operating expenses and of decreases
in revenues), and (v) the extent to which the lessee has the opportunity to
benefit from operations of the business conducted at the property (e.g.,
whether the lessee benefits from decreased operating expenses or increased
revenues).(12)
In addition, section 7701(e) provides that a contract that purports to
be a service contract, partnership agreement, or another type of arrangement
will be treated instead as a lease of property if the contract is properly
treated as such, taking into account all relevant factors, including whether or
not: (i) the service recipient is in physical possession of the property, (ii)
the service recipient controls the property, (iii) the service recipient has a
significant economic or possessory interest in the property (e.g., the
property's use is likely to be dedicated to the service recipient for a
substantial portion of the useful life of the property, the recipient shares
the risk that the property will decline in value, the recipient shares in any
appreciation in the value of the property, the recipient shares in any savings
in the property's operating costs or the recipient bears the risk of damage to
or loss of the property), (iv) the service provider does not bear any risk of
substantially diminished receipts or substantially increased expenditures if
there is nonperformance under the contract, (v) the service provider does not
use the property concurrently to provide significant services to entities
unrelated to the service recipient and (vi) the total contract price does not
substantially exceed the rental value of the property for the contract period.
Since the determination of whether a service contract, partnership agreement,
or some other type of arrangement should be treated as a lease is inherently
factual, the presence or absence of any single factor may not be dispositive in
every case.(13)
We have concluded that the Lease will be treated as a lease for
Federal income tax purposes, rather than a service contract, management
contract or other type of arrangement. This conclusion is based, in part, on
the following facts: (i) the Operating Partnership and CRL intend their
relationship to be that of lessor and lessee (as evidenced by the terms of the
- --------------------
(12) See, e.g., Xerox Corp. v. U.S., 80-2 USTC Paragraph 9530 (Ct. Cl. Tr.
Div. 1980), aff'd per curiam, 656 F.2d 659 (Ct. Cl. 1981).
(13) P.L.R. 8918012 (January 24, 1989).
<PAGE> 124
Crescent Real Estate Equities, Inc.
July 26, 1996
Page 11
Lease), (ii) CRL, as tenant under the Lease, will have the right to exclusive
possession, use and quiet enjoyment of Canyon Ranch during the term of the
Lease and the right to uninterrupted control in the operation of the business
conducted at Canyon Ranch (subject to its assumption of the Management
Agreement), (iii) CRL will dictate how Canyon Ranch is maintained and improved,
(iv) CRL will bear all the costs and expenses of operating Canyon Ranch, (v)
CRL will benefit from any savings in the costs of operating Canyon Ranch during
the term of the Lease, (vi) in the event of damage or destruction to Canyon
Ranch, CRL will be at economic risk because its obligation to make rental
payments will not abate, (vii) CRL will indemnify the Operating Partnership
against all liabilities imposed on the Operating Partnership during the term of
the Lease by reason of injury to persons or damage to property occurring at
Canyon Ranch or CRL's use, management, maintenance or repair of Canyon Ranch,
(viii) CRL is obligated to pay substantial fixed rent for the period of use of
Canyon Ranch, regardless of whether its revenues exceed its costs and expenses,
and (ix) CRL stands to incur substantial losses (or derive substantial profits)
depending on how successfully it operates Canyon Ranch.
We do not believe that our conclusion that the Lease of Canyon Ranch
will be treated as a lease for Federal income tax purposes is affected by the
fact that CRL entered the Lease subject to its assumption of CRI's obligations
under the preexisting Management Agreement. The Management Agreement gives CRM
control over the day-to-day operation of Canyon Ranch and allows CRM to share
with CRL in the benefits of any increases in revenues or cost savings in the
operation of Canyon Ranch. However, CRM's operation of Canyon Ranch will not
be controlled by the Operating Partnership, and the Management Agreement does
not affect the fact that CRL bears most of the risk of loss if Canyon Ranch is
not successful. Moreover, the IRS has issued a private letter ruling in which
it treated leases of several hotel properties as producing "rents from real
property" in a situation where the lessees had contracted with a third party to
conduct the day-to-day operations of the hotels.(14) This ruling suggests that
the IRS will respect a lease of a hotel for federal income tax purposes even if
the hotel is operated by an independent contractor rather than by the lessee.
B. Percentage Rent Provision is not Profit-Based
Pursuant to the Lease, CRL will be obligated to pay the Operating
Partnership base rent and percentage rent. Under the regulations, percentage
rent based on a percentage of gross receipts or sales in excess of a floor
amount, which is how the percentage rent is structured under the Lease, will
not qualify as "rents from real property" unless (i) such floor amount does not
depend in whole or in part on the income or profits of the lessee, (ii) the
percentage and the floor amount are fixed at the time the lease is entered
into, (iii) the
- --------------------
(14) See, P.L.R. 8117036 (January 27, 1981).
<PAGE> 125
Crescent Real Estate Equities, Inc.
July 26, 1996
Page 12
percentage and the floor amount are not renegotiated during the term of the
lease in a manner that has the effect of basing the percentage rent on income
or profits, and (iv) the percentage and the floor amount conform with normal
business practice.(15)
Under the terms of Article 4.2 of the Lease, the Lessee will pay
percentage rent during the first seven years of the Lease on an annual basis
equal to the sum of (i) 15 percent of the amount by which gross receipts from
the Leased Property exceed $29,000,000 (with such amount not exceeding
$4,000,000), (ii) 11 percent of the amount by which gross receipts from the
Leased Property exceed $33,000,000 (with such amount not exceeding $7,000,000),
and (iii) 8.5 percent of the amount by which gross receipts from the Leased
Property exceed $40,000,000. During years eight through ten of the Lease the
Lessee will pay percentage rent equal to the sum of (i) 20 percent of the
amount by which gross receipts from the Leased Property exceed $29,000,000
(with such amount not exceeding $4,000,000), (ii) 16 percent of the amount by
which the gross receipts from the Leased Property exceed $33,000,000 (with such
amounts not exceeding $7,000,000) and (iii) 15 percent of the amount by which
gross receipts from the Leased Property exceed $40,000,000. This formula
effectively rewards the tenant for any increases in gross receipts over the
threshold amounts. This type of formula does not base the percentage rent on
the tenant's income or profits, and similar formulas have been treated by the
IRS as generating "rents from real property."(16) Moreover, the Operating
Partnership has represented that (i) the floor amounts used to compute the
percentage rent under the Lease do not depend in whole or in part on the income
or profits of any person, (ii) the percentage rent provision of the Lease will
not be renegotiated during the term of the Lease or at the expiration or
earlier termination of the Lease in a manner that has the effect of basing the
rent on income or profits, and (iii) the percentage rent provision of the Lease
conforms with normal business practice. In addition, based on our experience
and an examination of the Lease and certain projections regarding Canyon
Ranch's expected future performance, the Lease appears to conform with normal
business practice.
C. CRL is not a "Related Party Tenant"
Rents derived under the Lease will not qualify as "rents from real
property" if CRL is treated as a "related party tenant." CRL will be treated
as a "related party tenant" if the Company, or an owner of 10 percent or more
of the Company, directly or constructively owns
- --------------------
(15) Treas. Reg. Section 1.866-4(b)(3).
(16) See, e.g., P.L.R. 8803007 (September 23, 1987) (percentage rent based on
gross revenues in excess of gross revenues for a base year treated as
"rents from real property"); cf. P.L.R. 9104018 (October 26, 1990)
(interest based on gross revenues in excess of a floor amount treated as
qualifying interest under section 856(f)).
<PAGE> 126
Crescent Real Estate Equities, Inc.
July 26, 1996
Page 13
10 percent or more of the entity's assets or net profits.(17) Constructive
ownership is determined for purposes of this test by applying the rules of
section 318(a) as modified by section 856(d)(5). Those rules generally provide
that if 10 percent or more in value of the stock of the Company is owned,
directly or indirectly, by or for any person, the Company is considered as
owning the stock owned, directly or indirectly, by or for such person. In
determining whether CRL is a "related party tenant" it is necessary to consider
not only CRL's current ownership, but also its potential ownership after the
exercise of the Zuckerman and Cohen Options. This is because, for federal
income tax purposes, the Zuckerman and Cohen Options are likely to be treated
as currently exercised. These options are likely to be treated as currently
exercised, because each is composed of a matching put and call option for CRL
stock with a nominal exercise price.
1. CRL's Current Ownership
CRL will not be treated as a "related party tenant" under its current
ownership because two individuals, Zuckerman and Cohen, collectively own a 100
percent interest in CRL's assets and net profits. In reaching this conclusion,
we recognize that Zuckerman and Cohen each own certain Units of the Operating
Partnership as a result of the Acquisition Transaction.(18) We also recognize
that the Operating Partnership has an option to acquire a 30 percent interest
in a management company that will also be owned by Zuckerman. The Operating
Partnership has represented that (i) Zuckerman and Cohen do not individually,
or as a group, own more than 10 percent of the value of the Company's stock,
(ii) in the future Zuckerman and Cohen are not expected to own more than 10
percent of the value of the Company's stock individually, or as a group, and
(iii) neither the Operating Partnership nor the Company intends to acquire,
directly or constructively, an interest of 10 percent or more in the assets or
net profits of CRL at any time in the future. Moreover, Article 7.8 of the
Lease will prevent CRL and its members and managers from acquiring, directly or
constructively, a greater than six percent stock interest in the Company
without the Operating Partnership's prior written consent, and Section 6.4 of
the First Amended and Restated Articles of Incorporation of the Company
prevents CRL and its members and managers from acquiring more than 8 percent of
the Company's stock.
- --------------------
(17) Section 856(d)(2)(B)(ii).
(18) See Rev. Rul. 73-194, 1973-1 C.B. 355 (management company treated as an
independent contractor with respect to a REIT, where an affiliate of the
management company and the REIT were partners).
<PAGE> 127
Crescent Real Estate Equities, Inc.
July 26, 1996
Page 14
2. CRL's Ownership-Treating the Zuckerman and Cohen
Options as Exercised
CRL will not be treated as a "related party tenant" if the Zuckerman
and Cohen Options are treated as exercised because after exercise of these
options a 99 percent interest in CRL's assets and net profits will be owned by
RoseStar, with the remaining one percent interest owned by RSCR. An
individual, Sanjay Varma, currently owns a 91 percent interest in the assets
and net profits of RoseStar and 91 percent of the stock of RSCR. In reaching
this conclusion, we recognize that Sanjay Varma owns certain Units of the
Operating Partnership.(19) The Operating Partnership has represented that (i)
Sanjay Varma does not own more than 10 percent of the value of the Company's
stock, (ii) Sanjay Varma is not expected to own more than 10 percent of the
value of the Company's stock in the future, and (iii) neither the Operating
Partnership nor the Company intends to acquire, directly or constructively, an
interest of 10 percent or more in the assets or net profits of RoseStar at any
time in the future. In concluding that CRL will not be treated as a "related
party tenant" if the Zuckerman and Cohen Options are treated as exercised, we
have applied the definition of related party tenant set forth in section
856(d)(2)(B)(ii), which applies to tenants which are not corporations. If CRL
is not treated as a partnership for federal income tax purposes, but is instead
treated as an association taxable as a corporation, then the applicable
definition of related party tenant is the one set forth in section
856(d)(2)(B)(i), which looks to control over voting securities. If CRL were
treated as a corporation for federal income tax purposes, Gerald W. Haddock and
John C. Goff could possibly be deemed to control all of its voting stock,
because of the extensive powers that they are granted as managers of RoseStar
under the RoseStar Regulations. If this were the case, it would be necessary
to consider whether the ownership of such voting stock could possibly be
attributed to the Company under the constructive ownership rules described
above or otherwise.
An entity which has associates and an objective to carry on a business
for joint profit will be treated as a partnership for federal income tax
purposes, and not as an association taxable as a corporation, if it has not
more than two of the following four characteristics of a corporation: (i)
continuity of life; (ii) centralization of management; (iii) limited liability;
and (iv) free transferability of interests.(20) The entity must also have no
other characteristics which are significant in determining its classification.
Generally, other factors are considered only insofar as they relate to the
determination of the presence or absence of the foregoing corporate
characteristics.(21) The IRS has applied this four-factor test in determining
whether
- --------------------
(19) See Rev. Rul. 73-194, 1973-1 C.B. 355 (described above).
(20) Treas. Reg. Section 301.7701-2(a).
(21) See Rev. Rul. 79-106, 1979-1 C.B. 448.
<PAGE> 128
Crescent Real Estate Equities, Inc.
July 26, 1996
Page 15
limited liability companies formed under the ArizonaLimited Liability Company
Act (Ariz. Rev. Stat. Ann., Title 29, Chapter 4, sections 29-601 through 29-857
(1992), referred to herein as the "Act") are partnerships for federal income
tax purposes.(22) The IRS has issued Rev. Proc. 95-10, which specifies
conditions which must be satisfied for a limited liability company to receive a
favorable advanced ruling that it will be classified as a partnership for
federal income tax purposes.(23) CRL should satisfy these conditions.
However, such conditions are applicable only in determining whether rulings
will be issued and are not intended as substantive rules for determination of
partnership status.
An organization will be treated as possessing the corporate
characteristic of continuity of life, even if the agreement organizing an
entity provides that it is to continue only for a stated period, unless a
member has the power to dissolve the organization at an earlier time.(24)
Section 29-781.A of the Act provides that an LLC organized under the Act is
dissolved on the occurrence of the first of the following: (1) at the time or
on the happening of the events specified for dissolution in the articles of
organization or an operating agreement; (2) the written consent to dissolve by
all members; (3) an event of withdrawal of a member under section 29-733 of the
Act, unless the business of the LLC is continued by one or more managers or
members pursuant to a right to continue stated in an operating agreement or, if
an operating agreement does not provide a right to continue, by agreement or
consent of all of the remaining members within 90 days after the event of
withdrawal; (4) entry of a judgment of dissolution under section 29-785 of the
Act; or (5) acquisition by a single person of all outstanding interests in the
LLC. Section 29-733 of the Act provides that, except as approved by the
written consent of all members at the time, a person ceases to be a member of
an LLC on the occurrence of any of the following events of withdrawal: (1) the
member withdraws from the LLC as provided in section 29-734; (2) on assignment
of all the member's interest and admission of one or more of the assignees as a
member; (3) the member is expelled as a member pursuant to the articles of
organization or a operating agreement; (4) unless otherwise provided in an
operating agreement, the member does any of the following: (a) makes an
assignment for the benefit of creditors, (b) files a voluntary petition in
bankruptcy, (c) is adjudicated as bankrupt or insolvent, (d) files a petition
or answer seeking for himself any reorganization, arrangement, composition,
readjustment, liquidation or similar relief under any statute, law or rule, (e)
files an answer or other pleading admitting or failing to contest the material
allegations of a petition filed against him in a bankruptcy, insolvency,
reorganization or similar proceeding, (f) seeks, consents to or acquiesces in
the appointment of a trustee, receiver or liquidator of the member or of all or
any substantial part of the
- --------------------
(22) See, e.g., Rev. Rul. 93-93, 1993-42 I.R.B. 13; and P.L.R. 9321047
(February 25, 1993).
(23) 1995-3 I.R.B. 20.
(24) Treas. Reg. Section 301.7701-2(b)(3).
<PAGE> 129
Crescent Real Estate Equities, Inc.
July 26, 1996
Page 16
member's property; or (5) if a member is a natural person, the member's death,
or the entry of an order or judgment by a court of competent jurisdiction
adjudicating the member incompetent to manage the member's person or the
member's estate. Section 7.1.1 of the CRL Articles provides that CRL shall be
dissolved upon any withdrawal event, as defined in Section 29-733 of the Act,
unless a majority in interest of the remaining members consent to continue CRL
(and CRL has a least two remaining members). Accordingly, CRL will lack the
corporate characteristic of continuity of life.An organization will be treated
as possessing the corporate characteristic of free transferability of interests
if the members owning all or substantially all of the interests in an
organization may substitute for themselves without the consent of the other
members a person who is not a member of the organization.(25) Section 29-732.A
of the Act provides that an interest in an LLC is personal property and, is
assignable in whole or in part; an assignment of an interest in an LLC does not
dissolve the LLC or entitle the assignee to participate in the management of
the business and affairs of the LLC or to become a member or to exercise the
rights of a member, unless the assignee is admitted as a member as provided in
section 29-731 of the Act. Section 29-731.B.2 of the Act provides that after
an LLC's initial articles of organization are filed, a person who is an
assignee of all or part of a member's interest in an LLC may become a member on
the approval or consent of all members or of any one or more members who have
the right under an operating agreement to admit additional members. Section
29-731.B.3 provides that if the person is an assignee of an interest in the LLC
of a member who has the power under an operating agreement to grant the
assignee the right to become a member, the assignee may become a member on the
exercise of the power in compliance with all conditions limiting the member's
exercise of the power. Article 5 of the CRL Articles provides, in part, that
no member shall have the right to substitute in its place a transferee.
Accordingly, CRL will lack the corporate characteristic of free transferability
of interests.
An organization will be treated as lacking the corporate
characteristic of centralization of management if management decisions are made
by a vote of the majority of beneficial owners.(26) Section 3.1 of the CRL
Articles provides that CRL's management is vested in its members. Accordingly,
CRL will lack the corporate characteristic of centralization of management.
Because CRL will lack the corporate characteristics of continuity of life ,
free transferability of interests and centralization of management, in our
opinion it will be treated as partnership for federal income tax purposes.
- --------------------
(25) Treas. Reg. Section 301.7701-2(e).
(26) Treas. Reg. Section 301.7701-2(g), Ex. (7).
<PAGE> 130
Crescent Real Estate Equities, Inc.
July 26, 1996
Page 17
D. Incidental Personal Property
1. Rents Attributable to Personal Property Will Be
Treated as "Rents from Real Property"
As noted above, the rents attributable to the Operating Partnership's
personal property leased under or in connection with the Lease must not be
greater than 15 percent of the rents received under the Lease. The rent
attributable to personal property leased under or in connection with a lease of
real property is the amount that bears the same ratio to total rent for the
taxable year as (i) the average of the adjusted bases of the personal property
leased under or in connection with a lease of real property at the beginning
and at the end of the taxable year bears to (ii) the average of the aggregate
adjusted bases of the real and personal property subject to the lease at the
beginning and at the end of such taxable year (the "Adjusted Basis Ratio").(27)
Section 36.2 of the Lease provides that the average of the adjusted bases of
the personal property leased to the lessee under the Lease at the beginning and
end of any calendar year shall not exceed 15 percent of the average of the
adjusted tax bases of the Leased Property at the beginning and at the end of
each such calendar year. In addition, the Operating Partnership has
represented that the adjusted tax basis of the personal property leased under
or in connection with the Lease will not represent more than 15 percent of the
aggregate adjusted tax basis of Canyon Ranch at any time.
2. Payments Attributable to RoseStar's Acquisition of Certain
Personal Property Will Not Be Treated as "Rents from Real
Property"
Pursuant to Article I of the Contribution Agreement, the conveyance to
the Operating Partnership did not include the FF & E. Instead, the FF & E was
sold by CRI to CRL in exchange for the proceeds of loans from the Operating
Partnership. Under the terms of Article 7.5 of the Lease, however, the lessee
is obligated to transfer and assign the FF & E upon termination of the Lease to
a person designated by the lessor at a price equal to the then existing fair
market value of the FF & E.
The Operating Partnership will not be treated as the tax owner of the
FF & E. The FF & E is owned by CRL. The payments that the Operating
Partnership will receive under the Crescent FF & E Note will not qualify as
"rents from real property." Instead, such payments will be treated for federal
income tax purposes as payments of principal and interest resulting from the
Operating Partnership's financing of CRL's purchase of the FF & E. The
payments pursuant to this financing, to the extent they constitute interest,
will be "qualifying income" for
- --------------------
(27) Section 856(d)(1)(C).
<PAGE> 131
Crescent Real Estate Equities, Inc.
July 26, 1996
Page 18
purposes of the 75 percent test. However, because the financing will be
secured by personal property under the terms of the Security Agreement, rather
than real property, such interest will not be "qualifying income" for purposes
of the 95 percent test. Similarly , interest accruing under the Life Share
Note, which is also secured by the FF & E under the terms of the Security
Agreement, will also be treated as "qualifying income" for purposes of the 75
percent test, but not for purposes of the 95 percent test.
E. Provision of Services by the Operating Partnership
1. Income Derived under the Terms of the Lease
Although the Operating Partnership may treat charges for services
customarily furnished or rendered in connection with the rental of Canyon Ranch
as "rents from real property," any services rendered to the occupants of Canyon
Ranch must be furnished or rendered by an independent contractor from whom the
Company does not derive or receive any income.(28) Moreover, to the extent
that any independent contractors provide noncustomary services to the occupants
of Canyon Ranch, the cost of such services must not be borne by the Operating
Partnership.(29) Under the terms of the Lease, the Operating Partnership will
not be required to provide any services, customary or noncustomary, in
connection with the rental of Canyon Ranch. Instead, all services relating to
the operation of Canyon Ranch will be provided by CRM under the terms of the
Management Agreement. The Operating Partnership will not bear the cost of any
of the services provided by CRM. Instead, such costs will be borne by CRL,
which as lessee under the Lease has assumed the obligations of the owner under
the Management Agreement.
Based on the foregoing, we believe that the provision of any
noncustomary services to the occupants of Canyon Ranch by CRM will have no
effect on the qualification of the income derived from Canyon Ranch as "rents
from real property." In fact, the IRS has issued a private letter ruling in
which it has treated the income derived from several leases of hotel properties
as "rents from real property" in a situation where the lessees had contracted
with a third-party to conduct the day-to-day operations of the hotels.(30) Our
conclusion is not altered by the fact that the Operating Partnership will
remain liable for any obligations arising under the Management Agreement, to
the extent that they are not satisfied by CRL, as lessee under the Lease. The
Operating Partnership should not be treated as bearing the cost of the services
provided by CRM merely because it could possibly be held liable for CRL's
obligations under
- --------------------
(28) Sections 856(d)(1), 856(d)(2)(C); Treas. Reg. Section 1.512(b)-1(c)(5).
(29) Treas. Reg. Section 1.856-4(b)(5).
(30) See, P.L.R. 8117036 (January 27, 1981).
<PAGE> 132
Crescent Real Estate Equities, Inc.
July 26, 1996
Page 19
the Management Agreement. The Operating Partnership is not retaining this
liability in an attempt to provide services to CRL. Instead, it is retaining
this liability only as an accommodation, in order to gain CRM's consent to its
purchase of Canyon Ranch. Moreover, the Operating Partnership believes that it
is highly unlikely that it will ever be required to reimburse CRM for the costs
and expenses of operating Canyon Ranch because of a default by CRL in its
obligations as owner under the Management Agreement. This is because (i)
Canyon Ranch is projected to generate enough gross income to cover the payments
to CRM under the Management Agreement, (ii) in connection with Section 7.7 of
the Lease, CRL represents that it has a net worth of at least $200,000, (iii)
in connection with Section 7.9 of the Lease, CRL covenants that it will retain
all income generated by the Leased Property and shall not distribute any
earnings to its beneficial owners, except as needed for federal and state
income taxes payable on taxable income from the Leased Property, until the
tenant has accumulated and is holding in reserve funds which are sufficient to
pay at least one monthly payment of Base Rent under the Lease, plus at least
one monthly payment of Base Rent under all other leases between lessor and
lessee, (iv) RoseStar has guaranteed CRL's obligations under the Lease and its
individual members have guaranteed CRL's obligations under the Lease (as well
as the Crescent FF & E Note and the Life Share Note) up to $200,000, and (v) in
the view of the Operating Partnership, RoseStar's capitalization is adequate to
allow RoseStar to assume its obligations as guarantor under the Guaranty.
2. Income Derived in the Case of a Default under the Lease
If the Operating Partnership were required to reimburse CRM for the
costs of operating Canyon Ranch because of a default by the Tenant under the
terms of the Management Agreement, we have concluded that the income derived by
the Operating Partnership from Canyon Ranch would be treated as "qualifying
income" for purposes of the 75 percent and 95 percent tests. This is because,
if the Operating Partnership were required to reimburse CRM for the cost of
operating Canyon Ranch, this would constitute an event of default under Article
16.1(c) of the Lease, allowing the Operating Partnership to terminate the
lessee's leasehold interest in Canyon Ranch. As a result of such a termination
of the Lease, any income derived by the Operating Partnership from Canyon Ranch
after the default would be treated as income from foreclosure property.
The Operating Partnership would be able to continue to operate Canyon
Ranch after any default under the Lease, without affecting its status as
foreclosure property. This is because CRM will provide all services relating
to the operation of Canyon Ranch and CRM will qualify as an independent
contractor from whom the Company will not derive any income. As noted above, a
REIT can use foreclosure property in the conduct of an active trade or
<PAGE> 133
Crescent Real Estate Equities, Inc.
July 26, 1996
Page 20
business, as long as this is done through the use of an independent
contractor, from whom the REIT does not derive or receive any income.(31)
As noted above, real property acquired upon default under a lease is
not eligible to be treated as foreclosure property if the lease is entered into
with an intent to evict or foreclose, or if the REIT knows or has reason to
know that default would occur.(32) This is not the case in the present
situation because (i) Canyon Ranch is projected to generate enough gross income
to produce a profit for CRL, (ii) in connection with Section 7.7 of the Lease,
the Tenant represents that it has a net worth of at least $200,000, (iii) in
connection with Section 7.9 of the Lease, the tenant covenants that it will
retain all income generated by the Leased Property and shall not distribute any
earnings to its beneficial owners, except as needed for federal and state
income taxes payable on taxable income from the Leased Property, until the
tenant has accumulated and is holding in reserve funds which are sufficient to
pay at least one monthly payment of Base Rent under the Lease, plus at least
one monthly payment of Base Rent under all other leases between lessor and
lessee, (iv) RoseStar has guaranteed CRL's obligations under the Lease and its
individual members have guaranteed CRL's obligations under the Lease (as well
as the Crescent FF & E Note and the Life Share Note) up to $200,000, and (v) in
the view of the Operating Partnership, RoseStar's capitalization is adequate to
allow RoseStar to assume its obligations as guarantor under the Guaranty.
Canyon Ranch would qualify as foreclosure property only for a period
of up to two years, beginning on the date of its acquisition by the Operating
Partnership, unless the Operating Partnership obtains an extension of the grace
period from the IRS.(33) Therefore, in the event the Operating Partnership
takes possession of Canyon Ranch as a result of a default under the Lease,
presumably the Operating Partnership will sell Canyon Ranch or within two years
rent it to another tenant under a lease that will produce "rents from real
property."
VI. ASSUMPTIONS AND REPRESENTATIONS
In providing these opinions, we have with your permission assumed the
following: (i) the due authorization, execution and delivery by all parties
thereto of the Transaction
- --------------------
(31) Section 856(e)(4)(C). The IRS clearly intended for REITs to be able to
treat hotels operated by independent contractors as foreclosure property. For
instance, the Treasury regulations defining foreclosure property refer to hotel
properties twice. See, Treas. Reg. Sections 1.856-6(b)(2), 1.856-6(d)(2). In
addition, the IRS has also recently issued a private letter ruling in which it
treated income received from hotels acquired pursuant to a bankruptcy petition
as income from foreclosure property, where the hotels were operated by third
party managers. P.L.R. 9420013 (2/15/94).
(32) Treas. Reg. Section 1.856-6(b)(3).
(33) Section 856(e)(2).
<PAGE> 134
Crescent Real Estate Equities, Inc.
July 26, 1996
Page 21
Documents, (ii) the authenticity of the originals of the Transaction Documents
and the genuineness of all signatures; (iii) the conformity to the original of
all documents submitted to us as copies; (iv) the absence of any evidence
extrinsic to the provisions of the written agreements between the parties that
the parties intended a meaning contrary to that expressed by those provisions;
(v) that each party to the Transaction Documents has the power and authority to
enter into and perform all of its obligations thereunder; (vi) that each of the
Transaction Documents is a legal, valid and binding obligation, enforceable in
accordance with its terms; and (vii) that each legal entity that is a party to
the Transaction Documents validly existing and in good standing under the laws
of the United States of America or one of the States thereof or the District of
Columbia. As to questions of fact material to such opinions, we have with your
permission, when relevant facts were not independently established. relied
upon, and assumed the truth, accuracy and completeness of, written and oral
statements and representations made by or on behalf of the parties to the
Transaction Documents by their respective officers or agents. With your
permission, we have further assumed that each of the parties to each of the
Transaction Documents fully complies with its obligations thereunder.
In addition, these opinions are conditioned upon certain
representations made by the Company and the Operating Partnership as to factual
and other matters as set forth in the attached letter. Unless facts material
to the opinions expressed herein are specifically stated to have been
independently established or verified by us, we have relied as to such facts
solely upon the representations made by the Company and the Operating
Partnership. We are not, however, aware of any facts or circumstances contrary
to or inconsistent with the representations. To the extent the representations
are with respect to matters set forth in the Code or Treasury Regulations, we
have reviewed with the individuals making such representations the relevant
provisions of the Code, the Treasury Regulations and published administrative
interpretations.
Our opinions contained herein are based in part upon our conclusion
that the U.S. federal income tax treatment of the transactions contemplated by
the Transaction Documents will be determined based on their economic substance.
Although there can be no assurance that the IRS will not take one or more
contrary positions, it is our opinion that none of those positions, if asserted
by the IRS, would prevail. However, because our opinions are not binding on
the IRS or the courts, there can be no assurance that contrary positions may
not be successfully asserted by the IRS. Our opinions are based upon the
present provisions of the Code, the regulations promulgated thereunder,
administrative rulings, judicial decisions, and any other applicable
authorities published and in effect on the date hereof (all of which are
subject to change, both prospectively and retroactively).
<PAGE> 135
Crescent Real Estate Equities, Inc.
July 26, 1996
Page 22
This letter and the opinions contained herein are based solely upon
our knowledge of the relevant facts. In this opinion, the words "our
knowledge" or words to similar effect signify that, in the course of our
representation of the Company or the Operating Partnership, in matters with
respect to which we have been engaged as counsel by such entity, no information
has come to the attention of those attorneys in our firm having detailed
knowledge of this transaction and the substance of this opinion that gives such
attorneys current, actual knowledge that any such opinions are not accurate.
In rendering this opinion, we have undertaken no investigation with respect to
such matters and we have not undertaken to communicate the details of this
transaction to all members or employees of our firm who may have performed, and
are currently performing, services for the Company or the Operating
Partnership, or any other person or entity.
The opinions contained herein are issued, and our opinions herein are
expressed, as of the date hereof. These opinions and this letter are limited
to the matters expressly set forth herein, and no statements or opinions may be
inferred beyond such matters. We do not assume any responsibility to update
these opinions or advise you of changes resulting from events (whether or note
they come to our attention) that may occur after the date hereof, including,
without limitation, future transactions or other actions under the Transaction
Documents, or any inaccuracy in any of the representations or warranties upon
which we have relied in rendering these opinions.
VII. CONCLUSION
Based on the assumptions stated above, it is our opinion that (i) the
Lease will be treated as a lease for federal income tax purposes, (ii) all of
the income that the Operating Partnership derives under the Lease will be
treated as "qualifying income" for purposes of the 95 percent test, and (iii)
all of the income the Operating Partnership derives under the Crescent FF & E
Note and the Life Share Note will be treated as "qualifying income" for
purposes of the 75 percent test.
Very Truly Yours,
SHAW, PITTMAN, POTTS & TROWBRIDGE
By: /s/ CHARLES B. TEMKIN
------------------------------
Charles B. Temkin, P.C.
<PAGE> 136
December 11, 1996
Crescent Real Estate Equities Company
777 Main Street
Suite 2100
Fort Worth, Texas 76102
Re: Canyon Ranch Lenox
Ladies and Gentlemen:
You have requested certain opinions regarding the application of U.S.
federal income tax laws to Crescent Real Estate Equities Company ("Crescent
Equities") and Crescent Real Estate Equities Limited Partnership (the
"Operating Partnership") in connection with the acquisition by Crescent Real
Estate Funding VI, L.P. ("Funding VI") of Canyon Ranch, a health and fitness
resort located in Lenox, Massachusetts from Canyon Ranch - Bellefontaine
Associates, L.P. ("CRBA").
I. Transaction Documents
In rendering the opinions expressed below, we have examined and relied
upon the following documents (collectively, the "Transaction Documents"):
(i) the Purchase Agreement between CRBA and the Operating
Partnership, ("the Contribution Agreement") dated October 12,
1996;
(ii) the Lease Agreement between CRBA and Vintage Resorts, L.L.C.
("Vintage"), dated December 11, 1996 (the "Lease");
(iii) the Management Agreement between CRBA and Canyon Ranch
Management, L.L.C. ("CRM"), dated December 11, 1996 (the
"Management Agreement");
(iv) the Assignment and Assumption of Purchase Agreement between
the Operating Partnership and Funding VI, dated December 5,
1996;
<PAGE> 137
Crescent Real Estate Equities Company
December 11, 1996
Page 2
(v) the Assignment and Assumption of Management Agreement between
CRBA and Funding VI, dated December 11, 1996;
(vi) the Assignment and Assumption of Master Lease between CRBA and
Funding VI, dated December 11, 1996;
(vii) the Assignment and Assumption of Contracts between CRBA and
Funding VI, dated December 11, 1996;
(viii) the Assignment and Assumption of Store Leases between CRBA and
Funding VI, dated December 11, 1996;
(ix) the Limited Guaranty Agreement between Gerald Haddock, John C.
Goff and Harry H. Frampton, together, as guarantors and
Funding VI, dated December 5, 1996 (the "Limited Guaranty");
(x) the First Amended and Restated Agreement of Limited
Partnership of Crescent Real Estate Funding VI, L.P. dated
December 11, 1996 (the "Funding VI Agreement");
(xi) the Certificate of Limited Partnership of Crescent Real Estate
Funding VI, L.P.;
(xii) the Articles of Incorporation of CRE Management VI Corp;
(xiii) the Bylaws of CRE Management VI Corp.;
(xiv) the Restated Declaration of Trust of Crescent Real Estate
Equities Company, and
(xv) such other documents or information as we deemed necessary for
the opinions set forth below.
II. Background of Transaction
A. The Management Agreement
Under the Management Agreement, CRBA, as owner of Canyon Ranch, has
contracted with CRM to manage and operate Canyon Ranch and to collect all
Canyon Ranch
<PAGE> 138
Crescent Real Estate Equities Company
December 11, 1996
Page 3
receipts. In addition, CRM has also agreed to honor resort memberships issued
to various persons by CRBA. CRM was also granted the right to issue additional
memberships in the resort in the future. In exchange for these services, CRM is
to be paid a profits-based management fee collected from the gross receipts of
the resort.
Under the Management Agreement, CRBA, as owner, is obligated to
establish a capital improvement reserve to be funded from gross receipts from
the resort. CRM, as manager, is entitled to withdraw funds from this reserve to
pay for capital improvements and additions to the furniture, fixtures and
equipment used in connection with the resort. Section 15.2 of the Management
Agreement requires that all assignments of the Management Agreement (other than
certain assignments to permitted transferees) be approved by CRM; and under
Section 15.3 of the Management Agreement any assignees are bound by the
obligations of the owner under the Management Agreement.
B. The Lease
Under the terms of the Lease, Vintage leased the following property
(the "Leased Property") from CRBA and assumed the related obligations: (i) the
land, buildings, fixtures and other improvements commonly known as "Canyon
Ranch in the Berkshires;" (ii) all personal property, tangible or intangible,
owned by CRBA and used in connection with the operation of Canyon Ranch; (iii)
various contracts entitling persons to use the guest rooms and/or the resort
facilities; (iv) various contracts (excluding employment contracts) relating to
the operation of the resort; and (v) CRBA's interest as owner under the
Management Agreement.
C. The Purchase Agreement and the Assignment and Assumption
Agreements
Under the Purchase Agreement, the Operating Partnership agreed to
purchase and CRBA agreed to sell the land, buildings, fixtures and other
improvements commonly known as Canyon Ranch, as well as certain personal
property used in connection with the operation of the resort to the Operating
Partnership, subject to the Lease and the Management Agreement. Under the
Purchase Agreement, the Operating Partnership also acquired CRBA's interest as
owner under the Management Agreement and as lessor under the Lease.
Under the Assignment and Assumption of Purchase Agreement, the
Operating Partnership transferred to Funding VI, a partnership in which the
Operating Partnership holds a 99 percent limited partnership interest, its
right and obligation to purchase Canyon Ranch from CRBA.
<PAGE> 139
Crescent Real Estate Equities Company
December 11, 1996
Page 4
Under the subsequent Assignment and Assumption of Management
Agreement, Funding VI assumed and agreed to perform all obligations of CRBA as
owner under the Management Agreement to the extent that such obligations are
not performed by Vintage as lessee under the Lease.
III. Requested Opinions
You have asked for our opinion concerning the impact that the purchase
of Canyon Ranch will have on the ability of Crescent Equities to continue to
qualify as a real estate investment trust (a "REIT") under section 856.(1)
Specifically, you have requested that we render an opinions addressing (i)
whether the Lease will be treated as a lease for federal income tax purposes
and (ii) whether the income that the Operating Partnership derives from the
lease will be treated as "qualifying income" for purposes of the 95 percent and
75 percent gross income tests for REIT qualification under section 856(c).
IV. Legal Background
A. 75 Percent and 95 Percent Tests
In order to qualify as a REIT for tax purposes, Crescent Equities must
satisfy certain tests with respect to the composition of its gross income on an
annual basis. First, at least 75 percent of Crescent Equities' gross income
(excluding gross income from certain prohibited transactions) for each taxable
year must consist of temporary investment income or of certain defined
categories of income derived directly or indirectly from investments relating
to real property or mortgages on real property. These categories include,
subject to various limitations, rents from real property, interest on mortgages
on real property, gains from the sale or other disposition of real property
(including interests in real property and 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.(2) Second, at least 95 percent of Crescent Equities' gross income
(excluding gross income from certain prohibited transactions) for each taxable
year must be derived from income qualifying under the 75 percent 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.(3)
- ---------------
(1) All section references herein are to the Internal Revenue Code of
1986, as amended (the "Code"), or to the regulations issued
thereunder, unless otherwise noted.
(2) Section 856(c)(3).
(3) Section 856(c)(2).
<PAGE> 140
Crescent Real Estate Equities Company
December 11, 1996
Page 5
In applying these income tests, REITs that are partners in a
partnership are required to include in their gross income their proportionate
share of the partnership's gross income. In addition, such REITs are to treat
this partnership gross income as retaining the same character as the items of
gross income of the partnership for purposes of section 856.(4) Thus, the
character of any income derived by the Operating Partnership, through its
partnership interest in Funding VI, from Canyon Ranch will affect the ability
of Crescent Equities to qualify as a REIT.
B. Rents from Real Property
Rents from real property satisfy both the 75 percent and 95 percent
tests for REIT qualification 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.(5) 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 percent or more of the REIT, directly
or constructively, owns 10 percent or more of such tenant (a "Related Party
Tenant").(6) Third, if rent attributable to personal property leased in
connection with a lease of real property is greater than 15 percent 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."(7)
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. However, rents will be qualified as "rents
from real property" if a REIT directly performs services in connection with the
lease of the property, if those services are "usually or customarily rendered"
in connection with the rental of space for occupancy, and if such services are
not considered to be rendered to the occupant of the property.(8)
- ---------------
(4) Treas. Reg. Section 1.856-3(g).
(5) Section 856(d)(2)(A).
(6) Section 856(d)(2)(B).
(7) Section 856(d)(1)(C).
(8) Sections 856(d)(1)(B), 856(d)(2)(C).
<PAGE> 141
Crescent Real Estate Equities Company
December 11, 1996
Page 6
C. Income from Foreclosure Property
Income from foreclosure property is treated as "qualifying income" for
purposes of the 75 percent and 95 percent tests (although any net income from
foreclosure property is taxed at the maximum corporate rate). Foreclosure
property is any real property, and any personal property incident to such real
property, acquired by a REIT through default under a mortgage or a lease. A
REIT may elect to treat such property as foreclosure property for a grace
period of up to two years.(9) However, such property will cease to qualify as
foreclosure property if it is used by the REIT in a trade or business more than
90 days after it is acquired and it is not operated through an independent
contractor from whom the REIT does not derive or receive any income.(10)
Moreover, property is not eligible to be treated as foreclosure property if the
lease is entered into with an intent to evict or foreclose, or if the REIT
knows or has reason to know that default would occur.(11)
V. Opinions
A. Lease Will be Treated as a Lease for Federal Income Tax
Purposes
In order for any income derived by the Operating Partnership, through
its partnership interest in Funding VI, from Canyon Ranch to constitute either
"rents from real property," or in the case of a default under the Lease, "gross
income from foreclosure property," the Lease must be treated as a lease for
federal income tax purposes and not be treated as a service contract,
management contract or other type of arrangement. This determination depends on
an analysis of all of the surrounding facts and circumstances. In making this
determination, courts have considered a variety of factors, including the
following: (i) the intent of the parties, (ii) the form of the agreement, (iii)
the degree of control over the business conducted at the property that is
provided to the lessee (e.g., whether the lessee has substantial rights of
control over the operation of the property and its business), (iv) the extent
to which the lessee has the risk of loss from operations of the business
conducted at the property (e.g., whether the lessee bears the risk of increases
in operating expenses and of decreases in revenues), and (v) the extent to
which the lessee has the opportunity to benefit from operations of the business
conducted at the property (e.g., whether the lessee benefits from decreased
operating expenses or increased revenues).(12)
- ---------------
(9) Section 856(e).
(10) Section 856(e)(4).
(11) Treas. Reg. Section 1.856-6(b)(3).
(12) See, e.g., Xerox Corp. v. U.S., 80-2 USTC 9530 (Ct. Cl. Tr. Div.
1980), aff'd per curiam, 656 F.2d 659 (Ct. Cl. 1981).
<PAGE> 142
Crescent Real Estate Equities Company
December 11, 1996
Page 7
In addition, section 7701(e) provides that a contract that purports to
be a service contract, partnership agreement, or another type of arrangement
will be treated instead as a lease of property if the contract is properly
treated as such, taking into account all relevant factors, including whether or
not: (i) the service recipient is in physical possession of the property, (ii)
the service recipient controls the property, (iii) the service recipient has a
significant economic or possessory interest in the property (e.g., the
property's use is likely to be dedicated to the service recipient for a
substantial portion of the useful life of the property, the recipient shares
the risk that the property will decline in value, the recipient shares in any
appreciation in the value of the property, the recipient shares in any savings
in the property's operating costs or the recipient bears the risk of damage to
or loss of the property), (iv) the service provider does not bear any risk of
substantially diminished receipts or substantially increased expenditures if
there is nonperformance under the contract, (v) the service provider does not
use the property concurrently to provide significant services to entities
unrelated to the service recipient and (vi) the total contract price does not
substantially exceed the rental value of the property for the contract period.
Since the determination of whether a service contract, partnership agreement,
or some other type of arrangement should be treated as a lease is inherently
factual, the presence or absence of any single factor may not be dispositive in
every case.(13)
We have concluded that the Lease will be treated as a lease for
federal income tax purposes, rather than a service contract, management
contract or other type of arrangement. This conclusion is based, in part, on
the following facts: (i) Funding VI and Vintage intend their relationship to be
that of lessor and lessee (as evidenced by the terms of the Lease), (ii)
Vintage, as tenant under the Lease, will have the right to exclusive
possession, use and quiet enjoyment of Canyon Ranch during the term of the
Lease and the right to uninterrupted control in the operation of the business
conducted at Canyon Ranch (subject to its assumption of the Management
Agreement), (iii) Vintage will dictate how Canyon Ranch is maintained and
improved, (iv) Vintage will bear all the costs and expenses of operating Canyon
Ranch, (v) Vintage will benefit from any savings in the costs of operating
Canyon Ranch during the term of the Lease, (vi) in the event of damage or
destruction to Canyon Ranch, Vintage will be at economic risk because its
obligation to make rental payments will not abate, (vii) Vintage will indemnify
Funding VI against all liabilities imposed on Funding VI during the term of the
Lease by reason of injury to persons or damage to property occurring at Canyon
Ranch or Vintage's use, management, maintenance or repair of Canyon Ranch,
(viii) Vintage is obligated to pay substantial fixed rent for the period of use
of Canyon Ranch, regardless of whether its revenues exceed its costs and
expenses, and (ix) Vintage stands to incur
- ---------------
(13) P.L.R. 8918012 (January 24, 1989).
<PAGE> 143
Crescent Real Estate Equities Company
December 11, 1996
Page 8
substantial losses (or derive substantial profits) depending on how
successfully it operates Canyon Ranch.
We do not believe that our conclusion that the Lease of Canyon Ranch
will be treated as a lease for federal income tax purposes is affected by the
fact that Vintage entered the Lease subject to its assumption of CRBA's
obligations under the preexisting Management Agreement. The Management
Agreement gives CRM control over the day-to-day operation of Canyon Ranch and
allows CRM to share with Vintage in the benefits of any increases in revenues
or cost savings in the operation of Canyon Ranch. CRM's operation of Canyon
Ranch will not be controlled by the Operating Partnership, however, and the
Management Agreement does not affect the fact that Vintage bears most of the
risk of loss if Canyon Ranch is not successful. Moreover, the IRS has issued a
private letter ruling in which it treated leases of several hotel properties as
producing "rents from real property" in a situation where the lessees had
contracted with a third party to conduct the day-to-day operations of the
hotels.(14) This ruling suggests that the IRS will respect a lease of a hotel
for federal income tax purposes even if the hotel is operated by an independent
contractor rather than by the lessee.
B. Percentage Rent Provision is not Profit-Based
Pursuant to the Lease, Vintage will be obligated to pay Funding VI
base rent and percentage rent. Under the regulations, percentage rent based on
a percentage of gross receipts or sales in excess of a floor amount, which is
how the percentage rent is structured under the Lease, will not qualify as
"rents from real property" unless (i) such floor amount does not depend in
whole or in part on the income or profits of the lessee, (ii) the percentage
and the floor amount are fixed at the time the lease is entered into, (iii) the
percentage and the floor amount are not renegotiated during the term of the
lease in a manner that has the effect of basing the percentage rent on income
or profits, and (iv) the percentage and the floor amount conform with normal
business practice.(15)
Under the terms of Article 4.2 of the Lease, the Lessee will pay
percentage rent on an annual basis equal to the sum of (i) 28 percent of the
amount by which gross receipts from the Leased Property exceed $20,000,000
(with such amount not exceeding $7,000,000), (ii) 21 percent of the amount by
which gross receipts from the Leased Property exceed $27,000,000 (with such
amount not exceeding $8,000,000), and (iii) 15 percent of the amount by which
gross receipts from the Leased Property exceed $35,000,000. This formula
- ---------------
(14) See P.L.R. 8117036 (January 27, 1981).
(15) Treas. Reg. Section 1.856-4(b)(3).
<PAGE> 144
Crescent Real Estate Equities Company
December 11, 1996
Page 9
effectively rewards the tenant for any increases in gross receipts over the
threshold amounts. This type of formula does not base the percentage rent on
the tenant's income or profits, and similar formulas have been treated by the
IRS as generating "rents from real property."(16) Moreover, the Operating
Partnership has represented that (i) the floor amounts used to compute the
percentage rent under the Lease do not depend in whole or in part on the income
or profits of any person, (ii) the percentage rent provision of the Lease will
not be renegotiated during the term of the Lease or at the expiration or
earlier termination of the Lease in a manner that has the effect of basing the
rent on income or profits, and (iii) the percentage rent provision of the Lease
conforms with normal business practice. In addition, based on our experience
and an examination of the Lease and certain projections regarding Canyon
Ranch's expected future performance, the Lease appears to conform with normal
business practice.
C. Vintage is not a "Related Party Tenant"
Rents derived under the Lease will not qualify as "rents from real
property" if Vintage is treated as a "related party tenant." Vintage will be
treated as a "related party tenant" if Crescent Equities, or an owner of 10
percent or more of Crescent Equities, directly or constructively owns 10
percent or more of Vintage's assets or net profits.(17) Constructive ownership
is determined for purposes of this test by applying the rules of section 318(a)
as modified by section 856(d)(5). Those rules generally provide that if 10
percent or more in value of the stock of a company is owned, directly or
indirectly, by or for any person, the company is considered as owning the stock
owned, directly or indirectly, by or for such person. Vintage will not be
treated as a "related party tenant" under its current ownership because three
individuals, Frampton, Goff, and Haddock, collectively own a 100 percent
interest in Vintage's assets and net profits; Frampton owns 91 percent, and
Goff and Haddock each own 4.5 percent. In reaching this conclusion, we
recognize that each individual owns certain Units of the Operating
Partnership.(18) The Operating Partnership has represented that (i) Frampton,
Goff, and Haddock do not individually, or as a group, own more than 10 percent
of the value of Crescent Equities' stock, (ii) in the future Frampton, Goff,
and Haddock are not expected to own more than 10 percent of the value of
Crescent Equities' stock individually, or as a group, and (iii) neither the
Operating Partnership nor Crescent
- ---------------
(16) See, e.g., P.L.R. 8803007 (September 23, 1987) (percentage rent based
on gross revenues in excess of gross revenues for a base year treated
as "rents from real property"); cf. P.L.R. 9104018 (October 26,
1990) (interest based on gross revenues in excess of a floor amount
treated as qualifying interest under section 856(f)).
(17) Section 856(d)(2)(B)(ii).
(18) See Rev. Rul. 73-194, 1973-1 C.B. 355 (management company treated as
an independent contractor with respect to a REIT, where an affiliate
of the management company and the REIT were partners).
<PAGE> 145
Crescent Real Estate Equities Company
December 11, 1996
Page 10
Equities intends to acquire, directly or constructively, an interest of 10
percent or more in the assets or net profits of Vintage at any time in the
future. Moreover, Article 7.8 of the Lease will prevent Vintage and its members
and managers from acquiring, directly or constructively, a greater than six
percent stock interest in Crescent Equities without the Operating Partnership's
prior written consent, and the Restated Declaration of Trust of Crescent
Equities prevents Vintage and its members and managers from acquiring more than
8 percent of Crescent Equities' stock.
D. Rents Attributable to Personal Property Will Be Treated as
"Rents from Real Property"
As noted above, the rents attributable to Funding VI's personal
property leased under or in connection with the Lease must not be greater than
15 percent of the rents received under the Lease. The rent attributable to
personal property leased under or in connection with a lease of real property
is the amount that bears the same ratio to total rent for the taxable year as
(i) the average of the adjusted bases of the personal property leased under or
in connection with a lease of real property at the beginning and at the end of
the taxable year bears to (ii) the average of the aggregate adjusted bases of
the real and personal property subject to the lease at the beginning and at the
end of such taxable year (the "Adjusted Basis Ratio").(19) Section 36.2 of the
Lease provides that the average of the adjusted bases of the personal property
leased to the lessee under the Lease at the beginning and end of any calendar
year shall not exceed 15 percent of the average of the adjusted tax bases of
the Leased Property at the beginning and at the end of each such calendar year.
In addition, Crescent Equities has represented that the adjusted tax basis of
the personal property leased under or in connection with the Lease will not
represent more than 15 percent of the aggregate adjusted tax basis of Canyon
Ranch at any time.
E. Provision of Services by Funding VI
1. Income Derived under the Terms of the Lease
Although Funding VI may treat charges for services customarily
furnished or rendered in connection with the rental of Canyon Ranch as "rents
from real property," any services rendered to the occupants of Canyon Ranch
must be furnished or rendered by an independent contractor from whom Crescent
Equities does not derive or receive any income.(20) Moreover, to the extent that
any independent contractors provide noncustomary services to the occupants of
Canyon Ranch, the cost of such services must not be borne by
- ---------------
(19) Section 856(d)(1)(C).
(20) Sections 856(d)(1), 856(d)(2)(C); Treas. Reg. Section 1.512(b)-1(c)(5).
<PAGE> 146
Crescent Real Estate Equities Company
December 11, 1996
Page 11
Funding VI.(21) Under the terms of the Lease, Funding VI will not be required to
provide any services, customary or noncustomary, in connection with the rental
of Canyon Ranch. Instead, all services relating to the operation of Canyon
Ranch will be provided by CRM under the terms of the Management Agreement.
Funding VI will not bear the cost of any of the services provided by CRM.
Instead, such costs will be borne by Vintage, which as lessee under the Lease
has assumed the obligations of the owner under the Management Agreement.
Based on the foregoing, we believe that the provision of any
noncustomary services to the occupants of Canyon Ranch by CRM will have no
effect on the qualification of the income derived from Canyon Ranch as "rents
from real property." In fact, the IRS has issued a private letter ruling in
which it has treated the income derived from several leases of hotel properties
as "rents from real property" in a situation where the lessees had contracted
with a third-party to conduct the day-to-day operations of the hotels.(22) Our
conclusion is not altered by the fact that Funding VI will remain liable for
any obligations arising under the Management Agreement, to the extent that they
are not satisfied by Vintage, as lessee under the Lease. Funding VI should not
be treated as bearing the cost of the services provided by CRM merely because
it could possibly be held liable for Vintage's obligations under the Management
Agreement. Funding VI is not retaining this liability in an attempt to provide
services to Vintage. Instead, it is retaining this liability only as an
accommodation, in order to gain CRM's consent to its purchase of Canyon Ranch.
Moreover, Funding VI believes that it is highly unlikely that it will ever be
required to reimburse CRM for the costs and expenses of operating Canyon Ranch
because of a default by Vintage in its obligations as owner under the
Management Agreement. This is because (i) Canyon Ranch is projected to generate
enough gross income to cover the payments to CRM under the Management
Agreement, (ii) in connection with Section 7.7 of the Lease, Vintage represents
that it has a net worth of at least $200,000, (iii) in connection with Section
7.9 of the Lease, Vintage covenants that it will retain all income generated by
the Leased Property and shall not distribute any earnings to its beneficial
owners, except as needed for federal and state income taxes payable on taxable
income from the Leased Property, until the tenant has accumulated and is
holding in reserve funds which are sufficient to pay at least one monthly
payment of Base Rent under the Lease, plus at least one monthly payment of Base
Rent under all other leases between lessor and lessee, and (iv) Gerald W.
Haddock, John C. Goff and Harry H. Frampton have guaranteed Vintage's
obligations under the Lease.
- ---------------
(21) Treas. Reg. Section 1.856-4(b)(5).
(22) See P.L.R. 8117036 (January 27, 1981).
<PAGE> 147
Crescent Real Estate Equities Company
December 11, 1996
Page 12
2. Income Derived in the Case of a Default under the Lease
If Funding VI were required to reimburse CRM for the costs of
operating Canyon Ranch because of a default by the Tenant under the terms of
the Management Agreement, we have concluded that the income derived by Funding
VI from Canyon Ranch would be treated as "qualifying income" for purposes of
the 75 percent and 95 percent tests. This is because, if Funding VI were
required to reimburse CRM for the cost of operating Canyon Ranch, this would
constitute an event of default under Article 16.1(c) of the Lease, allowing
Funding VI to terminate the lessee's leasehold interest in Canyon Ranch. As a
result of such a termination of the Lease, any income derived by Funding VI
from Canyon Ranch after the default would be treated as income from foreclosure
property.
Funding VI would be able to continue to operate Canyon Ranch after any
default under the Lease, without affecting its status as foreclosure property.
This is because CRM will provide all services relating to the operation of
Canyon Ranch and CRM will qualify as an independent contractor from whom the
Company will not derive any income. As noted above, a REIT can use foreclosure
property in the conduct of an active trade or business, as long as this is done
through the use of an independent contractor, from whom the REIT does not
derive or receive any income.(23)
As noted above, real property acquired upon default under a lease is
not eligible to be treated as foreclosure property if the lease is entered into
with an intent to evict or foreclose, or if the REIT knows or has reason to
know that default would occur.(24) This is not the case in the present situation
because (i) Canyon Ranch is projected to generate enough gross income to
produce a profit for Vintage, (ii) in connection with Section 7.7 of the Lease,
the Tenant represents that it has a net worth of at least $200,000, (iii) in
connection with Section 7.9 of the Lease, the tenant covenants that it will
retain all income generated by the Leased Property and shall not distribute any
earnings to its beneficial owners, except as needed for federal and state
income taxes payable on taxable income from the Leased Property, until the
tenant has accumulated and is holding in reserve funds which are sufficient to
pay at least one monthly payment of Base Rent under the Lease, plus at least
one monthly payment of Base
- ---------------
(23) Section 856(e)(4)(C). The IRS clearly intended for REITs to be
able to treat hotels operated by independent contractors as foreclosure
property. For instance, the Treasury regulations defining foreclosure
property refer to hotel properties twice. See, Treas. Reg. Sections
1.856-6(b)(2), 1.856-6(d)(2). In addition, the IRS has also recently
issued a private letter ruling in which it treated income received from
hotels acquired pursuant to a bankruptcy petition as income from
foreclosure property, where the hotels were operated by third party
managers. P.L.R. 9420013 (February 15, 1994).
(24) Treas. Reg. Section 1.856-6(b)(3).
<PAGE> 148
Crescent Real Estate Equities Company
December 11, 1996
Page 13
Rent under all other leases between lessor and lessee, and (iv) Gerald W.
Haddock, John C. Goff, and Harry H. Frampton have guaranteed Vintage's
obligations under the Lease up to $200,000. Canyon Ranch would qualify as
foreclosure property only for a period of up to two years, beginning on the
date of its acquisition by Funding VI, unless Funding VI obtains an extension
of the grace period from the IRS.(25) Therefore, in the event Funding VI takes
possession of Canyon Ranch as a result of a default under the Lease, presumably
Funding VI will sell Canyon Ranch or within two years rent it to another tenant
under a lease that will produce "rents from real property."
VI. Assumptions and Representations
In providing these opinions, we have with your permission assumed the
following: (i) the due authorization, execution and delivery by all parties
thereto of the Transaction Documents, (ii) the authenticity of the originals of
the Transaction Documents and the genuineness of all signatures; (iii) the
conformity to the original of all documents submitted to us as copies; (iv) the
absence of any evidence extrinsic to the provisions of the written agreements
between the parties that the parties intended a meaning contrary to that
expressed by those provisions; (v) that each party to the Transaction Documents
has the power and authority to enter into and perform all of its obligations
thereunder; (vi) that each of the Transaction Documents is a legal, valid and
binding obligation, enforceable in accordance with its terms; and (vii) that
each legal entity that is a party to the Transaction Documents validly existing
and in good standing under the laws of the United States of America or one of
the States thereof or the District of Columbia. As to questions of fact
material to such opinions, we have with your permission, when relevant facts
were not independently established. relied upon, and assumed the truth,
accuracy and completeness of, written and oral statements and representations
made by or on behalf of the parties to the Transaction Documents by their
respective officers or agents. With your permission, we have further assumed
that each of the parties to each of the Transaction Documents fully complies
with its obligations thereunder.
In addition, these opinions are conditioned upon certain
representations made by the Company and the Operating Partnership as to factual
and other matters as set forth in the attached letter. Unless facts material to
the opinions expressed herein are specifically stated to have been
independently established or verified by us, we have relied as to such facts
solely upon the representations made by Crescent Equities and the Operating
Partnership. We are
- ---------------
(25) Section 856(e)(2).
<PAGE> 149
Crescent Real Estate Equities Company
December 11, 1996
Page 14
not, however, aware of any facts or circumstances contrary to or inconsistent
with the representations. To the extent the representations are with respect to
matters set forth in the Code or Treasury Regulations, we have reviewed with
the individuals making such representations the relevant provisions of the
Code, the Treasury Regulations and published administrative interpretations.
Our opinions contained herein are based in part upon our conclusion
that the U.S. federal income tax treatment of the transactions contemplated by
the Transaction Documents will be determined based on their economic substance.
Although there can be no assurance that the IRS will not take one or more
contrary positions, it is our opinion that none of those positions, if asserted
by the IRS, would prevail. Because our opinions are not binding on the IRS or
the courts, however, there can be no assurance that contrary positions may not
be successfully asserted by the IRS. Our opinions are based upon the present
provisions of the Code, the regulations promulgated thereunder, administrative
rulings, judicial decisions, and any other applicable authorities published and
in effect on the date hereof (all of which are subject to change, both
prospectively and retroactively).
This letter and the opinions contained herein are based solely upon
our knowledge of the relevant facts. In this opinion, the words "our knowledge"
or words to similar effect signify that, in the course of our representation of
Crescent Equities or the Operating Partnership, in matters with respect to
which we have been engaged as counsel by such entity, no information has come
to the attention of those attorneys in our firm having detailed knowledge of
this transaction and the substance of this opinion that gives such attorneys
current, actual knowledge that any such opinions are not accurate. In rendering
this opinion, we have undertaken no investigation with respect to such matters
and we have not undertaken to communicate the details of this transaction to
all members or employees of our firm who may have performed, and are currently
performing, services for Crescent Equities or the Operating Partnership, or any
other person or entity.
The opinions contained herein are issued, and our opinions herein are
expressed, as of the date hereof. These opinions and this letter are limited to
the matters expressly set forth herein, and no statements or opinions may be
inferred beyond such matters. We do not assume any responsibility to update
these opinions or advise you of changes resulting from events (whether or note
they come to our attention) that may occur after the date hereof, including,
without limitation, future transactions or other actions under the Transaction
Documents, or any inaccuracy in any of the representations or warranties upon
which we have relied in rendering these opinions.
<PAGE> 150
Crescent Real Estate Equities Company
December 11, 1996
Page 15
VII. Conclusion
Based on the assumptions stated above, it is our opinion that (i) the
Lease will be treated as a lease for federal income tax purposes and (ii) all
of the income that the Operating Partnership derives under the Lease through
its partnership interest in Funding VI will be treated as "qualifying income"
for purposes of the 95 percent test.
Very Truly Yours,
SHAW, PITTMAN, POTTS & TROWBRIDGE
/s/ CHARLES B. TEMKIN, P.C.
-------------------------------------
By: Charles B. Temkin, P.C.
<PAGE> 1
EXHIBIT 8.02
[LOCKE PURNELL RAIN HARRELL LETTERHEAD]
April 22, 1997
Crescent Real Estate Equities Company
777 Main Street, Suite 2100
Fort Worth, Texas 76102
Ladies and Gentlemen:
On March 25, 1997, Crescent Real Estate Equities Company ("Crescent
Equities") filed a registration statement on Form S-3, No. 333-21905, with the
Securities and Exchange Commission, which was declared effective on March 26,
1997. Such registration statement (the "Registration Statement") includes a
prospectus supplement to be filed on April 24, 1997 (the "Prospectus
Supplement") to the prospectus contained in the Registration Statement (the
"Prospectus"). We have acted as special tax counsel to Crescent Equities in
connection with the Prospectus Supplement. Capitalized terms used hereunder but
not defined have the meaning ascribed to them in the Prospectus Supplement.
In rendering this opinion we have examined such documents as we have
deemed relevant or necessary, including the Prospectus Supplement, and our
conclusions are based upon the facts contained in the Prospectus Supplement. The
initial and continuing accuracy of these facts constitutes an integral basis for
the opinion expressed herein.
In our opinion, the discussion contained in the Prospectus Supplement
in the subsection entitled "Federal Income Tax Considerations - State and
Local Taxes" accurately summarizes the Texas franchise tax matters that are
likely to be material to a holder of common shares of Crescent Equities as of
the date of the Prospectus Supplement. The foregoing opinion is limited to the
specific matter covered hereby and does not apply to any other matters discussed
under the heading "Federal Income Tax Considerations." This opinion is based
upon existing State of Texas statutes and regulations and positions of the Texas
State Comptroller of Public Accounts as of the date hereof, all of which are
subject to change, both retroactively or prospectively.
This opinion is furnished to you solely for use in connection with the
Prospectus Supplement. We hereby consent to the incorporation by reference of
this opinion as an exhibit to the Registration Statement and to the reference
to our Firm in the Prospectus
<PAGE> 2
Crescent Real Estate Equities Company
April 22, 1997
Page 2
and Prospectus Supplement under the caption "Federal Income Tax Considerations -
State and Local Taxes" and "Legal Matters". In giving this consent we do not
thereby admit that we come within the category of persons whose consent is
required under the Securities Act of 1933, as amended, or the rules and
regulations of the Securities and Exchange Commission promulgated thereunder.
Very truly yours,
LOCKE PURNELL RAIN HARRELL
(A Professional Corporation)
By: /s/ C. RONALD KALTEYER
----------------------------
C. Ronald Kalteyer
