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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): June 20, 1997
CRESCENT REAL ESTATE EQUITIES COMPANY
(formerly known as Crescent Real Estate Equities, Inc.)
(Exact name of Registrant as specified in its Charter)
Texas 1-13038 52-1862813
(State of Organization) (Commission File Number) (IRS Employer Identification
Number)
777 Main Street, Suite 2100
Fort Worth, Texas 76102
( Address of Principal Executive (Zip Code)
Offices)
(817) 877-0477
(Registrant's telephone number, including area code)
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ITEM 5. OTHER EVENTS
FOUNTAIN PLACE. On June 20, 1997, the Company entered into a contract
to acquire Fountain Place for approximately $114 million from an unaffiliated
entity. Upon completion of the acquisition which is expected to occur by the
end of October 1997, subject to various closing conditions, the Company will
hold fee simple title to Fountain Place. Fountain Place, a 60-story Class A
office property, is located in the Central Business District ("CBD") of Dallas,
Texas, approximately three blocks west of the Company's Trammell Crow Center
office property. Construction of the office property was completed in 1986.
Situated on approximately 1.84 acres, Fountain Place contains approximately 1.2
million square feet of net rentable space with a three level underground parking
structure that accommodates approximately 899 cars, as well as surface parking
that accommodates 343 cars. Management believes that Fountain Place is suitable
and adequate for continued use as a Class A office property and is adequately
covered by insurance.
The Company expects to finance the acquisition of Fountain Place by
assuming $97.1 million of nonrecourse indebtedness and financing the remaining
$16.9 million through a draw under the Company's unsecured $450 million credit
facility from a consortium of banks led by BankBoston, N.A. The $97.1 million
loan with The Chase Manhattan Bank is secured by Fountain Place. The loan
bears interest at the LIBOR rate (as defined in the loan documents) plus 1.75%
(7.47% at August 31, 1997), adjusted monthly. The loan provides for payments
of interest only throughout the term with a final payment of $97.1 million due
upon maturity in September 2001. The loan may be prepaid in whole or in part
subject to certain prepayment conditions.
Fountain Place was 94% leased as of June 30, 1997, with a weighted
average base rental rate per square foot of $12.89 (a weighted average
full-service rental rate of $14.92). Fountain Place is leased to approximately
25 tenants, the major tenants having principal businesses in the industry
sectors of oil and gas exploration and refining, government agencies, and
professional services (accounting and law). There are three tenants in Fountain
Place leasing more than 10% of the total net rentable square footage. As of
June 30, 1997, Hunt Consolidated, Inc., an international oil and gas exploration
and refining conglomerate, leased approximately 299,000 net rentable square
feet (approximately 24.9% of the net rentable square footage of Fountain Place)
pursuant to a lease that expires in December 1999. The current base rental
rate per square foot is $19.00 which remains in effect throughout the remainder
of the lease term. The lease provides for three 5-year renewal options at 90%
of the then-prevailing market rental rate. As of June 30, 1997, the
Environmental Protection Agency, a governmental agency, leased approximately
251,000 net rentable square feet (approximately 20.8% of the net rentable
square footage of Fountain Place) pursuant to a lease that expires in February
2017. Effective February 1998, base rental payments commence (following a
first year rental abatement) at a rate of $12.41 per square foot which remains
in effect throughout the remainder of the lease term. The lease provides for a
termination option after the tenth year with one year written notice and
subject to a penalty payment pursuant to the lease. The lease does not provide
a renewal option. As of June 30, 1997, Jenkens & Gilchrist, a national law
firm, leased
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approximately 168,000 net rentable square feet (approximately 14.0% of the net
rentable square footage of Fountain Place) pursuant to a lease that expires in
June 2009. The current base rental rate per square foot of $13.00 increases to
$16.00 per square foot effective July 2001 and to $19.00 effective July 2006.
The lease provides for one 5-year renewal option at the rental rate then
charged by landlord for comparable space in the building.
The Dallas CBD submarket consists of 18.3 million square feet of Class
A office space, which was approximately 30.6% of Dallas' total Class A office
space at June 30, 1997. At June 30, 1997, the Dallas CBD Class A office space
was 79% occupied, and the average quoted market rental rate for such space was
$19.48 per square foot.
Upon completion of this acquisition, the aggregate tax basis of
depreciable real property and improvements and personal property for Fountain
Place for federal income tax purposes will be approximately $114 million. For
federal income tax purposes, depreciation is computed using the straight-line
method over lives which range from 15 to 39 years for real property and
improvements and the double declining balance method over lives which range
from 5 to 7 years for the personal property.
The 1996 realty tax rate for real property was $2.681 per $100 of the
$83.8 million assessed value. The total amount of tax at this rate for 1996
was approximately $2.3 million.
For the year ended December 31, 1996, and the five months ended May
31, 1997, utility expense was approximately $1.7 million and $.7 million,
respectively, and expenses for repairs, maintenance and contract services were
approximately $3.6 million and $1.5 million, respectively.
The Company does not plan to renovate Fountain Place, other than
expenditures associated with the routine maintenance of the property.
The following table sets forth Fountain Place's year-end occupancy and
average base rent per leased square foot (excluding storage space) for the five
years ended December 31, 1996, and for the six months ended June 30, 1997.
<TABLE>
<CAPTION>
YEAR OCCUPANCY AVERAGE BASE RENT(1)
---- --------- -----------------
<S> <C> <C>
1992 88% $17.39
1993 89 16.96
1994 90 17.66
1995 92 17.64
1996 94 17.15
6/30/97 94 14.00
</TABLE>
(1) Represents annual base rental revenues (excluding scheduled rent increases
and free rent that would be taken into account under generally accepted
accounting principles) divided by average occupancy in square footage for
the year or period and excluding expenses payable by or reimbursed from
the tenants.
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The following table sets forth a schedule of lease expirations for leases
in place as of June 30, 1997, for Fountain Place, for each of the 10 years
beginning with the remainder of 1997, assuming that none of the tenants
exercises renewal options and excluding 72,045 square feet of unleased space.
<TABLE>
<CAPTION>
ANNUAL
BASE RENT
PER
PERCENTAGE PERCENTAGE OF SQUARE
NET RENTABLE OF LEASED TOTAL ANNUAL FOOT FOR
NUMBER OF AREA SUBJECT TO NET RENTABLE ANNUAL BASE BASE RENT NET
TENANTS WITH EXPIRING AREA SUBJECT RENT UNDER REPRESENTED RENTABLE
EXPIRING LEASES TO EXPIRING EXPIRING BY EXPIRING AREA
YEAR OF LEASE EXPIRATION LEASES (SQUARE FEET) LEASES LEASES(1) LEASES EXPIRING(1)
- ------------------------ ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1997 4 61,318 5.4% $1,247,960 6.6% $20.35
1998 2 2,395 .2 40,658 .2 16.98
1999 4 425,466 37.7 7,647,042 40.3 17.97
2000 6 29,646 2.6 389,043 2.1 13.12
2001 5 66,917 5.9 1,124,189 5.9 16.80
2002 0 0 0.0 0 0.0 0.00
2003 1 22,830 2.0 359,282 1.9 15.74
2004 0 0 0.0 0 0.0 0.00
2005 2 96,667 8.6 1,786,571 9.4 18.48
2006 0 0 0.0 0 0.0 0.00
2007 and thereafter 3 422,982 37.6 6,360,348 33.6 15.03
</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 excluding expenses
payable by or reimbursed from the tenants.
Certain matters discussed within this Form 8-K may be interrupted to
be forward-looking statements within the meaning of the federal securities
laws. Although Crescent Real Estate Equities Company ("Crescent Equities" and,
collectively with its subsidiaries, 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 release 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 the Form 8-K.
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ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS
(a) FINANCIAL STATEMENTS UNDER RULE 3-14 OF REGULATION S-X
Fountain Place
Report of Independent Public Accountants
Statements of Excess of Revenues Over Specific Operating Expenses
for the year ended December 31, 1996 and the five month period ended
May 31, 1997.
Notes to Statements.
(b) PRO FORMA FINANCIAL INFORMATION
Pro Forma financial statements for the Company as prescribed by
Article 11 of Regulation S-X will be provided in an amendment to this
8K.
(c) EXHIBITS
The following is a list of all exhibits filed as a part of this Form
8-K.
<TABLE>
<CAPTION>
Exhibit No. Description of Exhibit
----------- ----------------------
<S> <C>
23.01 Consent of Arthur Andersen LLP, Independent
Public Accountants, dated September 30, 1997
(filed herewith).
</TABLE>
5
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SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned hereunto duly authorized.
Dated: September 30, 1997 CRESCENT REAL ESTATE EQUITIES COMPANY
By: /s/ Dallas. E Lucas
--------------------------------------
Dallas E. Lucas
Senior Vice President and
Chief Financial and Accounting Officer
6
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INDEX TO FINANCIAL STATEMENTS
PAGE
FOUNTAIN PLACE
Report of Independent Public Accountants . . . . . . . . . . . . . . . . F-3
Statements of Excess of Revenues Over Specific Operating Expenses for
the Year Ended December 31, 1996 and the Five Month Period Ended May
31, 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-4
Notes to Statements . . . . . . . . . . . . . . . . . . . . . . . . . . F-5
F-1
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FOUNTAIN PLACE
Statements Of Excess Of Revenues Over
Specific Operating Expenses
For The Year Ended December 31, 1996,
And The Five Month Period Ended May 31, 1997
Together With Report Of Independent Public Accountants
F-2
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REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Partners of
Crescent Real Estate Equities Limited Partnership:
We have audited the accompanying statements of excess of revenues over specific
operating expenses (as defined in Note 2) of Fountain Place for the year ended
December 31, 1996, and the five month period ended May 31, 1997. This
statement is the responsibility of the Property's management. Our
responsibility is to express an opinion on these statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the statements. An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the statements referred to above presents fairly, in all
material respects, the excess of revenues over specific operating expenses of
Fountain Place for the year ended December 31, 1996, and the five month period
ended May 31, 1997, in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Dallas, Texas,
July 23, 1997
F-3
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FOUNTAIN PLACE
STATEMENTS OF EXCESS OF REVENUES
OVER SPECIFIC OPERATING EXPENSES
FOR THE YEAR ENDED DECEMBER 31, 1996,
AND THE FIVE MONTH PERIOD ENDED MAY 31, 1997
<TABLE>
<CAPTION>
December 31, May 31,
1996 1997
------------ ----------
<S> <C> <C>
REVENUES:
Office rent $18,920,706 $7,523,968
Parking 1,003,465 415,852
Recoveries 1,934,493 918,133
Other 648,730 254,579
------------ ----------
22,507,394 9,112,532
------------ ----------
SPECIFIC OPERATING EXPENSES:
Real estate taxes 2,250,067 1,174,762
Utilities 1,720,973 720,101
Repairs, maintenance, and contract services 3,563,067 1,529,122
Salaries 1,070,729 502,839
General and administrative 375,787 223,369
Management fees 648,505 243,322
Insurance 205,864 80,829
------------ ----------
9,834,992 4,474,344
------------ ----------
EXCESS OF REVENUES OVER SPECIFIC
OPERATING EXPENSES $12,672,402 $4,638,188
=========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
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FOUNTAIN PLACE
NOTES TO STATEMENTS OF EXCESS OF REVENUES
OVER SPECIFIC OPERATING EXPENSES
MAY 31, 1997, AND DECEMBER 31, 1996
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES:
Description of Property
Fountain Place (the "Property") is a 58-story office tower located in the
central business district of Dallas, Texas. The Property contains
approximately 1,200,000 rentable square feet as well as an underground parking
garage.
Use of Estimates
The preparation of statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Rental Income and Deferred Rent Concessions
In connection with obtaining certain tenants under long-term leases, property
management grants rent concessions. The aggregate future minimum rental
payments due over the terms of the leases are recognized as rental income on a
straight-line basis over the full term of the leases, including the periods of
rent concessions.
Recoveries
A portion of the operating expenses is charged back to tenants on a monthly
basis based upon estimated expenses. These charges are adjusted at period-end,
based upon actual expenses.
2. BASIS OF ACCOUNTING:
The accompanying statements of excess of revenues over specific operating
expenses is presented on the accrual basis of accounting. These statements are
not intended to be a complete presentation of revenues and operating expenses
for the year ended December 31, 1996, and the five month period ended May 31,
1997, as certain items such as depreciation, amortization, interest, and
partnership administrative expenses have been excluded since they are not
comparable to the proposed future operations of the Property.
3. PROPERTY MANAGEMENT:
Chubb Realty of Texas, Inc. (the "Manager"), a wholly owned subsidiary of
Bellemead Development Corporation, has had an arrangement to manage the
Property since August 1995. The Manager requires a management fee of 3.25% of
gross rental receipts, as defined. Total management fees for the year ended
December 31, 1996, and the five month period ended May 31, 1997, were
approximately $649,000 and $243,000, respectively.
F-5
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4. SIGNIFICANT TENANTS:
The largest tenant of the Property occupies approximately 300,000 square feet,
or 25%, of the total square footage. This lease expires in December 1999. The
second largest tenant of the Property occupies approximately 251,000 square
feet, or 21%, of the total rentable square footage. This lease expires in
February 2017.
F-6
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EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Number Description
- -------------- -----------
<S> <C>
23.01 Consent of Arthur Andersen LLP, Independent Public
Accountants, dated September 30, 1997 (filed herewith)
</TABLE>
<PAGE> 1
EXHIBIT 23.01
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference of our report dated July 23, 1997 included in this Form 8-K into
Crescent Real Estate Equities Company's previously filed Registration
Statements No. 33-91438, No. 33-92548, No. 333-3450, No. 333-3452, No.
333-3454, No. 333-13521, No. 333-21905, No. 333-23005 and No. 333-33893.
ARTHUR ANDERSEN LLP
Dallas, Texas
September 30, 1997
