<PAGE> 1
Filed Pursuant to Rule 424(b)(5)
Registration Number 333-21905
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with and
declared effective by the Securities and Exchange Commission. These
securities may not be sold nor may offers to buy be accepted without the
delivery of a final prospectus supplement and prospectus. This Prospectus
Supplement and the accompanying Prospectus shall not constitute an offer to
sell or the solicitation of an offer to buy nor shall there be any sale of
these securities in any State in which such offer, solicitation or sale
would be unlawful prior to registration or qualification under the
securities laws of any such State.
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS SUPPLEMENT DATED APRIL 9, 1997
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED MARCH 26, 1997)
17,500,000 SHARES
[CRESCENT LOGO]
COMMON SHARES
------------------------
Crescent Real Estate Equities Company (collectively with its subsidiaries,
the "Company") is a fully integrated real estate company operated as a real
estate investment trust for federal income tax purposes (a "REIT"). The Company
owns a portfolio of real estate assets located primarily in 17 metropolitan
submarkets in Texas and Colorado. The portfolio includes 58 office properties
with an aggregate of approximately 18.0 million net rentable square feet, four
full-service hotels with a total of 1,471 rooms and two destination health and
fitness resorts, six retail properties and economic interests in three
residential development corporations. The Company is one of the largest publicly
held REITs in the United States.
The Company will use the proceeds of this offering to facilitate the
Company's pending acquisitions of (i) a portfolio of real estate and other
assets consisting primarily of 14 office properties, with an aggregate of
approximately 3.0 million net rentable square feet, located in the Dallas
metropolitan area and (ii) approximately 90 behavioral healthcare facilities.
Upon completion of these pending investments, the Company will have completed
over $2.1 billion of real estate investments since the closing of its initial
public offering on May 5, 1994, approximately $1.3 billion of which will have
been completed since the closing of its public offering on October 2, 1996.
Total return to shareholders from the October 1996 offering through April 8,
1997 was 39.6%, including distributions and share price appreciation.
All of the common shares of beneficial interest (the "Common Shares")
offered hereby are being sold by the Company. Of the 17,500,000 Common Shares
offered hereby, 3,500,000 shares are being initially offered outside of the
United States and Canada and the remaining 14,000,000 shares are being initially
offered inside the United States and Canada. See "Underwriting." Upon the
closing of this offering, the Company's trust managers and senior management
will beneficially own approximately 18.5% of the common equity of the Company.
Since the closing of the Company's initial public offering, the Company has
made regular quarterly distributions to holders of its Common Shares. The Common
Shares are listed on the New York Stock Exchange (the "NYSE") under the symbol
"CEI." On April 8, 1997, the last reported sale price of the Common Shares on
the NYSE was $27.875 per share. See "Price Range of Common Shares and
Distributions." To ensure that the Company maintains its qualification as a REIT
for federal income tax purposes, ownership by any person generally is limited to
8.0% of the issued and outstanding Common Shares. See "Description of Common
Shares -- Ownership Limits and Restrictions on Transfer" in the accompanying
Prospectus.
SEE "RISK FACTORS" AT PAGE 2 IN THE ACCOMPANYING PROSPECTUS FOR CERTAIN
FACTORS RELEVANT TO AN INVESTMENT IN THE COMPANY.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS TO WHICH IT
RELATES. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
====================================================================================================================================
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share............................................ $ $ $
- ------------------------------------------------------------------------------------------------------------------------------------
Total(3)............................................. $ $ $
====================================================================================================================================
</TABLE>
(1) The Company has agreed to indemnify the several Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting expenses payable by the Company, estimated at $ .
(3) The Company has granted the several International Managers a 30-day option
to purchase up to 525,000 additional shares to cover any over-allotments and
has granted the several U.S. Underwriters a 30-day option to purchase up to
2,100,000 additional shares to cover any over-allotments. If both options
are exercised in full, the total Price to Public, Underwriting Discount and
Proceeds to Company will be $ , $ and $ ,
respectively. See "Underwriting."
------------------------
The Common Shares are offered by the several Underwriters subject to prior
sale, when, as and if delivered to and accepted by the Underwriters, and subject
to their right to withdraw, cancel or modify such offer and to reject orders in
whole or in part. It is expected that delivery of the Common Shares offered
hereby will be made in New York, New York, on or about , 1997.
------------------------
MERRILL LYNCH INTERNATIONAL
BEAR, STEARNS INTERNATIONAL LIMITED
DEAN WITTER INTERNATIONAL LTD.
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
PAINEWEBBER INTERNATIONAL
SMITH BARNEY INC.
------------------------
The date of this Prospectus Supplement is , 1997.
<PAGE> 2
PROPERTY LOCATIONS
The inside front cover is a gatefold.
The outside of the gatefold displays one picture of each of the following five
properties: Bank One Tower, in Austin, Texas, Trammell Crow Center, in Dallas,
Texas, Frost Bank Plaza, in Austin, Texas, 160 Spear Street in San Francisco,
California and Sonoma Mission Inn & Spa, in Sonoma, California. The outside
gatefold also includes the Crescent logo.
The inside of the gatefold displays in the background a picture of 5050 Quorum,
in Dallas, Texas (one of the 14 office properties in the Carter-Crowley Office
Portfolio to be acquired by the Company). In addition, on the left-hand side of
the gatefold a map of the United States that shows the location by state of the
Properties owned by the Company and the Pending Investments described in the
Prospectus Supplement. The map excludes the pending acquisition of 90 behavioral
healthcare facilities, which have not been regionalized. It also includes two
pie charts that display (i) the Company's property composition (including
Pending Investments) as a percentage of funds from operations and (ii) the
geographic distribution of the portfolio as a percentage of total investments
(excluding the pending acquisition of 90 behavioral healthcare facilities, which
have not been regionalized). The right-hand side of the gatefold includes two
bar graphs (i) of the Company's Office portfolio in square feet since the
Initial Offering and (ii) the improving aggregate submarket trends, for vacancy
and rent, of the Company's Class A office submarkets (inclusive of the 3.0
million square foot Carter-Crowley Office Portfolio). It also includes one
picture of Chancellor Park in San Diego, California and Reverchon Plaza in
Dallas, Texas (one of the 14 office properties in the Carter-Crowley Office
Portfolio).
------------------------
Certain persons participating in this offering may engage in transactions that
stabilize, maintain or otherwise affect the price of the Common Shares offered
hereby. Such transactions may include stabilizing transactions, the purchase of
Common Shares to cover syndicate short positions and the imposition of penalty
bids. For a description of these activities, see "Underwriting."
<PAGE> 3
PROSPECTUS SUPPLEMENT SUMMARY
The following Prospectus Supplement Summary is qualified in its entirety by
reference to the more detailed information and financial statements appearing
elsewhere in this Prospectus Supplement or in the accompanying Prospectus or
incorporated therein by reference.
On December 31, 1996, Crescent Real Estate Equities Company, a Texas real
estate investment trust ("Crescent Equities"), became the successor to Crescent
Real Estate Equities, Inc., a Maryland corporation (the "Predecessor
Corporation"), through the merger of the Predecessor Corporation and CRE Limited
Partner, Inc., a subsidiary of the Predecessor Corporation, into Crescent
Equities. The term "Company" includes, unless the context otherwise requires,
Crescent Equities, the Predecessor Corporation, Crescent Real Estate Equities
Limited Partnership, a Delaware limited partnership (the "Operating
Partnership"), and the other subsidiaries of Crescent Equities.
Unless otherwise indicated, all information presented in this Prospectus
Supplement assumes no exercise of the Underwriters' over-allotment option.
Historical information has been adjusted, as applicable, to reflect the
Company's two-for-one stock split, effected on March 26, 1997, in the form of a
100% share dividend.
Certain matters discussed within this Prospectus Supplement are
forward-looking statements within the meaning of the federal securities laws.
Although the Company believes that the expectations reflected in such
forward-looking statements are based upon reasonable assumptions, there can be
no assurance that these expectations will be realized. Factors that could cause
actual results to differ materially from current expectations include the
failure of pending investments to close, changes in general economic conditions,
changes in local real estate conditions, changes in industries in which the
Company's principal tenants compete, the failure to timely lease unoccupied
square footage, the failure to timely re-lease occupied square footage upon
expiration of leases, the inability to generate sufficient revenues to meet debt
service payments and operating expenses, the unavailability of equity and debt
financing and other risks described in this Prospectus Supplement or in the
accompanying Prospectus or incorporated therein by reference.
Capitalized terms used herein and not otherwise defined are as defined in
the Glossary appearing elsewhere in this Prospectus Supplement.
THE COMPANY
The Company is a fully integrated real estate company, operated as a real
estate investment trust for federal income tax purposes (a "REIT"), which owns a
portfolio of real estate assets (the "Properties") located primarily in 17
metropolitan submarkets in Texas and Colorado. The Properties include 58 office
properties with an aggregate of approximately 18.0 million net rentable square
feet (the "Office Properties"), four full-service hotels with a total of 1,471
rooms and two destination health and fitness resorts (collectively, the "Hotel
Properties"), six retail properties with an aggregate of approximately .6
million net rentable square feet (the "Retail Properties") and the real estate
mortgages and non-voting common stock in three residential development
corporations (the "Residential Development Corporations").
The Company will use the proceeds of this offering (the "Offering") to
facilitate the Company's pending acquisitions of (i) a portfolio of real estate
and other assets (the "Carter-Crowley Portfolio") consisting primarily of 14
office properties (the "Carter-Crowley Office Portfolio"), with an aggregate of
approximately 3.0 million net rentable square feet, located in the Dallas
metropolitan area and (ii) approximately 90 behavioral healthcare facilities
(the "Magellan Facilities"). Upon completion of these pending investments, the
Company will have completed over $2.1 billion of real estate investments since
the closing of the initial public offering of its common shares (the "Common
Shares") on May 5, 1994 (the "Initial Offering"), approximately $1.3 billion of
which will have been completed since the closing of the public offering of its
Common Shares on October 2, 1996 (the "October 1996 Offering"). Management
believes that it will be able to identify substantial opportunities for future
real estate investments from a variety of sources, including life insurance
companies and pension funds seeking to reduce their direct real estate
investments, corporations divesting of nonstrategic real estate assets and
private sellers requiring complex disposition structures.
S-3
<PAGE> 4
The Company's business objective is the maximization of total return to
shareholders through increases in distributions and share price. From the
Initial Offering through April 8, 1997, the total return to shareholders was
145.8%, with distributions having increased by approximately 31.9% and the
market price per Common Share having increased by approximately 123.0%. From the
October 1996 Offering through April 8, 1997, the total return to shareholders
was 39.6%, with distributions having increased by approximately 10.9% and the
market price per Common Share having increased by approximately 38.1%.
INVESTMENT STRATEGY
The Company intends to continue utilizing its extensive network of
relationships, its ability to identify underperforming assets, its market
reputation and its ready access to capital to achieve favorable returns on
invested capital and growth in cash flow by:
- acquiring high-quality office properties at prices significantly below
their estimated replacement cost in selected markets and submarkets that
management expects to experience above-average population and employment
growth as a result of desirable market and submarket conditions,
demographic shifts and specific regional, national and global economic
developments;
- acquiring unique destination resort and luxury hotel properties at prices
significantly below their estimated replacement cost; and
- employing the corporate, transactional and financial skills of the
Company's management team to structure innovative investments in other
types of real estate assets.
The Company's proven ability to structure innovative and complex
transactions, such as its pending acquisitions of the Carter-Crowley Portfolio
and the Magellan Facilities, provides it with a unique competitive advantage in
making real estate investments and enhances its ability to execute its
investment strategy.
OPERATING AND FINANCING STRATEGIES
The Company seeks to enhance its operating performance and financial
position by:
- applying aggressive leasing strategies in order to capture the potential
rental growth in the Company's existing portfolio of Office Properties as
occupancy and rental rates increase with the recovery of the markets and
submarkets in which the Company has invested;
- achieving a high tenant retention rate at the Company's Office Properties
through quality service, individualized attention to its tenants and
active preventive maintenance programs;
- empowering management and employing compensation formulas linked directly
with enhanced operating performance of the Company and its Properties;
and
- optimizing the use of debt and other sources of financing to create a
flexible capital structure that will allow the Company to continue its
opportunistic investment strategy.
Upon the closing of the Offering, the Company's trust managers and senior
management will beneficially own approximately 18.5% of the Company's common
equity (consisting of Common Shares and units of ownership interest in the
Operating Partnership ("Units"), including vested options to purchase Common
Shares and Units). This ownership percentage includes the approximately 13.3%
ownership position of Richard E. Rainwater, the Chairman of the Board of Trust
Managers, the approximately 2.2% ownership position of John C. Goff, the Vice
Chairman of the Board of Trust Managers, and the approximately 1.6% ownership
position of Gerald W. Haddock, the President and Chief Executive Officer.
S-4
<PAGE> 5
PROPERTIES
OFFICE PROPERTIES
The following table provides an overview of the Office Properties as of
December 31, 1996 and the states, cities and submarkets in which they are
located. For information regarding the Carter-Crowley Office Portfolio, which
contains an aggregate of approximately 3.0 million net rentable square feet, see
"Recent Developments -- Pending Investments -- Acquisition of Carter-Crowley
Portfolio."
<TABLE>
<CAPTION>
PERCENT
TOTAL PERCENT OF LEASED AT
NUMBER OF COMPANY TOTAL COMPANY COMPANY
STATE, CITY, SUBMARKET PROPERTIES NRA(1) NRA(1) PROPERTIES
- ---------------------------------------- ---------- ---------- ------------- ----------
<S> <C> <C> <C> <C>
TEXAS
DALLAS
Uptown/Turtle Creek................. 2 1,444,383 8% 91%
Far North Dallas.................... 4 1,403,199 8 96
Las Colinas......................... 3 1,198,801 7 99
Central Business District
("CBD")(2)........................ 1 1,128,331 6 80
Richardson/Plano(3)................. 3 301,033 2 100
LBJ Freeway......................... 1 239,103 1 98
-- ---------- --- ---
Subtotal/Weighted Average......... 14 5,714,850 32% 92%
-- ---------- --- ---
FORT WORTH
CBD................................. 1 954,895 5% 78%
-- ---------- --- ---
HOUSTON
Richmond/Buffalo Speedway........... 10 4,256,885 23% 74%
The Woodlands....................... 12 812,359 5 92
Katy Freeway........................ 1 414,251 2 100
-- ---------- --- ---
Subtotal/Weighted Average......... 23 5,483,495 30% 74%
-- ---------- --- ---
AUSTIN
CBD................................. 3 1,240,865 6% 84%
Northwest........................... 1 125,959 1 100
Southwest........................... 1 99,792 1 94
-- ---------- --- ---
Subtotal/Weighted Average......... 5 1,466,616 8% 86%
-- ---------- --- ---
COLORADO
DENVER
Cherry Creek(4)..................... 4 795,806 4% 73%
CBD(5).............................. 2 720,417 4 96
Denver Technology Center ("DTC").... 1 309,862 2 97
-- ---------- --- ---
Subtotal/Weighted Average......... 7 1,826,085 10% 86%
-- ---------- --- ---
COLORADO SPRINGS...................... 1 252,857 1% 100%
-- ---------- --- ---
ARIZONA
PHOENIX
CBD................................. 1 476,373 3% 74%
Camelback Corridor.................. 1 86,451 1 0
-- ---------- --- ---
Subtotal/Weighted Average......... 2 562,824 4% 63%
-- ---------- --- ---
LOUISIANA
NEW ORLEANS
CBD................................. 1 508,741 3% 74%
-- ---------- --- ---
NEBRASKA
OMAHA
CBD................................. 1 409,850 2% 98%
-- ---------- --- ---
NEW MEXICO
ALBUQUERQUE
CBD................................. 1 365,952 2% 90%
-- ---------- --- ---
CALIFORNIA
SAN FRANCISCO
South of Market - CBD............... 1 276,420 2% 20%
-- ---------- --- ---
SAN DIEGO
University Tower Centre ("UTC")..... 1 195,733 1% 90%
-- ---------- --- ---
TOTAL/WEIGHTED AVERAGE.......... 58 18,018,318 100% 84%
== ========== === ===
</TABLE>
- ---------------
(1) Represents net rentable area in square feet.
(2) The Company's Office Property in this submarket was acquired subsequent to
December 31, 1996.
(3) One of the Company's Office Properties in this submarket (representing
154,329 net rentable square feet) was acquired subsequent to December 31,
1996.
(4) Two of the Company's Office Properties in this submarket (representing an
aggregate of 246,589 net rentable square feet) were acquired subsequent to
December 31, 1996.
(5) One of the Company's Office Properties in this submarket (representing
169,610 net rentable square feet) was acquired subsequent to December 31,
1996.
S-5
<PAGE> 6
OFFICE PROPERTY MARKET INFORMATION
The following graph provides information regarding vacancy levels and
weighted average quoted market rental rates at year end for each of the years
from 1992 through 1996 for Class A office properties in all submarkets in which
the Company has invested or has pending investments in Class A office
properties.
CLASS A OFFICE
VACANCY AND QUOTED MARKET RENT
FOR ALL COMPANY SUBMARKETS
<TABLE>
<CAPTION>
MEASUREMENT PERIOD
(FISCAL YEAR COVERED) AVG. RENT(1) VACANCY
<S> <C> <C>
1992 16.17 17.7
1993 15.92 16.0
1994 16.48 12.8
1995 17.59 11.5
1996 19.52 10.7
</TABLE>
- ---------------
(1) Weighted average based on total net rentable square feet of Class A office
properties in all Company submarkets.
Source: Compiled from third-party sources
HOTEL PROPERTIES
The following table sets forth certain information about the Hotel
Properties for the years ended December 31, 1995 and 1996. The information for
the Hotel Properties is based on available rooms, except for Canyon Ranch-Tucson
and Canyon Ranch-Lenox, which are destination health and fitness resorts that
measure performance based on available guest nights.
<TABLE>
<CAPTION>
AVERAGE AVERAGE REVENUE PER
OCCUPANCY DAILY AVAILABLE
YEAR RATE RATE ROOM
COMPLETED/ ------------ ------------ ------------
HOTEL PROPERTY(1) LOCATION RENOVATED ROOMS 1995 1996 1995 1996 1995 1996
----------------- -------- ---------- ----- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
FULL-SERVICE/LUXURY
HOTELS
Hyatt Regency Beaver
Creek Avon, CO 1989 295 70% 67% $191 $207 $134 $139
Denver Marriott City
Center Denver, CO 1982/1994 613 77 79 98 108 76 85
Hyatt Regency
Albuquerque Albuquerque, NM 1990 395 74 77 87 93 64 71
Sonoma Mission Inn &
Spa Sonoma, CA 1927/1987 168 86 92 169 181 146 166
----- -- -- ---- ---- ---- ----
TOTAL/WEIGHTED AVERAGE 1,471 77% 77% $122 $131 $ 93 $101
===== == == ==== ==== ==== ====
DESTINATION HEALTH AND FITNESS
RESORTS
Canyon Ranch-Tucson Tucson, AZ 1980 240(2) 77%(3) 80%(3) $477(4) $479(4) $348(5) $366(5)
Canyon Ranch-Lenox Lenox, MA 1989 202(2) 76(3) 81(3) 390(4) 407(4) 288(5) 320(5)
----- -- -- ---- ---- ---- ----
TOTAL/WEIGHTED AVERAGE 442 77% 81% $437 $446 $321 $345
===== == == ==== ==== ==== ====
</TABLE>
- ---------------
(1) The Company cannot, consistent with its status as a REIT for federal income
tax purposes, operate the Hotel Properties directly and, accordingly, has
leased the Hotel Properties to lessees pursuant to long-term leases. See
"Properties -- Hotel Leases."
(2) Represents available guest nights, which is the maximum number of guests
that the resort can accommodate per night.
(3) Represents the number of paying and complimentary guests for the period,
divided by the maximum number of available guest nights for the period.
(4) Represents the average daily "all-inclusive" guest package charges for the
period, divided by the average daily number of paying guests for the period.
(5) Represents the total "all-inclusive" guest package charges for the period,
divided by the maximum number of available guest nights for the period.
S-6
<PAGE> 7
RECENT DEVELOPMENTS
PENDING INVESTMENTS
As of March 31, 1997, the Company had pending approximately $738.8 million
of additional investments. This amount includes the approximately $698.0 million
of investments (the "Pending Investments") to be made by the Company primarily
in connection with the pending acquisitions of the Carter-Crowley Office
Portfolio, certain other assets included in the Carter-Crowley Portfolio and the
Magellan Facilities. This amount also includes approximately $40.8 million of
investments to be made by a new corporation to be established by the Company
("Crescent Affiliate") and funded by the Company in the form of cash
contributions and loans to Crescent Affiliate. See "-- Proposed Spin-Off" below.
The Pending Investments and the investments to be made by Crescent Affiliate,
which are expected to close in the second quarter of 1997, are subject to
various closing conditions. There is no assurance that the Pending Investments
or the investments to be made by Crescent Affiliate will be completed.
On a pro forma basis, after giving effect to the Pending Investments and
completed acquisitions from January 1, 1996 as if they had occurred on January
1, 1996, the Company's office properties, hotel properties and behavioral health
care facilities would have accounted for approximately 77%, 8% and 13%,
respectively, of the Company's total rental revenues for the year ended December
31, 1996. The Company's office properties in Dallas/Fort Worth, Houston and
Austin, Texas and in Denver, Colorado will represent, upon completion of the
Pending Investments, an aggregate of approximately 88% of its office portfolio
based on total net rentable square feet and, on a pro forma basis, after giving
effect to the Pending Investments and completed acquisitions from January 1,
1996 as if they had occurred on January 1, 1996, would have accounted for an
aggregate of approximately 87% of office property rental revenues for the year
ended December 31, 1996.
PROPOSED SPIN-OFF
The Company intends to establish a new corporation, Crescent Affiliate, the
shares of which will be distributed to the shareholders of Crescent Equities and
the partners of the Operating Partnership, on a pro rata basis, in a spin-off.
Crescent Affiliate will acquire certain non-real estate assets contained in
the Carter-Crowley Portfolio, an approximately 50% interest in the entity that
will lease and operate the Magellan Facilities to be acquired by the Company and
warrants to purchase common stock of Magellan Health Services, Inc.
("Magellan"). The Company will provide approximately $40.8 million in the form
of cash contributions and loans to be used by Crescent Affiliate to acquire
these assets. The Company will also make available to Crescent Affiliate a line
of credit in the amount of approximately $20.0 million to be used by Crescent
Affiliate to fulfill certain ongoing obligations associated with these assets.
In addition, Crescent Affiliate will obtain certain rights pursuant to the terms
of an intercompany agreement to be entered into with the Company in connection
with the spin-off.
The spin-off is designed to provide the shareholders of the Company at the
time of the spin-off with the ability to benefit from both the real estate
operations of the Company and the related business operations of Crescent
Affiliate. As a result of the spin-off, Crescent Affiliate will become a public
company, the shares of which are expected to be publicly traded no later than
the effective date of the spin-off.
It is anticipated that Messrs. Rainwater, Goff and Haddock will hold the
same offices with Crescent Affiliate that they currently hold with the Company.
In addition, it is expected that the board of directors of Crescent Affiliate
will consist of seven members, five of which (including Messrs. Rainwater, Goff
and Haddock) are currently trust managers of the Company and two of which are
persons who will not be affiliated with the Company.
S-7
<PAGE> 8
COMPLETED INVESTMENTS
Since the October 1996 Offering, the Company has completed approximately
$693.0 million of real estate investments, consisting primarily of 21 Office
Properties containing approximately 7.4 million net rentable square feet, four
retail properties containing approximately .4 million net rentable square feet,
one full-service hotel and one destination health and fitness resort. The 21
Office Properties are located in submarkets of metropolitan areas within Texas
(in Dallas, Houston and Austin), Colorado (in Denver) and California (in San
Francisco and San Diego).
FINANCING ACTIVITIES
The Company obtained a $175 million credit facility (the "Credit Facility")
in June 1996 to enhance the Company's financial flexibility in making new real
estate investments. Advances under the Credit Facility bear interest at the
Eurodollar rate plus 185 basis points. The Credit Facility is unsecured and
expires in March 1999. The Company has entered into a commitment letter with the
lender under the Credit Facility to increase the amount of the Credit Facility
to $350 million, decrease the interest rate to the Eurodollar rate plus 138
basis points and extend the term until April 2000. Management believes that the
modification of the Credit Facility will be completed in April 1997.
STOCK SPLIT
On March 2, 1997, the Company declared a two-for-one stock split in the
form of a 100% share dividend. The share dividend was paid on March 26, 1997 to
shareholders of record on March 20, 1997.
DISTRIBUTIONS
The Company intends to continue making regular quarterly distributions to
its shareholders. The Company's current quarterly distribution rate is $.305 per
Common Share, an indicated annualized distribution of $1.22 per Common Share.
Future distributions will be at the discretion of the Board of Trust Managers.
In addition, the Company intends to make an additional one-time
distribution of shares of Crescent Affiliate, which will be distributed to the
shareholders of Crescent Equities and the partners of the Operating Partnership,
on a pro rata basis, in a spin-off expected to occur by the end of the second
quarter of 1997. Based on the Company's allocation of value to the assets
expected to be acquired by Crescent Affiliate, management estimates that the
value of the distribution will be $.10 to $.15 per Common Share.
THE OFFERING
All of the Common Shares offered hereby are being offered by the Company.
<TABLE>
<S> <C>
Common Shares Offered
U.S. Offering.................................... 14,000,000 shares
International Offering........................... 3,500,000 shares
Total.................................... 17,500,000 shares
Common Shares to be Outstanding After the
Offering......................................... 89,824,190 shares
Common Shares to be Outstanding and Issuable in
Exchange for Units After the Offering(1)......... 103,104,862 shares
Use of Proceeds.................................... To fund a portion of the purchase price of the
Pending Investments and to provide cash
contributions and loans to Crescent Affiliate in
connection with its formation and
capitalization.
NYSE Symbol........................................ "CEI"
</TABLE>
- ---------------
(1) Units are exchangeable on a one-for-two basis for Common Shares or, at the
option of the Company, cash, subject to certain exceptions.
S-8
<PAGE> 9
SUMMARY SELECTED FINANCIAL DATA
The following table sets forth certain summary financial information for
the Company on a consolidated pro forma and historical basis and for the
Rainwater Property Group (the Company's predecessor) on a combined historical
basis, which consists of the combined financial statements of the entities that
contributed Properties in exchange for Units or Common Shares in connection with
the formation of the Company. Such information should be read in conjunction
with "Selected Financial Data" and the financial statements and notes thereto
incorporated by reference into the accompanying Prospectus.
The pro forma information for the year ended December 31, 1995 assumes
completion, in each case as of January 1, 1995 in determining operating and
other data, of (i) the Company's public offering of its Common Shares in April
1995 (the "April 1995 Offering") and Mr. Rainwater's concurrent $31 million
investment in the Operating Partnership and the use of the net proceeds
therefrom to repay approximately $167 million of indebtedness secured by certain
of the Properties, (ii) the October 1996 Offering and the additional public
offering of 450,000 Common Shares that closed on October 9, 1996 and the use of
the net proceeds therefrom to repay approximately $168 million of indebtedness
and to fund approximately $289 million of Property acquisitions completed in the
fourth quarter of 1996 and the first quarter of 1997, (iii) the Offering and the
use of the net proceeds therefrom to fund the approximately $308.0 million
purchase price of the portion of the Carter-Crowley Portfolio to be acquired by
the Company, to fund approximately $40.8 million in connection with the
formation and capitalization of Crescent Affiliate and to fund approximately
$111.0 million of the purchase price for the assets to be acquired in the
Magellan transaction, (iv) additional borrowings of approximately $279.0
million, at an assumed interest rate of 7.0%, to fund the remaining portion of
the purchase price for the assets to be acquired in the Magellan transaction and
(v) the acquisition of the Properties acquired during 1995, 1996 and 1997.
The pro forma information for the year ended December 31, 1996 assumes
completion, in each case as of January 1, 1996 in determining operating and
other data, and, in each case as of December 31, 1996 in determining balance
sheet data, of (i) the October 1996 Offering and the additional public offering
of 450,000 Common Shares that closed on October 9, 1996 and the use of the net
proceeds therefrom to repay approximately $168 million of indebtedness and to
fund approximately $289 million of Property acquisitions completed in the fourth
quarter of 1996 and the first quarter of 1997, (ii) the Offering and the use of
the net proceeds therefrom to fund the approximately $308.0 million purchase
price of the portion of the Carter-Crowley Portfolio to be acquired by the
Company, to fund approximately $40.8 million in connection with the formation
and capitalization of Crescent Affiliate and to fund approximately $111.0
million of the purchase price for the assets to be acquired in the Magellan
transaction, (iii) additional borrowings of approximately $279.0 million, at an
assumed interest rate of 7.0%, to fund the remaining portion of the purchase
price for the assets to be acquired in the Magellan transaction and (iv) the
acquisition of the Properties acquired during 1996 and 1997.
S-9
<PAGE> 10
CRESCENT REAL ESTATE EQUITIES COMPANY
CONSOLIDATED PRO FORMA AND HISTORICAL FINANCIAL DATA AND
RAINWATER PROPERTY GROUP COMBINED HISTORICAL FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
COMPANY
------------------------------------------------------------------------
FOR THE
PERIOD FROM
PRO FORMA PRO FORMA MAY 5, 1994
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED TO
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1996 1995 1995 1994
------------ ------------ ------------ ------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Total Revenue..................... $ 426,905 $ 208,861 $ 413,581 $ 129,960 $ 50,343
Operating income (loss)........... 112,591 44,101 108,304 30,858 10,864
Income (loss) before minority
interest and extraordinary
item............................ 116,441 47,951 113,804 36,358 12,595
Income per share before
extraordinary item.............. $ 1.12 $ .72 $ 1.08 $ .66 $ .28
BALANCE SHEET DATA (AT PERIOD
END):
Total assets...................... $ 2,723,562 $1,730,922 -- $ 964,171 $ 538,354
Total debt........................ 1,212,786 667,808 -- 444,528 194,642
Total stockholders' equity........ 1,312,822 865,160 -- 406,531 235,262
OTHER DATA:
Funds from Operations before
minority interest(1)............ $ 188,754 $ 87,616 $ 184,606 $ 64,475 $ 32,723
Cash dividend declared per
share........................... -- $ 1.16 -- $ 1.05 $ .65
Weighted average Common Shares
outstanding and issuable in
exchange for Units.............. 103,059,240 64,648,842 103,059,240 54,182,006 44,997,710
Cash flow provided by (used in):
Operating activities............ --(2) $ 77,384 --(2) $ 65,011 $ 21,642
Investing activities............ --(2) (513,038) --(2) (421,406) (260,666)
Financing activities............ --(2) 444,315 --(2) 343,079 265,608
<CAPTION>
RAINWATER PROPERTY GROUP
---------------------------------
FOR THE
PERIOD
FROM
JANUARY 1, YEAR ENDED
1994 TO DECEMBER 31,
MAY 4, --------------------
1994 1993 1992
---------- -------- ---------
<S> <C> <C> <C>
OPERATING DATA:
Total Revenue..................... $ 21,185 $ 57,168 $ 49,586
Operating income (loss)........... (1,599) (53,024) (36,612)
Income (loss) before minority
interest and extraordinary
item............................ (1,599) (53,024) (36,612)
Income per share before
extraordinary item.............. -- -- --
BALANCE SHEET DATA (AT PERIOD
END):
Total assets...................... -- $290,869 $ 296,291
Total debt........................ -- 278,060 548,517
Total stockholders' equity........ -- 2,941 (328,240)
OTHER DATA:
Funds from Operations before
minority interest(1)............ -- -- --
Cash dividend declared per
share........................... -- -- --
Weighted average Common Shares
outstanding and issuable in
exchange for Units.............. -- -- --
Cash flow provided by (used in):
Operating activities............ $ 2,455 $ 9,313 $ (640)
Investing activities............ (2,379) (20,572) (8,924)
Financing activities............ (21,310) 28,861 14,837
</TABLE>
- ---------------
(1) Funds from Operations ("FFO"), based on the revised definition adopted by
the Board of Governors of the National Association of Real Estate Investment
Trusts ("NAREIT"), and as used herein, means net income (loss) (determined
in accordance with generally accepted accounting principles), excluding
gains (or losses) from debt restructuring and sales of property, plus
depreciation and amortization of real estate assets, and after adjustments
for unconsolidated partnerships and joint ventures. For a more detailed
description of FFO, see "Selected Financial Data."
(2) Pro forma information relating to operating, investing and financing
activities has not been included because management believes that the data
would not be meaningful due to the number of assumptions required in order
to calculate this data.
S-10
<PAGE> 11
THE COMPANY
The Company is a fully integrated real estate company, operated as a REIT,
which owns a portfolio of Properties located primarily in 17 metropolitan
submarkets in Texas and Colorado. The Properties include 58 Office Properties
with an aggregate of approximately 18.0 million net rentable square feet, four
full-service Hotel Properties with a total of 1,471 rooms and two destination
health and fitness resort Hotel Properties that can accommodate up to 442 guests
daily, six Retail Properties with an aggregate of approximately .6 million net
rentable square feet and the real estate mortgages (the "Residential Development
Property Mortgages") and non-voting common stock in the three Residential
Development Corporations.
The business objective of the Company is the maximization of total return
to shareholders through increases in distributions and share price. From the
Initial Offering through April 8, 1997, the total return to shareholders was
145.8%, with distributions having increased by approximately 31.9% and the
market price per Common Share having increased by approximately 123.0%. From the
October 1996 Offering through April 8, 1997, the total return to shareholders
was 39.6%, with distributions having increased by approximately 10.9% and the
market price per Common Share having increased by approximately 38.1%.
The Company has achieved these results by employing a well-defined
investment strategy that focuses on high-quality office properties in selected
growth markets, unique destination resort and luxury hotel properties and other
opportunistic real estate investments. In addition, the Company employs an
operating strategy that is designed to capitalize on the rental growth potential
of the Company's Office Property portfolio.
INVESTMENT STRATEGY
The Company acquires both premier and underperforming assets by utilizing
its extensive network of relationships, market reputation, ready access to
capital and ability to structure transactions creatively. Management believes
that it will be able to identify substantial opportunities for future real
estate investments from sources such as life insurance companies and pension
funds seeking to reduce their direct real estate investments, corporations
divesting of nonstrategic real estate assets and sellers requiring complex
disposition structures.
The Company's targeted investments include office properties that can be
acquired at significant discounts from replacement cost and that provide both a
favorable current return on invested capital and the opportunity for significant
cash flow growth through future increases in rental rates. Integral to this
investment strategy is the identification of specific markets and submarkets
that management believes will experience significant increases in demand for
office space due to the impact of factors that management expects to have a
positive effect on population and employment growth, including (i) desirable
market and submarket conditions, such as political environments favorable to
business, the availability of skilled and competitively priced labor, favorable
corporate and individual tax structures, affordable housing and a favorable
quality of life (as in markets such as Albuquerque, Omaha and Austin), (ii)
demographic shifts in the United States (such as the relocation of businesses
and the migration of people from the Northeast and the West Coast to Texas,
Colorado and Arizona) and (iii) specific regional, national and global economic
developments, such as an increase in demand for natural resources and the
resulting employment growth in markets that have a significant presence in the
oil and gas industry (as in Houston and New Orleans) and an improvement in
economic conditions as a result of growth in the technology industry and
international trade (as in San Francisco and San Diego).
The markets and submarkets in which the Company concentrates its
acquisitions of office properties are those in which, in addition to anticipated
above-average population and employment growth, replacement cost rental rates
are significantly in excess of current market rental rates. Management believes
that investment in markets and submarkets in which market rental rates are below
the level necessary to justify new construction of competitive properties will
allow the Company to continue to increase rental rates and cash flows as demand
for available office space increases.
S-11
<PAGE> 12
In addition to office properties, the Company targets destination resort
and luxury hotel properties which, due to their high replacement cost or unique
concept or location, are difficult to replace and experience little or no direct
competition. The recent increase in demand for destination resort and luxury
hotel rooms has been met with virtually no increase in the supply of rooms,
resulting in increasing occupancies and room rates. Management anticipates that
this trend will continue. In addition, management believes that numerous
opportunities to purchase destination resort and luxury hotel properties at
prices significantly below replacement cost will continue to be available. The
competition for such acquisitions is limited as a result of (i) the high dollar
value of these types of properties, (ii) the specialized management expertise
necessary to operate destination resorts and luxury hotels and (iii) the complex
ownership structures currently associated with these types of properties. As a
result, management believes that the Company will be able to acquire these types
of properties on terms that will provide attractive returns and substantial
potential for cash flow growth.
The Company also seeks other opportunistic real estate investments that
offer superior returns on its capital investment. For example, the Company has
entered into an agreement to acquire the Magellan Facilities in a transaction
designed to provide the Company, based on its investment in the properties, with
an attractive lease payment, and also to provide the shareholders of the Company
with the opportunity to benefit from the operations of the Magellan Facilities
through the distribution to the shareholders of the Company of the shares of
Crescent Affiliate, which will invest in the operator of the Magellan
Facilities. See "Recent Developments -- Pending Investments -- Magellan
Transaction."
Upon completion of the Pending Investments, the Company will have completed
over $2.1 billion of real estate investments since the Initial Offering,
approximately $1.3 billion of which will have been completed since the October
1996 Offering. As a result, the Company's investment in real estate assets will
have increased by approximately 527% since the Initial Offering, and by
approximately 110% since the October 1996 Offering. Management believes that the
Company's success in completing investments is the result of several competitive
advantages, including (i) management's ability, due to its extensive network of
relationships, to identify property acquisition opportunities, often before the
property is offered for sale, (ii) the proven ability of management to identify
underperforming assets that can be acquired at market prices not reflecting
their potential value, (iii) management's skill and creativity in consummating
unusual and complex transactions, such as acquisitions of mixed-use facilities
and portfolios that include traditional real estate assets, non-traditional real
estate assets and, in certain instances, other types of income-producing or
operating assets, and transactions that satisfy the special needs of sellers and
(iv) the Company's reputation for "certainty of closure" as a result of its
proven ability to complete large, time-sensitive transactions based on its
internal due diligence capability and expertise and its ready access to capital.
Management also believes that these competitive advantages offer the Company
increased opportunities to acquire attractive properties, often on terms more
favorable than those available to other potential purchasers.
OPERATING STRATEGY
The Company maintains an aggressive leasing strategy in order to capture
the potential rental growth in its portfolio of Office Properties as the
submarkets in which the Company has invested continue to recover and occupancy
and rental rates increase. As of December 31, 1996, the weighted average
full-service rental rate (i.e., including expense recoveries) for the Company's
Office Properties was $17.60 per square foot (including free rent and scheduled
rent increases that would be taken into account under generally accepted
accounting principles), compared to an estimated weighted average full-service
replacement cost rental rate (the rate estimated by management to be necessary
to justify new construction of comparable buildings) of $26.54 per square foot.
Many of the Company's submarkets have experienced substantial rental rate growth
during the past two years. As a result, the Company has been successful in
renewing or re-leasing office space in these markets at rental rates
significantly above expiring rental rates. For the year ended December 31, 1996,
leases were signed renewing or re-leasing 639,548 net rentable square feet of
office space at a weighted average full-service rental rate and an FFO annual
net effective rate (calculated as weighted average full-service rental rate
minus operating expenses) of $20.52 and $14.52 per square foot, respectively,
compared to expiring leases with a weighted average full-service rental rate and
an FFO annual net effective rate of $16.13 and $10.15 per square foot,
respectively (with each of these weighted average full-service rental rates
including free rent and scheduled rent increases that would be taken into
account under generally accepted accounting principles).
S-12
<PAGE> 13
This represents increases in the weighted average full-service rental rate and
in the FFO annual net effective rate of 27% and 43%, respectively.
The Company focuses its operational efforts at its Office Properties on
providing quality service, individualized attention to tenants and active
preventive maintenance programs, while managing Property operating expenses to
ensure competitive pricing. Management believes that this focus on creating and
maintaining long-term relationships with its tenants will increase tenant
retention, which in turn will reduce vacancy rates and leasing costs and enhance
overall operating performance.
The Company provides its skilled management team with substantial
flexibility in conducting Company operations while offering incentives that
reward management based on compensation formulas linked directly with enhanced
operating performance. Upon the closing of the Offering, the Company's trust
managers and senior management will beneficially own approximately 18.5% of the
common equity of the Company (consisting of Common Shares and Units, including
vested options to purchase Common Shares and Units). This ownership percentage
includes the approximately 13.3% ownership position of Mr. Rainwater, the
approximately 2.2% ownership position of Mr. Goff and the approximately 1.6%
ownership position of Mr. Haddock.
FINANCING STRATEGY
The Company intends to maintain a conservative capital structure with total
debt targeted at approximately 40% of total market capitalization. The Company,
however, consistently seeks to optimize its use of debt and other sources of
financing to create a flexible capital structure that will allow the Company to
continue its opportunistic investment strategy and maximize the returns to its
shareholders.
ORGANIZATION
Crescent Equities is organized as a Texas real estate investment trust. On
December 31, 1996, Crescent Equities became the successor to the Predecessor
Corporation through the merger of the Predecessor Corporation and CRE Limited
Partner, Inc., a subsidiary of the Predecessor Corporation, into Crescent
Equities.
The Company owns its assets and carries on its operations and other
activities, including providing management, leasing and development services for
certain of its Properties, through the Operating Partnership and its other
subsidiaries. The Company also has an economic interest in the development
activities of the Residential Development Corporations. The structure of the
Company is designed to facilitate and maintain its qualification as a REIT and
to permit persons contributing Properties (or interests therein) to the Company
to defer some or all of the tax liability that they otherwise might incur.
The Company's executive offices are located at 777 Main Street, Suite 2100,
Fort Worth, Texas 76102, and its telephone number is (817) 877-0477.
S-13
<PAGE> 14
RECENT DEVELOPMENTS
PENDING INVESTMENTS
The following briefly describes the Pending Investments and the investments
to be made by Crescent Affiliate. A more detailed description of these
investments is contained in the Company's Current Report on Form 8-K dated
January 29, 1997, as amended. The Pending Investments and the investments to be
made by Crescent Affiliate are expected to close by the end of the second
quarter of 1997 and are subject to various closing conditions. There is no
assurance that these investments will be completed.
Weighted average quoted market rental rates and occupancy and leasing
percentages for the Company's submarkets, as specified below or as set forth
under "-- Completed Investments" and in more detail under "Properties," are
derived from third-party sources, consisting of Jamison Research, Inc., Baca
Landata, Inc., The Woodlands Corporation, Cushman & Wakefield of Texas, Inc., CB
Commercial, Cushman & Wakefield of Colorado, Inc., Turner Commercial Research,
Grubb and Ellis Company, Pacific Realty Group, Inc., Koll Market Research and
John Burnham & Co. Weighted average quoted market rental rates do not
necessarily represent the amounts at which available space at the Company's
Office Properties will be leased.
Acquisition of Carter-Crowley Portfolio. On February 10, 1997, the Company
entered into a contract to acquire, for $383.3 million, substantially all of the
assets of Carter-Crowley, Inc. ("Carter-Crowley"), an unaffiliated company
controlled by the family of Donald J. Carter. The Carter-Crowley Portfolio
includes the Carter-Crowley Office Portfolio, approximately 1,216 acres of
commercially zoned, undeveloped land located in the Dallas/Fort Worth
metropolitan area, two multifamily residential properties located in the
Dallas/Fort Worth metropolitan area, marketable securities, an approximately 12%
limited partner interest in the limited partnership that owns the Dallas
Mavericks NBA basketball franchise, secured and unsecured promissory notes and
certain other assets (including operating businesses). A portion of the
Carter-Crowley Portfolio will be acquired by the Company and a portion will be
acquired by Crescent Affiliate with funds received from the Company in the form
of cash contributions and loans. The Company has exercised its right under the
contract to require Carter-Crowley to liquidate the approximately $47.0 million
of marketable securities and reduce the total purchase price by a corresponding
amount to $336.3 million. The assets in the Carter-Crowley Portfolio have been
preliminarily allocated between the Company and Crescent Affiliate and the
purchase price preliminarily allocated among these assets. These allocations of
assets and purchase prices are subject to adjustment prior to closing of the
transaction.
The Company anticipates that it will acquire assets from the Carter-Crowley
Portfolio, with an aggregate purchase price of approximately $308.0 million,
consisting primarily of the Carter-Crowley Office Portfolio, the two multifamily
residential properties, the approximately 1,216 acres of undeveloped land and
the secured and unsecured promissory notes relating primarily to the Dallas
Mavericks. In addition to the promissory notes relating to the Dallas Mavericks,
it is anticipated that the Company will obtain rights from the current holders
of the majority interest in the Dallas Mavericks to a contingent $10.0 million
payment if a new arena is built within a 75-mile radius of Dallas.
The remainder of the Carter-Crowley Portfolio will be purchased by Crescent
Affiliate utilizing cash contributions and loan proceeds that will be provided
to Crescent Affiliate by the Company. These assets, which have an estimated
value of approximately $28.3 million, are expected to consist primarily of the
approximately 12% limited partner interest in the limited partnership that owns
the Dallas Mavericks, an approximately 1% interest in a private venture capital
fund, a 100% interest in a construction equipment sale, leasing and services
company, certain direct non-operating working interests in various oil and gas
wells and an approximately 35% limited partner interest in two oil and gas
limited partnerships that own working interests in various oil and gas wells.
The Company identified the Carter-Crowley Portfolio, which had not been
marketed for sale, as a result of management's extensive network of
relationships. In addition, the agreement to acquire the Carter-Crowley
Portfolio was reached, in part, as a result of management's ability to develop
an innovative structure, involving the spin-off of Crescent Affiliate, that
satisfied the seller's requirement that the acquisition include not only the
Carter-Crowley Office Portfolio, but also all of the other assets in the
Carter-Crowley Portfolio. This
S-14
<PAGE> 15
structure was also designed to provide the shareholders of the Company at the
time of the spin-off with the opportunity to participate in the benefits that
may be derived from all of the assets in the Carter-Crowley Portfolio, including
the real estate assets (which are traditionally owned by REITs) and the other
income-producing and operating assets.
The Company has preliminarily allocated approximately $205.0 million
(approximately $68.33 per square foot) of the purchase price to the
Carter-Crowley Office Portfolio. The Carter-Crowley Office Portfolio contains an
aggregate of approximately 3.0 million net rentable square feet in seven
suburban Dallas submarkets. The buildings, which were constructed principally
between 1980 and 1986, range in size from approximately 40,000 to approximately
634,000 net rentable square feet and, as of December 31, 1996, were 91% leased.
The acquisition of the Carter-Crowley Office Portfolio will increase the
Company's ownership of office space in the Dallas market to more than 8.7
million net rentable square feet and to 13% of the Class A office space in the
Dallas market. The weighted average full-service rental rates for the
Carter-Crowley Office Portfolio were $12.18 per leased square foot, compared to
a weighted average quoted market rental rate for the submarkets in which the
Carter-Crowley Office Portfolio is located of $18.63 per square foot. The
Carter-Crowley Office Portfolio has a weighted average remaining lease term of
3.75 years. Major tenants include CompUSA, Inc., Aetna Life Insurance Company,
United States Data Corporation and Northern Telecom, Inc.
The following table provides information for the Carter-Crowley Office
Portfolio by submarket as of December 31, 1996.
<TABLE>
<CAPTION>
TOTAL
NET WEIGHTED AVERAGE OFFICE WEIGHTED AVERAGE
NUMBER RENTABLE PERCENT FULL-SERVICE SUBMARKET QUOTED MARKET
OF AREA LEASED AT RENTAL RATE PER PERCENT RENTAL RATE PER
CLASSIFICATION, SUBMARKET PROPERTIES (SQ. FT.) PROPERTIES SQUARE FOOT(1) LEASED(2) SQUARE FOOT(2)(3)
- ------------------------------------- ---------- --------- ---------- ---------------- --------- -----------------
<S> <C> <C> <C> <C> <C> <C>
CLASS A
Stemmons Freeway..................... 1 634,381 92% $12.54 60%(4) $16.87
Far North Dallas..................... 3 494,496 98 12.67 98 20.88
Uptown/Turtle Creek.................. 2 485,088 79 12.20 86 22.99
Richardson/Plano..................... 2 418,234 100 13.23 98 19.14
LBJ Freeway.......................... 1 213,915 89 13.08 95 20.32
Las Colinas.......................... 1 74,861 99 11.95 95 23.14
-- --------- --- ------ -- ------
Subtotal/Weighted Average.......... 10 2,320,975 92% $12.67 92% $19.93
-- --------- --- ------ -- ------
CLASS B
Central Expressway................... 2 413,721 85% $11.04 82% $13.82
LBJ Freeway.......................... 1 244,879 92 9.61 91 14.92
Far North Dallas..................... 1 40,525 100 10.75 90 15.56
-- --------- --- ------ -- ------
Subtotal/Weighted Average.......... 4 699,125 88% $10.50 89% $14.31
-- --------- --- ------ -- ------
TOTAL/WEIGHTED AVERAGE....... 14 3,020,100 91% $12.18 91% $18.63
== ========= === ====== == ======
</TABLE>
- ---------------
(1) Calculated based on base rent payable as of December 31, 1996, without
giving effect to free rent or scheduled rent increases that would be taken
into account under generally accepted accounting principles, and including
expenses payable by tenants.
(2) Source -- Jamison Research, Inc.
(3) Represents full-service rental rates. These rates do not necessarily
represent the amounts at which available space in the Carter-Crowley Office
Portfolio will be leased. The weighted average subtotals and total are based
on total net rentable square feet in each submarket of the Class A and/or
Class B office properties, as applicable, in the Carter-Crowley Office
Portfolio.
(4) Includes two buildings with an aggregate of approximately 530,000 net
rentable square feet which, subsequent to December 31, 1996, have been
reclassified as "owner occupied" and will not be included in Class A office
space in 1997. Excluding these two buildings, management estimates that the
percent leased in this submarket would have been approximately 75% as of
December 31, 1996.
The Carter-Crowley Office Portfolio is leased to more than 450 tenants, the
major tenants having principal businesses in the industry sectors of technology,
financial services and media services. None of the tenants in the 14 office
properties comprising the Carter-Crowley Office Portfolio lease over 10% of the
aggregate net rentable area.
S-15
<PAGE> 16
The following table sets forth for the Carter-Crowley Office Portfolio, on
an aggregate basis, a schedule of lease expirations for leases in place as of
December 31, 1996, for each of the 10 years beginning with January 1, 1997,
assuming that none of the tenants exercises renewal options, and excluding
290,590 square feet of unleased space. For the year ended December 31, 1996, the
weighted average amount of excess expenses paid by tenants for all leases was
$.16 per square foot.
<TABLE>
<CAPTION>
1997 1998 1999 2000 2001 2002 2003
---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Sq. Ft.(1).............................. 176,724 419,145 389,846 591,687 413,361 183,282 366,656
% Sq. Ft.(2)............................ 6.5% 15.4% 14.3% 21.7% 15.1% 6.7% 13.4%
Annual Rent(3).......................... $2,015,800 $5,281,006 $4,829,621 $8,180,128 $5,703,691 $2,423,756 $5,201,805
No. of Tenants.......................... 91 111 102 78 58 15 7
Rent per Sq. Ft......................... $11.41 $12.60 $12.39 $13.83 $13.80 $13.22 $14.19
Quoted Market Rental Rate............... $18.63
per Sq. Ft.(4)
<CAPTION>
2007 &
2004 2005 2006 BEYOND
---------- -------- -------- --------
<S> <C> <C> <C> <C>
Sq. Ft.(1).............................. 100,041 -- 41,072 47,696
% Sq. Ft.(2)............................ 3.7% 0.0% 1.5% 1.7%
Annual Rent(3).......................... $1,398,813 -- $635,055 $906,224
No. of Tenants.......................... 5 -- 2 1
Rent per Sq. Ft......................... $13.98 -- $15.46 $19.00
Quoted Market Rental Rate...............
per Sq. Ft.(4)
</TABLE>
- ---------------
(1) Total net rentable square feet represented by expiring leases.
(2) Percentage of total net rentable square feet represented by expiring leases.
(3) Calculated based on base rent payable as of the expiration day of the lease
for net rentable square feet expiring, without giving effect to free rent or
scheduled rent increases that would be taken into account under generally
accepted accounting principles and excluding all expenses payable by
tenants.
(4) Represents the weighted average full-service quoted market rental rate, as
of December 31, 1996, for all submarkets in which the office properties in
the Carter-Crowley Office Portfolio are located, based on total net rentable
square feet in the Carter-Crowley Office Portfolio.
Magellan Transaction. On January 29, 1997, the Company entered into an
agreement with Magellan to acquire substantially all of the real estate assets
of Magellan's domestic hospital provider business as currently owned and
operated by a wholly owned subsidiary of Magellan. The Magellan transaction
involves various components, certain of which relate to the Company and certain
of which relate to Crescent Affiliate, a new corporation to be established by
the Company. See "-- Proposed Spin-Off" below. Closing of the transaction is
subject to approval of the transaction by the stockholders of Magellan. The
total purchase price for the assets to be acquired in the Magellan transaction
is $400 million. Of this amount, it is anticipated that $390 million will be
paid by the Company for the Magellan Facilities and certain warrants to purchase
shares of common stock of Magellan and $10 million will be paid by Crescent
Affiliate for its interest in a limited liability company ("CBHS") and certain
warrants to purchase shares of common stock of Magellan. CBHS will be owned 50%
by Crescent Affiliate and 50% by Magellan, subject to potential dilution of each
of Magellan and Crescent Affiliate by up to 5% in connection with future
incentive compensation of management of CBHS.
The principal component of the transaction is the Company's acquisition of
the Magellan Facilities, which are to be leased to CBHS, and the subsidiaries of
CBHS, under a triple-net lease. The lease will require the payment of annual
minimum rent in the amount of $40 million, increasing in each subsequent year
during the 12-year term at a 5% compounded annual rate. All maintenance and
capital improvement costs will be the responsibility of CBHS during the term of
the lease. In connection with the Magellan transaction, the Company also will
receive warrants to purchase 1,283,311 shares of common stock of Magellan, at an
exercise price of $30.00 per share, with such warrants exercisable, in
increments, during the period from May 1998 through May 2009.
In connection with the closing of the Magellan transaction, Crescent
Affiliate will acquire its interest in CBHS and certain warrants to purchase
shares of Common Stock of Magellan in exchange for an initial payment of $10
million, with an additional $2.5 million payable to CBHS within five days
following the closing. Magellan will acquire its interest in CBHS in exchange
for the contribution of certain assets, with an additional $2.5 million payable
to CBHS within five days following the closing. In addition, each of Crescent
Affiliate and Magellan will agree to lend to CBHS in equal amounts, upon request
by Magellan during the five years following the closing, up to an aggregate of
$17.5 million. Any such loans will bear interest at the rate of 10% per annum
and have a term of five years. CBHS, as lessee of the Magellan Facilities, will
be responsible for operating the Magellan Facilities. Pursuant to a franchise
arrangement with an initial term of 12 years, Magellan will provide to CBHS and
its subsidiaries certain services necessary or desirable for the operation of
the business to be conducted at the Magellan Facilities (including the provision
of policies, procedures and
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protocols for operation of the Magellan Facilities and of a toll-free patient
referral number) in exchange for an annual franchise fee of $81 million plus the
greater of annual cost-of-living adjustments or a percentage of CBHS's gross
revenues, as defined in the franchise agreement. The payment by CBHS to Magellan
of the annual franchise fee will be subordinated to the payment by CBHS to the
Company of annual minimum rent. In addition, Magellan will not have the right to
terminate the franchise agreement due to the nonpayment of the franchise fee as
a result of the subordination of the franchise fee to the annual minimum rent.
In connection with the Magellan transaction, Crescent Affiliate will also
acquire warrants to purchase 1,283,311 shares of common stock of Magellan. These
warrants will have the same terms as the warrants to be purchased by the Company
from Magellan. In addition, Crescent Affiliate will issue to Magellan warrants
to purchase up to 2.5% of its common stock outstanding on the closing date, with
such warrants exercisable only in the same proportion as the Company and
Crescent Affiliate, in the aggregate, exercise their warrants to purchase common
stock of Magellan.
This unique transaction is structured to provide the Company with a secure,
above-average return on its investment as a result of the priority of annual
minimum rent to the franchise fees and the initial amount and annual escalation
in the lease payments. In addition, the structure of the transaction is intended
to provide the shareholders of the Company at the time of the spin-off with the
opportunity to benefit from the operations of the Magellan Facilities through
Crescent Affiliate's interest in CBHS. The warrants to purchase shares of common
stock of Magellan also will allow the Company and its shareholders to
participate in any appreciation in the price of the common stock of Magellan.
Management believes that the complex and innovative structure of this
transaction demonstrates its ability to consummate transactions and to provide
the Company and its shareholders with benefits that are not readily available to
other REITs.
Effect of Pending Investments. On a pro forma basis, after giving effect to
completed acquisitions from January 1, 1996 as if they had occurred on January
1, 1996, the Office Properties and the Hotel Properties would have accounted for
approximately 87% and 10%, respectively, of the Company's total rental revenues
for the year ended December 31, 1996. On a pro forma basis, after giving effect
to the Pending Investments and completed acquisitions from January 1, 1996 as if
they had occurred on January 1, 1996, the Company's office properties, hotel
properties and behavioral healthcare facilities would have accounted for
approximately 77%, 8% and 13%, respectively, of the Company's total rental
revenues for the year ended December 31, 1996.
PROPOSED SPIN-OFF
The Company intends to establish a new corporation, Crescent Affiliate, the
shares of which will be distributed to the shareholders of Crescent Equities and
the partners of the Operating Partnership, on a pro rata basis, in a spin-off.
It is anticipated that, under an intercompany agreement to be entered into
in connection with the spin-off, the Company and Crescent Affiliate will agree
to provide each other with rights to participate in certain transactions and to
make certain investments. For example, Crescent Affiliate will agree not to
acquire or make investments in real estate unless it has notified the Company of
the acquisition or investment opportunity, and the Company has determined not to
make such acquisitions or investments. Crescent Affiliate also will agree to
assist the Company in structuring and consummating any such acquisition or
investment in real estate which the Company elects to pursue, with the terms and
structure of such acquisition or investment to be determined by the Company.
Similarly, the Company will provide Crescent Affiliate with a right of first
offer (i) to become lessee of any real property that may be acquired by the
Company as to which the Company, consistent with its status as a REIT, must
enter into a "master" lease arrangement and (ii) to participate in transactions,
or make investments, where the Company is unable to pursue the entire
transaction or investment. The Company may, but will not be required to, offer
Crescent Affiliate the opportunity to participate in transactions, or make
investments, where the Company is able to pursue the entire transaction or
investment. In addition, each party will notify the other party of investment
opportunities developed by such party or of which such party is aware but is
unable or unwilling to pursue. The Company, in its sole discretion, will make
all decisions as to its ability or inability to pursue transactions or
investments. It is also anticipated that Crescent Affiliate will enter into
negotiations with the lessees of certain of the Hotel
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<PAGE> 18
Properties to acquire the rights of such lessees. No such negotiations are
currently ongoing and there is no assurance that any such agreements will be
reached.
The Company will provide to Crescent Affiliate approximately $40.8 million
in the form of cash contributions and loans to be used by Crescent Affiliate to
acquire certain assets in the Carter-Crowley Portfolio, its interest in CBHS and
warrants to purchase shares of common stock of Magellan. The Company will also
make available to Crescent Affiliate a line of credit in the amount of
approximately $20.0 million to be used by Crescent Affiliate to fulfill certain
ongoing obligations associated with these assets.
It is expected that Messrs. Rainwater, Goff and Haddock will hold the same
offices with Crescent Affiliate that they currently hold with the Company. In
addition, it is expected that the board of directors of Crescent Affiliate will
consist of seven members, five of which (including Messrs. Rainwater, Goff and
Haddock) are currently trust managers of the Company and two of which are
persons who will not be affiliated with the Company. A more detailed description
of the proposed management of Crescent Affiliate and the interests of certain
persons in the spin-off of Crescent Affiliate is contained in the Company's
Current Report on Form 8-K dated January 29, 1997, as amended.
The spin-off is designed to provide the shareholders of the Company at the
time of the spin-off with the ability to benefit from both the real estate
operations of the Company and the related business operations of Crescent
Affiliate. The spin-off of Crescent Affiliate will result in Crescent
Affiliate's becoming a public company, the shares of which are expected to be
publicly traded no later than the effective date of the spin-off.
COMPLETED INVESTMENTS
The following briefly describes the Company's Property acquisitions since
the October 1996 Offering. More detailed information regarding each of the
Properties described, including significant tenants, is set forth below under
"Properties." The information regarding the replacement costs of the Properties
is based on management estimates at the times of the acquisitions.
Greenway Plaza Portfolio. On October 7, 1996, the Company acquired from an
unaffiliated entity 10 suburban office properties with an aggregate of
approximately 4.3 million net rentable square feet (the "Greenway Plaza Office
Portfolio"), a 389-room full-service hotel, a private health and dining club, a
central plant which provides heated and chilled water to both the Greenway Plaza
Office Portfolio and third parties, and six parking garages (collectively with
the Greenway Plaza Office Portfolio, the "Greenway Plaza Portfolio"). The
aggregate cost of the Greenway Plaza Portfolio was approximately $206 million,
approximately 35% of the estimated replacement cost of the Greenway Plaza
Portfolio, which was funded through the issuance to the sellers of 1,198,664
Common Shares at $20.855 per share, the assumption of $115 million of
nonrecourse indebtedness and the payment of $66 million of cash.
Situated on 50.3 acres, the Greenway Plaza Office Portfolio, which is
located in the Richmond-Buffalo Speedway submarket of Houston, Texas, contains
approximately 2.0 million net rentable square feet of Class A office space and
approximately 2.3 million net rentable square feet of Class B office space. The
office buildings were constructed between 1969 and 1982 and range in size from
approximately 150,000 to approximately 880,000 net rentable square feet.
Structured parking accommodates approximately 11,500 cars.
The Greenway Plaza Office Portfolio was 74% leased as of December 31, 1996
(95% of the Class A office space and 56% of the Class B office space) with a
weighted average full-service rental rate per square foot of $13.42 ($14.38 for
Class A office space and $11.99 for Class B office space). The hotel and private
health and dining club are leased under triple-net leases with unaffiliated
third parties. The principal businesses of the tenants of the Greenway Plaza
Office Portfolio are in the industry sectors of energy service, investment
management and natural gas. Management anticipates increases in global energy
demand and believes that Houston's location at the center of the domestic
petroleum industry's production, processing and distribution network, together
with continued corporate relocations attracted by some of the lowest rental
rates for Class A office space in any major metropolitan area, will result in
increased occupancies and rental rates for the Greenway Plaza Portfolio.
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Chancellor Park. On October 24, 1996, the Company acquired Chancellor Park
and an adjacent 8.03-acre tract of land located in the University Towne Centre
("UTC") submarket of San Diego, California. The aggregate purchase price was
approximately $31.1 million, of which $25.4 million was allocated to Chancellor
Park and $5.7 million was allocated to the adjacent tract of land. The
acquisition was made by the Operating Partnership and CresCal Properties, L.P.
("CresCal"), a Delaware limited partnership in which the Operating Partnership
owns a 99% limited partner interest. In this transaction, the Operating
Partnership acquired promissory notes secured by liens on Chancellor Park and
the adjacent tract of land. CresCal acquired Chancellor Park and the adjacent
tract of land, subject to the indebtedness evidenced by the promissory notes.
The portion of the purchase price allocated to Chancellor Park represents
approximately 65% of the Property's estimated replacement cost. Chancellor Park
consists of two, three-story Class A office buildings aggregating approximately
196,000 net rentable square feet. Constructed in 1988, the Property has a
three-story parking structure and surface parking that can accommodate 630 cars.
The adjacent tract of land is one of only two tracts of undeveloped land zoned
for office development in the UTC submarket. The UTC submarket contains major
medical facilities, several hotels and a major regional mall. The UTC submarket,
which is located near the exclusive residential areas of La Jolla, Del Mar and
Rancho Santa Fe, contains approximately 2.7 million net rentable square feet of
Class A office space and is currently considered one of the strongest office
markets in the San Diego metropolitan area with a 92% occupancy rate for Class A
office space. As of December 31, 1996, the weighted average full-service rental
rate for Chancellor Park was $18.19 per leased square foot, 20.2% below the
weighted average Class A quoted market rental rates for the UTC submarket of
$22.80 per square foot. The weighted average remaining lease term at Chancellor
Park as of December 31, 1996 was 3.0 years. As of December 31, 1996, Chancellor
Park was 90% leased. Management believes that the Property has potential for
significant growth in cash flow through the leasing of currently vacant space
and, as current leases expire, through the renewal or re-lease of office space
at rental rates significantly above the expiring rental rates.
The Woodlands Retail Properties. On October 31, 1996, the Company acquired
a 75% limited partner interest in Woodland Retail Equities -- '96 Limited
("WRE"), a partnership that owns four retail properties located in The
Woodlands, a master planned development located 27 miles north of downtown
Houston, Texas. These four Properties were constructed between 1981 and 1995 and
contain an aggregate of approximately 356,000 net rentable square feet. The
Woodlands Corporation owns, through a subsidiary, the remaining 25% general
partner interest in WRE and will continue to manage and lease the Properties.
The Company's investment in WRE was approximately $22.5 million, with a minimum
preferential return of 9.75%, increasing by .25% annually on January 1 of each
year beginning in 1997, to a maximum preferential return of 10.5% beginning in
January 1999. This investment represents a strategic expansion of the Company's
joint venture relationship with The Woodlands Corporation, pursuant to which the
Company also holds its 75% limited partner interest in The Woodlands Office
Properties, and the continued diversification of the Company's real estate
assets in The Woodlands. As of December 31, 1996, The Woodlands Retail
Properties were 87% leased.
Sonoma Mission Inn & Spa. On November 18, 1996, the Company acquired Sonoma
Mission Inn & Spa, a four-star luxury resort and spa located approximately 40
miles north of San Francisco, California. Constructed in 1927 and redeveloped in
1986 and 1987, Sonoma Mission Inn & Spa occupies an eight-acre site and contains
168 rooms, an approximately 13,000 square foot spa complex, approximately 7,000
square feet of meeting and banquet facilities, two full-service restaurants and
two retail outlets. A $10.0 million expansion and enhancement of the resort,
including the addition of 30 suites, is currently in process and is expected to
be completed during 1997. The resort was acquired for approximately $53.4
million, including the issuance of approximately $25.2 million of Units, the
assumption of $19.0 million of debt which the Company subsequently retired and
approximately $9.2 million in cash. In addition, a minimum of $3.5 million of
deferred purchase price will be paid in the first quarter of 2000, subject to
increase depending upon the performance of the Property. The Sonoma Mission Inn
& Spa holds both Mobil's Four Star and AAA's Four Diamond awards. In 1996, the
spa was named "Luxury Spa of the Year" by Spa Management Magazine, an industry
trade journal. Management believes that, due to its location and the amenities
it offers, this Property will continue to benefit from a low level of direct
competition, which should result in high occupancies. Occupancy for the Sonoma
Mission Inn & Spa increased to 92% for the year ended December 31, 1996 as
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compared to 86% for 1995. Similarly, the average daily rate increased by
approximately 7.1% to $181 for the year ended December 31, 1996 from $169 in
1995 and revenue per available room increased by approximately 13.7% to $166 for
the year ended December 31, 1996 from $146 in 1995.
Canyon Ranch-Lenox. On December 11, 1996, the Company acquired Canyon
Ranch-Lenox, a destination health and fitness resort located in the Berkshire
mountains in Lenox, Massachusetts, approximately 120 miles north of New York
City. Canyon Ranch-Lenox, which opened in 1989, encompasses 120 acres and
includes 120 guest rooms, which can accommodate up to 202 guests on a daily
basis, an approximately 100,000 square foot spa complex, an approximately 10,600
square foot health and healing center offering a complete staff of health and
fitness professionals, six indoor/outdoor tennis courts and two pools. Canyon
Ranch-Lenox was acquired for approximately $30.0 million, including the
assumption of approximately $8.8 million in mortgage debt. Canyon Ranch-Lenox,
along with its "sister" spa Canyon Ranch-Tucson, another of the Company's Hotel
Properties, has consistently been voted among the top U.S. spas, according to
Conde Nast Traveler magazine. The previous owners are continuing to manage and
operate Canyon Ranch-Lenox pursuant to a 30-year management agreement. Occupancy
for Canyon Ranch-Lenox increased to 81% for the year ended December 31, 1996 as
compared to 76% for 1995. Similarly, the average daily rate increased by
approximately 4.4% to $407 for the year ended December 31, 1996 from $390 in
1995 and revenue per available room increased by approximately 11.1% to $320 for
the year ended December 31, 1996 from $288 in 1995.
160 Spear Street. On December 13, 1996, the Company acquired 160 Spear
Street, a 19-story Class A office building containing approximately 276,000 net
rentable square feet and located in the South of Market section of the CBD
submarket of San Francisco, California. The Company holds its interest in 160
Spear Street through the ownership of the lessee's interest in a long-term
ground lease that expires in July 2037. Constructed in 1984, the Property,
including a one-level, 37-space parking structure, was purchased for
approximately $35.5 million, approximately 55% of the Property's estimated
replacement cost. 160 Spear Street is located three blocks from the San
Francisco/Oakland Bay Bridge, one block from the Embarcadero BART mass transit
station and two blocks from the San Francisco Bay waterfront. As of December 31,
1996, 160 Spear Street was 20% leased, including only commenced leases, and 75%
leased, including all executed leases. All executed leases that have not yet
commenced will commence by the end of the second quarter of 1997. After giving
effect to all executed leases, three tenants lease 65% of the net rentable area,
and the major tenant, Sedgwick James, Inc., leases 38% of the building's net
rentable area. As of December 31, 1996, the weighted average full-service rental
rate for 160 Spear Street was $21.86 per leased square foot, based on executed
leases, 23.8% below the weighted average Class A quoted market rental rate of
$28.69 per square foot in the South of Market section of the CBD submarket. As
of December 31, 1996, the weighted average remaining lease term at 160 Spear
Street (including leases that have been executed but have not yet commenced) was
7.9 years. As of December 31, 1996, Class A office space in the South of Market
section of the CBD submarket was 97% leased.
Greenway I, IA and II. On December 18, 1996, the Company acquired Greenway
I, a two-story Class A office building and Greenway IA, a five-story Class A
office building, containing an aggregate of approximately 147,000 net rentable
square feet and located in the Richardson/Plano submarket of Dallas, Texas.
Constructed in 1983, Greenway I and IA, including surface parking lots which
contain 560 spaces, were purchased for approximately $17.0 million,
approximately 85% of the Properties' estimated replacement cost. On January 17,
1997, the Company acquired Greenway II, a seven-story Class A office building
containing approximately 154,000 net rentable square feet and also located in
the Richardson/Plano submarket. Constructed in 1985, Greenway II, including an
attached three-level, 560-space above ground parking structure, was purchased
for approximately $18.2 million, approximately 80% of the Property's estimated
replacement cost. The acquisition of Greenway I, IA and II represents the
Company's entrance into the "Telecom Corridor," an area located in the northern
suburbs of Dallas and having the largest concentration of telecommunications
firms in the United States. Major telecommunications companies in the area
include Northern Telecom, Inc. ("Nortel"), DSC Communications Corp., MCI
Communications Corp., Alcatel Network Systems, Inc. and Ericsson Radio Systems,
Inc. Nortel, the largest manufacturer of telecommunications equipment in Dallas,
is the sole tenant of Greenway I and IA, the major tenant of Greenway II,
leasing approximately 90% of the Property's net rentable area, and the major
tenant in the Telecom Corridor. As of
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December 31, 1996, the weighted average full-service rental rate for each of
Greenway I and IA was $12.31 per leased square foot, 35.7% below the weighted
average Class A quoted market rental rate of $19.14 per square foot in the
Richardson/Plano submarket. As of December 31, 1996, the weighted average
full-service rental rate for Greenway II was $18.90 per leased square foot.
Nortel's leases for Greenway I and IA expire at the end of 1997 and its lease
for Greenway II expires in October 1999. Based on Nortel's current expansion
plans and resulting space needs, management expects Nortel to exercise its
option to renew its leases for Greenway I and IA at 90% of the weighted average
Class A quoted market rental rate per leased square foot at the time of the
renewal. Greenway I and IA were 100% leased and Greenway II was 99% leased, as
of December 31, 1996.
Bank One Tower and Frost Bank Plaza. On December 23, 1996, the Company
acquired Bank One Tower, a 21-story Class A office building containing
approximately 389,000 net rentable square feet and located in the CBD submarket
of Austin, Texas. Constructed in 1974, the Bank One Tower underwent a $20
million renovation in 1994 and 1995. The Property, including an attached
eight-level, 719-space above ground parking structure, was purchased for
approximately $39.2 million, approximately 57% of the Property's estimated
replacement cost. The Property is one block from the CBD's newly completed post
office, one block from the new Warehouse Entertainment district featuring
upscale restaurants and clubs and two blocks from the Sixth Street entertainment
district. The major tenant, Texas Workers' Compensation Insurance Fund, occupies
40% of the net rentable area, and the three largest tenants occupy 64% of the
net rentable area. As of December 31, 1996, the weighted average full-service
rental rate for Bank One Tower was $14.55 per leased square foot, 27.1% below
the weighted average Class A quoted market rental rates in the CBD submarket of
$19.95 per square foot. The weighted average remaining lease term as of December
31, 1996 was 4.2 years. As of December 31, 1996, Bank One Tower was 99% leased.
On December 27, 1996, the Company acquired Frost Bank Plaza, a 24-story
Class A office building containing approximately 433,000 net rentable square
feet, which also is located in the Austin CBD submarket. The Company holds its
interest in Frost Bank Plaza through the ownership of the lessee's interests in
three long-term ground leases which expire in April and September 2080.
Constructed in 1984 and substantially renovated from 1992 through 1994, the
Property, including an attached eight-level, 514-space above ground parking
structure, was purchased for approximately $36.0 million, approximately 62% of
the Property's estimated replacement cost. As of December 31, 1996, the weighted
average full-service rental rate for Frost Bank Plaza was $16.35 per leased
square foot, 18.0% below the weighted average Class A quoted market rental rates
in the CBD submarket of $19.95 per square foot. The weighted average remaining
lease term as of December 31, 1996 was 7.6 years. As of December 31, 1996, Frost
Bank Plaza was 68% leased.
As of December 31, 1996, the Class A office occupancy rate in the Austin
CBD submarket was 90% with a weighted average Class A quoted market rental rate
of $19.95 per square foot. With Class A office occupancies of 96% to 99% in
Austin's major suburban submarkets, many tenants have focused on relocation to,
and expansion in, the CBD submarket to meet their needs for office space. Frost
Bank Plaza is one of only two Class A office buildings in Austin that can
currently accommodate new tenants which require at least 50,000 square feet of
office space. With the acquisition of Bank One Tower and Frost Bank Plaza, the
Company owns Properties containing 35% of the Class A office space in the Austin
CBD submarket and 20% of the overall Austin Class A office space.
Trammell Crow Center. On February 28, 1997, the Company acquired
substantially all of the economic interest in Trammell Crow Center, a 50-story
Class A office building constructed in 1984, which contains approximately
1,128,000 net rentable square feet and a six-level underground parking structure
that accommodates 1,154 cars. The Property is located in the cultural and
financial district of the CBD submarket of Dallas, Texas. The Company acquired
its interest in Trammell Crow Center through the purchase of fee simple title to
the Property (subject to the lessee's interest under a long-term ground lease
and the lessee's leasehold estate regarding the building) and two mortgage notes
encumbering the leasehold interests in the land and building, for approximately
$162 million, approximately 64% of the Property's estimated replacement cost.
The Property lies immediately across the east/west Woodall Rodgers Freeway from
The Crescent Office Towers, and management believes that, with this purchase,
the Company has obtained a dominant position in the office market for this
upscale section of Dallas. By jointly marketing these premier office properties
that previously were competitors for the city's highest profile tenants, the
Company believes that the rental rates
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for Trammell Crow Center will increase to levels more consistent with the
substantially higher rents at The Crescent Office Towers. Currently, the Company
quoted full-service rental rate for Trammell Crow Center is $22.69 per square
foot compared to a rate of $32.50 per square foot at The Crescent Office Towers.
Trammell Crow Center is leased primarily to law and accounting firms, including
Jones, Day, Reavis and Pogue, and Baker and Botts, LLP, each of which leases
more than 10% of the net rentable area of the Property. As of December 31, 1996,
Trammell Crow Center was 80% leased with a weighted average remaining lease term
of 5.6 years.
Denver Properties. On February 28, 1997, the Company acquired three office
buildings in Denver, Colorado, in a single transaction: 44 Cook, 55 Madison and
the AT&T office building. 44 Cook, a 10-story Class A office building
constructed in 1984 and containing approximately 122,000 net rentable square
feet, and 55 Madison, an eight-story Class A office building constructed in 1982
and containing approximately 125,000 net rentable square feet, are both located
in the Cherry Creek submarket of Denver, Colorado. 44 Cook and 55 Madison each
have underground parking structures containing 236 and 171 spaces, respectively,
and the buildings also share a four-level, 396-space parking structure. The
Cherry Creek submarket is located about three miles southeast of downtown Denver
and includes some of Denver's most prestigious single-family homes, the Denver
Country Club, Cherry Creek Mall and high-rise residential developments. With the
purchase of both 44 Cook and 55 Madison, the Company has added approximately
247,000 net rentable square feet to its office portfolio in the Cherry Creek
submarket, which, with its other Cherry Creek properties, The Citadel and
Ptarmigan Place, increases its ownership to 37% of the Class A office space in
this submarket. The weighted average full-service rental rates for 44 Cook and
55 Madison were $18.33 and $15.65 per leased square foot, respectively, as of
December 31, 1996. The weighted average Class A quoted market rental rate for
the Cherry Creek submarket was $17.84 per square foot, as of December 31, 1996.
Constructed in 1982, the AT&T office building, a 15-story office building,
contains approximately 170,000 net rentable square feet and is located in the
Denver CBD submarket. The AT&T office building has a four level, 207-space
parking structure and 12 tenants, the largest of which is AT&T Corp., which
occupies 42% of the net rentable area. The three Office Properties were acquired
for an aggregate purchase price of approximately $42.7 million, approximately
62% of the Properties' estimated replacement cost. As of December 31, 1996, 44
Cook, 55 Madison and the AT&T office building were 58%, 90% and 92% leased,
respectively.
FINANCING ACTIVITIES
The Company obtained a $175 million credit facility (the "Credit Facility")
in June 1996 to enhance the Company's financial flexibility in making new real
estate investments. Advances under the Credit Facility bear interest at the
Eurodollar rate plus 185 basis points. The Credit Facility is unsecured and
expires in March 1999. The Credit Facility requires the Company to maintain
compliance with a number of customary financial and other covenants on an
ongoing basis, including leverage ratios based on book value and debt service
coverage ratios, limitations on additional secured and total indebtedness and
distributions and a minimum net worth requirement. The Company has entered into
a commitment letter with the lender under the Credit Facility to increase the
amount of the Credit Facility to $350 million, decrease the interest rate to the
Eurodollar rate plus 138 basis points and extend the term until April 2000.
Management believes that the modification of the Credit Facility will be
completed in April 1997.
On December 26, 1996, 301 Congress Avenue, L.P., whose sole asset is 301
Congress Avenue, entered into a financing arrangement with Northwestern Mutual
Life Insurance Company for a $26 million mortgage loan secured by 301 Congress
Avenue. The loan bears interest at a fixed rate of 7.66% and has a seven-year
term during which only interest is payable, with a final payment of the entire
original principal amount due at the end of such term. The Company is a 50%
partner in 301 Congress Avenue, L.P. Following its receipt of the loan proceeds,
301 Congress Avenue, L.P. made a distribution to the Company of approximately
$13 million.
STOCK SPLIT
On March 2, 1997, the Company declared a two-for-one stock split in the
form of a 100% share dividend. The share dividend was paid on March 26, 1997 to
shareholders of record on March 20, 1997.
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PROPERTIES
OFFICE PROPERTIES
The Company's Office Properties are located primarily in Dallas/Fort Worth,
Houston and Austin, Texas and in Denver, Colorado. The Company's office
properties in Dallas/Fort Worth, Houston, Austin and Denver will represent, upon
completion of the Pending Investments, an aggregate of approximately 88% of its
office portfolio based on total net rentable square feet (46%, 26%, 7% and 9%
for Dallas/Fort Worth, Houston, Austin and Denver, respectively) and, on a pro
forma basis, after giving effect to the Pending Investments and the completed
acquisitions from January 1, 1996 as if they had occurred on January 1, 1996,
would have accounted for approximately 87% of office property rental revenues
(48%, 24%, 7% and 8%, respectively) for the year ended December 31, 1996.
The following table sets forth certain information about the Office
Properties as of December 31, 1996, without giving effect to the Pending
Investments. Based on annualized base rental revenues from office leases in
place as of December 31, 1996, no single tenant would account for more than 5%
of the Company's total annualized office property rental revenues for 1996.
<TABLE>
<CAPTION>
Weighted
Average
Net Full-Service
Rentable Rental Rate
Year Area Percent Per Leased
State, City, Property Submarket Completed (Sq. Ft.) Leased Sq. Ft.(1) Significant Tenants(2)
--------------------- ------------------ --------- ---------- ------- ------------ ----------------------------
<S> <C> <C> <C> <C> <C> <C>
TEXAS
DALLAS
The Crescent Office
Towers................... Uptown/Turtle 1985 1,210,899 97% $24.91 --
Creek
Trammell Crow Center(3).... CBD 1984 1,128,331 80 24.01 Jones, Day, Reavis and Pogue
Spectrum Center(4)......... Far North Dallas 1983 598,250 93 16.00 Federal Deposit Insurance
Corp.; Frito-Lay, Inc.
Waterside Commons.......... Las Colinas 1986 458,739 100 15.95 Sprint Communications
Company L.P.; GTE North
Incorporated
Caltex House............... Las Colinas 1982 445,993 97 24.89 Caltex Petroleum Corporation
The Aberdeen............... Far North Dallas 1986 320,629 100 15.82 Pepsico, Inc.
MacArthur Center I & II.... Las Colinas 1982/1986 294,069 100 16.47 Federal Home Loan Bank of
Dallas
Stanford Corporate
Centre................... Far North Dallas 1985 265,507 97 14.34 TENET Healthcare, Inc.
12404 Park Central......... LBJ Freeway 1987 239,103 98 15.94 Steak & Ale Restaurant
Corporation
3333 Lee Parkway........... Uptown/Turtle 1983 233,484 62(5) 17.04 Centex Corporation; Keystone
Creek Home Health Management,
Inc.
Liberty Plaza I & II....... Far North Dallas 1981/1986 218,813 96 13.63 Intecom, Inc.; Anthem Group
Services Corporation
Greenway II(3)............. Richardson/Plano 1985 154,329 99 18.90 Northern Telecom, Inc.
Greenway IA................ Richardson/Plano 1983 94,784 100 12.31 Northern Telecom, Inc.
Greenway I................. Richardson/Plano 1983 51,920 100 12.31 Northern Telecom, Inc.
---------- --- ------
Subtotal/Weighted
Average................ 5,714,850 92% $19.92
---------- --- ------
FORT WORTH
Continental Plaza.......... CBD 1982 954,895 78%(5) $17.12 Burlington Northern Santa Fe
---------- --- ------ Railroad
HOUSTON
Greenway Plaza Office
Portfolio(6)............. Richmond-Buffalo 1969-1982 4,256,885 74%(5) $13.42 The Coastal Corporation
Speedway
The Woodlands Office
Properties(7)............ The Woodlands 1980-1996 812,359 92 13.81 --
Three Westlake Park(8)..... Katy Freeway 1983 414,251 100 13.59 Amoco Production Company
---------- --- ------
Subtotal/Weighted
Average................ 5,483,495 74% $13.50
---------- --- ------
</TABLE>
S-23
<PAGE> 24
<TABLE>
<CAPTION>
Weighted
Average
Net Full-Service
Rentable Rental Rate
Year Area Percent Per Leased
State, City, Property Submarket Completed (Sq. Ft.) Leased Sq. Ft.(1) Significant Tenants(2)
--------------------- ------------------ --------- ---------- ------- ------------ ----------------------------
<S> <C> <C> <C> <C> <C> <C>
AUSTIN
Frost Bank Plaza........... CBD 1984 433,024 68% $16.35 U.S. Attorney's Office;
Akin, Gump, Strauss, Hauer &
Feld, L.L.P.
301 Congress Avenue(9)..... CBD 1986 418,338 86(5) 23.85 IBM Corporation; Lumberman's
Investment Corporation
Bank One Tower............. CBD 1974 389,503 99 14.55 Texas Workers' Compensation
Insurance Fund
The Avallon................ Northwest 1993 125,959 100 17.33 BMC Software
Barton Oaks Plaza One...... Southwest 1986 99,792 94 18.51 Iguana Entertainment, Inc.
---------- --- ------
Subtotal/Weighted
Average............... 1,466,616 86% $18.20
---------- --- ------
COLORADO
DENVER
MCI Tower.................. CBD 1982 550,807 97% $17.21 Atlantic Richfield Company
Ptarmigan Place............ Cherry Creek 1984 418,565 65(5) 13.93 Janus Capital Corporation
Regency Plaza One.......... DTC 1985 309,862 97 18.73 Nextel Communications
AT&T(3).................... CBD 1982 169,610 92(5) 12.97 AT&T Corp.
The Citadel................ Cherry Creek 1987 130,652 99 16.75 --
55 Madison(3).............. Cherry Creek 1982 124,519 90 15.65 --
44 Cook(3)................. Cherry Creek 1984 122,070 58(5) 18.33 Allmerica Financial
---------- --- ------
Subtotal/Weighted
Average............... 1,826,085 86% $16.42
---------- --- ------
COLORADO SPRINGS
Briargate Office and
Research Center.......... Colorado Springs 1988 252,857 100% $13.37 The Principal Mutual Life
---------- --- ------ Insurance Company
ARIZONA
PHOENIX
Two Renaissance Square..... CBD 1990 476,373 74%(5) $22.97 Lewis & Roca
6225 North 24th Street..... Camelback Corridor 1981 86,451 0(5) -- --
---------- --- ------
Subtotal/Weighted
Average............... 562,824 63% $22.97
---------- --- ------
LOUISIANA
NEW ORLEANS
1615 Poydras............... CBD 1984 508,741 74%(5) $14.55 Freeport-McMoRan, Inc.
---------- --- ------
NEBRASKA
OMAHA
Central Park Plaza......... CBD 1982 409,850 98% $14.17 Acceptance Insurance
---------- --- ------ Company
NEW MEXICO
ALBUQUERQUE
Albuquerque Plaza.......... CBD 1990 365,952 90% $17.83 U.S. West Communications;
---------- --- ------ Rodey, Dickason, Sloan,
Akin & Robb, P.A.
CALIFORNIA
SAN FRANCISCO
160 Spear Street........... South of 1984 276,420 20%(5) $20.48 Internal Revenue Service;
Market-CBD Providian National
---------- --- ------ Bancorp.
SAN DIEGO
Chancellor Park............ UTC 1988 195,733 90% $18.19 --
---------- --- ------
TOTAL/WEIGHTED
AVERAGE............... 18,018,318 84%(5) $17.05
========== === ======
</TABLE>
- ---------------
(1) Calculated based on base rent payable as of December 31, 1996, without
giving effect to free rent or scheduled rent increases that would be taken
into account under generally accepted accounting principles and including
adjustments for expenses payable by tenants.
(2) Identifies tenants with leases that contributed 20% or more of total rental
revenue paid at the Property as of December 31, 1996, on an annualized
basis.
(3) Acquired subsequent to December 31, 1996.
(4) The Company owns the principal economic interest in Spectrum Center through
an interest in Spectrum Mortgage Associates L.P., which owns both a mortgage
note secured by Spectrum Center and the ground lessor's interest in the land
underlying the office building.
S-24
<PAGE> 25
(5) The Company has executed leases at certain properties that had not commenced
as of December 31, 1996. If such leases had commenced as of December 31,
1996, the percent leased for all Office Properties would have been 89%. The
total percent leased for such Properties would have been as follows: 3333
Lee Parkway -- 75%; Continental Plaza -- 100%; Greenway Plaza Office
Portfolio -- 77%; 301 Congress Avenue -- 95%; Ptarmigan Place -- 98%;
AT&T -- 99%; 44 Cook -- 69%; Two Renaissance Square -- 85%; 6225 North 24th
Street -- 52%; 1615 Poydras -- 77% and 160 Spear Street -- 75%.
(6) Consists of 10 Office Properties.
(7) The Company has a 75% limited partner interest in the partnership that owns
the 12 Office Properties that comprise The Woodlands Office Properties.
(8) The Company owns the principal economic interest in Three Westlake Park
through its ownership of a mortgage note secured by Three Westlake Park.
(9) The Company has a 1% general partner and a 49% limited partner interest in
the partnership that owns 301 Congress Avenue.
The following table provides information for the Company's Office
Properties by state, city and submarket as of December 31, 1996, without giving
effect to the Pending Investments.
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
COMPANY CLASS A
CLASS A SHARE OF QUOTED
PERCENT OF PERCENT OFFICE CLASS A MARKET
TOTAL TOTAL LEASED AT PERCENT OFFICE RENTAL RATE
NUMBER OF COMPANY COMPANY COMPANY LEASED/ SUBMARKET PER SQUARE
STATE, CITY, SUBMARKET PROPERTIES NRA(1) NRA(1) PROPERTIES OCCUPIED(2) NRA(1) FOOT(2)(3)
---------------------- ---------- ---------- ---------- ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
TEXAS
DALLAS
Uptown/Turtle Creek................ 2 1,444,383 8% 91% 86% 26% $22.99
Far North Dallas................... 4 1,403,199 8 96 98 23 20.88
Las Colinas........................ 3 1,198,801 7 99 95 19 23.14
CBD(6)............................. 1 1,128,331 6 80 75 6 18.17
Richardson/Plano(7)................ 3 301,033 2 100 98 9 19.14
LBJ Freeway........................ 1 239,103 1 98 95 2 20.32
-- ---------- -- -- -- -- ------
Subtotal/Weighted Average........ 14 5,714,850 32% 92% 87% 12% $21.24
-- ---------- -- -- -- -- ------
FORT WORTH
CBD................................ 1 954,895 5% 78% 86% 23% $16.49
-- ---------- -- -- -- -- ------
HOUSTON
Richmond-Buffalo Speedway(8)....... 10 4,256,885 23% 74% 80% 54% $13.35
The Woodlands...................... 12 812,359 5 92 92 100 14.32(9)
Katy Freeway....................... 1 414,251 2 100 100 15 14.69
-- ---------- -- -- -- -- ------
Subtotal/Weighted Average........ 23 5,483,495 30% 74% 85% 48% $13.59
-- ---------- -- -- -- -- ------
AUSTIN
CBD................................ 3 1,240,865 6% 84% 90% 35% $19.95
Northwest.......................... 1 125,959 1 100 96 5 21.33
Southwest.......................... 1 99,792 1 94 99 9 21.50
-- ---------- -- -- -- -- ------
Subtotal/Weighted Average........ 5 1,466,616 8% 86% 93% 21% $20.17
-- ---------- -- -- -- -- ------
COLORADO
DENVER
Cherry Creek(10)................... 4 795,806 4% 73% 88% 37% $17.84
CBD(11)............................ 2 720,417 4 96 89 7 16.44
DTC................................ 1 309,862 2 97 91 8 22.95
-- ---------- -- -- -- -- ------
Subtotal/Weighted Average........ 7 1,826,085 10% 86% 90% 11% $18.15
-- ---------- -- -- -- -- ------
COLORADO SPRINGS..................... 1 252,857 1% 100% 95% 7% $16.83(12)
-- ---------- -- -- -- -- ------
ARIZONA
PHOENIX
CBD................................ 1 476,373 3% 74% 93% 27% $20.00
Camelback Corridor................. 1 86,451 1 0 95 3 23.40
-- ---------- -- -- -- -- ------
Subtotal/Weighted Average........ 2 562,824 4% 63% 95% 12% $20.52
-- ---------- -- -- -- -- ------
LOUISIANA
NEW ORLEANS
CBD................................ 1 508,741 3% 74% 86% 6% $14.63
-- ---------- -- -- -- -- ------
<CAPTION>
WEIGHTED
AVERAGE
COMPANY COMPANY
QUOTED FULL-SERVICE
RENTAL RATE RENTAL RATE
PER SQUARE PER SQUARE
STATE, CITY, SUBMARKET FOOT(4) FOOT(5)
---------------------- ----------- ------------
<S> <C> <C>
TEXAS
DALLAS
Uptown/Turtle Creek................ $30.40 $24.07
Far North Dallas................... 19.96 15.27
Las Colinas........................ 21.12 19.34
CBD(6)............................. 22.69 24.01
Richardson/Plano(7)................ 19.62 15.67
LBJ Freeway........................ 20.00 15.94
------ ------
Subtotal/Weighted Average........ $23.36 $19.92
------ ------
FORT WORTH
CBD................................ $16.85 $17.12
------ ------
HOUSTON
Richmond-Buffalo Speedway(8)....... $15.00 $13.42
The Woodlands...................... 14.32 13.81
Katy Freeway....................... 14.69 13.59
------ ------
Subtotal/Weighted Average........ $14.88 $13.50
------ ------
AUSTIN
CBD................................ $19.97 $18.28
Northwest.......................... 21.00 17.33
Southwest.......................... 21.50 18.51
------ ------
Subtotal/Weighted Average........ $20.16 $18.20
------ ------
COLORADO
DENVER
Cherry Creek(10)................... $18.16 $15.42
CBD(11)............................ 17.25 16.26
DTC................................ 24.00 18.73
------ ------
Subtotal/Weighted Average........ $18.79 $16.42
------ ------
COLORADO SPRINGS..................... $15.73 $13.37
------ ------
ARIZONA
PHOENIX
CBD................................ $20.00 $22.97
Camelback Corridor................. 21.00 --
------ ------
Subtotal/Weighted Average........ $20.15 $22.97
------ ------
LOUISIANA
NEW ORLEANS
CBD................................ $15.00 $14.55
------ ------
</TABLE>
S-25
<PAGE> 26
<TABLE>
<CAPTION>
COMPANY
CLASS A SHARE OF
PERCENT OF PERCENT OFFICE CLASS A
TOTAL TOTAL LEASED AT PERCENT OFFICE
NUMBER OF COMPANY COMPANY COMPANY LEASED/ SUBMARKET
STATE, CITY, SUBMARKET PROPERTIES NRA(1) NRA(1) PROPERTIES OCCUPIED(2) NRA(1)
---------------------- ---------- ---------- ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
NEBRASKA
OMAHA
CBD........................... 1 409,850 2% 98% 97% 32%
-- --------- -- -- -- --
NEW MEXICO
ALBUQUERQUE
CBD........................... 1 365,952 2% 90% 95% 28%
-- --------- -- -- -- --
CALIFORNIA
SAN FRANCISCO
South of Market - CBD......... 1 276,420 2% 20% 97% 3%
-- --------- -- -- -- --
SAN DIEGO
UTC........................... 1 195,733 1% 90% 92% 7%
-- --------- -- -- -- --
TOTAL/WEIGHTED AVERAGE...... 58 18,018,318 100% 84% 89% 15%
== ========= == == == ==
<CAPTION>
WEIGHTED
AVERAGE WEIGHTED
CLASS A AVERAGE
QUOTED COMPANY COMPANY
MARKET QUOTED FULL-SERVICE
RENTAL RATE RENTAL RATE RENTAL RATE
PER SQUARE PER SQUARE PER SQUARE
STATE, CITY, SUBMARKET FOOT(2)(3) FOOT(4) FOOT(5)
---------------------- ---------- ----------- ------------
<S> <C> <C> <C>
NEBRASKA
OMAHA
CBD........................... $ 18.00 $ 19.50 $ 14.17
--------- --------- ---------
NEW MEXICO
ALBUQUERQUE
CBD........................... $ 17.75 $ 18.50 $ 17.83
--------- --------- ---------
CALIFORNIA
SAN FRANCISCO
South of Market - CBD......... $ 28.69 $ 28.69 $ 20.48
--------- --------- ---------
SAN DIEGO
UTC........................... $ 22.80 $ 20.50 $ 18.19
--------- --------- ---------
TOTAL/WEIGHTED AVERAGE...... $ 17.98 $ 19.13 $ 17.05
========= ========= =========
</TABLE>
- ---------------
(1) Represents net rentable area in square feet.
(2) Sources are Jamison Research, Inc. (for the Uptown/Turtle Creek, Far North
Dallas, Las Colinas, Dallas CBD, Richardson/Plano, LBJ Freeway, Fort Worth
CBD and the New Orleans CBD submarkets), Baca Landata, Inc. (for the
Richmond-Buffalo Speedway submarket), The Woodlands Corporation (for The
Woodlands submarket), Cushman & Wakefield of Texas, Inc. (for the Katy
Freeway submarket), CB Commercial (for the Austin CBD, Northwest and
Southwest submarkets), Cushman & Wakefield of Colorado, Inc. (for the
Cherry Creek, Denver CBD and Denver DTC submarkets), Turner Commercial
Research (for the Colorado Springs market), Grubb and Ellis Company (for
the Phoenix CBD, Camelback Corridor and San Francisco South of Market
section of CBD submarkets), Pacific Realty Group, Inc. (for the Omaha CBD
submarket), Koll Market Research (for the Albuquerque CBD submarket) and
John Burnham & Co. (for the San Diego UTC submarket).
(3) Represents full-service rental rates. These rates do not necessarily
represent the amounts at which available space at the Company's Office
Properties will be leased. The weighted average subtotals and total are
based on total net rentable square feet of Company Office Properties in the
submarket.
(4) Represents weighted average rental rates per square foot quoted by the
Company as of December 31, 1996, based on total net rentable square feet of
Company Office Properties in the submarket, adjusted based on management
estimates, to equivalent full-service quoted rental rates to facilitate
comparison to weighted average Class A quoted submarket rental rates per
square foot. These rates do not necessarily represent the amounts at which
available space at the Company's Office Properties will be leased.
(5) Calculated based on base rent payable for Company Office Properties in the
submarket as of December 31, 1996, without giving effect to free rent or
scheduled rent increases that would be taken into account under generally
accepted accounting principles and including adjustments for expenses
payable by tenants, divided by total net rentable square feet of Company
Office Properties in the submarket.
(6) The Company's Office Property in this submarket was acquired subsequent to
December 31, 1996.
(7) One of the Company's Office Properties in this submarket (representing
154,329 net rentable square feet) was acquired subsequent to December 31,
1996.
(8) Includes both Class A and B office properties for submarket and Company
statistics.
(9) Represents a weighted average of the submarket rental rate per square foot
quoted for all classes of office properties within The Woodlands submarket,
adjusted based on management estimates, to equivalent full-service quoted
rental rates. The 12 Office Properties included in the schedule represent
all of the competitive office space within The Woodlands submarket.
(10) Two of the Company's Office Properties in this submarket (representing an
aggregate of 246,589 net rentable square feet) were acquired subsequent to
December 31, 1996.
(11) One of the Company's Office Properties in this submarket (representing
169,610 net rentable square feet) was acquired subsequent to December 31,
1996.
(12) Represents weighted average quoted triple-net rental rates per square foot,
adjusted based on management estimates, to equivalent full-service quoted
rental rates.
S-26
<PAGE> 27
OFFICE PROPERTY MARKET INFORMATION
The demographic conditions, economic conditions and trends (population
growth and employment growth) favoring the Company's major markets are projected
to continue to be substantially at or above the national average, as illustrated
in the following graph.
PROJECTED POPULATION AND EMPLOYMENT GROWTH
1996-2006
(% INCREASE)
<TABLE>
<CAPTION>
MEASUREMENT PERIOD
(FISCAL YEAR COVERED) POPULATION(1) EMPLOYMENT(2)
<S> <C> <C>
UNITED STATES 9.4 14.2
DALLAS-FORT WORTH, TX 21.1 22.2
HOUSTON, TX 12.7 14.0
DENVER, CO 20.9 21.6
AUSTIN, TX 41.0 41.2
PHOENIX, AZ 31.7 34.2
NEW ORLEANS, LA 4.0 8.9
OMAHA, NE 11.4 16.3
ALBUQUERQUE, NM 24.8 26.8
SAN FRANCISCO, CA 14.6 15.8
COLORADO SPRINGS, CO 22.5 26.3
SAN DIEGO, CA 21.8 23.9
</TABLE>
(1) Represents projected population growth from year-end 1996 through year-end
2006.
(2) Represents projected employment growth from year-end 1996 through year-end
2006.
- ---------------
Source: Cognetics, Inc.
S-27
<PAGE> 28
As reported by Cognetics, Inc. in December 1996, San Francisco/Oakland,
California; Dallas/Fort Worth, Texas; Phoenix, Arizona; Houston/Galveston,
Texas; Denver/Boulder, Colorado; San Diego, California; and Austin, Texas are
projected to be among the leading markets in the country for primary office
employment growth in the next decade. In addition, as reported in the 1997
edition of Emerging Trends magazine, a panel of more than 100 real estate
professionals has ranked San Francisco, Denver, San Diego and Dallas/Fort Worth
among the top 10 markets in the country for general real estate investment in
1997. Fortune magazine, in its November 11, 1996 issue, also ranked Denver and
Dallas/Fort Worth among the top 10 U.S. cities having the best overall
environment for work and family.
<TABLE>
<CAPTION>
TOP MARKETS FOR TOP 10 MARKETS FOR TOP 10 BEST
PRIMARY OFFICE GENERAL REAL AMERICAN METROPOLITAN
EMPLOYMENT GROWTH ESTATE INVESTMENT AREAS FOR WORK AND FAMILY
1996 TO 2006 IN 1997 1996
----------------- ------------------ -------------------------
<S> <C> <C>
1. Los Angeles, CA 1. SAN FRANCISCO, CA 1. Seattle, WA
2. SAN FRANCISCO/OAKLAND, CA 2. Seattle, WA 2. DENVER, CO
3. Atlanta, GA 3. Boston, MA 3. Philadelphia, PA
4. DALLAS/FORT WORTH, TX 4. Chicago, IL 4. Minneapolis, MN
5. Washington, DC 5. DENVER, CO 5. Raleigh/Durham, NC
6. Chicago, IL 6. SAN DIEGO, CA 6. St. Louis, MO
7. PHOENIX, AZ 7. Atlanta, GA 7. Cincinnati, OH
8. New York, NY 8. Los Angeles, CA 8. Washington, DC
9. HOUSTON/GALVESTON, TX 9. DALLAS/FORT WORTH, TX 9. Pittsburgh, PA
10. Tampa/St. Petersburg, FL 10. Washington, DC 10. DALLAS/FORT WORTH, TX
11. Minneapolis/St. Paul, MN Source: Emerging Trends Source: Fortune
12. Boston, MA (Equitable Real Estate
13. DENVER/BOULDER, CO Management)
14. Seattle, WA
15. Miami/Ft. Lauderdale, FL
16. Orlando, FL
17. SAN DIEGO, CA
18. Detroit, MI
19. Las Vegas, NV
20. AUSTIN, TX
Source: Cognetics, Inc.
</TABLE>
The majority of the Company's Office Properties are located in Texas and
Colorado. The 50 Dallas/Fort Worth, Houston, Denver and Austin Office Properties
together represent approximately 85% of the Company's current portfolio of
Office Properties on the basis of net rentable square feet. Upon completion of
the acquisition of the Carter-Crowley Office Portfolio, the 64 Dallas/Fort
Worth, Houston, Denver and Austin office properties will represent approximately
88% of the Company's portfolio of office properties on the basis of net rentable
square feet.
DALLAS/FORT WORTH METROPOLITAN AREA
The Company believes that the economic base and business profile of
Dallas/Fort Worth have become substantially more diverse since the mid-1980's.
The Dallas/Fort Worth economy currently has an extensive financial community and
emphasizes wholesale/retail trade, service industries and high-technology
manufacturing. Management believes that this diversified economy permitted
Dallas/Fort Worth to outperform the national economy in employment growth
through the recession of the early 1990's. According to the Texas Workforce
Commission, during 1996, employment growth in this area was 3.7%, with an
increase of approximately 85,600 jobs in non-farm employment. Dallas/Fort Worth
is the dominant transportation and distribution hub of the South Central region
of the United States as a result of its location, its extensive infrastructure,
the prominence of the Dallas/Fort Worth International Airport and the
development of the new Alliance Airport. The area is expected to benefit
substantially from the North American Free Trade Agreement as a primary trade
conduit with, and exporter to, Mexico. Many major corporations have relocated
S-28
<PAGE> 29
their headquarters to the Dallas/Fort Worth metropolitan area in recent years,
including J.C. Penney Company, Inc., GTE Telephone Operations and Exxon
Corporation. More recently, Countrywide Funding Corporation, TIG Holdings, a
former division of Transamerica Corporation, and Pepsico, Inc. have moved major
facilities to Dallas/Fort Worth, creating an estimated 1,300 to 1,650 new jobs.
Pepsico, Inc. is the sole tenant of The Aberdeen. In addition, Blockbuster
Entertainment Inc. has recently announced plans to relocate to the area.
Management believes that these relocations both demonstrate and contribute to
the vitality of the Dallas/Fort Worth metropolitan area.
DALLAS/FORT WORTH OFFICE PROPERTIES
The Company owns 15 Class A Office Properties in the Dallas/Fort Worth
metropolitan area with an aggregate of approximately 6.7 million net rentable
square feet. Following the acquisition of the Carter-Crowley Office Portfolio,
the Company will own a total of 29 office properties in the Dallas/Fort Worth
metropolitan area with an aggregate of approximately 9.7 million net rentable
square feet, including 25 Class A office properties with an aggregate of
approximately 9.0 million net rentable square feet, and four Class B office
properties with an aggregate of approximately .7 million net rentable square
feet.
The following graph provides information regarding vacancy levels and
weighted average quoted market rental rates at year end for each of the years
from 1990 through 1996 for Class A office properties in the Dallas metropolitan
area.
OVERALL CLASS A OFFICE
VACANCY AND QUOTED MARKET RENT
DALLAS, TX
<TABLE>
<CAPTION>
MEASUREMENT PERIOD
(FISCAL YEAR COVERED) AVG. RENT VACANCY
<S> <C> <C>
1990 17.70 19.3
1991 16.70 20.8
1992 15.83 21.9
1993 15.42 21.5
1994 15.91 17.6
1995 17.04 14.6
1996 19.76 13.7
</TABLE>
- ---------------
Source: Jamison Research, Inc.
The seven submarkets in which the 25 Class A office properties are located
accounted for 87% of the total Class A office space in the Dallas metropolitan
area as of December 31, 1996. These submarkets and the Class A office properties
located in each submarket, are identified below.
Uptown/Turtle Creek. Two of the Company's Office Properties, The Crescent
Office Towers and 3333 Lee Parkway, and two properties in the Carter-Crowley
Office Portfolio, Cedar Springs and Reverchon Plaza, are located in the
Uptown/Turtle Creek submarket. In addition to office buildings and other types
of commercial properties, the area has a varied mix of housing, a number of
freestanding shops and some of the region's best restaurants, including the Beau
Nash in the Hotel Crescent Court, located between The Crescent Office Towers and
The Crescent Atrium. The Uptown/Turtle Creek submarket is immediately adjacent
to the Park Cities, two upscale residential areas, and is easily accessible from
the north/south Dallas North Tollway and the east/west Woodall Rodgers Freeway.
The increase in vacancy in this submarket during 1995 and 1996
S-29
<PAGE> 30
was primarily the result of the relinquishment of approximately 200,000 square
feet of space (approximately 4% of the total Class A office space in the
submarket) by a savings and loan association and, subsequently, by a government
agency.
Far North Dallas. Four of the Company's Office Properties, Spectrum Center,
The Aberdeen, Stanford Corporate Centre and Liberty Plaza I & II, and three
properties in the Carter-Crowley Office Portfolio, The Addison, 5050 Quorum and
Addison Tower, are located in the Far North Dallas submarket. Commercial office
buildings in the Far North Dallas submarket are primarily located along or near
the Dallas North Tollway, which provides direct access to both the Dallas CBD
submarket and the LBJ Freeway submarket.
Las Colinas. Three of the Company's Office Properties, Waterside Commons,
Caltex House and MacArthur Center I & II, and one property in the Carter-Crowley
Office Portfolio, Valley Centre, are located in the Las Colinas submarket. Las
Colinas is a 12,000-acre master planned office, retail, hotel and residential
community located in Irving, Texas, approximately 10 minutes from the
Dallas/Fort Worth International Airport and approximately 15 and 25 minutes from
downtown Dallas and downtown Fort Worth, respectively.
Dallas CBD. One of the Company's Office Properties, Trammell Crow Center,
is located in the CBD submarket. Trammell Crow Center is located in Dallas'
cultural and financial district on the northeastern edge of the CBD submarket
immediately across the Woodall Rodgers Freeway from The Crescent Office Towers
in the Uptown/Turtle Creek submarket. The CBD represents one of the few
submarkets in Dallas with large blocks of available contiguous Class A office
space. In December 1996, a major lease renewal and expansion for Class A office
space in the CBD submarket was signed by NationsBank of Texas, N.A. In addition,
new tenants, such as Blockbuster Entertainment Inc., have recently announced
plans to relocate from outside the state into the Dallas CBD submarket.
Richardson/Plano. Three of the Company's Office Properties, Greenway I,
Greenway IA and Greenway II, and two properties in the Carter-Crowley Office
Portfolio, Palisades Central I and Palisades Central II, are located in the
Richardson/Plano submarket. This submarket is located in the northern suburbs of
Dallas in an area known as the "Telecom Corridor." This area has the largest
concentration of telecommunications firms in the United States. Some of the
major telecommunications companies either based in the area or having major
branches in the area include Nortel, DSC Communications Corp., MCI
Communications Corp., Alcatel Network Systems, Inc. and Ericsson Radio Systems,
Inc.
LBJ Freeway. One of the Company's Office Properties, 12404 Park Central,
and one property in the Carter-Crowley Office Portfolio, Meridian, are located
in the LBJ Freeway submarket. The LBJ Freeway is the major east/west
thoroughfare of North Dallas. Management believes that this submarket will
benefit greatly from completion of the North Central Expressway expansion
project currently underway. Completed sections of the expressway have already
improved access to the buildings in the Park Central complex, in which 12404
Park Central is located, and additional sections are scheduled to be completed
through the year 2000.
Stemmons Freeway. One property in the Carter-Crowley Office Portfolio,
Stemmons Place, is located in the Stemmons Freeway submarket. The Stemmons
Freeway submarket is at the center of the wholesale apparel, furniture and
textile industries of Dallas, and Stemmons Freeway (I-35E) serves as the main
north/south artery through Dallas. Only seven Class A office buildings are
located in this submarket, of which Stemmons Place is the second largest in
terms of net rentable square feet. The increase in vacancy in this submarket as
of December 31, 1996 is primarily attributable to the reclassification and
addition to the Class A office space inventory of two buildings with an
aggregate of approximately 530,000 net rentable square feet during the fourth
quarter of 1996. These buildings have since been reclassified as "owner
occupied" and will not be included in Class A office space in 1997.
S-30
<PAGE> 31
The Following graphs provide information regarding vacancy levels and
weighted average quoted market rental rates at year end for each of the years
from 1990 through 1996 for Class A office properties in the seven Dallas
submarkets in which the Company has invested or has pending investments in Class
A office properties.
UPTOWN/TURTLE CREEK CLASS A OFFICE
VACANCY AND QUOTED MARKET RENT
DALLAS, TX
<TABLE>
<CAPTION>
MEASUREMENT PERIOD
(FISCAL YEAR COVERED) AVG. RENT VACANCY
<S> <C> <C>
1990 17.77 18.9
1991 17.15 14.9
1992 17.08 16.0
1993 17.17 13.7
1994 18.04 9.8
1995 19.18 13.1
1996 22.99 14.1
</TABLE>
FAR NORTH DALLAS CLASS A OFFICE
VACANCY AND QUOTED MARKET RENT
DALLAS, TX
<TABLE>
<CAPTION>
MEASUREMENT PERIOD
(FISCAL YEAR COVERED) AVG. RENT VACANCY
<S> <C> <C>
1990 14.60 30.2
1991 14.55 27.2
1992 14.44 24.9
1993 14.55 22.3
1994 15.66 10.5
1995 16.96 2.7
1996 20.88 2.3
</TABLE>
LAS COLINAS CLASS A OFFICE
VACANCY AND QUOTED MARKET RENT
DALLAS, TX
<TABLE>
<CAPTION>
MEASUREMENT PERIOD
(FISCAL YEAR COVERED) AVG. RENT VACANCY
<S> <C> <C>
1990 16.69 9.3
1991 16.40 15.5
1992 15.83 17.8
1993 15.09 20.1
1994 16.61 8.1
1995 19.81 5.7
1996 23.14 4.6
</TABLE>
CBD CLASS A OFFICE
VACANCY AND QUOTED MARKET RENT
DALLAS, TX
<TABLE>
<CAPTION>
MEASUREMENT PERIOD
(FISCAL YEAR COVERED) AVG. RENT VACANCY
<S> <C> <C>
1990 22.83 17.5
1991 20.20 19.9
1992 18.24 22.5
1993 17.20 22.3
1994 16.71 24.6
1995 16.85 25.0
1996 18.17 24.9
</TABLE>
RICHARDSON/PLANO CLASS A OFFICE
VACANCY AND QUOTED MARKET RENT
DALLAS, TX
<TABLE>
<CAPTION>
MEASUREMENT PERIOD
(FISCAL YEAR COVERED) AVG. RENT VACANCY
<S> <C> <C>
1990 13.13 15.4
1991 12.90 11.1
1992 12.92 9.9
1993 13.18 8.8
1994 14.42 7.2
1995 15.85 6.5
1996 19.14 1.7
</TABLE>
LBJ FREEWAY CLASS A OFFICE
VACANCY AND QUOTED MARKET RENT
DALLAS, TX
<TABLE>
<CAPTION>
MEASUREMENT PERIOD
(FISCAL YEAR COVERED) AVG. RENT VACANCY
<S> <C> <C>
1990 15.13 19.7
1991 15.09 19.0
1992 14.29 22.0
1993 14.09 22.7
1994 14.95 16.3
1995 16.55 6.9
1996 20.32 5.2
</TABLE>
S-31
<PAGE> 32
STEMMONS FREEWAY CLASS A OFFICE
VACANCY AND QUOTED MARKET RENT
DALLAS, TX
<TABLE>
<CAPTION>
MEASUREMENT PERIOD
(FISCAL YEAR COVERED) AVG. RENT VACANCY
<S> <C> <C>
1990 14.40 25.1
1991 14.32 28.9
1992 14.25 35.1
1993 13.94 32.0
1994 14.27 35.8
1995 15.16 26.9
1996 16.87 39.8
</TABLE>
- ---------------
Source: Jamison Research, Inc.
Fort Worth CBD. One of the Company's Office Properties, Continental Plaza,
is located in the Fort Worth CBD submarket, which contained 40% of the city's
approximately 10.3 million net rentable square feet of Class A office space as
of December 31, 1996. Management believes that the Class A office market in the
Fort Worth CBD submarket will improve during the next five years. More than 25%
of all new jobs created in Fort Worth during 1996 were service-related, and job
growth of this type is expected to continue. Office tenants are primarily
service-related businesses. In addition, employment is increasing in Fort Worth,
and the revitalization of downtown Fort Worth is continuing with the addition of
new housing developments, restaurants, night clubs, retail shops and movie
theaters. The Fort Worth CBD submarket has recently received a further economic
boost, with construction commencing on a $60 million, privately funded, downtown
performing arts center and a new retail and entertainment center, as well as the
recently completed renovation of an enclosed downtown mall. Although vacancy
levels in the Fort Worth CBD have increased recently, the Company's Office
Property in this submarket was 100% leased as of December 31, 1996 (including
executed leases that had not yet commenced), with approximately 50% of the net
rentable square feet leased through 2013.
S-32
<PAGE> 33
The following graph provides information regarding vacancy levels and
weighted average quoted market rental rates at year end for each of the years
from 1990 through 1996 for Class A office properties in the Fort Worth CBD
submarket.
CBD CLASS A OFFICE
VACANCY AND QUOTED MARKET RENT
FORT WORTH, TX
<TABLE>
<CAPTION>
MEASUREMENT PERIOD
(FISCAL YEAR COVERED) AVG. RENT VACANCY
<S> <C> <C>
1990 18.33 16.9
1991 17.78 16.8
1992 17.15 16.0
1993 16.99 14.5
1994 17.16 11.3
1995 16.70 11.1
1996 16.49 14.2
</TABLE>
- ---------------
Source: Jamison Research, Inc.
HOUSTON METROPOLITAN AREA
The nation's fourth largest city and the largest in the Southwest, Houston
currently has a population of approximately 3.5 million, with a workforce of
approximately 1.8 million non-agricultural, wage and salaried workers. Houston
is central to the domestic petroleum industry's production, processing and
distribution network, and according to the University of Houston Center for
Public Policy, slightly over one-half of the city's primary employment base is
tied to the oil and gas industry. During the 1980s and early 1990s, the city's
economy stagnated as a result of the sharp decline in oil prices and cutbacks
and consolidations in the petroleum and other industries. Since 1991, however,
job growth has increased at an average annual rate of 2.0% per year, according
to the U.S. Bureau of Labor Statistics. In 1996, job growth increased by 2.3%
with the creation of 40,100 jobs and is projected by the University of Houston
Center for Public Policy to continue to increase at a rate of 2.0% to 3.0% for
the next several years. Although the petroleum industry remains essential to the
Houston economy, the city is also known as a major port for worldwide shipping
of non-petroleum products and in 1996 was the second largest U.S. port in terms
of foreign tonnage shipped. Houston is also home to the National Aeronautics and
Space Administration (NASA) and Johnson Space Center, the 600-acre Texas Medical
Center and the Astrodome sports complex. Non-energy related industries that are
major contributors to the Houston economy include aerospace manufacturing, data
processing, telecommunications and computer software development.
S-33
<PAGE> 34
HOUSTON OFFICE PROPERTIES
The following graphs provide information regarding vacancy levels and
weighted average quoted market rental rates at year end for each of the years
from 1990 through 1996, for Class A and Class B office properties in the Houston
metropolitan area.
OVERALL CLASS A OFFICE
VACANCY AND QUOTED MARKET RENT
HOUSTON, TX
<TABLE>
<CAPTION>
MEASUREMENT PERIOD
(FISCAL YEAR COVERED) AVG. RENT VACANCY
<S> <C> <C>
1990 14.97 12.8
1991 15.03 12.0
1992 14.72 12.1
1993 14.17 12.7
1994 14.08 9.9
1995 14.04 9.6
1996 14.44 7.8
</TABLE>
OVERALL CLASS B OFFICE
VACANCY AND QUOTED MARKET RENT
HOUSTON, TX
<TABLE>
<CAPTION>
MEASUREMENT PERIOD
(FISCAL YEAR COVERED) AVG. RENT VACANCY
<S> <C> <C>
1990 10.90 21.5
1991 11.10 19.8
1992 11.07 19.7
1993 10.93 20.0
1994 10.96 20.0
1995 11.18 19.2
1996 11.61 17.7
</TABLE>
- ---------------
Source: Baca Landata, Inc.
The Company has focused its acquisition efforts in the Houston metropolitan
area on three submarkets that management believes will benefit from growth in
demand for office space. As of December 31, 1996, these three submarkets
accounted for 12% of the total Class A office space, and 15% of the total Class
B office space, in the Houston metropolitan area.
Richmond-Buffalo Speedway. The Greenway Plaza Office Portfolio (10 Office
Properties) contains a majority of the total Class A and Class B office space in
the Richmond-Buffalo Speedway submarket. Virtually all of the office buildings
in the submarket that have in excess of 250,000 net rentable square feet are
located in or adjacent to Greenway Plaza. The submarket consists of
approximately 10.7 million net rentable square feet of office space, of which
approximately 3.9 million net rentable square feet are Class A office space and
approximately 4.0 million net rentable square feet are Class B office space. The
Greenway Plaza Office Portfolio includes Class A Office Properties with an
aggregate of approximately 2.0 million net rentable square feet and Class B
Office Properties with an aggregate of approximately 2.3 million net rentable
square feet. In June 1996, Dresser Industries vacated approximately 340,000
square feet in a Class B office building that is part of the Greenway Plaza
Office Portfolio, resulting in an increase in vacancy in this submarket for
Class B office properties as of December 31, 1996.
The Woodlands. Twelve of the Company's Office Properties are located in The
Woodlands submarket. The Woodlands submarket is a master planned community,
located 27 miles north of Houston, that contains a shopping mall, retail
centers, office buildings, a hospital, club facilities, a community college, a
performance pavilion and numerous other amenities targeting a population with
high earnings. The Woodlands Corporation maintains control over all development
within the community. The Company, through its 75% limited partner interest in
the partnership that owns the Office Properties in The Woodlands, has the option
to participate with The Woodlands Corporation in certain future office
development within The Woodlands.
Katy Freeway. One of the Company's Office Properties, Three Westlake Park,
is located in the Katy Freeway submarket, which is approximately eight miles
west of downtown Houston. A number of the world's largest oil companies,
including Exxon Corporation, Amoco Production Company and British Petroleum, are
located in this submarket, which is also known as the "Energy Corridor." The
Company owns the principal economic interest in Three Westlake Park through its
ownership of a mortgage note secured by Three Westlake Park.
S-34
<PAGE> 35
The following graphs provide information regarding vacancy levels and
weighted average quoted market rental rates at year end for each of the years
from 1990 through 1996, for Class A and Class B office properties in the
Richmond-Buffalo Speedway submarket, for all classes of competitive office
properties in The Woodlands submarket and for Class A office properties in the
Katy Freeway submarket.
RICHMOND-BUFFALO SPEEDWAY CLASS A OFFICE
VACANCY AND QUOTED MARKET RENT
HOUSTON, TX
<TABLE>
<CAPTION>
MEASUREMENT PERIOD
(FISCAL YEAR COVERED) AVG. RENT VACANCY
<S> <C> <C>
1990 12.29 12.0
1991 12.66 10.1
1992 13.26 8.1
1993 13.12 6.4
1994 12.92 6.3
1995 13.46 6.5
1996 14.03 4.4
</TABLE>
RICHMOND-BUFFALO SPEEDWAY CLASS B OFFICE
VACANCY AND QUOTED MARKET RENT
HOUSTON, TX
<TABLE>
<CAPTION>
MEASUREMENT PERIOD
(FISCAL YEAR COVERED) AVG. RENT VACANCY
<S> <C> <C>
1990 12.32 9.3
1991 12.37 10.2
1992 12.35 10.9
1993 12.55 13.5
1994 12.47 14.2
1995 12.47 22.8
1996 12.68 36.2
</TABLE>
THE WOODLANDS OFFICE
VACANCY AND QUOTED MARKET RENT
HOUSTON, TX
<TABLE>
<CAPTION>
MEASUREMENT PERIOD
(FISCAL YEAR COVERED) AVG. RENT(1) VACANCY
<S> <C> <C>
1990 11.45 44.6
1991 8.54 31.5
1992 11.20 14.2
1993 12.11 14.4
1994 12.83 16.5
1995 12.87 13.6
1996 14.32 8.0
</TABLE>
KATY FREEWAY (ENERGY CORRIDOR) CLASS A OFFICE
VACANCY AND QUOTED MARKET RENT
HOUSTON, TX
<TABLE>
<CAPTION>
MEASUREMENT PERIOD
(FISCAL YEAR COVERED) AVG. RENT VACANCY
<S> <C> <C>
1990 14.48 7.1
1991 15.83 5.9
1992 15.10 6.5
1993 15.10 5.4
1994 15.23 2.2
1995 15.42 2.9
1996 14.69 0.4
</TABLE>
- ---------------
(1) Weighted average of the submarket rental rate per square foot quoted for all
classes of office properties within The Woodlands submarket, adjusted based
on management estimates, to equivalent full-service quoted rental rates.
Source: Baca Landata, Inc., The Woodlands Corporation and Cushman & Wakefield of
Texas, Inc.
DENVER METROPOLITAN AREA
Like Dallas/Fort Worth, Denver has a diverse economic base that has
outperformed the national economy in terms of job growth in recent years. With
approximately 50% more college graduates, on a per capita basis, than the
national average, the city has one of the most highly educated workforces in the
nation, allowing it to attract the service and technology companies that draw on
the skills of this group. During the last decade, the city has become a center
for high-technology firms, especially those in the telecommunications industry.
Furthermore, Denver ranks as an important distribution center for the Western
and Central United States, and the 1995 opening of the Denver International
Airport has improved the city's standing as an air transportation hub with
respect to both passenger and freight traffic.
S-35
<PAGE> 36
DENVER OFFICE PROPERTIES
The following graph provides information regarding vacancy levels and
weighted average quoted market rental rates at year end for each of the years
from 1990 through 1996 for Class A office properties in the Denver metropolitan
area.
OVERALL CLASS A OFFICE
VACANCY AND QUOTED MARKET RENT
DENVER, CO
<TABLE>
<CAPTION>
MEASUREMENT PERIOD
(FISCAL YEAR COVERED) AVG. RENT VACANCY
<S> <C> <C>
1990 12.65 15.1
1991 12.75 14.3
1992 14.18 13.1
1993 14.67 9.6
1994 15.46 6.5
1995 17.06 8.4
1996 18.02 9.4
</TABLE>
- ---------------
Source: Cushman & Wakefield of Colorado, Inc.
The increase in vacancy during 1995 and 1996 was primarily the result of
the relinquishment of space in the Denver CBD submarket by government agencies
and certain major accounting firms. The Company believes that this increase in
vacancy will be relatively short-term given the low weighted average quoted
market rental rates in the Denver CBD submarket as compared to other Denver
submarkets, the relative lack of immediately available blocks of Class A office
space in the surrounding submarkets and the continuing population and employment
growth trends of the Denver metropolitan area.
The Company has focused its acquisition efforts in the Denver metropolitan
area on three submarkets which management believes have benefited and will
continue to benefit from the growth in demand for office space. These three
submarkets accounted for 82% of the total Class A office space in the Denver
metropolitan area as of December 31, 1996.
Cherry Creek. Four of the Company's Office Properties, The Citadel,
Ptarmigan Place, 44 Cook and 55 Madison, are located in the Cherry Creek
submarket. With approximately 2.1 million net rentable square feet of Class A
office space, Cherry Creek is the third largest of Denver's submarkets. Located
three miles southeast of the Denver CBD submarket, the area includes some of the
most prestigious single-family homes in the city, the Denver Country Club, the
Cherry Creek Mall and high-rise residential projects. The Company currently owns
37% of the Class A office space in the Cherry Creek submarket.
Denver CBD. Two of the Company's Office Properties, AT&T and MCI Tower, and
one of the Company's Hotel Properties, the Denver Marriott City Center (which is
located in the same building as MCI Tower), are located in the Denver CBD
submarket. With over 10.0 million net rentable square feet of Class A office
space as of December 31, 1996, the Denver CBD submarket contained 51% of the
city's total Class A office space. The $175 million Coors Field baseball stadium
is located on the west edge of the Denver CBD submarket and a $67 million
central library has been constructed at the city's center. A recently
constructed light rail system offers ease of commuter access from southern
Denver to the downtown area. The Denver
S-36
<PAGE> 37
CBD submarket has low lease rates in comparison to other Denver locations and
large blocks of Class A office space are available in the Denver CBD submarket.
As a result of these factors and the limited space available in the other Denver
submarkets, the Denver CBD submarket has become the only area within Denver that
can immediately accommodate a major Class A tenant.
Denver Technology Center ("DTC"). One of the Company's Properties, Regency
Plaza One, is located in the DTC submarket. This submarket has excellent access
to all parts of Denver, and many of Denver's prime residential communities are
located within five to 15 minutes of the area. Class A office space in the DTC
submarket totals approximately 4.0 million net rentable square feet, which is
second in size only to the Denver CBD submarket. As of December 31, 1996, Class
A office space in the DTC submarket was 91% leased. During the latter part of
1996, a tenant that had leased approximately 170,000 square feet in this
submarket vacated the space, resulting in an increase in vacancy as of December
31, 1996. A portion of this space (approximately 22,000 square feet) has since
been re-leased.
The following graphs provide information regarding vacancy levels and
weighted average quoted market rental rates at year end for each of the years
from 1990 through 1996, for Class A office properties in the three Denver
submarkets in which the Company has invested.
CHERRY CREEK CLASS A OFFICE
VACANCY AND QUOTED MARKET RENT
DENVER, CO
<TABLE>
<CAPTION>
MEASUREMENT PERIOD
(FISCAL YEAR COVERED) AVG. RENT VACANCY
<S> <C> <C>
1990 12.52 20.9
1991 13.52 17.8
1992 13.53 21.7
1993 12.55 9.9
1994 14.03 10.3
1995 17.11 11.1
1996 17.84 12.2
</TABLE>
CBD CLASS A OFFICE
VACANCY AND QUOTED MARKET RENT
DENVER, CO
<TABLE>
<CAPTION>
MEASUREMENT PERIOD
(FISCAL YEAR COVERED) AVG. RENT VACANCY
<S> <C> <C>
1990 12.31 17.3
1991 12.17 16.3
1992 14.07 8.9
1993 14.52 8.1
1994 15.80 5.8
1995 16.23 9.8
1996 16.44 10.8
</TABLE>
DTC CLASS A OFFICE
VACANCY AND QUOTED MARKET RENT
DENVER, CO
<TABLE>
<CAPTION>
MEASUREMENT PERIOD
(FISCAL YEAR COVERED) AVG. RENT VACANCY
<S> <C> <C>
1990 14.08 6.8
1991 14.97 7.7
1992 16.29 9.8
1993 16.14 7.6
1994 16.44 4.2
1995 19.95 5.6
1996 22.95 8.7
</TABLE>
- ---------------
Source: Cushman & Wakefield of Colorado, Inc.
S-37
<PAGE> 38
AUSTIN METROPOLITAN AREA
The Austin metropolitan area, which includes over 1,000,000 people, is home
to both the state capital of Texas and The University of Texas, the nation's
third largest university. Management believes that Austin's highly educated
workforce, low cost of living and high quality of life make it an attractive
area for business relocation and expansion and have made the city an important
base for research and development and high-technology companies. Five of the
area's six largest private employers are IBM Corporation, Motorola Incorporated,
Dell Computer Corporation, Advanced Micro Devices and Texas Instruments
Incorporated. Employment growth in Austin is projected by Cognetics, Inc. to be
41.2% from 1996 through 2006, one of the highest projected employment increases
in the country.
AUSTIN OFFICE PROPERTIES
The following graph provides information regarding vacancy levels and
weighted average quoted market rental rates at year end for each of the years
from 1990 through 1996 for Class A office properties in the Austin metropolitan
area.
OVERALL CLASS A OFFICE
VACANCY AND QUOTED MARKET RENT
AUSTIN, TX
<TABLE>
<CAPTION>
MEASUREMENT PERIOD
(FISCAL YEAR COVERED) AVG. RENT VACANCY
<S> <C> <C>
1990 13.07 22.7
1991 12.68 19.6
1992 16.06 13.5
1993 17.42 10.0
1994 18.49 10.8
1995 18.67 10.2
1996 20.13 6.8
</TABLE>
- ---------------
Source: CB Commercial
The three submarkets in which the five Class A Office Properties are
located accounted for 20% of the total Class A office space in the Austin
metropolitan area as of December 31, 1996. These submarkets and the Class A
Office Properties located in each submarket are identified below.
Austin CBD. Three of the Company's Office Properties, 301 Congress Avenue,
Bank One Tower and Frost Bank Plaza are located in the Austin CBD submarket.
This submarket contains approximately 3.6 million net rentable square feet of
Class A office space or 49% of Austin's total Class A office space. As of
December 31, 1996, the Class A office occupancy rate in the Austin CBD submarket
was 90% with a weighted average quoted market rental rate of $19.95 per square
foot. With Class A office occupancies of 96% to 99% in Austin's major suburban
submarkets, many tenants have focused on relocation to, and expansion in, the
CBD submarket to meet their needs for office space. As of December 31, 1996, the
Company owned 35% of the Class A office space in the CBD submarket.
Northwest. One of the Company's Office Properties, The Avallon, is located
in the Northwest submarket. The Northwest submarket contains approximately 1.8
million net rentable square feet of Class A office space, and is a principal
location for Austin's high-technology community. The increase in vacancy as of
S-38
<PAGE> 39
December 31, 1996 is primarily attributable to the addition to the submarket of
two newly-constructed Class A office buildings with an aggregate of
approximately 200,000 net rentable square feet. These buildings are now fully
leased and management therefore expects the vacancy rate to decline during the
first quarter of 1997.
Southwest. One of the Company's Office Properties, Barton Oaks Plaza One,
is located in the Southwest submarket. With approximately 1.2 million net
rentable square feet, the Southwest Class A office submarket is approximately
two-thirds of the size of the Northwest Class A office submarket, Austin's other
major Class A suburban submarket.
The following graphs provide information regarding vacancy levels and
weighted average quoted market rental rates at year end for each of the years
from 1990 through 1996 for Class A office properties in the three Austin
submarkets in which the Company has invested.
CBD CLASS A OFFICE
VACANCY AND QUOTED MARKET RENT
AUSTIN, TX
<TABLE>
<CAPTION>
MEASUREMENT PERIOD
(FISCAL YEAR COVERED) AVG. RENT VACANCY
<S> <C> <C>
1990 16.11 24.8
1991 17.84 23.4
1992 18.90 20.9
1993 18.95 16.0
1994 19.87 17.2
1995 20.17 15.2
1996 19.95 10.1
</TABLE>
NORTHWEST CLASS A OFFICE
VACANCY AND QUOTED MARKET RENT
AUSTIN, TX
<TABLE>
<CAPTION>
MEASUREMENT PERIOD
(FISCAL YEAR COVERED) AVG. RENT VACANCY
<S> <C> <C>
1990 10.81 21.1
1991 11.91 20.4
1992 16.38 11.5
1993 16.42 7.8
1994 18.33 3.4
1995 19.50 2.0
1996 21.33 4.2
</TABLE>
SOUTHWEST CLASS A OFFICE
VACANCY AND QUOTED MARKET RENT
AUSTIN, TX
<TABLE>
<CAPTION>
MEASUREMENT PERIOD
(FISCAL YEAR COVERED) AVG. RENT VACANCY
<S> <C> <C>
1990 10.42 15.3
1991 12.56 14.4
1992 12.89 3.8
1993 16.25 3.3
1994 18.00 2.4
1995 19.03 1.7
1996 21.50 0.6
</TABLE>
- ---------------
Source: CB Commercial
S-39
<PAGE> 40
LEASE EXPIRATIONS OF OFFICE PROPERTIES
The following table sets forth a schedule of lease expirations for leases
in place as of December 31, 1996, for each of the 10 years beginning with
January 1, 1997, for the Office Properties, on an aggregate basis by submarket,
assuming that none of the tenants exercises renewal options and excluding an
aggregate of 2,894,063 square feet of unleased space. For the year ended
December 31, 1996, the weighted average amount of excess expenses paid by
tenants for all leases was $.92 per square foot.
<TABLE>
<CAPTION>
STATE, CITY, SUBMARKET 1997 1998 1999 2000 2001 2002
- ---------------------- ---------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
TEXAS
DALLAS
Uptown/Turtle Creek..... Sq. Ft.(1) 255,963 171,680 76,043 -- 347,984 167,595
% Sq. Ft.(2) 19.8% 13.3% 5.9% 0.0% 26.9% 13.0%
Annual Rent(3) $4,634,564 $4,149,971 $1,383,101 -- $8,051,327 $4,448,769
No. of Tenants 41 26 12 -- 14 6
Rent per Sq. Ft. $18.11 $24.17 $18.19 -- $23.14 $26.54
Company Quoted $29.22
Rental Rate per
Sq. Ft.(4)
Far North Dallas........ Sq. Ft.(1) 249,331 70,021 85,706 188,451 201,455 78,356
% Sq. Ft.(2) 18.7% 5.2% 6.4% 14.1% 15.1% 5.9%
Annual Rent(3) $3,116,881 $1,056,123 $1,301,444 $2,802,073 $3,744,738 $1,014,710
No. of Tenants 19 13 12 6 8 1
Rent per Sq. Ft. $12.50 $15.08 $15.18 $14.87 $18.59 $12.95
Company Quoted $19.70
Rental Rate per
Sq. Ft.(4)
Las Colinas............. Sq. Ft.(1) 51,221 102,164 45,239 283,126 45,835 278,796
% Sq. Ft.(2) 4.4% 8.7% 3.8% 24.1% 3.9% 23.7%
Annual Rent(3) $704,978 $1,478,119 $708,365 $4,550,898 $931,263 $5,939,141
No. of Tenants 11 19 9 15 6 2
Rent per Sq. Ft. $13.76 $14.47 $15.66 $16.07 $20.32 $21.30
Company Quoted $17.81
Rental Rate per
Sq. Ft.(4)
CBD(5).................. Sq. Ft.(1) 118,596 80,252 256,581 4,921 5,419 16,171
% Sq. Ft.(2) 13.1% 8.9% 28.3% 0.5% 0.6% 1.8%
Annual Rent(3) $2,113,267 $1,995,705 $6,662,455 $94,729 $ 0 $351,940
No. of Tenants 10 2 8 2 1 2
Rent per Sq. Ft. $17.82 $24.87 $25.97 $19.25 $ 0 $21.76
Company Quoted $21.00
Rental Rate per
Sq. Ft.(4)
Richardson/Plano(6)..... Sq. Ft.(1) 154,839 1,798 139,033 3,865 -- --
% Sq. Ft.(2) 51.7% 0.6% 46.4% 1.3% 0.0% 0.0%
Annual Rent(3) $1,351,758 $20,417 $2,322,238 $70,923 -- --
No. of Tenants 2 2 1 2 -- --
Rent per Sq. Ft. $8.73 $11.36 $16.70 $18.35 -- --
Company Quoted $16.69
Rental Rate per
Sq. Ft.(4)
LBJ Freeway............. Sq. Ft.(1) 190,091 25,290 -- -- -- --
% Sq. Ft.(2) 88.3% 11.7% 0.0% 0.0% 0.0% 0.0%
Annual Rent(3) $2,656,882 $302,862 -- -- -- --
No. of Tenants 6 1 -- -- -- --
Rent per Sq. Ft. $13.98 $11.98 -- -- -- --
Company Quoted $20.00
Rental Rate per
Sq. Ft.(4)
<CAPTION>
2007 &
STATE, CITY, SUBMARKET 2003 2004 2005 2006 BEYOND
- ---------------------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
TEXAS
DALLAS
Uptown/Turtle Creek..... 126,486 47,651 41,130 59,165 --
9.8% 3.7% 3.2% 4.6% 0.0%
$3,059,116 $1,071,988 $836,680 $1,538,290 --
3 1 2 2 --
$24.19 $22.50 $20.34 $26.00 --
Far North Dallas........ 119,500 9,320 320,629 11,937 --
9.0% 0.7% 24.0% 0.9% 0.0%
$1,549,915 $144,833 $5,049,907 $274,551 --
1 1 1 1 --
$12.97 $15.54 $15.75 $23.00 --
Las Colinas............. 6,555 -- 363,579 -- --
0.6% 0.0% 30.9% 0.0% 0.0%
$162,236 -- $2,794,332 -- --
1 -- 1 -- --
$24.75 -- $7.69 -- --
CBD(5).................. -- 116,659 183,601 26,034 97,238
0.0% 12.9% 20.3% 2.9% 10.7%
-- $2,274,720 $3,633,779 $494,646 $2,212,165
-- 2 5 1 1
-- $19.50 $19.79 $19.00 $22.75
Richardson/Plano(6)..... -- -- -- -- --
0.0% 0.0% 0.0% 0.0% 0.0%
-- -- -- -- --
-- -- -- -- --
-- -- -- -- --
LBJ Freeway............. -- -- -- -- --
0.0% 0.0% 0.0% 0.0% 0.0%
-- -- -- -- --
-- -- -- -- --
-- -- -- -- --
</TABLE>
S-40
<PAGE> 41
<TABLE>
<CAPTION>
STATE, CITY, SUBMARKET 1997 1998 1999 2000 2001 2002
- ---------------------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
FORT WORTH
CBD..................... Sq. Ft.(1) 159,201 120,317 159,473 154,102 87,339 53,376
% Sq. Ft.(2) 21.7% 16.4% 21.7% 21.0% 11.9% 7.3%
Annual Rent(3) $1,952,964 $2,033,011 $2,659,890 $2,442,386 $1,314,694 $532,868
No. of Tenants 27 8 4 5 3 3
Rent per Sq. Ft. $12.27 $16.90 $16.68 $15.85 $15.05 $9.98
Company Quoted $15.30
Rental Rate per
Sq. Ft.(4)
HOUSTON
Richmond-Buffalo
Speedway............... Sq. Ft.(1) 251,425 314,169 376,815 229,757 223,687 253,101
% Sq. Ft.(2) 7.9% 9.9% 11.9% 7.3% 7.1% 8.0%
Annual Rent(3) $3,183,176 $3,963,614 $4,935,963 $2,990,396 $3,231,537 $3,909,404
No. of Tenants 58 74 48 31 24 20
Rent per Sq. Ft. $12.66 $12.62 $13.10 $13.02 $14.45 $15.45
Company Quoted $15.00
Rental Rate per
Sq. Ft.(4)
The Woodlands........... Sq. Ft.(1) 108,830 103,337 129,004 34,255 78,967 54,591
% Sq. Ft.(2) 14.7% 13.9% 17.4% 4.6% 10.7% 7.4%
Annual Rent(3) $1,125,334 $1,251,724 $1,506,229 $468,113 $1,209,949 $872,914
No. of Tenants 20 21 18 5 10 2
Rent per Sq. Ft. $10.34 $12.11 $11.68 $13.67 $15.32 $15.99
Company Quoted $14.32
Rental Rate per
Sq. Ft.(4)
Katy Freeway............ Sq. Ft.(1) 895 -- 1,817 411,539 -- --
% Sq. Ft.(2) 0.2% 0.0% 0.4% 99.3% 0.0% 0.0%
Annual Rent(3) $2,627 -- $2,217 $2,992,761 -- --
No. of Tenants 1 -- 1 1 -- --
Rent per Sq. Ft. $2.94 -- $1.22 $7.27 -- --
Company Quoted $9.10
Rental Rate per
Sq. Ft.(4)
AUSTIN
CBD..................... Sq. Ft.(1) 51,702 188,248 50,021 189,204 71,360 2,564
% Sq. Ft.(2) 5.1% 18.5% 4.9% 18.6% 7.0% 0.3%
Annual Rent(3) $602,696 $3,186,659 $639,077 $3,006,156 $969,111 $24,358
No. of Tenants 10 14 9 13 21 1
Rent per Sq. Ft. $11.66 $16.93 $12.78 $15.89 $13.58 $9.50
Company Quoted $14.50
Rental Rate per
Sq. Ft.(4)
Northwest............... Sq. Ft.(1) 2,486 -- 24,204 -- -- --
% Sq. Ft.(2) 2.0% 0.0% 19.4% 0.0% 0.0% 0.0%
Annual Rent(3) $39,776 -- $399,366 -- -- --
No. of Tenants 1 -- 2 -- -- --
Rent per Sq. Ft. $16.00 -- $16.50 -- -- --
Company Quoted $21.00
Rental Rate per
Sq. Ft.(4)
Southwest............... Sq. Ft.(1) 9,500 5,674 6,384 16,287 17,201 2,800
% Sq. Ft.(2) 10.4% 6.2% 7.0% 17.8% 18.8% 3.1%
Annual Rent(3) $143,832 $87,947 $114,990 $301,310 $348,817 $56,000
No. of Tenants 3 2 4 3 3 1
Rent per Sq. Ft. $15.14 $15.50 $18.01 $18.50 $20.28 $20.00
Company Quoted $21.50
Rental Rate per
Sq. Ft.(4)
<CAPTION>
2007 &
STATE, CITY, SUBMARKET 2003 2004 2005 2006 BEYOND
- ---------------------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
FORT WORTH
CBD..................... -- -- -- -- --
0.0% 0.0% 0.0% 0.0% 0.0%
-- -- -- -- --
-- -- -- -- --
-- -- -- -- --
HOUSTON
Richmond-Buffalo
Speedway............... 173,282 372,360 33,430 -- 939,061
5.5% 11.8 1.1% 0.0% 29.7%
$2,730,224 $6,021,179 $476,932 -- $23,196,070
16 4 4 -- 4
$15.76 $16.17 $14.27 -- $24.70
The Woodlands........... 34,518 91,131 71,000 35,612 --
4.7% 12.3% 9.6% 4.8% 0.0%
$571,907 $1,730,406 $545,990 $582,463 --
2 3 1 2 --
$16.57 $18.99 7.69 $16.36 --
Katy Freeway............ -- -- -- -- --
0.0% 0.0% 0.0% 0.0% 0.0%
-- -- -- -- --
-- -- -- -- --
-- -- -- -- --
AUSTIN
CBD..................... 37,375 93,210 211,510 83,462 39,737
3.7% 9.2% 20.8% 8.2% 3.9%
$410,980 $1,266,213 $3,922,783 $1,153,783 $737,367
2 5 4 2 2
$11.00 $13.58 $18.55 $13.82 $18.56
Northwest............... -- 98,188 -- -- --
0.0% 78.6% 0.0% 0.0% 0.0%
-- $2,097,731 -- -- --
-- 1 -- -- --
-- $21.36 -- -- --
Southwest............... -- -- -- 33,439 --
0.0% 0.0% 0.0% 36.6% 0.0%
-- -- -- $786,151 --
-- -- -- 1 --
-- -- -- $23.51 --
</TABLE>
S-41
<PAGE> 42
<TABLE>
<CAPTION>
STATE, CITY, SUBMARKET 1997 1998 1999 2000 2001 2002
- ---------------------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
COLORADO
DENVER
Cherry Creek(7)......... Sq. Ft.(1) 125,300 112,254 178,808 44,208 82,383 20,158
% Sq. Ft.(2) 21.8% 19.5% 31.1% 7.7% 14.3% 3.5%
Annual Rent(3) $1,741,125 $1,706,852 $2,613,005 $730,727 $1,360,917 $341,806
No. of Tenants 25 24 21 14 18 3
Rent per Sq. Ft. $13.90 $15.21 $14.61 $16.53 $16.52 $16.96
Company Quoted $18.16
Rental Rate per
Sq. Ft.(4)
CBD(8).................. Sq. Ft.(1) 88,063 5,782 73,992 76,861 13,268 406,702
% Sq. Ft.(2) 13.2% 0.9% 11.1% 11.6% 2.0% 61.2%
Annual Rent(3) $1,133,934 $63,429 $1,256,558 $951,148 $195,225 $7,142,949
No. of Tenants 6 1 5 3 2 2
Rent per Sq. Ft. $12.88 $10.97 $16.98 $12.37 $14.71 $17.56
Company Quoted $17.25
Rental Rate per
Sq. Ft.(4)
DTC..................... Sq. Ft.(1) 83,214 49,993 7,629 21,588 21,258 5,024
% Sq. Ft.(2) 27.6% 16.6% 2.5% 7.2% 7.1% 1.7%
Annual Rent(3) $1,344,878 $892,784 $124,166 $412,104 $479,812 $125,600
No. of Tenants 15 4 2 2 3 1
Rent per Sq. Ft. $16.16 $17.86 $16.28 $19.09 $22.57 $25.00
Company Quoted $24.00
Rental Rate per
Sq. Ft.(4)
COLORADO SPRINGS........ Sq. Ft.(1) 23,395 23,433 82,066 1,098 120,691 --
% Sq. Ft.(2) 9.3% 9.3% 32.7% 0.4% 48.1% 0.0%
Annual Rent(3) $230,477 $182,288 $741,482 $11,529 $1,473,939 --
No. of Tenants 3 3 3 1 2 --
Rent per Sq. Ft. $9.85 $7.78 $9.04 $10.50 $12.21 --
Company Quoted $11.40
Rental Rate per
Sq. Ft.(4)
ARIZONA
PHOENIX
CBD..................... Sq. Ft.(1) 596 988 20,957 61,939 77,729 38,363
% Sq. Ft.(2) 0.2% 0.3% 6.0% 17.7% 22.2% 11.0%
Annual Rent(3) $4,768 $15,901 $374,754 $1,479,817 $1,527,207 $728,897
No. of Tenants 1 2 3 5 5 2
Rent per Sq. Ft. $8.00 $16.09 $17.88 $23.89 $19.65 $19.00
Company Quoted $20.00
Rental Rate per
Sq. Ft.(4)
LOUISIANA
NEW ORLEANS
CBD..................... Sq. Ft.(1) -- -- 7,792 -- 10,202 15,709
% Sq. Ft.(2) 0.0% 0.0% 2.1% 0.0% 2.7% 4.2%
Annual Rent(3) -- -- $98,803 -- $110,506 $203,582
No. of Tenants -- -- 3 -- 2 2
Rent per Sq. Ft. -- -- $12.68 -- $10,83 $12.96
Company Quoted $15.00
Rental Rate per
Sq. Ft.(4)
NEBRASKA
OMAHA
CBD..................... Sq. Ft.(1) 74,034 3,983 15,565 392 67,421 177,280
% Sq. Ft.(2) 18.4% 1.0% 3.9% 0.1% 16.8% 44.1%
Annual Rent(3) $1,104,645 $47,796 $238,116 $7,840 $1,034,862 $2,159,724
No. of Tenants 6 2 2 1 1 4
Rent per Sq. Ft. $14.92 $12.00 $15.30 $20.00 $15.35 $12.18
Company Quoted $19.50
Rental Rate per
Sq. Ft.(4)
<CAPTION>
2007 &
STATE, CITY, SUBMARKET 2003 2004 2005 2006 BEYOND
- ---------------------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
COLORADO
DENVER
Cherry Creek(7)......... 11,211 -- -- -- --
2.0% 0.0% 0.0% 0.0% 0.0%
$184,878 -- -- -- --
2 -- -- -- --
$16.49 -- -- -- --
CBD(8).................. -- -- -- -- --
0.0% 0.0% 0.0% 0.0% 0.0%
-- -- -- -- --
-- -- -- -- --
-- -- -- -- --
DTC..................... 3,353 108,932 -- -- --
1.1% 36.2% 0.0% 0.0%
$83,825 $2,069,708 -- -- --
1 1 -- -- --
$25.00 $19.00 -- -- --
COLORADO SPRINGS........ -- -- -- -- --
0.0% 0.0% 0.0% 0.0% 0.0%
-- -- -- -- --
-- -- -- -- --
-- -- -- -- --
ARIZONA
PHOENIX
CBD..................... 12,273 137,172 -- -- --
3.5% 39.2% 0.0% 0.0% 0.0%
$235,049 $3,893,162 -- -- --
2 2 -- -- --
$19.15 $28.38 -- -- --
LOUISIANA
NEW ORLEANS
CBD..................... -- 310,591 26,805 3,183 --
0.0% 83.0% 7.2% 0.9% 0.0%
-- $5,281,192 $455,768 $53,315 --
-- 2 1 1 --
-- $17.00 $17.00 $16.75 --
NEBRASKA
OMAHA
CBD..................... 63,078 -- -- -- --
15.7% 0.0% 0.0% 0.0% 0.0%
$1,072,326 -- -- -- --
1 -- -- -- --
$17.00 -- -- -- --
</TABLE>
S-42
<PAGE> 43
<TABLE>
<CAPTION>
STATE, CITY, SUBMARKET 1997 1998 1999 2000 2001 2002
- ---------------------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
NEW MEXICO
ALBUQUERQUE
CBD..................... Sq. Ft.(1) 5,387 13,049 29,286 20,593 27,397 2,986
% Sq. Ft.(2) 1.6% 4.0% 9.0% 6.3% 8.4% 0.9%
Annual Rent(3) $88,831 $239,198 $559,719 $355,532 $571,659 $64,886
No. of Tenants 4 6 4 6 2 1
Rent per Sq. Ft. $16.49 $18.33 $19.11 $17.26 $20.87 $21.73
Company Quoted $18.50
Rental Rate per
Sq. Ft.(4)
CALIFORNIA
SAN FRANCISCO
South of Market CBD..... Sq. Ft.(1) 11,140 -- 12,232 1,700 -- --
% Sq. Ft.(2) 20.5% 0.0% 22.5% 3.1% 0.0% 0.0%
Annual Rent(3) $187,388 -- $279,059 $22,440 -- --
No. of Tenants 6 -- 5 1 -- --
Rent per Sq. Ft. $16.82 -- $22.81 $13.20 -- --
Company Quoted $28.69
Rental Rate per
Sq. Ft.(4)
SAN DIEGO
UTC..................... Sq. Ft.(1) 34,407 31,582 15,970 46,297 36,661 --
% Sq. Ft.(2) 19.5% 17.9% 9.1% 26.3% 20.8% 0.0%
Annual Rent(3) $581,355 $603,440 $321,095 $1,025,052 $740,956 --
No. of Tenants 7 6 3 5 6 --
Rent per Sq. Ft. $16.90 $19.11 $20.11 $22.14 $20.21 --
Company Quoted $20.50
Rental Rate per
Sq. Ft.(4)
TOTAL................... Sq. Ft.(1) 2,049,616 1,424,014 1,794,617 1,790,183 1,536,257 1,573,572
% Sq. Ft.(2) 13.7% 9.5% 12.0% 11.9% 10.2% 10.5%
Annual Rent(3) $28,046,136 $23,277,839 $29,242,092 $24,715,934 $27,296,519 $27,917,548
No. of Tenants 282 230 179 121 131 53
Rent per Sq. Ft. $13.68 $16.35 $16.29 $13.81 $17.77 $17.74
Company Quoted $17.99
Rental Rate per
Sq. Ft.(4)
<CAPTION>
2007 &
STATE, CITY, SUBMARKET 2003 2004 2005 2006 BEYOND
- ---------------------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
NEW MEXICO
ALBUQUERQUE
CBD..................... -- 41,906 186,265 -- --
0.0% 12.8% 57.0% 0.0% 0.0%
-- $689,354 $3,897,743 -- --
-- 1 2 -- --
-- $16.45 $20.93 -- --
CALIFORNIA
SAN FRANCISCO
South of Market CBD..... -- -- -- 29,234 --
0.0% 0.0% 0.0% 53.9% 0.0%
-- -- -- $680,903 --
-- -- -- 1 --
-- -- -- $23.22 --
SAN DIEGO
UTC..................... 4,329 6,811 -- -- --
2.5% 3.9% 0.0% 0.0% 0.0%
$104,130 $139,395 -- -- --
2 2 -- -- --
$24.05 $20.47 -- -- --
TOTAL................... 591,960 1,433,931 1,437,949 282,156 1,076,036
3.9% 9.6% 9.6% 1.9% 7.2%
$10,164,586 $26,679,881 $21,613,914 $5,564,099 $26,145,602
33 25 21 11 7
$17.17 $18.61 $15.03 $19.72 $24.30
</TABLE>
- ---------------
(1) Total net rentable square feet represented by expiring leases.
(2) Percentage of total net rentable square feet represented by expiring leases.
(3) Calculated based on base rent payable as of the expiration day of the lease
for net rentable square feet expiring, without giving effect to free rent or
scheduled rent increases that would be taken into account under generally
accepted accounting principles and excluding expenses payable by tenants.
(4) Represents weighted average rental rates per square foot quoted by the
Company as of December 31, 1996, based on total net rentable square feet of
Company Properties in the submarket. These rates have not been adjusted to
equivalent full-service quoted rental rates in markets in which the
Company's rates are not quoted on a full-service basis.
(5) The Company's Office Property in this submarket was acquired subsequent to
December 31, 1996.
(6) One of the Company's Office Properties in this submarket (representing
154,329 net rentable square feet) was acquired subsequent to December 31,
1996.
(7) Two of the Company's Office Properties in this submarket (representing an
aggregate of 246,589 net rentable square feet) were acquired subsequent to
December 31, 1996.
(8) One of the Company's Office Properties in this submarket (representing
169,610 net rentable square feet) was acquired subsequent to December 31,
1996.
S-43
<PAGE> 44
HISTORICAL RECURRING OFFICE PROPERTY
CAPITAL EXPENDITURES, TENANT IMPROVEMENT AND LEASING COSTS
The following table sets forth annual and per square foot recurring capital
expenditures (excluding those expenditures which are recoverable from tenants)
and tenant improvement and leasing costs for the period from May 4, 1994
(inception of operations) to December 31, 1994, and for the years ended December
31, 1995 and 1996, attributable to leases that commenced (i.e., the renewal or
replacement tenant began to pay rent) for the Office Properties consolidated in
the Company's financial statements during each of the periods presented. Tenant
improvement and leasing costs for commenced leases during a particular period do
not equal the cash paid for tenant improvement and leasing costs during such
period, due to the timing of payments.
<TABLE>
<CAPTION>
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
CAPITAL EXPENDITURES:
Capital Expenditures (in thousands)................... $ 147 $ 490 $ 1,214
Per square foot....................................... $ .04 $ .08 $ .13
TENANT IMPROVEMENT COSTS AND TENANT LEASING COSTS(1):
Replacement Tenant Square Feet........................ -- 159,877 404,860
Renewal Tenant Square Feet............................ 76,187 177,437 348,295
Tenant Improvement Costs (in thousands)............... $ 521 $ 1,901 $ 6,264
Per square foot leased................................ $ 6.83 $ 5.64 $ 8.32
Tenant Leasing Costs (in thousands)................... $ 54 $ 1,039 $ 3,171
Per square foot leased................................ $ .71 $ 3.08 $ 4.21
Total (in thousands).................................. $ 575 $ 2,940 $ 9,435
Total per square foot................................. $ 7.54 $ 8.72 $ 12.53
Average lease term.................................... 3.3 years 6.6 years 5.3 years
Total per square foot per year(2)..................... $ 2.28 $ 1.32 $ 2.36
</TABLE>
- ---------------
(1) Excludes leasing activity for leases that have less than a one-year term
(i.e., storage and temporary space).
(2) Total per square foot per year equals total per square foot divided by
average lease term.
Capital expenditures may fluctuate in any given period subject to the
nature, extent and timing of improvements required to be made in the Company's
Property portfolio. The Company maintains an active preventive maintenance
program in order to minimize required capital improvements. In addition, capital
improvement costs are recoverable from tenants in many instances.
Tenant improvement and leasing costs also may fluctuate in any given year
depending upon factors such as the property, the term of the lease, the type of
lease (renewal or replacement tenant), the involvement of external leasing
agents and overall competitive market conditions. Management believes that
future recurring tenant improvements and leasing costs for the Company's
existing Office Property portfolio will approximate on average for "renewal
tenants" $6.00 to $8.00 per square foot or, $1.20 to $1.60 per square foot per
year based on an average five year lease term, and for "replacement tenants"
$12.00 to $14.00 per square foot, or $2.40 to $2.80 per square foot per year
based on an average five year lease term.
S-44
<PAGE> 45
HOTEL PROPERTY MARKET INFORMATION
The U.S. hotel industry is experiencing a resurgence in profitability from
its downturn in the early 1990's. Increased demand for destination resort and
luxury hotel rooms has been met with virtually no increase in the supply of such
rooms, resulting in increasing occupancies and room rates. According to Smith
Travel Research, average occupancies for hotel rooms rose from 62.1% in 1992 to
65.7% in 1996, the highest level in more than a decade. Average hotel room rates
grew 6.7%, 4.8%, and 4.8% in 1996, 1995 and 1994, respectively, with the 1994
figure outpacing inflation for the first time in eight years. Within the
luxury/resort and full-service segments of the industry, average occupancy
increased approximately 8.9% and 6.5%, respectively, between 1992 and 1996,
while average hotel room rates increased approximately 20.3% and 17.4%,
respectively, during the same period.
Business and convention travel accounts for about two-thirds of room demand
and has risen along with the improving economy and increased corporate profits.
Domestic leisure travel has also increased, especially among the "baby boomers"
who are not only at the prime age for leisure travel but also have a greater
tendency to travel than previous generations. A healthier, more active senior
population is also contributing to the increase in travel.
With the aging of the "baby boomer" generation and the growing interest in
quality of life activities, the resort/spa industry also is experiencing
significant growth in the United States.
The average annual growth rates in revenue per available room ("REVPAR"),
from 1991 through 1996, for the luxury/resort and full-service hotel segments
were 6.4% and 5.3%, respectively, according to Smith Travel Research.
The following table sets forth hotel REVPAR by price segment for the years
1991 through 1996.
<TABLE>
<CAPTION>
AVERAGE
ANNUAL
1991 1992 1993 1994 1995 1996 GROWTH RATE
------ ------ ------ ------ ------ ------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Luxury/Resort(1)........... $67.92 $70.61 $74.23 $80.42 $84.98 $92.45
% Change................. 4.0% 5.1% 8.3% 5.7% 8.8% 6.4%
Full-Service............... $45.21 $46.80 $49.11 $52.57 $55.52 $58.51
% Change................. 3.5% 4.9% 7.0% 5.6% 5.4% 5.3%
Mid-Priced................. $33.38 $33.90 $35.08 $38.39 $40.77 $43.51
% Change................. 1.6% 3.5% 9.4% 6.2% 6.7% 5.5%
Economy.................... $25.26 $25.50 $26.59 $28.01 $29.92 $31.93
% Change................. 1.0% 4.3% 5.3% 6.8% 6.7% 4.8%
Budget..................... $19.18 $19.23 $19.98 $21.08 $22.38 $23.74
% Change................. 0.3% 3.9% 5.5% 6.2% 6.1% 4.4%
</TABLE>
- ---------------
(1) Does not include destination health and fitness resorts such as Canyon
Ranch-Tucson and Canyon Ranch-Lenox.
Source: Smith Travel Research
S-45
<PAGE> 46
HOTEL PROPERTIES
The following table sets forth certain information about the Hotel
Properties for the years ended December 31, 1995 and 1996. The information for
the Hotel Properties is based on available rooms, except for Canyon Ranch-Tucson
and Canyon Ranch-Lenox, which are destination health and fitness resorts that
measure their performance based on available guest nights.
<TABLE>
<CAPTION>
AVERAGE AVERAGE REVENUE PER
OCCUPANCY DAILY AVAILABLE
YEAR RATE RATE ROOM
COMPLETED/ ------------ ------------ ------------
HOTEL PROPERTY(1) LOCATION RENOVATED ROOMS 1995 1996 1995 1996 1995 1996
----------------- -------- ---------- ----- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
FULL-SERVICE/LUXURY
HOTELS
Hyatt Regency Beaver
Creek Avon, CO 1989 295 70% 67% $191 $207 $134 $139
Denver Marriott City
Center Denver, CO 1982/1994 613 77 79 98 108 76 85
Hyatt Regency
Albuquerque Albuquerque, NM 1990 395 74 77 87 93 64 71
Sonoma Mission Inn &
Spa Sonoma, CA 1927/1987 168 86 92 169 181 146 166
----- -- -- ---- ---- ---- ----
TOTAL/WEIGHTED AVERAGE 1,471 77% 77% $122 $131 $ 93 $101
===== == == ==== ==== ==== ====
DESTINATION HEALTH AND FITNESS
RESORTS
Canyon Ranch-Tucson Tucson, AZ 1980 240(2) 77%(3) 80%(3) $477(4) $479(4) $348(5) $366(5)
Canyon Ranch-Lenox Lenox, MA 1989 202(2) 76(3) 81(3) 390(4) 407(4) 288(5) 320(5)
----- -- -- ---- ---- ---- ----
TOTAL/WEIGHTED AVERAGE 442 77% 81% $437 $446 $321 $345
===== == == ==== ==== ==== ====
</TABLE>
- ---------------
(1) The Company cannot, consistent with its status as a REIT for federal income
tax purposes, operate the Hotel Properties directly and, accordingly, has
leased the Hotel Properties to lessees pursuant to long-term leases. See
"-- Hotel Leases."
(2) Represents available guest nights, which is the maximum number of guests
that the resort can accommodate per night.
(3) Represents the number of paying and complimentary guests for the period,
divided by the maximum number of available guest nights for the period.
(4) Represents the average daily "all-inclusive" guest package charges for the
period, divided by the average daily number of paying guests for the period.
(5) Represents the total "all-inclusive" guest package charges for the period,
divided by the maximum number of available guest nights for the period.
The following table sets forth average occupancy, average daily rate
("ADR"), and REVPAR for the Hotel Properties by full-service/luxury hotels and
destination health and fitness resorts for each of the years ended December 31,
1992 through 1996. The information for the Hotel Properties is based on
available rooms, except for Canyon Ranch-Tucson and Canyon Ranch-Lenox, which
are destination health and fitness resorts, that measure performance based on
available guest nights and calculate occupancy, ADR and REVPAR as described in
the footnotes to the preceding table.
<TABLE>
<CAPTION>
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Full-Service/Luxury Hotels
Occupancy Rate.......................................... 70% 73% 73% 77% 77%
ADR..................................................... $106 $111 $117 $122 $131
REVPAR.................................................. $ 74 $ 81 $ 85 $ 93 $101
Destination Health and Fitness Resorts
Occupancy Rate.......................................... 71% 78% 78% 77% 81%
ADR..................................................... $380 $393 $418 $437 $446
REVPAR.................................................. $254 $290 $312 $321 $345
</TABLE>
S-46
<PAGE> 47
FULL-SERVICE/LUXURY HOTELS
Hyatt Regency Beaver Creek. The Hyatt Regency Beaver Creek is a 295-room
luxury hotel prominently anchoring the Village core of Beaver Creek ski resort,
adjoining Avon, Colorado. Opened in December 1989, the hotel, which is the only
luxury hotel permitted to operate in the Beaver Creek Village, is a
ski-in/ski-out facility with superb access to air and ground transportation. Two
ski lifts immediately adjacent to the hotel provide quick access to 1,125 acres
of skiable terrain. Other facilities include a fully equipped spa and health
club with a 17-meter, indoor/outdoor, year-round lap pool, approximately 23,000
square feet of retail space and an additional approximately 23,000 square feet
of meeting and banquet facilities. An agreement with the Beaver Creek Golf
Course gives the hotel approximately 35% of the available tee times on the only
golf course within the Beaver Creek resort.
Denver Marriott City Center. The 613-room Denver Marriott City Center,
adjoining the MCI Tower, is a full-service hotel that is the second largest
hotel in downtown Denver, Colorado. The hotel has over 25,000 square feet of
meeting space, a restaurant and lounge and a complete health club, including an
indoor swimming pool, a whirlpool, saunas and aerobic exercise areas. It is
adjacent to the 16th Street Mall and three blocks from the Colorado Convention
Center. In 1994, over $6 million was spent on a major renovation of the hotel,
including the complete renovation of two ballrooms, all guest rooms and meeting
rooms, and the restaurant and lounge. The Denver Marriott City Center serves as
headquarters for many major conventions in Denver.
Hyatt Regency Albuquerque. The 20-story Hyatt Regency Albuquerque is a
395-room full-service hotel located in downtown Albuquerque, New Mexico,
immediately across from the recently renovated and expanded Albuquerque
Convention Center. It is the leading convention hotel in New Mexico, with
approximately 20,000 square feet devoted to convention space. Approximately 65%
of the hotel's business is derived from the group/ convention trade. The hotel
contains a restaurant, lounges, meeting rooms, a pool and a health club with an
aerobics area, a sauna and specialized exercise equipment. It also offers floors
with special amenities for business travelers, including fax machines and
conference rooms.
Sonoma Mission Inn & Spa. Sonoma Mission Inn & Spa, a four-star luxury
resort and spa, is located approximately 40 miles north of San Francisco,
California. Constructed in 1927 and redeveloped in 1986 and 1987, the Sonoma
Mission Inn & Spa sits on an eight acre site and contains 168 rooms, an
approximately 13,000 square foot spa complex, approximately 7,000 square feet of
meeting and banquet facilities, two full-service restaurants and two retail
outlets. A $10.0 million expansion and enhancement of the resort, including the
addition of 30 suites, is currently in process and is expected to be completed
during 1997. More detailed information is set forth under "Recent
Developments -- Completed Investments."
DESTINATION HEALTH AND FITNESS RESORTS
Canyon Ranch-Tucson. Canyon Ranch-Tucson, an award-winning, destination
health and fitness resort, is located in Tucson, Arizona. The resort can
accommodate up to 240 guests on a daily basis and features an approximately
62,000 square foot spa complex, an approximately 16,000 square foot life
enhancement center offering structured therapy and counseling, an approximately
12,000 square foot health and healing center with a complete staff of
physicians, dietitians, psychologists and therapists, dining facilities, eight
outdoor tennis courts, one indoor and three outdoor pools, massage therapists
and a staff of fitness trainers.
Canyon Ranch-Lenox. Canyon Ranch-Lenox, an award-winning, destination
health and fitness resort, is located in the Berkshire mountains in Lenox,
Massachusetts, approximately 120 miles north of New York City. Canyon
Ranch-Lenox opened in 1989, encompasses 120 acres, and includes 120 guest rooms
which can accommodate up to 202 guests on a daily basis, an approximately
100,000 square foot spa complex, an approximately 10,600 square foot health and
healing center offering a complete staff of health and fitness professionals,
six indoor/outdoor tennis courts and two pools. More detailed information is set
forth under "Recent Developments -- Completed Investments."
S-47
<PAGE> 48
HOTEL LEASES
The Company cannot, consistent with its status as a REIT for federal income
tax purposes, operate the Hotel Properties directly. The Company has leased the
Hotel Properties to independent companies (collectively, the "Hotel Lessees")
pursuant to six separate leases. These independent companies are owned 4.5% by
each of John C. Goff and Gerald W. Haddock, each of whom is an officer and trust
manager of the Company, and 91% by asset managers of the Hotel Lessees. Under
the leases, each having a term of 10 years, the Hotel Lessees have assumed the
rights and obligations of the property owner under the respective management
agreement with the hotel operators, as well as the obligation to pay all
property taxes and other charges against the property. As part of each of the
lease agreements for five of the Hotel Properties, the Company has agreed to
fund all capital expenditures relating to furniture, fixtures and equipment
reserves required under the applicable management agreements. The only exception
is Canyon Ranch-Tucson, in which the hotel lessee owns all furniture, fixtures
and equipment associated with the property and will fund all related capital
expenditures. Each of the leases provides for the payment by the lessee of the
Hotel Property of (i) base rent, with periodic rent increases, (ii) percentage
rent based on a percentage of gross room revenues above a specified amount, and
(iii) a percentage of gross food and beverage revenues above a specified amount.
RETAIL PROPERTIES
The Company owns six Retail Properties, which in the aggregate contain
approximately 580,000 net rentable square feet. Four of the Retail Properties,
The Woodlands Retail Properties, are located in The Woodlands, a master planned
development located 27 miles north of downtown Houston, Texas. The Company owns
a 75% joint venture interest in the partnership that owns The Woodlands Retail
Properties. See "Recent Developments -- Completed Investments." The remaining
two Retail Properties, Las Colinas Plaza, with 135,449 net rentable square feet,
and The Crescent Atrium, with 88,623 net rentable square feet, are located in
submarkets of Dallas, Texas. As of December 31, 1996, the Retail Properties were
86% leased.
RESIDENTIAL DEVELOPMENT PROPERTIES
The Company owns economic interests in three Residential Development
Corporations through the Residential Development Property Mortgages and the
non-voting common stock in these Residential Development Corporations. The
Residential Development Corporations in turn, through joint ventures or
partnership arrangements, own interests in the 11 Residential Development
Properties. The Residential Development Corporations are responsible for the
continued development and the day-to-day operations of the Residential
Development Properties. The Residential Development Properties are The
Highlands, The Reserve at Frisco, One Beaver Creek, Cresta, Eagle Ranch, Market
Square and Villa Montane, which are located in Colorado; Mira Vista, Falcon
Point and Spring Lakes which are located in Texas; and Whitehawk Ranch, which is
located in California.
DEBT STRUCTURE
The Company had an aggregate of approximately $934.8 million of outstanding
debt as of March 31, 1997. Included in this amount is $306.0 million which was
outstanding under the Credit Facility and other unsecured short-term financing
arrangements, $40.0 million of which the Company intends to maintain outstanding
under the Credit Facility throughout its term. On a pro forma basis, assuming
completion of the Offering and additional borrowings of approximately $279.0
million to fund a portion of the purchase price for the assets to be acquired in
the Magellan transaction, the Company's total market capitalization (based on
the closing stock price on April 8, 1997 of $27.875 per Common Share, after the
full conversion of all Units and including total indebtedness and minority
interest in joint ventures) will be approximately $4.1 billion, and the
Company's debt will represent approximately 29.5% of its total market
capitalization.
The Company intends to maintain a conservative capital structure with total
debt targeted at approximately 40% of total market capitalization. The Company,
however, consistently seeks to optimize its use of debt and other sources of
financing to create a flexible capital structure that will allow the Company to
continue its opportunistic investment strategy and maximize the returns to its
shareholders.
S-48
<PAGE> 49
The existing indebtedness of the Company as of March 31, 1997 is set forth
in the table below:
<TABLE>
<CAPTION>
INTEREST RATE AT BALANCE
MAXIMUM MARCH 31, EXPIRATION OUTSTANDING
DESCRIPTION BORROWINGS 1997 DATE AT MARCH 31, 1997
----------- ---------- ---------------- ---------- -----------------
<S> <C> <C> <C> <C>
FIXED RATE DEBT:
LaSalle Note I(1)...................... $239,000,000 7.83% August 2027 $239,000,000
LaSalle Note II(2)..................... 161,000,000 7.79% March 2028 161,000,000
CIGNA Note(3).......................... 63,500,000 7.47% December 2002 63,500,000
Northwestern Life Note(4).............. 26,000,000 7.66% January 2004 26,000,000
Metropolitan Life Note(5)(6)........... 12,338,000 8.88% September 2001 12,338,000
Nomura Funding VI Note(6)(7)........... 8,756,000 10.07% July 2020 8,756,000
------------ ------ ------------
TOTAL/WEIGHTED AVERAGE......... $510,594,000 7.83% $510,594,000
============ ====== ============
VARIABLE RATE DEBT:
Line of Credit(8)...................... $175,000,000 7.29% March 1999 $156,000,000
FNBB Note(9)........................... 150,000,000 7.29% July 1997 150,000,000
LaSalle Note III(6)(10)................ 115,000,000 7.57% July 1999 115,000,000
Texas Commerce Bank Note(11)........... 11,700,000 7.14% September 1997 3,157,000
------------ ------ ------------
TOTAL/WEIGHTED AVERAGE......... $451,700,000 7.36% $424,157,000
============ ====== ============
</TABLE>
- ---------------
(1) The note provides for the payment of interest only through August 2002,
followed by principal amortization based on a 25-year amortization schedule
through maturity. In August 2007, the interest rate increases, and the
Company is required to remit, in addition to the monthly debt service
payment, excess property cash flow, as defined, to be applied first against
principal until the note is paid in full and thereafter, against accrued
excess interest, as defined. It is the Company's intention to repay the
note in full at such time (August 2007) by making a final payment of
approximately $220 million. The LaSalle Note I is secured by the Properties
owned by Funding I. See "Structure of the Company."
(2) The note provides for the payment of interest only through March 2003,
followed by principal amortization based on a 25-year amortization schedule
through maturity. In March 2006, the interest rate increases, and the
Company is required to remit, in addition to the monthly debt service
payment, excess property cash flow, as defined, to be applied first against
principal until the note is paid in full and thereafter, against accrued
excess interest, as defined. It is the Company's intention to repay the
note in full at such time (March 2006) by making a final payment of
approximately $154 million. The LaSalle Note II is secured by the
Properties owned by Funding II. See "Structure of the Company."
(3) The note requires payments of interest only during its term. The CIGNA Note
is secured by MCI Tower and Denver Marriott City Center.
(4) The note requires payments of interest only during its term. The
Northwestern Life Note is secured by 301 Congress Avenue.
(5) The note requires monthly payments of principal and interest and is secured
by five of The Woodlands Office Properties.
(6) The note was assumed in connection with an acquisition and was not
subsequently retired by the Company because of prepayment penalties.
(7) Under the terms of the note, principal and interest are payable based on a
25-year amortization schedule. In July 1998, the Company may defease the
loan by purchasing Treasury obligations to pay the note without penalty.
The Nomura Funding VI Note is secured by the Property owned by Funding VI.
See "Structure of the Company." In July 2010, the interest rate due under
the note will change to a 10-year treasury yield plus 500 basis points or
if the Company so elects, it may repay the note without penalty.
(8) The Credit Facility is unsecured with an interest rate of the Eurodollar
rate plus 185 basis points. The interest rate is expected to decrease to
the Eurodollar rate plus 138 basis points in connection with the
modification of the Credit Facility, which is expected to occur by May
1997. See "Recent Developments -- Financing Activities."
(9) The note is unsecured with an interest rate of the Eurodollar rate plus 185
basis points. The note requires payments of interest only during its term.
(10) The note bears interest at the rate for 30-day LIBOR plus a weighted
average rate of 2.135% (subject to a rate cap of 10%), and requires
payments of interest only during its term. The LaSalle Note III is secured
by the Properties owned by Funding III, IV and V. See "Structure of the
Company."
(11) The note bears interest at 30-day LIBOR plus 1.7%, and requires payments of
interest only during its term. The Texas Commerce Bank Note is secured by
land and improvements that relate to the construction of an additional
office building that will be part of The Avallon.
S-49
<PAGE> 50
USE OF PROCEEDS
The Company intends to use the net proceeds of the Offering, estimated at
$459.8 million (based on an assumed public offering price of $27.875 per share)
after estimated expenses payable by the Company, to fund the approximately
$308.0 million purchase price of the Carter-Crowley Portfolio to be acquired by
the Company, to fund approximately $40.8 million in connection with the
formation and capitalization of Crescent Affiliate and to fund approximately
$111.0 million of the purchase price for the assets to be acquired in the
Magellan transaction. The Company intends to fund the remaining approximately
$279.0 million of the purchase price for the assets to be acquired in the
Magellan transaction through additional short-term borrowings expected to be
obtained on terms similar to those under the Credit Facility.
If the Underwriters' over-allotment option is exercised, the additional net
proceeds (which are estimated to be $69.5 million if the over-allotment option
is exercised in full) will be used to fund an additional portion of the purchase
price for the assets to be acquired in the Magellan transaction. Pending
application of the net proceeds, the Company will invest the net proceeds in
short-term, income-producing investments or will temporarily reduce amounts
outstanding under the Credit Facility.
PRICE RANGE OF COMMON SHARES AND DISTRIBUTIONS
The Common Shares have been traded on the New York Stock Exchange ("NYSE")
under the symbol "CEI" since the completion of the Initial Offering in May 1994.
For each calendar quarter indicated, the following table reflects the high and
low sales prices for the Common Shares and the distributions declared by the
Company with respect to each such quarter. All information provided in the table
below has been adjusted to reflect the two-for-one stock split effected in the
form of a 100% share dividend paid by the Company on March 26, 1997 to
shareholders of record on March 20, 1997.
<TABLE>
<CAPTION>
PRICE
HIGH LOW DISTRIBUTIONS
---- --- -------------
<S> <C> <C> <C>
1995
First Quarter.............................................. $14 5/8 $12 1/2 $ .25
Second Quarter............................................. $16 $13 15/16 $ .25
Third Quarter.............................................. $16 3/16 $14 7/8 $.275
Fourth Quarter............................................. $17 15/16 $15 1/8 $.275
1996
First Quarter.............................................. $17 7/16 $16 1/16 $.275
Second Quarter............................................. $19 1/16 $16 11/16 $.275
Third Quarter.............................................. $21 3/16 $17 1/2 $.305
Fourth Quarter............................................. $26 5/8 $20 5/16 $.305
1997
First Quarter.............................................. $31 3/8 $25 3/16 --(1)
Second Quarter through April 8............................. $29 $25 7/8 --(2)
</TABLE>
- ---------------
(1) The Board of Trust Managers has declared a distribution of $.305 per share
payable on May 14, 1997 to shareholders of record on April 30, 1997. The
record date for the distribution will follow the closing of the Offering
and, accordingly, holders of Common Shares purchased in the Offering will be
eligible to receive the distribution (as long as they continue to be holders
on the record date).
(2) In addition to the regular quarterly distribution, the Company intends to
make a one-time distribution of shares of Crescent Affiliate, which will be
distributed to the shareholders of Crescent Equities and the partners of the
Operating Partnership, on a pro rata basis, in a spin-off expected to occur
by the end of the second quarter of 1997. Based on the Company's allocation
of value to the assets expected to be acquired by Crescent Affiliate,
management estimates that the value of the distribution will be $.10 to $.15
per Common Share.
The last reported sale price of the Common Shares on the NYSE on April 8,
1997, was $27.875. As of March 31, 1997, there were approximately 282 holders of
record of the Common Shares.
The Company's current quarterly distribution is $.305 per Common Share, an
indicated annualized distribution of $1.22 per Common Share.
The actual results of operations of the Company and the amounts actually
available for distribution will be affected by a number of factors, including
revenues received from the Properties and any additional properties acquired in
the future, the operating and interest expenses of the Company, the ability of
tenants to meet their rent
S-50
<PAGE> 51
obligations, general leasing activity in the markets in which the Office
Properties are located, consumer preferences relating to the Hotel Properties,
the general condition of the United States economy, federal, state and local
taxes payable by the Company, capital expenditure requirements and the adequacy
of reserves. In addition, the Credit Facility limits distributions to the
partners of the Operating Partnership for any four successive quarters to an
amount that will not exceed 90% of funds from operations for such period and
100% of funds available for distribution for such period.
Future distributions by the Company will be at the discretion of the Board
of Trust Managers. The Board of Trust Managers has indicated that it will review
the adequacy of the Company's distribution rate on a quarterly basis.
Under the Internal Revenue Code of 1986, as amended (the "Code"), REITs are
subject to numerous organizational and operational requirements, including the
requirement to distribute at least 95% of taxable income. Pursuant to this
requirement, the Company was required to distribute $41.8 million and $40.8
million for 1996 and 1995, respectively. Actual distributions by the Company
were $73.4 million and $52.8 million for 1996 and 1995, respectively.
Distributions by the Company to the extent of its current and accumulated
earnings and profits for federal income tax purposes generally will be taxable
to a shareholder as ordinary dividend income. Distributions in excess of current
and accumulated earnings and profits will be treated as a nontaxable reduction
of the shareholder's basis in such shareholder's Common Shares, to the extent
thereof, and thereafter as taxable gain. Distributions that are treated as a
reduction of the shareholder's basis in its Common Shares will have the effect
of deferring taxation until the sale of the shareholder's shares. The Company
has determined that, for federal income tax purposes, none of the quarterly
distributions made for 1994, 10% of the quarterly distributions made in 1995 and
38% of quarterly distributions made in 1996, represented a return of capital to
shareholders. Given the dynamic nature of the Company's acquisition strategy and
the extent to which any future acquisitions would alter this calculation, no
assurances can be given regarding what portion, if any, of distributions for
1997 or subsequent years will constitute a return of capital for federal income
tax purposes.
S-51
<PAGE> 52
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
December 31, 1996 (i) on a historical basis and (ii) on a pro forma basis
assuming the acquisition of the Properties acquired subsequent to December 31,
1996, the completion of the Offering, additional borrowings of approximately
$279.0 million and the application of the net proceeds of the Offering and the
proceeds of the borrowings, as described in "Use of Proceeds" as if they had
occurred on December 31, 1996. Such information should be read in conjunction
with the financial statements and notes thereto incorporated by reference into
the accompanying Prospectus.
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1996
------------------------
HISTORICAL PRO FORMA
---------- ----------
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<S> <C> <C>
Indebtedness
Credit Facility and Short-Term Indebtedness............... $ 40,000 $ 584,978(1)
Mortgage Indebtedness..................................... 627,808 627,808
Minority interest
Operating Partnership..................................... 120,227 120,227
Interest in Joint Venture................................. 29,265 29,265
Stockholders' equity
Common Shares, $0.01 par value, 250,000,000 shares
authorized, 72,292,760 historical and 89,792,760 pro
forma shares issued and outstanding.................... 361(2) 897(2)
Preferred Shares, $0.01 par value, 100,000,000 shares
authorized............................................. -- --
Paid-in capital........................................... 905,724 1,352,850
Deferred compensation restricted shares................... (364) (364)
Retained deficit.......................................... (40,561) (40,561)
---------- ----------
Total capitalization.............................. $1,682,460 $2,675,100
========== ==========
</TABLE>
- ---------------
(1) The increase is attributable to additional indebtedness of (i) $266.0
million incurred primarily in connection with Property acquisitions
subsequent to December 31, 1996 and (ii) $279.0 million to be incurred in
connection with the Magellan transaction.
(2) Does not include 13,280,672 Common Shares reserved for issuance upon
exercise of Exchange Rights for the exchange of Units for Common Shares.
S-52
<PAGE> 53
SELECTED FINANCIAL DATA
The following table sets forth certain financial information for the
Company on a consolidated pro forma and historical basis and for the Rainwater
Property Group (the Company's predecessor) on a combined historical basis, which
consists of the combined financial statements of the entities that contributed
Properties in exchange for Units or Common Shares in connection with the
formation of the Company. Such information should be read in conjunction with
the financial statements and notes thereto incorporated by reference into the
accompanying Prospectus.
The pro forma information for the year ended December 31, 1995 assumes
completion, in each case as of January 1, 1995 in determining operating and
other data, of (i) the April 1995 Offering and Mr. Rainwater's concurrent $31
million investment in the Operating Partnership and the use of the net proceeds
therefrom to repay approximately $167 million of indebtedness secured by certain
of the Properties, (ii) the October 1996 Offering and the additional public
offering of 450,000 Common Shares that closed on October 9, 1996 and the use of
the net proceeds therefrom to repay approximately $168 million of indebtedness
and to fund approximately $289 million of Property acquisitions completed in the
fourth quarter of 1996 and the first quarter of 1997, (iii) the Offering and the
use of the net proceeds therefrom to fund the approximately $308.0 million
purchase price of the portion of the Carter-Crowley Portfolio to be acquired by
the Company, to fund approximately $40.8 million in connection with the
formation and capitalization of Crescent Affiliate and to fund approximately
$111.0 million of the purchase price for the assets to be acquired in the
Magellan transaction, (iv) additional borrowings of approximately $279.0
million, at an assumed interest rate of 7.0%, to fund the remaining portion of
the purchase price for the assets to be acquired in the Magellan transaction and
(v) the acquisition of the Properties acquired during 1995, 1996 and 1997.
The pro forma information for the year ended December 31, 1996 assumes
completion, in each case as of January 1, 1996 in determining operating and
other data, and, in each case as of December 31, 1996 in determining balance
sheet data, of (i) the October 1996 Offering and the additional public offering
of 450,000 Common Shares that closed on October 9, 1996 and the use of the net
proceeds therefrom to repay approximately $168 million of indebtedness and to
fund approximately $289 million of Property acquisitions completed in the fourth
quarter of 1996 and the first quarter of 1997, (ii) the Offering and the use of
the net proceeds therefrom to fund the approximately $308.0 million purchase
price of the portion of the Carter-Crowley Portfolio to be acquired by the
Company, to fund approximately $40.8 million in connection with the formation
and capitalization of Crescent Affiliate and to fund approximately $111.0
million of the purchase price for the assets to be acquired in the Magellan
transaction, (iii) additional borrowings of approximately $279.0 million, at an
assumed interest rate of 7.0%, to fund the remaining portion of the purchase
price for the assets to be acquired in the Magellan transaction and (iv) the
acquisition of the Properties acquired during 1996 and 1997.
S-53
<PAGE> 54
CRESCENT REAL ESTATE EQUITIES COMPANY
CONSOLIDATED PRO FORMA AND HISTORICAL FINANCIAL DATA AND
RAINWATER PROPERTY GROUP COMBINED HISTORICAL FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
COMPANY
---------------------------------------------------------------------------
FOR THE
PRO FORMA PRO FORMA PERIOD FROM
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED MAY 5, 1994
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, TO DECEMBER 31,
1996 1996 1995 1995 1994
------------ ------------ ------------ ------------ ---------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Revenue --
Rental property......................... $ 407,888 $ 202,003 $ 395,065 $ 123,489 $ 49,075
Interest and other income............... 19,017 6,858 18,516 6,471 1,268
Residential developments(1)............. -- -- -- -- --
Operating expenses --
Rental property operating(2)............ 142,082 73,813 136,849 45,949 18,993
Corporate general and administrative.... 7,000 4,674 7,000 3,812 1,815
Residential developments(1)............. -- -- -- -- --
Interest expense......................... 88,612 42,926 86,995 18,781 3,493
Depreciation and amortization............ 73,808 40,535 71,370 28,060 14,255
Amortization of deferred financing
costs................................... 2,812 2,812 3,063 2,500 923
Writedown of investment property......... -- -- -- -- --
----------- ---------- ----------- ---------- ----------
Operating income (loss).................. 112,591 44,101 108,304 30,858 10,864
Reorganization costs..................... -- -- -- -- 1,900
Equity in net income of residential
developments(1)......................... 3,850 3,850 5,500 5,500 3,631
----------- ---------- ----------- ---------- ----------
Income (loss) before minority interest
and extraordinary item.................. $ 116,441 $ 47,951 $ 113,804 $ 36,358 $ 12,595
=========== ========== =========== ========== ==========
Income per share before extraordinary
item.................................... $ 1.12 $ .72 $ 1.08 $ .66 $ .28
BALANCE SHEET DATA (AT PERIOD END):
Real estate, before accumulated
depreciation............................ $ 2,599,526 $1,732,626 -- $1,006,706 $ 557,675
Total assets............................. 2,723,562 1,730,922 -- 964,171 538,354
Mortgages and notes payable.............. 862,786 627,808 -- 424,528 --
Credit Facility.......................... 350,000 40,000 -- 20,000 194,642
Minority interest in Operating
Partnership............................. 120,227 120,227 -- 71,925 93,192
Stockholders' equity..................... 1,312,822 865,160 -- 406,531 235,262
OTHER DATA:
Funds from Operations before minority
interest(3)............................. $ 188,754 $ 87,616 $ 184,606 $ 64,475 $ 32,723
Cash dividend declared per share(4)...... -- $ 1.16 -- $ 1.05 $ .65
Weighted average Common Shares
outstanding and issuable upon exchange
of Units................................ 103,059,240 64,648,842 103,059,240 54,182,006 44,997,710
Cash flow provided by (used in):
Operating activities.................... --(5) $ 77,384 --(5) $ 65,011 $ 21,642
Investing activities.................... --(5) (513,038) --(5) (421,406) (260,666)
Financing activities.................... --(5) 444,315 --(5) 343,079 265,608
Number of Properties (at period end):
Office Properties....................... 72 53 72 30 10
Hotel Properties........................ 6 6 6 3 0
Behavioral Healthcare Facilities........ 90 0 90 0 0
Retail Properties....................... 6 6 6 2 2
Residential Development Properties...... 9 9 9 9 3
<CAPTION>
RAINWATER PROPERTY GROUP
---------------------------------
FOR THE
PERIOD
FROM
JANUARY 1, YEAR ENDED
1994 TO DECEMBER 31,
MAY 4, --------------------
1994 1993 1992
---------- -------- ---------
<S> <C> <C> <C>
OPERATING DATA:
Revenue --
Rental property......................... $ 18,550 $ 48,232 $ 41,946
Interest and other income............... 42 605 425
Residential developments(1)............. 2,593 8,331 7,215
Operating expenses --
Rental property operating(2)............ 8,696 21,230 20,104
Corporate general and administrative.... -- -- --
Residential developments(1)............. 1,428 4,077 5,714
Interest expense......................... 4,867 29,226 36,245
Depreciation and amortization............ 7,793 18,081 18,190
Amortization of deferred financing
costs................................... -- -- --
Writedown of investment property......... -- 37,578 5,945
-------- -------- ---------
Operating income (loss).................. (1,599) (53,024) (36,612)
Reorganization costs..................... -- -- --
Equity in net income of residential
developments(1)......................... -- -- --
-------- -------- ---------
Income (loss) before minority interest
and extraordinary item.................. $ (1,599) $(53,024) $ (36,612)
======== ======== =========
Income per share before extraordinary
item.................................... -- -- --
BALANCE SHEET DATA (AT PERIOD END):
Real estate, before accumulated
depreciation............................ -- $358,400 $ 336,923
Total assets............................. -- 290,869 296,291
Mortgages and notes payable.............. -- 278,060 548,517
Credit Facility.......................... -- -- --
Minority interest in Operating
Partnership............................. -- -- --
Stockholders' equity..................... -- 2,941 (328,240)
OTHER DATA:
Funds from Operations before minority
interest(3)............................. -- -- --
Cash dividend declared per share(4)...... -- -- --
Weighted average Common Shares
outstanding and issuable upon exchange
of Units................................ -- -- --
Cash flow provided by (used in):
Operating activities.................... $ 2,455 $ 9,313 $ (640)
Investing activities.................... (2,379) (20,572) (8,924)
Financing activities.................... (21,310) 28,861 14,837
Number of Properties (at period end):
Office Properties....................... 4 4 3
Hotel Properties........................ 0 0 0
Behavioral Healthcare Facilities........ 0 0 0
Retail Properties....................... 2 2 2
Residential Development Properties...... 3 2 1
</TABLE>
- ---------------
(1) The Company accounts for its investments in the Residential Development
Property Mortgages and non-voting common stock of the Residential
Development Corporations under the equity method of accounting as a result
of the noncontrolling interests held after the formation of the Company.
(2) Includes real estate taxes, repairs and maintenance and other rental
property operating expenses, including property-level general and
administrative expenses.
(3) FFO, based on the revised definition adopted by the Board of Governors of
NAREIT and as used herein, means net income (loss), determined in accordance
with generally accepted accounting principles ("GAAP"), excluding gains (or
losses) from debt restructuring and sales of property, plus depreciation and
amortization of real estate assets, and after adjustments for unconsolidated
partnerships and joint ventures. FFO was developed by NAREIT as a relative
measure of performance and liquidity of an equity REIT in order to recognize
that income-producing real estate historically has not depreciated on the
basis determined under GAAP. The Company considers FFO an appropriate
measure of performance of an equity REIT. However, FFO (i) does not
represent cash generated from operating activities determined in accordance
with GAAP (which, unlike FFO, generally reflects all cash effects of
transactions and other events that enter into the determination of net
income), (ii) is not necessarily indicative of cash flow available to fund
cash needs and (iii) should not be considered as an alternative to net
income determined in accordance with GAAP as an indication of the Company's
operating performance, or to cash flow from operating activities determined
in accordance with GAAP as a measure of either liquidity or the Company's
ability to
S-54
<PAGE> 55
make distributions. The Company has historically distributed an amount less
than FFO, primarily due to reserves required for capital expenditures,
including leasing costs. An increase in FFO does not necessarily result in
an increase in aggregate distributions because the Board of Trust Managers
is not required to increase distributions unless necessary in order to
enable the Company to maintain REIT status. Because the Company must
distribute 95% of its real estate investment trust taxable income (as
defined in the Code), however, a significant increase in FFO will generally
require an increase in distributions to shareholders and unitholders
although not necessarily on a proportionate basis. Accordingly, the Company
believes that in order to facilitate a clear understanding of the
consolidated historical operating results of the Company, FFO should be
considered in conjunction with the Company's net income (loss) and cash
flows as reported in the consolidated financial statements and notes thereto
incorporated by reference into the accompanying Prospectus. However, the
Company's measure of FFO may not be comparable to similarly titled measures
for other REITs because these REITs may not apply the modified definition of
FFO in the same manner as the Company.
(4) For 1994, distributions were taxable as ordinary dividend income.
Distributions in 1994 were paid on 45,043,360 outstanding shares and Units.
For 1996 and 1995, 62% and 90%, respectively, of the distributions were
taxable as ordinary dividend income, with the remainder treated as a return
of capital. Distributions in 1995 were paid on 45,043,360, 57,636,642,
57,645,564 and 57,640,562 outstanding shares and Units for the first,
second, third and fourth quarters, respectively. Distributions in 1996 were
paid on 57,640,562, 57,776,538, 84,360,692 and 85,574,200 outstanding shares
and Units for the first, second, third and fourth quarters, respectively.
(5) Pro forma information relating to operating, investing and financing
activities has not been included because management believes that the data
would not be meaningful due to the number of assumptions required in order
to calculate this data.
S-55
<PAGE> 56
MANAGEMENT
Set forth below is information with respect to the members of the Board of
Trust Managers, all of whom joined the Predecessor Corporation as directors in
1994 (except Melvin Zuckerman who became a trust manager in 1996), and the
executive officers of the Company, all of whom joined the Predecessor
Corporation in their current capacities in 1994 (except James M. Eidson, Jr. and
Joseph D. Ambrose III who became executive officers of the Company in 1995 and
1996, respectively).
<TABLE>
<CAPTION>
NAME TERM EXPIRES AGE POSITION
---- ------------ --- --------
<S> <C> <C> <C>
Richard E. Rainwater 1997 52 Chairman of the Board of Trust Managers
John C. Goff 1999 41 Vice Chairman of the Board of Trust Managers
Gerald W. Haddock 1998 49 President, Chief Executive Officer and Trust Manager
Dallas E. Lucas N/A 35 Senior Vice President, Chief Financial and
Accounting Officer
James S. Wassel N/A 46 Senior Vice President, Asset Management
David M. Dean N/A 36 Senior Vice President, Law, and Secretary
James M. Eidson, Jr. N/A 42 Senior Vice President, Acquisitions
Jerry R. Crenshaw N/A 33 Vice President, Controller
Bruce A. Picker N/A 32 Vice President, Treasurer
Joseph D. Ambrose III N/A 45 Vice President, Administration
Anthony M. Frank 1997 65 Trust Manager
Morton H. Meyerson 1998 58 Trust Manager
William F. Quinn 1997 49 Trust Manager
Paul E. Rowsey, III 1999 42 Trust Manager
Melvin Zuckerman 1997 68 Trust Manager
</TABLE>
STRUCTURE OF THE COMPANY
The Company is a fully integrated real estate company operating as a REIT
for federal income tax purposes. The Company provides management, leasing and
development services with respect to certain of its Properties. Crescent
Equities is a Texas real estate investment trust which became the successor to
the Predecessor Corporation, on December 31, 1996, through the merger of the
Predecessor Corporation and CRE Limited Partner, Inc., a subsidiary of the
Predecessor Corporation, into Crescent Equities. The merger was structured to
preserve the existing business, purpose, tax status, management, capitalization
and assets, liabilities and net worth (other than due to the costs of the
transaction) of the Predecessor Corporation, and the economic interests and
voting rights of the stockholders of the Predecessor Corporation (who became the
shareholders of Crescent Equities as a result of the merger).
The direct and indirect subsidiaries of Crescent Equities include the
Operating Partnership; CREE, Ltd.; six limited partnerships in which the
Operating Partnership owns substantially all of the economic interests directly
or indirectly, with the remaining interests owned indirectly by the Company
through six separate corporations, each of which is a wholly owned subsidiary of
CREE Ltd. and the general partner of one of the six limited partnerships. The
Company conducts all of its business through the Operating Partnership and its
other subsidiaries. The Company also has an economic interest in the development
activities of the Residential Development Corporations.
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<PAGE> 57
The following table sets forth, by subsidiary, the Properties owned by such
subsidiary:
<TABLE>
<S> <C>
Operating Partnership: AT&T, Bank One Tower, Canyon Ranch-Tucson, Chancellor Park,
Central Park Plaza, Denver Marriott City Center, Frost Bank
Plaza, Greenway I, Greenway IA, Greenway II, MCI Tower,
Sonoma Mission Inn & Spa, Spectrum Center(1), Three Westlake
Park(2), Trammell Crow Center(3), The Woodlands Office
Properties(4), The Woodlands Retail Properties(4), 44 Cook,
55 Madison, 160 Spear Street, 1615 Poydras, 301 Congress
Avenue(5), 3333 Lee Parkway and 6225 North 24th Street
Crescent Real Estate The Aberdeen, The Avallon, Caltex House, The Citadel,
Funding I, L.P. ("Funding Continental Plaza, The Crescent Atrium, The Crescent Office
I"): Towers, Regency Plaza One and Waterside Commons
Crescent Real Estate Albuquerque Plaza, Barton Oaks Plaza One, Briargate Office
Funding II, L.P. and Research Center, Hyatt Regency Albuquerque, Hyatt
("Funding II") Regency Beaver Creek, Las Colinas Plaza, Liberty Plaza I &
II, MacArthur Center I & II, Ptarmigan Place, Stanford
Corporate Centre, Two Renaissance Square and 12404 Park
Central
Crescent Real Estate Greenway Plaza Portfolio(6)
Funding III, IV and
V, L.P. ("Funding III,
IV and V"):
Crescent Real Estate Canyon Ranch-Lenox
Funding VI, L.P.
("Funding VI"):
</TABLE>
- ---------------
(1) The Operating Partnership owns the principal economic interest in Spectrum
Center through an interest in the partnership which owns both a mortgage
note secured by the building and the ground lessor's interest in the land
underlying the building.
(2) The Operating Partnership owns the principal economic interest in Three
Westlake Park through its ownership of a mortgage note secured by the
building.
(3) The Operating Partnership owns the principal economic interest in Trammell
Crow Center through its ownership of fee simple title to the Property
(subject to a ground lease and a leasehold estate regarding the building)
and two mortgage notes encumbering the leasehold interests in the land and
building.
(4) The Operating Partnership owns a 75% limited partner interest in the
partnerships that own The Woodlands Office and Retail Properties.
(5) The Operating Partnership owns a 49% limited partner interest and
Crescent/301 L.L.C., a wholly owned subsidiary of CREE Ltd. and the
Operating Partnership, owns a 1% general partner interest in 301 Congress
Avenue, L.P., the partnership that owns 301 Congress Avenue.
(6) Funding III owns the Greenway Plaza Portfolio, except for the central heated
and chilled water plant building and Coastal Tower office building, both
located within Greenway Plaza, which are owned by Funding IV and Funding V,
respectively.
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<PAGE> 58
FEDERAL INCOME TAX CONSIDERATIONS
INTRODUCTION
The following is a summary of the material federal income tax
considerations associated with an investment in the Common Shares offered hereby
prepared by Shaw, Pittman, Potts & Trowbridge, tax counsel to Crescent Equities
("Tax Counsel"). This discussion is based upon the laws, regulations and
reported rulings and decisions in effect as of the date of this Prospectus
Supplement, all of which are subject to change, retroactively or prospectively,
and to possibly differing interpretations. This discussion does not purport to
deal with the federal income or other tax consequences applicable to all
investors in light of their particular investment circumstances or to all
categories of investors, some of whom may be subject to special rules
(including, for example, insurance companies, tax-exempt organizations,
financial institutions, broker-dealers, foreign corporations and persons who are
not citizens or residents of the United States). No ruling on the federal, state
or local tax considerations relevant to the operation of Crescent Equities or
the Operating Partnership or to the purchase, ownership or disposition of the
Common Shares is being requested from the Internal Revenue Service (the "IRS")
or from any other tax authority. Tax Counsel has rendered certain opinions
discussed herein and believes that if the IRS were to challenge the conclusions
of Tax Counsel, such conclusions would prevail in court. However, opinions of
counsel are not binding on the IRS or on the courts, and no assurance can be
given that the conclusions reached by Tax Counsel would be sustained in court.
EACH PROSPECTIVE PURCHASER IS URGED TO CONSULT HIS OR HER OWN TAX ADVISOR
REGARDING THE SPECIFIC TAX CONSEQUENCES TO HIM OR HER OF THE PURCHASE, OWNERSHIP
AND DISPOSITION OF THE COMMON STOCK IN AN ENTITY ELECTING TO BE TAXED AS A REAL
ESTATE INVESTMENT TRUST, INCLUDING THE FEDERAL, STATE, LOCAL, FOREIGN AND OTHER
TAX CONSEQUENCES OF SUCH PURCHASE, OWNERSHIP, DISPOSITION AND ELECTION AND OF
POTENTIAL CHANGES IN APPLICABLE TAX LAWS.
TAXATION OF CRESCENT EQUITIES
Crescent Equities has made an election to be treated as a real estate
investment trust under Sections 856 through 860 of the Code (as used in this
section, a "REIT"), commencing with its taxable year ended December 31, 1994.
Crescent Equities believes that it was organized and has operated in such a
manner so as to qualify as a REIT, and Crescent Equities intends to continue to
operate in such a manner, but no assurance can be given that it has operated in
a manner so as to qualify, or will operate in a manner so as to continue to
qualify as a REIT.
The sections of the Code relating to qualification and operation as a REIT
are highly technical and complex. The following sets forth the material aspects
of the Code sections that govern the federal income tax treatment of a REIT and
its shareholders. This summary is qualified in its entirety by the applicable
Code sections, rules and regulations promulgated thereunder, and administrative
and judicial interpretations thereof.
In the opinion of Tax Counsel, Crescent Equities qualified as a REIT under
the Code with respect to its taxable years ending on or before December 31,
1996, and is organized in conformity with the requirements for qualification as
a REIT, its manner of operation has enabled it to meet the requirements for
qualification as a REIT as of the date of this Prospectus Supplement, and its
proposed manner of operation will enable it to meet the requirements for
qualification as a REIT in the future. It must be emphasized that this opinion
is based on various assumptions relating to the organization and operation of
Crescent Equities and the Operating Partnership and is conditioned upon certain
representations made by Crescent Equities and the Operating Partnership as to
certain relevant factual matters, including matters related to the organization,
expected operation, and assets of Crescent Equities and the Operating
Partnership. Moreover, continued qualification as a REIT will depend upon
Crescent Equities' ability to meet, through actual annual operating results, the
distribution levels, stock ownership requirements and the various qualification
tests and other requirements imposed under the Code, as discussed below.
Accordingly, no assurance can be given that the actual stock ownership of
Crescent Equities, the mix of its assets, or the results of its operations for
any particular taxable year will satisfy such requirements. For a discussion of
the tax consequences of failing to qualify as a REIT, see "-- Taxation of
Crescent Equities -- Failure to Qualify," below.
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<PAGE> 59
If Crescent Equities qualifies for taxation as a REIT, it generally will
not be subject to federal corporate income taxes on its net income that is
currently distributed to shareholders. This treatment substantially eliminates
the "double taxation" (at the corporate and shareholder levels) that generally
results from investments in a corporation. However, Crescent Equities will be
subject to federal income tax in the following circumstances. First, Crescent
Equities will be taxed at regular corporate rates on any undistributed "real
estate investment trust taxable income," including undistributed net capital
gains. Second, under certain circumstances, Crescent Equities may be subject to
the "alternative minimum tax" on its items of tax preference. Third, if Crescent
Equities has "net income from foreclosure property," it will be subject to tax
on such income at the highest corporate rate. "Foreclosure property" generally
means real property and any personal property incident to such real property
which is acquired as a result of a default either on a lease of such property or
on indebtedness which such property secured and with respect to which an
appropriate election is made, except that property ceases to be foreclosure
property (i) after a two-year period (which in certain cases may be extended by
the IRS) or, if earlier, (ii) when the REIT engages in construction on the
property (other than for completion of certain improvements) or for more than 90
days uses the property in a business conducted other than through an independent
contractor. "Net income from foreclosure property" means (a) the net gain from
disposition of foreclosure property which is held primarily for sale to
customers in the ordinary course of business or (b) other net income from
foreclosure property which would not satisfy the 75% gross income test
(discussed below). Property is not eligible for the election to be treated as
foreclosure property if the loan or lease with respect to which the default
occurs (or is imminent) was made, entered into or acquired by the REIT with an
intent to evict or foreclose or when the REIT knew or had reason to know that
default would occur. Fourth, if Crescent Equities has "net income derived from
prohibited transactions," such income will be subject to a 100% tax. The term
"prohibited transaction" generally includes a sale or other disposition of
property (other than foreclosure property) that is held primarily for sale to
customers in the ordinary course of business. Fifth, if Crescent Equities should
fail to satisfy the 75% gross income test or the 95% gross income test (as
discussed below), but has nonetheless maintained its qualification as a REIT
because certain other requirements have been met, it will be subject to a 100%
tax on the net income attributable to the greater of the amount by which
Crescent Equities fails the 75% or 95% test. Sixth, if, during each calendar
year, Crescent Equities fails to distribute at least the sum of (i) 85% of its
"real estate investment trust ordinary income" for such year, (ii) 95% of its
"real estate investment trust capital gain net income" for such year, and (iii)
any undistributed taxable income from prior periods, Crescent Equities will be
subject to a 4% excise tax on the excess of such required distribution over the
amounts actually distributed. Seventh, if Crescent Equities acquires any asset
from a C corporation (i.e., a corporation generally subject to full corporate
level tax) in a transaction in which the basis of the asset in Crescent
Equities' hands is determined by reference to the basis of the asset (or any
other property) in the hands of the corporation, and Crescent Equities
recognizes gain on the disposition of such asset during the 10-year period
beginning on the date on which such asset was acquired by Crescent Equities,
then, to the extent of such property's "built-in" gain (the excess of the fair
market value of such property at the time of acquisition by Crescent Equities
over the adjusted basis in such property at such time), such gain will be
subject to tax at the highest regular corporate rate applicable (as provided in
Treasury Regulations that have not yet been promulgated). (The results described
above with respect to the recognition of "built-in gain" assume that Crescent
Equities will make an election pursuant to IRS Notice 88-19.)
Requirements of Qualification. The Code defines a REIT as a corporation,
trust or association (1) which is managed by one or more trustees or directors;
(2) the beneficial ownership of which is evidenced by transferable shares, or by
transferable certificates of beneficial interest; (3) which would be taxable as
a domestic corporation, but for Sections 856 through 860 of the Code; (4) which
is neither a financial institution nor an insurance company subject to certain
provisions of the Code; (5) the beneficial ownership of which is held (without
reference to any rules of attribution) by 100 or more persons; (6) during the
last half of each taxable year not more than 50% in value of the outstanding
stock of which is owned, directly or indirectly, by five or fewer individuals
(as defined in the Code); and (7) which meets certain other tests, described
below, regarding certain distributions and the nature of its income and assets
and properly files an election to be treated as a REIT. The Code provides that
conditions (1) through (4), inclusive, must be met during the entire taxable
year and that condition (5) must be met during at least 335 days of a taxable
year of 12 months (or during a proportionate part of a taxable year of less than
12 months).
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<PAGE> 60
Crescent Equities issued sufficient Common Shares pursuant to the Initial
Offering to satisfy the requirements described in (5) and (6) above. While the
existence of the Exchange Rights may cause Limited Partners to be deemed to own
the Common Shares they could acquire through the Exchange Rights, the amount of
Common Shares that can be acquired at any time through the Exchange Rights is
limited to an amount which, together with any other Common Shares actually or
constructively deemed, under the Declaration of Trust, to be owned by any
person, does not exceed the Ownership Limit. See "Description of Common
Shares -- Ownership Limits and Restrictions on Transfer" in the accompanying
Prospectus. Moreover, the ownership of Common Shares by persons other than
contributing Limited Partners generally is limited under the Ownership Limit to
no more than 8.0% of the outstanding Common Shares. In addition, the Declaration
of Trust provides for restrictions regarding the ownership or transfer of Common
Shares in order to assist Crescent Equities in continuing to satisfy the share
ownership requirements described in (5) and (6) above. See "Description of
Common Shares -- Ownership Limits and Restrictions on Transfer" in the
accompanying Prospectus.
If a REIT owns a "qualified REIT subsidiary," the Code provides that the
qualified REIT subsidiary is disregarded for federal income tax purposes, and
all assets, liabilities and items of income, deduction and credit of the
qualified REIT subsidiary are treated as assets, liabilities and such items of
the REIT itself. A qualified REIT subsidiary is a corporation all of the capital
stock of which has been owned by the REIT from the commencement of such
corporation's existence. CREE Ltd., CRE Management I Corp. ("Management I"), CRE
Management II Corp. ("Management II"), CRE Management III Corp. ("Management
III"), CRE Management IV Corp. ("Management IV"), CRE Management V Corp.
("Management V"), CRE Management VI Corp. ("Management VI"), CresCal Properties,
Inc. and Crescent Commercial Realty Corp. are qualified REIT subsidiaries, and
thus all of the assets (i.e., the respective partnership interests in the
Operating Partnership, Funding I, Funding II, Funding III, Funding IV, Funding
V, Funding VI, CresCal and Crescent Commercial Realty Holdings, L.P.),
liabilities and items of income, deduction and credit of CREE Ltd., Management
I, Management II, Management III, Management IV, Management V, Management VI,
CresCal Properties, Inc. and Crescent Commercial Realty Corp. are treated as
assets and liabilities and items of income, deduction and credit of Crescent
Equities. Unless otherwise required, all references to Crescent Equities in this
"Federal Income Tax Considerations" section refer to Crescent Equities and its
qualified REIT subsidiaries.
In the case of a REIT which is a partner in a partnership, Treasury
Regulations provide that the REIT will be deemed to own its proportionate share
of the assets of the partnership and will be deemed to be entitled to the income
of the partnership attributable to such share. In addition, the assets and gross
income (as defined in the Code) of the partnership attributed to the REIT shall
retain the same character as in the hands of the partnership for purposes of
Section 856 of the Code, including satisfying the gross income tests and the
assets tests described below. Thus, Crescent Equities' proportionate share of
the assets, liabilities and items of income of the Operating Partnership and its
subsidiary partnerships are treated as assets, liabilities and items of income
of Crescent Equities for purposes of applying the requirements described herein.
Income Tests. In order for Crescent Equities to achieve and maintain its
qualification as a REIT, there are three requirements relating to Crescent
Equities' gross income that must be satisfied annually. First, at least 75% of
Crescent Equities' gross income (excluding gross income from prohibited
transactions) for each taxable year must consist of temporary investment income
or of certain defined categories of income derived directly or indirectly from
investments relating to real property or mortgages on real property. These
categories include, subject to various limitations, rents from real property,
interest on mortgages on real property, gains from the sale or other disposition
of real property (including interests in real property and in mortgages on real
property) not primarily held for sale to customers in the ordinary course of
business, income from foreclosure property, and amounts received as
consideration for entering into either loans secured by real property or
purchases or leases of real property. Second, at least 95% of Crescent Equities'
gross income (excluding gross income from prohibited transactions) for each
taxable year must be derived from income qualifying under the 75% test and from
dividends, other types of interest and gain from the sale or disposition of
stock or securities, or from any combination of the foregoing. Third, for each
taxable year, gain from the sale or other disposition of stock or securities
held for less than one year, gain from prohibited transactions and gain on the
sale or other disposition of real property held for less than four years (apart
from involuntary conversions and sales of foreclosure property) must represent
less than 30% of Crescent Equities' gross income (including gross income from
prohibited transactions) for such taxable year. Crescent Equities,
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<PAGE> 61
through its partnership interests in the Operating Partnership and all
subsidiary partnerships, believes it satisfied all three of these income tests
for 1994, 1995 and 1996 and expects to satisfy them for subsequent taxable
years.
The bulk of the Operating Partnership's income is currently derived from
rents with respect to the Office Properties, the Hotel Properties and the Retail
Properties. Rents received by Crescent Equities will qualify as "rents from real
property" in satisfying the gross income requirements for a REIT described above
only if several conditions are met. First, the amount of rent must not be based
in whole or in part on the income or profits of any person. An amount received
or accrued generally will not be excluded from the term "rents from real
property" solely by reason of being based on a fixed percentage or percentages
of receipts or sales. Second, the Code provides that rents received from a
tenant will not qualify as "rents from real property" if the REIT, or an owner
of 10% or more of the REIT, directly or constructively, owns 10% or more of such
tenant (a "Related Party Tenant"). Third, if rent attributable to personal
property leased in connection with a lease of real property is greater than 15%
of the total rent received under the lease, then the portion of rent
attributable to such personal property will not qualify as "rents from real
property." Finally, for rents to qualify as "rents from real property," a REIT
generally must not operate or manage the property or furnish or render services
to the tenants of such property, other than through an independent contractor
from whom the REIT derives no revenue, except that a REIT may directly perform
services which are "usually or customarily rendered" in connection with the
rental of space for occupancy, other than services which are considered to be
rendered to the occupant of the property.
Crescent Equities, based in part upon opinions of Tax Counsel as to whether
various tenants, including the lessees of the Hotel Properties, constitute
Related Party Tenants, believes that the income it received in 1994, 1995 and
1996 and will receive in subsequent taxable years from (i) charging rent for any
property that is based in whole or in part on the income or profits of any
person (except by reason of being based on a percentage or percentages of
receipts or sales, as described above); (ii) charging rent for personal property
in an amount greater than 15% of the total rent received under the applicable
lease; (iii) directly performing services considered to be rendered to the
occupant of property or which are not usually or customarily furnished or
rendered in connection with the rental of real property; or (iv) entering into
any lease with a Related Party Tenant, will not cause Crescent Equities to fail
to meet the gross income tests. Opinions of counsel are not binding upon the IRS
or any court, and there can be no complete assurance that the IRS will not
assert successfully a contrary position.
The Operating Partnership will also receive fixed and contingent interest
on the Residential Development Property Mortgages. Interest on mortgages secured
by real property satisfies the 75% and 95% gross income tests only if it does
not include any amount whose determination depends in whole or in part on the
income of any person, except that (i) an amount is not excluded from the term
"interest" solely by reason of being based on a fixed percentage or percentages
of receipts or sales and (ii) income derived from a shared appreciation
provision in a mortgage is treated as gain recognized from the sale of the
secured property. Certain of the Residential Development Property Mortgages
contain provisions for contingent interest based upon property sales. In the
opinion of Tax Counsel, each of the Residential Development Property Mortgages
constitutes debt for federal income tax purposes, any contingent interest
derived therefrom will be treated as being based on a fixed percentage of sales,
and therefore all interest derived therefrom will constitute interest received
from mortgages for purposes of the 75% and 95% gross income tests. If, however,
the contingent interest provisions were instead characterized as shared
appreciation provisions, any resulting income would, because the underlying
properties are primarily held for sale to customers in the ordinary course, be
treated as income from prohibited transactions, which would not satisfy the 75%
and 95% gross income tests, which would count toward the 30% gross income test,
and which would be subject to a 100% tax.
In applying the 95% and 75% gross income tests to Crescent Equities, it is
necessary to consider the form in which certain of its assets are held, whether
that form will be respected for federal income tax purposes, and whether, in the
future, such form may change into a new form with different tax attributes (for
example, as a result of a foreclosure on debt held by the Operating
Partnership). For example, the Residential Development Properties are primarily
held for sale to customers in the ordinary course of business, and the income
resulting from such sales, if directly attributed to Crescent Equities, would
not qualify under the 75% and 95% gross income tests and would count as gain
from the sale of assets for purposes of the 30% limitation. In addition, such
income would be considered "net income from prohibited transactions" and thus
would be subject to a 100% tax. The income from such sales, however, will be
earned by the Residential Development Corporations rather than by the Operating
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Partnership and will be paid to the Operating Partnership in the form of
interest and principal payments on the Residential Development Property
Mortgages or distributions with respect to the stock in the Residential
Development Corporations held by the Operating Partnership. In similar fashion,
the income earned by the Hotel Properties, if directly attributed to Crescent
Equities, would not qualify under the 75% and 95% gross income tests because it
would not constitute "rents from real property." Such income is, however, earned
by the lessees of these Hotel Properties and what the Operating Partnership
receives from the lessees of these Hotel Properties is rent. Comparable issues
are raised by the Operating Partnership's acquisition of subordinated debt
secured by a Florida hotel and by CDMC's acquisition of an interest in the
partnership which owns the hotel. If such debt were recharacterized as equity,
or if the ownership of the partnership were attributed from CDMC to the
Operating Partnership, the Operating Partnership would be treated as receiving
income from hotel operations rather than interest income on the debt or dividend
income from CDMC. Tax Counsel is of the opinion that (i) the Residential
Development Properties or any interest therein will be treated as owned by the
Residential Development Corporations, (ii) amounts derived by the Operating
Partnership from the Residential Development Corporations under the terms of the
Residential Development Property Mortgages will qualify as interest or
principal, as the case may be, paid on mortgages on real property for purposes
of the 75% and 95% gross income tests, (iii) amounts derived by the Operating
Partnership with respect to the stock of the Residential Development
Corporations will be treated as distributions on stock (i.e., as dividends, a
return of capital, or capital gain, depending upon the circumstances) for
purposes of the 75% and 95% gross income tests, (iv) the leases of the Hotel
Properties will be treated as leases for federal income tax purposes, and the
rent payable thereunder will qualify as "rents from real property," and (v) the
subordinated debt secured by the Florida hotel will be treated as debt for
federal income tax purposes, the income payable thereunder will qualify as
interest, and CDMC's ownership of the partnership interest in the partnership
which owns the hotel will not be attributed to the Operating Partnership. Tax
Counsel has provided opinions similar to those provided with respect to the
Operating Partnership's investment in the Residential Development Corporations
with respect to its investments in certain other entities through non-voting
securities and secured debt. Investors should be aware that there are no
controlling Treasury Regulations, published rulings, or judicial decisions
involving transactions with terms substantially the same as those with respect
to the Residential Development Corporations and the leases of the Hotel
Properties. Therefore, the opinions of Tax Counsel with respect to these matters
are based upon all of the facts and circumstances and upon rulings and judicial
decisions involving situations that are considered to be analogous. Opinions of
counsel are not binding upon the IRS or any court, and there can be no complete
assurance that the IRS will not assert successfully a contrary position. If one
or more of the leases of the Hotel Properties is not a true lease, part or all
of the payments that the Operating Partnership receives from the respective
lessee may not satisfy the various requirements for qualification as "rents from
real property," or the Operating Partnership might be considered to operate the
Hotel Properties directly. In that case, Crescent Equities likely would not be
able to satisfy either the 75% or 95% gross income tests and, as a result,
likely would lose its REIT status. Similarly, if the IRS were to challenge
successfully the arrangements with the Residential Development Corporations,
Crescent Equities' qualification as a REIT could be jeopardized.
If any of the Residential Development Properties were to be acquired by the
Operating Partnership as a result of foreclosure on any of the Residential
Development Property Mortgages, or if any of the Hotel Properties were to be
operated directly by the Operating Partnership or a subsidiary partnership as a
result of a default by the lessee under the lease, such property would
constitute foreclosure property for two years following its acquisition (or for
up to an additional four years if an extension is granted by the IRS), provided
that (i) the Operating Partnership or its subsidiary partnership conducts sales
or operations through an independent contractor; (ii) the Operating Partnership
or its subsidiary partnership does not undertake any construction on the
foreclosed property other than completion of improvements which were more than
10% complete before default became imminent; and (iii) foreclosure was not
regarded as foreseeable at the time Crescent Equities acquired the Residential
Development Property Mortgages or leased the Hotel Properties. For so long as
any of these properties constitutes foreclosure property, the income from such
sales would be subject to tax at the maximum corporate rates and would qualify
under the 75% and 95% gross income tests. However, if any of these properties
does not constitute foreclosure property at any time in the future, income
earned from the disposition or operation of such property will not qualify under
the 75% and 95% gross income tests and, in the case of the Residential
Development Properties, will count toward the 30% test and will be subject to
the 100% tax.
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Crescent Equities anticipates that it will have certain income which will
not satisfy the 75% or the 95% gross income test and/or which will constitute
income whose receipt could cause Crescent Equities not to comply with the 30%
gross income test. For example, income from dividends on the stock of the
Residential Development Corporations will not satisfy the 75% gross income test.
It is also possible that certain income resulting from the use of creative
financing or acquisition techniques would not satisfy the 75%, 95% or 30% gross
income tests. Crescent Equities believes, however, that the aggregate amount of
nonqualifying income will not cause Crescent Equities to exceed the limits on
nonqualifying income under the 75%, 95% or 30% gross income tests.
Any gross income derived from a prohibited transaction is taken into
account in applying the 30% gross income test necessary to qualify as a REIT.
Crescent Equities believes that no asset owned by the Operating Partnership is
primarily held for sale to customers and that the sale of any of the Properties
will not be in the ordinary course of business. Whether property is held
primarily for sale to customers in the ordinary course of business depends,
however, on the facts and circumstances in effect from time to time, including
those related to a particular property. No assurance can be given that Crescent
Equities can (a) comply with certain safe-harbor provisions of the Code which
provide that certain sales do not constitute prohibited transactions or (b)
avoid owning property that may be characterized as property held primarily for
sale to customers in the ordinary course of business.
If Crescent Equities fails to satisfy one or both of the 75% or 95% gross
income tests for any taxable year, it may nevertheless qualify as a REIT for
such year if it is entitled to relief under certain provisions of the Code.
These relief provisions generally will be available if Crescent Equities'
failure to meet such tests is due to reasonable cause and not to willful
neglect, Crescent Equities attaches a schedule of the sources of its income to
its tax return, and any incorrect information on the schedule is not due to
fraud with intent to evade tax. It is not possible, however, to state whether in
all circumstances Crescent Equities would be entitled to the benefit of these
relief provisions. As discussed above, even if these relief provisions apply, a
tax equal to approximately 100% of the corresponding net income would be imposed
with respect to the excess of 75% or 95% of Crescent Equities' gross income over
Crescent Equities' qualifying income in the relevant category, whichever is
greater.
Asset Tests. Crescent Equities, at the close of each quarter of its taxable
year, must also satisfy three tests relating to the nature of its assets. First,
at least 75% of the value of Crescent Equities' total assets must be represented
by real estate assets (including (i) its allocable share of real estate assets
held by the Operating Partnership, any partnerships in which the Operating
Partnership owns an interest, or qualified REIT subsidiaries of Crescent
Equities and (ii) stock or debt instruments held for not more than one year
purchased with the proceeds of a stock offering or long-term (at least five
years) debt offering of Crescent Equities), cash, cash items and government
securities. Second, not more than 25% of Crescent Equities' total assets may be
represented by securities other than those in the 75% asset class. Third, of the
investments included in the 25% asset class, the value of any one issuer's
securities owned by Crescent Equities may not exceed 5% of the value of Crescent
Equities' total assets, and Crescent Equities may not own more than 10% of any
one issuer's outstanding voting securities. The 25% and 5% tests generally must
be met for any quarter in which Crescent Equities acquires securities of an
issuer. Thus, this requirement must be satisfied not only on the date Crescent
Equities first acquires corporate securities, but also each time Crescent
Equities increases its ownership of corporate securities (including as a result
of increasing its interest in the Operating Partnership either with the proceeds
of the Offering or by acquiring Units from Limited Partners upon the exercise of
their Exchange Rights).
The Operating Partnership owns 100% of the non-voting stock of each
Residential Development Corporation. In addition, the Operating Partnership owns
the Residential Development Property Mortgages. As stated above, in the opinion
of Tax Counsel each of these mortgages will constitute debt for federal income
tax purposes and therefore will be treated as a real estate asset; however, the
IRS could assert that such mortgages should be treated as equity interests in
their respective issuers, which would not qualify as real estate assets. By
virtue of its ownership of partnership interests in the Operating Partnership,
Crescent Equities will be considered to own its pro rata share of these assets.
Neither Crescent Equities nor the Operating Partnership, however, will directly
own more than 10% of the voting securities of any Residential Development
Corporation and, in the opinion of Tax Counsel, Crescent Equities will not be
considered to own any of such voting securities. In addition, Crescent Equities
and its senior management believe that Crescent Equities' pro rata shares of the
value of the securities of each Residential Development Corporation do not
separately exceed 5% of the total value of Crescent Equities' total assets. This
belief is based in part upon its analysis of the estimated values of the various
securities owned by the Operating
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Partnership relative to the estimated value of the total assets owned by the
Operating Partnership. No independent appraisals will be obtained to support
this conclusion, and Tax Counsel, in rendering its opinion as to the
qualification of Crescent Equities as a REIT, is relying on the conclusions of
Crescent Equities and its senior management as to the value of the various
securities and other assets. There can be no assurance, however, that the IRS
might not contend that the values of the various securities held by Crescent
Equities through the Operating Partnership separately exceed the 5% value
limitation or, in the aggregate, exceed the 25% value limitation or that the
voting securities of the Residential Development Corporations should be
considered to be owned by Crescent Equities. Finally, if the Operating
Partnership were treated for tax purposes as a corporation rather than as a
partnership, Crescent Equities would violate the 10% of voting securities and 5%
of value limitations, and the treatment of any of the Operating Partnership's
subsidiary partnerships as a corporation rather than as a partnership could also
violate one or the other, or both, of these limitations. In the opinion of Tax
Counsel, for federal income tax purposes the Operating Partnership and all the
subsidiary partnerships will be treated as partnerships and not as either
associations taxable as corporations or publicly traded partnerships. See
"-- Tax Aspects of the Operating Partnership and the Subsidiary Partnerships"
below.
As noted above, the 5% and 25% value requirements must be satisfied not
only on the date Crescent Equities first acquires corporate securities, but also
each time Crescent Equities increases its ownership of corporate securities
(including as a result of increasing its interest in the Operating Partnership
either with the proceeds of the Offering or by acquiring Units from Limited
Partners upon the exercise of their Exchange Rights). Although Crescent Equities
plans to take steps to ensure that it satisfies the 5% and 25% value tests for
any quarter with respect to which retesting is to occur, there can be no
assurance that such steps (i) will always be successful; (ii) will not require a
reduction in Crescent Equities' overall interest in the various corporations; or
(iii) will not restrict the ability of the Residential Development Corporations
to increase the sizes of their respective businesses, unless the value of the
assets of Crescent Equities is increasing at a commensurate rate.
Annual Distribution Requirements. In order to qualify as a REIT, Crescent
Equities is required to distribute dividends (other than capital gain dividends)
to its shareholders in an amount at least equal to (A) the sum of (i) 95% of the
"real estate investment trust taxable income" of Crescent Equities (computed
without regard to the dividends paid deduction and Crescent Equities' net
capital gain) and (ii) 95% of the net income (after tax), if any, from
foreclosure property, minus (B) certain excess noncash income. Such
distributions must be paid in the taxable year to which they relate, or in the
following taxable year if declared before Crescent Equities timely files its tax
return for such year, and if paid on or before the date of the first regular
dividend payment after such declaration. To the extent that Crescent Equities
does not distribute all of its net capital gain or distributes at least 95%, but
less than 100%, of its "real estate investment trust taxable income," as
adjusted, it will be subject to tax thereon at regular capital gains and
ordinary corporate tax rates. Furthermore, if Crescent Equities should fail to
distribute, during each calendar year, at least the sum of (i) 85% of its "real
estate investment trust ordinary income" for such year; (ii) 95% of its "real
estate investment trust capital gain income" for such year; and (iii) any
undistributed taxable income from prior periods, Crescent Equities would be
subject to a 4% excise tax on the excess of such required distribution over the
amounts actually distributed.
Crescent Equities believes that it has made and intends to make timely
distributions sufficient to satisfy all annual distribution requirements. In
this regard, the limited partnership agreement of the Operating Partnership (the
"Operating Partnership Agreement") authorizes CREE Ltd., as general partner, to
take such steps as may be necessary to cause the Operating Partnership to
distribute to its partners an amount sufficient to permit Crescent Equities to
meet these distribution requirements. It is possible, however, that, from time
to time, Crescent Equities may experience timing differences between (i) the
actual receipt of income and actual payment of deductible expenses and (ii) the
inclusion of such income and deduction of such expenses in arriving at its "real
estate investment trust taxable income." Issues may also arise as to whether
certain items should be included in income. For example, Tax Counsel has opined
that the Operating Partnership should include in income only its share of the
interest income actually paid on the two mortgage notes secured by Spectrum
Center and Three Westlake Park, respectively, and the two mortgage notes secured
by Trammell Crow Center, all of which were acquired at a substantial discount,
rather than its share of the amount of interest accruing pursuant to the terms
of these investments, but opinions of counsel are not binding on the IRS or the
courts. In this regard, the IRS has taken a contrary view in a recent technical
advice memorandum concerning the accrual of original issue discount ("OID").
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The Company believes, however, that even if the Operating Partnership were to
include in income the full amount of interest income accrued on these notes, and
the Operating Partnership were not allowed any offsetting deduction for the
amount of such interest to the extent it is uncollectible, the Company
nonetheless would be able to satisfy the 95% distribution requirement without
borrowing additional funds or distributing stock dividends (as discussed below).
In addition, it is possible that certain creative financing or creative
acquisition techniques used by the Operating Partnership may result in income
(such as income from cancellation of indebtedness or gain upon the receipt of
assets in foreclosure whose fair market value exceeds the Operating
Partnership's basis in the debt which was foreclosed upon) which is not
accompanied by cash proceeds. In this regard, the modification of a debt can
result in taxable gain equal to the difference between the holder's basis in the
debt and the principal amount of the modified debt. Tax Counsel has opined that
the four mortgage notes secured by Spectrum Center, Three Westlake Park and
Trammell Crow Center, were not modified in the hands of the Operating
Partnership. Based on the foregoing, Crescent Equities may have less cash
available for distribution in a particular year than is necessary to meet its
annual 95% distribution requirement or to avoid tax with respect to capital gain
or the excise tax imposed on certain undistributed income for such year. To meet
the 95% distribution requirement necessary to qualify as a REIT or to avoid tax
with respect to capital gain or the excise tax imposed on certain undistributed
income, Crescent Equities may find it appropriate to arrange for borrowings
through the Operating Partnership or to pay distributions in the form of taxable
share dividends.
Under certain circumstances, Crescent Equities may be able to rectify a
failure to meet the distribution requirement for a year by paying "deficiency
dividends" to stockholders in a later year, which may be included in Crescent
Equities' deduction for dividends paid for the earlier year. Thus, Crescent
Equities may be able to avoid being taxed on amounts distributed as deficiency
dividends; however, Crescent Equities will be required to pay interest based
upon the amount of any deduction taken for deficiency dividends.
Ownership Information. Pursuant to applicable Treasury Regulations, in
order to be treated as a REIT, Crescent Equities must maintain certain records
and request certain information from its shareholders designed to disclose the
actual ownership of its Equity Shares (as defined in the accompanying
Prospectus). Crescent Equities believes that it has complied and intends to
continue to comply with such requirements.
Failure to Qualify. If Crescent Equities fails to qualify as a REIT in any
taxable year and the relief provisions do not apply, Crescent Equities will be
subject to tax (including any applicable alternative minimum tax) on its taxable
income at regular corporate rates. Distributions to shareholders in any year in
which Crescent Equities fails to qualify as a REIT will not be deductible by
Crescent Equities; nor will they be required to be made. If Crescent Equities
fails to qualify as a REIT, then, to the extent of Crescent Equities' current
and accumulated earnings and profits, all distributions to shareholders will be
taxable as ordinary income and, subject to certain limitations of the Code,
corporate distributees may be eligible for the dividends received deduction.
Unless entitled to relief under specific statutory provisions, Crescent Equities
will also be disqualified from electing to be treated as a REIT for the four
taxable years following the year during which it ceased to qualify as a REIT. It
is not possible to state whether in all circumstances Crescent Equities would be
entitled to such statutory relief.
Possible Legislation. On October 6, 1995, the House of Representatives
passed budget reconciliation legislation entitled the Tax Simplification Act of
1995, which contained various amendments to the Code, including amendments to
the provisions governing the tax treatment of REITs. The modifications to the
REIT rules were sponsored by the REIT industry and would generally have operated
to liberalize the requirements for qualification as a REIT. These modifications
would have become effective in the first taxable year following their enactment.
However, these modifications were not part of the budget reconciliation
legislation which passed Congress in 1995 and which, in any event, President
Clinton subsequently vetoed. On March 20, 1997, 18 members of the House Ways and
Means Committee introduced a substantially similar package of REIT amendments.
Whether or when modifications to the REIT rules will ultimately be enacted, or
what provisions they will contain if they are enacted, cannot be ascertained at
this time.
TAXATION OF TAXABLE DOMESTIC SHAREHOLDERS
As long as Crescent Equities qualifies as a REIT, distributions made to
Crescent Equities' taxable U.S. shareholders out of Crescent Equities' current
or accumulated earnings and profits (and not designated as capital
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gain dividends) will be taken into account by such U.S. shareholders as ordinary
income and, for corporate shareholders, will not be eligible for the dividends
received deduction. Distributions that are properly designated as capital gain
dividends will be taxed as long-term capital gains (to the extent they do not
exceed Crescent Equities' actual net capital gain for the taxable year) without
regard to the period for which the shareholder has held its Common Shares.
However, corporate shareholders may be required to treat up to 20% of certain
capital gain dividends as ordinary income. Distributions in excess of current
and accumulated earnings and profits will not be taxable to a shareholder to the
extent that they do not exceed the adjusted basis of the shareholder's Common
Shares, but rather will reduce the adjusted basis of such shares. To the extent
that distributions in excess of current and accumulated earnings and profits
exceed the adjusted basis of a shareholder's Common Shares, such distributions
will be included in income as long-term capital gain (or short-term capital gain
if the shares have been held for one year or less) assuming the shares are a
capital asset in the hands of the shareholder. In addition, any distribution
declared by Crescent Equities in October, November or December of any year
payable to a shareholder of record on a specified date in any such month shall
be treated as both paid by Crescent Equities and received by the shareholder on
December 31 of such year, provided that the distribution is actually paid by
Crescent Equities during January of the following calendar year. Shareholders
may not include any net operating losses or capital losses of Crescent Equities
in their respective income tax returns.
In general, any loss upon a sale or exchange of shares by a shareholder who
has held such shares for six months or less (after applying certain holding
period rules) will be treated as a long-term capital loss to the extent of
distributions from Crescent Equities required to be treated by such shareholder
as long-term capital gain.
TAXATION OF TAX-EXEMPT SHAREHOLDERS
Most tax-exempt employees' pension trusts are not subject to federal income
tax except to the extent of their receipt of "unrelated business taxable income"
as defined in Section 512(a) of the Code ("UBTI"). Distributions by the Company
to a shareholder that is a tax-exempt entity should not constitute UBTI,
provided that the tax-exempt entity has not financed the acquisition of its
Common Shares with "acquisition indebtedness" within the meaning of the Code and
the Common Shares is not otherwise used in an unrelated trade or business of the
tax-exempt entity. In addition, certain pension trusts that own more than 10% of
a "pension-held REIT" must report a portion of the dividends that they receive
from such a REIT as UBTI. The Company has not been and does not expect to be
treated as a pension-held REIT for purposes of this rule.
TAXATION OF FOREIGN SHAREHOLDERS
The rules governing United States federal income taxation of nonresident
alien individuals, foreign corporations, foreign partnerships and other foreign
shareholders (collectively, "Non-U.S. Shareholders") are complex, and no attempt
will be made herein to provide more than a summary of such rules. Prospective
Non-U.S. Shareholders should consult with their own tax advisors to determine
the impact of federal, state and local tax laws with regard to an investment in
Common Shares, including any reporting requirements.
Distributions that are not attributable to gain from sales or exchanges by
Crescent Equities of United States real property interests and not designated by
Crescent Equities as capital gain dividends will be treated as dividends of
ordinary income to the extent that they are made out of current and accumulated
earnings and profits of Crescent Equities. Such distributions ordinarily will be
subject to a withholding tax equal to 30% of the gross amount of the
distribution, unless an applicable tax treaty reduces or eliminates that tax.
Crescent Equities expects to withhold U.S. income tax at the rate of 30% on the
gross amount of any such distribution made to a Non-U.S. Shareholder unless (i)
a lower treaty rate applies and the Non-U.S. Shareholder has filed the required
IRS Form 1001 with Crescent Equities or (ii) the Non-U.S. Shareholder files an
IRS Form 4224 with Crescent Equities claiming that the distribution is
effectively connected with the Non-U.S. Shareholder's conduct of a U.S. trade or
business. Distributions in excess of Crescent Equities' current and accumulated
earnings and profits will be subject to a 10% withholding requirement but will
not be taxable to a shareholder to the extent that such distributions do not
exceed the adjusted basis of the shareholder's Common Shares, but rather will
reduce the adjusted basis of such shares. To the extent that distributions in
excess of current and accumulated earnings and profits exceed the adjusted basis
of a Non-U.S. Shareholder's shares, such distributions will give rise to tax
liability if the Non-U.S. Shareholder would otherwise be subject to tax on any
gain from the sale or disposition of the Common Shares, as described below. If
it
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cannot be determined at the time a distribution is made whether or not such
distribution will be in excess of current and accumulated earnings and profits,
the distributions would be subject to withholding at the same rate as dividends.
However, a Non-U.S. Shareholder may seek a refund from the IRS of amounts of tax
withheld in excess of the Non-U.S. Shareholder's actual U.S. tax liability.
For any year in which Crescent Equities qualifies as a REIT, distributions
that are attributable to gain from sales or exchanges by Crescent Equities of
United States real property interests will be taxed to a Non-U.S. Shareholder
under the provisions of the Foreign Investment in Real Property Tax Act of 1980,
as amended ("FIRPTA"). Under FIRPTA, distributions attributable to gain from
sales of United States real property interests are taxed to a Non-U.S.
Shareholder as if such gain were effectively connected with a United States
business. Non-U.S. Shareholders would thus be taxed at the normal capital gain
rates applicable to U.S. shareholders (subject to applicable alternative minimum
tax and a special alternative minimum tax in the case of nonresident alien
individuals). Also, distributions subject to FIRPTA may be subject to a 30%
branch profits tax in the hands of a foreign corporate shareholder not entitled
to treaty exemption. Crescent Equities is required to withhold 35% of any
distribution that could be designated by Crescent Equities as a capital gain
dividend. This amount is creditable against the Non-U.S. Shareholder's FIRPTA
tax liability.
Gain recognized by a Non-U.S. Shareholder upon a sale of Common Shares
generally will not be taxed under FIRPTA if Crescent Equities is a "domestically
controlled REIT," defined generally as a REIT in which at all times during a
specified testing period less than 50% in value of the shares was held directly
or indirectly by foreign persons. Crescent Equities is and currently expects to
continue to be a "domestically controlled REIT," and in such case the sale of
Common Shares would not be subject to taxation under FIRPTA. However, gain not
subject to FIRPTA nonetheless will be taxable to a Non-U.S. Shareholder if (i)
investment in the Common Shares is treated as effectively connected with the
Non-U.S. Shareholder's U.S. trade or business, in which case the Non-U.S.
Shareholder will be subject to the same treatment as U.S. shareholders with
respect to such gain or (ii) the Non-U.S. Shareholder is a nonresident alien
individual who was present in the United States for 183 days or more during the
taxable year and either the individual has a "tax home" in the United States or
the gain is attributable to an office or other fixed place of business
maintained by the individual in the United States, in which case gains will be
subject to a 30% tax. If the gain on the sale of Common Shares were to be
subject to taxation under FIRPTA, the Non-U.S. Shareholder would be subject to
the same treatment as U.S. shareholders with respect to such gain (subject to
applicable alternative minimum tax and a special alternative minimum tax in the
case of nonresident alien individuals), and the purchaser of the Common Shares
would be required to withhold and remit to the IRS 10% of the purchase price.
TAX ASPECTS OF THE OPERATING PARTNERSHIP AND THE SUBSIDIARY PARTNERSHIPS
The following discussion summarizes certain federal income tax
considerations applicable solely to Crescent Equities' investment in the
Operating Partnership and its subsidiary partnerships and represents the views
of Tax Counsel. The discussion does not cover state or local tax laws or any
federal tax laws other than income tax laws.
Classification of the Operating Partnership and its Subsidiary Partnerships
for Tax Purposes. In the opinion of Tax Counsel, based on the provisions of the
Operating Partnership Agreement and the partnership agreements of the various
subsidiary partnerships, certain factual assumptions and certain representations
described in the opinion, the Operating Partnership and the subsidiary
partnerships will each be treated as a partnership and neither an association
taxable as a corporation for federal income tax purposes, nor a "publicly traded
partnership" taxable as a corporation. Unlike a ruling from the IRS, however, an
opinion of counsel is not binding on the IRS or the courts, and no assurance can
be given that the IRS will not challenge the status of the Operating Partnership
and its subsidiary partnerships as partnerships for federal income tax purposes.
If for any reason the Operating Partnership were taxable as a corporation rather
than as a partnership for federal income tax purposes, Crescent Equities would
fail to qualify as a REIT because it would not be able to satisfy the income and
asset requirements. See "-- Taxation of Crescent Equities," above. In addition,
any change in the Operating Partnership's status for tax purposes might be
treated as a taxable event, in which case Crescent Equities might incur a tax
liability without any related cash distributions. See "-- Taxation of Crescent
Equities," above. Further, items of income and deduction for the Operating
Partnership would not pass through to the respective partners, and the partners
would be treated as shareholders for tax purposes. The Operating Partnership
would be required to pay income tax at regular corporate
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tax rates on its net income, and distributions to partners would constitute
dividends that would not be deductible in computing the Operating Partnership's
taxable income. Similarly, if any of the subsidiary partnerships were taxable as
a corporation rather than as a partnership for federal income tax purposes, such
treatment might cause Crescent Equities to fail to qualify as a REIT, and in any
event such partnership's items of income and deduction would not pass through to
its partners, and its net income would be subject to income tax at regular
corporate rates.
Income Taxation of the Operating Partnership and its Subsidiary
Partnerships. A partnership is not a taxable entity for federal income tax
purposes. Rather, Crescent Equities will be required to take into account its
allocable share of the Operating Partnership's income, gains, losses, deductions
and credits for any taxable year of such Partnership ending within or with the
taxable year of Crescent Equities, without regard to whether Crescent Equities
has received or will receive any cash distributions. The Operating Partnership's
income, gains, losses, deductions and credits for any taxable year will include
its allocable share of such items from its subsidiary partnerships.
Tax Allocations with Respect to Pre-Contribution Gain. Pursuant to Section
704(c) of the Code, income, gain, loss and deduction attributable to appreciated
property that is contributed to a partnership in exchange for an interest in the
partnership must be allocated for federal income tax purposes in a manner such
that the contributor is charged with the unrealized gain associated with the
property at the time of the contribution. The amount of such unrealized gain is
generally equal to the difference between the fair market value of the
contributed property at the time of contribution and the adjusted tax basis of
such property at the time of contribution (the "Book-Tax Difference"). In
general, the fair market value of the properties initially contributed to the
Operating Partnership were substantially in excess of their adjusted tax bases.
The Operating Partnership Agreement requires that allocations attributable to
each item of initially contributed property be made so as to allocate the tax
depreciation available with respect to such property first to the partners other
than the partner that contributed the property, to the extent of, and in
proportion to, such partners' share of book depreciation, and then, if any tax
depreciation remains, to the partner that contributed the property. Accordingly,
the depreciation deductions allocable will not correspond exactly to the
percentage interests of the partners. Upon the disposition of any item of
initially contributed property, any gain attributable to an excess at such time
of basis for book purposes over basis for tax purposes will be allocated for tax
purposes to the contributing partner and, in addition, the Operating Partnership
Agreement provides that any remaining gain will be allocated for tax purposes to
the contributing partners to the extent that tax depreciation previously
allocated to the noncontributing partners was less than the book depreciation
allocated to them. These allocations are intended to be consistent with Section
704(c) of the Code and with Treasury Regulations thereunder. The tax treatment
of properties contributed to the Operating Partnership subsequent to its
formation is expected generally to be consistent with the foregoing.
In general, the contributing partners will be allocated lower amounts of
depreciation deductions for tax purposes and increased taxable income and gain
on sale by the Operating Partnership of one or more of the contributed
properties. These tax allocations will tend to reduce or eliminate the Book-Tax
Difference over the life of the Operating Partnership. However, the special
allocation rules of Section 704(c) of the Code do not always entirely rectify
the Book-Tax Difference on an annual basis. Thus, the carryover basis of the
contributed assets in the hands of the Operating Partnership will cause Crescent
Equities to be allocated lower depreciation and other deductions. This may cause
Crescent Equities to recognize taxable income in excess of cash proceeds, which
might adversely affect Crescent Equities' ability to comply with the REIT
distribution requirements. See "-- Taxation of Crescent Equities," above.
SALE OF PROPERTY
Generally, any gain realized by the Operating Partnership on the sale of
real property, if the property is held for more than one year, will be long-term
capital gain, except for any portion of such gain that is treated as
depreciation or cost recovery recapture.
Crescent Equities' share of any gain realized on the sale of any property
held by the Operating Partnership as inventory or other property held primarily
for sale to customers in the ordinary course of the Operating Partnership's
business, however, will be treated as income from a prohibited transaction that
is subject to a 100% penalty tax. See "-- Taxation of Crescent Equities," above.
Such prohibited transaction income will also have an adverse effect upon
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Crescent Equities' ability to satisfy the income tests for status as a REIT for
federal income tax purposes. Under existing law, whether property is held as
inventory or primarily for sale to customers in the ordinary course of the
Operating Partnership's business is a question of fact that depends on all the
facts and circumstances with respect to the particular transaction. The
Operating Partnership intends to hold its properties for investment with a view
to long-term appreciation, to engage in the business of acquiring, developing,
owning and operating the properties, and to make such occasional sales of
properties as are consistent with these investment objectives.
TAXATION OF THE RESIDENTIAL DEVELOPMENT CORPORATIONS
A portion of the amounts to be used to fund distributions to shareholders
is expected to come from the Residential Development Corporations through
dividends on non-voting common stock thereof held by the Operating Partnership
and interest on the Residential Development Property Mortgages held by the
Operating Partnership. The Residential Development Corporations will not qualify
as REITs and will pay federal, state and local income taxes on their taxable
incomes at normal corporate rates, which taxes will reduce the cash available
for distribution by Crescent Equities to its shareholders. Crescent Equities
anticipates that, initially, deductions for interest and amortization will
largely offset the otherwise taxable income of the Residential Development
Corporations, but there can be no assurance that this will be the case or that
the IRS will not challenge such deductions. Any federal, state or local income
taxes that the Residential Development Corporations are required to pay will
reduce the cash available for distribution by Crescent Equities to its
shareholders.
STATE AND LOCAL TAXES
Crescent Equities and its shareholders may be subject to state and local
tax in various states and localities, including those states and localities in
which it or they transact business, own property, or reside. The tax treatment
of Crescent Equities and the shareholders in such jurisdictions may differ from
the federal income tax treatment described above. Consequently, prospective
shareholders should consult their own tax advisors regarding the effect of state
and local tax laws upon an investment in the Common Shares.
In particular, the State of Texas imposes a franchise tax upon corporations
and limited liability companies that do business in Texas. The Texas franchise
tax is imposed on each such entity with respect to the entity's "net taxable
capital" and its "net taxable earned surplus" (generally, the entity's federal
taxable income, with certain adjustments). The franchise tax on net taxable
capital is imposed at the rate of 0.25% of an entity's net taxable capital. The
franchise tax rate on "net taxable earned surplus" is 4.5%. The Texas franchise
tax is generally equal to the greater of the tax on "net taxable capital" and
the tax on "net taxable earned surplus." The Texas franchise tax is not applied
on a consolidated group basis. Any Texas franchise tax that Crescent Equities is
indirectly required to pay will reduce the cash available for distribution by
Crescent Equities to shareholders. Even if an entity is doing business in Texas
for Texas franchise tax purposes, the entity is subject to the Texas franchise
tax only on the portion of the taxable capital or taxable earned surplus
apportioned to Texas.
As a Texas real estate investment trust, Crescent Equities will not be
subject directly to the Texas franchise tax. However, Crescent Equities will be
subject indirectly to the Texas franchise tax as a result of its interests in
CREE Ltd., Management I, Management II, Management III, Management IV and
Management V, which will be subject to the Texas franchise tax because they are
general partners of the Operating Partnership, Funding I, Funding II, Funding
III, Funding IV and Funding V, and the Operating Partnership, Funding I, Funding
II, Funding III, Funding IV and Funding V will be doing business in Texas.
It is anticipated that Crescent Equities' Texas franchise tax liability
will not be substantial because CREE Ltd., Management I, Management II,
Management III, Management IV and Management V are allocated only a small
portion of the taxable income of the Operating Partnership, Funding I, Funding
II, Funding III, Funding IV and Funding V. In addition, Management VI and
Funding VI are not anticipated to be subject to the Texas franchise tax.
The Operating Partnership, Funding I, Funding II, Funding III, Funding IV
and Funding V will not be subject to the Texas franchise tax, under the laws in
existence at the time of this Prospectus Supplement because they are
partnerships instead of corporations. There is no assurance, however, that the
Texas legislature, which is currently meeting in regular session in 1997, will
not expand the scope of the Texas franchise tax to apply to limited
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partnerships such as the Operating Partnership, Funding I, Funding II, Funding
III, Funding IV and Funding V or enact other legislation which may result in
subjecting Crescent Equities to the Texas franchise tax. Any statutory change by
the Texas legislature may be applied retroactively.
In addition, it should be noted that two of the Residential Development
Corporations will be doing business in Texas and will be subject to the Texas
franchise tax. Further, Crescent/301, L.L.C. will be subject to the Texas
franchise tax because it is doing business in Texas and limited liability
companies are subject to Texas franchise tax. However, this franchise tax should
not be substantial because Crescent/301, L.L.C. owns a 1% interest in 301
Congress Avenue, L.P. Other entities that will be subject to the Texas franchise
tax include CresTex Development, LLC and its member CresCal Properties, Inc. and
any other corporations or limited liability companies doing business in Texas
with Texas receipts. It is expected that the franchise tax liability of these
entities will not be substantial.
Governor George W. Bush of Texas has announced his desire that the Texas
legislature consider in its 1997 regular session, and the Texas legislature is
currently considering, proposals for property tax relief in Texas. Such relief
would require increasing the proportion of education funding costs paid by the
State of Texas and reducing the proportion paid by local property taxes.
Alternatives for increasing State of Texas revenues that have been considered
include broadening the franchise tax base to include other entities, enactment
of a new gross receipts tax, enactment of a new business activity tax, an
increase in the sales tax and/or broadening the sales tax base. If the franchise
tax is broadened, it could be expanded to apply to partnerships such as the
Operating Partnership, Funding I, Funding II, Funding III, Funding IV and
Funding V (and possibly to business trusts such as Crescent Equities). If either
a gross receipts tax or a business activity tax was enacted, it most likely
would replace the current franchise tax. However, a gross receipts tax or a
business activities tax could apply to partnerships such as the Operating
Partnership, Funding I, Funding II, Funding III, Funding IV and Funding V (and
possibly to business trusts such as Crescent Equities). Whether or when any of
these provisions, or any alternative provisions, will ultimately be enacted, or
what provisions they will contain if they are enacted, cannot be ascertained at
this time.
On April 7, 1997, the House Select Committee on Revenue and Public
Education Funding of the Texas House of Representatives released an omnibus tax
bill that would significantly expand the Texas franchise tax and the Texas sales
tax. Effective for annual reports due on or after January 1, 1998, the bill, if
enacted in its current form, would broaden the franchise tax to apply not only
to corporations and limited liability companies, but to substantially all
business entities including business trusts and limited partnerships.
Accordingly, the Texas franchise tax would apply to Crescent Equities and its
subsidiary partnerships that are doing business in Texas, including the
Operating Partnership, Funding I, Funding II, Funding III, Funding IV and
Funding V, and to Funding VI (as to which the franchise tax is not expected to
be substantial).
Effective on October 1, 1997, the bill, if enacted in its current form,
would expand the sales tax base to include numerous items that are currently
exempt or excluded. The expansion would apply to both state sales and local
sales taxes. The state sales tax rate is 6.25% percent of the sales price of a
taxable item. The bill, if enacted in its current form, would subject commercial
leases of real property to the sales tax, where the lessee uses the property in
furtherance of a trade or business.
Whether the bill will be enacted in its current form or at all cannot be
ascertained at this time. Enactment of the bill would require submission to, and
approval by, the Texas House of Representatives, the Texas Senate and the
Governor of Texas.
Locke Purnell Rain Harrell (A Professional Corporation), special tax
counsel to the Company ("Special Tax Counsel"), has reviewed the discussion in
this section with respect to Texas franchise tax matters and is of the opinion
that, based on the current structure of Crescent Equities and based upon current
law, it accurately summarizes the Texas franchise tax matters expressly
described herein. Special Tax Counsel expresses no opinion on any other tax
considerations affecting Crescent Equities or a holder of Common Shares,
including, but not limited to, other Texas franchise tax matters not
specifically discussed above.
Tax Counsel has not reviewed the discussion in this section with respect to
Texas franchise tax matters and has expressed no opinion with respect thereto.
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UNDERWRITING
Subject to the terms and conditions set forth in the international purchase
agreement and related international terms agreement (collectively, the
"International Purchase Agreement") among the Company and each of the
underwriters named below (the "International Managers"), the Company has agreed
to sell to each of the International Managers, for whom Merrill Lynch
International, Bear, Stearns International Limited, Dean Witter International
Ltd., Donaldson, Lufkin & Jenrette Securities Corporation, PaineWebber
International (U.K.) Ltd. and Smith Barney Inc. are acting as lead managers, and
each of the International Managers severally has agreed to purchase from the
Company, the aggregate number of Common Shares set forth below opposite their
respective names:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
- ------------------------------------------------------------ --------------
<S> <C>
Merrill Lynch International.................................
Bear, Stearns International Limited.........................
Dean Witter International Ltd. .............................
Donaldson, Lufkin & Jenrette Securities Corporation.........
PaineWebber International (U.K.) Ltd. ......................
Smith Barney Inc. ..........................................
---------
Total.......................................... 3,500,000
=========
</TABLE>
The Company has also entered into a purchase agreement (the "U.S. Purchase
Agreement" and, together with the International Purchase Agreement, the
"Purchase Agreements") with certain underwriters in the United States and Canada
(the "U.S. Underwriters" and, together with the International Managers, the
"Underwriters") for whom Merrill Lynch, Pierce, Fenner & Smith Incorporated
("Merrill Lynch"), Bear, Stearns & Co. Inc., Dean Witter Reynolds Inc. ("Dean
Witter"), Donaldson, Lufkin & Jenrette Securities Corporation, PaineWebber
Incorporated and Smith Barney Inc. are acting as representatives. Subject to the
terms and conditions set forth in the U.S. Purchase Agreement, and concurrently
with the sale of 3,500,000 Common Shares to the International Managers pursuant
to the International Purchase Agreement, the Company has agreed to sell to the
U.S. Underwriters, and the U.S. Underwriters have severally agreed to purchase
from the Company, an aggregate of 14,000,000 Common Shares. The public offering
price per share and the underwriting discount per share are identical under the
U.S. Purchase Agreement and the International Purchase Agreement.
In each Purchase Agreement, the U.S. Underwriters and the International
Managers have agreed, subject to the terms and conditions set forth therein, to
purchase all of the shares being sold pursuant to each such Purchase Agreement
if any of such Common Shares are purchased. Under certain circumstances, the
commitments of nondefaulting U.S. Underwriters or International Managers may be
increased. The closing with respect to the sale of the shares to be purchased by
the International Managers and the U.S. Underwriters are conditioned one upon
the other.
The International Managers have advised the Company that the International
Managers propose initially to offer the Common Shares to the public at the price
per share set forth on the cover page of this Prospectus Supplement and to
certain dealers at such price less a concession not in excess of $ per
share. The International Managers may allow, and such dealers may re-allow, a
discount not in excess of $ per share on sales to certain other
dealers. After the date of this Prospectus Supplement, the initial price per
share to the public and concession and discount may be changed by the
International Managers.
The Company has been informed that the U.S. Underwriters and the
International Managers have entered into an intersyndicate agreement (the
"Intersyndicate Agreement") that provides for the coordination of their
activities. Under the terms of the Intersyndicate Agreement, the U.S.
Underwriters and the International Managers are permitted to sell Common Shares
to each other for purposes of resale at the price per share to the public on the
cover page of this Prospectus Supplement, less an amount not greater than the
selling concession. Under the terms of the Intersyndicate Agreement, the
International Managers and any dealer to whom they sell Common Shares will not
offer to sell or sell Common Shares to persons who are United States persons or
Canadian persons or to persons they believe intend to resell to persons who are
United States persons or Canadian persons, and the U.S. Underwriters and any
dealer to whom they sell Common Shares will not offer to sell or sell Common
Shares to
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persons who are non-United States and non-Canadian persons or to persons they
believe intend to resell to persons who are non-United States and non-Canadian
persons, except in each case for transactions pursuant to the Intersyndicate
Agreement.
Each International Manager has agreed that (i) it has not offered or sold,
and it will not offer or sell, directly or indirectly, any Common Shares offered
hereby in the United Kingdom by means of any document except in circumstances
which do not constitute an offer to the public within the meaning of the
Companies Act 1985, (ii) it has complied and will comply with all applicable
provisions of the Financial Services Act 1986 with respect to anything done by
it in relation to the Common Shares in, from or otherwise involving the United
Kingdom, and (iii) it has only issued or passed on and will only issue or pass
on in the United Kingdom any document received by it in connection with the
issuance of Common Shares to a person who is of a kind described in Article 9(3)
of the Financial Services Act 1986 (Investment advertisements) (Exemptions)
Order 1988 or is a person to whom the document may otherwise lawfully be issued
or passed on.
Purchasers of Common Shares offered hereby may be required to pay stamp
taxes and other charges in accordance with the laws and practices of the country
of purchase, in addition to the price per share to the public set forth on the
cover of this Prospectus Supplement.
The Company has granted an option to the International Managers,
exercisable during the 30-day period after the date of this Prospectus
Supplement, to purchase up to 525,000 additional Common Shares solely to cover
over-allotments, if any, at the price per share to the public set forth on the
cover page of this Prospectus Supplement, less the underwriting discount set
forth on the cover of this Prospectus Supplement. To the extent that the
International Managers exercise this option, each International Manager will
have a firm commitment, subject to certain conditions, to purchase approximately
the same percentage thereof which the number of Common Shares to be purchased by
it shown in the foregoing table bears to the Common Shares initially offered
hereby. The Company has granted an option to the U.S. Underwriters, exercisable
during the 30-day period after the date of this Prospectus Supplement, to
purchase up to 2,100,000 additional Common Shares solely to cover
over-allotments, if any, on terms similar to those granted to the International
Managers.
In the Purchase Agreement, the Company has agreed to indemnify the several
Underwriters against certain civil liabilities, including liabilities under the
Securities Act of 1933 (the "Securities Act"), or to contribute to payments the
Underwriters may be required to make in respect thereof.
In connection with the Offering, each of the officers and trust managers of
the Company has agreed not to offer, sell, contract to sell or otherwise dispose
of any capital stock of the Company or Units for a period of 90 days after the
closing of the Offering without the prior written consent of Merrill Lynch and
the Company.
In connection with the Offering, the rules of the Securities and Exchange
Commission permit the U.S. Representatives and the International Managers to
engage in certain transactions that stabilize the price of the Common Shares.
Such transactions may consist of bids or purchases for the purpose of pegging,
fixing or maintaining the price of the Common Shares.
If the U.S. Underwriters or International Managers create a short position
in the Common Shares in connection with the offering, i.e., if they sell more
Common Shares than are set forth on the cover page of this Prospectus
Supplement, the U.S. Representatives and the International Managers,
respectively, may reduce that short position by purchasing Common Shares in the
open market.
The U.S. Representatives and the International Managers may also impose a
penalty bid on certain Underwriters and selling group members. This means that
if the U.S. Representatives and the International Managers purchase Common
Shares in the open market to reduce the U.S. Underwriters' or International
Managers' short position, respectively, or to stabilize the price of the Common
Shares, they may reclaim the amount of the selling concession from the
Underwriters and any selling group members who sold those Common Shares as part
of the Offering.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases. The imposition of a penalty bid
might also have an effect on the price of a security to the extent that it were
to discourage resales of the security.
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Neither the Company nor any of the Underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the Common Shares. In addition, neither
the Company nor any of the Underwriters makes any representation that the U.S.
Representatives or the International Managers will engage in such transactions
or that such transactions, once commenced, will not be discontinued without
notice.
Merrill Lynch from time to time provides investment banking and financial
advisory services to the Company, and provided an opinion to the Operating
Partnership and a special committee of the Board of Trust Managers in connection
with the pending Magellan transaction, for which customary compensation has been
received. In addition, Dean Witter provided an opinion to the board of directors
of Magellan in connection with the pending Magellan transaction, for which
customary compensation was received.
The Common Shares are listed on the NYSE under the symbol "CEI."
LEGAL MATTERS
The legality of the Common Shares offered hereby will be passed upon for
the Company by Shaw, Pittman, Potts & Trowbridge, Washington, D.C. Certain legal
matters described under "Federal Income Tax Considerations" will be passed upon
for the Company by Shaw, Pittman, Potts & Trowbridge, which will rely, as to all
Texas franchise tax matters, upon the opinion of Locke Purnell Rain Harrell (A
Professional Corporation), Dallas, Texas. Certain legal matters related to the
Offering will be passed upon for the Underwriters by Hogan & Hartson L.L.P.,
Washington, D.C.
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GLOSSARY
"ADR" means average daily rate.
"April 1995 Offering" means the public offering of Common Shares that
closed on April 4, 1995.
"Board of Trust Mangers" means the Board of Trust Managers of Crescent
Equities.
"Book-Tax Difference" means the difference between the fair market value
and the adjusted tax basis of property at the time of its contribution to a
partnership.
"CBD" means central business district.
"CBHS" means the limited liability company to be owned 50% by Crescent
Affiliate and 50% by Magellan.
"CDMC" means Crescent Development Management Corporation, a Delaware
corporation that is one of the Residential Development Corporations, which
indirectly owns interests in six Residential Development Properties in Colorado
(Cresta, Market Square, The Reserve at Frisco, One Beaver Creek, Eagle Ranch and
Villa Montane), approximately 90% of the effective interest in which is owned by
the Company through its investment in the non-voting common stock and
approximately 90% of the economic interest in which is owned by the Company
through its investments in the applicable Residential Development Property
Mortgage and non-voting common stock.
"Carter-Crowley" means Carter-Crowley Properties, Inc.
"Carter-Crowley Office Portfolio" means the 14 office properties, located
in seven suburban submarkets of Dallas, Texas, with an aggregate of
approximately 3.0 million net rentable square feet to be acquired by the
Company.
"Carter-Crowley Portfolio" means the assets to be purchased by the Company
and Crescent Affiliate from Carter-Crowley.
"Code" means the Internal Revenue Code of 1986, as amended.
"Common Shares" means the common shares of beneficial interest, $0.01 par
value, of Crescent Equities.
"Company" means, unless the context requires otherwise, Crescent Equities,
the Predecessor Corporation, the Operating Partnership and the other
subsidiaries of Crescent Equities.
"Credit Facility" means the Company's line of credit from the consortium of
financial institutions led by The First National Bank of Boston in the aggregate
principal amount of up to $175 million.
"CREE Ltd." means Crescent Real Estate Equities, Ltd., a Delaware
corporation that is a wholly owned subsidiary of Crescent Equities and the sole
general partner of the Operating Partnership.
"CresCal" means CresCal Properties, L.P., a Delaware limited partnership
whose 1% general partner is an indirect subsidiary of CREE Ltd. and whose 99%
limited partner is the Operating Partnership.
"Crescent Affiliate" means the new corporation to be established by the
Company, with the shares of Crescent Affiliate to be distributed to the
shareholders of Crescent Equities and the partners of the Operating Partnership,
on a pro forma basis, in a spin-off.
"Crescent Equities" means Crescent Real Estate Equities Company, a Texas
real estate investment trust.
"Declaration of Trust" means the Restated Declaration of Trust of Crescent
Equities, as in effect as of the date of this Prospectus Supplement.
"Exchange Rights" means the rights granted to Limited Partners of the
Operating Partnership to exchange their Units for Common Shares on a one-for-two
basis or, at the election of the Company, for cash equal to the then-current
fair market value of the number of Common Shares for which such Units are
exchangeable.
"FIRPTA" means the Foreign Investment in Real Property Tax Act of 1980, as
amended.
"Funding I" means Crescent Real Estate Funding I, L.P., a Delaware limited
partnership whose 1% general partner is an indirect subsidiary of CREE Ltd. and
whose 99% limited partner is the Operating Partnership.
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"Funding II" means Crescent Real Estate Funding II, L.P., a Delaware
limited partnership whose 1% general partner is an indirect subsidiary of CREE
Ltd. and whose 99% limited partner is the Operating Partnership.
"Funding III" means Crescent Real Estate Funding III, L.P., a Delaware
limited partnership whose 1% general partner is an indirect subsidiary of CREE
Ltd. and whose 99% limited partner is the Operating Partnership.
"Funding IV" means Crescent Real Estate Funding IV, L.P., a Delaware
limited partnership whose 1% general partners are indirect subsidiaries of CREE
Ltd. and whose 99% limited partner is the Operating Partnership.
"Funding V" means Crescent Real Estate Funding V, L.P., a Delaware limited
partnership whose 1% general partner is an indirect subsidiary of CREE Ltd. and
whose 99% limited partner is the Operating Partnership.
"Funding VI" means Crescent Real Estate Funding VI, L.P., a Delaware
limited partnership whose 1% general partner is an indirect subsidiary of CREE
Ltd. and whose 99% limited partner is the Operating Partnership.
"Greenway Plaza Office Portfolio" means the 10 suburban office properties
with an aggregate of approximately 4.3 million net rentable square feet located
in Houston, Texas.
"Greenway Plaza Portfolio" means the property portfolio located in Houston,
Texas that consists primarily of the Greenway Plaza Office Portfolio, a 389-room
full-service hotel and a private health and dining club.
"HADC" means Houston Area Development Corp., a Texas corporation that is
one of the Residential Development Corporations, and that directly owns the
Falcon Point Residential Development Property and the Spring Lakes Residential
Development Property, approximately 94% of the effective interest in which is
owned by the Company through its investments in the non-voting common stock and
approximately 98% of the economic interest in which is owned by the Company
through its investments in the applicable Residential Development Property
Mortgages and non-voting common stock.
"Hotel Lessees" means the four Texas limited liability companies in which
each of Messrs. Goff and Haddock directly or indirectly owns a 4.5% interest,
one of which is the lessee of the Hyatt Regency Beaver Creek and the Hyatt
Regency Albuquerque, one of which is the lessee of Canyon Ranch-Tucson and
Canyon Ranch-Lenox, one of which is the lessee of Sonoma Mission Inn & Spa and
one of which is the lessee of the Denver Marriott City Center.
"Hotel Properties" means the Hyatt Regency Beaver Creek, the Denver
Marriott City Center, the Hyatt Regency Albuquerque, Sonoma Mission Inn & Spa,
Canyon Ranch-Tucson and Canyon Ranch-Lenox.
"Initial Offering" means the initial public offering of Common Shares that
closed on May 5, 1994.
"International Manager(s)" means the various underwriters who have agreed
to purchase Common Shares in the International Offering, and any of them.
"International Offering" means the offering made outside of the United
States and Canada of 3,500,000 Common Shares (assuming no exercise of the
Underwriter's over-allotment option) by the International Managers.
"International Purchase Agreement" means the purchase agreement and related
international terms agreement between the Company and the International Managers
for the purchase of Common Shares in the International Offering.
"Intersyndicate Agreement" means the agreement between the International
Managers and the U.S. Underwriters that provides for the coordination of their
activities.
"IRS" means the United States Internal Revenue Service.
"Limited Partner(s)" means the limited partners in the Operating
Partnership, and any of them.
"Magellan" means Magellan Health Services, Inc.
"Magellan Facilities" means the approximately 90 behavioral healthcare
facilities to be acquired by the Company.
"Management I" means CRE Management I Corp., a Delaware corporation that is
the sole general partner of Funding I and a wholly owned subsidiary of CREE Ltd.
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"Management II" means CRE Management II Corp., a Delaware corporation that
is the sole general partner of Funding II and a wholly owned subsidiary of CREE
Ltd.
"Management III" means CRE Management III Corp., a Delaware corporation
that is the sole general partner of Funding III and a wholly owned subsidiary of
CREE Ltd.
"Management IV" means CRE Management IV Corp., a Delaware corporation that
is the sole general partner of Funding IV and a wholly owned subsidiary of CREE
Ltd.
"Management V" means CRE Management V Corp., a Delaware corporation that is
the sole general partner of Funding V and a wholly owned subsidiary of CREE Ltd.
"Management VI" means CRE Management VI Corp., a Delaware corporation that
is the sole general partner of Funding VI and a wholly owned subsidiary of CREE
Ltd.
"MVDC" means Mira Vista Development Corporation, a Texas corporation that
is one of the Residential Development Corporations, that directly owns the Mira
Vista Residential Development Property, approximately 94% of the effective
interest in which is owned by the Company through its investments in the
non-voting common stock and approximately 98% of the economic interest in which
is owned by the Company through its investments in the applicable Residential
Development Property Mortgage and non-voting common stock.
"NAREIT" means the National Association of Real Estate Investment Trusts.
"NYSE" means the New York Stock Exchange.
"Non-U.S. Shareholder(s)" means one or more nonresident alien individual,
foreign corporation, foreign partnership or other foreign shareholder of the
Company.
"October 1996 Offering" means the public offering of Common Shares that
closed on October 2, 1996.
"Offering" means the U.S. Offering and the International Offering,
collectively.
"Office Property(ies)" means 44 Cook, 55 Madison, 160 Spear Street, 301
Congress Avenue, 1615 Poydras, 3333 Lee Parkway, 6225 North 24th Street, 12404
Park Central, AT&T, The Aberdeen, Albuquerque Plaza, The Avallon, Bank One
Tower, Barton Oaks Plaza One, Briargate Office and Research Center, Caltex
House, Central Park Plaza, Chancellor Park, The Citadel, Continental Plaza, The
Crescent Office Towers, Frost Bank Plaza, Greenway I, Greenway IA, Greenway II,
the Greenway Plaza Office Portfolio, Liberty Plaza I & II, MacArthur Center I &
II, MCI Tower, Ptarmigan Place, Regency Plaza One, Spectrum Center, Stanford
Corporate Centre, Three Westlake Park, Trammell Crow Center, Two Renaissance
Square, Waterside Commons and The Woodlands Office Properties.
"Operating Partnership" means Crescent Real Estate Equities Limited
Partnership, a Delaware limited partnership, in which CREE Ltd. holds a 1%
general partner interest, Crescent Equities holds an 83.4% limited partner
interest and limited partners (other than Crescent Equities) hold, in the
aggregate, a 15.6% limited partner interest.
"Ownership Limit" means the prohibition on ownership, directly or by virtue
of the attribution provisions of the Code, of more than 8.0% of the issued and
outstanding Common Share by any single shareholder (or in the case of Richard E.
Rainwater and certain related persons as a group, more than 9.5% of the issued
and outstanding Common Shares) and on ownership, directly or by virtue of the
attribution provisions of the Code, of more than 9.9% of the issued and
outstanding shares of any series of preferred shares by any single shareholder.
"Pending Investments" means the approximately $698.0 million of pending
investments of the Company as of March 31, 1997, consisting primarily of the
Carter-Crowley Office Portfolio, certain other assets included in the
Carter-Crowley Portfolio and the Magellan Facilities.
"Predecessor Corporation" means Crescent Real Estate Equities, Inc., a
Maryland corporation which was the predecessor in interest to Crescent Equities.
"Property(ies)" means the Office Properties, the Retail Properties, the
Hotel Properties, the economic interests in the Residential Development
Properties, and any of them.
S-76
<PAGE> 77
"Prospectus" means the prospectus, as the same may be amended.
"Prospectus Supplement" means this prospectus supplement, as the same may
be amended.
"Purchase Agreement" means the International Purchase Agreement and the
U.S. Purchase Agreement, collectively.
"Rainwater Property Group" means the entities that contributed Properties
to the Company in exchange for Units or Common Shares in connection with the
formation of the Company.
"REIT" means a real estate investment trust.
"Related Party Tenant" means a tenant of a property owned by a REIT, 10% or
more of which is owned by the REIT or by a 10% or more owner of the REIT.
"Residential Development Corporation(s)" means CDMC, HADC, MVDC, and any of
them.
"Residential Development Property(ies)" means the Mira Vista Residential
Development Property, the Falcon Point Residential Development Property, the
Spring Lakes Residential Development Property, The Highlands Residential
Development Property, The Reserve at Frisco Residential Development Property,
the Whitehawk Ranch Residential Development Property, the One Beaver Creek
Residential Development Property, the Cresta Residential Development Property,
the Market Square Residential Development Property, the Eagle Ranch Residential
Development Property, the Villa Montane Residential Development Property, and
any of them.
"Residential Development Property Mortgage(s)" means (i) the mortgage in
the principal amount of $14.4 million secured by the Mira Vista Residential
Development Property, (ii) the mortgages in the aggregate principal amount of
$14.4 million secured by the Falcon Point Residential Development Property and
the Spring Lakes Residential Development Property, (iii) the promissory note in
the principal amount of $20.2 million (of which $15.5 million had been advanced
as of March 31, 1997), which is secured by both CDMC's limited partner interest
in a partnership that owns six Residential Development Properties located in
Colorado and the obligation of the voting shareholders to make certain
additional capital contributions to CDMC, and (iv) the promissory note in the
principal amount of $4.0 million, of which $3.8 million had been advanced as of
March 31, 1997, secured by the Whitehawk Ranch Residential Development Property,
or any of them.
"Retail Properties" means Las Colinas Plaza, The Crescent Atrium and The
Woodlands Retail Properties.
"REVPAR" means revenue per available room.
"Securities Act" means the Securities Act of 1933, as amended.
"Special Tax Counsel" means Locke Purnell Rain Harrell (A Professional
Corporation), special tax counsel to the Company.
"Tax Counsel" means Shaw, Pittman, Potts & Trowbridge, tax counsel to the
Company.
"Treasury Regulations" means the regulations promulgated by the United
States Department of Treasury under the Code.
"UBTI" means unrelated business taxable income under the Code.
"Underwriters" means the U.S. Underwriters and the International Managers,
collectively.
"Units" means units of ownership interest in the Operating Partnership,
each of which is exchangeable on a one-for-two basis for Common Shares or, at
the option of the Company, the cash equivalent thereof, and any of them.
"U.S. Offering" means the offering in the United States and Canada of
14,000,000 Common Shares (assuming no exercise of the Underwriter's
over-allotment option) by the U.S. Underwriters.
"U.S. Purchase Agreement" means the purchase agreement and the related
terms agreement between the Company and the U.S. Underwriters for the purchase
of Common Shares in the U.S. Offering.
S-77
<PAGE> 78
"U.S. Representatives" means Merrill Lynch, Pierce, Fenner & Smith
Incorporated, Bear, Stearns & Co. Inc., Dean Witter Reynolds Inc., Donaldson,
Lufkin & Jenrette Securities Corporation, PaineWebber Incorporated and Smith
Barney Inc., the representatives of the U.S. Underwriters in the U.S. Offering.
"U.S. Underwriters" means the various underwriters who have agreed to
purchase Common Shares in the U.S. Offering, and any of them.
"WRE" means Woodlands Retail Equities -- '96 Limited, a partnership in
which the Company has a 75% limited partner interest and which owns The
Woodlands Retail Properties.
S-78
<PAGE> 79
The inside back cover displays five pictures of properties to be
acquired by the Company in connection with the acquisition of the
Center-Crowley Office Portfolio. The pictures are (i) Meridian, (ii) Stemmons
Place, (iii) Walnut Green, (iv) Palisades Central II and (v) Amberton, all of
which are located in Dallas, Texas.
<PAGE> 80
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NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED OR
INCORPORATED BY REFERENCE IN THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS IN
CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. NEITHER THE
DELIVERY OF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCE, CREATE ANY IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS SUPPLEMENT OR IN THE
PROSPECTUS OR IN AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF. THIS PROSPECTUS
SUPPLEMENT AND THE PROSPECTUS DO NOT CONSTITUTE AN OFFER OR SOLICITATION BY
ANYONE IN ANY STATE IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN
WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR
TO ANYONE TO WHOM IT IS UNLAWFUL TO MAKE SUCH OR SOLICITATION.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PROSPECTUS SUPPLEMENT
Prospectus Supplement Summary............... S-3
The Company................................. S-11
Recent Developments......................... S-14
Properties.................................. S-23
Debt Structure.............................. S-48
Use of Proceeds............................. S-50
Price Range of Common Shares and
Distributions............................. S-50
Capitalization.............................. S-52
Selected Financial Data..................... S-53
Management.................................. S-56
Structure of the Company.................... S-56
Federal Income Tax Considerations........... S-58
Underwriting................................ S-71
Legal Matters............................... S-73
Glossary.................................... S-74
PROSPECTUS
The Company................................. 2
Risk Factors................................ 2
Use of Proceeds............................. 6
Ratios of Earnings to Combined Fixed Charges
and Preferred Shares Dividends............ 6
Description of Preferred Shares............. 6
Description of Common Shares................ 11
Description of Common Share Warrants........ 13
Certain Provisions of the Declaration of
Trust, Bylaws and Texas Law............... 14
ERISA Considerations........................ 18
Plan of Distribution........................ 19
Available Information....................... 20
Incorporation of Certain Documents by
Reference................................. 21
Experts..................................... 21
Legal Matters............................... 21
</TABLE>
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17,500,000 SHARES
[CRESCENT LOGO]
COMMON SHARES
------------------------
PROSPECTUS SUPPLEMENT
------------------------
MERRILL LYNCH INTERNATIONAL
BEAR, STEARNS
INTERNATIONAL LIMITED
DEAN WITTER
INTERNATIONAL LTD.
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
PAINEWEBBER INTERNATIONAL
SMITH BARNEY INC.
, 1997
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