<PAGE> 1
Filed Pursuant to Rule 424(b)(5)
Registration Number 333-21905
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with and
declared effective by the Securities and Exchange Commission. These
securities may not be sold nor may offers to buy be accepted without the
delivery of a final prospectus supplement and prospectus. This Prospectus
Supplement and the accompanying Prospectus shall not constitute an offer to
sell or the solicitation of an offer to buy nor shall there be any sale of
these securities in any State in which such offer, solicitation or sale
would be unlawful prior to registration or qualification under the
securities laws of any such State.
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS SUPPLEMENT DATED SEPTEMBER 30,1997
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED MARCH 26, 1997)
8,500,000 SHARES
[CRESCENT LOGO]
COMMON SHARES
------------------------
Crescent Real Estate Equities Company (collectively with its subsidiaries,
the "Company") is a fully integrated real estate company operated as a real
estate investment trust for federal income tax purposes (a "REIT"). The Company
owns a portfolio of real estate assets located primarily in 20 metropolitan
submarkets in Texas and Colorado. The portfolio includes 76 office properties
with an aggregate of approximately 24.6 million net rentable square feet, 91
behavioral healthcare facilities, five full-service hotels with a total of 1,900
rooms and two destination health and fitness resorts, seven retail properties
and economic interests in five residential development corporations. The Company
is one of the largest publicly held REITs in the United States.
Upon completion of the pending investments described herein, the Company
will have completed over $3.0 billion of real estate investments since the
closing of its initial public offering on May 5, 1994, approximately $1.6
billion of which will have been completed since the closing of its public
offering on April 28, 1997. Total return to shareholders from the April 1997
offering through September 30, 1997 was approximately 58.8%, including
distributions and share price appreciation.
All of the common shares of beneficial interest (the "Common Shares")
offered hereby are being sold by the Company. Of the 8,500,000 Common Shares
offered hereby, 6,800,000 shares are being initially offered in the United
States and Canada, and the remaining 1,700,000 shares are being initially
offered outside of the United States and Canada. See "Underwriting." Upon the
closing of this offering, the Company's trust managers and senior management
will beneficially own approximately 16.1% of the common equity of the Company.
Since the closing of the Company's initial public offering, the Company has
made regular quarterly distributions to holders of its Common Shares. The Common
Shares are listed on the New York Stock Exchange (the "NYSE") under the symbol
"CEI." On September 30, 1997, the last reported sale price of the Common Shares
on the NYSE was $40 per share. See "Price Range of Common Shares and
Distributions." To ensure that the Company maintains its qualification as a REIT
for federal income tax purposes, ownership by any person generally is limited to
8.0% of the issued and outstanding Common Shares. See "Description of Common
Shares -- Ownership Limits and Restrictions on Transfer" in the accompanying
Prospectus.
SEE "RISK FACTORS" AT PAGE 2 IN THE ACCOMPANYING PROSPECTUS FOR CERTAIN
FACTORS RELEVANT TO AN INVESTMENT IN THE COMPANY.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS TO WHICH IT
RELATES. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<S> <C> <C> <C>
===========================================================================================================================
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2)
- ---------------------------------------------------------------------------------------------------------------------------
Per Share............................................ $ $ $
- ---------------------------------------------------------------------------------------------------------------------------
Total(3)............................................. $ $ $
===========================================================================================================================
</TABLE>
(1) The Company has agreed to indemnify the several Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting expenses payable by the Company, estimated at $ .
(3) The Company has granted the several U.S. Underwriters a 30-day option to
purchase up to 1,020,000 additional shares to cover any over-allotments and
has granted the several International Managers a 30-day option to purchase
up to 255,000 additional shares to cover any over-allotments. If both
options are exercised in full, the total Price to Public, Underwriting
Discount and Proceeds to Company will be $ , $ and
$ , respectively. See "Underwriting."
------------------------
The Common Shares are offered by the several Underwriters subject to prior
sale, when, as and if delivered to and accepted by the Underwriters, and subject
to their right to withdraw, cancel or modify such offer and to reject orders in
whole or in part. It is expected that delivery of the Common Shares offered
hereby will be made in New York, New York, on or about , 1997.
------------------------
MERRILL LYNCH & CO.
MORGAN STANLEY DEAN WITTER
PAINEWEBBER INCORPORATED
SMITH BARNEY INC.
------------------------
The date of this Prospectus Supplement is , 1997.
<PAGE> 2
------------------------
Certain persons participating in this offering may engage in transactions that
stabilize, maintain or otherwise affect the price of the Common Shares offered
hereby. Such transactions may include stabilizing transactions, the purchase of
Common Shares to cover syndicate short positions and the imposition of penalty
bids. For a description of these activities, see "Underwriting."
<PAGE> 3
PROSPECTUS SUPPLEMENT SUMMARY
The following Prospectus Supplement Summary is qualified in its entirety by
reference to the more detailed information and financial statements appearing
elsewhere in this Prospectus Supplement or in the accompanying Prospectus or
incorporated therein by reference.
On December 31, 1996, Crescent Real Estate Equities Company, a Texas real
estate investment trust ("Crescent Equities"), became the successor to Crescent
Real Estate Equities, Inc., a Maryland corporation (the "Predecessor
Corporation"), through the merger of the Predecessor Corporation and CRE Limited
Partner, Inc., a subsidiary of the Predecessor Corporation, into Crescent
Equities. The term "Company" includes, unless the context otherwise requires,
Crescent Equities, the Predecessor Corporation, Crescent Real Estate Equities
Limited Partnership, a Delaware limited partnership (the "Operating
Partnership"), Crescent Real Estate Equities, Ltd., a Delaware corporation which
is the sole general partner of the Operating Partnership ("CREE Ltd."), and the
other subsidiaries of Crescent Equities.
Unless otherwise indicated, all information presented in this Prospectus
Supplement assumes no exercise of the Underwriters' over-allotment option.
Historical information has been adjusted, as applicable, to reflect the
Company's two-for-one stock split, effected on March 26, 1997, in the form of a
100% share dividend.
Certain matters discussed within this Prospectus Supplement are
forward-looking statements within the meaning of the federal securities laws.
Although the Company believes that the expectations reflected in such
forward-looking statements are based upon reasonable assumptions, there can be
no assurance that these expectations will be realized. Factors that could cause
actual results to differ materially from current expectations include the
failure of pending investments to close, changes in general economic conditions,
changes in local real estate conditions, changes in industries in which the
Company's principal tenants compete, the failure to timely lease unoccupied
square footage, the failure to timely re-lease occupied square footage upon
expiration of leases, the inability to generate sufficient revenues to meet debt
service payments and operating expenses, the unavailability of equity and debt
financing and other risks described in this Prospectus Supplement or in the
accompanying Prospectus or incorporated therein by reference.
THE COMPANY
The Company is a fully integrated real estate company, operated as a real
estate investment trust for federal income tax purposes (a "REIT"), which owns a
portfolio of real estate assets (the "Properties") located primarily in 20
metropolitan submarkets in Texas and Colorado. The Properties include 76 office
properties (the "Office Properties") with an aggregate of approximately 24.6
million net rentable square feet (78 office properties with an aggregate of 26.2
million net rentable square feet assuming completion of the Pending Investments,
as defined below), 91 behavioral healthcare facilities (the "Behavioral
Healthcare Facilities"), five full-service hotels with a total of 1,900 rooms
and two destination health and fitness resorts (collectively, the "Hotel
Properties"), the real estate mortgages relating to and non-voting common stock
in five residential development corporations (the "Residential Development
Corporations"), which in turn, through joint venture or partnership
arrangements, own interests in 14 residential development properties (the
"Residential Development Properties"), and seven retail properties with an
aggregate of approximately 771,000 net rentable square feet (the "Retail
Properties").
Upon completion of the Pending Investments, the Company will have completed
over $3.0 billion of real estate investments since the closing of the initial
public offering of its common shares (the "Common Shares") on May 5, 1994 (the
"Initial Offering"), approximately $1.6 billion of which will have been
completed since the closing of the public offering of its Common Shares on April
28, 1997 (the "April 1997 Offering"). In addition to the Pending Investments,
the Company has entered into a partnership with Vornado Realty Trust ("VNO") and
certain of its affiliates to participate in the acquisition of Americold
Corporation ("Americold") and URS Logistics, Inc. ("URS"), the two largest
suppliers of public refrigerated warehouse space in the United States, which
together own 79 refrigerated warehouses with an aggregate of approximately 368
million cubic feet. VNO or its affiliates will own approximately 60% of the
partnership, and the Company or its affiliates will own the remaining
approximately 40%.
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<PAGE> 4
The Company's business objective is the maximization of total return to
shareholders through increases in distributions and share price. From the
Initial Offering through September 30, 1997, the total return to shareholders
was approximately 247.7%, with distributions having increased by approximately
31.9% and the market price per Common Share having increased by approximately
220.0%. From the April 1997 Offering through September 30, 1997, the total
return to shareholders was approximately 58.8%, with the market price per Common
Share having increased by approximately 57.6%. In addition, the Company has
announced an increase in its quarterly distribution from $.305 per Common Share
to $.38 per Common Share commencing with the distribution for the third quarter
of 1997, an increase of approximately 24.6%.
INVESTMENT STRATEGY
Management believes that it will be able to identify substantial
opportunities for future real estate investments from a variety of sources,
including life insurance companies and pension funds seeking to reduce their
direct real estate investments, public and private real estate companies,
corporations divesting of nonstrategic real estate assets and private sellers
requiring complex disposition structures. The Company intends to continue
utilizing its extensive network of relationships, its ability to identify
underperforming assets, its market reputation and its ready access to low-cost
equity and debt capital to achieve favorable returns on invested capital and
growth in cash flow by:
- acquiring high-quality office properties at prices significantly below
their estimated replacement cost in selected core markets and submarkets
that management expects to experience above-average population and
employment growth; and
- employing the corporate, transactional and financial skills of the
Company's management team to structure innovative investments in other
types of real estate assets (including destination resort and luxury
hotel properties and residential land developments).
The Company believes that its proven ability to structure innovative
transactions provides it with a unique competitive advantage in making real
estate investments and enhances its ability to execute its investment strategy.
OPERATING AND FINANCING STRATEGIES
The Company seeks to enhance its operating performance and financial
position by:
- applying well-defined leasing strategies in order to capture the
significant potential rental growth in the Company's existing portfolio
of Office Properties as occupancy and rental rates increase with the
recovery of the markets and submarkets in which the Company has invested;
- achieving a high tenant retention rate at the Company's Office Properties
through quality service, individualized attention to its tenants and
active preventive maintenance programs;
- empowering management and employing compensation formulas linked directly
with enhanced operating performance of the Company and its Properties;
and
- optimizing the use of debt and other sources of financing to create a
flexible and conservative capital structure that will allow the Company
to continue its investment strategy.
Upon the closing of this offering (the "Offering"), the Company's trust
managers and senior management will beneficially own approximately 16.1% of the
Company's common equity (consisting of Common Shares and units of ownership
interest in the Operating Partnership ("Units"), including vested options to
purchase Common Shares and Units). This ownership percentage includes the
approximately 11.7% ownership position of Richard E. Rainwater, the Chairman of
the Board of Trust Managers, the approximately 2.3% ownership position of John
C. Goff, the Vice Chairman of the Board of Trust Managers, and the approximately
1.7% ownership position of Gerald W. Haddock, the President, Chief Executive
Officer and Trust Manager.
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<PAGE> 5
PROPERTIES
The following table sets forth for the six months ended June 30, 1997, the
Company's earnings before interest expense, depreciation, amortization and
minority interest ("EBIDA"), on a percentage basis, by type of Property, after
giving effect to the Pending Investments (as defined below) and the completed
acquisitions from January 1, 1997, as if they had occurred on January 1, 1997.
See "Recent Developments -- Pending Investments" and "Recent
Developments -- Completed Investments."
<TABLE>
<CAPTION>
PERCENT OF
PROPERTY TYPE EBIDA
------------- ----------
<S> <C>
Office Properties........................................... 63%
Behavioral Healthcare Facilities............................ 15
Hotel Properties............................................ 12
Residential Development Properties.......................... 8
Retail Properties........................................... 2
---
100%
===
</TABLE>
OFFICE PROPERTIES
The following table provides an overview of the Office Properties as of
June 30, 1997 and the states, cities and submarkets in which they are located,
after giving effect to the Pending Investments as if they had occurred on
January 1, 1997.
<TABLE>
<CAPTION>
PERCENT PERCENT
PERCENT OF COMPANY LEASED AT
TOTAL OF TOTAL ANNUALIZED COMPANY
NUMBER OF COMPANY COMPANY RENTAL OFFICE
STATE, CITY, SUBMARKET PROPERTIES NRA(1) NRA(1) REVENUES(2) PROPERTIES
- --------------------------------------------------------- ---------- ---------- -------- ----------- ----------
<S> <C> <C> <C> <C> <C>
TEXAS
DALLAS
Central Business District ("CBD")(3)................. 2 2,328,597 9% 11% 87%
Far North Dallas..................................... 8 1,938,220 7 7 96
Uptown/Turtle Creek.................................. 4 1,929,471 7 9 87(6)
Las Colinas.......................................... 4 1,273,662 5 6 98
Richardson/Plano..................................... 5 719,267 3 2 100
LBJ Freeway.......................................... 3 697,897 3 2 88(6)
Stemmons Freeway..................................... 1 634,381 2 2 90
Central Expressway................................... 2 413,721 2 1 85
-- ---------- --- --- ---
Subtotal/Weighted Average.......................... 29 9,935,216 38% 40% 91%
-- ---------- --- --- ---
FORT WORTH
CBD.................................................. 1 954,895 4% 3% 63%(6)
-- ---------- --- --- ---
HOUSTON
Richmond-Buffalo Speedway............................ 10 4,256,885 16% 15% 79%(6)
CBD(4)............................................... 3 2,764,418 11 11 92
The Woodlands........................................ 12 812,227 3 3 97
Katy Freeway......................................... 1 414,251 2 1 100
West Loop/Galleria(3)................................ 1 399,777 1 1 87
-- ---------- --- --- ---
Subtotal/Weighted Average.......................... 27 8,647,558 33% 31% 86%
-- ---------- --- --- ---
AUSTIN
CBD.................................................. 3 1,240,865 5% 5% 87%
Northwest............................................ 1 125,959 0 1 100
Southwest............................................ 1 99,792 0 0 92
-- ---------- --- --- ---
Subtotal/Weighted Average.......................... 5 1,466,616 5% 6% 89%
-- ---------- --- --- ---
COLORADO
DENVER
Cherry Creek......................................... 4 794,270 3% 3% 85%(6)
CBD.................................................. 2 720,417 3 3 98
Denver Technology Center ("DTC")..................... 1 309,862 1 1 94
-- ---------- --- --- ---
Subtotal/Weighted Average.......................... 7 1,824,549 7% 7% 91%
-- ---------- --- --- ---
COLORADO SPRINGS....................................... 1 252,857 1% 1% 100%
-- ---------- --- --- ---
FLORIDA
MIAMI
Downtown -- CBD(5)................................... 1 782,686 3% 3% 78%(6)
-- ---------- --- --- ---
ARIZONA
PHOENIX
Downtown -- CBD...................................... 1 476,373 2% 2% 87%
Camelback Corridor................................... 1 86,451 0 0 67
-- ---------- --- --- ---
Subtotal/Weighted Average.......................... 2 562,824 2% 2% 84%
-- ---------- --- --- ---
LOUISIANA
NEW ORLEANS
CBD.................................................. 1 508,741 2% 2% 74%
-- ---------- --- --- ---
</TABLE>
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<PAGE> 6
<TABLE>
<CAPTION>
PERCENT PERCENT
PERCENT OF COMPANY LEASED AT
TOTAL OF TOTAL ANNUALIZED COMPANY
NUMBER OF COMPANY COMPANY RENTAL OFFICE
STATE, CITY, SUBMARKET PROPERTIES NRA(1) NRA(1) REVENUES(2) PROPERTIES
- --------------------------------------------------------- ---------- ---------- -------- ----------- ----------
<S> <C> <C> <C> <C> <C>
NEBRASKA
OMAHA
CBD.................................................. 1 409,850 2% 1% 99%
-- ---------- --- --- ---
NEW MEXICO
ALBUQUERQUE
CBD.................................................. 1 365,952 1% 2% 94%
-- ---------- --- --- ---
CALIFORNIA
SAN FRANCISCO
South of Market - CBD................................ 1 276,420 1% 1% 81%
-- ---------- --- --- ---
SAN DIEGO
University Tower Centre ("UTC")...................... 1 195,733 1% 1% 85%
-- ---------- --- --- ---
TOTAL/WEIGHTED AVERAGE........................... 78 26,183,897 100% 100% 88%(6)
== ========== === === ===
</TABLE>
- ---------------
(1) NRA means net rentable area in square feet.
(2) Represents percent of annualized office property rental revenues based on
June 1997 rental revenues, except for the Pending Investments and the
acquisitions completed after June 30, 1997, which are annualized based on
rental revenues for the six months ended June 30, 1997.
(3) Includes Pending Investments consisting of one office property in the Dallas
CBD submarket and one office property in the Houston West Loop/Galleria
submarket.
(4) The Company's Office Properties in this submarket were acquired subsequent
to June 30, 1997.
(5) The Company's Office Property in this submarket was acquired subsequent to
June 30, 1997.
(6) Leases have been executed at certain Properties in these submarkets but had
not commenced as of June 30, 1997. If such leases had commenced as of June
30, 1997, the percent leased for all Office Properties in the Company's
submarkets would have been 90%. The total percent leased at the Company's
Office Properties would have been as follows: Uptown/Turtle Creek -- 92%;
LBJ Freeway -- 96%; Fort Worth CBD -- 100%; Richmond-Buffalo
Speedway -- 82%; Cherry Creek -- 90%; and Miami Downtown-CBD -- 82%.
LEASE EXPIRATIONS OF OFFICE PROPERTIES
The following table sets forth a schedule of lease expirations for leases
in place as of June 30, 1997, for each of the 10 years beginning with the
remainder of 1997 for the Office Properties and the Pending Investments,
assuming that none of the tenants exercises renewal options and excluding an
aggregate of 3,241,715 square feet of unleased space.
<TABLE>
<CAPTION>
Percentage
of Total Annual
Net Rentable Annual Full-Service
Area Percentage of Annual Full-Service Rent Per
Number of Represented Leased Net Full-Service Rent Net
Tenants with by Expiring Rentable Area Rent Under Represented Rentable
Year of Lease Expiring Leases Represented by Expiring by Expiring Area
Expiration Leases (Square Feet) Expiring Leases Leases(1) Leases Expiring(1)
------------- ------------ ------------- --------------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
1997.............................. 304 1,733,613 7.6% $26,409,303 6.4% $15.23
1998.............................. 420 2,035,949 8.9% 32,922,861 8.0% 16.17
1999.............................. 357 3,230,020 14.2% 55,391,009 13.5% 17.15
2000.............................. 268 2,657,819 11.7% 42,134,552 10.2% 15.85
2001.............................. 247 3,151,958 13.8% 56,811,502 13.8% 18.02
2002.............................. 128 2,674,178 11.8% 51,207,613 12.4% 19.15
2003.............................. 49 1,095,723 4.8% 19,639,059 4.8% 17.92
2004.............................. 45 1,964,080 8.6% 38,589,013 9.4% 19.65
2005.............................. 30 1,699,365 7.5% 31,830,510 7.7% 18.73
2006.............................. 18 509,946 2.2% 10,879,286 2.7% 21.33
2007 and thereafter............... 20 2,019,587 8.9% 45,841,466 11.1% 22.70
</TABLE>
- ---------------
(1) Calculated based on base rent payable as of the expiration date of the lease
for net rentable square feet expiring, without giving effect to free rent or
scheduled rent increases that would be taken into account under generally
accepted accounting principles and including expenses payable by or
reimbursable from tenants.
S-6
<PAGE> 7
OFFICE PROPERTY MARKET INFORMATION
The following graph provides information regarding vacancy levels and
weighted average quoted market rental rates at year end for each of the years
from 1992 through 1996, and at June 30, 1997, for Class A office properties in
all submarkets in which the Company has invested or has Pending Investments in
Class A office properties.
CLASS A OFFICE
VACANCY AND QUOTED MARKET RENT
FOR ALL COMPANY SUBMARKETS
<TABLE>
<CAPTION>
MEASUREMENT PERIOD
(FISCAL YEAR COVERED) AVG. RENT VACANCY
<S> <C> <C>
1992 16.10 17
1993 15.68 16.1
1994 16.09 12.6
1995 16.91 11.4
1996 18.47 10.5
6/30/97 19.60 9.1
</TABLE>
- ---------------
(1) Weighted average based on total net rentable square feet of Class A office
properties in all Company submarkets.
Source: Compiled from third-party sources
BEHAVIORAL HEALTHCARE FACILITIES
On June 17, 1997, the Company acquired substantially all of the real estate
assets of the domestic hospital provider business of Magellan Health Services,
Inc., as previously owned and operated by a wholly owned subsidiary of Magellan
Health Services, Inc. The transaction involved various components, the principal
component of which was the acquisition of the 91 Behavioral Healthcare
Facilities (and one additional behavioral healthcare facility which subsequently
was sold) for approximately $387.2 million. The Behavioral Healthcare
Facilities, which are located in 28 states, are leased to a single tenant (and
its subsidiaries) under a triple-net lease. The tenant, Charter Behavioral
Health Systems, LLC ("CBHS"), is a newly formed Delaware limited liability
company owned 50% by a subsidiary of Magellan Health Services, Inc. and 50% by
Crescent Operating, Inc. See "Recent Developments -- Formation of Crescent
Operating, Inc." The lease requires the payment of annual minimum rent in the
amount of approximately $41.7 million for the period ending June 16, 1998,
increasing in each subsequent year during the 12-year term at a 5% compounded
annual rate. All maintenance and capital improvement costs are the
responsibility of CBHS during the term of the lease. In addition, the obligation
of CBHS, pursuant to a franchise agreement, to pay an approximately $78.3
million franchise fee to Magellan Health Services, Inc. and one of its
subsidiaries, as franchisor, is subordinated to the obligation of CBHS to pay
annual minimum rent to the Company. The franchisor does not have the right to
terminate the franchise agreement due to any nonpayment of the franchise fee as
a result of the subordination of the franchise fee to the annual minimum rent.
The lease is designed to provide the Company with a secure, above-average return
on its investment as a result of the
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<PAGE> 8
priority of annual minimum rent to the franchise fee and the initial amount and
annual escalation in the lease payments.
HOTEL PROPERTIES
The following table sets forth certain information about the Hotel
Properties for the six months ended June 30, 1997 and 1996. The information for
the Hotel Properties is based on available rooms, except for Canyon Ranch-Tucson
and Canyon Ranch-Lenox, which are destination health and fitness resorts that
measure performance based on available guest nights.
<TABLE>
<CAPTION>
AVERAGE AVERAGE REVENUE PER
OCCUPANCY DAILY AVAILABLE
RATE RATE ROOM
------------ ------------ ------------
SIX MONTHS SIX MONTHS SIX MONTHS
ENDED ENDED ENDED
YEAR JUNE 30, JUNE 30, JUNE 30,
COMPLETED/ ------------ ------------ ------------
HOTEL PROPERTY(1) LOCATION RENOVATED ROOMS 1997 1996 1997 1996 1997 1996
----------------- -------- ---------- ----- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
FULL-SERVICE/LUXURY HOTELS
Denver Marriott City Center Denver, CO 1982/1994 613 81% 81% $111 $104 $ 90 $ 85
Four Seasons Hotel-Houston(2) Houston, TX 1982 399 69 67 158 146 110 98
Hyatt Regency Albuquerque Albuquerque, NM 1990 395 74 78 99 93 74 72
Hyatt Regency Beaver Creek Avon, CO 1989 295 69 68 270 253 186 173
Sonoma Mission Inn & Spa Sonoma, CA 1927/1987 168(3) 89 93 180 162 161 150
----- -- -- ---- ---- ---- ----
TOTAL/WEIGHTED AVERAGE 1,870(3) 76% 76% $148 $136 $112 $104
===== == == ==== ==== ==== ====
DESTINATION HEALTH AND FITNESS RESORTS
Canyon Ranch-Tucson Tucson, AZ 1980 240(4) 86%(5) 85%(5) $527(6) $503(6) $437(7) $413(7)
Canyon Ranch-Lenox Lenox, MA 1989 202(4) 79 (5) 82 (5) 407(6) 367(6) 311(7) 292(7)
----- -- -- ---- ---- ---- ----
TOTAL/WEIGHTED AVERAGE 442 83% 84% $475 $442 $379 $358
===== == == ==== ==== ==== ====
</TABLE>
- ---------------
(1) Because of the Company's status as a REIT for federal income tax purposes,
it does not operate the Hotel Properties and has leased the Hotel Properties
to subsidiaries of Crescent Operating, Inc. pursuant to long-term leases.
See "Properties -- Hotel Properties."
(2) Acquired subsequent to June 30, 1997
(3) Does not include the addition of 30 rooms subsequent to June 30, 1997.
(4) Represents available guest nights, which is the maximum number of guests
that the resort can accommodate per night.
(5) Represents the number of paying and complimentary guests for the period,
divided by the maximum number of available guest nights for the period.
(6) Represents the average daily "all-inclusive" guest package charges for the
period, divided by the average daily number of paying guests for the period.
(7) Represents the total "all-inclusive" guest package charges for the period,
divided by the maximum number of available guest nights for the period.
RESIDENTIAL DEVELOPMENT PROPERTIES
The Company owns economic interests in five Residential Development
Corporations through the real estate mortgages (the "Residential Development
Property Mortgages") relating to and the non-voting common stock in these
Residential Development Corporations. The Residential Development Corporations
in turn, through joint ventures or partnership arrangements, own interests in
the 14 Residential Development Properties. The Residential Development
Corporations are responsible for the continued development and the day to day
operations of the Residential Development Properties.
RECENT DEVELOPMENTS
PENDING INVESTMENTS
As of September 30, 1997, the Operating Partnership had pending
approximately $159.0 million (including $97.1 million of assumed indebtedness)
in additional real estate investments (the "Pending Investments") consisting of
a Class A office building located in downtown Dallas, Texas containing
approximately 1.2 million net rentable square feet and a Class A office building
located in suburban Houston, Texas containing approximately 400,000 net rentable
square feet. These investments, which are expected to close by the end of
October 1997, are subject to completion of due diligence and customary closing
conditions. There is no assurance that the Pending Investments will be
completed.
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<PAGE> 9
On a pro forma basis, after giving effect to the Pending Investments and
completed investments from January 1, 1997 as if they had occurred on January 1,
1997, the Office Properties, Behavioral Healthcare Facilities, Hotel Properties,
Residential Development Properties and Retail Properties would have accounted
for approximately 63%, 15%, 12%, 8% and 2%, respectively, of the Company's EBIDA
for the six months ended June 30, 1997. The Company's office properties in
Dallas/Fort Worth and Houston, Texas and in Denver, Colorado will represent,
upon completion of the Pending Investments, an aggregate of approximately 82% of
its office portfolio based on total net rentable square feet and, on a pro forma
basis, after giving effect to the Pending Investments and the completed
acquisitions from January 1, 1997 as if they had occurred on January 1, 1997,
would have accounted for an aggregate of approximately 81% of office property
rental revenues for the six months ended June 30, 1997.
PROPOSED INVESTMENT WITH VNO
On September 29, 1997, the Company entered into a partnership with VNO and
certain affiliates of VNO to participate in the acquisition, for an aggregate
purchase price (including the assumption of certain debt) of approximately $949
million, of Americold and URS, two companies which currently own and operate 79
refrigerated warehouses with an aggregate of approximately 368 million cubic
feet. Americold and URS are the two largest suppliers of public refrigerated
warehouse space in the United States. VNO or its affiliates will own
approximately 60% of the partnership, and the Company or its affiliates will own
the remaining approximately 40%. The transaction is expected to be completed in
the fourth quarter of 1997, subject to resolution of various structuring issues
and closing conditions. There can be no assurance that the transaction will be
completed. The Company has not classified the Company's partnership with VNO and
affiliates as a Pending Investment for which pro forma financial information and
other information has been presented, due to the various structuring
considerations to be resolved before the investment occurs. See "Recent
Developments -- Proposed Investment with VNO."
COMPLETED INVESTMENTS
Since June 30, 1997, the Company has completed approximately $774.1 million
of real estate investments consisting of investments of approximately $80
million in The Woodlands, an approximately 27,000-acre, master-planned
residential and commercial community located 27 miles north of downtown Houston;
approximately $235 million in Desert Mountain, a master-planned, luxury
residential and recreational community in northern Scottsdale, Arizona;
approximately $327.6 million in Houston Center, an approximately 3.0 million
square foot, mixed-use property located in the CBD submarket of Houston, Texas
consisting of three high-rise Class A office buildings aggregating approximately
2.8 million net rentable square feet (the "Houston Center Office Properties"),
the 399-room Four Seasons-Houston Hotel Property, 114 luxury apartments, the
Park Shops in Houston Center Retail Property containing approximately 191,000
net rentable square feet and approximately 20 acres of undeveloped commercial
land (as to which the Company has entered into an agreement, subject to approval
of the Houston City Council, for the construction of an approximately 1,000-room
hotel); and approximately $131.5 million in Miami Center, a 34-story Class A
office building located in the Downtown-CBD submarket of Miami, Florida.
TRANSACTIONS WITH AFFILIATES OF UNION BANK OF SWITZERLAND
On August 12, 1997, the Company entered into two transactions with
affiliates of Union Bank of Switzerland. In one transaction (the "UBS
Offering"), the Company sold 4,700,000 Common Shares to one of the affiliates
for approximately $148 million and received approximately $145 million in net
proceeds. In the other transaction, the Company entered into a forward share
purchase agreement with a second affiliate. Under the forward share purchase
agreement, the Company committed to purchase 4,700,000 Common Shares from the
second affiliate by August 12, 1998. The price to be paid by the Company for the
4,700,000 Common Shares will be determined on the date the Company settles the
forward share purchase agreement and will include a forward accretion component,
minus an adjustment for the Company's distribution rate. The Company may fulfill
its settlement obligations under the forward share purchase agreement in cash or
Common Shares, at its option. As a result, the forward share purchase agreement
will permit the Company to benefit from increases in the market price of its
Common Shares while limiting the risk associated with decreases in the market
price of its common shares.
S-9
<PAGE> 10
FORMATION OF CRESCENT OPERATING, INC.
In April 1997, the Company established a new Delaware corporation, Crescent
Operating, Inc. All of the outstanding common stock of Crescent Operating, Inc.
was distributed, effective June 12, 1997, to those persons who were limited
partners of the Operating Partnership or shareholders of the Company on May 30,
1997, in a spin-off.
Crescent Operating, Inc. was formed to become a lessee and operator of
various assets and to perform an agreement (the "Intercompany Agreement")
between Crescent Operating, Inc. and the Company, pursuant to which each has
agreed to provide the other with rights to participate in certain transactions.
As a result of the formation of Crescent Operating, Inc. and the execution of
the Intercompany Agreement, persons who own equity interests in both Crescent
Operating, Inc. and the Company have the opportunity to participate in the
benefits of both the real estate investments of the Company (including ownership
of real estate assets) and the lease of certain of such assets and the ownership
of other non-real estate assets by Crescent Operating, Inc. Crescent Operating,
Inc.'s certificate of incorporation, as amended and restated, generally
prohibits Crescent Operating, Inc., for so long as the Intercompany Agreement
remains in effect, from engaging in activities or making investments that a REIT
could make, unless the Company was first given the opportunity but elected not
to pursue such activities or investments.
NOTE OFFERING
On September 22, 1997, the Operating Partnership completed a private
offering (the "Note Offering") of senior unsecured notes (the "Notes") in an
aggregate principal amount of $400,000,000. The Notes were issued in two series,
the 6 5/8% Notes due 2002 (the "2002 Notes") and the 7 1/8% Notes due 2007 (the
"2007 Notes"). The 2002 Notes were issued in an aggregate principal amount of
$150,000,000, bear interest at a rate of 6 5/8% per annum payable semi-annually
in arrears and mature on September 15, 2002. The 2007 Notes were issued in an
aggregate principal amount of $250,000,000, bear interest at a rate of 7 1/8%
per annum payable semi-annually in arrears and mature on September 15, 2007. The
interest rate on the Notes is subject to increase upon the occurrence of certain
events specified in the Notes.
The Notes are redeemable, in whole or in part, at the option of the
Operating Partnership upon payment of principal, accrued and unpaid interest and
the premium specified in the Notes. The Notes also contain certain covenants,
including limitations on the ability of the Operating Partnership and its
subsidiaries to incur additional debt, other than certain intercompany debt that
is subordinate to payment of the Notes, unless certain asset and income tests
are satisfied.
FINANCING ACTIVITIES
On September 22, 1997, the Company's line of credit from a consortium of
banks led by BankBoston, N.A. (the "Credit Facility") was increased to $450
million to enhance the Company's financial flexibility in making new real estate
investments. Concurrently with such increase, the interest rate on advances
under the Credit Facility was decreased from the Eurodollar rate plus 138 basis
points to the Eurodollar rate plus 120 basis points. The Credit Facility is
unsecured and expires in June 2000.
DISTRIBUTIONS
The Company intends to continue making regular quarterly distributions to
its shareholders. The Company's current quarterly distribution rate is $.305 per
Common Share, an indicated annualized distribution of $1.22 per Common Share.
The Company has announced an increase in its quarterly distribution to $.38 per
Common Share, an indicated annualized distribution of $1.52 per Common Share,
payable on November 4, 1997 to holders of record on October 16, 1997. Future
distributions will be at the discretion of the Board of Trust Managers.
S-10
<PAGE> 11
THE OFFERING
All of the Common Shares offered hereby are being offered by the Company.
<TABLE>
<S> <C>
Common Shares Offered
U.S. Offering.................................... 6,800,000 shares
International Offering........................... 1,700,000 shares
-----------------
Total.................................... 8,500,000 shares
Common Shares to be Outstanding After the
Offering......................................... 110,942,050 shares
Common Shares to be Outstanding and Issuable in
Exchange for Units After the Offering(1)......... 123,832,504 shares
Use of Proceeds.................................... to fund a portion of the Pending Investments and
repay certain short-term indebtedness and
amounts outstanding under the Credit Facility as
described in "Use of Proceeds"
NYSE Symbol........................................ "CEI"
</TABLE>
- ---------------
(1) Units are exchangeable on a one-for-two basis for Common Shares or, at the
option of the Company, cash, subject to certain exceptions.
S-11
<PAGE> 12
SUMMARY SELECTED FINANCIAL DATA
The following table sets forth certain summary financial information for
the Company on a consolidated pro forma and historical basis and for the
Rainwater Property Group (the Company's predecessor) on a combined historical
basis, which consists of the combined financial statements of the entities that
contributed Properties in exchange for Units or Common Shares in connection with
the formation of the Company. Such information should be read in conjunction
with "Selected Financial Data."
The pro forma information for the year ended December 31, 1996 assumes
completion, in each case as of January 1, 1996 in determining operating and
other data, of (i) the Company's public offering of its common shares in October
1996 (the "October 1996 Offering") and the additional public offering of 450,000
common shares that closed on October 9, 1996 and the use of the net proceeds
therefrom to repay approximately $168 million of indebtedness and to fund
approximately $289 million of Property acquisitions in the fourth quarter of
1996 and the first quarter of 1997, (ii) the April 1997 Offering and the
additional public offering of 500,000 common shares that closed on May 14, 1997
and the use of the net proceeds therefrom to fund approximately $593.5 million
of Property acquisitions and other investments in the second quarter of 1997,
(iii) the UBS Offering and the use of the net proceeds therefrom to repay
approximately $145 million of indebtedness under the Credit Facility, (iv) the
Note Offering and the use of the net proceeds therefrom to fund approximately
$327.6 million of the acquisition of Houston Center, to repay approximately
$50.0 million of indebtedness incurred under the Credit Facility, to fund
approximately $10.0 million of the purchase price of Miami Center and to repay
approximately $7.2 million of short-term indebtedness, (v) the Company's
issuance of 307,831 Common Shares on September 22, 1997 in connection with the
acquisition of Houston Center and the use of the net proceeds therefrom to repay
approximately $10.0 million of indebtedness incurred under the Credit Facility,
(vi) this Offering and the use of the net proceeds therefrom to fund
approximately $61.9 million of Pending Investments and to repay approximately
$259.8 million of short-term indebtedness and indebtedness incurred under the
Credit Facility, (vii) assumed indebtedness of $97.1 million in connection with
the purchase of one of the Pending Investments and (viii) the Pending
Investments and the Property acquisitions and other investments made during 1996
and 1997. The pro forma information for the year ended December 31, 1996 does
not include the Company's proposed investment in VNO. See "Recent
Developments -- Proposed Investment with VNO."
The pro forma information for the six months ended June 30, 1997 assumes
completion, in each case as of January 1, 1997 in determining operating and
other data, and, in each case as of June 30, 1997 in determining balance sheet
data, of (i) the April 1997 Offering and the additional public offering of
500,000 common shares that closed on May 14, 1997 and the use of the net
proceeds therefrom to fund approximately $593.5 million of Property acquisitions
and other investments in the second quarter of 1997, (ii) the UBS Offering and
the use of the net proceeds therefrom to repay approximately $145 million of
indebtedness under the Credit Facility, (iii) the Note Offering and the use of
the net proceeds therefrom to fund approximately $327.6 million of the
acquisition of Houston Center, to repay approximately $50.0 million of
indebtedness incurred under the Credit Facility, to fund approximately $10.0
million of the purchase price of Miami Center and to repay approximately $7.2
million of short-term indebtedness, (iv) the Company's issuance of 307,831
Common Shares on September 22, 1997 in connection with the acquisition of
Houston Center and the use of the net proceeds therefrom to repay approximately
$10.0 million of indebtedness incurred under the Credit Facility; (v) this
Offering and the use of the net proceeds therefrom to fund approximately $61.9
million of Pending Investments and to repay approximately $259.8 million of
short-term indebtedness and indebtedness incurred under the Credit Facility;
(vi) assumed indebtedness of $97.1 million in connection with the purchase of
one of the Pending Investments and (vii) the Pending Investments and the
Property acquisitions and other investments made during 1997. The pro forma
information for the six months ended June 30, 1997 does not include the
Company's proposed investment in VNO. See "Recent Developments -- Proposed
Investment with VNO."
S-12
<PAGE> 13
CRESCENT REAL ESTATE EQUITIES COMPANY
CONSOLIDATED PRO FORMA AND HISTORICAL FINANCIAL DATA AND
RAINWATER PROPERTY GROUP COMBINED HISTORICAL FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
COMPANY
---------------------------------------------------------------------------------------------------
FOR THE
PERIOD FROM
PRO FORMA MAY 5, 1994
SIX MONTHS ENDED JUNE 30, YEAR ENDED YEAR ENDED YEAR ENDED TO
--------------------------------------- DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1997 1996 1996 1996 1995 1994
----------- ----------- ----------- ------------ ------------ ------------ ------------
PRO FORMA ACTUAL ACTUAL (UNAUDITED)
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Total revenue............. $ 275,948 $ 183,203 $ 88,059 $ 521,868 $ 208,861 $ 129,960 $ 50,343
Operating income (loss)... 67,164 47,432 16,043 112,628 44,101 30,858 10,864
Income (loss) before
minority interests and
extraordinary item....... 82,530 49,431 18,218 133,748 47,951 36,358 12,595
Income per share before
extraordinary item....... $ .66 $ .52 $ .31 $ 1.07 $ .72 $ .66 $ .28
BALANCE SHEET DATA (AT
PERIOD END):
Total assets.............. $ 3,759,289 $ 2,779,780 $ 1,053,366 $ -- $ 1,730,922 $ 964,171 $ 538,354
Total debt................ 1,614,325 1,132,496 534,408 -- 667,808 444,528 194,642
Total shareholders'
equity................... 1,914,744 1,438,064 395,148 -- 865,160 406,531 235,262
OTHER DATA:
Funds from Operations
before minority
interests(1)............. $ 132,913 $ 78,522 $ 36,728 $ 235,615 $ 87,616 $ 64,475 $ 32,723
Cash distribution declared
per share................ -- $ .61 $ .55 -- $ 1.16 $ 1.05 $ .65
Weighted average Common
Shares outstanding and
issuable in exchange for
Units.................... 124,109,401 94,269,446 57,753,882 124,109,401 64,684,842 54,182,186 44,997,716
Cash flow provided by
(used in):
Operating activities..... $ --(2) $ 71,493 $ 31,486 $ --(2) $ 77,384 $ 65,011 $ 21,642
Investing activities..... --(2) (1,024,052) (92,376) --(2) (513,038) (421,406) (260,666)
Financing activities..... --(2) 982,556 55,640 --(2) 444,315 343,079 265,608
<CAPTION>
RAINWATER PROPERTY GROUP
---------------------------------
FOR THE
PERIOD
FROM
JANUARY 1, YEAR ENDED
1994 TO DECEMBER 31,
MAY 4, --------------------
1994 1993 1992
---------- -------- ---------
<S> <C> <C> <C>
OPERATING DATA:
Total revenue............. $ 21,185 $ 57,168 $ 49,586
Operating income (loss)... (1,599) (53,024) (36,612)
Income (loss) before
minority interests and
extraordinary item....... (1,599) (53,024) (36,612)
Income per share before
extraordinary item....... -- -- --
BALANCE SHEET DATA (AT
PERIOD END):
Total assets.............. -- $290,869 $ 296,291
Total debt................ -- 278,060 548,517
Total shareholders'
equity................... -- 2,941 (328,240)
OTHER DATA:
Funds from Operations
before minority
interests(1)............. -- -- --
Cash distribution declared
per share................ -- -- --
Weighted average Common
Shares outstanding and
issuable in exchange for
Units.................... -- -- --
Cash flow provided by
(used in):
Operating activities..... $ 2,455 $ 9,313 $ (640)
Investing activities..... (2,379) (20,572) (8,924)
Financing activities..... (21,310) 28,861 14,837
</TABLE>
- ---------------
(1) Funds from Operations ("FFO"), based on the revised definition adopted by
the Board of Governors of the National Association of Real Estate Investment
Trusts ("NAREIT"), and as used herein, means net income (loss) (determined
in accordance with generally accepted accounting principles), excluding
gains (or losses) from debt restructuring and sales of property, plus
depreciation and amortization of real estate assets, and after adjustments
for unconsolidated partnerships and joint ventures. For a more detailed
description of FFO, see "Selected Financial Data."
(2) Pro forma information relating to operating, investing and financing
activities has not been included because management believes that the data
would not be meaningful due to the number of assumptions required in order
to calculate this data.
S-13
<PAGE> 14
THE COMPANY
The Company is a fully integrated real estate company, operated as a REIT,
which owns a portfolio of Properties located primarily in 20 metropolitan
submarkets in Texas and Colorado. The Properties include 76 Office Properties
with an aggregate of approximately 24.6 million net rentable square feet (78
office properties with an aggregate of 26.2 million net rentable square feet
assuming completion of the Pending Investments), 91 Behavioral Healthcare
Facilities, five full-service Hotel Properties with a total of 1,900 rooms and
two destination health and fitness resort Hotel Properties that can accommodate
up to 442 guests daily, the Residential Development Property Mortgages relating
to and non-voting common stock in the five Residential Development Corporations,
which in turn, through joint ventures or partnership arrangements, own interests
in 14 Residential Development Properties, and seven Retail Properties with an
aggregate of approximately 771,000 net rentable square feet. On a pro forma
basis, after giving effect to the Pending Investments and the completed
acquisitions from January 1, 1997 as if they had occurred on January 1, 1997,
the Office Properties, Behavioral Healthcare Facilities, Hotel Properties,
Residential Development Properties and Retail Properties would have accounted
for approximately 63%, 15%, 12%, 8% and 2%, respectively, of the Company's EBIDA
for the six months ended June 30, 1997.
The business objective of the Company is the maximization of total return
to shareholders through increases in distributions and share price. From the
Initial Offering through September 30, 1997, the total return to shareholders
was 247.7%, with distributions having increased by approximately 31.9% and the
market price per Common Share having increased by approximately 220.0%. From the
April 1997 Offering through September 30, 1997, the total return to shareholders
was 58.8%, with the market price per Common Share having increased by
approximately 57.6%. In addition, the Company has announced an increase in its
quarterly distribution from $.305 per Common Share to $.38 per Common Share
commencing with the distribution for the third quarter of 1997, an increase of
approximately 24.6%.
The Company has achieved these results by employing a well-defined
investment strategy that focuses on high-quality office properties in selected
growth markets and innovative real estate investments. In addition, the Company
employs an operating strategy that is designed to capitalize on the rental
growth potential of the Company's Office Property portfolio.
INVESTMENT STRATEGY
The Company acquires premier assets and assets that have been undervalued
by utilizing its extensive network of relationships, market reputation, ready
access to low-cost equity and debt capital and ability to structure transactions
creatively. Management believes that it will be able to identify substantial
opportunities for future real estate investments from sources such as life
insurance companies and pension funds seeking to reduce their direct real estate
investments, public and private real estate companies, corporations divesting of
nonstrategic real estate assets and sellers requiring complex disposition
structures.
The Company's targeted investments include office properties that can be
acquired at significant discounts from replacement cost and that provide both a
favorable current return on invested capital and the opportunity for significant
cash flow growth through future increases in rental rates. Integral to this
investment strategy is the identification of specific markets and submarkets
that management believes will experience significant increases in demand for
office space due to the impact of factors that management expects to have a
positive effect on population and employment growth, including (i) desirable
market and submarket conditions, such as political environments favorable to
business, the availability of skilled and competitively priced labor, favorable
corporate and individual tax structures, affordable housing and a favorable
quality of life (as in markets such as Albuquerque, Omaha and Austin), (ii)
demographic shifts in the United States (such as the relocation of businesses
and the migration of people from the Northeast and the West Coast to Texas,
Colorado and Arizona) and (iii) specific regional, national and global economic
developments, such as an increase in demand for natural resources and the
resulting employment growth in markets that have a significant presence in the
oil and gas industry (as in Houston and New Orleans) and an improvement in
economic conditions as a result of growth in the technology industry and/or
international trade (as in San Francisco, San Diego and Miami).
S-14
<PAGE> 15
The markets and submarkets in which the Company concentrates its
acquisitions of office properties are those in which, in addition to anticipated
above-average population and employment growth, replacement cost rental rates
are significantly in excess of current market rental rates. Management believes
that investment in markets and submarkets in which market rental rates are below
the level necessary to justify new construction of competitive properties will
allow the Company to continue to increase rental rates and cash flows as demand
for available office space increases.
Within its core office markets and submarkets, the Company seeks to develop
or acquire substantial ownership positions which provide distinct competitive
operating advantages, including the ability (i) to accommodate changing tenant
space needs within a particular submarket, (ii) to influence rental rates
through the Company's ownership of a significant portion of high-quality office
space in these markets and submarkets, and (iii) to achieve superior operating
expense efficiencies through arrangements with local and regional providers of
office services.
The Company also seeks innovative real estate investments that offer
superior returns on its capital investment. For example, the lease of the
Behavioral Healthcare Facilities provides the Company, based on its investment
in the Behavioral Healthcare Facilities, with an attractive lease payment that
increases annually during the initial 12-year term of the lease. In addition,
the Company has invested in 14 Residential Development Properties, each of which
requires relatively low capital investments in comparison to the Company's other
real estate investments and has substantial infrastructure in place.
Upon completion of the Pending Investments, the Company will have completed
over $3.0 billion of real estate investments since the Initial Offering,
approximately $1.6 billion of which will have been completed since the April
1997 Offering. As a result, the Company's investment in real estate assets will
have increased by approximately 1,087% since the Initial Offering, and by
approximately 90.1% since the April 1997 Offering. Management believes that the
Company's success in completing investments is the result of several competitive
advantages, including (i) management's ability, due to its extensive network of
relationships, to identify property acquisition opportunities, often before the
property is offered for sale, (ii) the proven ability of management to identify
underperforming assets that can be acquired at market prices not reflecting
their potential value, (iii) management's skill and creativity in consummating
unusual and complex transactions, such as acquisitions of mixed-use facilities
and portfolios that include traditional real estate assets, non-traditional real
estate assets and, in certain instances, other types of income-producing or
operating assets, and transactions that satisfy the special needs of sellers and
(iv) the Company's reputation for "certainty of closure" as a result of its
proven ability to complete large, time-sensitive transactions based on its
internal due diligence capability and expertise and its ready access to capital.
Management also believes that these competitive advantages offer the Company
increased opportunities to acquire attractive properties, often on terms more
favorable than those available to other potential purchasers.
OPERATING STRATEGY
The Company maintains a well-defined leasing strategy in order to capture
the potential rental growth in its portfolio of Office Properties as the
submarkets in which the Company has invested continue to recover and occupancy
and rental rates increase. For Office Properties owned as of June 30, 1997, the
weighted average full-service rental rate (i.e., including expense recoveries)
was $17.19 per square foot (including free rent and scheduled rent increases
that would be taken into account under generally accepted accounting
principles), compared to an estimated weighted average full-service replacement
cost rental rate (the rate estimated by management to be necessary to justify
new construction of comparable buildings) of $26.29 per square foot. Many of the
Company's submarkets have experienced substantial rental rate growth during the
past two years. As a result, the Company has been successful in renewing or
re-leasing office space in these markets at rental rates significantly above
expiring rental rates. For Office Properties owned during the six months ended
June 30, 1997, leases were signed renewing or re-leasing 516,967 net rentable
square feet of office space at a weighted average full-service rental rate and
an FFO annual net effective rate (calculated as weighted average full-service
rental rate minus operating expenses) of $17.99 and $11.60 per square foot,
respectively, compared to expiring leases with a weighted average full-service
rental rate and an FFO annual net effective rate of $15.40 and $8.56 per square
foot, respectively (with each of these weighted average full-service rental
rates including free rent and scheduled rent increases that would be taken into
account under generally accepted
S-15
<PAGE> 16
accounting principles). This represents increases in the weighted average
full-service rental rate and in the FFO annual net effective rate of 17% and
36%, respectively.
The Company expects to use its substantial market share in its core office
markets and submarkets to reduce Property operating expenses. For example, in
its core markets of Dallas and Denver, the Company successfully negotiated bulk
contracts for such services as cleaning and elevator maintenance, resulting in
discounts of approximately 5% to 10% from contracts previously in place.
The Company focuses its operational efforts at its Office Properties on
providing quality service, individualized attention to tenants and active
preventive maintenance programs, while managing Property operating expenses to
ensure competitive pricing. Management believes that this focus on creating and
maintaining long-term relationships with its tenants will increase tenant
retention, which in turn will reduce vacancy rates and leasing costs and enhance
overall operating performance.
The Company provides its skilled management team with substantial
flexibility in conducting Company operations while offering incentives that
reward management based on compensation formulas linked directly with enhanced
operating performance. Upon the closing of the Offering, the Company's trust
managers and senior management will beneficially own approximately 16.1% of the
common equity of the Company (consisting of Common Shares and Units, including
vested options to purchase Common Shares and Units). This ownership percentage
includes the approximately 11.7% ownership position of Mr. Rainwater, the
approximately 2.3% ownership position of Mr. Goff and the approximately 1.7%
ownership position of Mr. Haddock.
FINANCING STRATEGY
The Company intends to maintain a conservative capital structure with total
debt currently targeted at approximately 40% of total market capitalization. The
Company, however, consistently seeks to optimize its use of debt and other
sources of financing to create a flexible capital structure that will allow the
Company to continue its innovative investment strategy and maximize the returns
to its shareholders. It is the Company's policy that any indebtedness will be
incurred by the Operating Partnership and its subsidiaries, and that Crescent
Equities will not incur indebtedness other than short-term trade debt, employee
compensation, distributions payable or similar indebtedness that will be paid in
the ordinary course of business.
ORGANIZATION
Crescent Equities is organized as a Texas real estate investment trust. On
December 31, 1996, Crescent Equities became the successor to the Predecessor
Corporation through the merger of the Predecessor Corporation and CRE Limited
Partner, Inc., a subsidiary of the Predecessor Corporation, into Crescent
Equities.
The Company owns its assets and carries on its operations and other
activities, including providing management, leasing and development services for
certain of its Properties, through the Operating Partnership and its other
subsidiaries. The Company also has an economic interest in the development
activities of the Residential Development Corporations. The structure of the
Company is designed to facilitate and maintain its qualification as a REIT and
to permit persons contributing Properties (or interests therein) to the Company
to defer some or all of the tax liability that they otherwise might incur.
The Company's executive offices are located at 777 Main Street, Suite 2100,
Fort Worth, Texas 76102, and its telephone number is (817) 877-0477.
S-16
<PAGE> 17
RECENT DEVELOPMENTS
PENDING INVESTMENTS
The following briefly describes the Pending Investments. The Pending
Investments, with an aggregate expected cost of approximately $159.0 million
(including $97.1 million of assumed indebtedness), are expected to close by the
end of October 1997 and are subject to various closing conditions. There is no
assurance that these investments will be completed.
Fountain Place. The Company has entered into an agreement to acquire
Fountain Place, a 60-story Class A office building located in the CBD submarket
of Dallas, Texas, approximately three blocks west of the Company's Trammell Crow
Center Office Property. Built in 1986 and designed by renowned architect I.M.
Pei, the building, located on approximately 1.8 acres, contains approximately
1.2 million net rentable square feet. Major tenants of Fountain Place include
Hunt Consolidated, Inc., United States Environmental Protection Agency, Jenkens
& Gilchrist and Principal Financial Securities, Inc.
U.S. Home Building. The Company has entered into an agreement to acquire
the U.S. Home Building, a 21-story Class A office building located in the West
Loop/Galleria suburban office submarket of Houston, Texas, approximately five
miles west of downtown Houston and approximately 2.5 miles west of the Company's
Greenway Plaza properties. Built in 1982, the building is located on
approximately 1.9 acres and contains approximately 400,000 net rentable square
feet. Major tenants of the U.S. Home Building include U.S. Home Corporation and
Nextel Communications, Inc.
PROPOSED INVESTMENT WITH VNO
On September 29, 1997, the Company entered into a partnership with VNO and
certain affiliates of VNO to acquire, for an aggregate purchase price (including
the assumption of certain debt) of approximately $949 million, Americold and
URS, two companies which currently own and operate 79 refrigerated warehouses
with an aggregate of approximately 368 million cubic feet. Americold and URS,
the two largest suppliers of public refrigerated warehouse space in the United
States, operate the warehouses pursuant to arrangements with national food
suppliers such as Tyson Foods, Kraft Foods, ConAgra and Pillsbury. VNO or its
affiliates will own approximately 60% of the partnership, and the Company or its
affiliates will own the remaining approximately 40%. Although the terms of the
definitive partnership agreement are subject to negotiation, the existing
agreement provides that certain major decisions require approval of both
partners. Other than these decisions, the VNO partner will have the right to
make all decisions relating to the partnership. The transaction, including the
acquisition of the warehouses, is expected to be completed in the fourth quarter
of 1997, subject to resolution of various structuring issues and closing
conditions. There can be no assurance that the transactions will be completed.
The Company has not classified the Company's partnership with VNO and
affiliates as a Pending Investment for which pro forma financial information and
other information has been presented, due to the various structuring
considerations to be resolved before the investment occurs. These structuring
issues include the identity and nature of the entities that will own Americold
and URS; certain terms of the partnership agreement; the identification and
division of the assets that will be owned by the partnership and any assets that
may be owned by an entity formed to conduct the business operations currently
conducted by Americold and URS; the structure of the entity that will operate
the warehouses; and the nature and terms of any lease that may be entered into
between the operating entity and the owner of the warehouses.
COMPLETED INVESTMENTS
The following briefly describes the Company's Property acquisitions since
June 30, 1997. The information regarding the replacement costs of the Properties
is based on management estimates at the times of the acquisitions.
S-17
<PAGE> 18
The Woodlands Corporation. On July 31, 1997, the Company and certain Morgan
Stanley funds (the "Morgan Stanley Group"), acquired The Woodlands Corporation,
a subsidiary of Mitchell Energy Corporation, for approximately $543 million. In
connection with the acquisition, the Company and the Morgan Stanley Group made
equity investments of approximately $80 million and $109 million, respectively.
The remaining approximately $354 million and associated acquisition and
financing costs of approximately $15 million were financed by the two limited
partnerships, described below, through which the investment was made. The
Woodlands Corporation was the principal owner, developer and operator of The
Woodlands, an approximately 27,000-acre, master-planned residential and
commercial community located 27 miles north of downtown Houston, Texas. The
Woodlands, which is approximately 50% developed, includes a shopping mall,
retail centers, office buildings, a hospital, club facilities, a community
college, a performance pavilion and numerous other amenities.
The acquisition was made through The Woodlands Commercial Properties
Company, L.P. ("Woodlands-CPC"), a limited partnership in which the Morgan
Stanley Group holds a 57.5% interest and the Company holds a 42.5% interest, and
the Woodlands Land Development Company, L.P. ("Woodlands-LDC"), a limited
partnership in which the Morgan Stanley Group holds a 57.5% interest and a newly
formed Residential Development Corporation, The Woodlands Land Company, Inc.
("WLC"), holds a 42.5% interest. The Company owns all of the non-voting common
stock, representing a 95% economic interest, and effective September 30, 1997,
Crescent Operating, Inc. acquired all of the voting common stock, representing a
5% economic interest, in WLC. The Company is the managing general partner of
Woodlands-CPC and WLC is the managing general partner of Woodlands-LDC.
In connection with the acquisition, Woodlands-CPC acquired The Woodlands
Corporation's 25% general partner interest in the partnerships that own
approximately 1.2 million square feet of Office and Retail Properties in The
Woodlands. The Company previously held a 75% limited partner interest in each of
these partnerships and, as a result of the acquisition, the Company's indirect
economic ownership interest in these Properties increased to approximately 85%.
The other assets acquired by Woodlands-CPC include a 364-room executive
conference center, a private golf and tennis club serving approximately 1,600
members and offering 81 holes of golf, and approximately 400 acres of land that
will support commercial development of more than 3.5 million square feet of
office, multi-family, industrial, retail and lodging properties. In addition,
Woodlands-CPC acquired The Woodlands Corporation's general partner interests,
ranging from one to 50 percent, in additional office and retail properties and
in multi-family and light industrial properties. Woodlands-LDC acquired
approximately 6,400 acres of land that will support development of more than
20,000 lots for single-family homes and approximately 2,500 acres of land that
will support more than 21.5 million net rentable square feet of commercial
development. The executive conference center, including the golf and tennis club
and golf courses, is operated and leased by a partnership owned 42.5% by
Crescent Operating, Inc. and 57.5% by the Morgan Stanley Group.
Desert Mountain. On August 29, 1997, the Company acquired, through a newly
formed Residential Development Corporation, Desert Mountain Development
Corporation ("DMDC"), the majority economic interest in Desert Mountain
Properties Limited Partnership ("DMPL"), the partnership that owns Desert
Mountain, a master-planned, luxury residential and recreational community in
northern Scottsdale, Arizona. The partnership interest was acquired from a
subsidiary of Mobil Land Development Corporation for approximately $235 million.
The sole limited partner of DMPL is Sonora Partners Limited Partnership
("Sonora") whose principal owner is Lyle Anderson, the original developer of
Desert Mountain. A portion of Sonora's interest in DMPL is exchangeable for
Common Shares of the Company. Sonora currently owns a 7% economic interest in
DMPL and DMDC, which is the sole general partner of DMPL, owns the remaining 93%
economic interest. The Company owns all of the non-voting common stock,
representing a 95% economic interest, and effective September 30, 1997, Crescent
Operating, Inc. acquired all of the voting common stock, representing a 5%
economic interest, in DMDC. The Company also holds a Residential Development
Property Mortgage on Desert Mountain. DMPL has entered into an advisory
agreement with the Lyle Anderson Company pursuant to which Mr. Anderson provides
advisory services in connection with the operation and development of Desert
Mountain.
S-18
<PAGE> 19
Desert Mountain is an 8,300-acre property that is zoned for the development
of approximately 4,500 lots, approximately 1,500 of which have been sold.
However, the current plans for Desert Mountain contemplate limiting development
in order to maintain the exclusive nature of the community. Desert Mountain also
includes The Desert Mountain Club, a private golf, tennis and fitness club
serving over 1,600 members. The club offers four Jack Nicklaus signature 18-hole
golf courses, including Cochise, site of the Senior PGA Tour's The Tradition
golf tournament.
Houston Center. On September 22, 1997, the Company acquired Houston Center,
an approximately 3.0 million square foot, mixed-use property located in the CBD
submarket of Houston, Texas. Houston Center consists of the Houston Center
Office Properties aggregating approximately 2.8 million net rentable square
feet, the 399-room Four Seasons-Houston Hotel Property, 114 luxury apartments,
the Park Shops in Houston Center Retail Property containing approximately
191,000 net rentable square feet and approximately 20 acres of undeveloped
commercial land. Houston Center was acquired for approximately $327.6 million.
The Company allocated approximately $250.1 million of the purchase price to the
Houston Center Office Properties and the Park Shops in Houston Center Retail
Property, which represents approximately 50% of the estimated replacement cost.
Houston Center is located on the east side of downtown Houston within walking
distance of the Houston Convention Center and is also near the site of the
proposed downtown major league baseball stadium. Built between 1974 and 1983,
the Houston Center Office Properties are situated on approximately 5.7 acres.
Major tenants include Chevron USA, Inc., Ernst & Young U.S., Lyondell
Petrochemical Company and American Exploration Company. The Four Seasons
Hotel-Houston, which was built in 1982, is one of the highest rated luxury
hotels in Houston, with a five-diamond rating from the American Automobile
Association. The upscale, luxury Four Seasons Place apartments, which are
located atop the hotel, offer both long-term residential and short-term
corporate units at monthly rental rates ranging from approximately $2.00 to
$4.00 per leased square foot. A subsidiary of Crescent Operating, Inc. is the
lessee of the Four Seasons Hotel-Houston and the master lessee of the luxury
apartments. The 20-acre tract is one of the largest contiguous undeveloped
parcels in downtown Houston. The Company has entered into an agreement, subject
to approval of the Houston City Council, for the construction of an
approximately 1,000-room hotel on a portion of this tract.
In connection with the acquisition of Houston Center, the seller purchased
307,831 Common Shares, which at the seller's direction were issued directly to
Citicorp Real Estate, Inc., one of the holders of indebtedness secured by
Houston Center prior to the acquisition.
Miami Center. On September 30, 1997, the Company acquired Miami Center, a
34-story Class A office building located in the Downtown-CBD submarket of Miami,
Florida. Built in 1983, the building is located on approximately 1.81 acres and
contains approximately 783,000 net rentable square feet. Miami Center was
acquired for approximately $131.5 million, approximately 68% of the estimated
replacement cost. Major tenants of Miami Center include Citibank International
and BankAmerica Corporation. The Miami Downtown-CBD submarket is continuing to
benefit from an increase in international trade, particularly with countries in
South and Central America.
TRANSACTIONS WITH AFFILIATES OF UNION BANK OF SWITZERLAND
On August 12, 1997, the Company entered into two transactions with
affiliates of Union Bank of Switzerland. In the UBS Offering, the Company sold
4,700,000 Common Shares to one of the affiliates for approximately $148 million
and received approximately $145 million in net proceeds. In the other
transaction, the Company entered into a forward share purchase agreement with a
second affiliate. Under the forward share purchase agreement, the Company
committed to purchase 4,700,000 Common Shares from the second affiliate by
August 12, 1998. The price to be paid by the Company for the 4,700,000 Common
Shares will be determined on the date the Company settles the forward share
purchase agreement and will include a forward accretion component, minus an
adjustment for the Company's distribution rate. The Company may fulfill its
settlement obligations under the forward share purchase agreement in cash or
Common Shares, at its option. As a result, the forward share purchase agreement
will permit the Company to benefit from increases in the market price of its
Common Shares while limiting the risk associated with decreases in the market
price of its Common Shares.
S-19
<PAGE> 20
FORMATION OF CRESCENT OPERATING, INC.
In April 1997, the Company established a new Delaware corporation, Crescent
Operating, Inc. All of the outstanding common stock of Crescent Operating, Inc.
was distributed, effective June 12, 1997, to those persons who were limited
partners of the Operating Partnership or shareholders of the Company on May 30,
1997, in a spin-off.
Crescent Operating, Inc. was formed to become a lessee and operator of
various assets and to perform the Intercompany Agreement between Crescent
Operating, Inc. and the Company, pursuant to which each has agreed to provide
the other with rights to participate in certain transactions. As a result of the
formation of Crescent Operating, Inc. and the execution of the Intercompany
Agreement, persons who own equity interests in both Crescent Operating, Inc. and
the Company have the opportunity to participate in the benefits of both the real
estate investments of the Company (including ownership of real estate assets)
and the lease of certain of such assets and the ownership of other non-real
estate assets by Crescent Operating, Inc. Crescent Operating, Inc.'s certificate
of incorporation, as amended and restated, generally prohibits Crescent
Operating, Inc., for so long as the Intercompany Agreement remains in effect,
from engaging in activities or making investments that a REIT could make, unless
the Company was first given the opportunity but elected not to pursue such
activities or investments.
NOTE OFFERING
On September 22, 1997, the Operating Partnership completed the Note
Offering of senior unsecured Notes in an aggregate principal amount of
$400,000,000. The Notes were issued in two series, the 2002 Notes and the 2007
Notes. The 2002 Notes were issued in an aggregate principal amount of
$150,000,000, bear interest at a rate of 6 5/8% per annum payable semi-annually
in arrears and mature on September 15, 2002. The 2007 Notes were issued in an
aggregate principal amount of $250,000,000, bear interest at a rate of 7 1/8%
per annum payable semi-annually in arrears and mature on September 15, 2007. The
interest rate on the Notes is subject to temporary increase by 50 basis points
in the event that a registered offer to exchange the Notes for notes of the
Operating Partnership with terms identical in all material respects to the Notes
is not consummated or a shelf registration statement with respect to the resale
of the Notes is not declared effective by the Securities and Exchange Commission
(the "Commission") on or before the 180th day following the date of original
issuance of the Notes. The interest rate on the Notes also is subject to
temporary or permanent increase by 37.5 basis points in the event that, within
the period from the date of original issuance of the Notes to the first
anniversary of original issuance, the Notes are not assigned, or do not retain,
an investment grade rating (as defined in the Notes) by specified rating
agencies. These adjustments may apply simultaneously.
The Notes are redeemable, in whole or in part, at the option of the
Operating Partnership upon payment of principal, accrued and unpaid interest and
the premium specified in the Notes. The Notes also contain certain covenants,
including limitations on the ability of the Operating Partnership and its
subsidiaries to incur additional debt, other than certain intercompany debt that
is subordinate to payment of the Notes, unless certain asset and income tests
are satisfied.
FINANCING ACTIVITIES
On September 22, 1997, the Company's Credit Facility was increased to $450
million to enhance the Company's financial flexibility in making new real estate
investments. Concurrently with such increase, the interest rate on advances
under the Credit Facility was decreased from the Eurodollar rate plus 138 basis
points to the Eurodollar rate plus 120 basis points. The Credit Facility is
unsecured and expires in June 2000.
S-20
<PAGE> 21
PROPERTIES
OFFICE PROPERTIES
The Office Properties are located primarily in Dallas/Fort Worth and
Houston, Texas and in Denver, Colorado. The Company's office properties in
Dallas/Fort Worth, Houston, and Denver will represent, upon completion of the
Pending Investments, an aggregate of approximately 82% of its office portfolio
based on total net rentable square feet (42%, 33% and 7% for Dallas/Fort Worth,
Houston and Denver, respectively) and, on a pro forma basis, after giving effect
to the Pending Investments and the completed acquisitions from January 1, 1997
as if they had occurred on January 1, 1997, would have accounted for
approximately 81% of office property rental revenues (43%, 31% and 7%,
respectively) for the six months ended June 30, 1997.
The following table sets forth certain information about the Office
Properties as of June 30, 1997, assuming completion of the Pending Investments
and the acquisitions completed after June 30, 1997. Based on annualized base
rental revenues from office leases in place as of June 30, 1997 and assuming
completion of the Pending Investments and acquisitions completed after June 30,
1997, no single tenant would account for more than 4% of the Company's total
annualized office property rental revenues for 1997.
<TABLE>
<CAPTION>
Weighted
Average
Net Full-Service
Rentable Rental Rate
Year Area Percent Per Leased
State, City, Property Submarket Completed (Sq. Ft.) Leased Sq. Ft.(1) Significant Tenants(2)
--------------------- ------------------ --------- ---------- ------- ------------ ----------------------------
<S> <C> <C> <C> <C> <C> <C>
TEXAS
DALLAS
The Crescent Office
Towers................... Uptown/Turtle 1985 1,210,899 98% $25.50 --
Creek
Fountain Place(3).......... CBD 1986 1,200,266 94 14.90 Hunt Consolidated, Inc.
Trammell Crow Center(4).... CBD 1984 1,128,331 80 23.29 Jones, Day, Reavis and Pogue
Stemmons Place............. Stemmons Freeway 1983 634,381 90 13.51 Aetna Life Insurance Company
Spectrum Center(5)......... Far North Dallas 1983 598,250 93 16.67 Federal Deposit Insurance
Corp.; Frito-Lay, Inc.
Waterside Commons.......... Las Colinas 1986 458,739 100 15.82 Sprint Communications
Company L.P.
Caltex House............... Las Colinas 1982 445,993 95 23.27 Caltex Petroleum Corporation
Reverchon Plaza............ Uptown/Turtle 1985 374,165 83 14.39 BloomFCA!, Inc.; Pusker
Creek Gibbon Chapin, Inc.
The Aberdeen............... Far North Dallas 1986 320,629 100 17.31 Pepsico, Inc.
MacArthur Center I & II.... Las Colinas 1982/1986 294,069 98 17.00 Federal Home Loan Bank of
Dallas
Stanford Corporate
Centre................... Far North Dallas 1985 265,507 100 14.75 TENET Healthcare, Inc.
The Amberton............... Central Expressway 1982 255,052 79 10.46 Pacific Southwest Bank,
F.S.B.
Concourse Office Park...... LBJ Freeway 1972-1986 244,879 91 11.39 --
12404 Park Central......... LBJ Freeway 1987 239,103 76(6) 16.08 Steak & Ale Restaurant
Corporation
Palisades Central II....... Richardson/Plano 1985 237,731 100 15.08 United States Data
Corporation; Northern
Telecom, Inc.; Lyons
Partnership, L.P.
3333 Lee Parkway........... Uptown/Turtle 1983 233,484 41(6) 16.93 Keystone Home Health
Creek Management, Inc.
Liberty Plaza I & II....... Far North Dallas 1981/1986 218,813 100 12.81 Intecom, Inc.; Anthem Group
Services Corporation
The Addison................ Far North Dallas 1981 215,016 100 15.00 Comp USA, Inc.
The Meridian............... LBJ Freeway 1984 213,915 99 12.67 OpenConnect Systems
Incorporated
Palisades Central I........ Richardson/Plano 1980 180,503 100 13.19 ITEX Corporation
Walnut Green............... Central Expressway 1986 158,669 97 12.89 Cinemark USA, Inc.
Greenway II................ Richardson/Plano 1985 154,329 100 18.14 Northern Telecom, Inc.
Addison Tower.............. Far North Dallas 1987 145,886 88 12.71 --
5050 Quorum................ Far North Dallas 1981 133,594 93 13.79 --
Cedar Springs Plaza........ Uptown/Turtle 1982 110,923 81 14.93 Larkin, Meeder & Scheiwdel,
Creek Inc.
Greenway IA................ Richardson/Plano 1983 94,784 100 12.88 Northern Telecom, Inc.
Valley Centre.............. Las Colinas 1985 74,861 99 13.07 --
Greenway I................. Richardson/Plano 1983 51,920 100 12.88 Northern Telecom, Inc.
One Preston Park........... Far North Dallas 1980 40,525 74 12.38 --
---------- --- ------
Subtotal/Weighted
Average................ 9,935,216 91% $17.36
---------- --- ------
</TABLE>
S-21
<PAGE> 22
<TABLE>
<CAPTION>
Weighted
Average
Net Full-Service
Rentable Rental Rate
Year Area Percent Per Leased
State, City, Property Submarket Completed (Sq. Ft.) Leased Sq. Ft.(1) Significant Tenants(2)
--------------------- ------------------ --------- ---------- ------- ------------ ----------------------------
<S> <C> <C> <C> <C> <C> <C>
FORT WORTH
Continental Plaza.......... CBD 1982 954,895 63%(6) $16.67 Burlington Northern Santa Fe
---------- --- ------
Railroad
HOUSTON
Greenway Plaza Office
Portfolio(7)............. Richmond-Buffalo 1969-1982 4,256,885 79%(6) $14.37 The Coastal Corporation
Speedway
Houston Center Office
Properties(8)............ CBD 1974-1983 2,764,418 92 14.36 --
The Woodlands Office
Properties(9)............ The Woodlands 1980-1996 812,227 97 13.61 --
Three Westlake Park(10).... Katy Freeway 1983 414,251 100 13.18 Amoco Production Company
U.S. Home Building(3)...... West Loop/Galleria 1982 399,777 87 15.31 --
---------- --- ------
Subtotal/Weighted
Average............... 8,647,558 86% $14.27
---------- --- ------
AUSTIN
Frost Bank Plaza........... CBD 1984 433,024 72% $16.28 --
301 Congress Avenue(11).... CBD 1986 418,338 95 23.14 IBM Corporation; Lumberman's
Investment Corporation
Bank One Tower............. CBD 1974 389,503 95 15.37 Texas Workers' Compensation
Insurance Fund
The Avallon................ Northwest 1993 125,959 100 17.72 BMC Software
Barton Oaks Plaza One...... Southwest 1986 99,792 92 19.30 Iguana Entertainment, Inc.
---------- --- ------
Subtotal/Weighted
Average............... 1,466,616 89% $18.47
---------- --- ------
COLORADO
DENVER
MCI Tower.................. CBD 1982 550,807 98% $17.20 Atlantic Richfield Company
Ptarmigan Place............ Cherry Creek 1984 418,565 83(6) 15.29 Janus Capital Corporation
Regency Plaza One.......... DTC 1985 309,862 94 19.58 Nextel Communications
AT&T Building.............. CBD 1982 169,610 99 14.16 AT&T Corp.
The Citadel................ Cherry Creek 1987 130,652 96 17.93 --
55 Madison................. Cherry Creek 1982 125,690 90 15.11 --
44 Cook.................... Cherry Creek 1984 119,363 70 16.48 Allmerica Financial
---------- --- ------
Subtotal/Weighted
Average............... 1,824,549 91% $16.78
---------- --- ------
COLORADO SPRINGS
Briargate Office and
Research Center.......... Colorado Springs 1988 252,857 100% $14.15 The Principal Mutual Life
---------- --- ------
Insurance Company
FLORIDA
MIAMI
Miami Center(12)........... Downtown-CBD 1983 782,686 78%(6) $23.50 --
---------- --- ------
ARIZONA
PHOENIX
Two Renaissance Square..... Downtown-CBD 1990 476,373 87% $22.59 Lewis & Roca
6225 North 24th Street..... Camelback Corridor 1981 86,451 67 21.24 Employee Solutions, Inc.
---------- --- ------
Subtotal/Weighted
Average............... 562,824 84% $22.43
---------- --- ------
LOUISIANA
NEW ORLEANS
1615 Poydras............... CBD 1984 508,741 74% $14.62 FM Service Company
---------- --- ------
NEBRASKA
OMAHA
Central Park Plaza......... CBD 1982 409,850 99% $12.91 Acceptance Insurance
---------- --- ------
Company; First National
Bank of Omaha
NEW MEXICO
ALBUQUERQUE
Albuquerque Plaza.......... CBD 1990 365,952 94% $18.12 U.S. West Communications;
---------- --- ------
Rodey, Dickason, Sloan,
Akin & Robb, P.A.
CALIFORNIA
SAN FRANCISCO
160 Spear Street........... South of 1984 276,420 81% $22.15 Providian National
Market-CBD
---------- --- ------
Bancorp; Sedwick
James of California, Inc.
SAN DIEGO
Chancellor Park(13)........ UTC 1988 195,733 85% $20.50 Van Camp Seafood
---------- --- ------
Company
TOTAL WEIGHTED
AVERAGE............... 26,183,897 88%(6) $16.55
========== === ======
</TABLE>
S-22
<PAGE> 23
- ---------------
(1) Calculated based on base rent payable as of June 30, 1997, without giving
effect to free rent or scheduled rent increases that would be taken into
account under generally accepted accounting principles and including
adjustments for expenses payable by or reimbursable from tenants.
(2) Identifies tenants with leases that contributed 20% or more of total rental
revenue paid at the Property as of June 30, 1997, on an annualized basis.
(3) Pending Investment.
(4) The Company owns the principal economic interest in Trammell Crow Center
through its ownership of fee simple title to the Property (subject to a
ground lease and a leasehold estate regarding the building) and two
mortgage notes encumbering the leasehold interests in the land and
building.
(5) The Company owns the principal economic interest in Spectrum Center through
an interest in the limited partnership that owns both a mortgage note
secured by Spectrum Center and the ground lessor's interest in the land
underlying the office building.
(6) Leases have been executed at certain Properties but had not commenced as of
June 30, 1997. If such leases had commenced as of June 30, 1997, the
percent leased for Office Properties would have been 90%. The total percent
leased for such Properties would have been as follows: 12404 Park
Central -- 100%; 3333 Lee Parkway -- 79%; Continental Plaza -- 100%;
Greenway Plaza Office Portfolio -- 82%; Ptarmigan Place -- 94%; and Miami
Center -- 82%.
(7) Consists of 10 Office Properties.
(8) Consists of three Office Properties acquired subsequent to June 30, 1997.
(9) The Company has a 75% limited partner interest and an indirect
approximately 10% general partner interest in the partnership that owns the
12 Office Properties that comprise The Woodlands Office Properties.
(10) The Company owns the principal economic interest in Three Westlake Park
through its ownership of a mortgage note secured by Three Westlake Park.
(11) The Company has a 1% general partner and a 49% limited partner interest in
the partnership that owns 301 Congress Avenue.
(12) Acquired subsequent to June 30, 1997.
(13) The Company owns Chancellor Park through its ownership of a mortgage note
secured by the building and through its direct and indirect interests in
the partnership which owns the building.
The following table provides information for the Office Properties by
state, city and submarket as of June 30, 1997, assuming completion of the
Pending Investments and the acquisitions completed after June 30, 1997.
<TABLE>
<CAPTION>
PERCENT OFFICE COMPANY
PERCENT OF LEASED AT SUBMARKET SHARE OF
TOTAL TOTAL COMPANY PERCENT OFFICE
NUMBER OF COMPANY COMPANY OFFICE LEASED/ SUBMARKET
STATE, CITY, SUBMARKET PROPERTIES NRA(1) NRA(1) PROPERTIES OCCUPIED(2) NRA(1)(2)
---------------------- ---------- ---------- ---------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
CLASS A OFFICE PROPERTIES
TEXAS
DALLAS
CBD(6)................................ 2 2,328,597 9% 87% 79% 13%
Uptown/Turtle Creek................... 4 1,929,471 7 87(8) 88 34
Far North Dallas...................... 7 1,897,695 7 97 97 31
Las Colinas........................... 4 1,273,662 5 98 97 19
Richardson/Plano...................... 5 719,267 3 100 98 21
Stemmons Freeway...................... 1 634,381 2 90 76 31
LBJ Freeway........................... 2 453,018 2 87(8) 94 5
-- ---------- -- -- -- --
Subtotal/Weighted Average........... 25 9,236,091 35% 92% 88% 18%
-- ---------- -- -- -- --
FORT WORTH
CBD................................... 1 954,895 4% 63%(8) 86% 23%
-- ---------- -- -- -- --
HOUSTON
CBD(7)................................ 3 2,764,418 11% 92% 91% 11%
Richmond-Buffalo Speedway............. 4 1,994,274 7 97 97 51
The Woodlands......................... 7 486,140 2 100 100 100
Katy Freeway.......................... 1 414,251 2 100 100 15
West Loop/Galleria(6)................. 1 399,777 1 87 93 3
-- ---------- -- -- -- --
Subtotal/Weighted Average........... 16 6,058,860 23% 95% 98% 13%
-- ---------- -- -- -- --
AUSTIN
CBD................................... 3 1,240,865 5% 87% 91% 35%
Northwest............................. 1 125,959 0 100 97 6
Southwest............................. 1 99,792 0 92 96 9
-- ---------- -- -- -- --
Subtotal/Weighted Average........... 5 1,466,616 5% 89% 94% 21%
-- ---------- -- -- -- --
COLORADO
DENVER
Cherry Creek.......................... 4 794,270 3% 85%(8) 94% 37%
CBD................................... 2 720,417 3 98 91 7
DTC................................... 1 309,862 1 94 89 7
-- ---------- -- -- -- --
Subtotal/Weighted Average........... 7 1,824,549 7% 91% 91% 11%
-- ---------- -- -- -- --
COLORADO SPRINGS........................ 1 252,857 1% 100% 94% 7%
-- ---------- -- -- -- --
<CAPTION>
WEIGHTED
AVERAGE
WEIGHTED COMPANY
AVERAGE COMPANY FULL-
QUOTED QUOTED SERVICE
MARKET RENTAL RENTAL
RENTAL RATE RATE PER RATE PER
PER SQUARE SQUARE SQUARE
STATE, CITY, SUBMARKET FOOT(2)(3) FOOT(4) FOOT(5)
---------------------- ----------- -------- --------
<S> <C> <C> <C>
CLASS A OFFICE PROPERTIES
TEXAS
DALLAS
CBD(6)................................ $19.48 $ 21.67 $18.63
Uptown/Turtle Creek................... 24.15 27.97 22.41
Far North Dallas...................... 22.52 22.12 15.37
Las Colinas........................... 25.65 23.58 18.47
Richardson/Plano...................... 18.18 21.51 14.82
Stemmons Freeway...................... 17.63 16.50 13.51
LBJ Freeway........................... 22.14 19.24 14.25
------ ------- ------
Subtotal/Weighted Average........... $21.83 $ 22.85 $17.78
------ ------- ------
FORT WORTH
CBD................................... $17.27 $ 17.00 $16.67
------ ------- ------
HOUSTON
CBD(7)................................ $15.31 $ 16.50 $14.35
Richmond-Buffalo Speedway............. 15.37 15.03 15.28
The Woodlands......................... 14.66 14.66 13.82
Katy Freeway.......................... 15.71 16.00 13.18
West Loop/Galleria(6)................. 17.00 17.00 14.03
------ ------- ------
Subtotal/Weighted Average........... $15.42 $ 15.87 $14.52
------ ------- ------
AUSTIN
CBD................................... $21.36 $ 20.47 $18.49
Northwest............................. 23.66 21.00 17.72
Southwest............................. 22.11 22.00 19.30
------ ------- ------
Subtotal/Weighted Average........... $21.61 $ 20.62 $18.48
------ ------- ------
COLORADO
DENVER
Cherry Creek.......................... $18.38 $ 19.82 $15.90
CBD................................... 17.53 16.65 16.47
DTC................................... 22.83 24.00 19.58
------ ------- ------
Subtotal/Weighted Average........... $18.80 $ 19.28 $16.78
------ ------- ------
COLORADO SPRINGS........................ $17.33(9) $ 17.23 $14.15
------ ------- ------
</TABLE>
S-23
<PAGE> 24
<TABLE>
<CAPTION>
PERCENT OFFICE COMPANY
PERCENT OF LEASED AT SUBMARKET SHARE OF
TOTAL TOTAL COMPANY PERCENT OFFICE
NUMBER OF COMPANY COMPANY OFFICE LEASED/ SUBMARKET
STATE, CITY, SUBMARKET PROPERTIES NRA(1) NRA(1) PROPERTIES OCCUPIED(2) NRA(1)(2)
---------------------- ---------- ---------- ---------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
FLORIDA
MIAMI
Downtown - CBD(10).................... 1 782,686 3% 78%(8) 89% 25%
-- ---------- -- -- -- --
ARIZONA
PHOENIX
Downtown - CBD........................ 1 476,373 2% 87% 88% 27%
Camelback Corridor.................... 1 86,451 0 67 96 3
-- ---------- -- -- -- --
Subtotal/Weighted Average........... 2 562,824 2% 84% 93% 12%
-- ---------- -- -- -- --
LOUISIANA
NEW ORLEANS
CBD................................... 1 508,741 2% 74% 86% 6%
-- ---------- -- -- -- --
NEBRASKA
OMAHA
CBD................................... 1 409,850 2% 99% 98% 32%
-- ---------- -- -- -- --
NEW MEXICO
ALBUQUERQUE
CBD................................... 1 365,952 1% 94% 96% 31%
-- ---------- -- -- -- --
CALIFORNIA
SAN FRANCISCO
South of Market - CBD................. 1 276,420 1% 81% 97% 3%
-- ---------- -- -- -- --
SAN DIEGO
UTC................................... 1 195,733 1% 85% 95% 7%
-- ---------- -- -- -- --
CLASS A OFFICE PROPERTIES
SUBTOTAL/WEIGHTED
AVERAGE........................... 63 22,896,074 87% 90% 91% 14%
== ========== == == == ==
CLASS B OFFICE PROPERTIES
TEXAS
DALLAS
Central Expressway.................... 2 413,721 2% 85% 83% 11%
LBJ Freeway........................... 1 244,879 1 91 93 2
Far North Dallas...................... 1 40,525 0 74 89 1
-- ---------- -- -- -- --
Subtotal/Weighted Average........... 4 699,125 3% 87% 90% 3%
-- ---------- -- -- -- --
HOUSTON
Richmond-Buffalo Speedway............. 6 2,262,611 9% 62%(8) 68% 54%
The Woodlands......................... 5 326,087 1 92 92 100
-- ---------- -- -- -- --
Subtotal/Weighted Average........... 11 2,588,698 10% 66% 70% 57%
-- ---------- -- -- -- --
CLASS B OFFICE PROPERTIES
SUBTOTAL/WEIGHTED
AVERAGE........................... 15 3,287,823 13% 70% 86% 13%
== ========== == == == ==
CLASS A AND CLASS B OFFICE
PROPERTIES TOTAL/WEIGHTED
AVERAGE........................... 78 26,183,897 100% 88%(8) 90% 14%
== ========== == == == ==
<CAPTION>
WEIGHTED
AVERAGE
WEIGHTED COMPANY
AVERAGE COMPANY FULL-
QUOTED QUOTED SERVICE
MARKET RENTAL RENTAL
RENTAL RATE RATE PER RATE PER
PER SQUARE SQUARE SQUARE
STATE, CITY, SUBMARKET FOOT(2)(3) FOOT(4) FOOT(5)
---------------------- ----------- -------- --------
<S> <C> <C> <C>
FLORIDA
MIAMI
Downtown - CBD(10).................... $24.95 $ 26.00 $23.50
------ ------- ------
ARIZONA
PHOENIX
Downtown - CBD........................ $20.66 $ 21.50 $22.59
Camelback Corridor.................... 24.49 21.97 21.24
------ ------- ------
Subtotal/Weighted Average........... $21.25 $ 21.57 $22.42
------ ------- ------
LOUISIANA
NEW ORLEANS
CBD................................... $15.08 $ 15.50 $14.62
------ ------- ------
NEBRASKA
OMAHA
CBD................................... $18.00 $ 18.50 $12.91
------ ------- ------
NEW MEXICO
ALBUQUERQUE
CBD................................... $18.33 $ 17.50 $18.12
------ ------- ------
CALIFORNIA
SAN FRANCISCO
South of Market - CBD................. $29.30 $ 29.30 $22.15
------ ------- ------
SAN DIEGO
UTC................................... $24.36 $ 24.36 $20.50
------ ------- ------
CLASS A OFFICE PROPERTIES
SUBTOTAL/WEIGHTED
AVERAGE........................... $19.57 $ 20.11 $16.96
====== ======= ======
CLASS B OFFICE PROPERTIES
TEXAS
DALLAS
Central Expressway.................... $15.13 $ 16.50 $11.51
LBJ Freeway........................... 16.16 15.50 11.39
Far North Dallas...................... 16.58 15.90 12.38
------ ------- ------
Subtotal/Weighted Average........... $15.57 $ 16.11 $11.51
------ ------- ------
HOUSTON
Richmond-Buffalo Speedway............. $14.44 $ 13.50 $13.12
The Woodlands......................... 14.11 14.11 13.36
------ ------- ------
Subtotal/Weighted Average........... $14.40 $ 13.58 $13.16
------ ------- ------
CLASS B OFFICE PROPERTIES
SUBTOTAL/WEIGHTED
AVERAGE........................... $14.65 $ 14.05 $12.68
====== ======= ======
CLASS A AND CLASS B OFFICE
PROPERTIES TOTAL/WEIGHTED
AVERAGE........................... $18.95 $ 19.36 $16.53
====== ======= ======
</TABLE>
- ---------------
(1) NRA means net rentable area in square feet assuming completion of the
Pending Investments and the completed acquisitions from June 30, 1997 as if
they had been completed as of June 30, 1997.
(2) Market information is for Class A office space under the caption "Class A
Office Properties" and market information is for Class B office space under
the caption "Class B Office Properties." Sources are Jamison Research, Inc.
(for the Dallas CBD, Uptown/ Turtle Creek, Far North Dallas, Las Colinas,
Richardson/Plano, Stemmons Freeway, LBJ Freeway, Central Expressway, Fort
Worth CBD and the New Orleans CBD submarkets), Baca Landata, Inc. (for the
Richmond-Buffalo Speedway, Houston CBD and West Loop/Galleria submarkets),
The Woodlands Corporation (for The Woodlands submarket), Cushman &
Wakefield of Texas, Inc. (for the Katy Freeway submarket), CB Commercial
(for the Austin CBD, Northwest and Southwest submarkets, and the Miami
Downtown - CBD submarket), Cushman & Wakefield of Colorado, Inc. (for the
Cherry Creek, Denver CBD and Denver DTC submarkets), Turner Commercial
Research (for the Colorado Springs market), Grubb and Ellis Company (for
the Phoenix Downtown - CBD, Camelback Corridor and San Francisco South of
Market section of CBD submarkets), Pacific Realty Group, Inc. (for the
Omaha CBD submarket), Koll Market Research (for the Albuquerque CBD
submarket) and John Burnham & Co. (for the San Diego UTC submarket).
(3) Represents full-service rental rates. These rates do not necessarily
represent the amounts at which available space at the Office Properties
will be leased. The weighted average subtotals and total are based on total
net rentable square feet of Company Office Properties in the submarket.
S-24
<PAGE> 25
(4) For Office Properties, represents weighted average rental rates per square
foot quoted by the Company as of June 30, 1997, based on total net rentable
square feet of Company Office Properties in the submarket, adjusted based
on management estimates, to equivalent full-service quoted rental rates to
facilitate comparison to weighted average Class A or Class B, as the case
may be, quoted submarket rental rates per square foot. For Pending
Investments, represents weighted average full-service quoted market rental
rates per square foot. These rates do not necessarily represent the amounts
at which available space at the Company Office Properties will be leased.
(5) Calculated based on base rent payable for Company Office Properties and
Pending Investments in the submarket as of June 30, 1997, without giving
effect to free rent or scheduled rent increases that would be taken into
account under generally accepted accounting principles and including
adjustments for expenses payable by or reimbursable from tenants, divided
by total net rentable square feet of Company Office Properties in the
submarket.
(6) Includes Pending Investments consisting of one office property in the
Dallas CBD submarket and one office property in the Houston West
Loop/Galleria submarket.
(7) The Company's Office Properties in this submarket were acquired subsequent
to June 30, 1997.
(8) Leases have been executed at certain Properties in these submarkets but had
not commenced as of June 30, 1997. If such leases had commenced as of June
30, 1997, the percent leased for all Office Properties in the Company's
submarkets would have been 90%. The total percent leased at the Company's
Office Properties would have been as follows: Uptown/Turtle Creek -- 92%;
LBJ Freeway -- 100%; Fort Worth CBD -- 100%; Cherry Creek -- 92%; Miami
Downtown-CBD -- 82%; and Richmond-Buffalo Speedway (Class B) -- 68%.
(9) Represents weighted average quoted triple-net rental rates per square foot,
adjusted based on management estimates, to equivalent full-service quoted
rental rates.
(10) The Company's Office Property in this submarket was acquired subsequent to
June 30, 1997.
OFFICE PROPERTY MARKET INFORMATION
The following graph provides information regarding vacancy levels and
weighted average quoted market rental rates at year end for each of the years
from 1992 through 1996, and at June 30, 1997, for Class A office properties in
all submarkets in which the Company has invested or has Pending Investments in
Class A office properties.
CLASS A OFFICE
VACANCY AND QUOTED MARKET RENT
FOR ALL COMPANY SUBMARKETS
<TABLE>
<CAPTION>
MEASUREMENT PERIOD
(FISCAL YEAR COVERED) AVG. RENT VACANCY
<S> <C> <C>
1992 16.10 17
1993 15.68 16.1
1994 16.09 12.6
1995 16.91 11.4
1996 18.47 10.5
6/30/97 19.60 9.1
</TABLE>
- ---------------
(1) Weighted average based on total net rentable square feet of Class A office
properties in all Company submarkets.
Source: Compiled from third-party sources.
S-25
<PAGE> 26
The demographic conditions, economic conditions and trends (population
growth and employment growth) favoring the markets in which the Company has
invested or has Pending Investments, are projected to continue to be
substantially at or above the national average, as illustrated in the following
graph.
PROJECTED POPULATION AND EMPLOYMENT GROWTH
1997-2007
(% INCREASE)
<TABLE>
<CAPTION>
MEASUREMENT PERIOD
(FISCAL YEAR COVERED) POPULATION EMPLOYMENT
<S> <C> <C>
UNITED STATES 8.6 12.6
DALLAS-FORT WORTH, TX 17.8 16.9
HOUSTON, TX 11.2 12.4
DENVER, CO 16.6 16.2
AUSTIN, TX 29.7 28.7
MIAMI, FL 12.2 13.8
PHOENIX, AZ 23.2 23.4
NEW ORLEANS, LA 4.4 10.0
OMAHA, NE 11.1 14.5
ALBUQUERQUE, NM 17.2 19.3
SAN FRANCISCO, CA 14.6 14.6
COLORADO SPRINGS, CO 17.7 19.3
SAN DIEGO, CA 18.5 18.4
</TABLE>
[X] Represents projected population growth from year-end 1997 through year-end
2007.
[ ] Represents projected employment growth from year-end 1997 through year-end
2007.
- ---------------
Source: Cognetics, Inc.
S-26
<PAGE> 27
As reported by Cognetics, Inc. in December 1996, San Francisco/Oakland,
California; Dallas/Fort Worth, Texas; Phoenix, Arizona; Houston/Galveston,
Texas; Denver/Boulder, Colorado; Miami, Florida; San Diego, California; and
Austin, Texas are projected to be among the leading markets in the country for
primary office employment growth in the next decade. In addition, as reported in
the 1997 edition of Emerging Trends in Real Estate magazine, a panel of more
than 100 real estate professionals has ranked San Francisco, Denver, San Diego,
Dallas/Fort Worth, Phoenix, Miami and Houston among the top 15 markets in the
country for general real estate investment in 1997. Fortune magazine, in its
November 11, 1996 issue, also ranked Denver and Dallas/Fort Worth among the top
10 U.S. cities having the best overall environment for work and family.
<TABLE>
<CAPTION>
TOP MARKETS FOR TOP 10 MARKETS FOR TOP 10 BEST
PRIMARY OFFICE GENERAL REAL AMERICAN METROPOLITAN
EMPLOYMENT GROWTH ESTATE INVESTMENT AREAS FOR WORK AND FAMILY
1996 TO 2006 IN 1997 1996
----------------- ------------------ -------------------------
<S> <C> <C>
1. Los Angeles, CA 1. SAN FRANCISCO, CA 1. Seattle, WA
2. SAN FRANCISCO/OAKLAND, CA 2. Seattle, WA 2. DENVER, CO
3. Atlanta, GA 3. Boston, MA 3. Philadelphia, PA
4. DALLAS/FORT WORTH, TX 4. Chicago, IL 4. Minneapolis, MN
5. Washington, DC 5. DENVER, CO 5. Raleigh/Durham, NC
6. Chicago, IL 6. SAN DIEGO, CA 6. St. Louis, MO
7. PHOENIX, AZ 7. Atlanta, GA 7. Cincinnati, OH
8. New York, NY 8. Los Angeles, CA 8. Washington, DC
9. HOUSTON/GALVESTON, TX 9. DALLAS/FORT WORTH, TX 9. Pittsburgh, PA
10. Tampa/St. Petersburg, FL 10. Washington, DC 10. DALLAS/FORT WORTH, TX
11. Minneapolis/St. Paul, MN 11. Minneapolis, MN Source: Fortune
12. Boston, MA 12. New York, NY
13. DENVER/BOULDER, CO 13. PHOENIX, AZ
14. Seattle, WA 14. MIAMI, FL
15. MIAMI/FT. LAUDERDALE, FL 15. HOUSTON, TX
16. Orlando, FL Source: Emerging Trends in
17. SAN DIEGO, CA Real Estate-1997(Equitable
18. Detroit, MI Real Estate Investment
19. Las Vegas, NV Management, Inc. and Real
20. AUSTIN, TX Estate Research Corporation)
Source: Cognetics, Inc.
</TABLE>
S-27
<PAGE> 28
LEASE EXPIRATIONS OF OFFICE PROPERTIES
The following table sets forth a schedule of lease expirations for leases
in place as of June 30, 1997, for each of the 10 years beginning with the
remainder of 1997, for the Office Properties and Pending Investments, on an
aggregate basis by submarket, assuming that none of the tenants exercises
renewal options and excluding an aggregate of 3,241,715 square feet of unleased
space.
<TABLE>
<CAPTION>
STATE, CITY, SUBMARKET 1997 1998 1999 2000 2001 2002
---------------------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
TEXAS
DALLAS
CBD(5).................. Sq. Ft.(1) 73,800 4,500 687,939 34,567 72,336 94,273
% Sq. Ft.(2) 3.6% 0.2% 33.8% 1.7% 3.6% 4.6%
Annual Rent(3) $1,586,968 $90,072 $16,352,646 $542,587 $1,294,653 $2,390,080
No. of Tenants 10 3 12 7 6 3
Rent per Sq.
Ft. $21.50 $20.02 $23.77 $15.70 $17.90 $25.35
Company Quoted $21.67
Rental Rate per
Sq. Ft.(4)
Far North Dallas........ Sq. Ft.(1) 243,144 110,637 140,005 295,848 261,092 110,600
% Sq. Ft.(2) 13.2% 6.0% 7.6% 16.0% 14.1% 6.0%
Annual Rent(3) $3,253,537 $1,656,054 $2,101,613 $4,493,161 $5,023,539 $1,626,482
No. of Tenants 28 43 34 27 18 5
Rent per Sq.
Ft. $13.38 $14.97 $15.01 $15.19 $19.24 $14.71
Company Quoted $21.99
Rental Rate per
Sq. Ft.(4)
Uptown/Turtle Creek..... Sq. Ft.(1) 133,855 221,552 137,428 165,645 391,062 269,982
% Sq. Ft.(2) 8.1% 13.4% 8.3% 10.0% 23.6% 16.3%
Annual Rent(3) $3,024,561 $5,358,443 $2,694,330 $2,821,195 $9,975,311 $6,813,950
No. of Tenants 33 32 24 14 19 11
Rent per Sq.
Ft. $22.60 $24.19 $19.61 $17.03 $25.51 $25.24
Company Quoted $27.97
Rental Rate per
Sq. Ft.(4)
Las Colinas............. Sq. Ft.(1) 34,945 97,005 75,549 304,954 66,480 284,934
% Sq. Ft.(2) 2.8% 7.9% 6.1% 24.7% 5.4% 23.1%
Annual Rent(3) $484,948 $1,601,165 $1,260,739 $5,204,249 $1,401,879 $7,129,041
No. of Tenants 10 22 17 22 10 5
Rent per Sq.
Ft. $13.88 $16.51 $16.69 $17.07 $21.09 $25.02
Company Quoted $23.58
Rental Rate per
Sq. Ft.(4)
Richardson/Plano........ Sq. Ft.(1) 158,219 103,266 216,174 163,270 5,365 65,628
% Sq. Ft.(2) 22.2% 14.5% 30.4% 22.9% 0.8% 9.2%
Annual Rent(3) $1,738,095 $1,538,049 $3,577,108 $2,405,532 $86,698 $962,792
No. of Tenants 6 10 16 9 2 2
Rent per Sq.
Ft. $10.99 $14.89 $16.55 $14.73 $16.16 $14.67
Company Quoted $21.51
Rental Rate per
Sq. Ft.(4)
LBJ Freeway............. Sq. Ft.(1) 121,796 189,600 97,037 86,377 40,681 65,093
% Sq. Ft.(2) 20.0% 31.2% 16.0% 14.2% 6.7% 10.7%
Annual Rent(3) $1,755,229 $2,794,016 $1,172,604 $1,155,200 $579,339 $891,870
No. of Tenants 34 32 29 19 11 5
Rent per Sq.
Ft. $14.41 $14.74 $12.08 $13.37 $14.24 $13.70
Company Quoted $17.93
Rental Rate per
Sq. Ft.(4)
Stemmons Freeway........ Sq. Ft.(1) 20,322 62,898 68,490 80,755 193,712 12,617
% Sq. Ft.(2) 3.6% 11.0% 12.0% 14.2% 34.1% 2.2%
Annual Rent(3) $262,379 $796,586 $931,869 $1,060,310 $2,836,481 $160,436
No. of Tenants 5 15 12 18 8 2
Rent per Sq.
Ft. $12.91 $12.66 $13.61 $13.13 $14.64 $12.72
Company Quoted $16.50
Rental Rate per
Sq. Ft.(4)
<CAPTION>
2007 &
STATE, CITY, SUBMARKET 2003 2004 2005 2006 BEYOND
- ---------------------- ---------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
TEXAS
DALLAS
CBD(5).................. 22,830 137,640 280,268 104,181 520,220
1.1% 6.8% 13.8% 5.1% 25.7%
$406,958 $3,066,732 $5,985,480 $2,549,985 $9,098,321
1 2 7 2 4
$17.83 $22.28 $21.36 $24.48 $17.49
Far North Dallas........ 342,548 9,320 320,629 11,937 --
18.6% 0.5% 17.4% 0.6% 0.0%
$5,471,470 $154,712 $5,550,088 $280,281 --
4 1 1 1 --
$15.97 $16.60 $17.31 $23.48 $0.00
Uptown/Turtle Creek..... 126,486 70,110 41,130 59,611 40,420
7.6% 4.2% 2.5% 3.6% 2.4%
$3,443,190 $1,896,328 $938,231 $1,661,272 $889,644
2 2 2 2 1
$27.22 $27.05 $22.81 $27.87 $22.01
Las Colinas............. 6,555 -- 363,579 -- --
0.5% 0.0% 29.5% 0.0% 0.0%
$177,902 -- $5,593,890 -- --
1 -- 1 -- --
$27.14 -- $15.39 $0.00 $0.00
Richardson/Plano........ -- -- -- -- --
0.0% 0.0% 0.0% 0.0% 0.0%
== == == == ==
$0.00 $0.00 $0.00 $0.00 $0.00
LBJ Freeway............. -- 7,523 -- -- --
0.0% 1.2% 0.0% 0.0% 0.0%
-- $122,249 -- -- --
-- 1 -- -- --
$0.00 $16.25 $0.00 $0.00 $0.00
Stemmons Freeway........ 3,446 92,518 -- 34,644 --
.6% 16.2% 0.0% 6.1% 0.0%
$105,350 $1,274,683 -- $506,495 --
1 4 -- 1 --
$30.57 $13.78 $0.00 $14.62 $0.00
</TABLE>
S-28
<PAGE> 29
<TABLE>
<CAPTION>
STATE, CITY, SUBMARKET 1997 1998 1999 2000 2001 2002
---------------------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Central Expressway...... Sq. Ft.(1) 10,131 83,466 47,906 31,489 72,733 95,732
% Sq. Ft.(2) 3.0% 24.4% 14.0% 9.2% 21.3% 28.1%
Annual Rent(3) $123,600 $972,267 $569,340 $388,048 $935,096 $1,096,755
No. of Tenants 7 15 12 5 13 5
Rent per Sq.
Ft. $12.20 $11.65 $11.88 $12.32 $12.86 $11.46
Company Quoted $16.50
Rental Rate per
Sq. Ft.(4)
FORT WORTH
CBD..................... Sq. Ft.(1) 161,278 46,280 7,583 72,348 148,968 165,803
% Sq. Ft.(2) 26.8% 7.7% 1.3% 12.0% 24.7% 27.5%
Annual Rent(3) $2,750,408 $829,422 $117,473 $1,357,208 $2,589,994 $2,657,364
No. of Tenants 22 8 4 4 7 4
Rent per Sq.
Ft. $17.05 $17.92 $15.49 $18.76 $17.39 $16.03
Company Quoted $17.00
Rental Rate per
Sq. Ft.(4)
HOUSTON
Richmond-Buffalo
Speedway............... Sq. Ft.(1) 185,684 319,211 364,854 238,866 235,572 319,104
% Sq. Ft.(2) 5.6% 9.5% 10.9% 7.1% 7.0% 9.5%
Annual Rent(3) $2,458,236 $4,208,263 $5,096,283 $3,275,823 $3,529,847 $5,012,087
No. of Tenants 40 76 47 36 25 24
Rent per Sq.
Ft. $13.24 $13.18 $13.97 $13.72 $14.98 $15.71
Company Quoted $14.22
Rental Rate per
Sq. Ft.(4)
CBD(6).................. Sq. Ft.(1) 57,651 206,898 598,126 171,993 845,830 185,500
% Sq. Ft.(2) 2.3% 8.1% 23.5% 6.8% 33.3% 7.3%
Annual Rent(3) $826,276 $2,304,937 $8,408,621 $2,336,903 $13,048,199 $4,142,153
No. of Tenants 14 69 42 30 34 12
Rent per Sq.
Ft. $14.33 $11.14 $14.06 $13.59 $15.43 $22.33
Company Quoted $15.31
Rental Rate per
Sq. Ft.(4)
The Woodlands........... Sq. Ft.(1) 104,565 102,542 154,024 32,512 85,425 73,745
% Sq. Ft.(2) 13.3% 13.1% 19.6% 4.1% 10.9% 9.4%
Annual Rent(3) $1,138,447 $1,306,147 $1,950,992 $480,453 $1,362,999 $1,219,545
No. of Tenants 18 21 20 4 11 5
Rent per Sq.
Ft. $10.89 $12.74 $12.67 $14.78 $15.96 $16.54
Company Quoted $14.38
Rental Rate per
Sq. Ft.(4)
Katy Freeway............ Sq. Ft.(1) 895 -- 1,817 411,539 -- --
% Sq. Ft.(2) 0.2% 0.0% 0.4% 99.4% 0.0% 0.0%
Annual Rent(3) $8,176 -- $13,482 $5,544,303 -- --
No. of Tenants 1 -- 1 1 -- --
Rent per Sq.
Ft. $9.14 $0.00 $7.42 $13.47 $0.00 $0.00
Company Quoted $16.00
Rental Rate per
Sq. Ft.(4)
West Loop/Galleria(5)... Sq. Ft.(1) 46,393 33,697 103,951 36,524 59,396 57,818
% Sq. Ft.(2) 13.7% 10.0% 30.8% 10.8% 17.6% 17.1%
Annual Rent(3) $759,618 $475,563 $1,436,845 $559,063 $862,554 $982,375
No. of Tenants 13 8 12 7 6 9
Rent per Sq.
Ft. $16.37 $14.11 $13.82 $15.31 $14.52 $16.99
Company Quoted $17.00
Rental Rate per
Sq. Ft.(4)
<CAPTION>
2007 &
STATE, CITY, SUBMARKET 2003 2004 2005 2006 BEYOND
- ---------------------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Central Expressway...... -- -- -- -- --
0.0% 0.0% 0.0% 0.0% 0.0%
-- -- -- -- --
-- -- -- -- --
$0.00 $0.00 $0.00 $0.00 $0.00
FORT WORTH
CBD..................... -- -- -- -- --
0.0% 0.0% 0.0% 0.0% 0.0%
-- -- -- -- --
-- -- -- -- --
$0.00 $0.00 $0.00 $0.00 $0.00
HOUSTON
Richmond-Buffalo
Speedway............... 184,873 523,078 33,430 -- 940,004
5.5% 15.6% 1.0% 0.0% 28.3%
$3,024,256 $8,769,021 $501,001 -- $24,643,104
16 7 4 -- 4
$16.36 $16.76 $14.99 $0.00 $26.22
CBD(6).................. 66,881 76,569 59,940 60,665 213,634
2.6% 3.0% 2.4% 2.4% 8.3%
$720,508 $1,108,924 $850,588 $926,512 $3,448,773
7 5 2 2 4
$10.77 $14.48 $14.19 $15.27 $16.14
The Woodlands........... 34,518 91,131 71,000 35,612 --
4.4% 11.6% 9.0% 4.6% 0.0%
$579,572 $1,895,381 $893,890 $602,763 --
2 3 1 2 --
$16.79 $20.80 $12.59 $16.93 $0.00
Katy Freeway............ -- -- -- -- --
0.0% 0.0% 0.0% 0.0% 0.0%
-- -- -- -- --
-- -- -- -- --
$0.00 $0.00 $0.00 $0.00 $0.00
West Loop/Galleria(5)... -- -- -- -- --
0.0% 0.0% 0.0% 0.0% 0.0%
-- -- -- -- --
-- -- -- -- --
$0.00 $0.00 $0.00 $0.00 $0.00
</TABLE>
S-29
<PAGE> 30
<TABLE>
<CAPTION>
STATE, CITY, SUBMARKET 1997 1998 1999 2000 2001 2002
---------------------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
AUSTIN
CBD..................... Sq. Ft.(1) 34,089 185,317 53,595 189,204 71,889 62,759
% Sq. Ft.(2) 3.2% 17.3% 5.0% 17.6% 6.7% 5.8%
Annual Rent(3) $583,131 $4,287,063 $1,099,869 $3,885,512 $1,310,628 $1,154,971
No. of Tenants 7 13 10 13 20 5
Rent per Sq.
Ft. $17.11 $23.13 $20.52 $20.54 $18.23 $18.40
Company Quoted $20.47
Rental Rate per
Sq. Ft.(4)
Northwest............... Sq. Ft.(1) 2,486 -- 24,204 -- -- --
% Sq. Ft.(2) 2.0% 0.0% 19.4% 0.0% 0.0% 0.0%
Annual Rent(3) $49,720 -- $432,427 -- -- --
No. of Tenants 1 -- 2 -- -- --
Rent per Sq.
Ft. $20.00 $0.00 $17.87 $0.00 $0.00 $0.00
Company Quoted $21.00
Rental Rate per
Sq. Ft.(4)
Southwest............... Sq. Ft.(1) 5,463 5,674 6,384 17,894 17,201 2,800
% Sq. Ft.(2) 6.1% 6.4% 7.2% 20.1% 19.4% 3.2%
Annual Rent(3) $99,111 $97,350 $121,264 $342,786 $358,553 $61,068
No. of Tenants 2 2 4 4 3 1
Rent per Sq.
Ft. $18.14 $17.16 $18.99 $19.16 $20.84 $21.81
Company Quoted $22.00
Rental Rate per
Sq. Ft.(4)
COLORADO
DENVER
Cherry Creek............ Sq. Ft.(1) 80,603 129,709 110,565 50,405 101,751 28,544
% Sq. Ft.(2) 12.1% 19.6% 16.7% 7.6% 15.3% 4.3%
Annual Rent(3) $1,167,167 $2,162,983 $1,714,263 $869,282 $1,835,099 $520,766
No. of Tenants 18 24 19 15 21 6
Rent per Sq.
Ft. $14.48 $16.68 $15.50 $17.25 $18.04 $18.24
Company Quoted $19.82
Rental Rate per
Sq. Ft.(4)
CBD..................... Sq. Ft.(1) 85,413 9,117 86,459 76,861 13,268 399,382
% Sq. Ft.(2) 12.6% 1.3% 12.8% 11.3% 2.0% 58.9%
Annual Rent(3) $1,220,633 $168,102 $1,562,055 $998,180 $195,398 $7,492,406
No. of Tenants 3 2 6 3 2 1
Rent per Sq.
Ft. $14.29 $18.44 $18.07 $12.99 $14.73 $18.76
Company Quoted $16.65
Rental Rate per
Sq. Ft.(4)
DTC..................... Sq. Ft.(1) 38,088 49,993 11,744 32,188 16,871 32,471
% Sq. Ft.(2) 13.2% 17.2% 4.0% 11.1% 5.8% 11.2%
Annual Rent(3) $667,582 $958,537 $217,072 $614,222 $391,591 $762,674
No. of Tenants 4 4 4 5 3 4
Rent per Sq.
Ft. $17.53 $19.17 $18.48 $19.08 $23.21 $23.49
Company Quoted $24.00
Rental Rate per
Sq. Ft.(4)
COLORADO SPRINGS........ Sq. Ft.(1) 6,708 16,556 78,327 10,706 132,345 6,877
% Sq. Ft.(2) 2.7% 6.6% 31.1% 4.3% 52.6% 2.7%
Annual Rent(3) $112,065 $192,006 $1,004,187 $191,654 $2,332,431 $87,269
No. of Tenants 1 2 3 2 3 1
Rent per Sq.
Ft. $16.71 $11.60 $12.82 $17.90 $17.62 $12.69
Company Quoted $17.23
Rental Rate per
Sq. Ft.(4)
<CAPTION>
2007 &
STATE, CITY, SUBMARKET 2003 2004 2005 2006 BEYOND
- ---------------------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
AUSTIN
CBD..................... 37,375 93,210 211,510 83,462 50.460
3.5% 8.7% 19.7% 7.8% 4.7%
$623,044 $1,927,820 $4,132,452 $1,808,341 $1,019,187
2 5 4 2 2
$16.67 $20.68 $19.54 $21.67 $20.20
Northwest............... -- 98,188 -- -- --
0.0% 78.6% 0.0% 0.0% 0.0%
-- $2,235,194 -- -- --
-- 1 -- -- --
$0.00 $22.76 $0.00 $0.00 $0.0
Southwest............... -- -- -- 33,439 --
0.0% 0.0% 0.0% 37.6% 0.0%
-- -- -- $802,202 --
-- -- -- 1 --
$0.00 $0.00 $0.00 $23.99 $0.00
COLORADO
DENVER
Cherry Creek............ 151,593 9,721 -- -- --
22.9% 1.5% 0.0% 0.0% 0.0%
$2,810,781 $182,269 -- -- --
3 1 -- -- --
$18.54 $18.75 $0.00 $0.00 $0.00
CBD..................... 7,320 -- -- -- --
1.1% 0.0% 0.0% 0.0% 0.0%
$154,232 -- -- -- --
1 -- -- -- --
$21.07 $0.00 $0.00 $0.00 $0.00
DTC..................... -- 108,932 -- -- --
0.0% 37.5% 0.0% 0.0% 0.0%
-- $2,327,562 -- -- --
-- 1 -- -- --
$0.00 $21.37 $0.00 $0.00 $0.00
COLORADO SPRINGS........ -- -- -- -- --
0.0% 0.0% 0.0% 0.0% 0.0%
-- -- -- -- --
-- -- -- -- --
$0.00 $0.00 $0.00 $0.00 $0.00
</TABLE>
S-30
<PAGE> 31
<TABLE>
<CAPTION>
STATE, CITY, SUBMARKET 1997 1998 1999 2000 2001 2002
---------------------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
FLORIDA
MIAMI
Downtown-CBD(7)......... Sq. Ft.(1) 34,780 8,898 56,057 13,543 56,956 82,399
% Sq. Ft.(2) 5.8% 1.5% 9.3% 2.2% 9.4% 13.7%
Annual Rent(3) $786,238 $191,703 $1,594,675 $284,128 $1,540,904 $2,471,858
No. of Tenants 8 4 7 3 6 7
Rent per Sq.
Ft. $22.61 $21.54 $28.45 $20.98 $27.05 $30.00
Company Quoted $26.00
Rental Rate per
Sq. Ft.(4)
ARIZONA
PHOENIX
Downtown-CBD............ Sq. Ft.(1) 12,235 519 20,957 61,939 59,391 38,363
% Sq. Ft.(2) 3.1% 0.1% 5.1% 15.1% 14.5% 9.4%
Annual Rent(3) $183,046 $11,802 $382,733 $1,535,694 $1,404,146 $728,897
No. of Tenants 4 1 3 5 6 2
Rent per Sq.
Ft. $14.96 $22.74 $18.26 $24.79 $23.64 $19.00
Company Quoted $21.50
Rental Rate per
Sq. Ft.(4)
Camelback Corridor...... Sq. Ft.(1) -- -- -- -- -- --
% Sq. Ft.(2) 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
Annual Rent(3) -- -- -- -- -- --
No. of Tenants -- -- -- -- -- --
Rent per Sq.
Ft. $0.00 $0.00 $0.00 $0.00 $0.00 $0.00
Company Quoted $21.97
Rental Rate per
Sq. Ft.(4)
LOUISIANA
NEW ORLEANS
CBD..................... Sq. Ft.(1) -- -- 7,792 -- 10,202 19,352
% Sq. Ft.(2) 0.0% 0.0% 2.1% 0.0% 2.7% 5.1%
Annual Rent(3) -- -- $99,738 -- $110,535 $254,648
No. of Tenants -- -- 3 -- 2 3
Rent per Sq.
Ft. $0.00 $0.00 $12.80 $0.00 $10.83 $13.16
Company Quoted $15.50
Rental Rate per
Sq. Ft.(4)
NEBRASKA
OMAHA
CBD..................... Sq. Ft.(1) 57,537 3,983 15,565 8,502 67,421 188,930
% Sq. Ft.(2) 14.3% 1.0% 3.8% 2.1% 16.6% 46.6%
Annual Rent(3) $907,011 $55,431 $247,864 $141,250 $1,034,862 $2,355,207
No. of Tenants 2 2 2 2 1 4
Rent per Sq.
Ft. $15.76 $13.92 $15.92 $16.61 $15.35 $12.47
Company Quoted $18.50
Rental Rate per
Sq. Ft.(4)
NEW MEXICO
ALBUQUERQUE
CBD..................... Sq. Ft.(1) 5,387 13,049 29,286 20,593 27,397 2,986
% Sq. Ft.(2) 1.6% 3.9% 8.8% 6.2% 8.2% 0.9%
Annual Rent(3) $88,831 $248,444 $563,709 $360,431 $585,210 $64,886
No. of Tenants 4 6 4 6 2 1
Rent per Sq.
Ft. $16.49 $19.04 $19.25 $17.50 $21.36 $21.73
Company Quoted $17.50
Rental Rate per
Sq. Ft.(4)
<CAPTION>
2007 &
STATE, CITY, SUBMARKET 2003 2004 2005 2006 BEYOND
- ---------------------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
FLORIDA
MIAMI
Downtown-CBD(7)......... 30,180 66,938 103,073 4,464 145,622
5.0% 11.1% 17.1% 0.7% 24.2%
$676,304 $1,609,222 $2,768,825 $121,823 $3,960,757
3 3 4 1 3
$22.41 $24.04 $26.86 $27.29 $27.20
ARIZONA
PHOENIX
Downtown-CBD............ 10,151 161,818 -- 43,536 --
2.5% 39.6% 0.0% 10.6% 0.0%
$170,295 $4,543,214 -- $779,516 --
2 3 -- 1 --
$16.78 $28.08 $0.00 $17.91 $0.00
Camelback Corridor...... -- 58,076 -- -- --
0.0% 100.0% 0.0% 0.0% 0.0%
-- $1,364,786 -- -- --
-- 1 -- -- --
$0.00 $23.50 $0.00 $0.00 $0.00
LOUISIANA
NEW ORLEANS
CBD..................... -- 310,591 26,805 3,183 --
0.0% 82.2% 7.1% 0.8% 0.0%
-- $5,281,192 $455,768 $53,697 --
-- 2 1 1 --
$0.00 $17.00 $17.00 $16.87 $0.00
NEBRASKA
OMAHA
CBD..................... 63,078 -- -- -- --
15.6% 0.0% 0.0% 0.0% 0.0%
$1,072,325 -- -- -- --
1 -- -- -- --
$17.00 $0.00 $0.00 $0.00 $0.00
NEW MEXICO
ALBUQUERQUE
CBD..................... -- 41,906 186,265 5,888 --
0.0% 12.6% 56.0% 1.8% 0.0%
-- $689,354 $4,122,799 101,097 --
-- 1 2 1 --
$0.00 $16.45 $22.13 $17.17 $0.00
</TABLE>
S-31
<PAGE> 32
<TABLE>
<CAPTION>
CALIFORNIA
SAN FRANCISCO
STATE, CITY, SUBMARKET 1997 1998 1999 2000 2001 2002
---------------------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
South of Market-CBD..... Sq. Ft.(1) 4,980 -- 12,232 1,700 60,713 --
% Sq. Ft.(2) 2.1% 0.0% 5.5% 0.8% 27.2% 0.0%
Annual Rent(3) $97,050 -- $341,687 $22,440 $1,383,200 --
No. of Tenants 4 -- 5 1 1 --
Rent per Sq.
Ft. $19.49 $0.00 $27.93 $13.20 $22.78 $0.00
Company Quoted $29.30
Rental Rate per
Sq. Ft.(4)
SAN DIEGO
UTC..................... Sq. Ft.(1) 13,166 31,582 15,970 47,597 37,901 8,486
% Sq. Ft.(2) 7.9% 19.1% 9.6% 28.7% 22.9% 5.1%
Annual Rent(3) $277,240 $618,456 $325,538 $1,264,938 $802,356 $168,023
No. of Tenants 5 6 3 6 7 1
Rent per Sq.
Ft. $21.06 $19.58 $20.38 $26.58 $21.17 $19.80
Company Quoted $24.36
Rental Rate per
Sq. Ft.(4)
TOTAL................... Sq. Ft.(1) 1,733,613 2,035,949 3,230,020 2,657,819 3,151,958 2,674,178
% Sq. Ft.(2) 7.6% 8.9% 14.2% 11.7% 13.8% 11.8%
Annual Rent(3) $26,409,303 $32,922,861 $55,391,009 $42,134,552 $56,811,502 $51,207,613
No. of Tenants 304 420 357 268 247 128
Rent per Sq.
Ft. $15.23 $16.17 $17.15 $15.85 $18.02 $19.15
Company Quoted $19.55
Rental Rate per
Sq. Ft.(4)
<CAPTION>
2007 &
STATE, CITY, SUBMARKET 2003 2004 2005 2006 BEYOND
- ---------------------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
CALIFORNIA
SAN FRANCISCO
South of Market-CBD..... 3,560 -- 1,736 29,324 109,227
1.6% 0.0% 0.8% 13.1% 48.9%
$97,010 -- $37,498 $685,302 $2,781,680
1 -- 1 1 2
$27.25 $0.00 $21.60 $23.37 $25.47
SAN DIEGO
UTC..................... 4,329 6,811 -- -- --
2.6% 4.1% 0.0% 0.0% 0.0%
$105,861 $140,370 -- -- --
2 2 -- -- --
$24.45 $20.61 $0.00 $0.00 $0.00
TOTAL................... 1,095,723 1,964,080 1,699,365 509,946 2,019,587
4.8% 8.6% 7.5% 2.2% 8.9%
$19,639,059 $38,589,013 $31,830,510 $10,879,286 $45,841,466
49 45 30 18 20
$17.92 $19.65 $18.73 $21.33 $22.70
</TABLE>
- ---------------
(1) Total net rentable square feet represented by expiring leases.
(2) Percentage of total net rentable square feet represented by expiring leases.
(3) Calculated based on base rent payable as of the expiration day of the lease
for net rentable square feet expiring, without giving effect to free rent or
scheduled rent increases that would be taken into account under generally
accepted accounting principles and including expenses payable by or
reimbursable from tenants based on current levels.
(4) For Office Properties, represents weighted average full-service rental rates
per square foot quoted by the Company as of June 30, 1997, based on total
net rentable square feet of Company Properties in the submarket. For Pending
Investments, represents weighted average full-service quoted market rental
rates per square foot. These rates have been adjusted to equivalent
full-service quoted rental rates in markets in which the Company's rates are
quoted on a full-service basis.
(5) Includes Pending Investments consisting of one office property in the Dallas
CBD submarket and one office property in the Houston West Loop/Galleria
submarket.
(6) The Company's Office Properties in this submarket were acquired subsequent
to June 30, 1997.
(7) The Company's Office Property in this submarket was acquired subsequent to
June 30, 1997.
S-32
<PAGE> 33
HISTORICAL RECURRING OFFICE PROPERTY
CAPITAL EXPENDITURES, TENANT IMPROVEMENT AND LEASING COSTS
The following table sets forth annual and per square foot recurring capital
expenditures (excluding those expenditures which are recoverable from tenants)
and tenant improvement and leasing costs for the period from May 4, 1994
(inception of operations) to December 31, 1994, for the years ended December 31,
1995 and 1996, and for the six months ended June 30, 1997, attributable to
leases that commenced (i.e., the renewal or replacement tenant began to pay
rent) for the Office Properties consolidated in the Company's financial
statements during each of the periods presented. Tenant improvement and leasing
costs for commenced leases during a particular period do not equal the cash paid
for tenant improvement and leasing costs during such period, due to the timing
of payments.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------- SIX MONTHS ENDED
1994 1995 1996 JUNE 30, 1997
--------- --------- --------- ----------------
<S> <C> <C> <C> <C>
CAPITAL EXPENDITURES:
Capital Expenditures (in thousands)........ $ 147 $ 490 $ 1,214 $ 746
Per square foot............................ $ .04 $ .08 $ .13 $ .04
TENANT IMPROVEMENT COSTS AND TENANT LEASING
COSTS(1):
Replacement Tenant Square Feet............. -- 159,877 404,860 178,697
Renewal Tenant Square Feet................. 76,187 177,437 348,295 338,270
Tenant Improvement Costs (in thousands).... $ 521 $ 1,901 $ 6,264 $ 3,049
Per square foot leased..................... $ 6.83 $ 5.64 $ 8.32 $ 5.90
Tenant Leasing Costs (in thousands)........ $ 54 $ 1,039 $ 3,171 $ 2,427
Per square foot leased..................... $ .71 $ 3.08 $ 4.21 $ 4.69
Total (in thousands)....................... $ 575 $ 2,940 $ 9,435 $ 5,476
Total per square foot...................... $ 7.54 $ 8.72 $ 12.53 $ 10.59
Average lease term......................... 3.3 years 6.6 years 5.3 years 4.9 years
Total per square foot per year(2).......... $ 2.28 $ 1.32 $ 2.36 $ 2.16
</TABLE>
- ---------------
(1) Excludes leasing activity for leases that have less than a one-year term
(i.e., storage and temporary space).
(2) Total per square foot per year equals total per square foot divided by
average lease term.
Capital expenditures may fluctuate in any given period subject to the
nature, extent and timing of improvements required to be made in the Company's
Property portfolio. The Company maintains an active preventive maintenance
program in order to minimize required capital improvements. In addition, capital
improvement costs are recoverable from tenants in many instances.
Tenant improvement and leasing costs also may fluctuate in any given year
depending upon factors such as the property, the term of the lease, the type of
lease (renewal or replacement tenant), the involvement of external leasing
agents and overall competitive market conditions. Management believes that
future recurring tenant improvements and leasing costs for the Company's
existing Office Property portfolio will approximate on average for "renewal
tenants" $6.00 to $8.00 per square foot or, $1.20 to $1.60 per square foot per
year based on an average five year lease term, and for "replacement tenants"
$12.00 to $14.00 per square foot, or $2.40 to $2.80 per square foot per year
based on an average five year lease term.
S-33
<PAGE> 34
BEHAVIORAL HEALTHCARE FACILITIES
On June 17, 1997, the Company acquired substantially all of the real estate
assets of the domestic hospital provider business of Magellan Health Services,
Inc., as previously owned and operated by a wholly owned subsidiary of Magellan
Health Services, Inc. The transaction involved various components, the principal
component of which was the acquisition of the 91 Behavioral Healthcare
Facilities (and one additional behavioral healthcare facility which subsequently
was sold) for approximately $387.2 million. The Behavioral Healthcare
Facilities, which are located in 28 states, are leased to CBHS and its
subsidiaries under a triple-net lease. CBHS is a newly formed Delaware limited
liability company owned 50% by a subsidiary of Magellan Health Services, Inc.
and 50% by Crescent Operating, Inc. The lease requires the payment of annual
minimum rent in the amount of approximately $41.7 million for the period ending
June 16, 1998, increasing in each subsequent year during the 12-year term at a
5% compounded annual rate. All maintenance and capital improvement costs are the
responsibility of CBHS during the term of the lease. In addition, the obligation
of CBHS, pursuant to a franchise agreement, to pay an approximately $78.3
million franchise fee to Magellan Health Services, Inc. and one of its
subsidiaries, as franchisor, is subordinated to the obligation of CBHS to pay
annual minimum rent to the Company. The franchisor does not have the right to
terminate the franchise agreement due to any nonpayment of the franchise fee as
a result of the subordination of the franchise fee to the annual minimum rent.
The lease is designed to provide the Company with a secure, above-average return
on its investment as a result of the priority of annual minimum rent to the
franchise fee and the initial amount and annual escalation in the lease
payments.
HOTEL PROPERTIES
The following table sets forth certain information about the Hotel
Properties for the six months ended June 30, 1997 and 1996. The information for
the Hotel Properties is based on available rooms, except for Canyon Ranch-Tucson
and Canyon Ranch-Lenox, which are destination health and fitness resorts that
measure their performance based on available guest nights.
<TABLE>
<CAPTION>
AVERAGE AVERAGE REVENUE PER
OCCUPANCY DAILY AVAILABLE
RATE RATE ROOM
------------ ------------ ------------
SIX MONTHS SIX MONTHS SIX MONTHS
ENDED ENDED ENDED
YEAR JUNE 30, JUNE 30, JUNE 30,
COMPLETED/ ------------ ------------ ------------
HOTEL PROPERTY(1) LOCATION RENOVATED ROOMS 1997 1996 1997 1996 1997 1996
----------------- -------- ---------- ----- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
FULL-SERVICE/LUXURY HOTELS
Denver Marriott City Center Denver, CO 1982/1994 613 81% 81% $111 $104 $ 90 $ 85
Four Seasons Hotel-Houston(2) Houston, TX 1982 399 69 67 158 146 110 98
Hyatt Regency Albuquerque Albuquerque, NM 1990 395 74 78 99 93 74 72
Hyatt Regency Beaver Creek Avon, CO 1989 295 69 68 270 253 186 173
Sonoma Mission Inn & Spa Sonoma, CA 1927/1987 168(3) 89 93 180 162 161 150
----- -- -- ---- ---- ---- ----
TOTAL/WEIGHTED AVERAGE 1,870(3) 76% 76% $148 $136 $112 $104
===== == == ==== ==== ==== ====
DESTINATION HEALTH AND FITNESS RESORTS
Canyon Ranch-Tucson Tucson, AZ 1980 240(4) 86%(5) 85%(5) $527(6) $503(6) $437(7) $413(7)
Canyon Ranch-Lenox Lenox, MA 1989 202(4) 79(5) 82(5) 407(6) 367(6) 311(7) 292(7)
----- -- -- ---- ---- ---- ----
TOTAL/WEIGHTED AVERAGE 442 83% 84% $475 $442 $379 $358
===== == == ==== ==== ==== ====
</TABLE>
- ---------------
(1) Because of the Company's status as a REIT for federal income tax purposes,
it does not operate the Hotel Properties and has leased the Hotel Properties
to subsidiaries of Crescent Operating, Inc. pursuant to long-term leases.
(2) Acquired subsequent to June 30, 1997.
(3) Does not include the addition of 30 rooms subsequent to June 30, 1997.
(4) Represents available guest nights, which is the maximum number of guests
that the resort can accommodate per night.
(5) Represents the number of paying and complimentary guests for the period,
divided by the maximum number of available guest nights for the period.
(6) Represents the average daily "all-inclusive" guest package charges for the
period, divided by the average daily number of paying guests for the period.
(7) Represents the total "all-inclusive" guest package charges for the period,
divided by the maximum number of available guest nights for the period.
S-34
<PAGE> 35
The following table sets forth average occupancy, average daily rate
("ADR"), and revenue per available room ("REVPAR") for the Hotel Properties by
full-service/luxury hotels and destination health and fitness resorts for each
of the years ended December 31, 1992 through 1996, and for the six months ended
June 30, 1997 and 1996. The information for the Hotel Properties is based on
available rooms, except for Canyon Ranch-Tucson and Canyon Ranch-Lenox, which
are destination health and fitness resorts, that measure performance based on
available guest nights and calculate occupancy, ADR and REVPAR as described in
the footnotes to the preceding table.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------ ------------
1992 1993 1994 1995 1996 1997 1996
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Full-Service/Luxury Hotels
Occupancy Rate.......................... 67% 70% 70% 73% 74% 76% 76%
ADR..................................... $109 $112 $118 $124 $133 $148 $136
REVPAR.................................. $ 73 $ 79 $ 83 $ 91 $ 99 $112 $104
Destination Health and Fitness Resorts
Occupancy Rate.......................... 71% 78% 78% 77% 81% 83% 84%
ADR..................................... $380 $393 $418 $437 $446 $475 $442
REVPAR.................................. $254 $290 $312 $321 $345 $379 $358
</TABLE>
FULL-SERVICE/LUXURY HOTELS
Denver Marriott City Center. The 613-room Denver Marriott City Center,
adjoining the MCI Tower, is a full-service hotel that is the second largest
hotel in downtown Denver, Colorado. The hotel has over 25,000 square feet of
meeting space, a restaurant and lounge and a complete health club, including an
indoor swimming pool, a whirlpool, saunas and aerobic exercise areas. It is
adjacent to the 16th Street Mall and three blocks from the Colorado Convention
Center. In 1994, over $6.0 million was spent on a major renovation of the hotel,
including the complete renovation of two ballrooms, all guest rooms and meeting
rooms, and the restaurant and lounge. The Denver Marriott City Center serves as
headquarters for many major conventions in Denver.
Four Seasons Hotel-Houston. The 399-room Four Seasons Hotel-Houston is one
of the highest rated luxury hotels in Houston, with a five diamond rating from
the American Automobile Association. It is centrally located in downtown
Houston, just two blocks from the Houston Convention Center, and is connected by
a climate-controlled skywalk to The Park Shops in Houston Center, a three-level
shopping plaza also owned by the Company. Built in 1982, the 29-story hotel has
approximately 18,000 square feet of meeting and function space, an award-winning
restaurant, spa, 24-hour fitness center including pool, whirlpool, sauna, and
exercise equipment, and a full-service business center. The upscale, luxury Four
Seasons Place apartments, which are located atop the hotel, offer both long-term
residential and short-term corporate units at monthly rental rates ranging from
approximately $2.00 to $4.00 per leased square foot.
Hyatt Regency Albuquerque. The 20-story Hyatt Regency Albuquerque is a
395-room full-service hotel located in downtown Albuquerque, New Mexico,
immediately across from the recently renovated and expanded Albuquerque
Convention Center. It is the leading convention hotel in New Mexico, with
approximately 20,000 square feet devoted to convention space. Approximately 65%
of the hotel's business is derived from the group/ convention trade. The hotel
contains a restaurant, lounges, meeting rooms, a pool and a health club with an
aerobics area, a sauna and specialized exercise equipment. It also offers floors
with special amenities for business travelers, including fax machines and
conference rooms.
Hyatt Regency Beaver Creek. The Hyatt Regency Beaver Creek is a 295-room
luxury hotel prominently anchoring the Village core of Beaver Creek ski resort,
adjoining Avon, Colorado. Opened in December 1989, the hotel, which is the only
luxury hotel permitted to operate in the Beaver Creek Village, is a
ski-in/ski-out facility with superb access to air and ground transportation. Two
ski lifts immediately adjacent to the hotel provide quick access to 1,125 acres
of skiable terrain. Other facilities include a fully equipped spa and health
club with a 17-meter, indoor/outdoor, year-round lap pool, approximately 23,000
square feet of retail space and an additional approximately 23,000 square feet
of meeting and banquet facilities. An agreement with the Beaver Creek Golf
Course gives the hotel approximately 35% of the available tee times on the only
golf course within the Beaver Creek resort.
S-35
<PAGE> 36
Sonoma Mission Inn & Spa. Sonoma Mission Inn & Spa, a four-star luxury
resort and spa, is located approximately 40 miles north of San Francisco,
California. Constructed in 1927 and redeveloped in 1986 and 1987, the Sonoma
Mission Inn & Spa sits on an eight acre site and contains 198 rooms, an
approximately 13,000 square foot spa complex, approximately 7,000 square feet of
meeting and banquet facilities, two full-service restaurants and two retail
outlets. In July 1997, an approximately $6.0 million expansion of the resort,
including the addition of 30 suites, was completed. An additional approximately
$4.0 million enhancement of the resort is currently in process and is expected
to be completed by the end of 1997.
DESTINATION HEALTH AND FITNESS RESORTS
Canyon Ranch-Tucson. Canyon Ranch-Tucson, an award-winning, destination
health and fitness resort, is located in Tucson, Arizona. The resort can
accommodate up to 240 guests on a daily basis and features an approximately
62,000 square foot spa complex, an approximately 16,000 square foot life
enhancement center offering structured therapy and counseling, an approximately
12,000 square foot health and healing center with a complete staff of
physicians, dietitians, psychologists and therapists, dining facilities, eight
outdoor tennis courts, one indoor and three outdoor pools, massage therapists
and a staff of fitness trainers.
Canyon Ranch-Lenox. Canyon Ranch-Lenox, an award-winning, destination
health and fitness resort, is located in the Berkshire mountains in Lenox,
Massachusetts, approximately 120 miles north of New York City. Canyon
Ranch-Lenox opened in 1989, encompasses 120 acres, and includes 120 guest rooms
which can accommodate up to 202 guests on a daily basis, an approximately
100,000 square foot spa complex, an approximately 10,600 square foot health and
healing center offering a complete staff of health and fitness professionals,
six indoor/outdoor tennis courts and two pools.
HOTEL LEASES
Because of the Company's status as a REIT for federal income tax purposes,
it does not operate the Hotel Properties directly. The Company has leased the
Hotel Properties to subsidiaries of Crescent Operating, Inc. (collectively, the
"Hotel Lessees") pursuant to seven separate leases. Under the leases, each
having a term of 10 years, the Hotel Lessees have assumed the rights and
obligations of the property owner under the respective management agreement with
the hotel operators, as well as the obligation to pay all property taxes and
other charges against the property. As part of each of the lease agreements for
six of the Hotel Properties, the Company has agreed to fund all capital
expenditures relating to furniture, fixtures and equipment reserves required
under the applicable management agreements. The only exception is Canyon
Ranch-Tucson, in which the hotel lessee owns all furniture, fixtures and
equipment associated with the property and will fund all related capital
expenditures. Each of the leases provides for the payment by the lessee of the
Hotel Property of (i) base rent, with periodic rent increases, (ii) percentage
rent based on a percentage of gross room revenues above a specified amount, and
(iii) a percentage of gross food and beverage revenues above a specified amount.
RESIDENTIAL DEVELOPMENT PROPERTIES
The Company owns economic interests in five Residential Development
Corporations through the Residential Development Property Mortgages relating to
and the non-voting common stock in these Residential Development Corporations.
The Residential Development Corporations in turn, through joint ventures or
partnership arrangements, own interests in the 14 Residential Development
Properties. The Residential Development Corporations are responsible for the
continued development and the day-to-day operations of the Residential
Development Properties. The Residential Development Properties are The
Highlands, The Reserve at Frisco, One Beaver Creek, Cresta, Eagle Ranch, Market
Square, Villas at Beaver Creek, Villa Montane Townhouses and Villa Montane Club,
which are located in Colorado; The Woodlands, Mira Vista, Falcon Point and
Spring Lakes, which are located in Texas; and Desert Mountain, which is located
in Arizona.
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<PAGE> 37
RETAIL PROPERTIES
The Company owns seven Retail Properties, which in the aggregate contain
approximately 771,000 net rentable square feet. Four of the Retail Properties,
The Woodlands Retail Properties, with an aggregate of approximately 356,000 net
rentable square feet, are located in The Woodlands, a master-planned development
located 27 miles north of downtown Houston, Texas. The Company has a 75% limited
partner interest and an indirect approximately 10% general partner interest in
the partnership that owns The Woodlands Retail Properties. The Park Shops in
Houston Center, which has an aggregate of approximately 191,000 net rentable
square feet, is located in the CBD submarket of Houston, Texas. See "Recent
Developments -- Completed Investments." The two remaining Retail Properties, Las
Colinas Plaza, with approximately 135,000 net rentable square feet, and The
Crescent Atrium, with approximately 89,000 net rentable square feet, are located
in submarkets of Dallas, Texas. As of June 30, 1997, the Retail Properties were
90% leased.
DEBT STRUCTURE
The Company has an aggregate of approximately $1.8 billion of outstanding
debt at September 30, 1997. Included in this amount is $751.5 million which was
outstanding under the Credit Facility and other unsecured short-term financing
arrangements, $40.0 million of which the Company intends to maintain
outstanding. On a pro forma basis, assuming completion of the Offering and the
application of the net proceeds therefrom, the Company's total market
capitalization (based on the closing stock price on September 30, 1997 of $40.00
per Common Share, after the full conversion of all Units and including total
indebtedness and minority interests in joint ventures) will be approximately
$6.6 billion, and the Company's debt will represent approximately 24.5% of its
total market capitalization.
The Company intends to maintain a conservative capital structure with total
debt currently targeted at approximately 40% of total market capitalization. The
Company, however, consistently seeks to optimize its use of debt and other
sources of financing to create a flexible capital structure that will allow the
Company to continue its innovative investment strategy and maximize the returns
to its shareholders. It is the Company's policy that any indebtedness will be
incurred by the Operating Partnership and its subsidiaries, and that Crescent
Equities will not incur indebtedness other than short-term trade debt, employee
compensation, distribution payable or similar indebtedness that will be paid in
the ordinary course of business.
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<PAGE> 38
The existing indebtedness of the Company as of September 30, 1997, is set
forth in the table below:
<TABLE>
<CAPTION>
INTEREST RATE AT BALANCE
MAXIMUM SEPTEMBER 30, EXPIRATION OUTSTANDING
DESCRIPTION BORROWINGS 1997 DATE AT SEPTEMBER 30, 1997
----------- ---------- ---------------- ---------- ---------------------
<S> <C> <C> <C> <C>
SECURED FIXED RATE DEBT:
LaSalle Note I(1)................. $ 239,000,000 7.83% August 2027 $ 239,000,000
LaSalle Note II(2)................ 161,000,000 7.79% March 2028 161,000,000
CIGNA Note(3)..................... 63,500,000 7.47% December 2002 63,500,000
Northwestern Life Note(4)......... 26,000,000 7.66% January 2004 26,000,000
Metropolitan Life Note(5)(6)...... 12,162,000 8.88% September 2001 12,162,000
Nomura Funding VI Note(6)(7)...... 8,716,000 10.07% July 2020 8,716,000
-------------- ------ --------------
Subtotal/Weighted
Average................. $ 510,378,000 7.83% $ 510,378,000
-------------- ------ --------------
SECURED VARIABLE RATE DEBT:
LaSalle Note III(6)(8)............ $ 115,000,000 7.76% July 1999 $ 115,000,000
-------------- ------ --------------
UNSECURED FIXED RATE DEBT:
The 2002 Notes(9)................. $ 150,000,000 6.63% September 2002 $ 150,000,000
The 2007 Notes(9)................. 250,000,000 7.13% September 2007 250,000,000
-------------- ------ --------------
Subtotal/Weighted
Average................. $ 400,000,000 6.94% $ 400,000,000
-------------- ------ --------------
UNSECURED VARIABLE RATE DEBT:
Line of Credit(10)................ $ 450,000,000 6.86% June 2000 $ 316,500,000
BankBoston Note I(11)............. 235,000,000 7.03% October 1997 235,000,000
BankBoston Note II(12)............ 200,000,000 6.86% August 1998 200,000,000
-------------- ------ --------------
Subtotal/Weighted
Average................. $ 885,000,000 6.91% $ 751,500,000
-------------- ------ --------------
TOTAL/WEIGHTED AVERAGE.... $1,910,378,000 7.23% $1,776,878,000
============== ====== ==============
</TABLE>
- ---------------
(1) The note provides for the payment of interest only through August 2002,
followed by principal amortization based on a 25-year amortization schedule
through maturity. In August 2007, the interest rate increases, and the
Company is required to remit, in addition to the monthly debt service
payment, excess property cash flow, as defined, to be applied first against
principal until the note is paid in full and thereafter, against accrued
excess interest, as defined. It is the Company's intention to repay the
note in full at such time (August 2007) by making a final payment of
approximately $220 million. The LaSalle Note I is secured by the Properties
owned by Funding I. See "Structure of the Company."
(2) The note provides for the payment of interest only through March 2003,
followed by principal amortization based on a 25-year amortization schedule
through maturity. In March 2006, the interest rate increases, and the
Company is required to remit, in addition to the monthly debt service
payment, excess property cash flow, as defined, to be applied first against
principal until the note is paid in full and thereafter, against accrued
excess interest, as defined. It is the Company's intention to repay the
note in full at such time (March 2006) by making a final payment of
approximately $154 million. The LaSalle Note II is secured by the
Properties owned by Funding II. See "Structure of the Company."
(3) The note requires payments of interest only during its term. The CIGNA Note
is secured by MCI Tower and Denver Marriott City Center.
(4) The note requires payments of interest only during its term. The
Northwestern Life Note is secured by 301 Congress Avenue.
(5) The note requires monthly payments of principal and interest and is secured
by five of The Woodlands Office Properties.
(6) The note was assumed in connection with an acquisition and was not
subsequently retired by the Company because of prepayment penalties.
(7) Under the terms of the note, principal and interest are payable based on a
25-year amortization schedule. In July 1998, the Company may defease the
loan by purchasing Treasury obligations to pay the note without penalty.
The Nomura Funding VI Note is secured by Canyon Ranch-Lenox, the Property
owned by Funding VI. See "Structure of the Company." In July 2010, the
interest rate due under the note will change to a 10-year treasury yield
plus 500 basis points or, if the Company so elects, it may repay the note
without penalty.
(8) The note bears interest at the rate for 30-day LIBOR plus a weighted
average rate of 2.135% (subject to a rate cap of 10%), and requires
payments of interest only during its term. The LaSalle Note III is secured
by the Properties owned by Funding III, IV and V. See "Structure of the
Company."
(9) The Notes are unsecured and require payments of interest only during their
terms. The interest rate on the Notes is subject to temporary increase by
50 basis points in the event that a registered offer to exchange the Notes
for notes of the Operating Partnership with terms identical in all material
respects to the Notes is not consummated or a shelf registration statement
with respect to the resale of the Notes is not declared effective by the
Commission on or before the 180th day following the date of original
issuance of the Notes. The interest rate on the Notes also is subject to
temporary or permanent increase by 37.5 basis points in the event that,
within the period from the date of original issuance of the Notes to the
first anniversary of original issuance, the Notes are not assigned, or do
not retain, an investment grade rating (as defined in the Notes) by
specified rating agencies. These adjustments may apply simultaneously.
(10) The Credit Facility is unsecured with an interest rate of the Eurodollar
rate plus 120 basis points.
(11) The note is unsecured with an interest rate of the Eurodollar rate plus 138
basis points. The note requires payments of interest only during its term.
(12) The note is unsecured with an interest rate of the Eurodollar rate plus 120
basis points. The note requires payments of interest only during its term.
S-38
<PAGE> 39
USE OF PROCEEDS
The Company intends to use the net proceeds of the Offering, estimated at
$321.7 million after estimated expenses payable by the Company, to fund
approximately $45.0 million of the purchase price of the U.S. Home Building, to
fund approximately $16.9 million of the purchase price of Fountain Place, to
repay approximately $235.0 million of short-term indebtedness and to repay
approximately $24.8 million of the amounts outstanding under the Credit
Facility. The short-term indebtedness to be repaid was used to fund
approximately $75.0 million of the Company's investment in The Woodlands and
approximately $160.0 million of the purchase price of the Behavioral Healthcare
Facilities. The amounts to be repaid under the Credit Facility were used to fund
a portion of the purchase price of Miami Center.
If the Underwriters' over-allotment option is exercised, the additional net
proceeds (which are estimated to be $48.4 million if the over-allotment option
is exercised in full) will be used to reduce amounts outstanding under the
Credit Facility. The amounts to be repaid were used to fund an additional
portion of the purchase price of Miami Center.
The short-term indebtedness to be repaid, which is unsecured and expires in
October 1997, bears interest at the Eurodollar rate plus 138 basis points. The
Credit Facility, which is unsecured and expires in June 2000, bears interest at
the Eurodollar rate plus 120 basis points.
The funding of the approximately $61.9 million for Pending Investments and
the repayment of the approximately $235.0 million of short-term indebtedness
will be effected through (i) an initial repayment of approximately $296.9
million under the Credit Facility and (ii) subsequent borrowings under the
Credit Facility in an equal amount.
PRICE RANGE OF COMMON SHARES AND DISTRIBUTIONS
The Common Shares have been traded on the New York Stock Exchange ("NYSE")
under the symbol "CEI" since the completion of the Initial Offering in May 1994.
For each calendar quarter indicated, the following table reflects the high and
low sales prices for the Common Shares and the distributions declared by the
Company with respect to each such quarter. All information provided in the table
below has been adjusted to reflect the two-for-one stock split effected in the
form of a 100% share dividend paid by the Company on March 26, 1997 to
shareholders of record on March 20, 1997.
<TABLE>
<CAPTION>
PRICE
----------------------
HIGH LOW DISTRIBUTIONS
---- --- -------------
<S> <C> <C> <C>
1995
First Quarter.............................................. $14 5/8 $12 1/2 $ .25
Second Quarter............................................. $16 $13 15/16 $ .25
Third Quarter.............................................. $16 3/16 $14 7/8 $.275
Fourth Quarter............................................. $17 15/16 $15 1/8 $.275
1996
First Quarter.............................................. $17 7/16 $16 1/16 $.275
Second Quarter............................................. $19 1/16 $16 11/16 $.275
Third Quarter.............................................. $21 3/16 $17 1/2 $.305
Fourth Quarter............................................. $26 5/8 $20 5/16 $.305
1997
First Quarter.............................................. $31 3/8 $25 3/16 $.305
Second Quarter............................................. $31 3/4 $25 1/8 $.305(1)
Third Quarter.............................................. $40 $30 3/8 (2)
</TABLE>
- ---------------
(1) In addition to the regular quarterly distribution, the Company made a
one-time distribution of shares of Crescent Operating, Inc., which was
distributed to the shareholders of the Company and the partners of the
Operating Partnership, on a pro rata basis, in a spin-off effective June 12,
1997.
(2) The record date for the distribution for the third quarter of 1997 is
October 16, 1997. The record date is expected to follow the Offering and,
accordingly, it is anticipated that holders of Common Shares purchased in
the Offering will be eligible to receive the distribution (as long as they
become and continue to be holders on the record date).
S-39
<PAGE> 40
The last reported sale price of the Common Shares on the NYSE on September
30, 1997, was $40.00. As of September 30, 1997, there were approximately 375
holders of record of the Common Shares.
The Company's current quarterly distribution is $.305 per Common Share, an
indicated annualized distribution of $1.22 per Common Share. The Company has
announced an increase in its quarterly distribution to $.38 per Common Share
beginning with the distribution for the third quarter of 1997 (which will be
payable on November 4, 1997 to holders of record on October 16, 1997), an
indicated annualized distribution of $1.52 per Common Share.
The actual results of operations of the Company and the amounts actually
available for distribution will be affected by a number of factors, including
revenues received from the Properties and any additional properties acquired in
the future, the operating and interest expenses of the Company, the ability of
tenants to meet their rent obligations, general leasing activity in the markets
in which the Office Properties are located, consumer preferences relating to the
Hotel Properties, the general condition of the United States economy, federal,
state and local taxes payable by the Company, capital expenditure requirements
and the adequacy of reserves. In addition, the Credit Facility limits
distributions to the partners of the Operating Partnership for any four
successive quarters to an amount that will not exceed 90% of funds from
operations for such period and 100% of funds available for distribution for such
period.
Future distributions by the Company will be at the discretion of the Board
of Trust Managers. The Board of Trust Managers has indicated that it will review
the adequacy of the Company's distribution rate on a quarterly basis.
Under the Internal Revenue Code of 1986, as amended (the "Code"), REITs are
subject to numerous organizational and operational requirements, including the
requirement to distribute at least 95% of taxable income. Pursuant to this
requirement, the Company was required to distribute $41.8 million and $40.8
million for 1996 and 1995, respectively. Actual distributions by the Company
were $73.4 million and $52.8 million for 1996 and 1995, respectively.
Distributions by the Company to the extent of its current and accumulated
earnings and profits for federal income tax purposes generally will be taxable
to a shareholder as ordinary dividend income. Distributions in excess of current
and accumulated earnings and profits will be treated as a nontaxable reduction
of the shareholder's basis in such shareholder's Common Shares, to the extent
thereof, and thereafter as taxable gain. Distributions that are treated as a
reduction of the shareholder's basis in its Common Shares will have the effect
of deferring taxation until the sale of the shareholder's shares. The Company
has determined that, for federal income tax purposes, none of the quarterly
distributions made for 1994, 10% of the quarterly distributions made in 1995 and
38% of quarterly distributions made in 1996, represented a return of capital to
shareholders. Given the dynamic nature of the Company's acquisition strategy and
the extent to which any future acquisitions would alter this calculation, no
assurances can be given regarding what portion, if any, of distributions for
1997 or subsequent years will constitute a return of capital for federal income
tax purposes.
S-40
<PAGE> 41
CAPITALIZATION
The following table sets forth the capitalization of the Company as of June
30, 1997 (i) on a historical basis and (ii) on a pro forma basis assuming the
completion of, in each case as of June 30, 1997, the Offering and the
application of the net proceeds of the Offering, as described in "Use of
Proceeds"; the UBS Offering, the issuance of the Notes, the issuance of 307,831
Common Shares in connection with the acquisition of Houston Center, and the
application of the net proceeds from such offering and issuances; the
acquisitions completed subsequent to June 30, 1997; and the Pending Investments
(including the assumption of 97.1 million of indebtedness in connection
therewith). Such information should be read in conjunction with the financial
statements and notes thereto incorporated by reference into the accompanying
Prospectus.
<TABLE>
<CAPTION>
AS OF JUNE 30, 1997
------------------------
HISTORICAL PRO FORMA
---------- ----------
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<S> <C> <C>
Indebtedness
Credit Facility and Short-Term Indebtedness (Unsecured)... $ 499,700(1) $ 491,720
Mortgage Indebtedness..................................... 632,796 722,605
Long-Term Indebtedness (Unsecured)........................ -- 400,000
Minority interests
Operating Partnership..................................... 118,645 118,645
Interests in Joint Venture................................ 28,369 28,369
Shareholders' equity
Common Shares, $0.01 par value, 250,000,000 shares
authorized, 97,034,491 historical and 110,542,322 pro
forma shares issued and outstanding.................... 970 1,105(2)
Preferred Shares, $0.01 par value, 100,000,000 shares
authorized............................................. -- --
Paid-in capital........................................... 1,499,477 1,976,022(2)
Deferred compensation restricted shares................... (283) (283)
Retained deficit.......................................... (62,100) (62,100)
---------- ----------
Total capitalization.............................. $2,717,574 $3,676,083
========== ==========
</TABLE>
- ---------------
(1) Credit Facility and Short-Term Indebtedness (Unsecured) increased to
$751,500 as of September 30, 1997, primarily as a result of additional
short-term borrowings obtained in connection with the acquisition of the
Company's interest in The Woodlands, the acquisition of Desert Mountain and
the acquisition of Miami Center, which were partially offset by net proceeds
of $145,000 from the UBS Offering, $50,000 from the Note Offering and
$10,000 from the 307,831 Common Shares issued on September 22, 1997.
(2) The pro forma increase in shareholders' equity and paid-in capital reflects
(i) $145,000 from the UBS Offering, (ii) $10,000 from the 307,831 Common
Shares issued on September 22, 1997 and (iii) the Offering. Shareholders'
equity does not include 12,890,454 Common Shares reserved for issuance upon
exercise of rights granted to limited partners ("Limited Partners") of the
Operating Partnership to exchange their Units for Common Shares on a
one-for-two basis or, at the election of the Company, for cash equal to the
then-current fair market value of the number of Common Shares for which such
Units are exchangeable ("Exchange Rights").
S-41
<PAGE> 42
SELECTED FINANCIAL DATA
The following table sets forth certain financial information for the
Company on a consolidated pro forma and historical basis and for the Rainwater
Property Group (the Company's predecessor) on a combined historical basis, which
consists of the combined financial statements of the entities that contributed
Properties in exchange for Units or Common Shares in connection with the
formation of the Company. Such information should be read in conjunction with
the financial statements and notes thereto incorporated by reference into the
accompanying Prospectus.
The pro forma information for the year ended December 31, 1996 assumes
completion, in each case as of January 1, 1996 in determining operating and
other data, of (i) the October 1996 Offering and the additional public offering
of 450,000 common shares that closed on October 9, 1996 and the use of the net
proceeds therefrom to repay approximately $168 million of indebtedness and to
fund approximately $289 million of Property acquisitions in the fourth quarter
of 1996 and the first quarter of 1997, (ii) the April 1997 Offering and the
additional public offering of 500,000 common shares that closed on May 14, 1997
and the use of the net proceeds therefrom to fund approximately $593.5 million
of Property acquisitions and other investments in the second quarter of 1997,
(iii) the UBS Offering and the use of the net proceeds therefrom to repay
approximately $145 million of indebtedness under the Credit Facility, (iv) the
Note Offering and the use of the net proceeds therefrom to fund approximately
$327.6 million of the acquisition of Houston Center, to repay approximately
$50.0 million of indebtedness incurred under the Credit Facility, to fund
approximately $10.0 million of the purchase price of Miami Center and to repay
approximately $7.2 million of short-term indebtedness, (v) the Company's
issuance of 307,831 Common Shares on September 22, 1997 in connection with the
acquisition of Houston Center and the use of the net proceeds therefrom to repay
approximately $10.0 million of indebtedness incurred under the Credit Facility,
(vi) this Offering and the use of the net proceeds therefrom to fund
approximately $61.9 million of Pending Investments and to repay approximately
$259.8 million of short-term indebtedness and indebtedness incurred under the
Credit Facility, (vii) assumed indebtedness of $97.1 million in connection with
the purchase of one of the Pending Investments and (viii) the Pending
Investments and the Property acquisitions and other investments made during 1996
and 1997. The pro forma information for the year ended December 31, 1996 does
not include the Company's proposed investment in VNO. See "Recent
Developments -- Proposed Investment with VNO."
The pro forma information for the six months ended June 30, 1997 assumes
completion, in each case as of January 1, 1997 in determining operating and
other data, and, in each case as of June 30, 1997 in determining balance sheet
data, of (i) the April 1997 Offering and the additional public offering of
500,000 common shares that closed on May 14, 1997 and the use of the net
proceeds therefrom to fund approximately $593.5 million of Property acquisitions
and other investments in the second quarter of 1997, (ii) the UBS Offering and
the use of the net proceeds therefrom to repay approximately $145 million of
indebtedness under the Credit Facility and other short-term indebtedness, (iii)
the Note Offering and the use of the net proceeds therefrom to fund
approximately $327.6 million of the acquisition of Houston Center, to repay
approximately $50.0 million of indebtedness incurred under the Credit Facility,
to fund approximately $10.0 million of the purchase price of Miami Center and to
repay approximately $7.2 million of short-term indebtedness, (iv) the Company's
issuance of 307,831 Common Shares on September 22, 1997 in connection with the
acquisition of Houston Center and the use of the net proceeds therefrom to repay
approximately $10.0 million of indebtedness incurred under the Credit Facility,
(v) this Offering and the use of the net proceeds therefrom to fund
approximately $61.9 million of Pending Investments and to repay approximately
$259.8 million of short-term indebtedness and indebtedness incurred under the
Credit Facility, (vi) assumed indebtedness of $97.1 million in connection with
the purchase of one of the Pending Investments and (vii) the Pending Investments
and the Property acquisitions and other investments made during 1997. The pro
forma information for the six months ended June 30, 1997 does not include the
Company's proposed investment in VNO. See "Recent Developments -- Proposed
Investment with VNO."
S-42
<PAGE> 43
CRESCENT REAL ESTATE EQUITIES COMPANY
CONSOLIDATED PRO FORMA AND HISTORICAL FINANCIAL DATA AND
RAINWATER PROPERTY GROUP COMBINED HISTORICAL FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
COMPANY
---------------------------------------------------------------------------------------
PRO FORMA
SIX MONTHS ENDED JUNE 30, YEAR ENDED YEAR ENDED YEAR ENDED
----------------------------------------- DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1997 1996 1996 1996 1995
------------ ----------- ----------- ------------ ------------ ------------
PRO FORMA ACTUAL ACTUAL (UNAUDITED)
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Revenue --
Rental property................. $ 262,806 $ 174,882 $ 85,549 $ 503,532 $ 202,003 $ 123,489
Interest and other income....... 13,142 8,321 2,510 18,336 6,858 6,471
Residential developments(1)..... -- -- -- -- -- --
Operating expenses --
Rental property operating(2).... 94,954 65,165 31,098 186,579 73,813 45,949
Corporate general and
administrative................ 7,483 7,483 2,299 10,000 4,674 3,812
Residential developments(1)..... -- -- -- -- -- --
Interest expense................. 58,413 31,612 19,018 117,125 42,926 18,781
Depreciation and amortization.... 46,354 30,291 18,281 92,005 40,535 28,060
Amortization of deferred
financing costs................. 1,580 1,220 1,320 3,531 2,812 2,500
Writedown of investment
property........................ -- -- -- -- -- --
------------ ----------- ----------- ------------ ----------- -----------
Operating income (loss).......... 67,164 47,432 16,043 112,628 44,101 30,858
Reorganization costs............. -- -- -- -- -- --
Equity in net income of
unconsolidated
subsidiaries(1)................. 15,366 1,999 2,175 21,120 3,850 5,500
------------ ----------- ----------- ------------ ----------- -----------
Income (loss) before minority
interests and extraordinary
item............................ $ 82,530 $ 49,431 $ 18,218 $ 133,748 $ 47,951 $ 36,358
============ =========== =========== ============ =========== ===========
Income per share before
extraordinary item.............. $ .66 $ .52 $ .31 $ 1.07 $ .72 $ .66
BALANCE SHEET DATA (AT PERIOD
END):
Real estate, before accumulated
depreciation.................... $ 3,246,892 $ 2,628,792 $ 1,098,901 -- $ 1,732,626 $ 1,006,706
Total assets..................... 3,759,289 2,779,780 1,053,366 -- 1,730,922 964,171
Mortgages and other secured notes
payable......................... 722,605 632,796 476,053 -- 627,808 424,528
Credit Facility and other
unsecured obligations(3)........ 891,720 499,700 58,355 -- 40,000 20,000
Total liabilities................ 1,697,531 1,194,702 556,511 -- 716,270 476,234
Minority interest in Operating
Partnership..................... 118,645 118,645 69,887 -- 120,227 71,925
Shareholders' equity............. 1,914,744 1,438,064 395,148 -- 865,160 406,531
OTHER DATA:
Funds from Operations before
minority interests(4)........... $ 132,913 $ 78,522 $ 36,728 $ 235,615 $ 87,616 $ 64,475
Cash distribution declared per
share(5)........................ -- $ .61 $ .55 -- $ 1.16 $ 1.05
Weighted average Common Shares
outstanding and issuable upon
exchange of Units............... 124,109,401 94,269,446 57,753,882 124,109,401 64,684,842 54,182,006
Cash flow provided by (used in):
Operating activities............ --(6) $ 71,493 $ 31,486 --(6) $ 77,384 $ 65,011
Investing activities............ --(6) (1,024,052) (92,376) --(6) (513,038) (421,406)
Financing activities............ --(6) 982,556 55,640 --(6) 444,315 343,079
Number of Properties (at period
end):
Office Properties............... 78 72 56 78 53 30
Hotel Properties................ 7 6 3 7 6 3
Behavioral Healthcare
Facilities.................... 91 92 0 92 0 0
Retail Properties............... 7 6 2 7 6 2
Residential Development
Properties.................... 14 12 9 14 9 9
<CAPTION>
COMPANY RAINWATER PROPERTY GROUP
--------------- ---------------------------------
FOR THE
PERIOD
FOR THE FROM
PERIOD FROM JANUARY 1, YEAR ENDED
MAY 5, 1994 1994 TO DECEMBER 31,
TO DECEMBER 31, MAY 4, --------------------
1994 1994 1993 1992
--------------- ---------- -------- ---------
<S> <C> <C> <C> <C>
OPERATING DATA:
Revenue --
Rental property................. $ 49,075 $ 18,550 $ 48,232 $ 41,946
Interest and other income....... 1,268 42 605 425
Residential developments(1)..... -- 2,593 8,331 7,215
Operating expenses --
Rental property operating(2).... 18,993 8,696 21,230 20,104
Corporate general and
administrative................ 1,815 -- -- --
Residential developments(1)..... -- 1,428 4,077 5,714
Interest expense................. 3,493 4,867 29,226 36,245
Depreciation and amortization.... 14,255 7,793 18,081 18,190
Amortization of deferred
financing costs................. 923 -- -- --
Writedown of investment
property........................ -- -- 37,578 5,945
----------- -------- -------- ---------
Operating income (loss).......... 10,864 (1,599) (53,024) (36,612)
Reorganization costs............. 1,900 -- -- --
Equity in net income of
unconsolidated
subsidiaries(1)................. 3,631 -- -- --
----------- -------- -------- ---------
Income (loss) before minority
interests and extraordinary
item............................ $ 12,595 $ (1,599) $(53,024) $ (36,612)
=========== ======== ======== =========
Income per share before
extraordinary item.............. $ .28 -- -- --
BALANCE SHEET DATA (AT PERIOD
END):
Real estate, before accumulated
depreciation.................... $ 557,675 -- $358,400 $ 336,923
Total assets..................... 538,354 -- 290,869 296,291
Mortgages and other secured notes
payable......................... -- -- 278,060 548,517
Credit Facility and other
unsecured obligations(3)........ 194,642 -- -- --
Total liabilities................ 209,900
Minority interest in Operating
Partnership..................... 93,192 -- -- --
Shareholders' equity............. 235,262 -- 2,941 (328,240)
OTHER DATA:
Funds from Operations before
minority interests(4)........... $ 32,723 -- -- --
Cash distribution declared per
share(5)........................ $ .65 -- -- --
Weighted average Common Shares
outstanding and issuable upon
exchange of Units............... 44,997,716 -- -- --
Cash flow provided by (used in):
Operating activities............ $ 21,642 $ 2,455 $ 9,313 $ (640)
Investing activities............ (260,666) (2,379) (20,572) (8,924)
Financing activities............ 265,608 (21,310) 28,861 14,837
Number of Properties (at period
end):
Office Properties............... 10 4 4 3
Hotel Properties................ 0 0 0 0
Behavioral Healthcare
Facilities.................... 0 0 0 0
Retail Properties............... 2 2 2 2
Residential Development
Properties.................... 3 3 2 1
</TABLE>
S-43
<PAGE> 44
- ---------------
(1) The Company accounts for its investments in the Residential Development
Property Mortgages and non-voting common stock of the Residential
Development Corporations under the equity method of accounting as a result
of the noncontrolling interests held. The Company also accounts for its
investment in Woodlands-CPC under the equity method of accounting.
(2) Includes real estate taxes, repairs and maintenance and other rental
property operating expenses, including property-level general and
administrative expenses.
(3) The Credit Facility was converted from a secured facility to an unsecured
facility in October 1996.
(4) FFO, based on the revised definition adopted by the Board of Governors of
NAREIT and as used herein, means net income (loss), determined in accordance
with generally accepted accounting principles ("GAAP"), excluding gains (or
losses) from debt restructuring and sales of property, plus depreciation and
amortization of real estate assets, and after adjustments for unconsolidated
partnerships and joint ventures. FFO was developed by NAREIT as a relative
measure of performance and liquidity of an equity REIT in order to recognize
that income-producing real estate historically has not depreciated on the
basis determined under GAAP. The Company considers FFO an appropriate
measure of performance of an equity REIT. However, FFO (i) does not
represent cash generated from operating activities determined in accordance
with GAAP (which, unlike FFO, generally reflects all cash effects of
transactions and other events that enter into the determination of net
income), (ii) is not necessarily indicative of cash flow available to fund
cash needs and (iii) should not be considered as an alternative to net
income determined in accordance with GAAP as an indication of the Company's
operating performance, or to cash flow from operating activities determined
in accordance with GAAP as a measure of either liquidity or the Company's
ability to make distributions. The Company has historically distributed an
amount less than FFO, primarily due to reserves required for capital
expenditures, including leasing costs. An increase in FFO does not
necessarily result in an increase in aggregate distributions because the
Board of Trust Managers of the Company is not required to increase
distributions unless necessary in order to enable the Company to maintain
REIT status. Because the Company must distribute 95% of its real estate
investment trust taxable income (as defined in the Code), however, a
significant increase in FFO will generally require an increase in
distributions to shareholders and unitholders although not necessarily on a
proportionate basis. Accordingly, the Company believes that in order to
facilitate a clear understanding of the consolidated historical operating
results of the Company, FFO should be considered in conjunction with the
Company's net income (loss) and cash flows as reported in the consolidated
financial statements and notes thereto incorporated by reference into the
accompanying Prospectus. However, the Company's measure of FFO may not be
comparable to similarly titled measures for other REITs because these REITs
may not apply the modified definition of FFO in the same manner as the
Company.
(5) For 1994, distributions were taxable as ordinary dividend income.
Distributions in 1994 were paid on 45,043,360 outstanding shares and Units.
For 1996 and 1995, 62% and 90%, respectively, of the distributions were
taxable as ordinary dividend income, with the remainder treated as a return
of capital. Distributions in 1995 were paid on 45,043,360, 57,636,642,
57,645,564 and 57,640,562 outstanding shares and Units for the first,
second, third and fourth quarters, respectively. Distributions in 1996 were
paid on 57,640,562, 57,776,538, 84,360,692 and 85,574,200 outstanding shares
and Units for the first, second, third and fourth quarters, respectively.
Distributions in 1997 were paid on 109,755,561 and 110,299,404 outstanding
shares and Units for the first and second quarters, respectively.
(6) Pro forma information relating to operating, investing and financing
activities has not been included because management believes that the data
would not be meaningful due to the number of assumptions required in order
to calculate this data.
S-44
<PAGE> 45
MANAGEMENT
Set forth below is information with respect to the members of the Board of
Trust Managers, all of whom joined the Predecessor Corporation as directors in
1994 (except Melvin Zuckerman who became a director in 1996) and the executive
officers.
<TABLE>
<CAPTION>
NAME TERM EXPIRES AGE POSITION
---- ------------ --- --------
<S> <C> <C> <C>
Richard E. Rainwater 1997 53 Chairman of the Board of Trust Managers of Crescent
Equities
John C. Goff 1999 42 Vice Chairman of the Board of Trust Managers of
Crescent Equities
Gerald W. Haddock 1998 49 President, Chief Executive Officer and Sole Director
of CREE Ltd., and President, Chief Executive
Officer and Trust Manager of Crescent Equities
Anthony M. Frank 1997 66 Trust Manager of Crescent Equities
Morton H. Meyerson 1998 59 Trust Manager of Crescent Equities
William F. Quinn 1997 49 Trust Manager of Crescent Equities
Paul E. Rowsey, III 1999 42 Trust Manager of Crescent Equities
Melvin Zuckerman 1997 69 Trust Manager of Crescent Equities
Dallas E. Lucas N/A 35 Senior Vice President, Chief Financial and
Accounting Officer of Crescent Equities and CREE
Ltd.
David M. Dean N/A 36 Senior Vice President, Law, and Secretary of
Crescent Equities and CREE Ltd.
James M. Eidson, Jr. N/A 43 Senior Vice President, Acquisitions of CREE Ltd.
William D. Miller N/A 38 Senior Vice President, Administration, of CREE Ltd.
and Crescent Equities
Bruce A. Picker N/A 33 Vice President and Treasurer of CREE Ltd. and
Crescent Equities
Joseph D. Ambrose III N/A 46 Vice President, Administration of CREE Ltd.
Jerry R. Crenshaw, Jr. N/A 33 Vice President and Controller of CREE Ltd.
Barry L. Gruebbel N/A 42 Vice President, Property Management, of CREE Ltd.
Howard W. Lovett N/A 40 Vice President, Corporate Leasing, of CREE Ltd.
John M. Walker, Jr. N/A 47 Vice President, Acquisitions, of CREE Ltd.
John L. Zogg, Jr. N/A 34 Vice President, Leasing and Marketing, of CREE Ltd.
Murphy C. Yates N/A 50 Director of Leasing and Operations of CREE Ltd.
</TABLE>
STRUCTURE OF THE COMPANY
The Company is a fully integrated real estate company operating as a REIT
for federal income tax purposes. The Company provides management, leasing and
development services with respect to certain of its Properties. Crescent
Equities is a Texas real estate investment trust which became the successor to
the Predecessor Corporation on December 31, 1996, through the merger of the
Predecessor Corporation and CRE Limited Partner, Inc., a subsidiary of the
Predecessor Corporation, into Crescent Equities. The merger was structured to
preserve the existing business, purpose, tax status, management, capitalization
and assets, liabilities and net worth (other than due to the costs of the
transaction) of the Predecessor Corporation, and the economic interests and
voting rights of the stockholders of the Predecessor Corporation (who became the
shareholders of Crescent Equities as a result of the merger).
The direct and indirect subsidiaries of Crescent Equities include the
Operating Partnership; CREE Ltd.; seven single purpose limited partnerships in
which the Operating Partnership owns substantially all of the economic interests
directly through its approximately 99% limited partner interest in such seven
limited partnerships, with the remaining interests owned indirectly by the
Company through seven separate corporations, each of which is a wholly owned
subsidiary of CREE Ltd. and is also the approximately 1% general partner of one
of the seven limited partnerships. The Company conducts all of its business
through the Operating Partnership and its other subsidiaries. The Company also
has an economic interest in the development activities of the Residential
Development Corporations.
S-45
<PAGE> 46
The following table sets forth, by subsidiary, the Properties owned by such
subsidiary:
<TABLE>
<S> <C>
Operating Partnership: The Addison, Addison Tower, The Amberton, AT&T Building,
Bank One Tower, Canyon Ranch-Tucson, Cedar Springs Plaza,
Chancellor Park(1), Central Park Plaza, Concourse Office
Park, Denver Marriott City Center, Four Seasons
Hotel-Houston, Frost Bank Plaza, Greenway I, Greenway IA,
Greenway II, Houston Center Office Properties, MCI Tower,
The Meridan, Miami Center, One Preston Park, Palisades
Central I, Palisades Central II, Park Shops in Houston
Center, Reverchon Plaza, Sonoma Mission Inn & Spa, Spectrum
Center(2), Stemmons Place, Three Westlake Park(3), Trammell
Crow Center(4), The Woodlands Office Properties(5), The
Woodlands Retail Properties(5), Valley Centre, Walnut Green,
44 Cook, 55 Madison, 160 Spear Street, 301 Congress
Avenue(6), 1615 Poydras, 3333 Lee Parkway, 5050 Quorum and
6225 North 24th Street
Crescent Real Estate The Aberdeen, The Avallon, Caltex House, The Citadel,
Funding I, L.P. ("Funding Continental Plaza, The Crescent Atrium, The Crescent Office
I"): Towers, Regency Plaza One and Waterside Commons
Crescent Real Estate Albuquerque Plaza, Barton Oaks Plaza One, Briargate Office
Funding II, L.P. and Research Center, Hyatt Regency Albuquerque, Hyatt
("Funding II") Regency Beaver Creek, Las Colinas Plaza, Liberty Plaza I &
II, MacArthur Center I & II, Ptarmigan Place, Stanford
Corporate Centre, Two Renaissance Square and 12404 Park
Central
Crescent Real Estate Greenway Plaza Portfolio(7)
Funding III, IV and
V, L.P. ("Funding III,
IV and V"):
Crescent Real Estate Canyon Ranch-Lenox
Funding VI, L.P.
("Funding VI"):
Crescent Real Estate Behavioral Healthcare Facilities
Funding VII, L.P.
("Funding VII"):
</TABLE>
- ---------------
(1) The Operating Partnership owns Chancellor Park through its ownership of the
mortgage note secured by the building and through its direct and indirect
interests in the partnership which owns the building.
(2) The Operating Partnership owns the principal economic interest in Spectrum
Center through an interest in Spectrum Mortgage Associates, L.P., which owns
both a mortgage note secured by the building and the ground lessor's
interest in the land underlying the building.
(3) The Operating Partnership owns the principal economic interest in Three
Westlake Park through its ownership of a mortgage note secured by the
building.
(4) The Operating Partnership owns the principal economic interest in Trammell
Crow Center through its ownership of fee simple title to the Property
(subject to a ground lease and a leasehold estate regarding the building)
and two mortgage notes encumbering the leasehold interests in the land and
building.
(5) The Operating Partnership owns a 75% limited partner interest and an
indirect approximately 10% general partner interest in the partnerships that
own The Woodlands Office and Retail Properties.
(6) The Operating Partnership owns a 49% limited partner interest and
Crescent/301, L.L.C., a wholly owned subsidiary of CREE Ltd. and the
Operating Partnership, owns a 1% general partner interest in 301 Congress
Avenue, L.P., the partnership that owns 301 Congress Avenue.
(7) Funding III owns the Greenway Plaza Portfolio, except for the central heated
and chilled water plant building and Coastal Tower office building, both
located within Greenway Plaza, which are owned by Funding IV and Funding V,
respectively.
S-46
<PAGE> 47
FEDERAL INCOME TAX CONSIDERATIONS
INTRODUCTION
The following is a summary of the material federal income tax
considerations associated with an investment in the Common Shares offered hereby
prepared by Shaw, Pittman, Potts & Trowbridge, tax counsel to Crescent Equities
("Tax Counsel"). This discussion is based upon the laws, regulations and
reported rulings and decisions in effect as of the date of this Prospectus
Supplement, all of which are subject to change, retroactively or prospectively,
and to possibly differing interpretations. This discussion does not purport to
deal with the federal income or other tax consequences applicable to all
investors in light of their particular investment circumstances or to all
categories of investors, some of whom may be subject to special rules
(including, for example, insurance companies, tax-exempt organizations,
financial institutions, broker-dealers, foreign corporations and persons who are
not citizens or residents of the United States). No ruling on the federal, state
or local tax considerations relevant to the operation of Crescent Equities or
the Operating Partnership or to the purchase, ownership or disposition of the
Common Shares is being requested from the Internal Revenue Service (the "IRS")
or from any other tax authority. Tax Counsel has rendered certain opinions
discussed herein and believes that if the IRS were to challenge the conclusions
of Tax Counsel, such conclusions would prevail in court. However, opinions of
counsel are not binding on the IRS or on the courts, and no assurance can be
given that the conclusions reached by Tax Counsel would be sustained in court.
EACH PROSPECTIVE PURCHASER IS URGED TO CONSULT HIS OR HER OWN TAX ADVISOR
REGARDING THE SPECIFIC TAX CONSEQUENCES TO HIM OR HER OF THE PURCHASE, OWNERSHIP
AND DISPOSITION OF THE COMMON SHARES IN AN ENTITY ELECTING TO BE TAXED AS A REAL
ESTATE INVESTMENT TRUST, INCLUDING THE FEDERAL, STATE, LOCAL, FOREIGN AND OTHER
TAX CONSEQUENCES OF SUCH PURCHASE, OWNERSHIP, DISPOSITION AND ELECTION AND OF
POTENTIAL CHANGES IN APPLICABLE TAX LAWS.
TAXATION OF CRESCENT EQUITIES
Crescent Equities has made an election to be treated as a real estate
investment trust under Sections 856 through 860 of the Code (as used in this
section, a "REIT"), commencing with its taxable year ended December 31, 1994.
Crescent Equities believes that it was organized and has operated in such a
manner so as to qualify as a REIT, and Crescent Equities intends to continue to
operate in such a manner, but no assurance can be given that it has operated in
a manner so as to qualify, or will operate in a manner so as to continue to
qualify as a REIT.
The sections of the Code relating to qualification and operation as a REIT
are highly technical and complex. The following sets forth the material aspects
of the Code sections that govern the federal income tax treatment of a REIT and
its shareholders. This summary is qualified in its entirety by the applicable
Code sections, rules and regulations promulgated thereunder, and administrative
and judicial interpretations thereof.
In the opinion of Tax Counsel, Crescent Equities qualified as a REIT under
the Code with respect to its taxable years ending on or before December 31,
1996, and is organized in conformity with the requirements for qualification as
a REIT, its manner of operation has enabled it to meet the requirements for
qualification as a REIT as of the date of this Prospectus Supplement, and its
proposed manner of operation will enable it to meet the requirements for
qualification as a REIT in the future. It must be emphasized that this opinion
is based on various assumptions relating to the organization and operation of
Crescent Equities and the Operating Partnership and is conditioned upon certain
representations made by Crescent Equities and the Operating Partnership as to
certain relevant factual matters, including matters related to the organization,
expected operation, and assets of Crescent Equities and the Operating
Partnership. Moreover, continued qualification as a REIT will depend upon
Crescent Equities' ability to meet, through actual annual operating results, the
distribution levels, stock ownership requirements and the various qualification
tests and other requirements imposed under the Code, as discussed below.
Accordingly, no assurance can be given that the actual stock ownership of
Crescent Equities, the mix of its assets, or the results of its operations for
any particular taxable year will satisfy such requirements. For a discussion of
the tax consequences of failing to qualify as a REIT, see "-- Taxation of
Crescent Equities -- Failure to Qualify," below.
If Crescent Equities qualifies for taxation as a REIT, it generally will
not be subject to federal corporate income taxes on its net income that is
currently distributed to shareholders. This treatment substantially eliminates
the
S-47
<PAGE> 48
"double taxation" (at the corporate and shareholder levels) that generally
results from investments in a corporation. However, Crescent Equities will be
subject to federal income tax in the following circumstances. First, Crescent
Equities will be taxed at regular corporate rates on any undistributed "real
estate investment trust taxable income," including undistributed net capital
gains. Second, under certain circumstances, Crescent Equities may be subject to
the "alternative minimum tax" on its items of tax preference. Third, if Crescent
Equities has "net income from foreclosure property," it will be subject to tax
on such income at the highest corporate rate. "Foreclosure property" generally
means real property and any personal property incident to such real property
which is acquired as a result of a default either on a lease of such property or
on indebtedness which such property secured and with respect to which an
appropriate election is made, except that property ceases to be foreclosure
property (i) after a two-year period (which in certain cases may be extended by
the IRS) or, if earlier, (ii) when the REIT engages in construction on the
property (other than for completion of certain improvements) or for more than 90
days uses the property in a business conducted other than through an independent
contractor. "Net income from foreclosure property" means (a) the net gain from
disposition of foreclosure property which is held primarily for sale to
customers in the ordinary course of business or (b) other net income from
foreclosure property which would not satisfy the 75% gross income test
(discussed below). Property is not eligible for the election to be treated as
foreclosure property if the loan or lease with respect to which the default
occurs (or is imminent) was made, entered into or acquired by the REIT with an
intent to evict or foreclose or when the REIT knew or had reason to know that
default would occur. Fourth, if Crescent Equities has "net income derived from
prohibited transactions," such income will be subject to a 100% tax. The term
"prohibited transaction" generally includes a sale or other disposition of
property (other than foreclosure property) that is held primarily for sale to
customers in the ordinary course of business. Fifth, if Crescent Equities should
fail to satisfy the 75% gross income test or the 95% gross income test (as
discussed below), but has nonetheless maintained its qualification as a REIT
because certain other requirements have been met, it will be subject to a 100%
tax on the net income attributable to the greater of the amount by which
Crescent Equities fails the 75% or 95% test. Sixth, if, during each calendar
year, Crescent Equities fails to distribute at least the sum of (i) 85% of its
"real estate investment trust ordinary income" for such year, (ii) 95% of its
"real estate investment trust capital gain net income" for such year, and (iii)
any undistributed taxable income from prior periods, Crescent Equities will be
subject to a 4% excise tax on the excess of such required distribution over the
amounts actually distributed. Seventh, if Crescent Equities acquires any asset
from a C corporation (i.e., a corporation generally subject to full corporate
level tax) in a transaction in which the basis of the asset in Crescent
Equities' hands is determined by reference to the basis of the asset (or any
other property) in the hands of the corporation, and Crescent Equities
recognizes gain on the disposition of such asset during the 10-year period
beginning on the date on which such asset was acquired by Crescent Equities,
then, to the extent of such property's "built-in" gain (the excess of the fair
market value of such property at the time of acquisition by Crescent Equities
over the adjusted basis in such property at such time), such gain will be
subject to tax at the highest regular corporate rate applicable (as provided in
regulations promulgated by the United States Department of Treasury under the
Code ("Treasury Regulations") that have not yet been promulgated). (The results
described above with respect to the recognition of "built-in gain" assume that
Crescent Equities will make an election pursuant to IRS Notice 88-19.)
Requirements of Qualification. The Code defines a REIT as a corporation,
trust or association (1) which is managed by one or more trustees or directors;
(2) the beneficial ownership of which is evidenced by transferable shares, or by
transferable certificates of beneficial interest; (3) which would be taxable as
a domestic corporation, but for Sections 856 through 860 of the Code; (4) which
is neither a financial institution nor an insurance company subject to certain
provisions of the Code; (5) the beneficial ownership of which is held (without
reference to any rules of attribution) by 100 or more persons; (6) during the
last half of each taxable year not more than 50% in value of the outstanding
stock of which is owned, directly or indirectly, by five or fewer individuals
(as defined in the Code); and (7) which meets certain other tests, described
below, regarding certain distributions and the nature of its income and assets
and properly files an election to be treated as a REIT. The Code provides that
conditions (1) through (4), inclusive, must be met during the entire taxable
year and that condition (5) must be met during at least 335 days of a taxable
year of 12 months (or during a proportionate part of a taxable year of less than
12 months).
Crescent Equities issued sufficient Common Shares pursuant to the Initial
Offering to satisfy the requirements described in (5) and (6) above. While the
existence of Exchange Rights may cause Limited Partners to be deemed to own the
Common Shares they could acquire through the Exchange Rights, the amount of
Common Shares that
S-48
<PAGE> 49
can be acquired at any time through the Exchange Rights is limited to an amount
which, together with any other Common Shares actually or constructively deemed,
under the Declaration of Trust, to be owned by any person, does not exceed the
Ownership Limit (as defined in the accompanying Prospectus). See "Description of
Common Shares -- Ownership Limits and Restrictions on Transfer" in the
accompanying Prospectus. Moreover, the ownership of Common Shares generally is
limited under the Ownership Limit to no more than 8.0% of the outstanding Common
Shares. In addition, the Declaration of Trust provides for restrictions
regarding the ownership or transfer of Common Shares in order to assist Crescent
Equities in continuing to satisfy the share ownership requirements described in
(5) and (6) above. See "Description of Common Shares -- Ownership Limits and
Restrictions on Transfer" in the accompanying Prospectus.
If a REIT owns a "qualified REIT subsidiary," the Code provides that the
qualified REIT subsidiary is disregarded for federal income tax purposes, and
all assets, liabilities and items of income, deduction and credit of the
qualified REIT subsidiary are treated as assets, liabilities and such items of
the REIT itself. A qualified REIT subsidiary is a corporation all of the capital
stock of which has been owned by the REIT from the commencement of such
corporation's existence. CREE Ltd., CRE Management I Corp. ("Management I"), CRE
Management II Corp. ("Management II"), CRE Management III Corp. ("Management
III"), CRE Management IV Corp. ("Management IV"), CRE Management V Corp.
("Management V"), CRE Management VI Corp. ("Management VI"), CRE Management VII
Corp. ("Management VII"), CresCal Properties, Inc. and Crescent Commercial
Realty Corp. are qualified REIT subsidiaries, and thus all of the assets (i.e.,
the respective partnership interests in the Operating Partnership, Funding I,
Funding II, Funding III, Funding IV, Funding V, Funding VI, Funding VII, CresCal
Properties, L.P. and Crescent Commercial Realty Holdings, L.P.), liabilities and
items of income, deduction and credit of CREE Ltd., Management I, Management II,
Management III, Management IV, Management V, Management VI, Management VII,
CresCal Properties, Inc. and Crescent Commercial Realty Corp. are treated as
assets and liabilities and items of income, deduction and credit of Crescent
Equities. Unless otherwise required, all references to Crescent Equities in this
"Federal Income Tax Considerations" section refer to Crescent Equities and its
qualified REIT subsidiaries.
In the case of a REIT which is a partner in a partnership, Treasury
Regulations provide that the REIT will be deemed to own its proportionate share
of the assets of the partnership and will be deemed to be entitled to the income
of the partnership attributable to such share. In addition, the assets and gross
income (as defined in the Code) of the partnership attributed to the REIT shall
retain the same character as in the hands of the partnership for purposes of
Section 856 of the Code, including satisfying the gross income tests and the
assets tests described below. Thus, Crescent Equities' proportionate share of
the assets, liabilities and items of income of the Operating Partnership and its
subsidiary partnerships are treated as assets, liabilities and items of income
of Crescent Equities for purposes of applying the requirements described herein.
Income Tests. In order for Crescent Equities to achieve and maintain its
qualification as a REIT, there are three requirements relating to Crescent
Equities' gross income that must be satisfied annually. First, at least 75% of
Crescent Equities' gross income (excluding gross income from prohibited
transactions) for each taxable year must consist of temporary investment income
or of certain defined categories of income derived directly or indirectly from
investments relating to real property or mortgages on real property. These
categories include, subject to various limitations, rents from real property,
interest on mortgages on real property, gains from the sale or other disposition
of real property (including interests in real property and in mortgages on real
property) not primarily held for sale to customers in the ordinary course of
business, income from foreclosure property, and amounts received as
consideration for entering into either loans secured by real property or
purchases or leases of real property. Second, at least 95% of Crescent Equities'
gross income (excluding gross income from prohibited transactions) for each
taxable year must be derived from income qualifying under the 75% test and from
dividends, other types of interest and gain from the sale or disposition of
stock or securities, or from any combination of the foregoing. Third, for each
taxable year, gain from the sale or other disposition of stock or securities
held for less than one year, gain from prohibited transactions and gain on the
sale or other disposition of real property held for less than four years (apart
from involuntary conversions and sales of foreclosure property) must represent
less than 30% of Crescent Equities' gross income (including gross income from
prohibited transactions) for such taxable year. Crescent Equities, through its
partnership interests in the Operating Partnership and all subsidiary
partnerships, believes it satisfied all three of these income tests for 1994,
1995 and 1996 and expects to satisfy them for subsequent taxable years.
S-49
<PAGE> 50
The bulk of the Operating Partnership's income is currently derived from
rents with respect to the Office Properties, the Behavioral Healthcare
Facilities, the Hotel Properties and the Retail Properties. Rents received by
Crescent Equities will qualify as "rents from real property" in satisfying the
gross income requirements for a REIT described above only if several conditions
are met. First, the amount of rent must not be based in whole or in part on the
income or profits of any person. An amount received or accrued generally will
not be excluded from the term "rents from real property" solely by reason of
being based on a fixed percentage or percentages of receipts or sales. Second,
the Code provides that rents received from a tenant will not qualify as "rents
from real property" if the REIT, or an owner of 10% or more of the REIT,
directly or constructively, owns 10% or more of such tenant (a "Related Party
Tenant"). Third, if rent attributable to personal property leased in connection
with a lease of real property is greater than 15% of the total rent received
under the lease, then the portion of rent attributable to such personal property
will not qualify as "rents from real property." Finally, for rents to qualify as
"rents from real property," a REIT generally must not operate or manage the
property or furnish or render services to the tenants of such property, other
than through an independent contractor from whom the REIT derives no revenue,
except that a REIT may directly perform services which are "usually or
customarily rendered" in connection with the rental of space for occupancy,
other than services which are considered to be rendered to the occupant of the
property.
Crescent Equities, based in part upon opinions of Tax Counsel as to whether
various tenants, including CBHS and the lessees of the Hotel Properties,
constitute Related Party Tenants, believes that the income it received in 1994,
1995 and 1996 and will receive in subsequent taxable years from (i) charging
rent for any property that is based in whole or in part on the income or profits
of any person (except by reason of being based on a percentage or percentages of
receipts or sales, as described above); (ii) charging rent for personal property
in an amount greater than 15% of the total rent received under the applicable
lease; (iii) directly performing services considered to be rendered to the
occupant of property or which are not usually or customarily furnished or
rendered in connection with the rental of real property; or (iv) entering into
any lease with a Related Party Tenant, will not cause Crescent Equities to fail
to meet the gross income tests. Opinions of counsel are not binding upon the IRS
or any court, and there can be no assurance that the IRS will not assert a
contrary position successfully.
The Operating Partnership will also receive fixed and contingent interest
on the Residential Development Property Mortgages. Interest on mortgages secured
by real property satisfies the 75% and 95% gross income tests only if it does
not include any amount whose determination depends in whole or in part on the
income of any person, except that (i) an amount is not excluded from the term
"interest" solely by reason of being based on a fixed percentage or percentages
of receipts or sales and (ii) income derived from a shared appreciation
provision in a mortgage is treated as gain recognized from the sale of the
secured property. Certain of the Residential Development Property Mortgages
contain provisions for contingent interest based upon property sales. In the
opinion of Tax Counsel, each of the Residential Development Property Mortgages
constitutes debt for federal income tax purposes, any contingent interest
derived therefrom will be treated as being based on a fixed percentage of sales,
and therefore all interest derived therefrom will constitute interest received
from mortgages for purposes of the 75% and 95% gross income tests. If, however,
the contingent interest provisions were instead characterized as shared
appreciation provisions, any resulting income would, because the underlying
properties are primarily held for sale to customers in the ordinary course, be
treated as income from prohibited transactions, which would not satisfy the 75%
and 95% gross income tests, which would count toward the 30% gross income test,
and which would be subject to a 100% tax.
In connection with the 1997 distribution by Crescent Equities of the common
stock of Crescent Operating, Crescent Equities was required to recognize gain
equal to the excess, if any, of the fair market value of the assets distributed
over the basis of Crescent Equities in them. In the opinion of Tax Counsel, such
gain constituted gain on the sale of stock or securities for purposes of the
gross income tests. Opinions of counsel are not binding upon the IRS or any
court, and there can be no assurance that the IRS will not assert a contrary
position successfully.
In applying the 95% and 75% gross income tests to Crescent Equities, it is
necessary to consider the form in which certain of its assets are held, whether
that form will be respected for federal income tax purposes, and whether, in the
future, such form may change into a new form with different tax attributes (for
example, as a result of a foreclosure on debt held by the Operating
Partnership). For example, the Residential Development Properties are primarily
held for sale to customers in the ordinary course of business, and the income
resulting from such sales, if directly attributed to Crescent Equities, would
not qualify under the 75% and 95% gross income tests and would count as gain
from the sale of assets for purposes of the 30% limitation. In addition, such
income would be
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considered "net income from prohibited transactions" and thus would be subject
to a 100% tax. The income from such sales, however, will be earned by the
Residential Development Corporations rather than by the Operating Partnership
and will be paid to the Operating Partnership in the form of interest and
principal payments on the Residential Development Property Mortgages or
distributions with respect to the stock in the Residential Development
Corporations held by the Operating Partnership. In similar fashion, the income
earned by the Hotel Properties, if directly attributed to Crescent Equities,
would not qualify under the 75% and 95% gross income tests because it would not
constitute "rents from real property." Such income is, however, earned by the
lessees of these Hotel Properties and what the Operating Partnership receives
from the lessees of these Hotel Properties is rent. Comparable issues are raised
by the Operating Partnership's acquisition of subordinated debt secured by a
Florida hotel and by the acquisition of an interest in the partnership which
owns the hotel by Crescent Development Management Corporation ("CDMC"), one of
the Residential Development Corporations. If such debt were recharacterized as
equity, or if the ownership of the partnership were attributed from CDMC to the
Operating Partnership, the Operating Partnership would be treated as receiving
income from hotel operations rather than interest income on the debt or dividend
income from CDMC. Furthermore, if Crescent Operating, Inc. were treated for
federal income tax purposes as not separate from or an agent of either Crescent
Equities or the Operating Partnership, or if Crescent Equities and Crescent
Operating, Inc. were treated as a "stapled entity," the income, assets and
activities of Crescent Operating, Inc. would be considered to be the income,
assets and activities of Crescent Equities, with the result that Crescent
Equities would fail to meet the 95% and 75% gross income tests or the asset
tests discussed below. A similar consequence might follow if the loan of
approximately $35.9 million from the Operating Partnership to Crescent
Operating, Inc. does not constitute debt for federal income tax purposes.
Tax Counsel is of the opinion that (i) the Residential Development
Properties or any interest therein will be treated as owned by the Residential
Development Corporations, (ii) amounts derived by the Operating Partnership from
the Residential Development Corporations under the terms of the Residential
Development Property Mortgages will qualify as interest or principal, as the
case may be, paid on mortgages on real property for purposes of the 75% and 95%
gross income tests, (iii) amounts derived by the Operating Partnership with
respect to the stock of the Residential Development Corporations will be treated
as distributions on stock (i.e., as dividends, a return of capital, or capital
gain, depending upon the circumstances) for purposes of the 75% and 95% gross
income tests, (iv) the leases of the Hotel Properties will be treated as leases
for federal income tax purposes, and the rent payable thereunder will qualify as
"rents from real property," (v) the subordinated debt secured by the Florida
hotel will be treated as debt for federal income tax purposes, the income
payable thereunder will qualify as interest, and CDMC's ownership of the
partnership interest in the partnership which owns the hotel will not be
attributed to the Operating Partnership, (vi) Crescent Operating, Inc. will be
treated for federal income tax purposes as a corporate entity separate from and
not an agent of either Crescent Equities or the Operating Partnership, and
Crescent Operating, Inc. and Crescent Equities will not be treated as a stapled
entity for federal income tax purposes; and (vii) the loan of approximately
$35.9 million from the Operating Partnership to Crescent Operating, Inc. will
constitute debt for federal income tax purposes. Tax Counsel has provided
opinions similar to those provided with respect to the Operating Partnership's
investment in the Residential Development Corporations with respect to its
investments in certain other entities through non-voting securities and secured
debt. Investors should be aware that there are no controlling Treasury
Regulations, published rulings, or judicial decisions involving transactions
with terms substantially the same as those with respect to the Residential
Development Corporations, the leases of the Hotel Properties and the
relationship among Crescent Equities, the Operating Partnership and Crescent
Operating, Inc.. Therefore, the opinions of Tax Counsel with respect to these
matters are based upon all of the facts and circumstances and upon rulings and
judicial decisions involving situations that are considered to be analogous.
Opinions of counsel are not binding upon the IRS or any court, and there can be
no assurance that the IRS will not assert successfully a contrary position. If
one or more of the leases of the Hotel Properties is not a true lease, part or
all of the payments that the Operating Partnership receives from the respective
lessee may not satisfy the various requirements for qualification as "rents from
real property," or the Operating Partnership might be considered to operate the
Hotel Properties directly. In that case, Crescent Equities likely would not be
able to satisfy either the 75% or 95% gross income tests and, as a result,
likely would lose its REIT status. Similarly, if the IRS were to challenge
successfully the arrangements with the Residential Development Corporations or
Crescent Operating, Inc., Crescent Equities' qualification as a REIT could be
jeopardized.
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If any of the Residential Development Properties were to be acquired by the
Operating Partnership as a result of foreclosure on any of the Residential
Development Property Mortgages, or if any of the Hotel Properties were to be
operated directly by the Operating Partnership or a subsidiary partnership as a
result of a default by the lessee under the lease, such property would
constitute foreclosure property for two years following its acquisition (or for
up to an additional four years if an extension is granted by the IRS), provided
that (i) the Operating Partnership or its subsidiary partnership conducts sales
or operations through an independent contractor; (ii) the Operating Partnership
or its subsidiary partnership does not undertake any construction on the
foreclosed property other than completion of improvements which were more than
10% complete before default became imminent; and (iii) foreclosure was not
regarded as foreseeable at the time Crescent Equities acquired the Residential
Development Property Mortgages or leased the Hotel Properties. For so long as
any of these properties constitutes foreclosure property, the income from such
sales would be subject to tax at the maximum corporate rates and would qualify
under the 75% and 95% gross income tests. However, if any of these properties
does not constitute foreclosure property at any time in the future, income
earned from the disposition or operation of such property will not qualify under
the 75% and 95% gross income tests and, in the case of the Residential
Development Properties, will count toward the 30% test and will be subject to
the 100% tax.
With regard to the sale of the Common Shares offered to an affiliate of
Union Bank of Switzerland, it is possible that Crescent Equities may receive
certain payments in Common Shares, depending on the market price of the Common
Shares upon settlement of the forward share purchase agreement. In the opinion
of Tax Counsel, such payments will not constitute gross income and therefore
will not be taken into account in the application of gross income tests.
Crescent Equities anticipates that it will have certain income which will
not satisfy the 75% or the 95% gross income test and/or which will constitute
income whose receipt could cause Crescent Equities not to comply with the 30%
gross income test. For example, income from dividends on the stock of the
Residential Development Corporations and any gain recognized upon the
distribution of the common stock of Crescent Operating, Inc. will not satisfy
the 75% gross income test. Furthermore, the amount of gain Crescent Equities
recognized upon this distribution depended upon the fair market value of the
common stock of Crescent Operating, Inc. at the time of the distribution. Prior
to the distribution, the Board of Trust Managers of Crescent Equities determined
that the value of this stock was $.99 per share, but there can be no assurance
that the IRS will agree with this determination in light of various factors
including subsequent trading prices. It is also possible that certain income
resulting from the use of creative financing or acquisition techniques would not
satisfy the 75%, 95% or 30% gross income tests. Crescent Equities believes,
however, that the aggregate amount of nonqualifying income will not cause
Crescent Equities to exceed the limits on nonqualifying income under the 75%,
95% or 30% gross income tests.
Any gross income derived from a prohibited transaction is taken into
account in applying the 30% gross income test necessary to qualify as a REIT.
Crescent Equities believes that no asset owned by the Operating Partnership is
primarily held for sale to customers and that the sale of any of the Properties
will not be in the ordinary course of business. Whether property is held
primarily for sale to customers in the ordinary course of business depends,
however, on the facts and circumstances in effect from time to time, including
those related to a particular property. No assurance can be given that Crescent
Equities can (a) comply with certain safe-harbor provisions of the Code which
provide that certain sales do not constitute prohibited transactions or (b)
avoid owning property that may be characterized as property held primarily for
sale to customers in the ordinary course of business.
If Crescent Equities fails to satisfy one or both of the 75% or 95% gross
income tests for any taxable year, it may nevertheless qualify as a REIT for
such year if it is entitled to relief under certain provisions of the Code.
These relief provisions generally will be available if Crescent Equities'
failure to meet such tests is due to reasonable cause and not to willful
neglect, Crescent Equities attaches a schedule of the sources of its income to
its tax return, and any incorrect information on the schedule is not due to
fraud with intent to evade tax. It is not possible, however, to state whether in
all circumstances Crescent Equities would be entitled to the benefit of these
relief provisions. As discussed above, even if these relief provisions apply, a
tax equal to approximately 100% of the corresponding net income would be imposed
with respect to the excess of 75% or 95% of Crescent Equities' gross income over
Crescent Equities' qualifying income in the relevant category, whichever is
greater.
Asset Tests. Crescent Equities, at the close of each quarter of its taxable
year, must also satisfy three tests relating to the nature of its assets. First,
at least 75% of the value of Crescent Equities' total assets must be
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represented by real estate assets (including (i) its allocable share of real
estate assets held by the Operating Partnership, any partnerships in which the
Operating Partnership owns an interest, or qualified REIT subsidiaries of
Crescent Equities and (ii) stock or debt instruments held for not more than one
year purchased with the proceeds of a stock offering or long-term (at least five
years) debt offering of Crescent Equities), cash, cash items and government
securities. Second, not more than 25% of Crescent Equities' total assets may be
represented by securities other than those in the 75% asset class. Third, of the
investments included in the 25% asset class, the value of any one issuer's
securities owned by Crescent Equities may not exceed 5% of the value of Crescent
Equities' total assets, and Crescent Equities may not own more than 10% of any
one issuer's outstanding voting securities. The 25% and 5% tests generally must
be met for any quarter in which Crescent Equities acquires securities of an
issuer. Thus, this requirement must be satisfied not only on the date Crescent
Equities first acquires corporate securities, but also each time Crescent
Equities increases its ownership of corporate securities (including as a result
of increasing its interest in the Operating Partnership either with the proceeds
of the Offering or by acquiring Units from Limited Partners upon the exercise of
their Exchange Rights).
The Operating Partnership owns 100% of the non-voting stock of each
Residential Development Corporation. In addition, the Operating Partnership owns
the Residential Development Property Mortgages. As stated above, in the opinion
of Tax Counsel each of these mortgages will constitute debt for federal income
tax purposes and therefore will be treated as a real estate asset; however, the
IRS could assert that such mortgages should be treated as equity interests in
their respective issuers, which would not qualify as real estate assets. By
virtue of its ownership of partnership interests in the Operating Partnership,
Crescent Equities will be considered to own its pro rata share of these assets.
Neither Crescent Equities nor the Operating Partnership, however, will directly
own more than 10% of the voting securities of any Residential Development
Corporation at the end of any quarter of Crescent Equities' taxable year, and,
in the opinion of Tax Counsel, Crescent Equities will not be considered to own
any of such voting securities. In addition, Crescent Equities and its senior
management believe that Crescent Equities' pro rata shares of the value of the
securities of each Residential Development Corporation do not separately exceed
5% of the total value of Crescent Equities' total assets. This belief is based
in part upon its analysis of the estimated values of the various securities
owned by the Operating Partnership relative to the estimated value of the total
assets owned by the Operating Partnership. No independent appraisals will be
obtained to support this conclusion, and Tax Counsel, in rendering its opinion
as to the qualification of Crescent Equities as a REIT, is relying on the
conclusions of Crescent Equities and its senior management as to the value of
the various securities and other assets. There can be no assurance, however,
that the IRS might not contend that the values of the various securities held by
Crescent Equities through the Operating Partnership separately exceed the 5%
value limitation or, in the aggregate, exceed the 25% value limitation or that
the voting securities of the Residential Development Corporations should be
considered to be owned by Crescent Equities. Finally, if the Operating
Partnership were treated for tax purposes as a corporation rather than as a
partnership, Crescent Equities would violate the 10% of voting securities and 5%
of value limitations, and the treatment of any of the Operating Partnership's
subsidiary partnerships as a corporation rather than as a partnership could also
violate one or the other, or both, of these limitations. In the opinion of Tax
Counsel, for federal income tax purposes the Operating Partnership and all the
subsidiary partnerships will be treated as partnerships and not as either
associations taxable as corporations or publicly traded partnerships. See
"-- Tax Aspects of the Operating Partnership and the Subsidiary Partnerships"
below.
As noted above, the 5% and 25% value requirements must be satisfied not
only on the date Crescent Equities first acquires corporate securities, but also
each time Crescent Equities increases its ownership of corporate securities
(including as a result of increasing its interest in the Operating Partnership
either with the proceeds of the Offering or by acquiring Units from Limited
Partners upon the exercise of their Exchange Rights). Although Crescent Equities
plans to take steps to ensure that it satisfies the 5% and 25% value tests for
any quarter with respect to which retesting is to occur, there can be no
assurance that such steps (i) will always be successful; (ii) will not require a
reduction in Crescent Equities' overall interest in the various corporations; or
(iii) will not restrict the ability of the Residential Development Corporations
to increase the sizes of their respective businesses, unless the value of the
assets of Crescent Equities is increasing at a commensurate rate.
Annual Distribution Requirements. In order to qualify as a REIT, Crescent
Equities is required to distribute dividends (other than capital gain dividends)
to its shareholders in an amount at least equal to (A) the sum of (i) 95% of the
"real estate investment trust taxable income" of Crescent Equities (computed
without regard to the dividends paid deduction and Crescent Equities' net
capital gain) and (ii) 95% of the net income (after tax), if any,
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from foreclosure property, minus (B) certain excess noncash income. Such
distributions must be paid in the taxable year to which they relate, or in the
following taxable year if declared before Crescent Equities timely files its tax
return for such year, and if paid on or before the date of the first regular
dividend payment after such declaration. To the extent that Crescent Equities
does not distribute all of its net capital gain or distributes at least 95%, but
less than 100%, of its "real estate investment trust taxable income," as
adjusted, it will be subject to tax thereon at regular capital gains and
ordinary corporate tax rates. Furthermore, if Crescent Equities should fail to
distribute, during each calendar year, at least the sum of (i) 85% of its "real
estate investment trust ordinary income" for such year; (ii) 95% of its "real
estate investment trust capital gain income" for such year; and (iii) any
undistributed taxable income from prior periods, Crescent Equities would be
subject to a 4% excise tax on the excess of such required distribution over the
amounts actually distributed.
Crescent Equities believes that it has made and intends to make timely
distributions sufficient to satisfy all annual distribution requirements. In
this regard, the limited partnership agreement of the Operating Partnership (the
"Operating Partnership Agreement") authorizes CREE Ltd., as general partner, to
take such steps as may be necessary to cause the Operating Partnership to
distribute to its partners an amount sufficient to permit Crescent Equities to
meet these distribution requirements. It is possible, however, that, from time
to time, Crescent Equities may experience timing differences between (i) the
actual receipt of income and actual payment of deductible expenses and (ii) the
inclusion of such income and deduction of such expenses in arriving at its "real
estate investment trust taxable income." Issues may also arise as to whether
certain items should be included in income. For example, Tax Counsel has opined
that the Operating Partnership should include in income only its share of the
interest income actually paid on the two mortgage notes secured by Spectrum
Center and Three Westlake Park, respectively, and the two mortgage notes secured
by Trammell Crow Center, all of which were acquired at a substantial discount,
rather than its share of the amount of interest accruing pursuant to the terms
of these investments, but opinions of counsel are not binding on the IRS or the
courts. In this regard, the IRS has taken a contrary view in a recent technical
advice memorandum concerning the accrual of original issue discount. The Company
believes, however, that even if the Operating Partnership were to include in
income the full amount of interest income accrued on these notes, and the
Operating Partnership were not allowed any offsetting deduction for the amount
of such interest to the extent it is uncollectible, the Company nonetheless
would be able to satisfy the 95% distribution requirement without borrowing
additional funds or distributing stock dividends (as discussed below). In
addition, it is possible that certain creative financing or creative acquisition
techniques used by the Operating Partnership may result in income (such as
income from cancellation of indebtedness or gain upon the receipt of assets in
foreclosure whose fair market value exceeds the Operating Partnership's basis in
the debt which was foreclosed upon) which is not accompanied by cash proceeds.
In this regard, the modification of a debt can result in taxable gain equal to
the difference between the holder's basis in the debt and the principal amount
of the modified debt. Tax Counsel has opined that the four mortgage notes
secured by Spectrum Center, Three Westlake Park and Trammell Crow Center, were
not modified in the hands of the Operating Partnership. Based on the foregoing,
Crescent Equities may have less cash available for distribution in a particular
year than is necessary to meet its annual 95% distribution requirement or to
avoid tax with respect to capital gain or the excise tax imposed on certain
undistributed income for such year. To meet the 95% distribution requirement
necessary to qualify as a REIT or to avoid tax with respect to capital gain or
the excise tax imposed on certain undistributed income, Crescent Equities may
find it appropriate to arrange for borrowings through the Operating Partnership
or to pay distributions in the form of taxable share dividends.
Under certain circumstances, Crescent Equities may be able to rectify a
failure to meet the distribution requirement for a year by paying "deficiency
dividends" to stockholders in a later year, which may be included in Crescent
Equities' deduction for dividends paid for the earlier year. Thus, Crescent
Equities may be able to avoid being taxed on amounts distributed as deficiency
dividends; however, Crescent Equities will be required to pay interest based
upon the amount of any deduction taken for deficiency dividends.
Ownership Information. Pursuant to applicable Treasury Regulations, in
order to be treated as a REIT, Crescent Equities must maintain certain records
and request certain information from its shareholders designed to disclose the
actual ownership of its Equity Shares (as defined in the accompanying
Prospectus). Crescent Equities believes that it has complied and intends to
continue to comply with such requirements.
Failure to Qualify. If Crescent Equities fails to qualify as a REIT in any
taxable year and the relief provisions do not apply, Crescent Equities will be
subject to tax (including any applicable alternative minimum tax) on its
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taxable income at regular corporate rates. Distributions to shareholders in any
year in which Crescent Equities fails to qualify as a REIT will not be
deductible by Crescent Equities; nor will they be required to be made. If
Crescent Equities fails to qualify as a REIT, then, to the extent of Crescent
Equities' current and accumulated earnings and profits, all distributions to
shareholders will be taxable as ordinary income and, subject to certain
limitations of the Code, corporate distributees may be eligible for the
dividends received deduction. Unless entitled to relief under specific statutory
provisions, Crescent Equities will also be disqualified from electing to be
treated as a REIT for the four taxable years following the year during which it
ceased to qualify as a REIT. It is not possible to state whether in all
circumstances Crescent Equities would be entitled to such statutory relief.
Recent Legislation. On August 5, 1997, President Clinton signed the
Taxpayer Relief Act of 1997. This legislation contains various amendments to the
tax provisions governing REITs which were sponsored by the REIT industry and
generally operate to liberalize the requirements for qualification as a REIT.
The changes will be effective for taxable years beginning after the enactment
date, which is 1998 and thereafter for Crescent Equities. At that time REITs
will be permitted to earn up to one percent of their gross income from tenants,
determined on a property-by-property basis, by furnishing services which are
noncustomary or provided directly to the tenants, without causing the rental
income fail to qualify as rents from real property; the 30% gross income test
will be repealed; the REIT distribution requirements will not require
distributions with respect to certain noncash income items such as income from
the cancellation of indebtedness; the partnership attribution rules will be less
inclusive, and so less likely to cause certain rents to be treated as being from
a Related Party Tenant; and the definition of hedging income which qualifies
under the 95% gross income test will be greatly expanded.
TAXATION OF TAXABLE DOMESTIC SHAREHOLDERS
As long as Crescent Equities qualifies as a REIT, distributions made to
Crescent Equities' taxable U.S. shareholders out of Crescent Equities' current
or accumulated earnings and profits (and not designated as capital gain
dividends) will be taken into account by such U.S. shareholders as ordinary
income and, for corporate shareholders, will not be eligible for the dividends
received deduction. Distributions that are properly designated as capital gain
dividends will be taxed as long-term capital gains (to the extent they do not
exceed Crescent Equities' actual net capital gain for the taxable year) without
regard to the period for which the shareholder has held its Common Shares.
However, corporate shareholders may be required to treat up to 20% of certain
capital gain dividends as ordinary income. Distributions in excess of current
and accumulated earnings and profits will not be taxable to a shareholder to the
extent that they do not exceed the adjusted basis of the shareholder's Common
Shares, but rather will reduce the adjusted basis of such shares. To the extent
that distributions in excess of current and accumulated earnings and profits
exceed the adjusted basis of a shareholder's Common Shares, such distributions
will be included in income as long-term capital gain (or short-term capital gain
if the shares have been held for one year or less) assuming the shares are a
capital asset in the hands of the shareholder. In addition, any distribution
declared by Crescent Equities in October, November or December of any year
payable to a shareholder of record on a specified date in any such month shall
be treated as both paid by Crescent Equities and received by the shareholder on
December 31 of such year, provided that the distribution is actually paid by
Crescent Equities during January of the following calendar year. Shareholders
may not include any net operating losses or capital losses of Crescent Equities
in their respective income tax returns.
In general, any loss upon a sale or exchange of shares by a shareholder who
has held such shares for six months or less (after applying certain holding
period rules) will be treated as a long-term capital loss to the extent of
distributions from Crescent Equities required to be treated by such shareholder
as long-term capital gain.
TAXATION OF TAX-EXEMPT SHAREHOLDERS
Most tax-exempt employees' pension trusts are not subject to federal income
tax except to the extent of their receipt of "unrelated business taxable income"
as defined in Section 512(a) of the Code ("UBTI"). Distributions by the Company
to a shareholder that is a tax-exempt entity should not constitute UBTI,
provided that the tax-exempt entity has not financed the acquisition of its
Common Shares with "acquisition indebtedness" within the meaning of the Code and
the Common Shares is not otherwise used in an unrelated trade or business of the
tax-exempt entity. In addition, certain pension trusts that own more than 10% of
a "pension-held REIT" must report a portion of the dividends that they receive
from such a REIT as UBTI. The Company has not been and does not expect to be
treated as a pension-held REIT for purposes of this rule.
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TAXATION OF FOREIGN SHAREHOLDERS
The rules governing United States federal income taxation of nonresident
alien individuals, foreign corporations, foreign partnerships and other foreign
shareholders (collectively, "Non-U.S. Shareholders") are complex, and no attempt
will be made herein to provide more than a summary of such rules. Prospective
Non-U.S. Shareholders should consult with their own tax advisors to determine
the impact of federal, state and local tax laws with regard to an investment in
Common Shares, including any reporting requirements.
Distributions that are not attributable to gain from sales or exchanges by
Crescent Equities of United States real property interests and not designated by
Crescent Equities as capital gain dividends will be treated as dividends of
ordinary income to the extent that they are made out of current and accumulated
earnings and profits of Crescent Equities. Such distributions ordinarily will be
subject to a withholding tax equal to 30% of the gross amount of the
distribution, unless an applicable tax treaty reduces or eliminates that tax.
Crescent Equities expects to withhold U.S. income tax at the rate of 30% on the
gross amount of any such distribution made to a Non-U.S. Shareholder unless (i)
a lower treaty rate applies and the Non-U.S. Shareholder has filed the required
IRS Form 1001 with Crescent Equities or (ii) the Non-U.S. Shareholder files an
IRS Form 4224 with Crescent Equities claiming that the distribution is
effectively connected with the Non-U.S. Shareholder's conduct of a U.S. trade or
business. Distributions in excess of Crescent Equities' current and accumulated
earnings and profits will be subject to a 10% withholding requirement but will
not be taxable to a shareholder to the extent that such distributions do not
exceed the adjusted basis of the shareholder's Common Shares, but rather will
reduce the adjusted basis of such shares. To the extent that distributions in
excess of current and accumulated earnings and profits exceed the adjusted basis
of a Non-U.S. Shareholder's shares, such distributions will give rise to tax
liability if the Non-U.S. Shareholder would otherwise be subject to tax on any
gain from the sale or disposition of the Common Shares, as described below. If
it cannot be determined at the time a distribution is made whether or not such
distribution will be in excess of current and accumulated earnings and profits,
the distributions would be subject to withholding at the same rate as dividends.
However, a Non-U.S. Shareholder may seek a refund from the IRS of amounts of tax
withheld in excess of the Non-U.S. Shareholder's actual U.S. tax liability.
For any year in which Crescent Equities qualifies as a REIT, distributions
that are attributable to gain from sales or exchanges by Crescent Equities of
United States real property interests will be taxed to a Non-U.S. Shareholder
under the provisions of the Foreign Investment in Real Property Tax Act of 1980,
as amended ("FIRPTA"). Under FIRPTA, distributions attributable to gain from
sales of United States real property interests are taxed to a Non-U.S.
Shareholder as if such gain were effectively connected with a United States
business. Non-U.S. Shareholders would thus be taxed at the normal capital gain
rates applicable to U.S. shareholders (subject to applicable alternative minimum
tax and a special alternative minimum tax in the case of nonresident alien
individuals). Also, distributions subject to FIRPTA may be subject to a 30%
branch profits tax in the hands of a foreign corporate shareholder not entitled
to treaty exemption. Crescent Equities is required to withhold 35% of any
distribution that could be designated by Crescent Equities as a capital gain
dividend. This amount is creditable against the Non-U.S. Shareholder's FIRPTA
tax liability.
Gain recognized by a Non-U.S. Shareholder upon a sale of Common Shares
generally will not be taxed under FIRPTA if Crescent Equities is a "domestically
controlled REIT," defined generally as a REIT in which at all times during a
specified testing period less than 50% in value of the shares was held directly
or indirectly by foreign persons. Crescent Equities is and currently expects to
continue to be a "domestically controlled REIT," and in such case the sale of
Common Shares would not be subject to taxation under FIRPTA. However, gain not
subject to FIRPTA nonetheless will be taxable to a Non-U.S. Shareholder if (i)
investment in the Common Shares is treated as effectively connected with the
Non-U.S. Shareholder's U.S. trade or business, in which case the Non-U.S.
Shareholder will be subject to the same treatment as U.S. shareholders with
respect to such gain or (ii) the Non-U.S. Shareholder is a nonresident alien
individual who was present in the United States for 183 days or more during the
taxable year and either the individual has a "tax home" in the United States or
the gain is attributable to an office or other fixed place of business
maintained by the individual in the United States, in which case gains will be
subject to a 30% tax. If the gain on the sale of Common Shares were to be
subject to taxation under FIRPTA, the Non-U.S. Shareholder would be subject to
the same treatment as U.S. shareholders with respect to such gain (subject to
applicable alternative minimum tax and a special alternative minimum tax in the
case of nonresident alien individuals), and the purchaser of the Common Shares
would be required to withhold and remit to the IRS 10% of the purchase price.
S-56
<PAGE> 57
TAX ASPECTS OF THE OPERATING PARTNERSHIP AND THE SUBSIDIARY PARTNERSHIPS
The following discussion summarizes certain federal income tax
considerations applicable solely to Crescent Equities' investment in the
Operating Partnership and its subsidiary partnerships and represents the views
of Tax Counsel. The discussion does not cover state or local tax laws or any
federal tax laws other than income tax laws.
Classification of the Operating Partnership and its Subsidiary Partnerships
for Tax Purposes. In the opinion of Tax Counsel, based on the provisions of the
Operating Partnership Agreement and the partnership agreements of the various
subsidiary partnerships, certain factual assumptions and certain representations
described in the opinion, the Operating Partnership and the subsidiary
partnerships will each be treated as a partnership and neither an association
taxable as a corporation for federal income tax purposes, nor a "publicly traded
partnership" taxable as a corporation. Unlike a ruling from the IRS, however, an
opinion of counsel is not binding on the IRS or the courts, and no assurance can
be given that the IRS will not challenge the status of the Operating Partnership
and its subsidiary partnerships as partnerships for federal income tax purposes.
If for any reason the Operating Partnership were taxable as a corporation rather
than as a partnership for federal income tax purposes, Crescent Equities would
fail to qualify as a REIT because it would not be able to satisfy the income and
asset requirements. See "-- Taxation of Crescent Equities," above. In addition,
any change in the Operating Partnership's status for tax purposes might be
treated as a taxable event, in which case Crescent Equities might incur a tax
liability without any related cash distributions. See "-- Taxation of Crescent
Equities," above. Further, items of income and deduction for the Operating
Partnership would not pass through to the respective partners, and the partners
would be treated as shareholders for tax purposes. The Operating Partnership
would be required to pay income tax at regular corporate tax rates on its net
income, and distributions to partners would constitute dividends that would not
be deductible in computing the Operating Partnership's taxable income.
Similarly, if any of the subsidiary partnerships were taxable as a corporation
rather than as a partnership for federal income tax purposes, such treatment
might cause Crescent Equities to fail to qualify as a REIT, and in any event
such partnership's items of income and deduction would not pass through to its
partners, and its net income would be subject to income tax at regular corporate
rates.
Income Taxation of the Operating Partnership and its Subsidiary
Partnerships. A partnership is not a taxable entity for federal income tax
purposes. Rather, Crescent Equities will be required to take into account its
allocable share of the Operating Partnership's income, gains, losses, deductions
and credits for any taxable year of such Partnership ending within or with the
taxable year of Crescent Equities, without regard to whether Crescent Equities
has received or will receive any cash distributions. The Operating Partnership's
income, gains, losses, deductions and credits for any taxable year will include
its allocable share of such items from its subsidiary partnerships.
Tax Allocations with Respect to Pre-Contribution Gain. Pursuant to Section
704(c) of the Code, income, gain, loss and deduction attributable to appreciated
property that is contributed to a partnership in exchange for an interest in the
partnership must be allocated for federal income tax purposes in a manner such
that the contributor is charged with the unrealized gain associated with the
property at the time of the contribution. The amount of such unrealized gain is
generally equal to the difference between the fair market value of the
contributed property at the time of contribution and the adjusted tax basis of
such property at the time of contribution (the "Book-Tax Difference"). In
general, the fair market value of the properties initially contributed to the
Operating Partnership were substantially in excess of their adjusted tax bases.
The Operating Partnership Agreement requires that allocations attributable to
each item of initially contributed property be made so as to allocate the tax
depreciation available with respect to such property first to the partners other
than the partner that contributed the property, to the extent of, and in
proportion to, such partners' share of book depreciation, and then, if any tax
depreciation remains, to the partner that contributed the property. Accordingly,
the depreciation deductions allocable will not correspond exactly to the
percentage interests of the partners. Upon the disposition of any item of
initially contributed property, any gain attributable to an excess at such time
of basis for book purposes over basis for tax purposes will be allocated for tax
purposes to the contributing partner and, in addition, the Operating Partnership
Agreement provides that any remaining gain will be allocated for tax purposes to
the contributing partners to the extent that tax depreciation previously
allocated to the noncontributing partners was less than the book depreciation
allocated to them. These allocations are intended to be consistent with Section
704(c) of the Code and with Treasury Regulations thereunder. The tax treatment
of properties contributed to the Operating Partnership subsequent to its
formation is expected generally to be consistent with the foregoing.
S-57
<PAGE> 58
In general, the contributing partners will be allocated lower amounts of
depreciation deductions for tax purposes and increased taxable income and gain
on sale by the Operating Partnership of one or more of the contributed
properties. These tax allocations will tend to reduce or eliminate the Book-Tax
Difference over the life of the Operating Partnership. However, the special
allocation rules of Section 704(c) of the Code do not always entirely rectify
the Book-Tax Difference on an annual basis. Thus, the carryover basis of the
contributed assets in the hands of the Operating Partnership will cause Crescent
Equities to be allocated lower depreciation and other deductions. This may cause
Crescent Equities to recognize taxable income in excess of cash proceeds, which
might adversely affect Crescent Equities' ability to comply with the REIT
distribution requirements. See "-- Taxation of Crescent Equities," above.
SALE OF PROPERTY
Generally, any gain realized by the Operating Partnership on the sale of
real property, if the property is held for more than one year, will be long-term
capital gain, except for any portion of such gain that is treated as
depreciation or cost recovery recapture.
Crescent Equities' share of any gain realized on the sale of any property
held by the Operating Partnership as inventory or other property held primarily
for sale to customers in the ordinary course of the Operating Partnership's
business, however, will be treated as income from a prohibited transaction that
is subject to a 100% penalty tax. See "-- Taxation of Crescent Equities," above.
Such prohibited transaction income will also have an adverse effect upon
Crescent Equities' ability to satisfy the income tests for status as a REIT for
federal income tax purposes. Under existing law, whether property is held as
inventory or primarily for sale to customers in the ordinary course of the
Operating Partnership's business is a question of fact that depends on all the
facts and circumstances with respect to the particular transaction. The
Operating Partnership intends to hold its properties for investment with a view
to long-term appreciation, to engage in the business of acquiring, developing,
owning and operating the properties, and to make such occasional sales of
properties as are consistent with these investment objectives.
TAXATION OF THE RESIDENTIAL DEVELOPMENT CORPORATIONS
A portion of the amounts to be used to fund distributions to shareholders
is expected to come from the Residential Development Corporations through
dividends on non-voting common stock thereof held by the Operating Partnership
and interest on the Residential Development Property Mortgages held by the
Operating Partnership. The Residential Development Corporations will not qualify
as REITs and will pay federal, state and local income taxes on their taxable
incomes at normal corporate rates, which taxes will reduce the cash available
for distribution by Crescent Equities to its shareholders. Crescent Equities
anticipates that, initially, deductions for interest and amortization will
largely offset the otherwise taxable income of the Residential Development
Corporations, but there can be no assurance that this will be the case or that
the IRS will not challenge such deductions. Any federal, state or local income
taxes that the Residential Development Corporations are required to pay will
reduce the cash available for distribution by Crescent Equities to its
shareholders.
STATE AND LOCAL TAXES
Crescent Equities and its shareholders may be subject to state and local
tax in various states and localities, including those states and localities in
which it or they transact business, own property, or reside. The tax treatment
of Crescent Equities and the shareholders in such jurisdictions may differ from
the federal income tax treatment described above. Consequently, prospective
shareholders should consult their own tax advisors regarding the effect of state
and local tax laws upon an investment in the Common Shares.
In particular, the State of Texas imposes a franchise tax upon corporations
and limited liability companies that do business in Texas. The Texas franchise
tax is imposed on each such entity with respect to the entity's "net taxable
capital" and its "net taxable earned surplus" (generally, the entity's federal
taxable income, with certain adjustments). The franchise tax on net taxable
capital is imposed at the rate of 0.25% of an entity's net taxable capital. The
franchise tax rate on "net taxable earned surplus" is 4.5%. The Texas franchise
tax is generally equal to the greater of the tax on "net taxable capital" and
the tax on "net taxable earned surplus." The Texas franchise tax is not applied
on a consolidated group basis. Any Texas franchise tax that Crescent Equities is
indirectly required to pay will reduce the cash available for distribution by
Crescent Equities to shareholders. Even if an entity is doing
S-58
<PAGE> 59
business in Texas for Texas franchise tax purposes, the entity is subject to the
Texas franchise tax only on the portion of the taxable capital or taxable earned
surplus apportioned to Texas.
As a Texas real estate investment trust, Crescent Equities will not be
subject directly to the Texas franchise tax. However, Crescent Equities will be
subject indirectly to the Texas franchise tax as a result of its interests in
CREE Ltd., Management I, Management II, Management III, Management IV,
Management V and Management VII, which will be subject to the Texas franchise
tax because they are general partners of the Operating Partnership, Funding I,
Funding II, Funding III, Funding IV, Funding V and Funding VII, and the
Operating Partnership, Funding I, Funding II, Funding III, Funding IV, Funding V
and Funding VII will be doing business in Texas.
It is anticipated that Crescent Equities' Texas franchise tax liability
will not be substantial because CREE Ltd., Management I, Management II,
Management III, Management IV, Management V and Management VII are allocated
only a small portion of the taxable income of the Operating Partnership, Funding
I, Funding II, Funding III, Funding IV, Funding V and Funding VII. In addition,
Management VI and Funding VI are not anticipated to be subject to the Texas
franchise tax.
The Operating Partnership, Funding I, Funding II, Funding III, Funding IV,
Funding V and Funding VII will not be subject to the Texas franchise tax, under
the laws in existence at the time of this Prospectus Supplement because they are
partnerships instead of corporations. There is no assurance, however, that the
Texas legislature will not expand the scope of the Texas franchise tax to apply
to limited partnerships such as the Operating Partnership, Funding I, Funding
II, Funding III, Funding IV, Funding V and Funding VII or enact other
legislation which may result in subjecting Crescent Equities to the Texas
franchise tax. Any statutory change by the Texas legislature may be applied
retroactively.
In addition, it should be noted that two of the Residential Development
Corporations will be doing business in Texas and will be subject to the Texas
franchise tax. Further, Crescent/301, L.L.C. will be subject to the Texas
franchise tax because it is doing business in Texas and limited liability
companies are subject to Texas franchise tax. However, this franchise tax should
not be substantial because Crescent/301, L.L.C. owns a 1% interest in 301
Congress Avenue, L.P. Other entities that will be subject to the Texas franchise
tax include CresTex Development, LLC and its member CresCal Properties, Inc. and
any other corporations or limited liability companies doing business in Texas
with Texas receipts. It is expected that the franchise tax liability of these
entities will not be substantial.
The Texas legislature considered in its 1997 regular session proposals for
property tax relief in Texas. Such relief would have required increasing the
proportion of education funding costs paid by the State of Texas and reducing
the proportion paid by local property taxes. Alternatives for increasing State
of Texas revenues that have been considered include broadening the franchise tax
base to include other entities such as partnerships and real estate investment
trusts, enactment of a new gross receipts tax, enactment of a new business
activity tax, an increase in the sales tax and/or broadening the sales tax base.
The Texas House of Representatives and the Texas Senate both passed different
bills that would have broadened the franchise tax base to apply the franchise
tax to business trusts such as Crescent Equities and partnerships such as the
Operating Partnership, Funding I, Funding II, Funding III, Funding IV, Funding V
and Funding VII. However, the conference committee was not able to work out the
differences between these two bills and the Texas legislature adjourned the 1997
regular session without adopting such legislation. There can be no assurance
that the Texas legislature will not enact similar legislation in its next
regular session, beginning in 1999.
Locke Purnell Rain Harrell (A Professional Corporation), special tax
counsel to the Company ("Special Tax Counsel"), has reviewed the discussion in
this section with respect to Texas franchise tax matters and is of the opinion
that, based on the current structure of Crescent Equities and based upon current
law, it accurately summarizes the Texas franchise tax matters expressly
described herein. Special Tax Counsel expresses no opinion on any other tax
considerations affecting Crescent Equities or a holder of Common Shares,
including, but not limited to, other Texas franchise tax matters not
specifically discussed above.
Tax Counsel has not reviewed the discussion in this section with respect to
Texas franchise tax matters and has expressed no opinion with respect thereto.
S-59
<PAGE> 60
UNDERWRITING
Subject to the terms and conditions set forth in the purchase agreement and
related terms agreement (collectively, the "U.S. Purchase Agreement") among the
Company and each of the underwriters named below (the "U.S. Underwriters"), the
Company has agreed to sell to each of the U.S. Underwriters, for whom Merrill
Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch"), Morgan Stanley &
Co. Incorporated, PaineWebber Incorporated and Smith Barney Inc. are acting as
representatives (the "U.S. Representatives"), and each of the U.S. Underwriters
severally has agreed to purchase from the Company, the aggregate number of
Common Shares set forth below opposite their respective names:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
- ------------------------------------------------------------ --------------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated...................................
Morgan Stanley & Co. Incorporated...........................
PaineWebber Incorporated....................................
Smith Barney Inc. ..........................................
----------
Total.......................................... 6,800,000
==========
</TABLE>
The Company has also entered into a purchase agreement (the "International
Purchase Agreement" and, together with the U.S. Purchase Agreement, the
"Purchase Agreements") with certain underwriters outside the United States and
Canada (the "International Managers" and, together with the U.S. Underwriters,
the "Underwriters") for whom Merrill Lynch International, Morgan Stanley & Co.
International Limited, PaineWebber International (U.K.) Ltd. and Smith Barney
Inc. are acting as lead managers. Subject to the terms and conditions set forth
in the International Purchase Agreement, and concurrently with the sale of
6,800,000 Common Shares to the U.S. Underwriters pursuant to the U.S. Purchase
Agreement, the Company has agreed to sell to the International Managers, and the
International Managers have severally agreed to purchase from the Company, an
aggregate of 1,700,000 Common Shares. The public offering price per share and
the underwriting discount per share are identical under the International
Purchase Agreement and the U.S. Purchase Agreement.
In each Purchase Agreement, the U.S. Underwriters and the International
Managers have agreed, subject to the terms and conditions set forth therein, to
purchase all of the shares being sold pursuant to each such Purchase Agreement
if any of such Common Shares are purchased. Under certain circumstances, the
commitments of nondefaulting U.S. Underwriters or International Managers may be
increased. The closing with respect to the sale of the shares to be purchased by
the International Managers and the U.S. Underwriters are conditioned one upon
the other.
The U.S. Representatives have advised the Company that the U.S.
Underwriters propose initially to offer the Common Shares to the public at the
price per share set forth on the cover page of this Prospectus Supplement and to
certain dealers at such price less a concession not in excess of $ per
share. The U.S. Underwriters may allow, and such dealers may re-allow, a
discount not in excess of $ per share on sales to certain other dealers.
After the date of this Prospectus Supplement, the initial price per share to the
public and concession and discount may be changed by the U.S. Representatives.
The Company has been informed that the U.S. Underwriters and the
International Managers have entered into an intersyndicate agreement (the
"Intersyndicate Agreement") that provides for the coordination of their
activities. Under the terms of the Intersyndicate Agreement, the U.S.
Underwriters and the International Managers are permitted to sell Common Shares
to each other for purposes of resale at the price per share to the public on the
cover page of this Prospectus Supplement, less an amount not greater than the
selling concession. Under the terms of the Intersyndicate Agreement, the
International Managers and any dealer to whom they sell Common Shares will not
offer to sell or sell Common Shares to persons who are United States persons or
Canadian persons or to persons they believe intend to resell to persons who are
United States persons or Canadian persons, and the U.S. Underwriters and any
dealer to whom they sell Common Shares will not offer to sell or sell Common
Shares to persons who are non-United States and non-Canadian persons or to
persons they believe intend to resell to persons who are non-United States and
non-Canadian persons, except in each case for transactions pursuant to the
Intersyndicate Agreement.
S-60
<PAGE> 61
The Company has granted an option to the U.S. Underwriters, exercisable
during the 30-day period after the date of this Prospectus Supplement, to
purchase up to 1,020,000 additional Common Shares solely to cover over-
allotments, if any, at the price per share to the public set forth on the cover
page of this Prospectus Supplement, less the underwriting discount set forth on
the cover of this Prospectus Supplement. To the extent that the U.S.
Underwriters exercise this option, each U.S. Underwriter will have a firm
commitment, subject to certain conditions, to purchase approximately the same
percentage thereof which the number of Common Shares to be purchased by it shown
in the foregoing table bears to the Common Shares initially offered hereby. The
Company has granted an option to the International Managers, exercisable during
the 30-day period after the date of this Prospectus Supplement, to purchase up
to 255,000 additional Common Shares solely to cover over-allotments, if any, on
terms similar to those granted to the U.S. Underwriters.
In the Purchase Agreement, the Company has agreed to indemnify the several
Underwriters against certain civil liabilities, including liabilities under the
Securities Act of 1933 (the "Securities Act"), or to contribute to payments the
Underwriters may be required to make in respect thereof. Insofar as
indemnification of the Underwriters for liabilities arising under the Securities
Act may be permitted pursuant to such agreements, the Company has been informed
that, in the opinion of the Commission, such indemnification is against public
policy as expressed in the Securities Act and therefore is unenforceable.
In connection with the Offering, each of the officers and trust managers of
the Company has agreed not to offer, sell, contract to sell or otherwise dispose
of any capital stock of the Company or Units for a period of 90 days after the
closing of the Offering without the prior written consent of Merrill Lynch and
the Company.
In connection with the Offering, the rules of the Commission permit the
U.S. Representatives and the International Managers to engage in certain
transactions that stabilize the price of the Common Shares. Such transactions
may consist of bids or purchases for the purpose of pegging, fixing or
maintaining the price of the Common Shares.
If the U.S. Underwriters or International Managers create a short position
in the Common Shares in connection with the offering, i.e., if they sell more
Common Shares than are set forth on the cover page of this Prospectus
Supplement, the U.S. Representatives and the International Managers,
respectively, may reduce that short position by purchasing Common Shares in the
open market.
The U.S. Representatives and the International Managers may also impose a
penalty bid on certain Underwriters and selling group members. This means that
if the U.S. Representatives and the International Managers purchase Common
Shares in the open market to reduce the U.S. Underwriters' or International
Managers' short position, respectively, or to stabilize the price of the Common
Shares, they may reclaim the amount of the selling concession from the
Underwriters and any selling group members who sold those Common Shares as part
of the Offering.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases. The imposition of a penalty bid
might also have an effect on the price of a security to the extent that it were
to discourage resales of the security.
Neither the Company nor any of the Underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the Common Shares. In addition, neither
the Company nor any of the Underwriters makes any representation that the U.S.
Representatives or the International Managers will engage in such transactions
or that such transactions, once commenced, will not be discontinued without
notice.
Merrill Lynch from time to time provides investment banking and financial
advisory services to the Company, and provided an opinion to the Operating
Partnership and a special committee of the Board of Trust Managers in connection
with the acquisition of the Behavioral Healthcare Facilities, for which
customary compensation has been received. In addition, Dean Witter Reynolds Inc.
("Dean Witter") provided an opinion to the board of directors of Magellan Health
Services, Inc. in connection with the acquisition of the Behavioral Healthcare
Facilities, for which customary compensation was received. Dean Witter, Discover
& Co., the parent company of Dean Witter Reynolds Inc., has merged with Morgan
Stanley Group, Inc., the parent company of Morgan Stanley & Co. Incorporated.
The Common Shares are listed on the NYSE under the symbol "CEI."
S-61
<PAGE> 62
LEGAL MATTERS
The legality of the Common Shares offered hereby will be passed upon for
the Company by Shaw, Pittman, Potts & Trowbridge, Washington, D.C. Certain legal
matters described under "Federal Income Tax Considerations" will be passed upon
for the Company by Shaw, Pittman, Potts & Trowbridge, which will rely, as to all
Texas franchise tax matters, upon the opinion of Locke Purnell Rain Harrell (A
Professional Corporation), Dallas, Texas. Certain legal matters related to the
Offering will be passed upon for the Underwriters by Hogan & Hartson L.L.P.,
Washington, D.C.
S-62
<PAGE> 63
============================================================
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED OR
INCORPORATED BY REFERENCE IN THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS IN
CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. NEITHER THE
DELIVERY OF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCE, CREATE ANY IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS SUPPLEMENT OR IN THE
PROSPECTUS OR IN AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF. THIS PROSPECTUS
SUPPLEMENT AND THE PROSPECTUS DO NOT CONSTITUTE AN OFFER OR SOLICITATION BY
ANYONE IN ANY STATE IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN
WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR
TO ANYONE TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PROSPECTUS SUPPLEMENT
Prospectus Supplement Summary............... S-3
The Company................................. S-14
Recent Developments......................... S-17
Properties.................................. S-21
Debt Structure.............................. S-37
Use of Proceeds............................. S-39
Price Range of Common Shares and
Distributions............................. S-39
Capitalization.............................. S-41
Selected Financial Data..................... S-42
Management.................................. S-45
Structure of the Company.................... S-45
Federal Income Tax Considerations........... S-47
Underwriting................................ S-60
Legal Matters............................... S-62
PROSPECTUS
The Company................................. 2
Risk Factors................................ 2
Use of Proceeds............................. 6
Ratios of Earnings to Fixed Charges and
Preferred Shares Dividends................ 6
Description of Preferred Shares............. 6
Description of Common Shares................ 11
Description of Common Share Warrants........ 13
Certain Provisions of the Declaration of
Trust, Bylaws and Texas Law............... 14
ERISA Considerations........................ 18
Plan of Distribution........................ 19
Available Information....................... 20
Incorporation of Certain Documents by
Reference................................. 21
Experts..................................... 21
Legal Matters............................... 21
</TABLE>
============================================================
============================================================
8,500,000 SHARES
[CRESCENT LOGO]
COMMON SHARES
------------------------
PROSPECTUS SUPPLEMENT
------------------------
MERRILL LYNCH & CO.
MORGAN STANLEY DEAN WITTER
PAINEWEBBER INCORPORATED
SMITH BARNEY INC.
, 1997
============================================================
