<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): September 22, 1997
CRESCENT REAL ESTATE EQUITIES COMPANY
(Exact name of Registrant as specified in its Charter)
Texas 1-13038 52-1862813
(State of Organization) (Commission File Number) (IRS Employer
Identification Number)
777 Main Street, Suite 2100
Fort Worth, Texas 76102
(Address of Principal Executive Offices) (Zip Code)
(817) 877-0477
(Registrant's telephone number, including area code)
<PAGE> 2
Item 7. Financial Statements and Exhibits.
(c) Exhibits
The exhibits listed in the following index relate to the Registration
Statement on Form S-3 (No. 333-21905), as amended, of the registrant and are
filed herewith for incorporation by reference in such Registration Statement.
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C>
1.01 Lock-Up Agreement, dated as of September 22, 1997 by
and between the registrant and Citicorp Real Estate,
Inc.
5.01 Opinion of Shaw, Pittman, Potts & Trowbridge as to the
legality of the securities being registered by the
registrant
8.01 Opinion of Shaw, Pittman, Potts & Trowbridge regarding
certain material tax issues relating to the registrant
8.02 Opinion of Locke Purnell Rain Harrell (A Professional
Corporation) regarding certain Texas franchise tax
matters
23.01 Consent of Shaw, Pittman, Potts & Trowbridge (included
in its opinions filed as Exhibits 5.01 and 8.01)
23.02 Consent of Locke Purnell Rain Harrell (A Professional
Corporation) (included in its opinion filed as Exhibit
8.02)
</TABLE>
<PAGE> 3
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned hereunto duly authorized.
Dated: September 22, 1997 CRESCENT REAL ESTATE EQUITIES COMPANY
By: /s/ DALLAS E. LUCAS
-----------------------
Dallas E. Lucas
Senior Vice President and
Chief Financial Officer
<PAGE> 4
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C>
1.01 Lock-Up Agreement, dated as of September 22, 1997 by
and between the registrant and Citicorp Real Estate,
Inc.
5.01 Opinion of Shaw, Pittman, Potts & Trowbridge as to the
legality of the securities being registered by the
registrant
8.01 Opinion of Shaw, Pittman, Potts & Trowbridge regarding
certain material tax issues relating to the registrant
8.02 Opinion of Locke Purnell Rain Harrell (A Professional
Corporation) regarding certain Texas franchise tax
matters
23.01 Consent of Shaw, Pittman, Potts & Trowbridge (included
in its opinions filed as Exhibits 5.01 and 8.01)
23.02 Consent of Locke Purnell Rain Harrell (A Professional
Corporation) (included in its opinion filed as Exhibit
8.02)
</TABLE>
<PAGE> 1
EXHIBIT 1.01
LOCK-UP AGREEMENT
THIS LOCK-UP AGREEMENT (the "Agreement") is made and entered into by and
between Crescent Real Estate Equities Company ("REIT") and Citicorp Real
Estate, Inc. ("Designee") as of this 22nd day of September, 1997.
RECITALS
WHEREAS, Designee has elected to acquire the common shares of beneficial
interest, par value $.01 per share of REIT (the "REIT Shares") that are the
subject of, or were issued pursuant to, that certain Citicorp Stock Delivery
Agreement, dated as of August 3, 1997, by and between JMB/Houston Center
Partners Limited Partnership, an Illinois limited partnership, and REIT (the
"Citicorp Stock Delivery Agreement"); and
WHEREAS, REIT has the right under the Citicorp Stock Delivery Agreement
to require Designee to agree to certain restrictions on the transfer of any
REIT Shares that Designee so acquires.
NOW, THEREFORE, in consideration of the premises and other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged by REIT and Designee, REIT and Designee hereby agree as follows:
1. LOCK-UP. Designee hereby agrees that, except as set forth in
paragraph 2 below, from the date hereof until September 22, 1998, Designee
shall not offer, pledge, sell, contract to sell, grant any options for the
sale of or otherwise transfer, distribute or dispose of, directly or
indirectly (a "Transfer"), any REIT Shares, and any attempt to make any such
Transfer in violation of this Agreement shall be null and void ab initio and
of no force or effect.
2. EXCEPTIONS TO LOCK-UP. Notwithstanding the provisions of paragraph
1, REIT agrees that Designee shall have the right prior to September 22, 1998,
to Transfer all or any portion of the REIT Shares in a transaction that is
exempt from registration, and not registered, under the Securities Act of
1933, as amended (the "Securities Act"), to each person who executes a lock-up
agreement and is bound by the terms thereof, such lock-up agreement to be in
the form of this Agreement except that paragraph 3 shall be excluded and
appropriate revisions shall be made to the recitals.
3. NO RELIANCE. Designee acknowledges that it has made its own
independent analysis of an investment in REIT and it is not relying on
statements or representations made by JMB. Upon Designee's receipt of the
REIT Shares, Designee releases JMB from any and all liability under the
Citicorp Stock Delivery Agreement.
-1-
<PAGE> 2
JMB is a third party beneficiary of this Agreement solely with respect to the
immediately preceding sentence of this paragraph 3.
4. Successors and Assigns. This Agreement will be binding upon and
inure to the benefit of the parties hereto and their respective legal
representatives, successors and assigns.
5. Multiple Counterparts. This Agreement may be executed in several
counterparts, each of which will be deemed an original, and all of which will
constitute but one and the same instrument.
6. Controlling Law. This Agreement will be construed under,
governed by and enforced in accordance with the laws of the State of Texas.
7. No Rule of Construction. The parties hereto have each been
represented by counsel in the negotiations and preparation of this Agreement;
therefore, this Agreement will be deemed to be drafted by all parties, and no
rule of construction will be invoked respecting the authorship of this
Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first above written.
REIT:
CRESCENT REAL ESTATE EQUITIES
COMPANY, a Texas real estate investment
trust
By:
------------------------------------
Name:
----------------------------------
Title:
---------------------------------
DESIGNEE:
CITICORP REAL ESTATE, INC., a
DELAWARE CORPORATION
By:
------------------------------------
Name:
----------------------------------
Title:
---------------------------------
-2-
<PAGE> 1
EXHIBIT 5.01
September 22, 1997
Crescent Real Estate Equities Company
777 Main Street, Suite 2100
Fort Worth, Texas 76102
Ladies and Gentlemen:
We have acted as counsel to Crescent Real Estate Equities Company, a
Texas real estate investment trust (the "Company"), in connection with the
registration of 307,831 shares of common shares of beneficial interest of the
Company, par value $0.01 per share (the "Shares"), pursuant to a Registration
Statement on Form S-3 (Registration No. 333-21905), including the prospectus,
the prospectus supplement and all amendments, exhibits and documents related
thereto (collectively, the "Registration Statement"), under the Securities Act
of 1933, as amended, and with the proposed sale of the Shares in accordance
therewith.
Based upon our examination of the originals or copies of such
documents, corporate records, certificates of officers of the Company and other
instruments as we have deemed necessary and upon the laws as presently in
effect, we are of the opinion that the Shares have been duly authorized for
issuance by the Company, and that, upon issuance and delivery, the Shares will
be validly issued, fully paid and nonassessable.
We hereby consent to the incorporation by reference of this opinion as
an exhibit to the Registration Statement. We also consent to the reference to
Shaw, Pittman, Potts & Trowbridge under the caption "Legal Matters" in the
prospectus and the prospectus supplements.
Very truly yours,
SHAW, PITTMAN, POTTS & TROWBRIDGE
<PAGE> 1
EXHIBIT 8.01
September 22, 1997
Crescent Real Estate Equities Company
777 Main Street
Suite 2100
Fort Worth, Texas 76102
Ladies and Gentlemen:
On March 25, 1997, Crescent Real Estate Equities Company ("Crescent
Equities") filed a registration statement on Form S-3, No. 333-21905, with the
Securities and Exchange Commission, which was declared effective on March 26,
1997. Such registration statement (the "Registration Statement") includes a
prospectus supplement dated September 22, 1997 to the prospectus contained in
the Registration Statement (together, the "Prospectus"). In connection with
the filing of the prospectus supplement, you have asked us to render certain
opinions regarding the application of the U.S. federal income tax laws to
Crescent Equities,(1) Crescent Real Estate Equities Limited Partnership (the
"Operating Partnership") and certain partnerships and limited liability
companies in which the Operating Partnership has a direct or indirect ownership
interest (the "Subsidiary Partnerships"). The Subsidiary Partnerships
currently include Crescent Real Estate Funding I, L.P. ("Funding I"), Crescent
Real Estate Funding II, L.P. ("Funding II"), Crescent Real Estate Funding III,
L.P. ("Funding III"), Crescent Real Estate Funding IV, L.P. ("Funding IV"),
Crescent Real Estate Funding V, L.P. ("Funding V"), Crescent Real Estate
Funding VI, L.P. ("Funding VI"), Crescent Real Estate Funding VII, L.P.
("Funding VII"), CresCal Properties, L.P. ("CresCal"), CresTex Development,
L.L.C. ("CresTex"), Waterside Commons Limited Partnership ("Waterside"), G/C
Waterside Associates LLC ("Associates"), Woodlands Office Equities - '95
Limited (the "Woodlands Partnership"), Woodlands Retail Equities - '96 Limited
("WRE"), 301 Congress Avenue, L.P. ("301 Congress"), Crescent/301, L.L.C.
("Crescent/301"), Spectrum Mortgage Associates, L.P. ("SMA"), Crescent
Commercial Realty Holdings, L.P. ("CCRH"), CresWood Development, LLC and the
Woodlands Commercial Properties Company, L.P. (the "Commercial Partnership").
Capitalized terms used hereunder but not defined have the meaning ascribed to
them in the Prospectus, unless otherwise noted.
Specifically, you have requested that we render opinions addressing
the following:
- ----------------------------------
(1) Unless otherwise noted, all references to Crescent Equities herein
refer to Crescent Equities and its wholly owned subsidiaries, Crescent
Real Estate Equities, Ltd. ("CREE"), CRE Management I Corp., CRE
Management II Corp., CRE Management III Corp., CRE Management IV
Corp., CRE Management V Corp., CRE Management VI Corp., CRE Management
VII Corp., CresCal Properties, Inc., and Crescent Commercial Realty
Corp.
<PAGE> 2
Crescent Real Estate Equities Company
September 22, 1997
Page 2
1. Whether Crescent Equities qualified as a REIT under sections
856 through 860 of the Internal Revenue Code of 1986, as
amended (the "Code"), with respect to its taxable years ending
on or before December 31, 1996, whether Crescent Equities is
organized in conformity with the requirements for
qualification as a REIT, whether its manner of operation
enabled it to meet the requirements for qualification as a
REIT as of the date of the Registration Statement, and whether
Crescent Equities' proposed manner of operation, as set forth
in the Registration Statement, will enable it to meet the
requirements for qualification as a REIT in the future;
2. Whether the Residential Development Properties will be treated
for federal income tax purposes as owned by the Residential
Development Corporations;(2)
3. Whether amounts derived by the Operating Partnership with
respect to the stock of the Residential Development
Corporations will be treated as distributions on stock (i.e.,
as dividends, a return of capital, or capital gain, depending
upon the circumstances) for purposes of the 75 percent and 95
percent gross income tests of section 856(c) of the Code;
4. Whether the Residential Development Property Mortgages
constitute debt for federal income tax purposes;(3)
5. Whether contingent interest derived by the Operating
Partnership from the Residential Development Corporations
under the terms of certain of the Residential Development
Property Mortgages will be treated as being based on a fixed
percentage of sales, and therefore all interest derived
therefrom will qualify as interest paid on mortgages on real
property for purposes of the 75 percent and 95 percent gross
income tests of section 856(c) of the Code;
6. Whether the subordinate note secured by the Ritz-Carlton Hotel
will constitute debt for federal income tax purposes and
whether the Operating Partnership will be
- ----------------------------------
(2) For purposes of this letter, the term "Residential Development
Properties" will be deemed to include any assets of HBCLP, Inc.
("HBCLP"), unless otherwise noted, and the term "Residential
Development Corporations" will be deemed to include HBCLP, unless
otherwise noted.
(3) For purposes of this letter, the term "Residential Development
Property Mortgages" will be deemed to include the $25,000,000 line of
credit secured by HBCLP, Inc.'s limited partner interest in Hudson Bay
Partners, L.P. (the "HBCLP Note"), unless otherwise noted.
<PAGE> 3
Crescent Real Estate Equities Company
September 22, 1997
Page 3
construed as owning at any time a partnership interest in
Manalapan Hotel Partners for federal income tax purposes;
7. Whether the leases of the Hotel Properties will be treated as
leases for federal income tax purposes and whether the rent
payable thereunder will qualify as "rents from real property"
for purposes of the 75 percent and 95 percent gross income
tests of section 856(c) of the Code;
8. Whether Crescent Equities will be considered to own any of the
voting securities of the Residential Development Corporations
or DBL Holdings, Inc. ("DBLH") for purposes of section
856(c)(5)(B) of the Code;
9. Whether the Operating Partnership and each of the Subsidiary
Partnerships will be classified for federal income tax
purposes as partnerships and not as (a) associations taxable
as corporations or (b) publicly traded partnerships;
10. Whether the distribution of the stock of Crescent Operating,
Inc. ("Crescent Operating") by Crescent Equities to its
shareholders will be taxable to Crescent Equities as gain on
the sale of stock or securities for purposes of section
856(c) of the Code;
11. Whether Crescent Operating 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
in light of Crescent Operating's relationship with Crescent
Equities and the Operating Partnership;
12. Whether Crescent Operating and Crescent Equities will be
treated as a stapled entity for federal income tax purposes
under section 269B(a)(3) of the Code;
13. Whether the loan of approximately $35.9 million from the
Operating Partnership to Crescent Operating will constitute
debt for federal income tax purposes;
14. Whether Crescent Equities will be considered to have met the
requirements of section 856(c)(5) of the Code for the period
beginning April 1, 1997 and ending June 26, 1997 during which
it held Crescent Operating stock;
15. Whether the rents received by Crescent Equities from Charter
Behavioral Health Systems, LLC ("CBHS") and its affiliates
will constitute "rents from real property" under section
856(d) of the Code;
<PAGE> 4
Crescent Real Estate Equities Company
September 22, 1997
Page 4
16. Whether the Commercial Partnership and the Development
Partnership will be considered for federal income tax purposes
as separate entities and not as partners of or with each other;
17. Whether, assuming that the Commercial Partnership and the
Development Partnership are considered to constitute one
partnership for federal income tax purposes, the allocations of
profit and loss from the Leased Properties to the partners of
the Commercial Partnership and the allocations of profit and
loss from the Development Properties to the partners of the
Development Partnership will be respected under section 704;
18. Whether, assuming that the Commercial Partnership and the
Development Partnership are considered to constitute one
partnership for federal income tax purposes, the allocation to
Crescent Equities under Treas. Reg. 1.856-3(g) of gross income
derived from the sale of Development Properties to customers in
the ordinary course of business would be taken into account for
purposes of determining whether Crescent Equities meets the
requirements of the 95 percent and 75 percent gross income
tests set forth in sections 856(c)(2) and (3) (the "Gross
Income Tests");
19. With respect to the UBS Transaction, whether a payment, if
any, to Crescent Equities will be excluded from its gross
income under section 1032, and, if so, what effect it would
have on the application to Crescent Equities of the gross
income tests set forth in section 856(c); and
20. Whether the material under the heading "Federal Income Tax
Considerations" in the Prospectus is accurate and summarizes
the material federal income tax considerations to a
prospective holder of Common Shares.
The opinions set forth herein are based upon the existing provisions
of the Code, Treasury Regulations, and the reported interpretations thereof by
the Internal Revenue Service ("IRS") and by the courts in effect as of the date
hereof, all of which are subject to change, both retroactively or
prospectively, and to possibly different interpretations. We assume no
obligation to update the opinions set forth in this letter. We believe that
the conclusions expressed herein, if challenged by the IRS, would be sustained
in court. Because our opinions are not binding upon the IRS or the courts,
however, there can be no assurance that contrary positions may not be
successfully asserted by the IRS.
I. Documents and Representations
For the purpose of rendering these opinions, we have examined and
relied on originals, or copies certified or otherwise identified to our
satisfaction, of the following: (1) the Restated Declaration of Trust of
Crescent Real Estate Equities Company (the "Declaration of Trust"); (2) the
First Amended and Restated Agreement of Limited Partnership of Crescent Real
Estate Equities Limited Partnership, as amended (the "Operating Partnership
Agreement"); (3) the First Amended and Restated Agreement of Limited
Partnership of Crescent Real Estate Funding I, L.P. (the "Funding I
Agreement"); (4) the First Amended and Restated Agreement of Limited
Partnership of Crescent Real Estate Funding II, L.P., as amended (the "Funding
II Agreement"); (5) the First Amended and Restated Agreement of Limited
Partnership of Crescent Real Estate Funding III, L.P., as amended (the "Funding
III Agreement"); (6) the First Amended and Restated Agreement of Limited
Partnership of Crescent Real Estate Funding IV, L.P., as amended (the "Funding
IV Agreement"); (7) the First Amended and Restated Agreement of Limited
Partnership of Crescent Real Estate Funding V, L.P., as amended (the "Funding V
Agreement"); (8) the First Amended and Restated Agreement of Limited
Partnership of Crescent Real Estate Funding VI, L.P. (the "Funding VI
Agreement"); (9) the Agreement of Limited Partnership of Crescent Real Estate
Funding VII, L.P., as amended (the "Funding VII Agreement"); (10) the Agreement
of Limited Partnership of CresCal Properties, L.P., as amended by the First
Amendment to the Agreement of Limited Partnership of CresCal Properties, L.P.
(the "CresCal Agreement"); (11) the Limited Liability Company Agreement of
CresTex Development, L.L.C. (the "CresTex Agreement"); (12) the Limited
Partnership Agreement of Waterside Commons Limited Partnership, as amended by
the First Amendment to the Limited Partnership Agreement of Waterside Commons
Limited Partnership, dated August 23, 1995 (the "Waterside Agreement"); (13)
the Articles of Organization of G/C Waterside Associates LLC (the "Associates
Articles"); (14) the Regulations of G/C Waterside Associates, LLC (the
"Associates Regulations"); (15) the
<PAGE> 5
Crescent Real Estate Equities Company
September 22, 1997
Page 5
Amended and Restated Agreement of Limited Partnership of Woodlands Office
Equities - '95 Limited (the "Woodlands Partnership Agreement"); (16) the Amended
and Restated Agreement of Limited Partnership of Woodlands Retail Equities - '96
Limited (the "WRE Agreement"); (17) the Limited Partnership Agreement of 301
Congress Avenue, L.P. (the "301 Congress Partnership Agreement"); (18) the
Limited Liability Company Agreement of Crescent/301, L.L.C. (the "Crescent/301
Agreement"); (19) the Amended and Restated Agreement of Limited Partnership of
Spectrum Mortgage Associates, L.P. (the "SMA Agreement"); (20) the Agreement of
Limited Partnership of Crescent Realty Investments, LLP (the "CCRH Agreement");
(21) copies of all existing leases (including amendments) entered into as of the
date hereof with respect to property owned by the Operating Partnership or the
Subsidiary Partnerships; (22) copies of the Residential Development Property
Mortgages; (23) the Intercompany Agreement between the Operating Partnership
and Crescent Operating (the "Intercompany Agreement"); (23) the Registration
Statement of Crescent Operating on Form S-1 dated April 15, 1997; (24) the
First Restated Certificate of Incorporation of Crescent Operating (the
"Restated Certificate"); (25) the Amended and Restated Bylaws of Crescent
Operating; (26) the Real Estate Purchase and Sale Agreement between Magellan
Health Services, Inc. and the Operating Partnership (the "Magellan Agreement");
(27) the Certificate of Incorporation of The Woodlands Land Company, Inc.; (28)
the Agreement of WECCR General Partnership; (29) the Agreement of BOCH General
Partnership; (30) the Agreement of Limited Partnership of The Woodlands
Operating Company, L.P.; (31) the Agreement of Limited Partnership of The
Woodlands Land Development Company, L.P.; (32) the Amended and Restated
Agreement of Limited Partnership of the Woodlands Commercial Properties
Company, L.P.; (33) the Certificate of Merger of The Woodlands Commercial
Properties Company, L.P. and The Woodlands Land Development Company, L.P.; (34)
the Management and Advisory Agreement between The Woodlands Commercial
Properties Company, L.P. and The Woodlands Operating Company, L.P.; (35) the
Management and Advisory Agreement dated July 31, 1997 between The Woodlands
Land Development Company, L.P. and The Woodlands Operating Company, L.P.; (36)
the Lease Agreement between The Woodlands Commercial Properties Company, L.P.
and WECCR General Partnership; (37) the Registration Statement, as amended
through the date hereof; (38) the Prospectus; and (39) such other documents or
information as we have deemed necessary for the opinions set forth below. In
our examination, we have assumed the genuineness of all signatures, the legal
capacity of natural persons, the authenticity of all documents submitted to us
as originals, the conformity to original documents of all documents submitted
to us as certified or photostatic copies, and the authenticity of the originals
of such copies.
In addition, these opinions are conditioned upon certain
representations made by Crescent Equities and the Operating Partnership as to
factual and other matters as set forth in a letter submitted to us and in the
discussion of "Federal Income Tax Considerations" in the Prospectus. These
opinions are also based on the assumptions that (i) the Operating Partnership
will be operated in accordance with the terms and provisions of the Operating
Partnership Agreement, (ii) each of the Subsidiary Partnerships will be
operated in accordance with the terms and provisions of its organizational
documents, (iii) Crescent Equities will be operated in accordance with the
terms and provisions of its Restated Declaration of Trust, and (iv) the various
elections, procedural steps, and other actions by Crescent Equities or the
Operating Partnership described in the discussion of "Federal Income Tax
Considerations" in the Prospectus will be completed in a timely fashion or
otherwise carried out as so described.
Unless facts material to the opinions expressed herein are
specifically stated to have been independently established or verified by us,
we have relied as to such facts solely upon the
<PAGE> 6
Crescent Real Estate Equities Company
September 22, 1997
Page 6
representations made by Crescent Equities and the Operating Partnership. We
are not, however, aware of any facts or circumstances contrary to or
inconsistent with the representations. To the extent the representations are
with respect to matters set forth in the Code or Treasury Regulations, we have
reviewed with the individuals making such representations the relevant
provisions of the Code, the Treasury Regulations and published administrative
interpretations.
II. Opinions
1. Qualification of Crescent Real Estate Equities Company as a
REIT
Based on the foregoing, it is our opinion that (i) Crescent Equities
qualified as a REIT under sections 856 through 860 of the Code with respect to
its taxable years ending on or before December 31, 1996, (ii) Crescent Equities
is organized in conformity with the requirements for qualification as a REIT
and its manner of operation has enabled it to meet the requirements for
qualification as a REIT as of the date of the Prospectus Supplement, and (iii)
Crescent Equities' proposed manner of operation will enable it to meet the
requirements for qualification as a REIT in the future.
2. Ownership of the Residential Development Properties and
Treatment of Amounts Derived by the Operating Partnership with Respect to the
Stock of the Residential Development Corporations
If the Residential Development Corporations are not respected for tax
purposes, then the Operating Partnership would be treated for tax purposes as
directly owning certain of the Residential Development Properties. In such a
case, the income from the sales of the Residential Development Properties
treated as directly owned by the Operating Partnership would not qualify under
the 75 percent and 95 percent gross income tests and would count as gain from
the sale of assets for purposes of the 30 percent of gross income limitation.
In addition, such income would be considered "net income from prohibited
transactions" and thus would be subject to a 100 percent tax. Moreover, to the
extent that the Operating Partnership would be treated as directly owning
HBCLP's limited partner interest in Hudson Bay Partners, L.P. ("HB Partners"),
the Operating Partnership would be treated as owning any securities held by HB
Partners, and such deemed ownership could cause Crescent Equities to be treated
as owning more than 10 percent of the voting securities of one or more issuers
in violation of section 856(c)(5)(B). As a general rule, however,
corporations, as long as they have a business purpose or carry on any business
activity, are not disregarded for federal income tax purposes. Moline
Properties, Inc. v. Commissioner, 319 U.S. 436, 438-439 (1943).
<PAGE> 7
Crescent Real Estate Equities Company
September 22, 1997
Page 7
The Residential Development Corporations are not mere formalities
created for tax purposes. Crescent Equities and the Operating Partnership have
represented that each of the Residential Development Companies have their own
employees (except HBCLP, which has no employees), act independently in owning,
developing, and selling the Residential Development Properties, and do not act
as agents of the Operating Partnership or Crescent Equities. Moreover, Mira
Vista Development Corporation ("MVDC"), Houston Area Development Corporation
("HADC"), The Woodlands Land Company, Inc. ("Landevco"), and Desert Mountain
Development Corporation ("DMDC") should shield the Operating Partnership
against any liabilities generated by their respective property development
businesses, while Crescent Development Management Corporation ("CDMC") and
HBCLP should shield the Operating Partnership from any liabilities generated by
any future business conducted directly by CDMC and HBCLP, respectively.
Therefore, it is our opinion that for federal income tax purposes the
Operating Partnership will not be treated as owning the Residential Development
Properties held directly by the Residential Development Corporations and,
consequently, all amounts derived by the Operating Partnership with respect to
the stock of the Residential Development Corporations will be characterized as
distributions on stock (i.e., as dividends, a return of capital, or capital
gain, depending on the circumstances) for purposes of the 75 percent and 95
percent gross income tests.
3. Characterization of the Residential Development Property Mortgages as
Debt and Treatment of Amounts Paid Pursuant to Residential Development Property
Mortgages
a. Characterization as Debt. Debt instruments, especially
instruments that are held by persons related to the debtor, may under certain
circumstances be characterized for income tax purposes as equity, rather than
as debt. The characterization of an instrument as debt or equity is a question
of fact to be determined from all surrounding facts and circumstances, no one
of which is conclusive. See Kingbay v. Commissioner, 46 T.C. 147 (1966);
Hambuechen v. Commissioner, 43 T.C. 90 (1964). Among the criteria that have
been found relevant in characterizing such instruments are: (1) the intent of
the parties, (2) the extent of participation in management by the holder of the
instrument, (3) the ability of the corporation to obtain funds from outside
sources, (4) the "thinness" of the capital structure in relation to debt, (5)
the risk involved, (6) the formal indicia of the arrangement, (7) the relative
position of the obligees as to other creditors regarding payment of interest
and principal, (8) the voting power of the holder of the instrument, (9) the
provision of a fixed rate of interest, (10) the contingency of the obligation
to repay, (11) the source of the interest payments, (12) the presence or
absence of a fixed maturity date, (13) a provision for redemption by the
corporation, (14) a provision for redemption at the option of the holder, and
(15) the timing of the advance with reference to the organization of the
corporation. Fin Hay Realty Co. v. United States, 398 F.2d 694 (3d Cir. 1968).
<PAGE> 8
Crescent Real Estate Equities Company
September 22, 1997
Page 8
Although the Residential Development Property Mortgages are held by
the Operating Partnership, which owns all of the nonvoting stock of the
Residential Development Corporations, and an approximately 19 percent indirect
equity interest in Whitehawk Development Group, LLC, these mortgages possess a
number of attributes weighing in favor of debt treatment. For instance, each
of the Residential Development Property Mortgages is clearly denominated as
debt, has a fixed term of seven or more years (except the HBCLP Note which has
a term of five years), provides for the return of a fixed principal amount plus
interest, and is secured by the Residential Development Properties (or in the
case of the CDMC Mortgage, secured by an interest in a limited partnership
which holds indirect interests in several Residential Development Properties,
or in the case of the HBCLP Note, secured by HBCLP's interest in HB Partners).
The interest on the Residential Development Property Mortgages accrues at
either a fixed rate or, in the case of the Whitehawk Note, at the prime rate
plus one percent per annum (not including any additional interest based on
gross sales proceeds). In addition, the Residential Development Property
Mortgages are not subordinated to other indebtedness of the Residential
Development Corporations. Crescent Equities and the Operating Partnership have
represented that at the time that each of the Residential Development Property
Mortgages were acquired by the Operating Partnership, the outstanding principal
amount of such mortgages did not exceed approximately 80 percent of the fair
market value of the Residential Development Properties (or in the case of the
three notes secured by the Houston Area Properties, that the combined principal
amount of the three loans did not exceed approximately 85 percent of the fair
market value of the Houston Area Properties, or in the case of the HBCLP Note,
Crescent Equities and the Operating Partnership have represented that at the
time the HBCLP Note was acquired by the Operating Partnership the maximum
amount that could be drawn under the line of credit under such note did not
exceed 50 percent of the fair market value of HBCLP's interest in HB Partners)
and that the interest to be charged, including any contingent interest,
represents a commercially reasonable rate of interest. In addition, based on
our experience and an examination of the Residential Development Property
Mortgages, the interest appears to represent a commercially reasonable rate of
interest.
Based on the foregoing, it is our opinion that each of the Residential
Development Property Mortgages constitutes debt for federal income tax
purposes.
b. Treatment of Amounts Paid Pursuant to Residential Development
Property Mortgages. Section 856(f) of the Code defines "interest" for the
purposes of section 856(c)'s gross income tests to include contingent interest
that is based on a fixed percentage of any person's receipts or sales. On the
other hand, contingent interest provisions that are based on a specified
portion of the gain realized on the sale of the real property securing a
mortgage (or any gain that would be realized if such property were sold on a
specified date) may be characterized as "shared appreciation provisions" under
section 856(j) of the Code. If the properties underlying such a provision are
primarily held for sale to customers in the ordinary course of business, any
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Crescent Real Estate Equities Company
September 22, 1997
Page 9
income derived from such a provision would be treated as income from prohibited
transactions. Such income would not satisfy the 75 percent and 95 percent
gross income tests and would be subject to a 100 percent tax on "net income
from prohibited transactions."
Any contingent interest payable under the terms of the mortgage in the
principal amount of $14.4 million secured by the Mira Vista Residential
Development Property (the "Mira Vista Mortgage") will qualify as interest on an
obligation secured by a mortgage on real property, rather than income derived
from a shared appreciation provision, because such contingent interest will be
based on a percentage of the gross receipts derived from any sale of portions
of the Mira Vista Residential Development Property, as opposed to a portion of
the gain realized on such sales. Similarly, any contingent interest payable
under the terms of the mortgages in the aggregate principal amount of $14.4
million secured by the Falcon Point Residential Development Property and the
Spring Lakes Residential Development Property (the "Houston Area Development
Properties") (the "Houston Area Mortgages") will qualify as interest on
obligations secured by mortgages on real property, rather than income derived
from shared appreciation provisions, because such contingent interest will be
based on a percentage of the gross receipts derived from any sale of portions
of the Houston Area Development Properties, as opposed to a portion of the gain
realized on such sales.
The fact that the contingent interest provided for by the Mira Vista
Mortgage and the Houston Area Mortgages is based on gross receipts, rather than
gain, could have economic significance with respect to the return received by a
holder of such mortgages. For example, if the value of the Houston Area
Development Properties were to increase, but few lots were sold, the Operating
Partnership, as holder of the Houston Area Mortgages would not accrue any
contingent interest. On the other hand, the Operating Partnership would accrue
contingent interest if numerous lot sales were made at the Houston Area
Development Properties, even if such sales were made at a loss.
Based on the foregoing, it is our opinion that any contingent interest
derived from the Mira Vista Mortgage and the Houston Area Mortgages will be
treated as being based on a fixed percentage of sales and therefore such
interest will constitute interest received from real estate mortgages for
purposes of the 75 percent and 95 percent gross income tests, and that,
consequently, all amounts derived by the Operating Partnership from the
Residential Development Corporations under the terms of the Residential
Development Property Mortgages (other than the HBCLP Note) will be
characterized as interest or principal, as the case may be, paid on mortgages
on real property for purposes of the 75 percent and 95 percent gross income
tests. It is our opinion that all amounts derived by the Operating Partnership
from the HBCLP Note will be characterized as interest or principal, as the case
may be for purposes of the 95 percent gross income test.
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September 22, 1997
Page 10
4. Characterization of Ritz-Carlton Mortgage as Debt and
Treatment of Amounts Paid Pursuant to Ritz-Carlton Mortgage
a. Background. Manalapan Hotel Partners ("Manalapan") is
a Florida general partnership. The three original partners of Manalapan were
as follows: Siquille Developers, Inc., which held and still holds a 50 percent
interest; SCP (Palm Beach) Inc., as successor to Shimizu Land Corporation
("SCP"), which held and still holds a 25 percent interest; and AIT Manalapan
Limited Partnership ("AIT"), which also held a 25 percent interest. In 1989,
in order to construct The Ritz-Carlton Hotel in Palm Beach, Florida, Manalapan
entered into three different loan agreements with three different entities.
Each note is secured by the Ritz-Carlton Hotel and the land thereunder (the "RC
Property"). The senior note in the amount of $75 million is held by The Nippon
Credit Bank, New York Branch ("Nippon"). The two subordinate notes, each in
the initial principal amount of $9 million and due on June 22, 2004, were held
by SCP and by State Street Bank and Trust Company, as trustee of Ameritech
Pension Trust ("Ameritech"). As of February 28, 1997, the unpaid principal
balance of the senior note was $71,428,757.91, together with accrued interest
of $360,960.67; the unpaid principal balance of the note held by SCP was
$8,849,244.17, plus accrued interest of $1,526,548.60; and the unpaid principal
balance of Ameritech's note was $8,849,244.17, plus accrued interest of
$1,527,677.71.
On December 22, 1996, the Operating Partnership entered into an
agreement to purchase Ameritech's subordinate note (the "RC Note") for
$6,490,000 and an option to purchase AIT's interest in Manalapan (the
"Option"). The purchase price of the Option was $10,000; its exercise price
was $100,000. On February 27, 1997, the Operating Partnership transferred the
Option to CDMC. The Operating Partnership closed on the Loan Purchase and Sale
Agreement on March 5, 1997, purchasing the RC Note. On the same day, CDMC
exercised the Option and purchased the partnership interest in Manalapan.(4)
CDMC has the consent of the other Manalapan partners to transfer its interest
to a corporation ("New Crescent") that would be formed and then spun off by the
Operating Partnership and Crescent Equities.(5)
b. Characterization as Debt. Debt instruments, especially
instruments that are held by persons related to the debtor, may under certain
circumstances be characterized for income tax purposes as equity, rather than
as debt. The characterization of an instrument as debt or equity is a question
of fact to be determined from all surrounding facts and circumstances, no one
of which is conclusive. See Kingbay v. Commissioner, 46 T.C. 147 (1966);
Hambuechen v. Commissioner, 43 T.C. 90 (1964). Among the criteria that have
been found relevant in characterizing such
- ----------------------------------
(4) This series of transactions discussed in this paragraph will
hereinafter be referred to as the "Transactions."
(5) This consent would apply to Crescent Operating.
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Crescent Real Estate Equities Company
September 22, 1997
Page 11
instruments are the following: (1) the intent of the parties, (2) the extent of
participation in management by the holder of the instrument, (3) the ability of
the corporation to obtain funds from outside sources, (4) the "thinness" of the
capital structure in relation to debt, (5) the risk involved, (6) the formal
indicia of the arrangement, (7) the relative position of the obligees as to
other creditors regarding payment of interest and principal, (8) the voting
power of the holder of the instrument, (9) the provision of a fixed rate of
interest, (10) the contingency of the obligation to repay, (11) the source of
the interest payments, (12) the presence or absence of a fixed maturity date,
(13) a provision for redemption by the corporation, (14) a provision for
redemption at the option of the holder, and (15) the timing of the advance with
reference to the organization of the corporation. Fin Hay Realty Co. v. United
States, 398 F.2d 694 (3d Cir. 1968).
Although the purchase price of the RC Note reflects a significant
discount from its outstanding balance, this price does not establish that the
RC Property was in fact "under water." Rather, it indicates Ameritech's
reluctance to continue to bear the financing risk associated with the loan. In
addition, the RC Note possesses a number of attributes weighing in favor of
debt treatment. For instance, the RC Note is clearly denominated as debt, has
a fixed maturity date of June 22, 2004, provides for the return of interest on
the principal amount at a rate of 12 percent per annum, some of which already
has been paid, and is secured by the RC Property. As far as we are aware, the
RC Note was issued at a time when the fair market value of the RC Property
exceeded all debts that it secured, has never been in default, and has never
been modified. In addition, neither of the two subordinate notes was pro rata
among the owners of the partnership's equity; both were held only by two
minority partners. Also, the purchase by CDMC of the joint venture interest
indicates CDMC's belief that the equity interest had some value at the time of
the purchase. Furthermore, Crescent Equities and the Operating Partnership
have represented that the value of the RC Property exceeds the combined
outstanding balance of the RC Note and the notes held by Nippon and SCP.
Crescent Equities and the Operating Partnership have also represented that the
interest provided for under the RC Note represents a commercially reasonable
rate of interest. In addition, based on our experience and an examination of
the RC Note, the interest appears to represent a commercially reasonable rate
of interest.
Based on the foregoing, it is our opinion that the RC Note constitutes
debt for federal income tax purposes. Further, it is our opinion that amounts
designated as interest by the RC Note will be treated as interest for purposes
of the 75 percent and 95 percent gross income tests of section 856(c) of the
Code.
c. Option to Purchase Partnership Interest
The Operating Partnership's purchase of the Option and subsequent
transfer of it to CDMC, as well as CDMC's exercise of the option, raises two
issues of concern to the Operating
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Crescent Real Estate Equities Company
September 22, 1997
Page 12
Partnership. The first issue is whether ownership of the Option by the
Operating Partnership was tantamount to ownership of the joint venture
interest. The second issue is whether CDMC will be treated as an agent of the
Operating Partnership.
The IRS, in Revenue Ruling 82-150, 1982-2 C.B. 110, held that where a
taxpayer purchases an option to purchase an asset and the price paid for
acquiring the option is relatively high compared to the fair market value of
the asset, the doctrine of "substance over form" will be applied to the
transaction, and the taxpayer will be considered to have assumed ownership of
the asset through purchase of the option. The $10,000 price paid by the
Operating Partnership to purchase the Option, however, was relatively
insignificant compared to the exercise price and is not likely to be considered
a purchase of the joint venture interest.
Also relevant is the Tax Court's decision in Penn-Dixie Steel
Corporation v. Commissioner, 69 T.C. 837 (1978). The court addressed the issue
of whether a transaction between two parties that entered into a joint venture
agreement providing for a put and a call should be construed as a sale of one
company's interest with payment of a portion of the purchase price deferred
until the put or the call was exercised. The court explained that, despite the
likelihood of the companies exercising either the put or the call, the put and
call arrangement did not legally, or as a practical matter, impose mutual
obligations upon one company to sell and the other to buy. Id. at 844. Under
the Penn-Dixie rationale, enough contingencies were present when the Operating
Partnership purchased the Option to prevent the purchase of the Option from
being construed as purchase of the joint venture interest. Based on the
foregoing, it is our opinion that the Operating Partnership's purchase of the
Option will not be construed as ownership of a partnership interest in
Manalapan.
The second issue that must be addressed is whether CDMC could be
regarded as an agent for the Operating Partnership. In Commissioner v.
Bollinger, the Supreme Court discussed the tax treatment of corporations
purporting to be agents for their shareholders. 485 U.S. 340 (1988). The
Court enumerated three factors that will lead to the finding of an agency
relationship with respect to an asset: (1) the corporation acquires the asset
with a written agency agreement in place; (2) the corporation functions as an
agent and not as a principal; and (3) the corporation is held out to third
parties as an agent. Id. at 349-50.
CDMC has not and will not hold itself out as an agent for the
Operating Partnership. In addition, there are no agreements between Crescent
Equities and the Voting Shareholders, whether written or oral, that control the
manner in which the Voting Shareholders exercise the voting rights inherent in
the voting stock of CDMC or that restrict the ability of the Voting
Shareholders to alienate such stock. There will be no such agreements between
Crescent Equities
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September 22, 1997
Page 13
and the Voting Shareholders in the future. Moreover, the voting stock of CDMC
owned by the Voting Shareholders is registered in the names of such Voting
Shareholders, and all dividends accruing on stock are delivered to the
addresses of such Voting Shareholders. No evidence exists to indicate that
CDMC did not act independently and in the best interests of its shareholders
when investing in the partnership interest in Manalapan, which has significant
potential for appreciation.
Although CDMC has the right to transfer its interest in Manalapan to
New Crescent, it is under no legal obligation to complete such a transfer. No
agreement, written or unwritten, to transfer the Manalapan interest to Crescent
Operating or any other New Crescent exists between the Operating Partnership
and CDMC. Crescent Equities has also represented that to the best of its
knowledge the Board of Directors of CDMC has made no decision regarding the
possible contribution to New Crescent, will continue to act independently with
regard to this matter, and will take whatever actions it determines are in the
best interest of CDMC at such time, if any, as there is an opportunity to
transfer the partnership interest to New Crescent. In our view, an application
of the Bollinger inquiry to these facts is unlikely to result in a
characterization of the relationship between CDMC and the Operating Partnership
as one between agent and principal, especially because CDMC and the Operating
Partnership will not hold themselves out to the public as principal and agent.
Finally, it is unlikely that the Operating Partnership will be
considered the owner of the partnership interest because, should the value of
the partnership interest depreciate, CDMC bears the risk of loss. CDMC also
will be the entity that benefits should the interest appreciate.
Based on the foregoing, it is our opinion that the Operating
Partnership's purchase of the Option will not be construed as ownership of a
partnership interest in Manalapan.
5. Characterization of the Leases of the Hotel Properties and the
Treatment of Amounts Paid Pursuant to Such Leases as "Rents From Real Property"
On January 3, 1995, we provided the Operating Partnership with a
memorandum (a copy of which is attached hereto) in which we expressed our
opinion that, based on certain assumptions, that the lease of the Hyatt Regency
Beaver Creek would be treated as a lease for federal income tax purposes and
that the rent payable thereunder would qualify as "rents from real property."
On April 1, 1996, we provided the Operating Partnership with a letter (a copy
of which is attached hereto) in which we updated the facts relating to the
lease of the Hyatt Regency Beaver Creek as expressed in our January 3, 1995
memorandum and affirmed the opinions expressed in that memorandum.
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Crescent Real Estate Equities Company
September 22, 1997
Page 14
On June 30, 1995, we provided the Operating Partnership with a
memorandum (a copy of which is attached hereto) in which we expressed our
opinion that, based on certain assumptions, that the lease of the Denver
Marriott City Center would be treated as a lease for federal income tax
purposes and that the rent payable thereunder would qualify as "rents from real
property." On September 27, 1996, we provided the Operating Partnership with a
letter (a copy of which is attached hereto) in which we affirmed the opinions
expressed in our June 30, 1995 memorandum.
On December 19, 1995, we provided the Operating Partnership with a
memorandum (a copy of which is attached hereto) in which we expressed our
opinion that, based on certain assumptions, that the lease of the Hyatt Regency
Albuquerque Plaza would be treated as a lease for federal income tax purposes
and that the rent payable thereunder would qualify as "rents from real
property." On April 1, 1996, we provided the Operating Partnership with a
letter (a copy of which is attached hereto) in which we updated the facts
relating to the lease of the Hyatt Regency Albuquerque Plaza as expressed in
our December 19, 1995 memorandum and affirmed the opinions expressed in that
memorandum.
On July 26, 1996, we provided the Operating Partnership with a
memorandum (a copy of which is attached hereto) in which we expressed our
opinion that, based on certain assumptions, that the lease of the Canyon Ranch
Tucson resort would be treated as a lease for federal income tax purposes and
that the rent payable thereunder would qualify as "rents from real property."
On December 11, 1996, we provided the Operating Partnership with a
letter (a copy of which is attached hereto) in which we expressed our opinion
that, based on certain assumptions, that the lease of the Canyon Ranch Lenox
resort would be treated as a lease for federal income tax purposes and that the
rent payable thereunder would qualify as "rents from real property."
We hereby affirm the opinions expressed in our January 3, 1995, June
30, 1995, December 19, 1995 and July 26, 1996 memoranda, as updated by our
letters dated April 1, 1996, September 27, 1996 and December 11, 1996, and
authorize you to rely upon those opinions in connection with the preparation of
the Registration Statement.
6. Ownership of DBL Holdings, Inc. and Residential Development
Company Voting Stock
Section 856(c)(5) restricts the types of assets that can be held by an
entity seeking to qualify as a REIT. Specifically, section 856(c)(5)(B)
provides that at the close of each quarter of the taxable year, a REIT must
hold no more than 10 percent of the outstanding voting securities of any one
issuer.
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Crescent Real Estate Equities Company
September 22, 1997
Page 15
The term "voting securities" as used in section 856(c)(5)(B) is not
defined in the Code. However, section 856(c)(6)(F) provides that terms not
defined in sections 856 through 859 shall have the same meaning as when used in
the Investment Company Act of 1940, as amended (the "ICA"). Section 2(a)(42)
of the ICA defines "voting security" as "any security presently entitling the
owner or holder thereof to vote for the election of directors of a company."
The IRS has not issued any revenue rulings discussing what constitutes
"voting securities" for purposes of section 856(c)(5)(B). However, the IRS has
issued one revenue ruling discussing what constitutes "voting securities" for
the purposes of section 851(b), which provides rules for qualification as a
regulated investment company (a "RIC"). (The RIC qualification provisions,
like section 856(c)(5)(B), incorporate the definition of "voting securities"
found in the ICA.) In Rev. Rul. 66-339, 1966-2 C.B. 274, the IRS held that a
shareholders' voting agreement was not a voting security for purposes of
section 851(b)(4). The taxpayer in the ruling was a small business investment
company which had made a loan to a corporation. Under the terms of the loan
agreement, a shareholders' agreement was executed, which required the election
of one director designated by the taxpayer during the term of the loan and,
thereafter, as long as the taxpayer owned or had the right to acquire at least
10 percent of the outstanding stock of the corporation. The IRS held that the
shareholders' agreement was not a voting security because the enforceability
the taxpayer's rights under the agreement depended upon the taxpayer's status
as a party to the agreement, rather than as a shareholder.
The IRS has not been entirely comfortable with Rev. Rul. 66-339,
however. In G.C.M. 36823, 1976 IRS GCM Lexis 114 (Aug. 24, 1976), which dealt
with the definition of "voting securities" for purposes of the REIT provisions,
the IRS recommended that Rev. Rul. 66-339 be modified to reflect the
interpretation of the term "voting security" as expressed in an opinion of the
chief counsel of the Securities and Exchange Commission ("SEC"). This opinion
held that "unless there are compelling considerations to the contrary in a
particular case, the definition of 'voting security' in the ICA should
generally be interpreted to include not only the formal legal right to vote for
the election of directors pursuant to the provisions of the law of the state of
incorporation and the corporation's charter and by-laws but also the de facto
power, based on all the surrounding facts and circumstances, to determine, or
influence the determination of, the identity of a corporation's directors." Id.
Despite this recommendation of G.C.M. 36823, however, Rev. Rul. 66-339 has
never been modified and would therefore continue to constitute good authority.
Since the issuance of G.C.M. 36823, the IRS has issued several private
letter rulings in which it has not treated a REIT as owning "voting securities"
of other corporations for purposes of section 856(c)(5)(B), despite the fact
that such securities were actually owned either by officers or shareholders of
the REIT. P.L.R. 8825112 (Mar. 30, 1988); P.L.R. 9340056 (July 13, 1993);
<PAGE> 16
Crescent Real Estate Equities Company
September 22, 1997
Page 16
P.L.R. 9428033 (April 20, 1994); P.L.R. 9436025 (June 8, 1994). In each of
these rulings, the REIT either directly or indirectly held substantial amounts
of the other corporation's nonvoting stock. None of these rulings makes any
mention of either Rev. Rul. 66-339 or the de facto voting power issue raised by
the IRS in G.C.M. 36823.
Although private letter rulings like those mentioned above were issued
by the IRS until June 8, 1994, the IRS subsequently announced that, for the
indefinite future, it would no longer issue private letter rulings with regard
to fact situations involving corporations the voting stock of which is held by
relatives of principal REIT shareholders and/or REIT employees. The IRS has
not provided an explanation for this "no ruling" policy. Nonetheless, the
policy could indicate that the IRS is reconsidering its position on the
treatment of fact situations similar to those involving Crescent Equities and
the Residential Development Corporations.
Crescent Equities does not directly or indirectly own any of the
voting stock of any of the Residential Development Corporations (with the
exception of Landevco and DMDC, the voting stock of which it will sell to a
third party prior to the close of the current quarter) or DBLH. In the case of
MVDC, the voting stock is owned by James Bartlett, Nick Hackstock, Tom
Nezworski, John C. Goff and Gerald W. Haddock (together, the "MVDC Voting
Shareholders"). In the case of HADC, the voting stock is owned by Sam Yager,
John C. Goff and Gerald W. Haddock (together, the "HADC Voting Shareholders").
In the case of CDMC, the voting stock is owned by Harry Frampton, John C. Goff
and Gerald W. Haddock (together, the "CDMC Voting Shareholders"). In the case
of HBCLP, such stock is owned by K-Holdings Co. and David Lesser (together, the
"HBCLP Voting Shareholders"). In the case of DBLH, such stock is owned by
Gerald W. Haddock and John C. Goff (together, the "DBLH Shareholders," and
together with the MVDC Voting Shareholders, the HADC Voting Shareholders, the
CDMC Voting Shareholders, and the HBCLP Voting Shareholders, the "Voting
Shareholders"). Moreover, the voting stock of the Residential Development
Corporations and DBLH owned by the Voting Shareholders is registered in the
names of such Voting Shareholders, and all dividends accruing on stock are
delivered to the addresses of such Voting Shareholders. Therefore, unless
Crescent Equities is deemed to own some of the shares of voting stock of the
Residential Development Corporations or DBLH actually held by the Voting
Shareholders, and provided the Operating Partnership, as represented, disposes
of its Landevco and DMDC voting shares prior to the end of this quarter,
Crescent Equities will not own more than 10 percent of the voting securities of
any of the Residential Development Corporations or DBLH in violation of section
856(c)(5)(B).
Crescent Equities and the Operating Partnership have informed us that
Crescent Operating is likely to be the third party that purchases the voting
stock of DMDC and Landevco. Although Crescent Operating was spun-off by
Crescent Equities and the Operating Partnership, it is not a mere formality
created for tax purposes. The Operating Partnership and Crescent Operating
hold themselves out to the public as separate entities, and the stock of
Crescent Operating is traded separately from the stock of Crescent Equities.
As noted above, following the sale of voting stock to Crescent
Operating, Crescent will not directly or indirectly own any of the voting stock
of DMDC or Landevco. Therefore, unless Crescent is deemed to own some of the
shares of voting stock of DMDC and Landevco actually held by Crescent
Operating, it will not own more than 10 percent of the voting securities of
DMDC in violation of section 856(c)(5)(B).
The IRS could argue that the ownership of some or all of the voting
stock actually held by the Voting Shareholders and Crescent Operating should be
attributed to Crescent Equities under two possible theories: (1) a "nominee" or
"de facto ownership" theory or (2) a constructive ownership theory. There is
no authority indicating that the IRS could successfully assert either of these
theories in a fact situation similar to that involving Crescent Equities and
the Residential Development Corporations or DBLH, however. Therefore, it is
our opinion that Crescent Equities will not be
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Crescent Real Estate Equities Company
September 22, 1997
Page 17
deemed to be the owner of the voting stock of the Residential Development
Corporations or DBLH held by the Voting Shareholders and Crescent Operating for
purposes of section 856(c)(5)(B). In connection with this opinion we note that
both John C. Goff and Gerald W. Haddock are presently officers and trust
managers of Crescent Equities and officers of some of Crescent Equities'
subsidiaries, while David H. Lesser was an employee of Crescent Equities prior
to his acquiring voting stock in HBCLP.
a. "Nominee" or "De Facto Ownership" Theory. Under a
"nominee" or "de facto ownership" theory, the IRS could attribute ownership of
the Residential Development Company voting stock and the DBLH Voting Stock from
the Voting Shareholders and Crescent Operating to Crescent Equities for tax
purposes, based on the "effective control" that Crescent Equities exercises
over the Voting Shareholders and Crescent Operating. The IRS has only applied
a "nominee" or "de facto ownership" theory in situations where there was a
written or oral agreement transferring "effective control" of the stock away
from the record owner, however. No such agreement exists between Crescent
Equities and the Voting Shareholders or Crescent Operating.
For example, in G.C.M. 36823, discussed above, the IRS based its
determination that a taxpayer was the "true owner" of another corporation's
voting stock for purposes of section 856(c)(5)(B) on the fact that the actual
owner of such stock had executed a written agreement giving the taxpayer a
proxy to vote the stock in a number of key situations. Under the agreement,
the taxpayer was given a proxy to vote all of the borrower's voting stock in
the event the borrower proposed (1) a merger or reorganization, (2) a
liquidation and dissolution, (3) any substantial change in business, (4) a sale
or disposition of all or substantially all of its assets, (5) any amendment to
the certificate of incorporation, (6) the organization of any significant
subsidiary, or (7) any substantial investment in any other corporation,
partnership, or joint venture. The proxy did not give the taxpayer the right
to vote for the borrower's directors, however. Nonetheless, the IRS concluded
that the taxpayer should be deemed to own the borrower's voting stock for
purposes of section 856(c)(5)(B), because the agreement with the actual owner
of the borrower's voting stock provided the taxpayer "with the type of control
over directors' decisions that is usually reserved to those having the power to
elect directors, that is, the owners of voting stock." 1976 IRS GCM Lexis 114.
In contrast, the IRS has never attributed ownership of voting
securities to a taxpayer for purposes of section 856(c)(5)(B) in situations
where no agreement regarding how such securities were to be voted existed
between the taxpayer and the actual owners of the securities. For example, in
a series of private letter rulings issued after the issuance of G.C.M. 36823,
the IRS ignored the "effective control" that taxpayers might exercise over
voting stock in situations where such stock was held by the taxpayer's officers
and shareholders. Id.
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Crescent Real Estate Equities Company
September 22, 1997
Page 18
Similarly, outside the context of section 856(c)(5)(B), the IRS has
treated the actual owners of corporate stock as mere nominees only in
situations where there was a written or oral agreement that provided another
party with effective control over such stock. For example, in Rev. Rul. 84-79,
1984-1 C.B. 190, the IRS found that the grantor and sole beneficiary of a
revocable voting trust "directly" owned stock for purposes of section 1504(a),
despite the fact that it had transferred the stock to the voting trust. The
IRS reached this conclusion because the voting trust agreement effectively
allowed the grantor to retain control over the stock, permitting it to revoke
the trust or replace the trustee without cause at any time. See also, Rev.
Rul. 70-469, 1970-2 C.B. 179; Miami National Bank v. Commissioner, 67 T.C. 793
(1977). In contrast, the IRS has not found that corporations retained
effective control of stock for purposes of section 1504(a)(4) in situations
where they transferred such stock to their shareholders, in the absence of a
voting trust agreement. See, e.g., T.A.M. 9206005 (Oct. 24, 1991); T.A.M.
9137003 (May 20, 1991).
The IRS has also refused to treat purchasers of corporate stock as
mere nominees when applying the "solely for voting stock" requirement for
section 368(a)(1)(B) reorganizations. For example, in Rev. Rul. 68-562, 1968-2
C.B. 157, the IRS found that an acquisition of all the stock of one
corporation ("Y") by another corporation ("X"), in exchange for X corporation
voting stock qualified as a section 368(a)(1)(B) reorganization. The IRS
reached this conclusion despite the fact that an individual who owned 90
percent of X's voting stock had purchased 50 percent of Y's stock for cash two
months before such acquisition. The IRS did not attribute this purchase of Y
stock to X, because the actual purchaser, even though he was X's principal
shareholder, was under no obligation to surrender such stock to X. Id. See
also, Rev. Rul. 72-354, 1972-2 C.B. 216 (Acquiring corporation satisfied
"solely for voting stock" requirement for a section 368(a)(1)(B) reorganization
when it sold stock in the target corporation that it had recently purchased for
cash to a third party with no commitment on the part of the third party to
surrender such stock in subsequent reorganization). In contrast, the IRS has
attributed third-party purchases of corporate stock to the acquiring party in a
368(a)(1)(B) reorganization in situations where a third-party purchaser had
previously agreed to transfer the purchased stock to the acquiring party. See,
e.g., G.C.M. 36041, 1974 IRS GCM Lexis 73.
Moreover, under the three-factor test for nominee status set forth by
the Supreme Court in Commissioner v. Bollinger, none of the Voting Shareholders
or Crescent Operating qualifies as a nominee of Crescent Equities with respect
to the Residential Development Corporation voting stock or the DBLH voting
stock. 485 U.S. 340 (1988). Bollinger involved partnerships that developed
apartment complexes in Kentucky. In order to avoid Kentucky's usury laws,
which limited the annual interest rate for noncorporate borrowers, the
partnerships entered into agreements with a corporation wholly owned by an
individual that was a partner in each of the partnerships. Pursuant to the
agreements, the corporation was to hold title to the apartment complexes as the
<PAGE> 19
Crescent Real Estate Equities Company
September 22, 1997
Page 19
partnerships' nominee and agent solely to secure financing. The agreements
also provided that the partnerships were to have sole control of and
responsibility for the complexes, and the partnerships were to be the principal
and owner of the property during financing, construction, and operation. All
parties who had contact with the complexes, if they were aware of the
corporation at all, regarded the partnerships as the owners and knew the
corporation was merely the partnerships' agent. Income and losses from the
complexes were reported on the partnerships' tax returns, and the partners each
reported their distributive share of such income and losses on their individual
returns. The IRS challenged the inclusion of the complexes' losses on the
partners' individual returns on the ground that the losses were attributable to
the corporation as the record owner of the complexes. The IRS argued that in
order for the partners to demonstrate that the corporation was acting merely as
an agent or nominee, they must give evidence of arms-length dealing between the
partnerships and the corporation and the payment of an agency fee. However,
the Supreme Court held that only three factors needed to be present to assure
the genuineness of an agency relationship: (1) the corporation must execute a
written agreement at the time the asset is acquired setting forth the
corporation's agency with respect to the asset, (2) the corporation must
function as an agent and not as a principal with respect to the asset for all
purposes, and (3) the corporation must be held out to be an agent and not a
principal in all dealings with third parties relating to the asset. Id.
Although Bollinger expressly dealt with situations where corporations
were acting as nominees for their shareholders, its three-factor test appears
to be relevant in determining the genuineness of all purported agency
relationships for federal income tax purposes. Therefore, if the IRS were to
assert that the Voting Shareholders and Crescent Operating are holding the
voting stock of the Residential Development Corporations and DBLH as mere
nominees of Crescent Equities, Bollinger's three-factor test should apply in
evaluating the relationship between Crescent Equities and the Voting
Shareholders as well as the relationship between Crescent Equities and Crescent
Operating.
When Bollinger's three-factor test is applied to Crescent Equities'
relationship to the Voting Shareholders and Crescent Operating, it becomes
apparent that the Voting Shareholders and Crescent Operating are not acting as
Crescent Equities' nominees with respect to their ownership of the voting stock
of the Residential Development Corporations and DBLH. First, in contrast to
the situation in Bollinger, where there was a written agreement between the
corporation and the partnerships setting forth the corporation's rights and
duties as agent, here there is and will be no written (or oral) agreement
between Crescent Equities and the Voting Shareholders or Crescent Operating
regarding the Voting Shareholders' and Crescent Operating's rights and duties
with respect to the voting stock of the Residential Development Corporations
and DBLH. Crescent Equities has no control over the ability of the Voting
Shareholders and Crescent Operating to alienate the voting stock and vote such
stock as they choose. Second, unlike the situation in Bollinger, where the
corporation functioned as an agent rather than a principal with respect to the
apartment complexes, here the Voting Shareholders and Crescent Operating
function as principals with respect to the voting stock.
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Crescent Real Estate Equities Company
September 22, 1997
Page 20
As noted above, the Voting Shareholders and Crescent Operating make their own
decisions about alienating the voting stock and how to exercise their voting
power, and they are independently obligated to make their shares of any
additional capital contributions. Third, unlike the situation in Bollinger,
where the corporation was clearly held out to all third parties as a mere agent
of the partnerships, here the Voting Shareholders and Crescent Operating have
been and will be held out to third parties as the true owners of the voting
stock in all respects. For example, the voting stock is registered in the name
of the Voting Shareholders and will be registered in the name of Crescent
Operating, and all corporate notices and dividends, if any, are delivered to
the addresses of the Voting Shareholders and will be delivered to Crescent
Operating.
b. Constructive Ownership Theory. Under a "constructive
ownership theory," the IRS could attempt to attribute ownership of the voting
stock of the Residential Development Corporations and DBLH from the Voting
Shareholders and Crescent Operating to Crescent Equities for purposes of
applying section 856(c)(5)(B). The absence of any relevant constructive
ownership provision should defeat such a position, however.
Although the Code contains several constructive ownership provisions,
such as sections 267(c), 318(a), 544(a), 554(a) and 1563(e), section 318(a) is
the only one that could possibly operate to attribute ownership of the voting
stock of the Residential Development Corporations from the Voting Shareholders
to Crescent Equities. This is because section 318(a) is the only constructive
ownership provision that provides for attribution of stock ownership to
corporations. All of the other constructive ownership provisions provide only
for attribution of stock ownership away from corporations.
The IRS should not be successful in attributing ownership of the
voting stock of the Residential Development Corporations and DBLH to Crescent
Equities under section 318(a), because that section applies only to other Code
sections that expressly provide for its application. There is no indication in
the Code or Treasury Regulations that taxpayers are to apply the constructive
ownership rules of section 318(a) in determining ownership of voting securities
for purposes of section 856(c)(5)(B).
Furthermore, the IRS and the courts have rejected all attempts to
apply section 318(a) to Code sections other than those to which it is expressly
made applicable. Thus, for example, in Brams v. Commissioner, 734 F.2d 290 (6th
Cir. 1984), the Sixth Circuit affirmed a decision of the Tax Court holding
that a transfer of property by a taxpayer to a corporation did not qualify for
nonrecognition treatment under section 351. Section 351 offers nonrecognition
treatment to persons who transfer property to corporations in exchange for
stock, only if such persons are in control of the corporation immediately after
the exchange. Section 368(c) defines "control" for this purpose as ownership
of 80 percent of the total combined voting power of all classes of stock
entitled to vote and at least 80 percent of the total number of shares of all
other classes of stock.
<PAGE> 21
Crescent Real Estate Equities Company
September 22, 1997
Page 21
In Brams, the Sixth Circuit determined that the taxpayer directly owned only
31.6 percent of the outstanding stock of the corporation immediately after the
transaction, and it refused to apply section 318(a) to attribute to the
taxpayer the ownership of an additional 52.6 percent of the outstanding stock
of the corporation held by the taxpayer's sons. Id. See also Yamamoto v.
Commissioner, 51 T.C.M. 1560 (1986) (Section 351 does not apply to a transfer
where the taxpayer owned part of the transferee's stock directly and owned 100%
of the stock of a second corporation which owned the balance of the transferee
corporation's stock).
Similarly, the IRS has refused to apply any attribution rules in
interpreting "control" for the purposes of interpreting the reorganization
provisions of section 368. For example, in Rev. Rul. 56-613, 1956-2 C.B. 212,
the IRS did not treat a corporation as satisfying the control requirement of
section 368(a)(1)(B) of the Code when it acquired 100 percent of one class of
shares of a target corporation, despite the fact that all the other shares of
the target corporation were owned by the acquiring corporation's wholly owned
subsidiary. See also Berghash v. Commissioner, 43 T.C. 743 (1965), aff'd, 361
F.2d 257 (2d Cir. 1966) (the option attribution rules of section 318(a) do not
apply in determining whether the control requirement of section 368(a)(1)(D) is
satisfied); Rev. Rul. 76-36, 1976-1 C.B. 105 (section 318(a) has no application
in determining "changes in ownership" under pre-1987 section 382).
Moreover, even if section 318(a) of the Code were applicable to the
determination of ownership of voting securities for purposes of section
856(c)(5)(B), it would not operate to attribute ownership of the voting stock
of the Residential Development Corporations and DBLH from the Voting
Shareholders and Crescent Operating to Crescent Equities. Section 318(a)(3)(C)
provides that stock ownership is to be attributed from a shareholder to a
corporation only if the shareholder owns, directly or indirectly, 50 percent or
more of the value of the stock of such corporation. The Declaration of Trust
currently contains limitations on stock ownership that will prevent any
shareholder from owning, actually or constructively, more than 8.0 percent of
the value of Crescent Equities common shares. Therefore, unless these
ownership limitations are waived, no person can possibly own, actually or
constructively, 50 percent of the value of Crescent Equities' common shares
required for the application of section 318(a)(3)(C). Consequently, it is our
opinion that Crescent Equities will not be treated for federal income tax
purposes as owning any of the voting stock of any of the Residential
Development Corporations (with the exception of Landevco and DMDC) or DBLH. In
addition, if, as represented, the Operating Partnership disposes of its DMDC
and Landevco voting shares prior to the end of this quarter, then in our
opinion Crescent Equities will not be treated as owning more than 10 percent of
the voting securities of an issuer in violation of section 856(c)(5)(B).
<PAGE> 22
Crescent Real Estate Equities Company
September 22, 1997
Page 22
7. Characterization of the Operating Partnership for U.S. Federal
Income Tax Purposes
a. Classification for Periods on or after January 1, 1997
Section 301.7701-2(a) of the Treasury Regulations provides that a
business entity formed on or after January 1, 1997 with two or more members
will be classified for federal tax purposes as either a corporation or a
partnership, unless it is otherwise subject to special treatment under the
Code. Under sections 301.7701-2(b)(1), (3), (4), (5), (6), (7) and (8) of the
Treasury Regulations, a corporation includes business entities denominated as
such under applicable law, as well as joint-stock companies, insurance
companies, entities that conduct certain banking activities, entities wholly
owned by a state or any political subdivision thereof, entities that are
taxable as corporations under a provision of the Code other than section
7701(a)(3), and certain entities formed under the laws of a foreign
jurisdiction. Section 301.7701-3(a) of the Treasury Regulations provides that
a business entity with two or more members that is not classified as a
corporation under section 301.7701-2(b)(1), (3), (4), (5), (6), (7) or (8) of
the Treasury Regulations (an "Eligible Entity") can elect its classification
for federal income tax purposes. Section 301.7701-3(b)(1) of the Treasury
Regulations provides that a domestic Eligible Entity formed on or after January
1, 1997 will be classified as a partnership unless it elects otherwise. Under
section 301.7701-3(b)(3) of the Treasury Regulations, a domestic Eligible
Entity in existence prior to January 1, 1997 will have the same classification
that the entity claimed under sections 301.7701-1 through 301.7701-3 of the
Treasury Regulations as in effect prior to January 1, 1997 (the "Prior
Regulations"), unless it elects otherwise.
The Operating Partnership was duly organized as a limited partnership
prior to January 1, 1997. The Operating Partnership is not a corporation as
defined under section 301.7701-2(b)(1), (3), (4), (5), (6), (7) or (8) of the
Treasury Regulations. Accordingly, the Operating Partnership is an Eligible
Entity that can elect its classification for federal income tax purposes for
all periods on or after January 1, 1997. You have represented that the
Operating Partnership will claim classification as a partnership under the
Prior Regulations, as reflected on a federal income tax return to be filed by
the Operating Partnership for the tax year ending December 31, 1996. You have
also represented that the Operating Partnership will not file an election to be
treated as a corporation. Based on the foregoing, it is our opinion that the
Operating Partnership will be treated as a partnership for federal income tax
purposes as defined in Code sections 7701(a)(2) and 761(a) and not as an
association taxable as a corporation for all periods on or after January 1,
1997.
b. Classification for Periods Prior to January 1, 1997.
Section 301.7701-3(f)(2) of the Treasury Regulations provides that the claimed
classification of a business entity that is not described in section
301.7701-2(b)(1), (3), (4), (5), (6), (7) or (8) of the Treasury Regulations
<PAGE> 23
Crescent Real Estate Equities Company
September 22, 1997
Page 23
and that was in existence prior to January 1, 1997 generally will be respected
for all periods prior to January 1, 1997 if the entity had a reasonable basis
for its claimed classification, and neither the entity nor any member thereof
was notified in writing on or before May 8, 1996 that the classification of the
entity was under examination.
Section 301.7701-2(a) of the Prior Regulations provided that an entity
that has associates and an objective to carry on a business for joint profit
will be treated as a partnership, and not as an association taxable as a
corporation, if it has not more than two of the following four characteristics
of a corporation: (i) continuity of life; (ii) centralization of management;
(iii) limited liability; and (iv) free transferability of interests. The
entity must also have no other characteristics that are significant in
determining its classification. Generally, other factors are considered only
insofar as they relate to the determination of the presence or absence of the
foregoing corporate characteristics. See Rev. Rul. 79-106, 1979-1 C.B. 448.
Revenue Procedure 89-12, 1989-1 C.B. 798, specified the conditions to
be satisfied for an entity to receive a favorable advanced ruling that it would
be classified as a partnership for federal income tax purposes. The Operating
Partnership may not have met all of the requirements necessary to obtain such a
ruling. Such requirements were applicable only in determining whether rulings
will be issued, however, and were not intended as substantive rules for the
determination of partnership status.
i. Limited Liability. Under section 301.7701-2(d) of
the Prior Regulations, an entity lacks the corporate characteristic of limited
liability if there is at least one member who is personally liable for the
debts of or claims against the partnership. In the case of a limited
partnership, a general partner of a limited partnership is personally liable
under the Prior Regulations if (i) it has substantial assets other than its
interest in the partnership or (ii) it is not a dummy acting as the agent of
the limited partners. As general partner of the Operating Partnership,
Crescent Real Estate Equities, Ltd. ("CREE") is personally liable for all the
debts and obligations of the Operating Partnership and owns a general
partnership interest therein of approximately one percent. However, section
856(i) of the Code provides that qualified REIT subsidiaries are treated as the
same entity as their REIT parent for federal income tax purposes. Therefore,
Crescent Equities will be treated as directly owning CREE's one percent general
partnership interest in the Operating Partnership. Furthermore, Crescent
Equities and the Operating Partnership have represented that CREE will act
independently of the Operating Partnership's limited partners. Therefore, the
Operating Partnership may have lacked the corporate characteristic of limited
liability.
ii. Continuity of Life. Section 301.7701-2(b) of the
Prior Regulations provided that if the bankruptcy, retirement, resignation,
expulsion, or other event of withdrawal of
<PAGE> 24
Crescent Real Estate Equities Company
September 22, 1997
Page 24
a general partner of a limited partnership causes a dissolution of the
partnership, continuity of life does not exist, even if dissolution may be
avoided by the remaining general partners or by at least a majority in interest
of all remaining partners agreeing to continue the partnership. Under Section
13.1.B of the Operating Partnership Agreement, the withdrawal of CREE and the
bankruptcy of Crescent Equities cause the Operating Partnership to terminate,
unless a majority in interest of the remaining partners consent to continue the
Partnership and appoint a new general partner. Accordingly, the Operating
Partnership lacked the corporate characteristic of continuity of life.
iii. Centralization of Management. Section
301.7701-2(c)(4) of the Prior Regulations provided that centralization of
management ordinarily will be found to exist in a limited partnership in which
substantially all of the partnership interests are held by the limited
partners, and that it may exist where the limited partners have a substantially
unrestricted right to remove the general partner. As noted above, under
section 856(i) of the Code, Crescent Equities will be treated as owning a one
percent general partner interest and an approximately 84 percent limited
partnership interest in the Operating Partnership. Furthermore, Section 7.1.A
of the Operating Partnership Agreement provides that the limited partners may
not remove CREE as general partner. Therefore, the Operating Partnership
lacked the corporate characteristic of centralization of management.
iv. Free Transferability of Interests. Section
301.7701-2(e) of the Prior Regulations provided that free transferability of
interests exists if the members owning all or substantially all of the
interests in an organization may substitute for themselves without the consent
of the other members a person who is not a member of the organization. Section
11.4.A of the Operating Partnership Agreement provides that if a limited
partner transfers its interest in the Operating Partnership, the transferee
(unless it falls within certain enumerated categories of transferees) will not
become a substituted limited partner without the prior consent of CREE.
Accordingly, the Operating Partnership may have lacked the corporate
characteristic of free transferability of interests.
v. Summary. In sum, because the Operating Partnership
did not have the corporate characteristics of continuity of life and
centralization of management and may have lacked limited liability and free
transferability, it is our opinion that the Operating Partnership had a
reasonable basis for claiming partnership classification under the Prior
Regulations. Based on the foregoing, it is our opinion that the Operating
Partnership will be treated as a partnership as defined in sections 7701(a)(2)
and 761(a) of the Code and not as an association taxable as a corporation for
all periods prior to January 1, 1997.
<PAGE> 25
Crescent Real Estate Equities Company
September 22, 1997
Page 25
c. Publicly Traded Partnership Status.
Section 7704 of the Code provides that certain publicly traded
partnerships may be taxed as corporations even though they otherwise meet all
of the relevant tests for treatment as partnerships for federal income tax
purposes. A partnership is considered to be a publicly traded partnership if
interests in the partnership are (or become) (i) traded on an established
securities market or (ii) readily tradable on a secondary market or the
substantial equivalent thereof. Treasury Regulations issued under section
7704(b) of the Code provide that interests in a partnership will not be treated
as readily tradable on a secondary market or the substantial equivalent thereof
if (i) all interests in the partnership were issued in a transaction that was
not registered under the Securities Act of 1933, and (ii) the partnership does
not have more than 100 partners at any time during its taxable year. For
purposes of determining the number of partners in the partnership, persons
owning an interest through a flow-through entity are treated as partners in the
partnership only if (i) substantially all of the value of the flow-through
entity is attributable to the lower-tier partnership interest, and (ii) a
principal purpose for the tiered arrangement is to permit the partnership to
satisfy the 100 partner requirement.
Based upon the structure and capitalization of the Operating
Partnership and representations of the Operating Partnership regarding its
current ownership, it is our opinion that the Operating Partnership will not
constitute a publicly traded partnership for purposes of section 7704 of the
Code.
8. Characterization of the Subsidiary Partnerships for U.S.
Federal Income Tax Purposes
a. Classification of Periods on or After January 1, 1997.
As previously discussed, under section 301.7701-3(b)(3) of the Treasury
Regulations, a domestic Eligible Entity in existence prior to January 1, 1997
will have the same classification that the entity claimed under sections
301.7701-1 through 301.7701-3 of the Prior Regulations, unless it elects
otherwise. The Subsidiary Partnerships, other than Funding VII which was duly
organized as a limited Partnership on April 29, 1997, were duly organized as
limited partnerships prior to January 1, 1997. Such Subsidiary Partnerships
are not corporations as defined under section 301.7701-2(b)(1), (3), (4), (5),
(6), (7) or (8) of the Treasury Regulations. Accordingly, each of the
Subsidiary Partnerships formed prior to January 1, 1997 is an Eligible Entity
that can elect its classification for federal income tax purposes for all
periods after January 1, 1997. Crescent Equities has represented to us that
each of the Subsidiary Partnerships formed prior to January 1, 1997 will claim
classification as a partnership under the Prior Regulations, as reflected on
federal income tax returns to be filed by each Subsidiary Partnership for the
tax year ending December 31, 1996. Crescent Equities has also represented that
none of the Subsidiary Partnerships will file an election to be treated as a
corporation. Based on the foregoing, it is our opinion that the
<PAGE> 26
Crescent Real Estate Equities Company
September 22, 1997
Page 26
Subsidiary Partnerships will be treated as partnerships for federal income tax
purposes as defined in sections 7701(a)(2) and 761(a) of the Code and not as
associations taxable as corporations for all periods on or after January 1,
1997.
b. Classification for Periods Prior to January 1, 1997
i. Funding I. The Operating Partnership owns a
99.6 percent interest in Funding I as a limited partner, while the remaining
0.4 percent general partner's interest is owned by CRE Management I Corp., a
wholly owned subsidiary of CREE. (However, with respect to the Waterside
Commons property, which is held by Funding I, Waterside Commons Limited
Partnership owns a 99 percent interest in Funding I as a limited partner, while
the remaining 1 percent general partner's interest is owned by CRE Management I
Corp.)
The Funding I Agreement provides in Sections 13.1.B and 13.1.D that
the dissolution, insolvency, bankruptcy or other event of withdrawal of the
general partner will cause the partnership to terminate, unless a majority in
interest of the remaining partners consent to continue the partnership and
appoint a new general partner. Accordingly, Funding I lacked the corporate
characteristic of continuity of life.
The Funding I Agreement provides in Section 11.1.B that no partner may
transfer all or any portion of its interest in the partnership. Accordingly,
Funding I lacked the corporate characteristic of free transferability of
interests.
Based on the continued organization and operation of Funding I in
accordance with its partnership agreement and the Delaware Revised Uniform
Limited Partnership Act (the "Act"), Funding I lacked the corporate
characteristics of continuity of life and free transferability of interests.
Accordingly, it is our opinion that Funding I had a reasonable basis for
claiming partnership classification under the Prior Regulations. Based on the
foregoing, it is our opinion that Funding I will be treated as a partnership as
defined in sections 7701(a)(2) and 761(e) of the Code and not as an association
taxable as a corporation for all periods prior to January 1, 1997.
In addition, based upon the structure and capitalization of Funding I
and representations of the Operating Partnership regarding Funding I's current
ownership, it is our opinion that Funding I will not constitute a publicly
traded partnership for purposes of section 7704 of the Code.(6)
- ----------------------------------
(6) For purposes of this opinion, we have assumed that Funding I will not
be treated as having more than three partners (Management I, the
Operating Partnership, and CW #1 Limited Partnership) for purposes of
section 1.7704-1(h) of the Treasury Regulations. Although the
Operating Partnership and CW #1 Limited Partnership are flow-through
entities for purposes of section 1.7704-1(h)(3), we have assumed that
the partners in the Operating Partnership and CW #1 Limited
Partnership will not be treated as partners in Funding I for purposes
of the 100 partner requirement, based upon your representation that
Funding I will not represent substantially all of the assets of either
the Operating Partnership or CW #1 Limited Partnership.
<PAGE> 27
Crescent Real Estate Equities Company
September 22, 1997
Page 27
ii. Funding II. The Operating Partnership owns a
99.8 percent interest in Funding II as a limited partner, while the remaining
0.2 percent general partner's interest is owned by CRE Management II Corp., a
wholly owned subsidiary of CREE.
The Funding II Agreement provides in Sections 13.1.B and 13.1.D that
the dissolution, insolvency, bankruptcy or other event of withdrawal of the
general partner will cause Funding II to terminate, unless a majority in
interest of the remaining partners consent to continue the partnership and
appoint a new general partner. Accordingly, Funding II lacked the corporate
characteristic of continuity of life.
In addition, the Funding II Agreement provides in Section 11.1.B that
no partner may transfer all or any portion of its interest in the partnership.
Accordingly, Funding II lacked the corporate characteristic of free
transferability of interests.
Based on the continued organization and operation of Funding II in
accordance with its partnership agreement and the Act, Funding II lacked the
corporate characteristics of continuity of life and free transferability of
interests. Accordingly, it is our opinion that Funding II had a reasonable
basis for claiming partnership classification under the Prior Regulations.
Based on the foregoing, it is our opinion that Funding II will be treated as a
partnership as defined in sections 7701(a)(2) and 761(e) of the Code and not as
an association taxable as a corporation for all periods prior to January 1,
1997.
In addition, based upon the structure and capitalization of Funding II
and representations of the Operating Partnership regarding Funding II's current
ownership, it is our opinion that Funding II will not constitute a publicly
traded partnership for purposes of section 7704 of the Code.(7)
- ----------------------------------
(7) For purposes of this opinion, we have assumed that Funding II will not
be treated as having more than two partners (Management II and the
Operating Partnership) for purposes of section 1.7704-1(h) of the
Treasury Regulations. Although the Operating Partnership is a
flow-through entity for purposes of section 1.7704-1(h)(3), we have
assumed that the partners in the Operating Partnership will not be
treated as partners in Funding II for purposes of the 100 partner
requirement, based upon your representation that Funding II will not
represent substantially all of the assets of the Operating
Partnership.
<PAGE> 28
Crescent Real Estate Equities Company
September 22, 1997
Page 28
iii. Funding III, Funding IV and Funding V. The Operating
Partnership owns an approximately 99 percent interest in each of Funding III,
Funding IV and Funding V as a limited partner. Nine Greenway, Ltd. owns a 0.1
percent limited partnership interest in each of Funding III, Funding IV and
Funding V. The remaining approximately 0.9 percent general partner's
interest in Funding III is owned by CRE Management III Corp., CRE Management IV
Corp. owns an approximately 0.9 percent general partner interest in Funding IV,
and CRE Management V Corp. owns an approximately 0.9 percent general partner
interest in Funding V. CRE Management III Corp., CRE Management IV Corp. and
CRE Management V Corp. are each wholly owned subsidiaries of CREE. The Funding
III Agreement, the Funding IV Agreement and the Funding V Agreement (together,
the "Funding Agreements") are substantially identical with respect to the terms
discussed herein.
Each of the Funding Agreements provides in Paragraph 18 that the
partnership shall dissolve and be wound up upon the occurrence of any of the
following events: (i) the expiration of the term of the partnership on December
31, 2096 (unless terminated earlier); (ii) the sale or disposition of
substantially all of the assets of the partnership; (iii) the written election
of all of the partners to dissolve the partnership; and (iv) unless, the
limited partner elects within ninety days to continue the partnership, upon the
dissolution of the general partner or if the general partner (a) makes a
general assignment for the benefit of creditors, (b) is adjudicated bankrupt or
insolvent, or (c) files a voluntary petition in bankruptcy or in the event
there is an order for relief entered against the general partner under the
Federal Bankruptcy Code of 1978, as amended (or a similar order under a
successor statute). Accordingly, Funding III, Funding IV and Funding V each
lacked the corporate characteristic of continuity of life.
In addition, each of the Funding Agreements provides in Paragraph 14
that no partner may transfer all or any portion of its interest in the
partnership and that any purported transfer of a partnership interest will be
null and void. Accordingly, Funding III, Funding IV and Funding V each lacked
the corporate characteristic of free transferability of interests.
Based on the continued organization and operation of each of Funding
III, Funding IV and Funding V in accordance with its partnership agreement and
the Act, Funding III, Funding IV and Funding V each lacked the corporate
characteristics of continuity of life and free transferability of interests.
Accordingly, it is our opinion that Funding III, Funding IV and Funding V each
had a reasonable basis for claiming partnership classification under the Prior
Regulations. Based on the foregoing, it is our opinion that each will be
treated as a partnership as defined in sections 7701(a)(2) and 761(e) of the
Code and not as an association taxable as a corporation for all periods prior
to January 1, 1997.
In addition, based upon the structure and capitalization of Funding
III, Funding IV and Funding V and representations of the Operating Partnership
regarding the current ownership of
<PAGE> 29
Crescent Real Estate Equities Company
September 22, 1997
Page 29
Funding III, Funding IV and Funding V, it is our opinion that neither Funding
III, Funding IV nor Funding V will constitute a publicly traded partnership for
purposes of section 7704 of the Code.(8)
iv. Funding VI.
The Operating Partnership owns a 99 percent interest in Funding VI as
a limited partner, while the remaining one percent general partner's interest
is owned by CRE Management VI Corp., a wholly owned subsidiary of CREE.
The Funding VI Agreement provides in Section 13.1 that the
dissolution, insolvency, bankruptcy or other event of withdrawal of the general
partner will cause Funding VI to terminate, unless a majority in interest of
the remaining partners consent to continue the partnership and appoint a new
general partner. Accordingly, Funding VI lacked the corporate characteristic
of continuity of life.
In addition, the Funding VI Agreement provides in Section 11.1 that no
partner may transfer all or any portion of its interest in the partnership.
Accordingly, Funding VI lacked the corporate characteristic of free
transferability of interests.
Based on the continued organization and operation of Funding VI in
accordance with its partnership agreement and the Act, Funding VI lacked the
corporate characteristics of continuity of life and free transferability of
interests. Accordingly, it is our opinion that Funding VI had a reasonable
basis for claiming partnership classification under the Prior Regulations.
Based on the foregoing, it is our opinion that Funding VI will be treated as a
partnership as defined in sections 7701(a)(2) and 761(e) of the Code and not as
an association taxable as a corporation for all periods prior to January 1,
1997.
In addition, based upon the structure and capitalization of Funding VI
and representations of the Operating Partnership regarding Funding VI's current
ownership, it is our opinion that Funding VI will not constitute a publicly
traded partnership for purposes of section 7704 of the Code.(9)
- ----------------------------------
(8) For purposes of this opinion, we have assumed that each of Funding
III, Funding IV and Funding V will be treated as having no more than
three partners for purposes of section 1.7704-1(h) of the Treasury
Regulations. Although the Operating Partnership is a flow-through
entity for purposes of section 1.7704-1(h)(3), we have assumed that
the partners in the Operating Partnership will not be treated as
partners in Funding III, Funding IV or Funding V for purposes of the
100 partner requirement, based upon your representation that neither
Funding III, Funding IV nor Funding V will represent substantially all
of the assets of the Operating Partnership.
(9) For purposes of this opinion, we have assumed that Funding VI will not
be treated as having more than two partners (Management VI and the
Operating Partnership) for purposes of section 1.7704-1(h) of the
Treasury Regulations. Although the Operating Partnership is a
flow-through entity for purposes of section 1.7704-1(h)(3), we have
assumed that the partners in the Operating Partnership will not be
treated as partners in Funding VI for purposes of the 100 partner
requirement, based upon your representation that Funding VI will not
represent substantially all of the assets of the Operating
Partnership.
<PAGE> 30
Crescent Real Estate Equities Company
September 22, 1997
Page 30
v. CresCal. The Operating Partnership owns a 99 percent
interest in CresCal as a limited partner, while the remaining one percent
general partner's interest is owned by CresCal Properties, Inc., a wholly owned
subsidiary of CREE.
The CresCal Agreement provides in Section 15(a) that the dissolution,
insolvency, bankruptcy or other event of withdrawal of the general partner will
cause CresCal to terminate, unless a majority in interest of the remaining
partners consent to continue the partnership and appoint a new general partner.
Accordingly, CresCal lacked the corporate characteristic of continuity of life.
In addition, the CresCal Agreement provides in Section 14 that no partner may
transfer all or any portion of its interest in the partnership. Accordingly,
CresCal lacked the corporate characteristic of free transferability of
interests.
Based on the continued organization and operation of CresCal in
accordance with its partnership agreement and the Act, CresCal lacked the
corporate characteristics of continuity of life and free transferability of
interests. Accordingly, it is our opinion that CresCal had a reasonable basis
for claiming partnership classification under the Prior Regulations. Based on
the foregoing, it is our opinion that CresCal will be treated as a partnership
as defined in sections 7701(a)(2) and 761(e) of the Code and not as an
association taxable as a corporation for all periods prior to January 1, 1997.
In addition, based upon the structure and capitalization of CresCal
and representations of the Operating Partnership regarding CresCal's current
ownership, it is our opinion that CresCal will not constitute a publicly traded
partnership for purposes of section 7704 of the Code.(10)
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(10) For the purposes of this opinion we have assumed that CresCal will
not be treated as having more than two partners for purposes of
section 1.7704-1(h) of the Treasury Regulation (CresCal Properties,
Inc. and Crescent Real Estate Equities Limited Partnership (the
"Operating Partnership")). Although the Operating Partnership is a
flow-through entity for purposes of section 1.7704-1(h)(2), we have
assumed that the partners in the Operating Partnership will not be
treated as partners in CresCal for purposes of the 100 partner
requirement, based upon your representation that CresCal will not
represent substantially all of the assets of the Operating
Partnership.
<PAGE> 31
Crescent Real Estate Equities Company
September 22, 1997
Page 31
vi. CresTex. The Operating Partnership owns a 99 percent
interest in CresTex, while the remaining one percent interest is owned by
CresCal Properties, Inc. The IRS has applied the same four-factor test,
described above, in determining whether limited liability companies, like
CresTex, which have been formed under the Delaware Limited Liability Company
Act, are treated as partnerships for federal income tax purposes.(11)
As noted above, under section 301.7701-2(b)(3) of the Prior
Regulations, an organization will be treated as possessing the corporate
characteristic of continuity of life, even if the agreement organizing an
entity provides that it is to continue only for a stated period, unless a
member has the power to dissolve the organization at an earlier time. Section
18-801 of the Delaware Limited Liability Company Act provides that a limited
liability company dissolves upon the first to occur of the following: (1) at
the time specified in an LLC agreement or 30 years from the date of formation
of the LLC if no time is set forth in the LLC agreement, (2) upon the happening
of events specified in an LLC agreement, (3) by the written consent of all
members, (4) by the death, retirement, resignation, expulsion, bankruptcy, or
dissolution of a member or the occurrence of any other event which terminates
the continued membership of a member in the LLC, unless the business of the LLC
is continued by the consent of all the remaining members within 90 days
following the occurrence of any terminating event or pursuant to a right to
continue stated in the LLC agreement, or (5) by the entry of a decree of
judicial dissolution under the Delaware Limited Liability Company Act. Section
1.04 of the CresTex Agreement provides that the duration of CresTex is until
the close of business on December 31, 2050, or until its earlier dissolution
upon an "Event of Dissolution" in accordance with Section 12.01 of the CresTex
Agreement. Section 12.01 of the CresTex Agreement provides that CresTex shall
be dissolved prior to December 31, 2050 upon the following "Events of
Dissolution": (1) the mutual consent of all members, (2) the withdrawal, death,
retirement, resignation, expulsion, bankruptcy, legal incapacity or dissolution
of any member, (3) a sale by CresTex of its assets, or (4) a decree of judicial
dissolution. Section 12.05 of the CresTex Agreement, however, provides that if
any Event of Dissolution occurs with respect to CresCal Properties, Inc., the
business of CresTex will be continued if, within ninety days, the remaining
members unanimously decide to continue the business and to approve the
admission of a new member, effective immediately before the dissolution event.
Accordingly, CresTex lacked the corporate characteristic of continuity of life.
Section 18-702(a) of the Delaware Limited Liability Company Act
provides, in part, that unless otherwise provided by the company's LLC
agreement, a membership interest is assignable in whole or in part; an
assignment of a member's interest does not entitle the assignee to participate
in the management of the business and affairs of the LLC. Section 18-704(a) of
the
- ----------------------------------
(11) See, e.g., Rev. Rul. 93-38, 1993-21 I.R.B. 4, P.L.R. 9602012
(October 6, 1995) and P.L.R. 9507004 (November 8, 1994).
<PAGE> 32
Crescent Real Estate Equities Company
September 22, 1997
Page 32
Delaware Limited Liability Company Act provides, in part, that an assignee of a
membership interest may become a member if and to the extent that the company's
LLC agreement so provides, or all members consent. Section 10.02 of the
CresTex Agreement provides that no member may withdraw from CresTex or transfer
all or any part of its interest in CresTex and that any purported transfer of
an interest in CresTex shall be null and void. Accordingly, CresTex lacked the
corporate characteristic of free transferability of interests.
In sum, because CresTex lacked the corporate characteristics of
continuity of life and free transferability of interests, it is our opinion
that CresTex had a reasonable basis for claiming partnership classification
under the Prior Regulations. Based on the foregoing, it is our opinion that
CresTex will be treated as a partnership as defined in sections 7701(a)(2) and
761(a) of the Code and not as an association taxable as a corporation for all
periods prior to January 1, 1997.
In addition, based upon the structure and capitalization of CresTex
and representations of the Operating Partnership regarding the current
ownership of CresTex, it is our opinion that CresTex will not constitute a
publicly traded partnership for purposes of section 7704 of the Code.(12)
vii. Waterside. The Operating Partnership owns an 89
percent interest in Waterside as a general partner, while the remaining 11
percent limited partner's interest is owned by Associates (1 percent) and CW #1
Limited Partnership (10 percent).
The Waterside Agreement provides in Section 7.1(c) that the bankruptcy
or other event of withdrawal of the general partnos will cause the partnership
to terminate. Accordingly, Waterside lacked the corporate characteristic of
continuity of life.
As the general partner of Waterside, the Operating Partnership will be
personally liable for all the debts and obligations of Waterside and, as noted
above, the Operating Partnership will own an 89 percent interest in Waterside.
In addition, the Operating Partnership has represented that it will act
independently of CW #1 Limited Partnership in managing Waterside. Therefore,
Waterside lacked the corporate characteristics of limited liability and
centralization of management.
- ----------------------------------aa
(12) For purposes of this opinion, we have assumed that CresTex will not be
treated as having more than two partners for purposes of section
1.7704-1(h) of the Treasury Regulations (CresCal Properties, Inc. and
the Operating Partnership). Although the Operating Partnership is a
flow-through entity for purposes of section 1.7704-1(h)(3), we have
assumed that the partners in the Operating Partnership will not be
treated as members of CresTex for purposes of the 100 partner
requirement, based upon your representation that CresTex will not
represent substantially all of the assets of the Operating
Partnership.
<PAGE> 33
Crescent Real Estate Equities Company
September 22, 1997
Page 33
Based on the continued organization and operation of Waterside in
accordance with its partnership agreement and the Act, Waterside lacked the
corporate characteristics of continuity of life, limited liability and
centralization of management. Accordingly, it is our opinion that Waterside
had a reasonable basis for claiming partnership classification under the Prior
Regulations. Based on the foregoing, it is our opinion that Waterside will be
treated as a partnership as defined in sections 7701(a)(2) and 761(e) and not
as an association taxable as a corporation for all periods prior to January 1,
1997.
In addition, based upon the structure and capitalization of Waterside
and representations of the Operating Partnership regarding Waterside's current
ownership, it is our opinion that Waterside will not constitute a publicly
traded partnership for purposes of section 7704 of the Code.(13)
viii. Associates. The Operating Partnership owns a 90
percent interest in Associates, while the remaining 10 percent interest is
owned by CREE, Ltd.. The IRS has applied the same four-factor test, described
above, in determining whether limited liability companies, like Associates,
which have been formed under the Texas Limited Liability Company Act, are
treated as partnerships for federal income tax purposes.(14)
Article 6.01 of the Texas Limited Liability Company Act provides, in
part, that except as otherwise provided in the company's regulations, a limited
liability company shall be dissolved upon the death, retirement, resignation,
expulsion, bankruptcy, or dissolution of a member or the occurrence of any
other event which terminates the continued membership of a member in the
limited liability company, unless there is at least one remaining member and
the business of the limited liability company is continued by the consent by
the number of members or class thereof stated in the articles of organization
or regulations of the limited liability company or of not so stated, by all
remaining members. Article 2 of the Associates Articles provides that the
duration of Associates is until the close of business on December 31, 2014, or
until its earlier dissolution in
- -------------------------------
(13) For purposes of this opinion, we have assumed that Waterside will not
be treated as having more than three partners (CW #1 Limited
Partnership, CREE, Ltd. and the Operating Partnership) for purposes of
section 1.7704-1(h) of the Treasury Regulations. Although the
Operating Partnership and CW #1 Limited Partnership are flow-through
entities for purposes of section 1.7704-1(h)(3), we have assumed that
the partners in the Operating Partnership and CW #1 Limited
Partnership will not be treated as partners in Waterside for purposes
of the 100 partner requirement, based upon your representation that
Waterside will not represent substantially all of the assets of either
the Operating Partnership or CW #1 Limited Partnership.
(14) See, e.g., P.L.R. 9242025 (July 22, 1992) and P.L.R. 9218078 (January
31, 1992).
<PAGE> 34
Crescent Real Estate Equities Company
September 22, 1997
Page 34
accordance with the provisions of the Act or the Associates Regulations.
Article 10.2(a)(iii) of the Associates Regulations provides, in part, that
Associates shall be dissolved upon the withdrawal, death, retirement,
resignation, expulsion, bankruptcy, legal incapacity or dissolution of any
member, unless the business of Associates is continued by the consent of all
the remaining members within ninety days. Accordingly, Associates lacked the
corporate characteristic of continuity of life.
Article 4.05 of the Texas Limited Liability Company Act provides, in
part, that unless otherwise provided by the company's regulations, a membership
interest is assignable in whole or in part; an assignment of a member's
interest does not entitle the assignee to become, or to exercise rights or
powers of a member; and until the assignee becomes a member, the assignor
member continues to be a member and to have the power to exercise any rights or
powers of a member, except to the extent those rights or powers are assigned.
Article 4.07 of the Texas Limited Liability Company Act provides, in part, that
an assignee of a membership interest may become a member if and to the extent
that the company's regulations so provide, or all members consent. Article 9.1
of the Associates Regulations, as amended by the First Amendment to the
Associates Regulations, provides that no member shall have the right to
withdraw from Associates or transfer all or any portion of its interest in
Associates. Accordingly, Associates lacked the corporate characteristic of
free transferability of interests.
In sum, because Associates lacked the corporate characteristics of
continuity of life and free transferability of interests, it is our opinion
that Associates had a reasonable basis for claiming partnership classification
under the Prior Regulations. Based on the foregoing, it is our opinion that
Associates will be treated as a partnership as defined in sections 7701(a)(2)
and 761(a) of the Code and not as an association taxable as a corporation for
all periods prior to January 1, 1997.
In addition, based upon the structure and capitalization of Associates
and representations of the Operating Partnership regarding Associates current
ownership, it is our opinion that Associates will not constitute a publicly
traded partnership for purposes of section 7704 of the Code.(15)
- ----------------------------------
(15) For purposes of this opinion, we have assumed that Associates will not
be treated as having more than two partners for purposes of section
1.7704-1(h) of the Treasury Regulations (CREE, Ltd. and the Operating
Partnership). Although the Operating Partnership is a flow-through
entity for purposes of section 1.7704-1(h)(3), we have assumed that
the partners in the Operating Partnership will not be treated as
partners in Associates for purposes of the 100 partner requirement,
based upon your representation that Associates will not represent
substantially all of the assets of the Operating Partnership.
<PAGE> 35
Crescent Real Estate Equities Company
September 22, 1997
Page 35
ix. Woodlands Partnership. The Operating Partnership owns
a 75 percent interest in the Woodlands Partnership as a limited partner, while
the remaining 25 percent general partner's interest is owned by The Woodlands
Office Equities, Inc., a wholly owned subsidiary of The Woodlands Corporation
("TWC Sub").
The Woodlands Partnership Agreement provides in Articles 10.1 and 10.2
that the Woodlands Partnership will terminate upon any event affecting the
general partner that would cause the dissolution of a limited partnership under
the Texas Revised Limited Partnership Act, unless the limited partner consents
to continue the partnership and appoint a new general partner. Accordingly,
the Woodlands Partnership lacked the corporate characteristic of continuity of
life.
Article 7.2.1 of the Woodlands Partnership Agreement provides for
certain circumstances in which a partner may transfer its interest in the
Woodlands Partnership beginning after the eighth anniversary of the
Contribution Date. Article 7.2.2 of the Woodlands Partnership Agreement,
however, provides that a person to whom an interest in the Woodlands
Partnership is transferred shall not be admitted to the Woodlands Partnership
without the prior written consent of the other partner, which consent may be
granted or withheld at the sole discretion of the other partner. Accordingly,
the Woodlands Partnership lacked the corporate characteristic of free
transferability of interests.
As noted above, the general partner of the Woodlands Partnership, TWC
Sub, owns a 25 percent interest in the Woodlands Partnership. Furthermore,
Article 9.3 of the Woodlands Partnership Agreement provides that the limited
partner may not remove TWC Sub as general partner, except upon the occurrence
of specified events of default. Accordingly, the Woodlands Partnership lacked
the corporate characteristic of centralization of management.
In sum, because the Woodlands Partnership lacked the corporate
characteristics of continuity of life, free transferability of interests and
centralization of management, it is our opinion that the Woodlands Partnership
had a reasonable basis for claiming partnership classification under the Prior
Regulations. Based on the foregoing, it is our opinion that the Woodlands
Partnership will be treated as a partnership as defined in sections 7701(a)(2)
and 761(a) of the Code and not as an association taxable as a corporation for
all periods prior to January 1, 1997.
In addition, based upon the structure and capitalization of the
Woodlands Partnership and representations of the Operating Partnership
regarding the current ownership of the Woodlands Partnership, it is our opinion
that the Woodlands Partnership will not constitute a publicly traded
partnership for purposes of section 7704 of the Code.(16)
- ----------------------------------
(16) For purposes of this opinion, we have assumed that the Woodlands
Partnership will not be treated as having more than two partners (TWC
Sub and the Operating Partnership) for purposes of section 1.7704-1(h)
of the Treasury Regulations. Although the Operating Partnership is a
flow-through entity for purposes of section 1.7704-1(h)(3), we have
assumed that the partners in the Operating Partnership will not be
treated as partners in the Woodlands Partnership for purposes of the
100 partner requirement, based upon your representation that the
Woodlands Partnership will not represent substantially all of the
assets of the Operating Partnership.
<PAGE> 36
Crescent Real Estate Equities Company
September 22, 1997
Page 36
x. WRE. The Operating Partnership owns a 75 percent
interest in WRE as a limited partner, while the remaining 25 percent general
partner's interest is owned by The Woodlands Office Equities, Inc., a wholly
owned subsidiary of The Woodlands Corporation ("TWC Sub").
The WRE Agreement provides in Articles 10.1 and 10.2 that WRE will
terminate upon any event affecting the general partner that would cause the
dissolution of a limited partnership under the Texas Revised Limited
Partnership Act, unless the limited partner consents to continue the
partnership and appoint a new general partner. Accordingly, WRE lacked the
corporate characteristic of continuity of life.
Article 7.2.1 of the WRE Agreement provides for certain circumstances
in which a partner may transfer its interest in WRE beginning after the eighth
anniversary of the Contribution Date. Article 7.2.2 of the WRE Agreement,
however, provides that a person to whom an interest in WRE is transferred shall
not be admitted to WRE without the prior written consent of the other partner,
which consent may be granted or withheld at the sole discretion of the other
partner. Accordingly, WRE lacked the corporate characteristic of free
transferability of interests.
As noted above, the general partner of WRE, TWC Sub, owns a 25 percent
interest WRE. Furthermore, Article 9.3 of the WRE Agreement provides that the
limited partner may not remove TWC Sub as general partner, except upon the
occurrence of specified events of default. Accordingly, WRE lacked the
corporate characteristic of centralization of management.
In sum, because WRE lacked the corporate characteristics of continuity
of life, free transferability of interests and centralization of management, it
is our opinion that WRE had a reasonable basis for claiming partnership
classification under the Prior Regulations. Based on the foregoing, it is our
opinion that WRE will be treated as a partnership as defined in sections
7701(a)(2) and 761(a) of the Code and not as an association taxable as a
corporation for all periods prior to January 1, 1997.
<PAGE> 37
Crescent Real Estate Equities Company
September 22, 1997
Page 37
In addition, based upon the structure and capitalization of WRE and
representations of the Operating Partnership regarding the current ownership of
WRE, it is our opinion that WRE will not constitute a publicly traded
partnership for purposes of section 7704 of the Code.(17)
xi. 301 Congress. The Operating Partnership owns a 49
percent limited partner interest in 301 Congress, a Delaware limited
partnership. The one percent general partner interest in 301 Congress is owned
by Crescent/301, a Delaware limited liability company that is wholly owned by
Operating Partnership and CREE, Ltd., and the remaining 50 percent limited
partner interest in 301 Congress is owned by Aetna Life Insurance Company
("Aetna").
The 301 Congress Partnership Agreement provides in Section 2.6 that
301 Congress will terminate seven years from the effective date of the 301
Congress Partnership Agreement, unless dissolved earlier under Article X of
such agreement. Article X of the 301 Congress Partnership Agreement provides
that 301 Congress will be dissolved upon the first to occur of the following:
(1) the expiration of seven years from the effective date of the 301 Congress
Partnership Agreement; (2) the sale, transfer or other disposition of the 301
Congress assets; (3) the acquisition by one partner of all of the interests in
301 Congress; (4) the occurrence of any "Event of Withdrawal" with respect to
the general partner under the Delaware Limited Partnership Act, unless a
majority of the remaining partners consent within 90 days to continue the
partnership and appoint a new general partner, effective as of the date of the
Event of Withdrawal; (5) the decision of all partners to dissolve 301 Congress;
(6) the election of a non-defaulting partner to dissolve 301 Congress upon a
default of another partner under Section 9.5 of the 301 Congress Partnership
Agreement; or (7) the entry of a judicial decree of dissolution. Accordingly,
301 Congress lacked the corporate characteristic of continuity of life.
Section 9.2 of the 301 Congress Partnership Agreement provides that no
partner shall have the right, without the express written consent of each other
partner, to transfer an interest in 301 Congress Avenue, with the exception of
certain transfers between Aetna, Crescent/301 and the Operating Partnership and
their respective affiliates. However, in the case of transfers between Aetna,
Crescent/301 and the Operating Partnership and their respective affiliates,
Section 9.2 of the 301 Congress Partnership Agreement provides that the
transferee shall not be admitted
- ----------------------------------
(17) For purposes of this opinion, we have assumed that WRE will not be
treated as having more than two partners (TWC Sub and the Operating
Partnership) for purposes of section 1.7704-1(h) of the Treasury
Regulations. Although the Operating Partnership is a flow-through
entity for purposes of section 1.7704-1(h)(3), we have assumed that
the partners in the Operating Partnership will not be treated as
partners in WRE for purposes of the 100 partner requirement, based
upon your representation that WRE will not represent substantially all
of the assets of the Operating Partnership.
<PAGE> 38
Crescent Real Estate Equities Company
September 22, 1997
Page 38
as a substitute partner without the consent of all other partners.
Accordingly, 301 Congress lacked the corporate characteristic of free
transferability of interests.
In sum, because 301 Congress lacked the corporate characteristics of
continuity of life and free transferability of interests, it is our opinion
that 301 Congress had a reasonable basis for claiming partnership
classification under the Prior Regulations. Based on the foregoing, it is our
opinion that 301 Congress will be treated as a partnership as defined in
sections 7701(a)(2) and 761(a) of the Code and not as an association taxable as
a corporation for all periods prior to January 1, 1997.
In addition, based upon the structure and capitalization of 301
Congress and representations of the Operating Partnership regarding the current
ownership of 301 Congress, it is our opinion that 301 Congress will not
constitute a publicly traded partnership for purposes of section 7704 of the
Code.(18)
xii. Crescent/301. As noted above, the Operating
Partnership owns its general partner interest in 301 Congress through
Crescent/301, a Delaware limited liability company that is wholly owned by
Operating Partnership and CREE, Ltd. The IRS has applied the same four-factor
test, described above, in determining whether limited liability companies, like
Crescent/301, which have been formed under the Delaware Limited Liability
Company Act, are treated as partnerships for federal income tax purposes.(19)
As noted above, under section 301.7701-2(b)(3) of the Prior
Regulations, an organization will be treated as possessing the corporate
characteristic of continuity of life, even if the agreement organizing an
entity provides that it is to continue only for a stated period, unless a
member has the power to dissolve the organization at an earlier time. Section
18-801 of the Delaware Limited Liability Company Act provides that a limited
liability company dissolves upon
- ----------------------------------
(18) For purposes of this opinion, we have assumed that 301 Congress will
not be treated as having more than three partners (CREE, Ltd., the
Operating Partnership and Aetna) for purposes of section 1.7704-1(h)
of the Treasury Regulations. Although Crescent/301 is a
flow-through entity for purposes of section 1.7704-1(h)(3), we have
treated Crescent/301 as having only two members, CREE, Ltd. and the
Operating Partnership. The partners in the Operating Partnership will
not be treated as members of Crescent/301 for purposes of the 100
partner requirement, based upon your representation that the Operating
Partnership's investment in 301 Congress, through Crescent/301, will
not represent substantially all of the assets of the Operating
Partnership.
(19) See, e.g., Rev. Rul. 93-38, 1993-21 I.R.B. 4, P.L.R. 9602012 (October
6, 1995) and P.L.R. 9507004 (November 8, 1994).
<PAGE> 39
Crescent Real Estate Equities Company
September 22, 1997
Page 39
the first to occur of the following: (1) at the time specified in an LLC
agreement or 30 years from the date of formation of the LLC if no time is set
forth in the LLC agreement, (2) upon the happening of events specified in an
LLC agreement, (3) by the written consent of all members, (4) by the death,
retirement, resignation, expulsion, bankruptcy, or dissolution of a member or
the occurrence of any other event which terminates the continued membership of
a member in the LLC, unless the business of the LLC is continued by the consent
of all the remaining members within 90 days following the occurrence of any
terminating event or pursuant to a right to continue stated in the LLC
agreement, or (5) by the entry of a decree of judicial dissolution under the
Delaware Limited Liability Company Act. Section 1.04 of the Crescent/301
Agreement provides that the duration of Crescent/301 is until the close of
business on December 31, 2050, or until its earlier dissolution upon an "Event
of Dissolution" in accordance with Section 12.01 of the Crescent/301 Agreement.
Section 12.01 of the Crescent/301 Agreement provides that Crescent/301 shall be
dissolved prior to December 31, 2050 upon the following "Events of
Dissolution": (1) the mutual consent of all members, (2) the withdrawal, death,
retirement, resignation, expulsion, bankruptcy, legal incapacity or dissolution
of any member, (3) a sale by Crescent/301 of its assets, or (4) a decree of
judicial dissolution. However, Section 12.05 of the Crescent/301 Agreement
provides that if any Event of Dissolution occurs with respect to CREE, Ltd.,
the business of Crescent/301 will be continued if, within ninety days, the
remaining members unanimously decide to continue the business and to approve
the admission of a new member, effective immediately before the dissolution
event. Accordingly, Crescent/301 lacked the corporate characteristic of
continuity of life.
Section 18-702(a) of the Delaware Limited Liability Company Act
provides, in part, that unless otherwise provided by the company's LLC
agreement, a membership interest is assignable in whole or in part; an
assignment of a member's interest does not entitle the assignee to participate
in the management of the business and affairs of the LLC. Section 18-704(a) of
the Delaware Limited Liability Company Act provides, in part, that an assignee
of a membership interest may become a member if and to the extent that the
company's LLC agreement so provides, or all members consent. Section 10.02 of
the Crescent/301 Agreement provides that no member may withdraw from
Crescent/301 or transfer all or any part of its interest in Crescent/301 and
that any purported transfer of an interest in Crescent/301 shall be null and
void. Accordingly, Crescent/301 lacked the corporate characteristic of free
transferability of interests.
In sum, because Crescent/301 lacked the corporate characteristics of
continuity of life and free transferability of interests, it is our opinion
that Crescent/301 had a reasonable basis for claiming partnership
classification under the Prior Regulations. Based on the foregoing, it is our
opinion that Crescent/301 will be treated as a partnership as defined in
sections 7701(a)(2) and 761(a) of the Code and not as an association taxable as
a corporation for all periods prior to January 1, 1997.
<PAGE> 40
Crescent Real Estate Equities Company
September 22, 1997
Page 40
In addition, based upon the structure and capitalization of
Crescent/301 and representations of the Operating Partnership regarding the
current ownership of Crescent/301, it is our opinion that Crescent/301 will not
constitute a publicly traded partnership for purposes of section 7704 of the
Code.(20)
xiii. SMA. The Operating Partnership owns an interest in
SMA as a general partner. Section 9.1 of the SMA Agreement provides that the
dissolution or adjudication of bankruptcy or any other occurrence which would
constitute an event of withdrawal by the Operating Partnership as general
partner (or, if there is more than one general partner, by the last remaining
general partner) causes a dissolution of SMA. Section 9.2 of the SMA Agreement
provides that in the event of a dissolution under section 9.1, SMA may be
reconstituted and its business continued only if Spectrum Dallas Associates,
L.P. ("SDA") and other limited partners with partnership interests totaling
more than 50% of the partnership interests of all limited partners
affirmatively elect to reconstitute SMA, agree on the identity of a new general
partner and execute an instrument affirming such facts. Accordingly, SMA
lacked the corporate characteristic of continuity of life.
The Operating Partnership, as general partner of SMA, owns a large
majority of the partnership interests in SMA and therefore should be viewed as
managing SMA on its own behalf. Moreover, section 7.1 of the SMA Agreement
provides that the limited partners have no power or authority with respect to
SMA except as specifically provided in the SMA Agreement, which does not
provide the limited partners with the power to remove the general partner of
SMA. Therefore, SMA lacked the corporate characteristic of centralization of
management.
As the general partner of SMA, the Operating Partnership will be
personally liable for all the debts and obligations of SMA. Moreover, the
Operating Partnership has substantial assets other than its general partner
interest in SMA. Furthermore, Crescent Equities has represented that the
Operating Partnership will act independently of the limited partners in SMA.
Therefore, SMA lacked the corporate characteristic of limited liability.
In sum, because SMA lacked the corporate characteristics of continuity
of life, centralization of management, and limited liability, it is our opinion
that SMA had a reasonable
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(20) For purposes of this opinion, we have assumed that Crescent/301 will
not be treated as having more than two partners for purposes of
section 1.7704-1(h) of the Treasury Regulations (CREE, Ltd. and the
Operating Partnership). Although the Operating Partnership is a
flow-through entity for purposes of section 1.7704-1(h)(3), we have
assumed that the partners in the Operating Partnership will not be
treated as members of Crescent/301 for purposes of the 100 partner
requirement, based upon your representation that Crescent/301 will not
represent substantially all of the assets of the Operating
Partnership.
<PAGE> 41
Crescent Real Estate Equities Company
September 22, 1997
Page 41
basis for claiming partnership classification under the Prior Regulations.
Based on the foregoing, it is our opinion that SMA will be treated as a
partnership as defined in sections 7701(a)(2) and 761(a) of the Code and not as
an association taxable as a corporation for all periods prior to January 1,
1997.
In addition, based upon the structure and capitalization of SMA and
representations of the Operating Partnership regarding SMA's current ownership,
it is our opinion that SMA will not constitute a publicly traded partnership
for purposes of section 7704 of the Code.(21)
xiv. CCRH. The Operating Partnership owns a 99.9 percent
interest in CCRH as a limited partner, while the remaining 0.1 percent general
partner's interest is owned by Crescent Commercial Realty Corp., a wholly owned
subsidiary of CREE.
The CCRH Agreement provides in section 15(a) that the dissolution,
insolvency, bankruptcy or other event of withdrawal of the general partner will
cause CCRH to terminate, unless a majority in interest of the remaining
partners consent to continue the partnership and appoint a new general partner.
Accordingly, CCRH lacked the corporate characteristic of continuity of life.
In addition, the CCRH Agreement provides in Section 14 that no partner
may transfer all or any portion of its interest in the partnership.
Accordingly, CCRH lacked the corporate characteristic of free transferability
of interests.
Based on the continued organization and operation of CCRH in
accordance with its partnership agreement and the Act, CCRH lacked the
corporate characteristics of continuity of life and free transferability of
interests. Accordingly, it is our opinion that CCRH had a reasonable basis for
claiming partnership classification under the Prior Regulations. Based on the
foregoing, it is our opinion that CCRH will be treated as a partnership as
defined in sections 7701(a)(2) and 761(e) of the Code and not as an association
taxable as a corporation for all periods prior to January 1, 1997.
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(21) For purposes of this opinion, we have assumed that SMA will not be
treated as having more than eighty partners for purposes of section
1.7704-1(h) of the Treasury Regulations. Although the Operating
Partnership is a flow-through entity for purposes of section
1.7704-1(h)(3), we have assumed that the partners in the Operating
Partnership will not be treated as members of SMA for purposes of the
100 partner requirement, based upon your representation that SMA will
not represent substantially all of the assets of the Operating
Partnership.
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Crescent Real Estate Equities Company
September 22, 1997
Page 42
In addition, based upon the structure and capitalization of CCRH and
representations of the Operating Partnership regarding CCRH's current
ownership, it is our opinion that CCRH will not constitute a publicly traded
partnership for purposes of section 7704 of the Code.(22)
9. Taxability to Crescent Equities of Distribution of Crescent
Operating Stock by Crescent Equities to Its Shareholders
The contribution of cash and assets by the Operating Partnership into
Crescent Operating was tax-free if it qualified under section 351, which
provides that a transfer to a corporation in exchange for its stock will be
tax-free provided that the transferor is in control of the corporation
following the transfer. For this purpose "control" is defined as the ownership
of stock possessing at least 80 percent of the total combined voting power of
all classes of stock entitled to vote. Section 368(c). Because, however, the
stock of Crescent Operating was distributed, first by the Operating Partnership
to its partners, and then by Crescent Equities to its shareholders, it is
necessary to take into account such distributions.
Although not directly on point, section 351(c) provides that for
purposes of determining control, a distribution by any corporate transferor of
part or all of the stock which it receives in the exchange to its shareholders
shall not be taken into account. Furthermore, the IRS has ruled that, in the
context of a complete liquidation of a partnership, the distribution by the
partnership of stock received in an exchange otherwise complying with section
351 did not violate the control requirement. Rev. Rul. 84-111, 1984-2 C.B. 88.
We also note that in the instant situation, the parties could have had the
Operating Partnership distribute the assets and cash to its partners and then
have had them contribute the cash and assets directly into Crescent Operating,
and so the situation does not suggest that the redistribution of the stock in
Crescent Operating was in any way abusive. Based upon the foregoing, it is our
opinion that the transfer of cash and assets into Crescent Operating satisfied
the requirements of section 351.
Nevertheless, under section 311, the distribution of the Crescent
Operating stock by Crescent Equities to its shareholders caused Crescent
Equities to recognize taxable income corresponding to the difference, if any,
between its basis in such Crescent Operating stock and the fair market value
thereof at the time of the distribution. Assuming, as we do, that the transfer
of cash and assets into Crescent Operating satisfied section 351, the gain so
recognized would have
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(22) For the purposes of this opinion we have assumed that CCRH will not
be treated as having more than two partners for purposes of section
1.7704-1(h) of the Treasury Regulation (Crescent Commercial Realty
Corp., Inc. and Crescent Real Estate Equities Limited Partnership (the
"Operating Partnership")). Although the Operating Partnership is a
flow-through entity for purposes of section 1.7704-1(h)(2), we have
assumed that the partners in the Operating Partnership will not be
treated as partners in CCRH for purposes of the 100 partner
requirement, based upon your representation that CCRH will not
represent substantially all of the assets of the Operating
Partnership.
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Crescent Real Estate Equities Company
September 22, 1997
Page 43
constituted gain on stock or securities. The basis of Crescent Equities in the
stock was equal to its pro rata share of the basis of the Operating Partnership
in the cash and assets transferred into Crescent Operating.
It is our opinion that the amount of gain recognized by Crescent
Equities in connection with the distribution constituted gain on the sale of
stock or securities for purposes of the gross income tests. In general, at
least 75% of a REIT's gross income for each taxable year must be from "rents
from real property," interest on obligations secured by mortgages on real
property, gains from the sale or other disposition of real property and certain
other sources; thus, gain on the sale of stock or securities does not qualify
under the 75% gross income test. Even though the gain recognized in connection
with the distribution does not qualify under the 75% gross income test,
Crescent Equities believes and has represented that the amount of such gain,
along with any other income that does not qualify under the 75% gross income
test, will not exceed 25% of the gross income of Crescent Equities for the
current taxable year. Because of the factual nature of valuation, we are
unable to render an opinion on the amount of such gain, but we have no reason
to believe that this is incorrect. Based on the foregoing, it is our opinion
that the gain recognized by Crescent Equities on the distribution of Crescent
Operating stock will not cause Crescent Equities to violate the 75% gross
income test.
In addition to the 75% gross income test, a REIT must derive less than
30% of its gross income from the sale or other disposition of (i) real property
held for less than four years; (ii) stock or securities held for less than one
year; and (iii) property sold or otherwise disposed of in a prohibited
transaction. Crescent Equities has represented that the amount of gain that
should be recognized by Crescent Equities on the distribution of Crescent
Operating stock, along with any other income that must be included under the
30% gross income test, will not exceed 30% of the gross income of Crescent
Equities for the current taxable year. Because of the factual nature of
valuation, we are unable to render an opinion on the amount of such gain, but
we have no reason to believe that this is incorrect. Based upon the foregoing,
it is our opinion that the gain recognized by Crescent Equities on the
distribution of Crescent Operating stock will not cause Crescent Equities to
violate the 30% gross income test.
10. Separate Corporate Entities
Because many, if not all, of the activities that Crescent Operating
will undertake would have an adverse impact on the status of Crescent Equities
as a REIT for federal income tax purposes were such activities to be engaged in
by the Operating Partnership, it is necessary to address the question of
whether Crescent Operating will be treated as a corporate entity separate from
and not an agent of either Crescent Equities or the Operating Partnership for
federal income tax purposes. The Operating Partnership and Crescent Operating
intend to establish a long-term business relationship. The facts as we
understand them to be are discussed below.
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Crescent Real Estate Equities Company
September 22, 1997
Page 44
According to the Restated Certificate, Crescent Operating will serve
the purpose of acting as lessee and/or operator of properties owned or to be
owned by Crescent Equities, the Operating Partnership, and other property
owners. The Restated Certificate also provides that one of Crescent
Operating's corporate purposes is to perform the Intercompany Agreement,
pursuant to which Crescent Operating and the Operating Partnership have agreed
to provide each other with rights of first opportunity and notification with
respect to certain transactions and investments. In addition, the Restated
Certificate and Intercompany Agreement prohibit Crescent Operating from
engaging in activities or making investments that a REIT could make, unless the
Operating Partnership was first given the opportunity but elected not to pursue
such activities or investments.
Some similarities in the day-to-day operations of the entities exist.
For instance, Crescent Operating's senior management is the same as that of
Crescent Equities. Five members of the Crescent Operating board are the same
as members of the Crescent Equities board, but the Crescent Operating board
includes two members unaffiliated with Crescent Equities. In addition, both
entities may have some or all of the same employees, especially at the
inception of Crescent Operating. Furthermore, Crescent Operating's ownership
was, at least initially, the same as the ownership of Crescent Equities and the
Operating Partnership. The Operating Partnership and Crescent Operating hold
themselves out to the public as separate entities, however, and do not
characterize their relationship as one between principal and agent. In
addition, it is contemplated that each corporation will be responsible for its
own contractual obligations, although certain payment obligations of Crescent
Operating related to its CBHS investment have been guaranteed by the Operating
Partnership. Furthermore, the Securities and Exchange Commission required that
Crescent Operating file a registration statement on Form S-1 because its
securities were distributed to the public. Finally, and perhaps most
important, the stock of Crescent Operating is being traded separately from that
of Crescent Equities.
The general principle of separate corporate entities was advanced by
the Supreme Court in Moline Properties v. Commissioner, 319 U.S. 436 (1943),
where a taxpayer sought to have the gain on sales of its real property treated
as the gain of its sole shareholder and have its corporate existence ignored as
merely fictitious. In Moline, the Court stated that "so long as [its] purpose
is the equivalent of a business activity or is followed by the carrying on of
business by the corporation, the corporation remains a separate taxable
entity." Id. at 439. The Tax Court has described the degree of corporate
purpose and activity requiring recognition of the corporation as a separate
entity as "extremely low" and has held that mortgaging corporate property is a
sufficient business activity to avoid classification as a dummy corporation.
Strong v. Commissioner, 66 T.C. 12, 24 (1976). Upholding the independent
existence of a one-person personal service corporation, the Tax Court concluded
that "[t]he policy favoring the recognition of corporations as entities
independent of their shareholders requires that we not ignore the
<PAGE> 45
Crescent Real Estate Equities Company
September 22, 1997
Page 45
corporate form so long as the corporation actually conducts business." Keller
v. Commissioner, 77 T.C. 1014, 1031 (1981), aff'd, 723 F.2d 58 (10th Cir.
1983).
Some of the activities leading courts to conclude that two entities
constitute separate corporations have included having separate checking
accounts, contracting in their own names, and holding themselves out to the
public as separate corporate businesses. See, e.g., Schuerholz v.
Commissioner, 35 T.C.M. (CCH) 726 (1976) (refusing to ignore the existence
separate from a partnership of an incorporated entity that engaged in such
activities, despite the absence of any annual meetings, failure to issue stock,
and lack of election of directors). Other business activities leading to
recognition of a company as a corporate entity have included the hiring and
contracting with employees, the keeping of its own books, and paying taxes.
See, e.g., Silvano Achiro v. Commissioner, 77 T.C. 881 (1981) (finding a
landfill management company that engaged in such activities to be a corporate
entity entitled to recognition). The Tenth Circuit found a business purpose to
be lacking and disregarded corporations that "paid no dividends, had no
employees, maintained no telephones, telephone listings, or separate business
addresses, and engaged in no substantive business activities." Lloyd F. Noonan
v. Commissioner, 451 F.2d 992 (9th Cir. 1971) (ignoring four corporations that
lacked a business purpose and concluding that partnership income attributed to
the corporations was properly attributable to the sole shareholders of such
corporations). Similarly, the Tax Court found bookkeeping entries and bank
accounts insufficient indicators of corporate existence where a corporation
owned no property, had no contracts except with a shareholder-employee, and did
not enter into its own arrangements with customers to whom its
shareholder-employee rendered services. Roubik v. Commissioner, 53 T.C. 365
(1969).
Applying these indicia of corporate existence to the proposed
activities of Crescent Operating and its relationship with Crescent Equities
and the Operating Partnership supports the conclusion that Crescent Operating
will be considered a corporate entity separate from Crescent Equities and the
Operating Partnership. Crescent Operating will enter into contracts, hire at
least some of its own employees, and, most important, hold itself out to the
public as a separate corporate entity. In fact, its stock is being publicly
traded separately from the stock of Crescent Equities. As the court stated in
Love v. United States, "[t]he decision to recognize or not to recognize the tax
identity of a corporation depends upon what the corporation does, not what it
is called, how many or how few own it, or how they regard it." 96 F. Supp.
919, 922 (Ct. Cl. 1951).
Even if Crescent Equities and Crescent Operating are treated as
separate entities, the non-REIT-qualified activities of Crescent Operating
could be attributed to Crescent Equities if Crescent Operating were regarded as
an agent for the Operating Partnership. In Commissioner v. Bollinger, the
Supreme Court discussed the tax treatment of corporations purporting to be
agents
<PAGE> 46
Crescent Real Estate Equities Company
September 22, 1997
Page 46
for their shareholders. 485 U.S. 340 (1988). The Court enumerated three
factors that will lead to the finding of an agency relationship with respect to
an asset: (1) the corporation acquires the asset with a written agency
agreement in place; (2) the corporation functions as an agent and not as a
principal; and (3) the corporation is held out to third parties as an agent.
Id. at 349-50.
According to the Restated Certificate, Crescent Operating will serve
the purpose of acting as lessee and/or operator of properties owned or to be
owned by Crescent Equities, the Operating Partnership, and other property
owners unaffiliated with Crescent Equities. An application of the Bollinger
factors to this broad language should not result in a characterization of the
relationship between Crescent Operating and the Operating Partnership as one
between agent and principal, especially because the Operating Partnership and
Crescent Operating will not hold themselves out to the public as principal and
agent.
Based upon the foregoing, it is our opinion that Crescent Operating
will be treated as a corporate entity separate from and not an agent of
Crescent Equities and the Operating Partnership for federal income tax
purposes.
11. Paired Share Issue
Section 269B(a)(3) of the Code requires that all entities that are
stapled entities be treated as a single entity for purposes of determining
whether any stapled entity is a REIT. A "stapled entity" is defined as any
group of two or more entities if more than 50 percent of the beneficial
ownership in each of the entities consists of stapled interests, which are
interests that, by reason of form of ownership, restrictions on transfer, or
other terms or conditions, are transferred or required to be transferred in
connection with the transfer of the other such interests.
If shares of Crescent Operating were characterized as "stapled" to
shares of Crescent Equities, then the REIT status of Crescent Equities could be
in jeopardy because the two entities would be treated as a single entity for
tax purposes. Shares of Crescent Operating have been issued independently of
Crescent Equities shares and are being publicly traded separately as well,
however. Furthermore, in a ruling in which the shareholders of a REIT were
identical to the shareholders of its lessee, the IRS stated in dicta that
having the same shareholders was not a sufficient condition to characterize the
entities as stapled. P.L.R. 8705084 (Oct. 31, 1986).(23)
Based on the foregoing, it is our opinion that the shares of Crescent
Operating and Crescent Equities are not stapled interests, and that Crescent
Operating and Crescent Equities will not be treated as stapled entities under
section 269B(a)(3) of the Code.
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(23) Private letter rulings do not have precedential effect, but do shed
light on the thinking of the Internal Revenue Service and do
constitute substantial authority under section 6662.
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Crescent Real Estate Equities Company
September 22, 1997
Page 47
12. Characterization of the Crescent Operating Note
Debt instruments, especially instruments that are held by persons
related to the debtor, may under certain circumstances be characterized for
income tax purposes as equity, rather than as debt. The characterization of an
instrument as debt or equity is a question of fact to be determined from all
surrounding facts and circumstances, no one of which is conclusive. See
Kingbay v. Commissioner, 46 T.C. 147 (1966); Hambuechen v. Commissioner, 43
T.C. 90 (1964). Among the criteria that have been found relevant in
characterizing such instruments are the following: (1) the intent of the
parties, (2) the extent of participation in management by the holder of the
instrument, (3) the ability of the corporation to obtain funds from outside
sources, (4) the "thinness" of the capital structure in relation to debt, (5)
the risk involved, (6) the formal indicia of the arrangement, (7) the relative
position of the obligees as to other creditors regarding payment of interest
and principal, (8) the voting power of the holder of the instrument, (9) the
provision of a fixed rate of interest, (10) the contingency of the obligation
to repay, (11) the source of the interest payments, (12) the presence or
absence of a fixed maturity date, (13) a provision for redemption by the
corporation, (14) a provision for redemption at the option of the holder, and
(15) the timing of the advance with reference to the organization of the
corporation. Fin Hay Realty Co. v. United States, 398 F.2d 694 (3d Cir. 1968).
The Crescent Operating Note possesses a number of attributes weighing
in favor of debt treatment. For instance, the Crescent Operating Note is
clearly denominated as debt, has a fixed maturity date of five years, provides
for the return of interest on the principal amount at a rate of 12 percent per
annum, and is secured by the Assets. In addition, Crescent Equities and the
Operating Partnership have represented that the value of the assets securing
the Crescent Operating Note exceeds the outstanding balance of the Crescent
Operating Note and that, based upon internal projections, they anticipate that
the Crescent Operating Note will be repaid in accordance with its terms.
Crescent Equities and the Operating Partnership have also represented that the
interest provided for under the Crescent Operating Note represents a
commercially reasonable rate of interest. In addition, based on our experience
and an examination of the Note, the interest appears to represent a
commercially reasonable rate of interest.
Based on the foregoing, it is our opinion that the Crescent Operating
Note constitutes debt for federal income tax purposes. Accordingly, it will
not constitute an ownership interest which could cause Crescent Equities to be
considered an owner of the Tenants under the section 318 attribution rules.
Further, it is our opinion that amounts designated as interest by the Crescent
Operating Note will be treated as interest for purposes of the 95 percent gross
income test of section 856(c).
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Crescent Real Estate Equities Company
September 22, 1997
Page 48
13. Related Party Tenant Issue
In signing the Magellan Agreement, the Operating Partnership entered
into an agreement involving the purchase of an entity that may pose a problem
under the related party rent provision of section 856(d)(2)(B) of the Code.
Although there is a possibility that a binding contract is not subject to the
application of the section rules,(25) we are not relying on that position. The
purpose of section 318 is to indicate in what circumstances taxpayers will be
deemed to have ownership interests that they do not actually have. We believe
that, whether a binding contract constitutes an option, or, arguably, actual
current ownership, a court would be likely to determine that there is no
attribution where there are significant contingencies that must be satisfied
prior to closing, but that there is attribution where any contingencies are
viewed as temporary or minor.(26)
The Magellan Agreement states that the formation of Crescent Operating
is a condition precedent to closing and that the failure of Crescent Equities
to cause the formation and distribution of Crescent Operating will not be
considered a breach entitling Magellan Health Services, Inc. to specific
performance. The requirement of the formation of a new corporate entity, which
must be independently approved by the Securities and Exchange Commission, is
clearly a significant contingency. In addition, acknowledging that ownership
by Crescent Equities of an ownership interest in CBHS or entities owned by CBHS
might lead to a violation of the REIT requirements of section 856 of the Code,
Section 8.4 of the Agreement states that neither Crescent Equities nor any
entity the assets of which would be attributed to Crescent Equities has the
right, option or obligation to enter into the Contribution Agreement or to own
any entities owned by CBHS and that any attempt to do so would be null and
void.
Based on the foregoing, it is our opinion that execution of the
Magellan Agreement will not be subject to the section 318 attribution rules
causing Crescent Equities to be considered the owner of the Tenants and that,
therefore, the rents from the Tenants should constitute rents from real
property under section 856(d).
14. Acquisition of Certain Assets from The Woodlands Corporation
a. Background
The Woodlands Corporation ("TWC") had significant real estate holdings,
directly, through wholly owned corporations, and through various partnerships
in which either TWC or a subsidiary were partners. The real estate included
office buildings, retail properties, rental housing, golf courses, a hotel,
conference centers, and residential land development projects. After merging
certain of the subsidiaries into itself, TWC merged its assets into The
Woodlands Commercial Properties Company, L.P.(the "Commercial Partnership") in
exchange for cash. The Commercial Partnership immediately divided into two
partnerships, one bearing its name and the other called The Woodlands Land
Development Company, L.P.(the "Development Partnership"), as a result of which
the commercial office buildings, the retail properties, the rental housing, the
hotel, the conference centers and the golf courses (the "Leased Properties")
were retained by the Commercial Partnership and the residential land development
projects and certain other assets (the "Development Properties") became the
assets of the Development Partnership. The partners of the Commercial
Partnership are the Operating Partnership, CresWood Development, LLC (which is
owned 100 percent by the Operating Partnership), and a group comprised of
affiliates of Morgan Stanley and various investors (the "MS Group"). The
partners of the Development Partnership are (i) The Woodlands Land Company,Inc.
("Landevco"), a corporation all of the stock of which is currently owned by the
Operating Partnership with the expectation that it will sell 5 percent of the
stock to Crescent Operating, Inc. ("COI") or another third party and retain 95
percent nonvoting common and (ii) the MS Group. A third partnership, The
Woodlands Operating Company (the "Management Company"), (a) employs the
employees previously employed by TWC and will furnish advisory and other
services to the Commercial Partnership and the Development Partnership and (b)
through a general partnership between itself and a wholly owned corporation,
WECCR General Partnership (the "Tenant Partnership"), has leased the hotel and
golf courses from the Commercial Partnership. The Partners of the Management
Partnership are COI and the MS Group.
b. Characterization of Commercial Partnership and
Development Partnership as Separate Entities
The income of the Commercial Partnership will in general consist of
items which meet the requirements of the Gross Income Tests, and the income of
the Development Partnership will consist generally of items which either do not
meet such requirements or are subject to the tax imposed by section 857 on
prohibited transactions. In light of certain linkages of these two
partnerships, discussed below, it is necessary to consider whether they would
be considered as separate entities and not as partners of or with each other,
because if they were aggregated, the effect could be to cause Crescent Equities
to be treated as realizing gross income of a nature that could jeopardize its
status as a REIT or to subject it to the tax on prohibited transactions.(24)
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(24) The succeeding opinion addresses the allocation of income under
section 704 in the event of such an aggregation.
(25) Revenue Ruling 89-64, 1989-1 C.B. 91, (Jan. 1, 1989), distinguished
between an option and a binding contract for attribution rule
purposes. The ruling held that a taxpayer whose option was not
exercisable for a stated period of time was nevertheless considered to
have an option that resulted in tax attribution. Consequently, the
language distinguishing bilateral contracts was dictum. We believe,
therefore, that reliance on this ruling would present significant tax
risks.
(26) While the Code and Treasury Regulations do not indicate the likely
effect on the attribution rules of restrictions on the exercise of an
option, some authority does exist. In Rev. Rul. 89-64, for instance,
the IRS held that the requirement that a certain period of time pass
before an option would be exercisable was not a sufficient contingency
to prevent attribution. 1989-1 C.B. 91. In contrast, in a private
letter ruling, the IRS ruled that a right of first refusal would not
trigger attribution because the right to purchase was subject to a
contingency (i.e., the obligor's decision to sell). P.L.R. 8106008
(Oct. 21, 1980).
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Crescent Real Estate Equities Company
September 22, 1997
Page 49
There are four principal links between the two partnerships. First, in
both partnerships, the timing of the shift in allocations which will occur as a
result of the economic performance of the partnerships is determined on an
aggregate basis. Second, the failure of the Operating Partnership to make
certain capital contributions to the Commercial Partnership can result in not
only a dilution of its interest in the Commercial Partnership, but also a
dilution of Landevco in the Development Partnership, and vice versa; and the
failure of the MS Group to make certain capital contributions in one of the
partnerships can similarly lead to the increase of the Operating Partnership's
interest in the Commercial Partnership and the increase of Landevco's interest
in the Development Partnership. Third, the occurrence of an event that
triggers the operation of the buy-sell provisions in one partnership will
trigger the buy-sell provisions in the other, as well.(27) Finally, the senior
debt of each partnership provides for cross-collateralization and cross-
default.
Two of these links are significantly attenuated, however, by side
agreements. The Cross Reimbursement and Indemnity Agreement provides that the
Commercial Partnership and the Development Partnership must indemnify the other
against loss occasioned by a failure of the partnership to perform under its
loan agreement. Furthermore, because of the relatively low level of leverage
being employed (approximately 60 percent for the Commercial Partnership and
approximately 72 percent for the Development Partnership), no such failure is
anticipated. Under the Cross Indemnity Agreement, the Operating Partnership and
Landevco agree to indemnify each other against any loss as a result of failure
of each to comply with the terms of its respective partnership agreement.
Again, no such failure is anticipated. It should also be noted that while a
third link, regarding the buy-sell provisions, involves a commonality of
timing, it does not result in any sharing whatsoever of profits and losses
between the two partnerships, because each partnership's buy-sell provisions
take into account only that partnership's assets.
There are, moreover, significant respects in which the two partnerships
are clearly different. As a matter of state law, the creditors of one
partnership (other than the senior lender) will have no rights against the
assets or the partners of the other partnership. Furthermore, there is no
sharing of profits and losses between the two partnerships. That is, the
partners of one partnership have absolutely no right to receive any of the
income of the other partnership and are similarly not responsible for any
losses it might realize. While the internal sharing arrangements of each
partnership base a shift in allocations upon the partnerships' performance on a
joint basis, it is nevertheless true that the partners of each partnership
share only the income of that partnership.
Whether persons are considered partners of each other for federal
income tax purposes depends on a consideration of a number of factors.
Commissioner v. Culbertson, 337 U.S. 733 (1949); Luna v. Commissioner, 42 T.C.
1067 (1964). A representative statement of these factors appears in Luna:
The following factors, none of which is conclusive, bear on the issue:
The agreement of the parties and their conduct in executing its terms;
the contributions, if any, which each party has made to the venture;
the parties' control over
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(27) The buy-sell provisions of the Management Company would similarly be
triggered.
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Crescent Real Estate Equities Company
September 22, 1997
Page 50
income and capital and the right of each to make withdrawals; whether
each party was a principal and coproprietor, sharing a mutual
proprietary interest in the net profits and having an obligation to
share losses, or whether one party was the agent or employee of the
other . . .; whether business was conducted in the joint names of the
parties; whether the parties filed Federal partnership returns or
otherwise represented to [the IRS] or to persons with whom they
dealt that they were joint venturers; whether separate books of
account were maintained for the venture; and whether the parties
exercised mutual control over and assumed mutual responsibilities for
the enterprise. (citations omitted) Id. at 1077-78.
In the present case, all the formal expressions of intent indicate that
the Commercial Partnership and the Development Partnership are separate. In
addition, neither partnership (nor its partners) has any interest in the profits
of the other partnership, and the only fact that could be construed as
obligation to share losses is the cross-collateralization of the senior debt.
Accordingly, in our opinion the Commercial Partnership and the Development
Partnership will be considered for federal income tax purposes as separate
entities and not as partners of or with each other.
c. Validity of Profit and Loss Allocations in Event of Aggregation
For purposes of the following discussion it is assumed that, contrary to
our opinion, the Commercial Partnership and the Development Partnership are
aggregated and considered to constitute a single partnership.
We note that, for purposes of applying the Gross Income Tests, each
partner of a partnership is considered to share in partnership gross income and
other items in proportion to the relative size of the partner's capital
interest in the partnership. Accordingly, if the partnerships are considered a
single partnership, Crescent Equities, through its ownership interests in the
Operating Partnership and CresWood Development, LLC, would be treated as
realizing a share of the Development Partnership's gross income corresponding
to Crescent Equities' share of the total capital interest of the joint entity.
By contrast, whether Crescent Equities would be subject to the prohibited
transactions tax of section 857(b)(6) would depend on whether Crescent Equities
would be (indirectly) allocated under the rules set forth in section 704 and
the regulations thereunder any income arising from the sale of property held
for sale to customers in the ordinary course of the entity's trade or business.
Given that the allocation and capital account maintenance provisions of both
partnerships meet the requirements of Treas.Reg. Section 1.704-1(b)(2)(ii) as
to having economic effect, the issue here is whether the allocation to Crescent
Equities of the income from the Leasing Properties and the allocation to the
other partners, including Landevco, of the income from the Development
Properties would have substantial economic effect with the meaning of
Treas. Reg. Section 1.704-1(b)(2)(iii). Under this provision, the economic
effect of an allocation is not substantial if (a) the after-tax economic
consequences of at least one partner may, in present value terms, be enhanced
compared to such consequences if the allocation were not contained in the
partnership agreement and (b) there is a strong likelihood that the after-tax
economic consequences of no
<PAGE> 51
Crescent Real Estate Equities Company
September 22, 1997
Page 51
partner will, in present value terms, be substantially diminished compared to
such consequences if the allocation were not contained in the partnership
agreement.
In the present case the test is whether the allocation to Crescent
Equities of its stated share of the income from the Leased Properties, as
opposed to some lesser percentage of the income from both the Leased Properties
and the Development Properties, (a) would provide an after-tax benefit to
Crescent Equities and (b) would not have a strong likelihood of substantially
diminishing the after-tax economic return to any partner. Given the
applicability to Crescent Equities of the prohibited transactions tax, the
first half of this test appears to be met. The facts suggest, however, that
the second half is not. That is, there is no strong likelihood that, in either
the short or the long run, the economic results of the Leased Properties and
the Development Properties will be comparable, so that a share of the income
from the Development Properties would offset the loss of a portion of the
income from the Leased Properties. Crescent Equities and the Operating
Partnership have represented this to be the case, and it is consistent with our
experience. Cf. Treas. Reg. Section 1.704-1(b)(5), Example(10) (allocation to
a foreign partner of 90 percent of all the income and other items from the
partner's operations within that country had substantial economic effect, where
the amount of such income could not predicted with any reasonable certainty).
Based upon the foregoing, it is our opinion that if, contrary to our
opinion, the Commercial Partnership and the Development Partnership are
considered to constitute one partnership for federal income tax purposes, the
allocations of profit and loss from the leased Properties to the partners of
the Commercial Partnership and the allocations of profit and loss from the
Development Properties to the partners of the Development Partnership will be
respected under section 704.
d. The Treatment under Gross Income Tests of Gross Income
from the Sale of Properties to Customers in the Ordinary Course
As noted above, if, contrary to our opinion, the Commercial Partnership
and the Development Partnership are considered to constitute a single
partnership for federal income tax purposes, Crescent Equities would be
considered to realize that portion of the income of the Development Partnership
from the sale of properties to customers in the ordinary course which
corresponds to the capital of Crescent Equities in the combined entity.
However, the language of section 856(c) clearly indicates that the Gross Income
Tests are applied by first excluding gross income from prohibited transactions.
This result has also been acknowledged by the IRS in a private letter ruling.
See P.L.R.9308013 (Nov. 24, 1992) ("P3 derives income from the sale of oil and
gas . . . . The Internal Revenue Service has previously ruled that Taxpayer's
share of such income (less appropriate deductions) is net income derived from
prohibited transactions within the meaning of Code section 857(b)(6). As a
result, Taxpayer's share of gross income, if any, from such sales is subject to
the 100 percent prohibited transaction tax and does not affect Taxpayer's
ability to meet the 95 percent and 75 percent income tests.")
In our opinion, if, contrary to our opinion, the Commercial Partnership
and the Development Partnership are considered to constitute one partnership
for federal income tax purposes,
<PAGE> 52
Crescent Real Estate Equities Company
September 22, 1997
Page 52
the allocation to Crescent Equities under Treas. Reg. Section 1.856-3(g) of
gross income derived from the sale of Development Properties to customers in
the ordinary course of business would not be taken into account for purposes of
determining whether Crescent Equities meets the requirements of the "Gross
Income Tests."
e. The TWC Partnerships
(i) Classification for Periods on or after January 1,
1997
Section 301.7701-2(a) of the Treasury Regulations provides that
a business entity formed on or after January 1, 1997 with two or more members
will be classified for federal tax purposes as either a corporation or a
partnership, unless it is otherwise subject to special treatment under the
Code. Under sections 301.7701-2(b)(1), (3), (4), (5), (6), (7) and (8) of the
Treasury Regulations, a corporation includes business entities denominated as
such under applicable law, as well as joint-stock companies, insurance
companies, entities that conduct certain banking activities, entities wholly
owned by a state or any political subdivision thereof, entities that are
taxable as corporations under a provision of the Code other than section
7701(a)(3), and certain entities formed under the laws of a foreign
jurisdiction. Section 301.7701-3(a) of the Treasury Regulations provides that
a business entity with two or more members that is not classified as a
corporation under section 301.7701-2(b)(1), (3), (4), (5), (6), (7) or (8) of
the Treasury Regulations (an "Eligible Entity") can elect its classification
for federal income tax purposes. Section 301.7701-3(b)(1) of the Treasury
Regulations provides that a domestic Eligible Entity formed on or after January
1, 1997 will be classified as a partnership unless it elects otherwise. Under
section 301.7701-3(b)(3) of the Treasury Regulations, a domestic Eligible
Entity in existence prior to January 1, 1997 will have the same classification
that the entity claimed under sections 301.7701-1 through 301.7701-3 of the
Treasury Regulations as in effect prior to January 1, 1997 (the "Prior
Regulations"), unless it elects otherwise.
Wood Glen Venture, Limited, Woodlands Equity Partnership-89, Southwood
Limited I, PC Retail - 93 Limited Partnership, Medical Manufacturing Partners,
Cochran's Crossing - 94 Limited, Holly Creek Apartments I Limited, Holly Creek
Apartments II Limited, Timbermill - 94 Limited, Woodlands-Sarofim #1, Ltd.,
Parkside Phase I - TWC Limited Partnership, Parkside Phase II - TWC Limited
Partnership, Village Square - TWC Limited Partnership, Grogan's Landing - TWC
Limited Partnership, Panther Creek Limited Partnership, Tamarac Pines Ltd.,
Tamarac Pines II, Ltd., and The Woodlands Mall Associates (collectively, the
"TWC Partnerships") were duly organized as limited partnership pursuant to the
Texas Uniform Limited Partnership Act (except Woodlands Equity Partnership-89,
Medical Manufacturing Partners, and The Woodlands Mall Associates, which were
formed pursuant to the Texas Uniform Partnership Act). None of the TWC
Partnerships is a corporation as defined under section 301.7701-2(b)(1), (3),
(4), (5), (6), (7) or (8) of the Treasury Regulations. Accordingly, each of
the TWC Partnerships is an Eligible Entity that can elect its classification
for federal income tax purposes for all periods on or after January 1, 1997.
You have represented that each of the TWC Partnerships claimed classification
as a partnership under the Prior Regulations. Based on the foregoing, and
assuming that none of the TWC Partnerships will file an election to be treated
as a corporation, it is our opinion that each of the TWC Partnerships will be
treated as a partnership for federal income tax purposes as defined in Code
sections 7701(a)(2) and 761(a) and not as an association taxable as a
corporation for all periods on or after January 1, 1997.
(ii) Publicly Traded Partnership Status
Section 7704 of the Code provides that certain publicly traded
partnerships may be taxed as corporations even though they otherwise meet all
of the relevant tests for treatment as partnerships for federal income tax
purposes. A partnership is considered to be a publicly traded partnership if
interests in the partnership are (or become) (i) traded on an established
securities market or (ii) readily tradable on a secondary market or the
substantial equivalent thereof. Treasury Regulations issued under section
7704(b) of the Code provide that interests in a partnership will not be treated
as readily tradable on a secondary market or the substantial equivalent thereof
if (i) all interests in the partnership were issued in a transaction that was
not registered under the Securities Act of 1933, and (ii) the partnership does
not have more than 100 partners at any time during its taxable year. For
purposes of determining the number of partners in the partnership, persons
owning an interest through a flow-through entity are treated as partners in the
partnership only if (i) substantially all of the value of the flow-through
entity is attributable to the lower-tier partnership interest, and (ii) a
principal purpose for the tiered arrangement is to permit the partnership to
satisfy the 100 partner requirement.
Based upon the structure and capitalization of each of the TWC
Partnerships, its current ownership, and the provisions limiting the transfer
of partnership interests included in the partnership agreements cited above, it
is our opinion that none of the TWC Partnerships will constitute a publicly
traded partnership for purposes of section 7704 of the Code.
15. The UBS Transaction
a. Background
Pursuant to the Transaction Documents, Crescent Equities (1) sold
4,700,000 shares of Crescent Equities to UBS for approximately $150,000,000,
less certain fees, and (ii) entered into a forward purchase contract, at a
higher price, with respect to an equivalent number of shares. The forward
purchase contract can be settled either in Crescent Equities shares or, in
certain circumstances at the election of Crescent Equities, in cash.
b. Opinions
Under section 1032(a), a corporation does not recognize gain or loss
(a) upon the receipt of money or other property in exchange for its stock or
(b) with respect to any lapse or acquisition of an option to buy or sell its
stock. In Revenue Ruling 88-31, 1988-1 C.B. 30, the Internal Revenue Service
("IRS") applied this provision in a situation where a corporation issued an
investment unit consisting of its stock and a right which the IRS characterized
as a cash settlement put option (because its holder had the right to receive a
payment which increased as the value of the stock declined). Noting that,
under section 1234, gain or loss from any closing transaction with respect to,
and gain on lapse of, an option in property is generally treated as a gain or
loss from the sale or exchange of the underlying property, and that a cash
settlement option in fact settled in cash is treated as a sale or exchange of
the option, the IRS concluded that any gain resulting from the cash settlement
put option (whether settlement was in cash or via the issuance of additional
stock) covered by section 1032.
In the present case, the effect of the forward contract is economically
equivalent to the issuance of a put option and the purchase of a call option on
Crescent Equities shares. The issuance of the put option is the precise
subject of Rev. Rul. 88-31. There is no logical reason to treat the purchase
of a call option differently, and it is within the rationale of Rev. Rul.
88-31. Furthermore, the purchase of a call option is within the literal
language of section 1032(a). Accordingly, it is our opinion that any payment
to Crescent Equities under the Transaction Documents will be gain that is not
recognized under section 1032(a).
The treatment of this type of item as gross income is specifically
addressed in the regulations under section 61, which define what is gross
income. Gains or losses which are not recognized are not included or deducted
from gross income, and section 1032 is specifically mentioned among the
examples of situations involving nonrecognition. Treas. Reg. Section
1.61-7(b). It therefore follows that items of this nature cannot be taken into
account under section 856(c), which looks to gross income. In our opinion,
payments to Crescent Equities under the Transaction Documents will not be taken
into account under section 856(c).
<PAGE> 53
Crescent Real Estate Equities Company
September 22, 1997
Page 49
There are four principal links between the two partnerships. First, in
both partnerships, the timing of the shift in allocations which will occur as a
result of the economic performance of the partnerships is determined on an
aggregate basis. Second, the failure of the Operating Partnership to make
certain capital contributions to the Commercial Partnership can result in not
only a dilution of its interest in the Commercial Partnership, but also a
dilution of Landevco in the Development Partnership, and vice versa; and the
failure of the MS Group to make certain capital contributions in one of the
partnerships can similarly lead to the increase of the Operating Partnership's
interest in the Commercial Partnership and the increase of Landevco's interest
in the Development Partnership. Third, the occurrence of an event that
triggers the operation of the buy-sell provisions in one partnership will
trigger the buy-sell provisions in the other, as well.(27) Finally, the senior
debt of each partnership provides for cross-collateralization and cross-
default.
Two of these links are significantly attenuated, however, by side
agreements. The Cross Reimbursement and Indemnity Agreement provides that the
Commercial Partnership and the Development Partnership must indemnify the other
against loss occasioned by a failure of the partnership to perform under its
loan agreement. Furthermore, because of the relatively low level of leverage
being employed (approximately 60 percent for the Commercial Partnership and
approximately 72 percent for the Development Partnership), no such failure is
anticipated. Under the Cross Indemnity Agreement, the Operating Partnership and
Landevco agree to indemnify each other against any loss as a result of failure
of each to comply with the terms of its respective partnership agreement.
Again, no such failure is anticipated. It should also be noted that while a
third link, regarding the buy-sell provisions, involves a commonality of
timing, it does not result in any sharing whatsoever of profits and losses
between the two partnerships, because each partnership's buy-sell provisions
take into account only that partnership's assets.
There are, moreover, significant respects in which the two partnerships
are clearly different. As a matter of state law, the creditors of one
partnership (other than the senior lender) will have no rights against the
assets or the partners of the other partnership. Furthermore, there is no
sharing of profits and losses between the two partnerships. That is, the
partners of one partnership have absolutely no right to receive any of the
income of the other partnership and are similarly not responsible for any
losses it might realize. While the internal sharing arrangements of each
partnership base a shift in allocations upon the partnerships' performance on a
joint basis, it is nevertheless true that the partners of each partnership
share only the income of that partnership.
Whether persons are considered partners of each other for federal
income tax purposes depends on a consideration of a number of factors.
Commissioner v. Culbertson, 337 U.S. 733 (1949); Luna v. Commissioner, 42 T.C.
1067 (1964). A representative statement of these factors appears in Luna:
The following factors, none of which is conclusive, bear on the issue:
The agreement of the parties and their conduct in executing its terms;
the contributions, if any, which each party has made to the venture;
the parties' control over
- -------------------------
(27) The buy-sell provisions of the Management Company would similarly be
triggered.
<PAGE> 54
Crescent Real Estate Equities Company
September 22, 1997
Page 50
income and capital and the right of each to make withdrawals; whether
each party was a principal and coproprietor, sharing a mutual
proprietary interest in the net profits and having an obligation to
share losses, or whether one party was the agent or employee of the
other . . .; whether business was conducted in the joint names of the
parties; whether the parties filed Federal partnership returns or
otherwise represented to [the IRS] or to persons with whom they
dealt that they were joint venturers; whether separate books of
account were maintained for the venture; and whether the parties
exercised mutual control over and assumed mutual responsibilities for
the enterprise. (citations omitted) Id. at 1077-78.
In the present case, all the formal expressions of intent indicate that
the Commercial Partnership and the Development Partnership are separate. In
addition, neither partnership (nor its partners) has any interest in the profits
of the other partnership, and the only fact that could be construed as
obligation to share losses is the cross-collateralization of the senior debt.
Accordingly, in our opinion the Commercial Partnership and the Development
Partnership will be considered for federal income tax purposes as separate
entities and not as partners of or with each other.
c. Validity of Profit and Loss Allocations in Event of Aggregation
For purposes of the following discussion it is assumed that, contrary to
our opinion, the Commercial Partnership and the Development Partnership are
aggregated and considered to constitute a single partnership.
We note that, for purposes of applying the Gross Income Tests, each
partner of a partnership is considered to share in partnership gross income and
other items in proportion to the relative size of the partner's capital
interest in the partnership. Accordingly, if the partnerships are considered a
single partnership, Crescent Equities, through its ownership interests in the
Operating Partnership and CresWood Development, LLC, would be treated as
realizing a share of the Development Partnership's gross income corresponding
to Crescent Equities' share of the total capital interest of the joint entity.
By contrast, whether Crescent Equities would be subject to the prohibited
transactions tax of section 857(b)(6) would depend on whether Crescent Equities
would be (indirectly) allocated under the rules set forth in section 704 and
the regulations thereunder any income arising from the sale of property held
for sale to customers in the ordinary course of the entity's trade or business.
Given that the allocation and capital account maintenance provisions of both
partnerships meet the requirements of Treas.Reg. Section 1.704-1(b)(2)(ii) as
to having economic effect, the issue here is whether the allocation to Crescent
Equities of the income from the Leasing Properties and the allocation to the
other partners, including Landevco, of the income from the Development
Properties would have substantial economic effect with the meaning of
Treas. Reg. Section 1.704-1(b)(2)(iii). Under this provision, the economic
effect of an allocation is not substantial if (a) the after-tax economic
consequences of at least one partner may, in present value terms, be enhanced
compared to such consequences if the allocation were not contained in the
partnership agreement and (b) there is a strong likelihood that the after-tax
economic consequences of no
<PAGE> 55
Crescent Real Estate Equities Company
September 22, 1997
Page 51
partner will, in present value terms, be substantially diminished compared to
such consequences if the allocation were not contained in the partnership
agreement.
In the present case the test is whether the allocation to Crescent
Equities of its stated share of the income from the Leased Properties, as
opposed to some lesser percentage of the income from both the Leased Properties
and the Development Properties, (a) would provide an after-tax benefit to
Crescent Equities and (b) would not have a strong likelihood of substantially
diminishing the after-tax economic return to any partner. Given the
applicability to Crescent Equities of the prohibited transactions tax, the
first half of this test appears to be met. The facts suggest, however, that
the second half is not. That is, there is no strong likelihood that, in either
the short or the long run, the economic results of the Leased Properties and
the Development Properties will be comparable, so that a share of the income
from the Development Properties would offset the loss of a portion of the
income from the Leased Properties. Crescent Equities and the Operating
Partnership have represented this to be the case, and it is consistent with our
experience. Cf. Treas. Reg. Section 1.704-1(b)(5), Example(10) (allocation to
a foreign partner of 90 percent of all the income and other items from the
partner's operations within that country had substantial economic effect, where
the amount of such income could not predicted with any reasonable certainty).
Based upon the foregoing, it is our opinion that if, contrary to our
opinion, the Commercial Partnership and the Development Partnership are
considered to constitute one partnership for federal income tax purposes, the
allocations of profit and loss from the leased Properties to the partners of
the Commercial Partnership and the allocations of profit and loss from the
Development Properties to the partners of the Development Partnership will be
respected under section 704.
d. The Treatment under Gross Income Tests of Gross Income
from the Sale of Properties to Customers in the Ordinary Course
As noted above, if, contrary to our opinion, the Commercial Partnership
and the Development Partnership are considered to constitute a single
partnership for federal income tax purposes, Crescent Equities would be
considered to realize that portion of the income of the Development Partnership
from the sale of properties to customers in the ordinary course which
corresponds to the capital of Crescent Equities in the combined entity.
However, the language of section 856(c) clearly indicates that the Gross Income
Tests are applied by first excluding gross income from prohibited transactions.
This result has also been acknowledged by the IRS in a private letter ruling.
See P.L.R.9308013 (Nov. 24, 1992) ("P3 derives income from the sale of oil and
gas . . . . The Internal Revenue Service has previously ruled that Taxpayer's
share of such income (less appropriate deductions) is net income derived from
prohibited transactions within the meaning of Code section 857(b)(6). As a
result, Taxpayer's share of gross income, if any, from such sales is subject to
the 100 percent prohibited transaction tax and does not affect Taxpayer's
ability to meet the 95 percent and 75 percent income tests.")
In our opinion, if, contrary to our opinion, the Commercial Partnership
and the Development Partnership are considered to constitute one partnership
for federal income tax purposes,
<PAGE> 56
Crescent Real Estate Equities Company
September 22, 1997
Page 52
the allocation to Crescent Equities under Treas. Reg. Section 1.856-3(g) of
gross income derived from the sale of Development Properties to customers in
the ordinary course of business would not be taken into account for purposes of
determining whether Crescent Equities meets the requirements of the "Gross
Income Tests."
15. The UBS Transaction
a. Background
Pursuant to the Transaction Documents, Crescent Equities has become
obligated (i) to sell 4,700,000 shares of Crescent Equities to UBS for
approximately $150,000,000, less certain fees, and (ii) to enter into a forward
purchase contract, at a higher price, with respect to an equivalent number of
shares. The forward purchase contract can be settled either in Crescent
Equities shares or, in certain circumstances at the election of Crescent
Equities, in cash.
b. Opinions
Under section 1032(a), a corporation does not recognize gain or loss
(a) upon the receipt of money or other property in exchange for its stock or
(b) with respect to any lapse or acquisition of an option to buy or sell its
stock. In Revenue Ruling 88-31, 1988-1 C.B. 30, the Internal Revenue Service
("IRS") applied this provision in a situation where a corporation issued an
investment unit consisting of its stock and a right which the IRS characterized
as a cash settlement put option (because its holder had the right to receive a
payment which increased as the value of the stock declined). Noting that,
under section 1234, gain or loss from any closing transaction with respect to,
and gain on lapse of, an option in property is generally treated as a gain or
loss from the sale or exchange of the underlying property, and that a cash
settlement option in fact settled in cash is treated as a sale or exchange of
the option, the IRS concluded that any gain resulting from the cash settlement
put option (whether settlement was in cash or via the issuance of additional
stock) covered by section 1032.
In the present case, the effect of the forward contract is economically
equivalent to the issuance of a put option and the purchase of a call option on
Crescent Equities shares. The issuance of the put option is the precise
subject of Rev. Rul. 88-31. There is no logical reason to treat the purchase
of a call option differently, and it is within the rationale of Rev. Rul.
88-31. Furthermore, the purchase of a call option is within the literal
language of section 1032(a). Accordingly, it is our opinion that any payment
to Crescent Equities under the Transaction Documents will be gain that is not
recognized under section 1032(a).
The treatment of this type of item as gross income is specifically
addressed in the regulations under section 61, which define what is gross
income. Gains or losses which are not recognized are not included or deducted
from gross income, and section 1032 is specifically mentioned among the
examples of situations involving nonrecognition. Treas. Reg. Section
1.61-7(b). It therefore follows that items of this nature cannot be taken into
account under section 856(c), which looks to gross income. In our opinion,
payments to Crescent Equities under the Transaction Documents will not be taken
into account under section 856(c).
<PAGE> 57
Crescent Real Estate Equities Company
September 22, 1997
Page 53
16. Accuracy of the Matters Described under the Heading "Federal
Income Tax Considerations" in the Prospectus.
It is our opinion that the description of the federal income tax
considerations discussed under the heading "Federal Income Tax Considerations"
in the Prospectus is accurate and fairly summarizes the federal income tax
considerations that are likely to be material to a holder of Common Shares.
III. Additional Limitations
The foregoing opinions are limited to the specific matters covered
thereby and should not be interpreted to imply that the undersigned has offered
its opinion on any other matter. Moreover, Crescent Equities' ability to
achieve and maintain qualification and taxation as a REIT depends upon Crescent
Equities' ability to meet certain diversity of stock ownership requirements
and, through actual annual operating results, certain requirements under the
Code regarding its income, assets and distribution levels. No assurance can be
given that the actual ownership of Crescent Equities' shares and its actual
operating results and distributions for any taxable year will satisfy the tests
necessary to achieve and maintain its status as a REIT.
IV. Consent to Filing
These opinions are furnished to you solely for use in connection with the
Registration Statement. We hereby consent to the incorporation by reference of
this letter as an exhibit to the Registration Statement and to the use of our
name under the captions "Legal Matters" and "Federal Income Tax Considerations"
in the Prospectus.
Very truly yours,
SHAW, PITTMAN, POTTS & TROWBRIDGE
-----------------------------------
By: Charles B. Temkin, P.C.
<PAGE> 1
EXHIBIT 8.02
[LOCKE PURNELL RAIN HARRELL LETTERHEAD]
September 22, 1997
Crescent Real Estate Equities Company
777 Main Street, Suite 2100
Fort Worth, Texas 76102
Ladies and Gentlemen:
On March 25, 1997, Crescent Real Estate Equities Company ("Crescent
Equities") filed a registration statement on Form S-3, No. 333-21905, with the
Securities and Exchange Commission, which was declared effective on March 26,
1997. Such registration statement (the "Registration Statement") includes a
prospectus supplement dated September 22, 1997 (the "Prospectus Supplement") to
the prospectus contained in the Registration Statement (the "Prospectus"). We
have acted as special tax counsel to Crescent Equities in connection with the
Prospectus Supplement. Capitalized terms used hereunder but not defined have
the meaning ascribed to them in the Prospectus Supplement.
In rendering this opinion we have examined such documents as we have
deemed relevant or necessary, including the Prospectus Supplement, and our
conclusions are based upon the facts contained in the Prospectus Supplement.
The initial and continuing accuracy of these facts constitutes an integral
basis for the opinion expressed herein.
In our opinion, the discussion contained in the Prospectus Supplement
in the subsection entitled "Federal Income Tax Considerations -- State and Local
Taxes" accurately summarizes the Texas franchise tax matters that are likely to
be material to a holder of common shares of Crescent Equities as of the date of
the Prospectus Supplement. The foregoing opinion is limited to the specific
matter covered hereby and does not apply to any other matters discussed under
the heading "Federal Income Tax Considerations." This opinion is based upon
existing State of Texas statutes and regulations and positions of the Texas
State Comptroller of Public Accounts as of the date hereof, all of which are
subject to change, both retroactively or prospectively.
This opinion is furnished to you solely for use in connection with the
Prospectus Supplement. We hereby consent to the incorporation by reference of
this opinion as an exhibit to the Registration Statement and to the reference
to our firm in the Prospectus Supplement under the caption "Federal Income Tax
Considerations -- State and Local Taxes" and "Legal
<PAGE> 2
Crescent Real Estate Equities Company
September 22, 1997
Page 2
Matters." In giving this consent we do not thereby admit that we come within
the category of persons whose consent is required under the Securities Act of
1933, as amended, or the rules and regulations of the Securities and Exchange
Commission promulgated thereunder.
Very truly yours,
LOCKE PURNELL RAIN HARRELL
(A Professional Corporation)
By: /s/ C. RONALD KALTEYER
-----------------------------
C. Ronald Kalteyer
