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FILED PURSUANT TO RULE 424(b)(5)
REGISTRATION NO. 333-38071
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED DECEMBER 12, 1997)
5,375,000 SHARES
[CRESCENT LOGO]
COMMON SHARES
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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
offers hereby 5,375,000 common shares of beneficial interest (the "Common
Shares") to Merrill Lynch International ("MLI") at a price of $38.125 per share.
The Common Shares are listed on the New York Stock Exchange (the "NYSE") under
the symbol "CEI." On December 12, 1997, the last reported sale price of the
Common Shares on the NYSE was $38.125 per share. It is expected that delivery of
the Common Shares offered hereby will be made in New York, New York, on or about
December 19, 1997.
SEE "RISK FACTORS" AT PAGE 2 IN THE ACCOMPANYING PROSPECTUS FOR CERTAIN
FACTORS RELEVANT TO AN INVESTMENT IN THE COMPANY.
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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.
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The date of this Prospectus Supplement is December 12, 1997.
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THE COMPANY
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.
The Company is a fully integrated real estate company, operated as a real
estate investment trust for federal income tax purposes (a "REIT"), which, as of
December 12, 1997, owned a portfolio of real estate assets (the "Properties")
that included 79 office properties (the "Office Properties") with an aggregate
of approximately 27.9 million net rentable square feet, approximately 91
behavioral healthcare facilities (the "Behavioral Healthcare Facilities"), five
full-service hotels with a total of 1,900 rooms and two destination health and
fitness resorts that can accommodate up to 442 guests daily (collectively, the
"Hotel Properties"), the real estate mortgages and non-voting common stock in
five residential development corporations (the "Residential Development
Corporations"), which in turn, through joint ventures or partnership
arrangements, own interests in 14 residential development properties (the
"Residential Development Properties"), and seven retail properties (the "Retail
Properties") with an aggregate of approximately 771,000 net rentable square
feet. The Office Properties and the Retail Properties are located primarily in
21 metropolitan submarkets in Texas and Colorado. In addition, the Company owns
a 40% interest in each of two partnerships, one of which owns Americold
Corporation ("Americold") and the other of which owns URS Logistics, Inc.
("URS"). Americold and URS are the two largest suppliers of public refrigerated
warehouse space in the United States and currently own and operate approximately
79 refrigerated warehouses with an aggregate of approximately 368 million cubic
feet.
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.
RISK FACTORS
Prospective investors should carefully consider the following summary
information in conjunction with the other information contained in this
Prospectus before purchasing Securities.
CONCENTRATION OF ASSETS
A significant portion of the Company's assets are, and revenues are derived
from, Properties located in the metropolitan areas of Dallas-Fort Worth and
Houston, Texas. Due to this geographic concentration, any deterioration in
economic conditions in the Dallas-Fort Worth or Houston metropolitan areas or
other geographic markets in which the Company in the future may acquire
substantial assets could have a substantial effect on the financial condition
and results of operations of the Company.
RISKS ASSOCIATED WITH THE ACQUISITION OF SUBSTANTIAL NEW ASSETS
From the closing of the Company's initial public offering in May 1994
through September 30, 1997, the Company has experienced rapid growth, increasing
its total assets by approximately 940 percent. There can be
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no assurance that the Company will be able to manage its growth effectively and
the failure to do so may have a material adverse effect on the financial
condition and results of operations of the Company.
PURCHASES FROM FINANCIALLY DISTRESSED SELLERS
Implementation of the Company's strategy of investing in real estate assets
in distressed circumstances has resulted in the acquisition of certain
Properties from owners that were in poor financial condition, and such strategy
is expected to result in the purchase of additional properties under similar
circumstances in the future. In addition to general real estate risks,
properties acquired in distress situations present risks related to inadequate
maintenance, negative market perception and continuation of circumstances which
precipitated the distress originally.
CHANGE IN POLICIES
The Board of Trust Managers provides guidance to the senior management of
the Operating Partnership regarding the Company's operating and financial
policies and strategies, including its policies and strategies with respect to
acquisitions, growth, operations, indebtedness, capitalization and
distributions. These policies and strategies may be revised, from time to time,
without shareholder approval. Changes in the Company's policies and strategies
could adversely affect the Company's financial condition and results of
operations. In addition, the Company has the right and intends to acquire
additional real estate assets pursuant to and consistent with its investment
strategies and policies without shareholder approval.
POSSIBLE ADVERSE CONSEQUENCES OF OWNERSHIP LIMIT
The limitation on ownership of Common Shares set forth in the Company's
Restated Declaration of Trust (the "Declaration of Trust") could have the effect
of discouraging offers to acquire the Company and of inhibiting or impeding a
change in control and, therefore, could adversely affect the shareholders'
ability to realize a premium over the then-prevailing market price for the
Common Shares in connection with such a transaction.
RELIANCE ON KEY PERSONNEL
The Company is dependent on the efforts of Mr. Richard E. Rainwater,
Chairman of the Board of Trust Managers, and other senior management personnel.
While the Company believes that it could find replacements for these key
executives, the loss of their services could have an adverse effect on the
operations of the Company. Mr. Rainwater has no employment agreement with the
Company and, therefore, is not obligated to remain with the Company for any
specified term. John C. Goff, Trust Manager and Vice Chairman of the Board of
Trust Managers, and Gerald W. Haddock, President, Chief Executive Officer and
Trust Manager, have entered into employment agreements with the Company, and
each of Messrs. Rainwater, Goff and Haddock has entered into a noncompetition
agreement with the Company. The Company has not obtained key-man insurance for
any of its senior management personnel.
RISKS RELATING TO QUALIFICATION AND OPERATION AS A REIT
The Company intends to continue to operate in a manner so as to qualify as
a REIT under the Internal Revenue Code of 1986, as amended (the "Code"). A
qualified REIT generally is not taxed at the corporate level on income it
currently distributes to its shareholders, so long as it distributes at least 95
percent of its taxable income currently and satisfies certain other highly
technical and complex requirements. Unlike many REITs, which tend to make only
one or two types of real estate investment, the Company invests in a broad range
of real estate products, and certain of its investments are more complicated
than those of other REITs. As a result, the Company is likely to encounter a
greater number of interpretative issues under the REIT qualification rules, and
more such issues which lack clear guidance, than are other REITs. The Company,
as a matter of policy, regularly consults with outside tax counsel in
structuring its new investments. The Company has received an opinion from Shaw,
Pittman, Potts & Trowbridge ("Tax Counsel") that the Company qualified as a REIT
under the Code for its taxable years ending on or before December 31, 1996, is
organized
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in conformity with the requirements for qualification as a REIT under the Code
and its proposed manner of operation will enable it to continue to meet the
requirements for qualification as a REIT. However, this opinion is based upon
certain representations made by the Company and the Operating Partnership and
upon existing law, which is subject to change, both retroactively and
prospectively, and to possibly different interpretations. Furthermore, Tax
Counsel's opinion is not binding upon either the Internal Revenue Service or the
courts. Because the Company's qualification as a REIT in its current and future
taxable years depends upon its meeting the requirements of the Code in future
periods, no assurance can be given that the Company will continue to qualify as
a REIT in the future. If, in any taxable year, the Company were to fail to
qualify as a REIT for federal income tax purposes, it would not be allowed a
deduction for distributions to shareholders in computing taxable income and
would be subject to federal income tax (including any applicable alternative
minimum tax) on its taxable income at regular corporate rates. In addition,
unless entitled to relief under certain statutory provisions, the Company would
be disqualified from treatment as a REIT for federal income tax purposes for the
four taxable years following the year during which the qualification was lost.
The additional tax liability resulting from the failure to so qualify would
significantly reduce the amount of funds available for distribution to
shareholders.
RISKS RELATING TO DEBT
The Company's organizational documents do not limit the level or amount of
debt that it may incur. It is the Company's current policy to pursue a strategy
of conservative use of leverage, generally with a ratio of debt to total market
capitalization targeted at approximately 40 percent, although this policy is
subject to reevaluation and modification by the Company and could be increased
above 40 percent. The Company has based its debt policy on the relationship
between its debt and its total market capitalization, rather than the book value
of its assets or other historical measures that typically have been employed by
publicly traded REITs, because management believes that market capitalization
more accurately reflects the Company's ability to borrow money and meet its debt
service requirements. Market capitalization is, however, more variable than book
value of assets or other historical measures. There can be no assurance that the
ratio of indebtedness to market capitalization (or any other measure of asset
value) or the incurrence of debt at any particular level would not adversely
affect the financial condition and results of operations of the Company.
RISKS RELATING TO CONTROL OF CERTAIN PROPERTIES
Hotel Risks. The Company has leased the Hotel Properties to subsidiaries of
Crescent Operating, Inc. ("COI"), and such subsidiaries, rather than the
Company, are entitled to exercise all rights of the owner of the respective
hotel. The Company will receive both base rent and a percentage of gross sales
above a certain minimum level pursuant to the leases, which expire between 2004
and 2007. As a result, the Company will participate in the economic operations
of the Hotel Properties only through its indirect participation in gross sales.
To the extent that operations of the Hotel Properties may affect the ability of
such subsidiaries to pay rent, the Company also may indirectly bear the risks
associated with any increases in expenses. Each of the Hotel Properties is
managed pursuant to a management agreement. The amount of rent payable to the
Company under the leases with respect to the Hotel Properties will depend on the
ability of such subsidiaries and the managers of the Hotel Properties to
maintain and increase revenues from the Hotel Properties. Accordingly, the
Company's results of operations will be affected by such factors as changes in
general economic conditions, the level of demand for rooms and related services
at the Hotel Properties, the ability of the subsidiaries and the managers of the
Hotel Properties to maintain and increase gross revenues at the Hotel
Properties, competition in the hotel industry and other factors relating to the
operation of the Hotel Properties. In addition, the Company expects, in
accordance with the terms of an intercompany agreement between the Company and
COI (the "Intercompany Agreement"), to lease any hotel properties that it may
acquire in the future to COI (or a subsidiary or subsidiaries) which, as lessees
of any such hotel properties, will be entitled to exercise all rights of the
owner. See "-- Real Estate Risks Specific to the Company's Business -- Potential
Conflicts of Interest."
Lack of Control of Residential Development Corporations. The Company is not
able to elect the boards of directors of the Residential Development
Corporations, and does not have the authority to control the
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management and operation of the Residential Development Corporations. As a
result, the Company does not have the right to control the timing or amount of
dividends paid by the Residential Development Corporations and, therefore, does
not have the authority to require that funds be distributed to it by any of
these entities.
Lack of Control of Americold and URS. The Company owns, through two
subsidiaries, a 40% interest in each of two partnerships, one of which owns
Americold and the other of which owns URS. The remaining 60% interest in the
partnerships is owned by two subsidiaries of Vornado Realty Trust (collectively,
"Vornado"). Under the terms of the existing partnership agreements for each of
the partnerships, Vornado has the right to make all decisions relating to the
management and operation of the partnerships other than certain major decisions
that require the approval of both the Company and Vornado. The partnership
agreement for each of the partnerships provides for a buy-sell arrangement upon
a failure of the Company and Vornado to agree on any of the specified major
decisions which, until November 1, 2000, can only be exercised by Vornado. In
addition, the Company has offered to Crescent Operating, and expects to
transfer, its voting interests in the two subsidiaries that hold the interests
in the partnerships to Crescent Operating (or to another entity if Crescent
Operating does not accept the offer), and thereafter the owner of the voting
interests, rather than the Company, will be entitled to approve certain major
decisions relating to the partnerships. See "-- Real Estate Risks Specific to
the Company's Business -- Risks of Joint Ownership of Assets."
GENERAL REAL ESTATE RISKS
Uncontrollable Factors Affecting Performance and Value. The economic
performance and value of the Company's real estate assets will be subject to all
of the risks incident to the ownership and operation of real estate. These
include the risks normally associated with changes in general national, regional
and local economic and market conditions. Such local real estate market
conditions may include excess supply and competition for tenants, including
competition based on rental rates, attractiveness and location of the property
and quality of maintenance, insurance and management services. In addition,
other factors may affect the performance and value of a property adversely,
including changes in laws and governmental regulations (including those
governing usage, zoning and taxes), changes in interest rates (including the
risk that increased interest rates may result in decreased sales of lots in the
Residential Development Properties) and the availability of financing.
Illiquidity of Real Estate Investments. Because real estate investments are
relatively illiquid, the Company's ability to vary its portfolio promptly in
response to economic or other conditions will be limited. In addition, certain
significant expenditures, such as debt service (if any), real estate taxes, and
operating and maintenance costs, generally are not reduced in circumstances
resulting in a reduction in income from the investment. The foregoing and any
other factor or event that would impede the ability of the Company to respond to
adverse changes in the performance of its investments could have an adverse
effect on the Company's financial condition and results of operations.
Environmental Matters. Under various federal, state and local laws,
ordinances and regulations, an owner or operator of real property may become
liable for the costs of removal or remediation of certain hazardous or toxic
substances released on or in its property, as well as certain other costs
relating to hazardous or toxic substances. Such liability may be imposed without
regard to whether the owner or operator knew of, or was responsible for, the
release of such substances. The presence of, or the failure to remediate
properly, such substances, when released, may adversely affect the owner's
ability to sell the affected real estate or to borrow using such real estate as
collateral. Such costs or liabilities could exceed the value of the affected
real estate. The Company has not been notified by any governmental authority of
any non-compliance, liability or other claim in connection with any of the
Properties and the Company is not aware of any other environmental condition
with respect to any of the Properties that management believes would have a
material adverse effect on the Company's business, assets or results of
operations. Prior to the Company's acquisition of its Properties, independent
environmental consultants conducted or updated Phase I environmental assessments
(which generally do not involve invasive techniques such as soil or ground water
sampling) on the Properties. None of these Phase I assessments or updates
revealed any materially adverse environmental condition not known to the Company
or the independent consultants preparing the assessments. There can be no
assurance, however, that environmental liabilities have not developed since such
environmental assessments were prepared, or that
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future uses or conditions (including, without limitation, changes in applicable
environmental laws and regulations) will not result in imposition of
environmental liability.
REAL ESTATE RISKS SPECIFIC TO THE COMPANY'S BUSINESS
Investment Risks. In implementing its investment strategies, the Company
has invested in a broad range of real estate assets, and in the future, may
invest in additional types of real estate assets not currently included in its
portfolio. There can be no assurance, however, that the Operating Partnership
will be able to implement its investment strategies successfully in the future.
As a result of its real estate investments, the Operating Partnership will be
subject to risks, in addition to general real estate risks, relating to the
specific assets and asset types in which it invests. For example, the Operating
Partnership is subject to risks that, upon expiration, leases for space in the
Office Properties and Retail Properties may not be renewed, the space may not be
re-leased, or the terms of renewal or re-lease (including the cost of required
renovations or concessions to tenants) may be less favorable than current lease
terms. In addition, the Company is subject to risks relating to the Behavioral
Healthcare Facilities, including the effect of any failure of the tenant to make
required lease payments (which equal more than 10% of the Company's current base
rental revenues), the effects of factors, such as regulation of the healthcare
industry and limitations on government disbursement programs, on the ability of
the tenant to make the required lease payments, and the limited number of
replacement tenants in the event of default under, or non-renewal of, the lease.
Similarly, the Company is subject to the risk that the success of its investment
in the Hotel Properties will be highly dependent upon the ability of the Hotel
Properties to compete in such features as access, location, quality of
accommodations, room rate structure and, to a lesser extent, the quality and
scope of other amenities such as food and beverage facilities.
Risks of Joint Ownership of Assets. The Company has the right to invest in
properties and assets jointly with other persons or entities. Joint ownership of
properties, under certain circumstances, may involve risks not otherwise
present, including the possibility that the Company's partners or co-investors
might become bankrupt, that such partners or co-investors might at any time have
economic or other business interests or goals which are inconsistent with the
business interests or goals of the Company, and that such partners or co-
investors may be in a position to take action contrary to the instructions or
the requests of the Company or contrary to the Company's policies or objectives,
including the Company's policy with respect to maintaining its qualification as
a REIT. See "-- Risks Relating to Control of Certain Investments -- Lack of
Control of Americold and URS."
Potential Conflicts of Interest. The Company has entered into the
Intercompany Agreement with COI pursuant to which each has agreed to provide the
other with rights to participate in certain transactions. The certificate of
incorporation of COI, as amended and restated, generally prohibits COI, for so
long as the Intercompany Agreement remains in effect, from engaging in
activities or making investments that a REIT could make, unless the Operating
Partnership was first given the opportunity but elected not to pursue such
activities or investments. In addition, subsidiaries of COI are the lessees of
each of the Hotel Properties, and COI owns a 50% interest in the entity which is
the lessee of the Behavioral Healthcare Facilities and the Company's largest
tenant in terms of current base rental. Richard E. Rainwater and John C. Goff
are, respectively, the Chairman of the Board and the Vice Chairman of the Board
of both the Company and COI, and Gerald W. Haddock also serves as President,
Chief Executive Officer and a director of COI, and serves as President, Chief
Executive Officer and a trust manager of the Company. As of September 30, 1997,
senior management and the trust managers of the Company beneficially owned
approximately 17.2% of the Company's common equity (consisting of Common Shares
and Units, including vested options to purchase Common Shares and Units) and
approximately the same percentage of the outstanding common stock of COI. The
common management and ownership among these entities may lead to conflicts of
interest in connection with transactions between the Operating Partnership and
COI.
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USE OF PROCEEDS
The Company intends to use the proceeds of the Offering (expected to be
approximately $200.8 million after deducting expenses of the Offering) to reduce
amounts outstanding under the Credit Facility. The advances under the Credit
Facility that are to be repaid were used to finance approximately $160.5 million
of the Company's investment in the two partnerships that own Americold and URS
and approximately $40.3 million of the purchase price of Bank One Center.
Advances under the Credit Facility bear interest at the Eurodollar rate plus 120
basis points. The Credit Facility is unsecured and expires in June 2000.
MANAGEMENT
Set forth below is information with respect to the eight trust managers,
all of whom joined the Company as directors in 1994 (except Melvin Zuckerman who
became a trust manager in 1996) and the executive officers.
<TABLE>
<CAPTION>
TERM
NAME EXPIRES AGE POSITION
---- ------- --- --------
<S> <C> <C> <C>
Richard E. Rainwater.................... 1997 53 Chairman of the Board of Trust Managers of the Company
John C. Goff............................ 1999 42 Vice Chairman of the Board of Trust Managers of the Company
Gerald W. Haddock....................... 1998 50 President and Chief Executive Officer of the Company and
CREE Ltd., and Trust Manager of the Company
Anthony M. Frank........................ 1997 66 Trust Manager of the Company
Morton H. Meyerson...................... 1998 59 Trust Manager of the Company
William F. Quinn........................ 1997 49 Trust Manager of the Company
Paul E. Rowsey, III..................... 1999 43 Trust Manager of the Company
Melvin Zuckerman........................ 1997 69 Trust Manager of the Company
Dallas E. Lucas......................... N/A 35 Senior Vice President, Chief Financial and Accounting
Officer of the Company and CREE Ltd.
David M. Dean........................... N/A 37 Senior Vice President, Law, and Secretary of the Company
and CREE Ltd.
James M. Eidson, Jr. ................... N/A 43 Senior Vice President, Acquisitions, of CREE Ltd.
William D. Miller....................... N/A 39 Senior Vice President, Administration, of the Company and
CREE Ltd.
Bruce A. Picker......................... N/A 33 Vice President and Treasurer of the Company and CREE Ltd.
Joseph D. Ambrose, III.................. N/A 46 Vice President, Administration, of CREE Ltd.
Jerry R. Crenshaw, Jr. ................. N/A 33 Vice President and Controller of CREE Ltd.
Barry L. Gruebbel....................... N/A 42 Vice President, Property Management, of CREE Ltd.
Howard W. Lovett........................ N/A 40 Vice President, Corporate Leasing, of CREE Ltd.
John M. Walker, Jr. .................... N/A 47 Vice President, Acquisitions, of CREE Ltd.
John L. Zogg, Jr. ...................... N/A 34 Vice President, Leasing and Marketing, of CREE Ltd.
Murphy C. Yates......................... N/A 50 Director of Leasing and Operations, of CREE Ltd.
</TABLE>
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STRUCTURE OF THE COMPANY
The Company is a fully integrated real estate company operating as a REIT
for federal income tax purposes. The Company provides management, leasing and
development services with respect to certain of its Properties. Crescent
Equities is a Texas real estate investment trust which became the successor to
the Predecessor Corporation, on December 31, 1996, through the merger of the
Predecessor Corporation and CRE Limited Partner, Inc., a subsidiary of the
Predecessor Corporation, into Crescent Equities. The merger was structured to
preserve the existing business, purpose, tax status, management, capitalization
and assets, liabilities and net worth (other than due to the costs of the
transaction) of the Predecessor Corporation, and the economic interests and
voting rights of the stockholders of the Predecessor Corporation (who became the
shareholders of Crescent Equities as a result of the merger).
The direct and indirect subsidiaries of Crescent Equities include the
Operating Partnership; CREE Ltd.; seven special purpose 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 seven separate corporations, each of which is a wholly owned
subsidiary of CREE Ltd. and the general partner of one of the seven limited
partnerships. The Company conducts all of its business through the Operating
Partnership and its other subsidiaries. The Company also has an economic
interest in the development activities of the Residential Development
Corporations.
The following table sets forth, by subsidiary, the Properties owned by such
subsidiary:
<TABLE>
<S> <C>
Operating Partnership: The Addison, Addison Tower, The Amberton, AT&T Building,
Bank One Center(1), Bank One Tower, Canyon Ranch-Tucson,
Cedar Springs Plaza, Central Park Plaza, Chancellor Park(2),
Concourse Office Park, Denver Marriott City Center, Fountain
Place, Four Seasons Hotel-Houston, Frost Bank Plaza,
Greenway I, Greenway IA, Greenway II, Houston Center Office
Properties, MCI Tower, The Meridian, Miami Center, One
Preston Park, Palisades Central I, Palisades Central II,
Park Shops at Houston Center, Reverchon Plaza, Sonoma
Mission Inn & Spa, Spectrum Center(3), Stemmons Place, Three
Westlake Park(4), Trammell Crow Center(5), U.S. Home
Building, The Woodlands Office Properties(6), The Woodlands
Retail Properties(6), Valley Centre, Walnut Green, 44 Cook,
55 Madison, 160 Spear Street, 301 Congress Avenue(7), 1615
Poydras, 3333 Lee Parkway, 5050 Quorum and 6225 North 24th
Street
Crescent Real Estate The Aberdeen, The Avallon, Caltex House, The Citadel,
Funding I, L.P. Continental Plaza, The Crescent Atrium, The Crescent Office
("Funding 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(8)
Funding III, IV and
V, L.P. ("Funding III,
IV and V")
Crescent Real Estate Canyon Ranch-Lenox
Funding VI, L.P.
("Funding VI")
Crescent Real Estate Behavioral Healthcare Facilities
Funding VII, L.P.
("Funding VII")
</TABLE>
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(1) The Operating Partnership owns a 50% interest in the limited partnership
that owns the Bank One Center.
(2) The Operating Partnership owns Chancellor Park through its ownership of a
mortgage note secured by the building and through its direct and indirect
interests in the partnership which owns the building.
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(3) 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 leasor's interest in the land
underlying the building.
(4) The Operating Partnership owns the principal economic interest in Three
Westlake Park through its ownership of a mortgage note secured by the
building.
(5) 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.
(6) The Operating Partnership owns a 75% limited partner interest and an
indirect approximately 10% general partner interest in the partnerships that
own The Woodlands Office and Retail Properties.
(7) The Operating Partnership owns a 49% limited partner interest and
Crescent/301, L.L.C. a wholly owned subsidiary of the General Partner and
the Operating Partnership, owns a 1% general partner interest in 301
Congress Avenue, L.P., the partnership that owns 301 Congress Avenue.
(8) 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.
FEDERAL INCOME TAX CONSIDERATIONS
INTRODUCTION
The following is a summary of the material federal income tax
considerations associated with an investment in the Common Shares offered hereby
prepared by Shaw, Pittman, Potts & Trowbridge, tax counsel to Crescent Equities
("Tax Counsel"). This discussion is based upon the laws, regulations and
reported rulings and decisions in effect as of the date of this Prospectus
Supplement, all of which are subject to change, retroactively or prospectively,
and to possibly differing interpretations. This discussion does not purport to
deal with the federal income or other tax consequences applicable to all
investors in light of their particular investment circumstances or to all
categories of investors, some of whom may be subject to special rules
(including, for example, insurance companies, tax-exempt organizations,
financial institutions, broker-dealers, foreign corporations and persons who are
not citizens or residents of the United States). No ruling on the federal, state
or local tax considerations relevant to the operation of Crescent Equities or
the Operating Partnership or to the purchase, ownership or disposition of the
Common Shares is being requested from the Internal Revenue Service (the "IRS")
or from any other tax authority. Tax Counsel has rendered certain opinions
discussed herein and believes that if the IRS were to challenge the conclusions
of Tax Counsel, such conclusions would prevail in court. However, opinions of
counsel are not binding on the IRS or on the courts, and no assurance can be
given that the conclusions reached by Tax Counsel would be sustained in court.
EACH PROSPECTIVE PURCHASER IS URGED TO CONSULT HIS OR HER OWN TAX ADVISOR
REGARDING THE SPECIFIC TAX CONSEQUENCES TO HIM OR HER OF THE PURCHASE, OWNERSHIP
AND DISPOSITION OF THE COMMON SHARES IN AN ENTITY ELECTING TO BE TAXED AS A REAL
ESTATE INVESTMENT TRUST, INCLUDING THE FEDERAL, STATE, LOCAL, FOREIGN AND OTHER
TAX CONSEQUENCES OF SUCH PURCHASE, OWNERSHIP, DISPOSITION AND ELECTION AND OF
POTENTIAL CHANGES IN APPLICABLE TAX LAWS.
TAXATION OF CRESCENT EQUITIES
Crescent Equities has made an election to be treated as a real estate
investment trust under Sections 856 through 860 of the Code (as used in this
section, a "REIT"), commencing with its taxable year ended December 31, 1994.
Crescent Equities believes that it was organized and has operated in such a
manner so as to qualify as a REIT, and Crescent Equities intends to continue to
operate in such a manner, but no assurance can be given that it has operated in
a manner so as to qualify, or will operate in a manner so as to continue to
qualify as a REIT.
The sections of the Code relating to qualification and operation as a REIT
are highly technical and complex. The following discussion 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
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for qualification as a REIT, its manner of operation has enabled it to meet the
requirements for qualification as a REIT as of the date of this Prospectus
Supplement, and its proposed manner of operation will enable it to meet the
requirements for qualification as a REIT in the future. It must be emphasized
that this opinion is based on various assumptions relating to the organization
and operation of Crescent Equities and the Operating Partnership and is
conditioned upon certain representations made by Crescent Equities and the
Operating Partnership as to certain relevant factual matters, including matters
related to the organization, expected operation, and assets of Crescent Equities
and the Operating Partnership. Moreover, continued qualification as a REIT will
depend upon Crescent Equities' ability to meet, through actual annual operating
results, the distribution levels, stock ownership requirements and the various
qualification tests and other requirements imposed under the Code, as discussed
below. Accordingly, no assurance can be given that the actual stock ownership of
Crescent Equities, the mix of its assets, or the results of its operations for
any particular taxable year will satisfy such requirements. For a discussion of
the tax consequences of failing to qualify as a REIT, see "-- Taxation of
Crescent Equities -- Failure to Qualify," below.
If Crescent Equities qualifies for taxation as a REIT, it generally will
not be subject to federal corporate income taxes on its net income that is
currently distributed to shareholders. This treatment substantially eliminates
the "double taxation" (at the corporate and shareholder levels) that generally
results from investments in a corporation. However, Crescent Equities will be
subject to federal income tax in the following circumstances. First, Crescent
Equities will be taxed at regular corporate rates on any undistributed "real
estate investment trust taxable income," including undistributed net capital
gains. Second, under certain circumstances, Crescent Equities may be subject to
the "alternative minimum tax" on its items of tax preference. Third, if Crescent
Equities has "net income from foreclosure property," it will be subject to tax
on such income at the highest corporate rate. "Foreclosure property" generally
means real property and any personal property incident to such real property
which is acquired as a result of a default either on a lease of such property or
on indebtedness which such property secured and with respect to which an
appropriate election is made, except that property ceases to be foreclosure
property (i) after a two-year period (which in certain cases may be extended by
the IRS) or, if earlier, (ii) when the REIT engages in construction on the
property (other than for completion of certain improvements) or for more than 90
days uses the property in a business conducted other than through an independent
contractor. "Net income from foreclosure property" means (a) the net gain from
disposition of foreclosure property which is held primarily for sale to
customers in the ordinary course of business or (b) other net income from
foreclosure property which would not satisfy the 75% gross income test
(discussed below). Property is not eligible for the election to be treated as
foreclosure property if the loan or lease with respect to which the default
occurs (or is imminent) was made, entered into or acquired by the REIT with an
intent to evict or foreclose or when the REIT knew or had reason to know that
default would occur. Fourth, if Crescent Equities has "net income derived from
prohibited transactions," such income will be subject to a 100% tax. The term
"prohibited transaction" generally includes a sale or other disposition of
property (other than foreclosure property) that is held primarily for sale to
customers in the ordinary course of business. Fifth, if Crescent Equities should
fail to satisfy the 75% gross income test or the 95% gross income test (as
discussed below), but has nonetheless maintained its qualification as a REIT
because certain other requirements have been met, it will be subject to a 100%
tax on the net income attributable to the greater of the amount by which
Crescent Equities fails the 75% or 95% test. Sixth, if, during each calendar
year, Crescent Equities fails to distribute at least the sum of (i) 85% of its
"real estate investment trust ordinary income" for such year, (ii) 95% of its
"real estate investment trust capital gain net income" for such year, and (iii)
any undistributed taxable income from prior periods, Crescent Equities will be
subject to a 4% excise tax on the excess of such required distribution over the
amounts actually distributed. Seventh, if Crescent Equities acquires any asset
from a C corporation (i.e., a corporation generally subject to full corporate
level tax) in a transaction in which the basis of the asset in Crescent
Equities' hands is determined by reference to the basis of the asset (or any
other property) in the hands of the corporation, and Crescent Equities
recognizes gain on the disposition of such asset during the 10-year period
beginning on the date on which such asset was acquired by Crescent Equities,
then, to the extent of such property's "built-in" gain (the excess of the fair
market value of such property at the time of acquisition by Crescent Equities
over the adjusted basis in such property at such time), such gain will be
subject to tax at the highest regular corporate rate applicable (as provided in
regulations promulgated by the United States Department of
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Treasury under the Code ("Treasury Regulations") that have not yet been
promulgated). (The results described above with respect to the recognition of
"built-in gain" assume that Crescent Equities will make an election pursuant to
IRS Notice 88-19.)
Requirements of Qualification. The Code defines a REIT as a corporation,
trust or association (1) which is managed by one or more trustees or directors;
(2) the beneficial ownership of which is evidenced by transferable shares, or by
transferable certificates of beneficial interest; (3) which would be taxable as
a domestic corporation, but for Sections 856 through 860 of the Code; (4) which
is neither a financial institution nor an insurance company subject to certain
provisions of the Code; (5) the beneficial ownership of which is held (without
reference to any rules of attribution) by 100 or more persons; (6) during the
last half of each taxable year not more than 50% in value of the outstanding
stock of which is owned, directly or indirectly, by five or fewer individuals
(as defined in the Code); and (7) which meets certain other tests, described
below, regarding certain distributions and the nature of its income and assets
and properly files an election to be treated as a REIT. The Code provides that
conditions (1) through (4), inclusive, must be met during the entire taxable
year and that condition (5) must be met during at least 335 days of a taxable
year of 12 months (or during a proportionate part of a taxable year of less than
12 months).
Crescent Equities issued sufficient Common Shares pursuant to the Initial
Offering to satisfy the requirements described in (5) and (6) above. While the
existence of Exchange Rights may cause Limited Partners to be deemed to own the
Common Shares they could acquire through the Exchange Rights, the amount of
Common Shares that can be acquired at any time through the Exchange Rights is
limited to an amount which, together with any other Common Shares actually or
constructively deemed, under the Declaration of Trust, to be owned by any
person, does not exceed the Ownership Limit (as defined in the accompanying
Prospectus). See "Description of Common Shares -- Ownership Limits and
Restrictions on Transfer" in the accompanying Prospectus. Moreover, the
ownership of Common Shares generally is limited under the Ownership Limit to no
more than 8.0% of the outstanding Common Shares. In addition, the Declaration of
Trust provides for restrictions regarding the ownership or transfer of Common
Shares in order to assist Crescent Equities in continuing to satisfy the share
ownership requirements described in (5) and (6) above. See "Description of
Common Shares -- Ownership Limits and Restrictions on Transfer" in the
accompanying Prospectus.
If a REIT owns a "qualified REIT subsidiary," the Code provides that the
qualified REIT subsidiary is disregarded for federal income tax purposes, and
all assets, liabilities and items of income, deduction and credit of the
qualified REIT subsidiary are treated as assets, liabilities and such items of
the REIT itself. A qualified REIT subsidiary is a corporation all of the capital
stock of which has been owned by the REIT from the commencement of such
corporation's existence. CREE Ltd., CRE Management I Corp. ("Management I"), CRE
Management II Corp. ("Management II"), CRE Management III Corp. ("Management
III"), CRE Management IV Corp. ("Management IV"), CRE Management V Corp.
("Management V"), CRE Management VI Corp. ("Management VI"), CRE Management VII
Corp. ("Management VII"), CresCal Properties, Inc. and Crescent Commercial
Realty Corp. are qualified REIT subsidiaries, and thus all of the assets (i.e.,
the respective partnership interests in the Operating Partnership, Funding I,
Funding II, Funding III, Funding IV, Funding V, Funding VI, Funding VII, CresCal
Properties, L.P. and Crescent Commercial Realty Holdings, L.P.), liabilities and
items of income, deduction and credit of CREE Ltd., Management I, Management II,
Management III, Management IV, Management V, Management VI, Management VII,
CresCal Properties, Inc. and Crescent Commercial Realty Corp. are treated as
assets and liabilities and items of income, deduction and credit of Crescent
Equities. Unless otherwise required, all references to Crescent Equities in this
"Federal Income Tax Considerations" section refer to Crescent Equities and its
qualified REIT subsidiaries.
In the case of a REIT which is a partner in a partnership, Treasury
Regulations provide that the REIT will be deemed to own its proportionate share
of the assets of the partnership and will be deemed to be entitled to the income
of the partnership attributable to such share. In addition, the assets and gross
income (as defined in the Code) of the partnership attributed to the REIT shall
retain the same character as in the hands of the partnership for purposes of
Section 856 of the Code, including satisfying the gross income tests and the
assets tests described below. Thus, Crescent Equities' proportionate share of
the assets, liabilities and items of
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income of the Operating Partnership and its subsidiary partnerships are treated
as assets, liabilities and items of income of Crescent Equities for purposes of
applying the requirements described herein.
Income Tests. In order for Crescent Equities to achieve and maintain its
qualification as a REIT, there are three requirements relating to Crescent
Equities' gross income that must be satisfied annually. First, at least 75% of
Crescent Equities' gross income (excluding gross income from prohibited
transactions) for each taxable year must consist of temporary investment income
or of certain defined categories of income derived directly or indirectly from
investments relating to real property or mortgages on real property. These
categories include, subject to various limitations, rents from real property,
interest on mortgages on real property, gains from the sale or other disposition
of real property (including interests in real property and in mortgages on real
property) not primarily held for sale to customers in the ordinary course of
business, income from foreclosure property, and amounts received as
consideration for entering into either loans secured by real property or
purchases or leases of real property. Second, at least 95% of Crescent Equities'
gross income (excluding gross income from prohibited transactions) for each
taxable year must be derived from income qualifying under the 75% test and from
dividends, other types of interest and gain from the sale or disposition of
stock or securities, or from any combination of the foregoing. Third, for each
taxable year, gain from the sale or other disposition of stock or securities
held for less than one year, gain from prohibited transactions and gain on the
sale or other disposition of real property held for less than four years (apart
from involuntary conversions and sales of foreclosure property) must represent
less than 30% of Crescent Equities' gross income (including gross income from
prohibited transactions) for such taxable year. Crescent Equities, through its
partnership interests in the Operating Partnership and all subsidiary
partnerships, believes it satisfied all three of these income tests for 1994,
1995 and 1996 and expects to satisfy them for subsequent taxable years.
The bulk of the Operating Partnership's income is currently derived from
rents with respect to the Office Properties, the Behavioral Healthcare
Facilities, the Hotel Properties and the Retail Properties. Rents received by
Crescent Equities will qualify as "rents from real property" in satisfying the
gross income requirements for a REIT described above only if several conditions
are met. First, the amount of rent must not be based in whole or in part on the
income or profits of any person. An amount received or accrued generally will
not be excluded from the term "rents from real property" solely by reason of
being based on a fixed percentage or percentages of receipts or sales. Second,
the Code provides that rents received from a tenant will not qualify as "rents
from real property" if the REIT, or an owner of 10% or more of the REIT,
directly or constructively, owns 10% or more of such tenant (a "Related Party
Tenant"). Third, if rent attributable to personal property leased in connection
with a lease of real property is greater than 15% of the total rent received
under the lease, then the portion of rent attributable to such personal property
will not qualify as "rents from real property." Finally, for rents to qualify as
"rents from real property," a REIT generally must not operate or manage the
property or furnish or render services to the tenants of such property, other
than through an independent contractor from whom the REIT derives no revenue,
except that a REIT may directly perform services which are "usually or
customarily rendered" in connection with the rental of space for occupancy,
other than services which are considered to be rendered to the occupant of the
property.
Crescent Equities, based in part upon opinions of Tax Counsel as to whether
various tenants, including CBHS and the lessees of the Hotel Properties,
constitute Related Party Tenants, believes that the income it received in 1994,
1995 and 1996 and will receive in subsequent taxable years from (i) charging
rent for any property that is based in whole or in part on the income or profits
of any person (except by reason of being based on a percentage or percentages of
receipts or sales, as described above); (ii) charging rent for personal property
in an amount greater than 15% of the total rent received under the applicable
lease; (iii) directly performing services considered to be rendered to the
occupant of property or which are not usually or customarily furnished or
rendered in connection with the rental of real property; or (iv) entering into
any lease with a Related Party Tenant, will not cause Crescent Equities to fail
to meet the gross income tests. Opinions of counsel are not binding upon the IRS
or any court, and there can be no assurance that the IRS will not assert a
contrary position successfully.
The Operating Partnership will also receive fixed and contingent interest
on the Residential Development Property Mortgages. Interest on mortgages secured
by real property satisfies the 75% and 95% gross income tests only if it does
not include any amount the determination of which depends in whole or in part on
the
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income of any person, except that (i) an amount is not excluded from the term
"interest" solely by reason of being based on a fixed percentage or percentages
of receipts or sales and (ii) income derived from a shared appreciation
provision in a mortgage is treated as gain recognized from the sale of the
secured property. Certain of the Residential Development Property Mortgages
contain provisions for contingent interest based upon property sales. In the
opinion of Tax Counsel, each of the Residential Development Property Mortgages
constitutes debt for federal income tax purposes, any contingent interest
derived therefrom will be treated as being based on a fixed percentage of sales,
and therefore all interest derived therefrom will constitute interest received
from mortgages for purposes of the 75% and 95% gross income tests. If, however,
the contingent interest provisions were instead characterized as shared
appreciation provisions, any resulting income would, because the underlying
properties are primarily held for sale to customers in the ordinary course, be
treated as income from prohibited transactions, which would not satisfy the 75%
and 95% gross income tests, which would count toward the 30% gross income test,
and which would be subject to a 100% tax.
In connection with the 1997 distribution by Crescent Equities of the common
stock of Crescent Operating, Crescent Equities was required to recognize gain
equal to the excess, if any, of the fair market value of the assets distributed
over the basis of Crescent Equities in them. In the opinion of Tax Counsel, such
gain constituted gain on the sale of stock or securities for purposes of the
gross income tests. Opinions of counsel are not binding upon the IRS or any
court, and there can be no assurance that the IRS will not assert a contrary
position successfully.
In applying the 95% and 75% gross income tests to Crescent Equities, it is
necessary to consider the form in which certain of its assets are held, whether
that form will be respected for federal income tax purposes, and whether, in the
future, such form may change into a new form with different tax attributes (for
example, as a result of a foreclosure on debt held by the Operating
Partnership). For example, the Residential Development Properties are primarily
held for sale to customers in the ordinary course of business, and the income
resulting from such sales, if directly attributed to Crescent Equities, would
not qualify under the 75% and 95% gross income tests and would count as gain
from the sale of assets for purposes of the 30% limitation. In addition, such
income would be considered "net income from prohibited transactions" and thus
would be subject to a 100% tax. The income from such sales, however, will be
earned by the Residential Development Corporations rather than by the Operating
Partnership and will be paid to the Operating Partnership in the form of
interest and principal payments on the Residential Development Property
Mortgages or distributions with respect to the stock in the Residential
Development Corporations held by the Operating Partnership. In similar fashion,
the income earned by the Hotel Properties, if directly attributed to Crescent
Equities, would not qualify under the 75% and 95% gross income tests because it
would not constitute "rents from real property." Such income is, however, earned
by the lessees of these Hotel Properties and what the Operating Partnership
receives from the lessees of these Hotel Properties is rent. Comparable issues
are raised by the Operating Partnership's acquisition of subordinated debt
secured by a Florida hotel and by the acquisition of an interest in the
partnership which owns the hotel by Crescent Development Management Corporation
("CDMC"), one of the Residential Development Corporations. If such debt were
recharacterized as equity, or if the ownership of the partnership were
attributed from CDMC to the Operating Partnership, the Operating Partnership
would be treated as receiving income from hotel operations rather than interest
income on the debt or dividend income from CDMC. Furthermore, if Crescent
Operating, Inc. were treated for federal income tax purposes as not separate
from or an agent of either Crescent Equities or the Operating Partnership, or if
Crescent Equities and Crescent Operating, Inc. were treated as a "stapled
entity," the income, assets and activities of Crescent Operating, Inc. would be
considered to be the income, assets and activities of Crescent Equities, with
the result that Crescent Equities would fail to meet the 95% and 75% gross
income tests or the asset tests discussed below. A similar consequence might
follow if the loan of approximately $35.9 million from the Operating Partnership
to Crescent Operating, Inc. does not constitute debt for federal income tax
purposes.
Tax Counsel is of the opinion that (i) the Residential Development
Properties or any interest therein will be treated as owned by the Residential
Development Corporations, (ii) amounts derived by the Operating Partnership from
the Residential Development Corporations under the terms of the Residential
Development Property Mortgages will qualify as interest or principal, as the
case may be, paid on mortgages on real property for purposes of the 75% and 95%
gross income tests, (iii) amounts derived by the Operating Partnership with
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respect to the stock of the Residential Development Corporations will be treated
as distributions on stock (i.e., as dividends, a return of capital, or capital
gain, depending upon the circumstances) for purposes of the 75% and 95% gross
income tests, (iv) the leases of the Hotel Properties will be treated as leases
for federal income tax purposes, and the rent payable thereunder will qualify as
"rents from real property," (v) the subordinated debt secured by the Florida
hotel will be treated as debt for federal income tax purposes, the income
payable thereunder will qualify as interest, and CDMC's ownership of the
partnership interest in the partnership which owns the hotel will not be
attributed to the Operating Partnership, (vi) Crescent Operating, Inc. will be
treated for federal income tax purposes as a corporate entity separate from and
not an agent of either Crescent Equities or the Operating Partnership, and
Crescent Operating, Inc. and Crescent Equities will not be treated as a stapled
entity for federal income tax purposes; and (vii) the loan of approximately
$35.9 million from the Operating Partnership to Crescent Operating, Inc. will
constitute debt for federal income tax purposes. Tax Counsel has provided
opinions similar to those provided with respect to the Operating Partnership's
investment in the Residential Development Corporations with respect to its
investments in certain other entities through non-voting securities and secured
debt. Investors should be aware that there are no controlling Treasury
Regulations, published rulings, or judicial decisions involving transactions
with terms substantially the same as those with respect to the Residential
Development Corporations, the leases of the Hotel Properties and the
relationship among Crescent Equities, the Operating Partnership and Crescent
Operating, Inc.. Therefore, the opinions of Tax Counsel with respect to these
matters are based upon all of the facts and circumstances and upon rulings and
judicial decisions involving situations that are considered to be analogous.
Opinions of counsel are not binding upon the IRS or any court, and there can be
no assurance that the IRS will not assert successfully a contrary position. If
one or more of the leases of the Hotel Properties is not a true lease, part or
all of the payments that the Operating Partnership receives from the respective
lessee may not satisfy the various requirements for qualification as "rents from
real property," or the Operating Partnership might be considered to operate the
Hotel Properties directly. In that case, Crescent Equities likely would not be
able to satisfy either the 75% or 95% gross income tests and, as a result,
likely would lose its REIT status. Similarly, if the IRS were to challenge
successfully the arrangements with the Residential Development Corporations or
Crescent Operating, Inc., Crescent Equities' qualification as a REIT could be
jeopardized.
If any of the Residential Development Properties were to be acquired by the
Operating Partnership as a result of foreclosure on any of the Residential
Development Property Mortgages, or if any of the Hotel Properties were to be
operated directly by the Operating Partnership or a subsidiary partnership as a
result of a default by the lessee under the lease, such property would
constitute foreclosure property for two years following its acquisition (or for
up to an additional four years if an extension is granted by the IRS), provided
that (i) the Operating Partnership or its subsidiary partnership conducts sales
or operations through an independent contractor; (ii) the Operating Partnership
or its subsidiary partnership does not undertake any construction on the
foreclosed property other than completion of improvements which were more than
10% complete before default became imminent; and (iii) foreclosure was not
regarded as foreseeable at the time Crescent Equities acquired the Residential
Development Property Mortgages or leased the Hotel Properties. For so long as
any of these properties constitutes foreclosure property, the income from such
sales would be subject to tax at the maximum corporate rates and would qualify
under the 75% and 95% gross income tests. However, if any of these properties
does not constitute foreclosure property at any time in the future, income
earned from the disposition or operation of such property will not qualify under
the 75% and 95% gross income tests and, in the case of the Residential
Development Properties, will count toward the 30% test and will be subject to
the 100% tax.
With regard to the sale of the Common Shares offered to an affiliate of
Union Bank of Switzerland, it is possible that Crescent Equities may receive
certain payments in Common Shares, depending on the market price of the Common
Shares upon settlement of the forward share purchase agreement. In the opinion
of Tax Counsel, such payments will not constitute gross income and therefore
will not be taken into account in the application of gross income tests.
Crescent Equities anticipates that it will have certain income which will
not satisfy the 75% or the 95% gross income test and/or which will constitute
income whose receipt could cause Crescent Equities not to comply with the 30%
gross income test. For example, income from dividends on the stock of the
Residential
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Development Corporations and any gain recognized upon the distribution of the
common stock of Crescent Operating, Inc. will not satisfy the 75% gross income
test. Furthermore, the amount of gain Crescent Equities recognized upon this
distribution depended upon the fair market value of the common stock of Crescent
Operating, Inc. at the time of the distribution. Prior to the distribution, the
Board of Trust Managers of Crescent Equities determined that the value of this
stock was $.99 per share, but there can be no assurance that the IRS will agree
with this determination in light of various factors including subsequent trading
prices. It is also possible that certain income resulting from the use of
creative financing or acquisition techniques would not satisfy the 75%, 95% or
30% gross income tests. Crescent Equities believes, however, that the aggregate
amount of nonqualifying income will not cause Crescent Equities to exceed the
limits on nonqualifying income under the 75%, 95% or 30% gross income tests.
Any gross income derived from a prohibited transaction is taken into
account in applying the 30% gross income test necessary to qualify as a REIT.
Crescent Equities believes that no asset owned by the Operating Partnership is
primarily held for sale to customers and that the sale of any of the Properties
will not be in the ordinary course of business. Whether property is held
primarily for sale to customers in the ordinary course of business depends,
however, on the facts and circumstances in effect from time to time, including
those related to a particular property. No assurance can be given that Crescent
Equities can (a) comply with certain safe-harbor provisions of the Code which
provide that certain sales do not constitute prohibited transactions or (b)
avoid owning property that may be characterized as property held primarily for
sale to customers in the ordinary course of business.
If Crescent Equities fails to satisfy one or both of the 75% or 95% gross
income tests for any taxable year, it may nevertheless qualify as a REIT for
such year if it is entitled to relief under certain provisions of the Code.
These relief provisions generally will be available if Crescent Equities'
failure to meet such tests is due to reasonable cause and not to willful
neglect, Crescent Equities attaches a schedule of the sources of its income to
its tax return, and any incorrect information on the schedule is not due to
fraud with intent to evade tax. It is not possible, however, to state whether in
all circumstances Crescent Equities would be entitled to the benefit of these
relief provisions. As discussed above, even if these relief provisions apply, a
tax equal to approximately 100% of the corresponding net income would be imposed
with respect to the excess of 75% or 95% of Crescent Equities' gross income over
Crescent Equities' qualifying income in the relevant category, whichever is
greater.
Asset Tests. Crescent Equities, at the close of each quarter of its taxable
year, must also satisfy three tests relating to the nature of its assets. First,
at least 75% of the value of Crescent Equities' total assets must be 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
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Equities will be considered to own its pro rata share of these assets. Neither
Crescent Equities nor the Operating Partnership, however, will directly own more
than 10% of the voting securities of any Residential Development Corporation at
the end of any quarter of Crescent Equities' taxable year, and, in the opinion
of Tax Counsel, Crescent Equities will not be considered to own any of such
voting securities. In addition, Crescent Equities and its senior management
believe that Crescent Equities' pro rata shares of the value of the securities
of each Residential Development Corporation do not separately exceed 5% of the
total value of Crescent Equities' total assets. This belief is based in part
upon its analysis of the estimated values of the various securities owned by the
Operating Partnership relative to the estimated value of the total assets owned
by the Operating Partnership. No independent appraisals will be obtained to
support this conclusion, and Tax Counsel, in rendering its opinion as to the
qualification of Crescent Equities as a REIT, is relying on the conclusions of
Crescent Equities and its senior management as to the value of the various
securities and other assets. There can be no assurance, however, that the IRS
might not contend that the values of the various securities held by Crescent
Equities through the Operating Partnership separately exceed the 5% value
limitation or, in the aggregate, exceed the 25% value limitation or that the
voting securities of the Residential Development Corporations should be
considered to be owned by Crescent Equities. Finally, if the Operating
Partnership were treated for tax purposes as a corporation rather than as a
partnership, Crescent Equities would violate the 10% of voting securities and 5%
of value limitations, and the treatment of any of the Operating Partnership's
subsidiary partnerships as a corporation rather than as a partnership could also
violate one or the other, or both, of these limitations. In the opinion of Tax
Counsel, for federal income tax purposes the Operating Partnership and all the
subsidiary partnerships will be treated as partnerships and not as either
associations taxable as corporations or publicly traded partnerships. See
"-- Tax Aspects of the Operating Partnership and the Subsidiary Partnerships"
below.
As noted above, the 5% and 25% value requirements must be satisfied not
only on the date Crescent Equities first acquires corporate securities, but also
each time Crescent Equities increases its ownership of corporate securities
(including as a result of increasing its interest in the Operating Partnership
either with the proceeds of the Offering or by acquiring Units from Limited
Partners upon the exercise of their Exchange Rights). Although Crescent Equities
plans to take steps to ensure that it satisfies the 5% and 25% value tests for
any quarter with respect to which retesting is to occur, there can be no
assurance that such steps (i) will always be successful; (ii) will not require a
reduction in Crescent Equities' overall interest in the various corporations; or
(iii) will not restrict the ability of the Residential Development Corporations
to increase the sizes of their respective businesses, unless the value of the
assets of Crescent Equities is increasing at a commensurate rate.
Annual Distribution Requirements. In order to qualify as a REIT, Crescent
Equities is required to distribute dividends (other than capital gain dividends)
to its shareholders in an amount at least equal to (A) the sum of (i) 95% of the
"real estate investment trust taxable income" of Crescent Equities (computed
without regard to the dividends paid deduction and Crescent Equities' net
capital gain) and (ii) 95% of the net income (after tax), if any, 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
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to permit Crescent Equities to meet these distribution requirements. It is
possible, however, that, from time to time, Crescent Equities may experience
timing differences between (i) the actual receipt of income and actual payment
of deductible expenses and (ii) the inclusion of such income and deduction of
such expenses in arriving at its "real estate investment trust taxable income."
Issues may also arise as to whether certain items should be included in income.
For example, Tax Counsel has opined that the Operating Partnership should
include in income only its share of the interest income actually paid on the two
mortgage notes secured by Spectrum Center and Three Westlake Park, respectively,
and the two mortgage notes secured by Trammell Crow Center, all of which were
acquired at a substantial discount, rather than its share of the amount of
interest accruing pursuant to the terms of these investments, but opinions of
counsel are not binding on the IRS or the courts. In this regard, the IRS has
taken a contrary view in a recent technical advice memorandum concerning the
accrual of original issue discount. The Company believes, however, that even if
the Operating Partnership were to include in income the full amount of interest
income accrued on these notes, and the Operating Partnership were not allowed
any offsetting deduction for the amount of such interest to the extent it is
uncollectible, the Company nonetheless would be able to satisfy the 95%
distribution requirement without borrowing additional funds or distributing
stock dividends (as discussed below). In addition, it is possible that certain
creative financing or creative acquisition techniques used by the Operating
Partnership may result in income (such as income from cancellation of
indebtedness or gain upon the receipt of assets in foreclosure whose fair market
value exceeds the Operating Partnership's basis in the debt which was foreclosed
upon) which is not accompanied by cash proceeds. In this regard, the
modification of a debt can result in taxable gain equal to the difference
between the holder's basis in the debt and the principal amount of the modified
debt. Tax Counsel has opined that the four mortgage notes secured by Spectrum
Center, Three Westlake Park and Trammell Crow Center, were not modified in the
hands of the Operating Partnership. Based on the foregoing, Crescent Equities
may have less cash available for distribution in a particular year than is
necessary to meet its annual 95% distribution requirement or to avoid tax with
respect to capital gain or the excise tax imposed on certain undistributed
income for such year. To meet the 95% distribution requirement necessary to
qualify as a REIT or to avoid tax with respect to capital gain or the excise tax
imposed on certain undistributed income, Crescent Equities may find it
appropriate to arrange for borrowings through the Operating Partnership or to
pay distributions in the form of taxable share dividends.
Under certain circumstances, Crescent Equities may be able to rectify a
failure to meet the distribution requirement for a year by paying "deficiency
dividends" to stockholders in a later year, which may be included in Crescent
Equities' deduction for dividends paid for the earlier year. Thus, Crescent
Equities may be able to avoid being taxed on amounts distributed as deficiency
dividends; however, Crescent Equities will be required to pay interest based
upon the amount of any deduction taken for deficiency dividends.
Ownership Information. Pursuant to applicable Treasury Regulations, in
order to be treated as a REIT, Crescent Equities must maintain certain records
and request certain information from its shareholders designed to disclose the
actual ownership of its Equity Shares (as defined in the accompanying
Prospectus). Crescent Equities believes that it has complied and intends to
continue to comply with such requirements.
Failure to Qualify. If Crescent Equities fails to qualify as a REIT in any
taxable year and the relief provisions do not apply, Crescent Equities will be
subject to tax (including any applicable alternative minimum tax) on its taxable
income at regular corporate rates. Distributions to shareholders in any year in
which Crescent Equities fails to qualify as a REIT will not be deductible by
Crescent Equities; nor will they be required to be made. If Crescent Equities
fails to qualify as a REIT, then, to the extent of Crescent Equities' current
and accumulated earnings and profits, all distributions to shareholders will be
taxable as ordinary income and, subject to certain limitations of the Code,
corporate distributees may be eligible for the dividends received deduction.
Unless entitled to relief under specific statutory provisions, Crescent Equities
will also be disqualified from electing to be treated as a REIT for the four
taxable years following the year during which it ceased to qualify as a REIT. It
is not possible to state whether in all circumstances Crescent Equities would be
entitled to such statutory relief.
Recent Legislation. On August 5, 1997, President Clinton signed the
Taxpayer Relief Act of 1997. This legislation contains various amendments to the
tax provisions governing REITs which were sponsored by the REIT industry and
generally operate to liberalize the requirements for qualification as a REIT.
The changes
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will be effective for taxable years beginning after the enactment date, which is
1998 and thereafter for Crescent Equities. At that time REITs will be permitted
to earn up to one percent of their gross income from tenants, determined on a
property-by-property basis, by furnishing services which are noncustomary or
provided directly to the tenants, without causing the rental income fail to
qualify as rents from real property; the 30% gross income test will be repealed;
the REIT distribution requirements will not require distributions with respect
to certain noncash income items such as income from the cancellation of
indebtedness; the partnership attribution rules will be less inclusive, and so
less likely to cause certain rents to be treated as being from a Related Party
Tenant; and the definition of hedging income which qualifies under the 95% gross
income test will be greatly expanded.
TAXATION OF TAXABLE DOMESTIC SHAREHOLDERS
For purposes of this summary, a "U.S. Shareholder" means a beneficial owner
of Common Shares who or that is for U.S. federal income tax purposes (i) a
citizen or resident of the United States, (ii) a corporation created or
organized in or under the laws of the United States or any state or political
subdivision thereof, (iii) an estate the income of which is subject to United
States federal income taxation regardless of its source, (iv) a trust if a court
within the United States is able to exercise primary jurisdiction over
administration of the trust and one or more U.S. persons have authority to
control all substantial decisions of the trust, or (v) a partnership to the
extent the interest therein is owned by any of the persons described in clauses
(i), (ii), (iii), or (iv) above. As used herein, the term "Non-U.S. Shareholder"
means a beneficial owner of Common Shares that is not a U.S. Shareholder.
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. As long as Crescent Equities qualifies as a REIT, distributions made to
Crescent Equities' taxable U.S. Shareholders out of Crescent Equities' current
or accumulated earnings and profits (and not designated as capital gain
dividends) will be taken into account by such U.S. Shareholders as ordinary
income and, for corporate U.S. 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 U.S. Shareholder has held its
Common Shares. However, corporate U.S. 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
U.S. 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 U.S. 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 U.S. Shareholder.
U.S. 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 U.S.
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
U.S. 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
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"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 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 or 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 that tax. A number of U.S.
tax treaties that reduce the rate of withholding tax on corporate dividends do
not reduce, or reduce to a lesser extent, the rate of withholding applied to
dividends from a REIT. 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, with regard to payments
on or after January 1, 1999, the Non-U.S. Shareholder files IRS Form W-8 with
Crescent Equities and, if the Common Shares are not traded on an established
securities market, acquires a taxpayer identification number from the IRS) or
(ii) the Non-U.S. Shareholder has filed an IRS Form 4224 (or, with respect to
payments on or after January 1, 1999, files IRS Form W-8) 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 treated
as a return of capital to the extent of the adjusted basis of a Non-U.S.
Shareholder's shares and thereafter as capital gain, which will be taxable to
the extent that 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.
Distributions in excess of current and accumulated earnings and profits are
currently subject to withholding at the same 30% or lower treaty rate applicable
to ordinary income dividends, but a Non-U.S. Shareholder may seek a refund of
amounts of tax withheld in excess of the Non-U.S. Shareholder's actual U.S. tax
liability, provided the required information is furnished to the IRS. Beginning
with payments made on or after January 1, 1999, Crescent Equities will be
permitted, but not required, to make reasonable estimates of the extent to which
distributions exceed current and accumulated earnings and profits. Such
distributions will generally be subject to a 10% withholding tax, which may be
refunded to the extent it exceeds the shareholder's actual U.S. tax liability,
provided the required information is furnished to the IRS.
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, subject to
possible exemption or rate reduction under an applicable tax treaty. 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 believes that it 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
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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 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 certain other conditions are met. Effectively connected gain realized by a
foreign corporate shareholder may be subject to an additional 30% branch profits
tax, subject to possible exemption or rate reduction under an applicable tax
treaty. 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 the additional 30%
branch profits 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 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
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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
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
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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,
Management V and Management VII, which will be subject to the Texas franchise
tax because they are general partners of the Operating Partnership, Funding I,
Funding II, Funding III, Funding IV, Funding V and Funding VII, and the
Operating Partnership, Funding I, Funding II, Funding III, Funding IV, Funding V
and Funding VII will be doing business in Texas.
It is anticipated that Crescent Equities' Texas franchise tax liability
will not be substantial because CREE Ltd., Management I, Management II,
Management III, Management IV, Management V and Management VII are allocated
only a small portion of the taxable income of the Operating Partnership, Funding
I, Funding II, Funding III, Funding IV, Funding V and Funding VII. In addition,
Management VI and Funding VI are not anticipated to be subject to the Texas
franchise tax.
The Operating Partnership, Funding I, Funding II, Funding III, Funding IV,
Funding V and Funding VII will not be subject to the Texas franchise tax, under
the laws in existence at the time of this Prospectus Supplement because they are
partnerships instead of corporations. There is no assurance, however, that the
Texas legislature will not expand the scope of the Texas franchise tax to apply
to limited partnerships such as the Operating Partnership, Funding I, Funding
II, Funding III, Funding IV, Funding V and Funding VII or enact other
legislation which may result in subjecting Crescent Equities to the Texas
franchise tax. Any statutory change by the Texas legislature may be applied
retroactively.
In addition, it should be noted that three of the Residential Development
Corporations will be doing business in Texas and will be subject to the Texas
franchise tax. Further, Crescent/301, L.L.C. will be subject to the Texas
franchise tax because it is doing business in Texas and limited liability
companies are subject to Texas franchise tax. However, this franchise tax should
not be substantial because Crescent/301, L.L.C. owns a 1% interest in 301
Congress Avenue, L.P. Other entities that will be subject to the Texas franchise
tax include CresTex Development, LLC and its member CresCal Properties, Inc. and
any other corporations or limited liability companies doing business in Texas
with Texas receipts. It is expected that the franchise tax liability of these
entities will not be substantial.
The Texas legislature considered in its 1997 regular session proposals for
property tax relief in Texas. Such relief would have required increasing the
proportion of education funding costs paid by the State of Texas and reducing
the proportion paid by local property taxes. Alternatives for increasing State
of Texas revenues that have been considered include broadening the franchise tax
base to include other entities such as
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partnerships and real estate investment trusts, enactment of a new gross
receipts tax, enactment of a new business activity tax, an increase in the sales
tax and/or broadening the sales tax base. The Texas House of Representatives and
the Texas Senate both passed different bills that would have broadened the
franchise tax base to apply the franchise tax to business trusts such as
Crescent Equities and partnerships such as the Operating Partnership, Funding I,
Funding II, Funding III, Funding IV, Funding V and Funding VII. However, the
conference committee was not able to work out the differences between these two
bills and the Texas legislature adjourned the 1997 regular session without
adopting such legislation. There can be no assurance that the Texas legislature
will not enact similar legislation in its next regular session, beginning in
1999. A committee of the Texas House of Representatives is currently studying
alternative methods and formulas to fund education in anticipation of the next
regular session.
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.
PLAN OF DISTRIBUTION
The Company has agreed, pursuant to a Purchase Agreement between the
Company, the Operating Partnership, Merrill Lynch and MLI, to sell the 5,375,000
Common Shares offered hereby to MLI for a total purchase price of approximately
$205 million (representing a price per Common Share equal to $38.125, the last
reported sale price of the Common Shares on December 12, 1997), and MLI has
agreed, subject to the terms and conditions set forth in such Purchase
Agreement, to purchase all of such Common Shares. In connection with the sale of
the Common Shares offered hereby, Merrill Lynch will receive from the Company a
placement fee equal to approximately $4.1 million, representing 2% of the gross
proceeds of the Offering.
Under certain circumstances, MLI may resell all or a portion of the Common
Shares offered hereby directly, indirectly to or through brokers or dealers or
in a distribution by one or more underwriters on a firm commitment or best
efforts basis, on the NYSE, in the over-the-counter market, on any national
securities exchange on which the Common Shares are listed or traded, in
privately negotiated transactions, through sales involving any distribution
reinvestment plan of the Company, or otherwise, at market prices prevailing at
the time of sale, at prices related to such prevailing market prices or at
negotiated prices.
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.
S-23
<PAGE> 24
PROSPECTUS
$1,500,000,000
[CRESCENT LOGO]
PREFERRED SHARES, COMMON SHARES AND COMMON SHARE WARRANTS
---------------------
Crescent Real Estate Equities Company (the "Company") may from time to time
offer, in one or more series, (i) preferred shares of beneficial interest, par
value $0.01 per share ("Preferred Shares"), (ii) common shares of beneficial
interest, par value $0.01 per share ("Common Shares"), and (iii) warrants
exercisable for Common Shares ("Common Share Warrants"), with an aggregate
public offering price of up to $1,500,000,000 in amounts, at prices and on terms
to be determined at the time of offering. The Preferred Shares, Common Shares
and Common Share Warrants (collectively, the "Securities") may be offered,
separately or together, in separate series, in amounts, at prices and on terms
to be described in one or more supplements to this Prospectus (each, a
"Prospectus Supplement").
The specific terms of the Securities in respect of which this Prospectus is
being delivered will be set forth in the applicable Prospectus Supplement and
will include, where applicable: (i) in the case of Preferred Shares, the
specific title and stated value, any dividend, liquidation, redemption,
conversion, voting and other rights, and the offering price; (ii) in the case of
Common Shares, any public offering price; and (iii) in the case of Common Share
Warrants, the specific title and aggregate number, and the issue price and the
exercise price. In addition, such specific terms may include limitations on
direct or beneficial ownership and restrictions on transfer of the Securities,
in each case as may be appropriate to preserve the status of the Company as a
real estate investment trust for federal income tax purposes.
The applicable Prospectus Supplement also will contain information as to
all material U.S. federal income tax considerations relevant to an investment
in, and any listing on a securities exchange of, the Securities covered by such
Prospectus Supplement.
The Securities may be offered directly, through agents designated from time
to time, or to or through underwriters or dealers. If any agents or underwriters
are involved in the sale of any of the Securities, their names, and any
applicable purchase price, fee, commission or discount arrangement with, between
or among them, will be set forth, or will be calculable from the information set
forth, in an accompanying Prospectus Supplement. See "Plan of Distribution." No
Securities may be sold without delivery of a Prospectus Supplement describing
the method and terms of the offering of such class or series of Securities.
SEE "RISK FACTORS" AT PAGE 2 OF THIS PROSPECTUS FOR CERTAIN FACTORS RELEVANT TO
AN INVESTMENT IN THE SECURITIES.
---------------------
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. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
---------------------
THE DATE OF THIS PROSPECTUS IS DECEMBER 12, 1997.
<PAGE> 25
THE COMPANY
Crescent Real Estate Equities Company, a Texas real estate investment trust
("Crescent Equities"), together with its subsidiaries, is a fully integrated
real estate company operating as a real estate investment trust for federal
income tax purposes (a "REIT"). The term "Company" includes, as the context
requires, Crescent Real Estate Equities, Inc., formerly a Maryland corporation
and the predecessor of Crescent Equities (the "Predecessor Corporation"),
Crescent Real Estate Equities Limited Partnership, a Delaware limited
partnership (the "Operating Partnership"), and the other subsidiaries of the
Crescent Equities.
As of December 12, 1997, the Company directly or indirectly owned a
portfolio of real estate assets (the "Properties") located primarily in 21
metropolitan submarkets in Texas and Colorado. The Properties include 79 office
properties (the "Office Properties") with an aggregate of approximately 27.9
million net rentable square feet, approximately 91 behavioral healthcare
facilities (the "Behavioral Healthcare Facilities"), five full-service hotels
with a total of 1,900 rooms and two destination health and fitness resorts that
can accommodate up to 442 guests daily (collectively, the "Hotel Properties"),
real estate mortgages relating to, and non-voting common stock in, five
residential development corporations (the "Residential Development
Corporations"), which in turn, through joint ventures or partnership
arrangements, own interests in 14 residential development properties (the
"Residential Development Properties"), and seven retail properties (the "Retail
Properties") with an aggregate of approximately 771,000 net rentable square
feet. In addition, the Company owns a 40% interest in each of two partnerships,
one of which owns Americold Corporation ("Americold") and the other of which
owns URS Logistics, Inc. ("URS"). Americold and URS are the two largest
suppliers of public refrigerated warehouse space in the United States and
currently own and operate approximately 79 refrigerated warehouses with an
aggregate of approximately 368 million cubic feet.
The Company, as a fully integrated real estate company, provides
management, leasing and development services with respect to certain of its
Properties. As of September 30, 1997, the Company had approximately 345
employees and its executive officers had more than 175 years of combined
experience in the real estate industry.
The Company owns its assets and carries on its operations and other
activities through the Operating Partnership and its other subsidiaries. The
Company also has an economic interest in the development activities of the
Residential Development Corporations. Crescent Real Estate Equities, Ltd., the
sole 1% general partner of the Operating Partnership (the "General Partner"),
controls the Operating Partnership, and Crescent Equities is the sole
stockholder of the General Partner. In addition, as of September 30, 1997, the
Company owned an approximately 88% limited partner interest in the Operating
Partnership.
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.
RISK FACTORS
Prospective investors should carefully consider the following summary
information in conjunction with the other information contained in this
Prospectus and the more detailed information on risks of investment contained in
the applicable Prospectus Supplement relating thereto before purchasing
Securities.
CONCENTRATION OF ASSETS
A significant portion of the Company's assets are, and revenues are derived
from, Properties located in the metropolitan areas of Dallas-Fort Worth and
Houston, Texas. Due to this geographic concentration, any deterioration in
economic conditions in the Dallas-Fort Worth or Houston metropolitan areas or
other geographic markets in which the Company in the future may acquire
substantial assets could have a substantial effect on the financial condition
and results of operations of the Company.
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RISKS ASSOCIATED WITH THE ACQUISITION OF SUBSTANTIAL NEW ASSETS
From the closing of the Company's initial public offering in May 1994
through September 30, 1997, the Company has experienced rapid growth, increasing
its total assets by approximately 940 percent. There can be no assurance that
the Company will be able to manage its growth effectively and the failure to do
so may have a material adverse effect on the financial condition and results of
operations of the Company.
PURCHASES FROM FINANCIALLY DISTRESSED SELLERS
Implementation of the Company's strategy of investing in real estate assets
in distressed circumstances has resulted in the acquisition of certain
Properties from owners that were in poor financial condition, and such strategy
is expected to result in the purchase of additional properties under similar
circumstances in the future. In addition to general real estate risks,
properties acquired in distress situations present risks related to inadequate
maintenance, negative market perception and continuation of circumstances which
precipitated the distress originally.
CHANGE IN POLICIES
The Board of Trust Managers provides guidance to the senior management of
the Operating Partnership regarding the Company's operating and financial
policies and strategies, including its policies and strategies with respect to
acquisitions, growth, operations, indebtedness, capitalization and
distributions. These policies and strategies may be revised, from time to time,
without shareholder approval. Changes in the Company's policies and strategies
could adversely affect the Company's financial condition and results of
operations. In addition, the Company has the right and intends to acquire
additional real estate assets pursuant to and consistent with its investment
strategies and policies without shareholder approval.
POSSIBLE ADVERSE CONSEQUENCES OF OWNERSHIP LIMIT
The limitation on ownership of Common Shares set forth in the Company's
Restated Declaration of Trust (the "Declaration of Trust") could have the effect
of discouraging offers to acquire the Company and of inhibiting or impeding a
change in control and, therefore, could adversely affect the shareholders'
ability to realize a premium over the then-prevailing market price for the
Common Shares in connection with such a transaction. See "Description of Common
Shares -- Ownership Limits and Restrictions on Transfer."
RELIANCE ON KEY PERSONNEL
The Company is dependent on the efforts of Mr. Richard E. Rainwater,
Chairman of the Board of Trust Managers, and other senior management personnel.
While the Company believes that it could find replacements for these key
executives, the loss of their services could have an adverse effect on the
operations of the Company. Mr. Rainwater has no employment agreement with the
Company and, therefore, is not obligated to remain with the Company for any
specified term. John C. Goff, Trust Manager and Vice Chairman of the Board of
Trust Managers, and Gerald W. Haddock, President, Chief Executive Officer and
Trust Manager, have entered into employment agreements with the Company, and
Messrs. Rainwater, Goff and Haddock each has entered into a noncompetition
agreement with the Company. The Company has not obtained key-man insurance for
any of its senior management personnel.
RISKS RELATING TO QUALIFICATION AND OPERATION AS A REIT
The Company intends to continue to operate in a manner so as to qualify as
a REIT under the Internal Revenue Code of 1986, as amended (the "Code"). A
qualified REIT generally is not taxed at the corporate level on income it
currently distributes to its shareholders, so long as it distributes at least 95
percent of its taxable income currently and satisfies certain other highly
technical and complex requirements. Unlike many REITs, which tend to make only
one or two types of real estate investment, the Company invests in a broad range
of real estate products, and certain of its investments are more complicated
than those of other REITs. As a result, the Company is likely to encounter a
greater number of interpretative issues under the REIT qualification rules, and
more such issues which lack clear guidance, than are other REITs. The Company,
as a
3
<PAGE> 27
matter of policy, regularly consults with outside tax counsel in structuring its
new investments. The Company has received an opinion from Shaw, Pittman, Potts
and Trowbridge ("Tax Counsel") that the Company qualified as a REIT under the
Code for its taxable years ending on or before December 31, 1996, is organized
in conformity with the requirements for qualification as a REIT under the Code
and its proposed manner of operation will enable it to continue to meet the
requirements for qualification as a REIT. However, this opinion is based upon
certain representations made by the Company and the Operating Partnership and
upon existing law, which is subject to change, both retroactively and
prospectively, and to possibly different interpretations. Furthermore, Tax
Counsel's opinion is not binding upon either the Internal Revenue Service or the
courts. Because the Company's qualification as a REIT in its current and future
taxable years depends upon its meeting the requirements of the Code in future
periods, no assurance can be given that the Company will continue to qualify as
a REIT in the future. If, in any taxable year, the Company were to fail to
qualify as a REIT for federal income tax purposes, it would not be allowed a
deduction for distributions to shareholders in computing taxable income and
would be subject to federal income tax (including any applicable alternative
minimum tax) on its taxable income at regular corporate rates. In addition,
unless entitled to relief under certain statutory provisions, the Company would
be disqualified from treatment as a REIT for federal income tax purposes for the
four taxable years following the year during which qualification was lost. The
additional tax liability resulting from the failure to so qualify would
significantly reduce the amount of funds available for distribution to
shareholders. The applicable Prospectus Supplement will contain information,
where applicable, as to all material U.S. federal income tax considerations
relevant to an investment in the Securities covered by such Prospectus
Supplement.
RISKS RELATING TO DEBT
The Company's organizational documents do not limit the level or amount of
debt that it may incur. It is the Company's current policy to pursue a strategy
of conservative use of leverage, generally with a ratio of debt to total market
capitalization targeted at approximately 40 percent, although this policy is
subject to reevaluation and modification by the Company and could be increased
above 40 percent. The Company has based its debt policy on the relationship
between its debt and its total market capitalization, rather than the book value
of its assets or other historical measures that typically have been employed by
publicly traded REITs, because management believes that market capitalization
more accurately reflects the Company's ability to borrow money and meet its debt
service requirements. Market capitalization is, however, more variable than book
value of assets or other historical measures. There can be no assurance that the
ratio of indebtedness to market capitalization (or any other measure of asset
value) or the incurrence of debt at any particular level would not adversely
affect the financial condition and results of operations of the Company.
RISKS RELATING TO CONTROL OF CERTAIN PROPERTIES
Hotel Risks. The Company has leased the Hotel Properties to subsidiaries of
Crescent Operating, Inc., and such subsidiaries, rather than the Company, are
entitled to exercise all rights of the owner of the respective hotel. The
Company will receive both base rent and a percentage of gross sales above a
certain minimum level pursuant to the leases, which expire between 2004 and
2007. As a result, the Company will participate in the economic operations of
the Hotel Properties only through its indirect participation in gross sales. To
the extent that operations of the Hotel Properties may affect the ability of
such subsidiaries to pay rent, the Company also may indirectly bear the risks
associated with any increases in expenses. Each of the Hotel Properties is
managed pursuant to a management agreement. The amount of rent payable to the
Company under the leases with respect to the Hotel Properties will depend on the
ability of such subsidiaries and the managers of the Hotel Properties to
maintain and increase revenues from the Hotel Properties. Accordingly, the
Company's results of operations will be affected by such factors as changes in
general economic conditions, the level of demand for rooms and related services
at the Hotel Properties, the ability of the subsidiaries and the managers of the
Hotel Properties to maintain and increase gross revenues at the Hotel
Properties, competition in the hotel industry and other factors relating to the
operation of the Hotel Properties. In addition, the Company, expects, in
accordance with the terms of an intercompany agreement between the Company and
Crescent Operating, Inc. (the "Intercompany Agreement"), to lease any hotel
properties that it may acquire in the future to Crescent Operating, Inc. (or a
subsidiary or subsidiaries) which, as lessees of any
4
<PAGE> 28
such hotel properties, will be entitled to exercise all rights of the owner. See
"-- Real Estate Risks Specific to the Company's Business -- Potential Conflicts
of Interest."
Lack of Control of Residential Development Corporations. The Company is not
able to elect the boards of directors of the Residential Development
Corporations, and does not have the authority to control the management and
operation of the Residential Development Corporations. As a result, the Company
does not have the right to control the timing or amount of dividends paid by the
Residential Development Corporations and, therefore, does not have the authority
to require that funds be distributed to it by any of these entities.
Lack of Control of Americold and URS. The Company owns, through two
subsidiaries, a 40% interest in each of two partnerships, one of which owns
Americold and the other of which owns URS. The remaining 60% interest in the
partnerships is owned by two subsidiaries of Vornado Realty Trust (collectively,
"Vornado"). Under the terms of the existing partnership agreements for each of
the partnerships, Vornado has the right to make all decisions relating to the
management and operation of the partnerships other than certain major decisions
that require the approval of both the Company and Vornado. The partnership
agreement for each of the partnerships provides for a buy-sell arrangement upon
a failure of the Company and Vornado to agree on any of the specified major
decisions which, until November 1, 2000, can only be exercised by Vornado. In
addition, the Company has offered to Crescent Operating, and expects to
transfer, its voting interests in the two subsidiaries that hold the interests
in the partnerships to Crescent Operating (or to another entity if Crescent
Operating does not accept the offer), and thereafter the owner of the voting
interests, rather than the Company, will be entitled to approve certain major
decisions relating to the partnerships. See "-- Real Estate Risks Specific to
the Company's Business -- Risks of Joint Ownership of Assets."
GENERAL REAL ESTATE RISKS
Uncontrollable Factors Affecting Performance and Value. The economic
performance and value of the Company's real estate assets will be subject to all
of the risks incident to the ownership and operation of real estate. These
include the risks normally associated with changes in general national, regional
and local economic and market conditions. Such local real estate market
conditions may include excess supply and competition for tenants, including
competition based on rental rates, attractiveness and location of the property
and quality of maintenance, insurance and management services. In addition,
other factors may affect the performance and value of a property adversely,
including changes in laws and governmental regulations (including those
governing usage, zoning and taxes), changes in interest rates (including the
risk that increased interest rates may result in decreased sales of lots in the
Residential Development Properties) and the availability of financing.
Illiquidity of Real Estate Investments. Because real estate investments are
relatively illiquid, the Company's ability to vary its portfolio promptly in
response to economic or other conditions will be limited. In addition, certain
significant expenditures, such as debt service (if any), real estate taxes, and
operating and maintenance costs, generally are not reduced in circumstances
resulting in a reduction in income from the investment. The foregoing and any
other factor or event that would impede the ability of the Company to respond to
adverse changes in the performance of its investments could have an adverse
effect on the Company's financial condition and results of operations.
Environmental Matters. Under various federal, state and local laws,
ordinances and regulations, an owner or operator of real property may become
liable for the costs of removal or remediation of certain hazardous or toxic
substances released on or in its property, as well as certain other costs
relating to hazardous or toxic substances. Such liability may be imposed without
regard to whether the owner or operator knew of, or was responsible for, the
release of such substances. The presence of, or the failure to remediate
properly, such substances, when released, may adversely affect the owner's
ability to sell the affected real estate or to borrow using such real estate as
collateral. Such costs or liabilities could exceed the value of the affected
real estate. The Company has not been notified by any governmental authority of
any non-compliance, liability or other claim in connection with any of the
Properties and the Company is not aware of any other environmental condition
with respect to any of the Properties that management believes would have a
material adverse effect on the Company's business, assets or results of
operations. Prior to the Company's acquisition of its Properties,
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<PAGE> 29
independent environmental consultants conducted or updated Phase I environmental
assessments (which generally do not involve invasive techniques such as soil or
ground water sampling) on the Properties. None of these Phase I assessments or
updates revealed any materially adverse environmental condition not known to the
Company or the independent consultants preparing the assessments. There can be
no assurance, however, that environmental liabilities have not developed since
such environmental assessments were prepared, or that future uses or conditions
(including, without limitation, changes in applicable environmental laws and
regulations) will not result in imposition of environmental liability.
REAL ESTATE RISKS SPECIFIC TO THE COMPANY'S BUSINESS
Investment Risks. In implementing its investment strategies, the Company
has invested in a broad range of real estate assets, and in the future, may
invest in additional types of real estate assets not currently included in its
portfolio. There can be no assurance, however, that the Operating Partnership
will be able to implement its investment strategies successfully in the future.
As a result of its real estate investments, the Operating Partnership will be
subject to risks, in addition to general real estate risks, relating to the
specific assets and asset types in which it invests. For example, the Operating
Partnership is subject to risks that, upon expiration, leases for space in the
Office Properties and Retail Properties may not be renewed, the space may not be
re-leased, or the terms of renewal or re-lease (including the cost of required
renovations or concessions to tenants) may be less favorable than current lease
terms. In addition, the Company is subject to risks relating to the Behavioral
Healthcare Facilities, including the effect of any failure of the tenant to make
required lease payments (which equal more than 10% of the Company's current base
rental revenues); the effects of factors, such as regulation of the healthcare
industry and limitations on government disbursement programs, on the ability of
the tenant to make the required lease payments, and the limited number of
replacement tenants in the event of default under, or non-renewal of, the lease.
Similarly, the Company is subject to the risk that the success of its investment
in the Hotel Properties will be highly dependent upon the ability of the Hotel
Properties to compete in such features as access, location, quality of
accommodations, room rate structure and, to a lesser extent, the quality and
scope of other amenities such as food and beverage facilities.
Risks of Joint Ownership of Assets. The Company has the right to invest in
properties and assets jointly with other persons or entities. Joint ownership of
properties, under certain circumstances, may involve risks not otherwise
present, including the possibility that the Company's partners or co-investors
might become bankrupt, that such partners or co-investors might at any time have
economic or other business interests or goals which are inconsistent with the
business interests or goals of the Company, and that such partners or co-
investors may be in a position to take action contrary to the instructions or
the requests of the Company or contrary to the Company's policies or objectives,
including the Company's policy with respect to maintaining its qualification as
a REIT. See "-- Risks Relating to Control of Certain Investments -- Lack of
Control of Americold and URS."
Potential Conflicts of Interest. The Company has entered into the
Intercompany Agreement with Crescent Operating, Inc., pursuant to which each has
agreed to provide the other with rights to participate in certain transactions.
The certificate of incorporation of Crescent Operating, Inc., as amended and
restated, generally prohibits Crescent Operating, Inc., for so long as the
Intercompany Agreement remains in effect, from engaging in activities or making
investments that a REIT could make, unless the Operating Partnership was first
given the opportunity but elected not to pursue such activities or investments.
In addition, subsidiaries of Crescent Operating, Inc. are the lessees of each of
the Hotel Properties, and Crescent Operating, Inc. owns a 50% interest in the
entity which is the lessee of the Behavioral Healthcare Facilities and the
Company's largest tenant in terms of current base rental. Richard E. Rainwater
and John C. Goff are, respectively, the Chairman of the Board and the Vice
Chairman of the Board of both the Company and Crescent Operating, Inc., and
Gerald W. Haddock also serves as President, Chief Executive Officer and a
director of Crescent Operating, Inc., and serves as President, Chief Executive
Officer and a trust manager of the Company. As of September 30, 1997, senior
management and the trust managers of the Company beneficially owned
approximately 17.2% 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) and approximately
the same percentage of the outstanding common stock of Crescent Operating, Inc.
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<PAGE> 30
The common management and ownership among these entities may lead to conflicts
of interest in connection with transactions between the Operating Partnership
and Crescent Operating, Inc.
USE OF PROCEEDS
Unless otherwise specified in the applicable Prospectus Supplement, the
Company intends to invest, contribute or otherwise transfer the net proceeds of
any sale of Securities to the Operating Partnership, which would use such net
proceeds for general business purposes, including the acquisition and
development of additional properties and other acquisition transactions, the
payment of certain outstanding debt and improvements to certain properties in
the Company's portfolio.
RATIOS OF EARNINGS TO FIXED CHARGES AND PREFERRED SHARES DIVIDENDS
The Company's ratio of earnings to fixed charges for the nine months ended
September 30, 1997, for the years ended December 31, 1996 and 1995, and for the
period from May 4, 1994 to December 31, 1994 were 2.42, 2.01, 2.60 and 3.85.
There were no preferred shares outstanding for any of the periods shown above.
Accordingly, the ratio of earnings to combined fixed charges and preferred
shares dividends is identical to the ratio of earnings to fixed charges.
Prior to completion of the Company's initial public offering in May 1994,
the Company's predecessors, which consisted of a group of affiliated entities
owned and controlled by Mr. Rainwater, utilized traditional single asset
mortgage loans and construction loans as their principal source of outside
capital. In connection with completion of the initial public offering, the
Company reorganized the predecessor entities into a single consolidated entity
and substantially deleveraged their asset base. As a result of these factors,
the Company does not consider information relating to the ratio of earnings to
fixed charges for the periods prior to the completion of the initial public
offering to be meaningful.
For the purposes of computing these ratios, earnings have been calculated
by adding fixed charges (excluding capitalized interest) to income (loss) before
taxes and extraordinary items. Fixed charges consist of interest costs, whether
expensed or capitalized, and amortization of debt expense and discount or
premium relating to any indebtedness, whether expensed or capitalized.
DESCRIPTION OF PREFERRED SHARES
GENERAL
The Declaration of Trust of the Company authorizes the Board of Trust
Managers to issue up to 100,000,000 preferred shares of beneficial interest, par
value $0.01 per share (the "Preferred Shares"). See "Certain Provisions of the
Declaration of Trust, Bylaws and Texas Law -- Preferred Shares." The Declaration
of Trust also authorizes the issuance of up to an aggregate of 100,000,000
Excess Shares issuable in exchange for Preferred Shares as described below at
"Description of Common Shares -- Ownership Limits and Restrictions on Transfer."
Under the Company's Declaration of Trust, the Board of Trust Managers may
from time to time establish and issue one or more series of Preferred Shares
without shareholder approval. The Board of Trust Managers may classify or
reclassify any unissued Preferred Shares by setting or changing the number,
designation, preference, conversion or other rights, voting powers,
restrictions, limitations as to dividends, qualifications and terms or
conditions of redemption of such series. Because the Board of Trust Managers has
the power to establish the preferences and rights of each series of Preferred
Shares, it may afford the holders of any series of Preferred Shares preferences,
powers and rights, voting or otherwise, senior to the rights of holders of
Common Shares. Preferred Shares will, when issued, be fully paid and
nonassessable.
The following description of Preferred Shares sets forth certain general
terms and provisions of Preferred Shares to which any Prospectus Supplement may
relate. The statements below describing Preferred Shares
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<PAGE> 31
are in all respects subject to and qualified in their entirety by reference to
the applicable provisions of the Company's Declaration of Trust and the
Company's Amended and Restated Bylaws (the "Bylaws").
The Prospectus Supplement relating to any Preferred Shares offered thereby
will contain the specific terms thereof, including, without limitation: (i) the
title and stated value of such Preferred Shares; (ii) the number of such
Preferred Shares offered, the liquidation preference per share and the offering
price of such Preferred Shares; (iii) the dividend rate(s), period(s) and/or
payment date(s) or method(s) of calculation thereof applicable to such Preferred
Shares; (iv) the date from which dividends on such Preferred Shares shall
accumulate, if applicable; (v) the procedures for any auction and remarketing,
if any, for such Preferred Shares; (vi) the provision for a sinking fund, if
any, for such Preferred Shares; (vii) the provision for redemption, if
applicable, of such Preferred Shares; (viii) any listing of such Preferred
Shares on any securities exchange; (ix) the terms and conditions, if applicable,
upon which such Preferred Shares will be convertible into Common Shares of the
Company, including the conversion price (or manner of calculation thereof); (x)
any other specific terms, preferences, rights, limitations or restrictions of
such Preferred Shares; (xi) a discussion of federal income tax considerations
applicable to such Preferred Shares; (xii) the relative ranking and preferences
of such Preferred Shares as to dividend rights and rights upon liquidation,
dissolution or winding up of the affairs of the Company; (xiii) any limitations
on issuance of any series of Preferred Shares ranking senior to or on a parity
with such series of Preferred Shares as to dividend rights and rights upon
liquidation, dissolution or winding up of the affairs of the Company; and (xiv)
any limitations on direct or beneficial ownership and restrictions on transfer,
in each case as may be appropriate to preserve the status of the Company as a
REIT.
RANK
Unless otherwise specified in the Prospectus Supplement, Preferred Shares
will, with respect to dividend rights and rights upon liquidation, dissolution
or winding up of the Company, rank (i) senior to all classes or series of Common
Shares of the Company, and to all equity securities ranking junior to Preferred
Shares, (ii) on a parity with all equity securities issued by the Company the
terms of which specifically provide that such equity securities rank on a parity
with Preferred Shares; and (iii) junior to all equity securities issued by the
Company the terms of which specifically provide that such equity securities rank
senior to Preferred Shares. The term "equity securities" does not include
convertible debt securities.
DIVIDENDS
Holders of Preferred Shares of each series will be entitled to receive,
when, as and if declared by the Board of Trust Managers, out of assets of the
Company legally available for payment, cash dividends (or dividends in kind or
in other property if expressly permitted and described in the applicable
Prospectus Supplement) at such rates and on such dates as will be set forth in
the applicable Prospectus Supplement. Each such dividend shall be payable to
holders of record as they appear on the share transfer books of the Company on
such record dates as shall be fixed by the Board of Trust Managers of the
Company.
Dividends on any series of Preferred Shares may be cumulative or
non-cumulative, as provided in the applicable Prospectus Supplement. Dividends,
if cumulative, will be cumulative from and after the date set forth in the
applicable Prospectus Supplement. If the Board of Trust Managers fails to
declare a dividend payable on a dividend payment date on any series of Preferred
Shares for which dividends are noncumulative, then the holders of such series of
Preferred Shares will have no right to receive a dividend in respect of the
dividend period ending on such dividend payment date, and the Company will have
no obligation to pay the dividend accrued for such period, whether or not
dividends on such series are declared payable on any future dividend payment
date.
Unless otherwise specified in the Prospectus Supplement, if any Preferred
Shares of any series are outstanding, no full dividends shall be declared or
paid or set apart for payment on any capital shares of the Company of any other
series ranking, as to dividends, on a parity with or junior to the Preferred
Shares of such series for any period unless (i) if such series of Preferred
Shares has a cumulative dividend, full cumulative dividends have been or
contemporaneously are declared and paid or declared and a sum sufficient for the
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payment thereof set apart for such payment on the Preferred Shares of such
series for all past dividend periods and the then-current dividend period or
(ii) if such series of Preferred Shares does not have a cumulative dividend,
full dividends for the then-current dividend period have been or
contemporaneously are declared and paid or declared and a sum sufficient for the
payment thereof set apart for such payment on the Preferred Shares of such
series. When dividends are not paid in full (or a sum sufficient for such full
payment is not so set apart) upon Preferred Shares of any series and the shares
of any other series of Preferred Shares ranking on a parity as to dividends with
the Preferred Shares of such series, all dividends declared upon Preferred
Shares of such series and any other series of Preferred Shares ranking on a
parity as to dividends with such Preferred Shares shall be declared pro rata so
that the amount of dividends declared per Preferred Share of such series and
such other series of Preferred Shares shall in all cases bear to each other the
same ratio that accrued dividends per share on the Preferred Shares of such
series (which shall not include any accumulation in respect of unpaid dividends
for prior dividend periods if such Preferred Shares do not have a cumulative
dividend) and such other series of Preferred Shares bear to each other. No
interest, or sum of money in lieu of interest, shall be payable in respect of
any dividend payment or payments on Preferred Shares of such series which may be
in arrears.
Except as provided in the immediately preceding paragraph, unless (i) if
such series of Preferred Shares has a cumulative dividend, full cumulative
dividends on the Preferred Shares of such series have been or contemporaneously
are declared and paid or declared and a sum sufficient for the payment thereof
set apart for payment for all past dividend periods and the then-current
dividend period, and (ii) if such series of Preferred Shares does not have a
cumulative dividend, full dividends on the Preferred Shares of such series have
been or contemporaneously are declared and paid or declared and a sum sufficient
for the payment thereof set apart for payment for the then-current dividend
period, no dividends (other than in Common Shares or other capital shares
ranking junior to the Preferred Shares of such series as to dividends and upon
liquidation) shall be declared or paid or set aside for payment or other
distribution upon the Common Shares, or any other capital shares of the Company
ranking junior to or on a parity with the Preferred Shares of such series as to
dividends or upon liquidation, nor shall any Common Shares, or any other capital
shares of the Company ranking junior to or on a parity with the Preferred Shares
of such series as to dividends or upon liquidation be redeemed, purchased or
otherwise acquired for any consideration (or any moneys be paid to or made
available for a sinking fund for the redemption of any such shares) by the
Company (except by conversion into or exchange for other capital shares of the
Company ranking junior to the Preferred Shares of such series as to dividends
and upon liquidation).
REDEMPTION
If so provided in the applicable Prospectus Supplement, any series of
Preferred Shares will be subject to mandatory redemption or redemption at the
option of the Company, in whole or in part, in each case upon the terms, at the
times and at the redemption prices set forth in such Prospectus Supplement.
The Prospectus Supplement relating to a series of Preferred Shares that is
subject to mandatory redemption will specify the number of such Preferred Shares
that shall be redeemed by the Company in each year commencing after a date to be
specified, at a redemption price per share to be specified, together with an
amount equal to all accrued and unpaid dividends thereon (which shall not, if
such Preferred Shares do not have a cumulative dividend, include any
accumulation in respect of unpaid dividends for prior dividend periods) to the
date of redemption. The redemption price may be payable in cash or other
property, as specified in the applicable Prospectus Supplement. If the
redemption price for Preferred Shares of any series is payable only from the net
proceeds of the issuance of capital shares of the Company, the terms of such
Preferred Shares may provide that, if no such capital shares shall have been
issued or to the extent the net proceeds from any issuance are insufficient to
pay in full the aggregate redemption price then due, such Preferred Shares shall
automatically and mandatorily be converted into the applicable capital shares of
the Company pursuant to conversion provisions specified in the applicable
Prospectus Supplement.
Notwithstanding the foregoing, unless (i) if such series of Preferred
Shares has a cumulative dividend, full cumulative dividends on all Preferred
Shares of any series shall have been or contemporaneously are declared and paid
or declared and a sum sufficient for the payment thereof set apart for payment
for all past
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dividend periods and the current dividend period and (ii) if such series of
Preferred Shares does not have a cumulative dividend, full dividends of the
Preferred Shares of any series have been or contemporaneously are declared and
paid or declared and a sum sufficient for the payment thereof set apart for
payment for the then-current dividend period, no Preferred Shares of any series
shall be redeemed unless all outstanding Preferred Shares of such series are
simultaneously redeemed; provided, however, that the foregoing shall not prevent
the purchase or acquisition of Preferred Shares of such series to preserve the
REIT status of the Company or pursuant to a purchase or exchange offer made on
the same terms to holders of all outstanding Preferred Shares of such series. In
addition, unless (i) if such series of Preferred Shares has a cumulative
dividend, full cumulative dividends on all outstanding Preferred Shares of any
series have been or contemporaneously are declared and paid or declared and a
sum sufficient for the payment thereof set apart for payment for all past
dividends periods and the then-current dividend period, and (ii) if such series
of Preferred Shares does not have a cumulative dividend, full dividends on the
Preferred Shares of any series have been or contemporaneously are declared and
paid or declared and a sum sufficient for the payment thereof set apart for
payment for the then-current dividend period, the Company shall not purchase or
otherwise acquire directly or indirectly any Preferred Shares of such series
(except by conversion into or exchange for capital shares of the Company ranking
junior to the Preferred Shares of such series as to dividends and upon
liquidation); provided, however, that the foregoing shall not prevent the
purchase or acquisition of Preferred Shares of such series to preserve the REIT
status of the Company or pursuant to a purchase or exchange offer made on the
same terms to holders of all outstanding Preferred Shares of such series.
If fewer than all of the outstanding Preferred Shares of any series are to
be redeemed, the number of shares to be redeemed will be determined by the
Company, and such shares may be redeemed pro rata from the holders of record of
such shares in proportion to the number of such shares held or for which
redemption is requested by such holder (with adjustments to avoid redemption of
fractional shares) or by lot in a manner determined by the Company.
Notice of redemption will be mailed at least 30 days but not more than 60
days before the redemption date to each holder of record of Preferred Shares of
any series to be redeemed at the address shown on the share transfer books of
the Company. Each notice shall state: (i) the redemption date; (ii) the number
of shares and the series of Preferred Shares to be redeemed; (iii) the
redemption to be surrendered for payment of the redemption price; (iv) that
dividends on the shares to be redeemed will cease to accrue on such redemption
date; and (v) the date upon which the holder's conversion rights, if any, as to
such shares shall terminate. If fewer than all of the Preferred Shares of any
series are to be redeemed, the notice mailed to each such holder thereof shall
also specify the number of Preferred Shares to be redeemed from each such
holder. If notice of redemption of any Preferred Shares has been given and if
the funds necessary for such redemption have been set aside by the Company in
trust for the benefit of the holders of any Preferred Shares so called for
redemption, then from and after the redemption date dividends will cease to
accrue on such Preferred Shares, and all rights of the holders of such shares
will terminate, except the right to receive the redemption price.
LIQUIDATION PREFERENCE
Upon any voluntary or involuntary liquidation, dissolution or winding up of
the affairs of the Company, then, before any distribution or payment shall be
made to the holders of any Common Shares or any other class or series of capital
shares of the Company ranking junior to the Preferred Shares in the distribution
of assets upon any liquidation, dissolution or winding up of the Company, the
holders of each series of Preferred Shares shall be entitled to receive out of
assets of the Company legally available for distribution to shareholders
liquidating distributions in the amount of the liquidation preference per share
(set forth in the applicable Prospectus Supplement), plus an amount equal to all
dividends accrued and unpaid thereon (which shall not include any accumulation
in respect of unpaid dividends for prior dividend periods if such Preferred
Shares do not have a cumulative dividend). After payment of the full amount of
the liquidating distributions to which they are entitled, the holders of
Preferred Shares will have no right or claim to any of the remaining assets of
the Company. In the event that, upon any such voluntary or involuntary
liquidation, dissolution or winding up, the available assets of the Company are
insufficient to pay the amount of the liquidating distributions on all
outstanding Preferred Shares and the corresponding amounts payable on all shares
of other
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classes or series of capital shares of the Company ranking on a parity with the
Preferred Shares in the distribution of assets, then the holders of the
Preferred Shares and all other such classes or series of capital shares shall
share ratably in any such distribution of assets in proportion to the full
liquidating distributions to which they would otherwise be respectively
entitled.
If liquidating distributions shall have been made in full to all holders of
Preferred Shares, the remaining assets of the Company shall be distributed among
the holders of any other classes or series of capital shares ranking junior to
the Preferred Shares upon liquidation, dissolution or winding up, according to
their respective rights and preferences and in each case according to their
respective number of shares. For such purposes, the consolidation or merger of
the Company with or into any other corporation, trust or entity, or the sale,
lease or conveyance of all or substantially all of the property or business of
the Company, shall not be deemed to constitute a liquidation, dissolution or
winding up of the Company.
VOTING RIGHTS
Holders of Preferred Shares will not have any voting rights, except as set
forth below or as otherwise from time to time required by law or as indicated in
the applicable Prospectus Supplement.
Unless provided otherwise for any series of Preferred Shares, so long as
any Preferred Shares remain outstanding, the Company will not, without the
affirmative vote or consent of the holders of at least two-thirds of each series
of Preferred Shares outstanding at the time, given in person or by proxy, either
in writing or at a meeting (such series voting separately as a class), (i)
authorize or create, or increase the authorized or issued amount of, any class
or series of capital shares ranking senior to such series of Preferred Shares
with respect to the payment of dividends or the distribution of assets upon
liquidation, dissolution or winding up or reclassify any authorized capital
shares of the Company into such shares, or create, authorize or issue any
obligation or security convertible into or evidencing the right to purchase any
such shares; or (ii) amend, alter or repeal the provisions of the Company's
Declaration of Trust or the designating amendment for such series of Preferred
Shares, whether by merger, consolidation or otherwise (an "Event"), so as to
materially and adversely affect any right, preference, privilege or voting power
of such series of Preferred Shares or the holders thereof, provided, however,
with respect to the occurrence of any of the Events set forth in (ii) above, so
long as the Preferred Shares remain outstanding with the terms thereof
materially unchanged, taking into account that upon the occurrence of an Event,
the Company may not be the surviving entity, the occurrence of any such Event
shall not be deemed to materially and adversely affect such rights, preferences,
privileges or voting power of holders of Preferred Shares and provided further
that (x) any increase in the amount of the authorized Preferred Shares or the
creation or issuance of any other series of Preferred Shares, or (y) any
increase in the amount of authorized shares of such series or any other series
of Preferred Shares, in each case ranking on a parity with or junior to the
Preferred Shares of such series with respect to payment of dividends or the
distribution of assets upon liquidation, dissolution or winding up, shall not be
deemed to materially and adversely affect such rights, preferences, privileges
or voting powers.
The foregoing voting provisions will not apply if, at or prior to the time
when the act with respect to which such vote would otherwise be required shall
be effected, all outstanding Preferred Shares of such series shall have been
redeemed or called for redemption and sufficient funds shall have been deposited
in trust to effect such redemption.
CONVERSION RIGHTS
The terms and conditions, if any, upon which any series of Preferred Shares
is convertible into Common Shares will be set forth in the applicable Prospectus
Supplement relating thereto. Such terms will include the number of Common Shares
into which the Preferred Shares are convertible, the conversion price (or manner
of calculation thereof), the conversion period, provisions as to whether
conversion will be at the option of the holders of Preferred Shares or the
Company, the events requiring an adjustment of the conversion price and
provisions affecting conversion in the event of the redemption of such series of
Preferred Shares.
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SHAREHOLDER LIABILITY
Under Texas law, no shareholder, including holders of Preferred Shares,
shall be personally liable for any contractual obligation of the Company on the
basis (i) that the person is or was the alter ego of the Company, or (ii) of
actual or constructive fraud, a sham to perpetrate a fraud, or similar theory,
unless the obligee demonstrates that the shareholder caused the Company to be
used for the purpose of perpetrating and did perpetrate an actual fraud on the
obligee primarily for the direct personal benefit of the shareholder.
RESTRICTIONS ON OWNERSHIP
As discussed below under "Description of Common Shares -- Ownership Limits
and Restrictions on Transfer," for the Company to qualify as a REIT under the
Code, not more than 50% in value of its outstanding equity securities of all
classes may be owned, directly or indirectly, by five or fewer individuals (as
defined in the Code to include certain entities) during the last half of a
taxable year. To assist the Company in meeting this requirement, the Company may
take certain actions to limit the beneficial ownership, directly or indirectly,
by a single person of the Company's outstanding equity securities, including any
Preferred Shares of the Company. Therefore, the designating amendment for each
series of Preferred Shares may contain provisions restricting the ownership and
transfer of Preferred Shares.
REGISTRAR AND TRANSFER AGENT
The Registrar and Transfer Agent for the Preferred Shares will be set forth
in the applicable Prospectus Supplement.
DESCRIPTION OF COMMON SHARES
GENERAL
The Declaration of Trust authorizes the Board of Trust Managers to issue up
to 250,000,000 Common Shares, as well as 250,000,000 Excess Shares, par value
$0.01 per share, issuable in exchange for Common Shares as described below at
"-- Ownership Limits and Restrictions on Transfer." The Common Shares are listed
on the New York Stock Exchange under the symbol "CEI."
Subject to such preferential rights as may be granted by the Board of Trust
Managers in connection with the future issuance of Preferred Shares, holders of
Common Shares are entitled to one vote per share on all matters to be voted on
by shareholders and are entitled to receive ratably such distributions as may be
declared on the Common Shares by the Board of Trust Managers in its discretion
from funds legally available therefor. In the event of the liquidation,
dissolution or winding up of the Company, holders of Common Shares are entitled
to share ratably in all assets remaining after payment of all debts and other
liabilities and any liquidation preference of the holders of Preferred Shares.
Holders of Common Shares have no subscription, redemption, conversion or
preemptive rights. Matters submitted for shareholder approval generally require
a majority vote of the shares present and voting thereon.
OWNERSHIP LIMITS AND RESTRICTIONS ON TRANSFER
For the Company to qualify as a REIT under the Code (i) not more than 50%
in value of outstanding equity securities of all classes ("Equity Shares") may
be owned, directly or indirectly, by five or fewer individuals (as defined in
the Code to include certain entities) during the last half of a taxable year;
(ii) the Equity Shares must be beneficially owned by 100 or more persons during
at least 335 days of a taxable year of 12 months or during a proportionate part
of a shorter taxable year; and (iii) certain percentages of the Company's gross
income must come from certain activities.
To ensure that five or fewer individuals do not own more than 50% in value
of the outstanding Equity Shares, the Declaration of Trust provides generally
that no holder may own, or be deemed to own by virtue of certain attribution
provisions of the Code, more than 8.0% of the issued and outstanding Common
Shares (the "Common Share Ownership Limit") or more than 9.9% of the issued and
outstanding shares of any series of
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Preferred Shares (the "Preferred Shares Ownership Limit"). In addition, the
Declaration of Trust separately provides that Mr. Rainwater, the Chairman of the
Board of Trust Managers, and certain related persons together may own, or be
deemed to own, by virtue of certain attribution provisions of the Code, up to
8.0% (the "Rainwater Ownership Limit") of the issued and outstanding Common
Shares (collectively, the "Ownership Limit"). The Board of Trust Managers, upon
receipt of a ruling from the IRS, an opinion of counsel, or other evidence
satisfactory to the Board of Trust Managers, in its sole discretion, may waive
or change, in whole or in part, the application of the Ownership Limit with
respect to any person that is not an individual (as defined in Section 542(a)(2)
of the Code). In connection with any such waiver or change, the Board of Trust
Managers may require such representations and undertakings from such person or
affiliates and may impose such other conditions, as the Board deems necessary,
advisable or prudent, in its sole discretion, to determine the effect, if any,
of the proposed transaction or ownership of Equity Shares on the Company's
status as a REIT for federal income tax purposes.
In addition, the Board of Trust Managers, from time to time, may increase
the Common Shares Ownership Limit, except that (i) the Common Shares Ownership
Limit may not be increased and no additional limitations may be created if,
after giving effect thereto, the Company would be "closely held" within the
meaning of Section 856(h) of the Code and (ii) the Common Shares Ownership Limit
may not be increased to a percentage that is greater than 9.9%. Under the
Declaration of Trust, neither the Preferred Shares Ownership Limit nor the
Rainwater Ownership Limit may be increased. The Board of Trust Managers may
reduce the Rainwater Ownership Limit, with the written consent of Mr. Rainwater,
after any transfer permitted by the Declaration of Trust. Prior to any
modification of the Ownership Limit or the Rainwater Ownership Limit, the Board
of Trust Managers will have the right to require such opinions of counsel,
affidavits, undertakings or agreements as it may deem necessary, advisable or
prudent, in its sole discretion, in order to determine or ensure the Company's
status as a REIT.
Under the Declaration of Trust, the Ownership Limit will not be
automatically removed even if the REIT provisions of the Code are changed so as
to no longer contain any ownership concentration limitation or if the ownership
concentration limit is increased. In addition to preserving the Company's status
as a REIT for federal income tax purposes, the Ownership Limit may prevent any
person or small group of persons from acquiring control of the Company.
The Declaration of Trust of the Company also provides that if an issuance,
transfer or acquisition of Equity Shares (i) would result in a holder exceeding
the Ownership Limit, (ii) would cause the Company to be beneficially owned by
less than 100 persons, (iii) would result in the Company being "closely held"
within the meaning of Section 856(h) of the Code or (iv) would otherwise result
in the Company failing to qualify as a REIT for federal income tax purposes,
such issuance, transfer or acquisition shall be null and void to the intended
transferee or holder, and the intended transferee or holder will acquire no
rights to the shares. Pursuant to the Declaration of Trust, Equity Shares owned,
transferred or proposed to be transferred in excess of the Ownership Limit or
which would otherwise jeopardize the Company's status as a REIT under the Code
will automatically be converted to Excess Shares. A holder of Excess Shares is
not entitled to distributions, voting rights and other benefits with respect to
such shares except the right to payment of the purchase price for the shares and
the right to certain distributions upon liquidation. Any dividend or
distribution paid to a proposed transferee on Excess Shares pursuant to the
Company's Declaration of Trust will be required to be repaid to the Company upon
demand. Excess Shares will be subject to repurchase by the Company at its
election. The purchase price of any Excess Shares will be equal to the lesser of
(i) the price in such proposed transaction or (ii) either (a) if the shares are
then listed on the New York Stock Exchange, the fair market value of such shares
reflected in the average closing sales prices for the shares on the 10 trading
days immediately preceding the date on which the Company or its designee
determines to exercise its repurchase right; or (b) if the shares are not then
so listed, such price for the shares on the principal exchange (including the
Nasdaq National Market) on which such shares are listed; or (c) if the shares
are not then listed on a national securities exchange, the latest quoted price
for the shares; or (d) if not quoted, the average of the high bid and low asked
prices if the shares are then traded over-the-counter, as reported by the Nasdaq
Stock Market; or (e) if such system is no longer in use, the principal automated
quotation system then in use; or (f) if the shares are not quoted on such
system, the average of the closing bid and asked prices as furnished by
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a professional market maker making a market in the shares; or (g) if there is no
such market maker or such closing prices otherwise are unavailable, the fair
market value, as determined by the Board of Trust Managers in good faith, on the
last trading day immediately preceding the day on which notice of such proposed
purchase is sent by the Company. The Declaration of Trust also establishes
certain restrictions relating to transfers of any Exchange Shares that may be
issued. If such transfer restrictions are determined to be void or invalid by
virtue of any legal decision, statute, rule or regulation, then the Company will
have the option to deem the intended transferee of any Excess Shares to have
acted as an agent on behalf of the Company in acquiring such Excess Shares and
to hold such Excess Shares on behalf of the Company.
Under the Declaration of Trust, the Company has the authority at any time
to waive the requirement that Excess Shares be issued or be deemed outstanding
in accordance with the provisions of the Declaration of Trust if the issuance of
such Excess Shares or the fact that such Excess Shares is deemed to be
outstanding would, in the opinion of nationally recognized tax counsel,
jeopardize the status of the Company as a REIT for federal income tax purposes.
All certificates issued by the Company representing Equity Shares will bear
a legend referring to the restrictions described above.
The Declaration of Trust of the Company also provides that all persons who
own, directly or by virtue of the attribution provisions of the Code, more than
5.0% of the outstanding Equity Shares (or such lower percentage as may be set by
the Board of Trust Managers), must file an affidavit with the Company containing
information specified in the Declaration of Trust no later than January 31 of
each year. In addition, each shareholder, upon demand, shall be required to
disclose to the Company in writing such information with respect to the direct,
indirect and constructive ownership of shares as the trust managers deem
necessary to comply with the provisions of the Code, as applicable to a REIT, or
to comply with the requirements of an authority or governmental agency.
The ownership limitations described above may have the effect of precluding
acquisitions of control of the Company by a third party. See "Certain Provisions
of the Declaration of Trust, Bylaws and Texas Law."
REGISTRAR AND TRANSFER AGENT
The Registrar and Transfer Agent for the Common Shares is BankBoston, N.A.
DESCRIPTION OF COMMON SHARE WARRANTS
The Company may issue Common Share Warrants for the purchase of Common
Shares. Common Share Warrants may be issued independently or together with any
other Securities offered by any Prospectus Supplement and may be attached to or
separate from such Securities. Each series of Common Share Warrants will be
issued under a separate warrant agreement (each, a "Warrant Agreement") to be
entered into between the Company and a warrant agent specified in the applicable
Prospectus Supplement (the "Warrant Agent"). The Warrant Agent will act solely
as an agent of the Company in connection with the Common Share Warrants of such
series and will not assume any obligation or relationship of agency or trust for
or with any holders or beneficial owners of Common Share Warrants. The following
sets forth certain general terms and provisions of the Common Share Warrants
offered hereby. Further terms of the Common Share Warrants and the applicable
Warrant Agreements will be set forth in the applicable Prospectus Supplement.
The applicable Prospectus Supplement will describe the terms of the Common
Share Warrants in respect of which this Prospectus is being delivered,
including, where applicable, the following: (i) the title of such Common Share
Warrants; (ii) the aggregate number of such Common Share Warrants; (iii) the
price or prices at which such Common Share Warrants will be issued; (iv) the
number of shares of Common Shares purchasable upon exercise of such Common Share
Warrants; (v) the designation and terms of any other Securities offered thereby
with which such Common Share Warrants are to be issued and the number of such
Common Share Warrants issued with each such Security offered thereby; (vi) the
date, if any, on and after which such Common Share Warrants and the related
Common Shares will be separately transferable;
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(vii) the price at which the Common Shares purchasable upon exercise of such
Common Share Warrants may be purchased; (viii) the date on which the right to
exercise such Common Share Warrants shall commence and the date on which such
right shall expire; (ix) the minimum or maximum number of such Common Share
Warrants which may be exercised at any one time; (x) information with respect to
book entry procedures, if any; (xi) any limitations on the acquisition or
ownership of such Common Share Warrants which may be required in order to
maintain the status of the Company as a REIT; (xii) a discussion of certain
federal income tax considerations; and (xiii) any other terms of such Common
Share Warrants, including terms, procedures and limitations relating to the
exchange and exercise of such Common Share Warrants.
Reference is made to the section captioned "Description of Common Shares"
for a general description of the Common Shares to be acquired upon the exercise
of the Common Share Warrants, including a description of certain restrictions on
the ownership of Common Shares.
CERTAIN PROVISIONS OF THE DECLARATION OF TRUST, BYLAWS AND TEXAS LAW
The Declaration of Trust and the Bylaws of the Company contain certain
provisions that may inhibit or impede acquisition or attempted acquisition of
control of the Company by means of a tender offer, a proxy contest or otherwise.
These provisions are expected to discourage certain types of coercive takeover
practices and inadequate takeover bids and to encourage persons seeking to
acquire control of the Company to negotiate first with the Board of Trust
Managers. The Company believes that these provisions increase the likelihood
that proposals initially will be on more attractive terms than would be the case
in their absence and increase the likelihood of negotiations, which might
outweigh the potential disadvantages of discouraging such proposals because,
among other things, negotiation of such proposals might result in improvement of
terms. The description set forth below is only a summary of the terms of the
Declaration of Trust and Bylaws (copies of which have been incorporated by
reference as exhibits to the Registration Statement of which this Prospectus
forms a part). See "Description of Common Shares -- Ownership Limits and
Restrictions on Transfer."
STAGGERED BOARD OF TRUST MANAGERS
The Declaration of Trust and the Bylaws provide that the Board of Trust
Managers will be divided into three classes of trust managers, each class
constituting approximately one-third of the total number of trust managers, with
the classes serving staggered three-year terms. The classification of the Board
of Trust Managers will have the effect of making it more difficult for
shareholders to change the composition of the Board of Trust Managers, because
only a minority of the trust managers are up for election, and may be replaced
by vote of the shareholders, at any one time. The Company believes, however,
that the longer terms associated with the classified Board of Trust Managers
will help to ensure continuity and stability of the Company's management and
policies.
The classification provisions also could have the effect of discouraging a
third party from accumulating a large block of the Company's capital shares or
attempting to obtain control of the Company, even though such an attempt might
be beneficial to the Company and some, or a majority, of its shareholders.
Accordingly, under certain circumstances shareholders could be deprived of
opportunities to sell their shares of Common Shares at a higher price than might
otherwise be available.
NUMBER OF TRUST MANAGERS; REMOVAL; FILLING VACANCIES
Subject to any rights of holders of Preferred Shares to elect additional
trust managers under specified circumstances ("Preferred Holders' Rights"), the
Declaration of Trust provides that the number of trust managers will be fixed
by, or in the manner provided in, the Bylaws, but must not be more than 25 nor
less than one. See "Description of Preferred Shares -- Voting Rights" below. In
addition, the Bylaws provide that, subject to any Preferred Holders' Rights, the
number of trust managers will be fixed by the Board of Trust Managers, but must
not be more than 25 or less than three. In addition, the Bylaws provide that,
subject to any Preferred Holders' Rights, and unless the Board of Trust Managers
otherwise determines, any vacancies (other than vacancies created by an increase
in the total number of trust managers) will be filled by the
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<PAGE> 39
affirmative vote of a majority of the remaining trust managers, although less
than a quorum, and any vacancies created by an increase in the total number of
trust managers may be filled by a majority of the entire Board of Trust
Managers. Accordingly, the Board of Trust Managers could temporarily prevent any
shareholder from enlarging the Board of Trust Managers and then filling the new
trust manager position with such shareholder's own nominees.
The Declaration of Trust and the Bylaws provide that, subject to any
Preferred Holders' Rights, trust managers may be removed only for cause upon the
affirmative vote of holders of at least 80% of the entire voting power of all
the then-outstanding shares entitled to vote generally in the election of trust
managers, voting together as a single class.
RELEVANT FACTORS TO BE CONSIDERED BY THE BOARD OF TRUST MANAGERS
The Declaration of Trust provides that, in determining what is in the best
interest of the Company in evaluating a "business combination," "change in
control" or other transaction, a trust manager of the Company shall consider all
of the relevant factors. These factors may include (i) the immediate and
long-term effects of the transaction on the Company's shareholders, including
shareholders, if any, who do not participate in the transaction; (ii) the social
and economic effects of the transaction on the Company's employees, suppliers,
creditors and customers and others dealing with the Company and on the
communities in which the Company operates and is located; (iii) whether the
transaction is acceptable, based on the historical and current operating results
and financial condition of the Company; (iv) whether a more favorable price
would be obtained for the Company's stock or other securities in the future; (v)
the reputation and business practices of the other party or parties to the
proposed transaction, including its or their management and affiliates, as they
would affect employees of the Company; (vi) the future value of the Company's
securities; (vii) any legal or regulatory issues raised by the transaction; and
(viii) the business and financial condition and earnings prospects of the other
party or parties to the proposed transaction including, without limitation, debt
service and other existing financial obligations, financial obligations to be
incurred in connection with the transaction, and other foreseeable financial
obligations of such other party or parties. Pursuant to this provision, the
Board of Trust Managers may consider subjective factors affecting a proposal,
including certain nonfinancial matters, and, on the basis of these
considerations, may oppose a business combination or other transaction which,
evaluated only in terms of its financial merits, might be attractive to some, or
a majority, of the Company's shareholders.
ADVANCE NOTICE PROVISIONS FOR SHAREHOLDER NOMINATIONS AND SHAREHOLDER PROPOSALS
The Bylaws provide for an advance notice procedure for shareholders to make
nominations of candidates for trust manager or bring other business before an
annual meeting of shareholders of the Company (the "Shareholder Notice
Procedure").
Pursuant to the Shareholder Notice Procedure (i) only persons who are
nominated by, or at the direction of, the Board of Trust Managers, or by a
shareholder who has given timely written notice containing specified information
to the Secretary of the Company prior to the meeting at which trust managers are
to be elected, will be eligible for election as trust managers of the Company
and (ii) at an annual meeting, only such business may be conducted as has been
brought before the meeting by, or at the direction of, the Chairman or the Board
of Trust Managers or by a shareholder who has given timely written notice to the
Secretary of the Company of such shareholder's intention to bring such business
before such meeting. In general, for notice of shareholder nominations or
proposed business to be conducted at an annual meeting to be timely, such notice
must be received by the Company not less than 70 days nor more than 90 days
prior to the first anniversary of the previous year's annual meeting.
The purpose of requiring shareholders to give the Company advance notice of
nominations and other business is to afford the Board of Trust Managers a
meaningful opportunity to consider the qualifications of the proposed nominees
or the advisability of the other proposed business and, to the extent deemed
necessary or desirable by the Board of Trust Managers, to inform shareholders
and make recommendations about such nominees or business, as well as to ensure
an orderly procedure for conducting meetings of shareholders.
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Although the Bylaws do not give the Board of Trust Managers power to block
shareholder nominations for the election of trust managers or proposal for
action, the Shareholder Notice Procedure may have the effect of discouraging a
shareholder from proposing nominees or business, precluding a contest for the
election of trust managers or the consideration of shareholder proposals if
procedural requirements are not met, and deterring third parties from soliciting
proxies for a non-management proposal or slate of trust managers, without regard
to the merits of such proposal or slate.
PREFERRED SHARES
The Declaration of Trust authorizes the Board of Trust Managers to
establish one or more series of Preferred Shares and to determine, with respect
to any series of Preferred Shares, the preferences, rights and other terms of
such series. See "Description of Preferred Shares." The Company believes that
the ability of the Board of Trust Managers to issue one or more series of
Preferred Shares will provide the Company with increased flexibility in
structuring possible future financings and acquisitions, and in meeting other
corporate needs. The authorized Preferred Shares are available for issuance
without further action by the Company's shareholders, unless such action is
required by applicable law or the rules of any stock exchange or automated
quotation system on which the Company's securities may be listed or traded at
the time of issuance or proposed issuance. Although the Board of Trust Managers
has no present intention to do so, it could, in the future, issue a series of
Preferred Shares which, due to its terms, could impede a merger, tender offer or
other transaction that some, or a majority, of the Company's shareholders might
believe to be in their best interests or in which shareholders might receive a
premium over then-prevailing market prices for their Common Shares.
AMENDMENT OF DECLARATION OF TRUST
The Declaration of Trust provides that it may be amended only by the
affirmative vote of the holders of not less than two-thirds of the votes
entitled to be cast, except that the provisions of the Declaration of Trust
relating to "business combinations" or "control shares" (as described below
under "-- Business Combinations" and "-- Control Share Acquisitions") may be
amended only with the affirmative vote of 80% of the votes entitled to be cast,
voting together as a single class.
RIGHTS TO PURCHASE SECURITIES AND OTHER PROPERTY
The Declaration of Trust authorizes the Board of Trust Managers, subject to
any rights of holders of any series of Preferred Shares, to create and issue
rights entitling the holders thereof to purchase from the Company Equity Shares
or other securities or property. The times at which and terms upon which such
rights are to be issued are within the discretion of the Board of Trust
Managers. This provision is intended to confirm the authority of the Board of
Trust Managers to issue share purchase rights which could have terms that would
impede a merger, tender offer or other takeover attempt, or other rights to
purchase securities of the Company or any other entity.
BUSINESS COMBINATIONS
The Declaration of Trust establishes special requirements with respect to
"business combinations" (including a merger, consolidation, share exchange, or,
in certain circumstances, an asset transfer or issuance of reclassification of
equity securities) between the Company and any person who beneficially owns,
directly or indirectly, 10% or more of the voting power of the Company's shares
(an "Interested Shareholder"), subject to certain exemptions. In general, the
Declaration of Trust provides that an Interested Shareholder or any affiliate
thereof may not engage in a "business combination" with the Company for a period
of five years following the date he becomes an Interested Shareholder.
Thereafter, pursuant to the Declaration of Trust, such transactions must be (i)
approved by the Board of Trust Managers of the Company and (ii) approved by the
affirmative vote of at least 80% of the votes entitled to be cast by holders of
voting shares other than voting shares held by the Interested Shareholder with
whom the business combination is to be effected, unless, among other things, the
holders of Equity Shares receive a minimum price (as defined in the Declaration
of Trust) for their shares and the consideration is received in cash or in the
same form as previously paid by the
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<PAGE> 41
Interested Shareholder for his shares. These provisions of the Declaration of
Trust do not apply, however, to business combinations that are approved or
exempted by the Board of Trust Managers of the Company prior to the time that
the Interested Shareholder becomes an Interested Shareholder.
CONTROL SHARE ACQUISITIONS
The Declaration of Trust provides that "control shares" of the Company
acquired in a control share acquisition have no voting rights except to the
extent approved by a vote of two-thirds of the votes entitled to be cast by the
holders of Equity Shares, excluding shares as to which the acquiror, officers of
the Company and employees of the Company who are also trust managers have the
right to vote or direct the vote. "Control shares" are Equity Shares which, if
aggregated with all other Equity Shares previously acquired which the person is
entitled to vote, would entitle the acquiror to vote (i) 20% or more but less
than one-third; (ii) one-third or more but less than a majority; or (iii) a
majority of the outstanding voting shares of the Company. Control shares do not
include Equity Shares that the acquiring person is entitled to vote on the basis
of prior shareholder approval. A "control share acquisition" is defined as the
acquisition of control shares, subject to certain exemptions enumerated in the
Declaration of Trust.
The Declaration of Trust provides that a person who has made or proposed to
make a control share acquisition and who has obtained a definitive financing
agreement with a responsible financial institution providing for any amount of
financing not to be provided by the acquiring person may compel the Board of
Trust Managers of the Company to call a special meeting of shareholders to be
held within 50 days of demand to consider the voting rights of the Equity
Shares. If no request for a meeting is made, the Declaration of Trust permits
the Company itself to present the question at any shareholders' meeting.
Pursuant to the Declaration of Trust, if voting rights are not approved at
a shareholders' meeting or if the acquiring person does not deliver an acquiring
person statement as required by the Declaration of Trust, then, subject to
certain conditions and limitations set forth in the Declaration of Trust, the
Company will have the right to redeem any or all of the control shares, except
those for which voting rights have previously been approved, for fair value
determined, without regard to the absence of voting rights of the control
shares, as of the date of the last control share acquisition or of any meeting
of shareholders at which the voting rights of such shares are considered and not
approved. Under the Declaration of Trust, if voting rights for control shares
are approved at a shareholders' meeting and, as a result, the acquiror would be
entitled to vote a majority of the Equity Shares entitled to vote, all other
shareholders will have the rights of dissenting shareholders under the Texas
Real Estate Investment Trust Act (the "TRA"). The Declaration of Trust provides
that the fair value of the Equity Shares for purposes of such appraisal rights
may not be less than the highest price per share paid by the acquiror in the
control share acquisition, and that certain limitations and restrictions of the
TRA otherwise applicable to the exercise of dissenters' rights do not apply.
These provisions of the Declaration of Trust do not apply to Equity Shares
acquired in a merger, consolidation or share exchange if the Company is a party
to the transaction, or if the acquisition is approved or excepted by the
Declaration of Trust or Bylaws of the Company prior to a control share
acquisition.
OWNERSHIP LIMIT
The limitation on ownership of shares of Common Shares set forth in the
Company's Declaration of Trust, as well as the provisions of the TRA, could have
the effect of discouraging offers to acquire the Company and of increasing the
difficulty of consummating any such offer. See "Description of Common
Shares -- Ownership Limits and Restrictions on Transfer."
ERISA CONSIDERATIONS
The following is a summary of material considerations arising under the
Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and the
prohibited transaction provisions of Section 4975 of the Code that may be
relevant to prospective investors. This discussion does not purport to deal with
all aspects of ERISA or the Code that may be relevant to particular investors in
light of their particular
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<PAGE> 42
circumstances. A PROSPECTIVE INVESTOR THAT IS AN EMPLOYEE BENEFIT PLAN SUBJECT
TO ERISA, A TAX QUALIFIED RETIREMENT PLAN, AN INDIVIDUAL RETIREMENT ACCOUNT
("IRA") OR A GOVERNMENTAL, CHURCH OR OTHER PLAN THAT IS EXEMPT FROM ERISA IS
ADVISED TO CONSULT ITS OWN LEGAL ADVISOR REGARDING THE SPECIFIC CONSIDERATIONS
ARISING UNDER APPLICABLE PROVISIONS OF ERISA, THE CODE AND STATE LAW WITH
RESPECT TO THE PURCHASE, OWNERSHIP, OR SALE OF THE SECURITIES BY SUCH PLAN OR
IRA.
FIDUCIARY DUTIES AND PROHIBITED TRANSACTIONS
A fiduciary of a pension, profit-sharing, retirement or other employee
benefit plan subject to ERISA (an "ERISA Plan") should consider the fiduciary
standards under ERISA in the context of the ERISA Plan's particular
circumstances before authorizing an investment of any portion of the ERISA
Plan's assets in the Securities. Accordingly, such fiduciary should consider (i)
whether the investment satisfies the diversification requirements of Section
404(a)(1)(C) of ERISA; (ii) whether the investment is in accordance with the
documents and instruments governing the ERISA Plan as required by Section
404(a)(1)(D) of ERISA; (iii) whether the investment is prudent under Section
404(a)(1)(B) of ERISA; and (iv) whether the investment is solely in the
interests of the ERISA Plan participants and beneficiaries and for the exclusive
purpose of providing benefits to the ERISA Plan participants and beneficiaries
and defraying reasonable administrative expenses of the ERISA Plan as required
by Section 404(a)(1)(A) of ERISA.
In addition to the imposition of fiduciary standards, ERISA and Section
4975 of the Code prohibit a wide range of transactions between an ERISA Plan, an
IRA or certain other plans (collectively, a "Plan") and persons who have certain
specified relationships to the Plan ("parties in interest" within the meaning of
ERISA and "disqualified persons" within the meaning of the Code). Thus, a Plan
fiduciary or person making an investment decision for a Plan also should
consider whether the acquisition or the continued holding of the Securities
might constitute or give rise to a direct or indirect prohibited transaction.
PLAN ASSETS
The prohibited transactions rules of ERISA and the Code apply to
transactions with a Plan and also to transactions with the "plan assets" of a
Plan. The "plan assets" of a Plan include the Plan's interest in an entity in
which the Plan invests and, in certain circumstances, the assets of the entity
in which the Plan holds such interest. The term "plan assets" is not
specifically defined in ERISA or the Code, nor, as of the date hereof, has it
been interpreted definitively by the courts in litigation. On November 13, 1986,
the United States Department of Labor, the governmental agency primarily
responsible for administering ERISA, adopted a final regulation (the "DOL
Regulation") setting out the standards it will apply in determining whether an
equity investment in an entity will cause the assets of such entity to
constitute "plan assets." The DOL Regulation applies for purposes of both ERISA
and Section 4975 of the Code.
Under the DOL Regulation, if a Plan acquires an equity interest in an
entity, which equity interest is not a "publicly offered security," the Plan's
assets generally would include both the equity interest and an undivided
interest in each of the entity's underlying assets unless certain specified
exceptions apply. The DOL Regulation defines a publicly offered security as a
security that is "widely held," "freely transferable," and either part of a
class of securities registered under Section 12(b) or 12(g) of the Exchange Act,
or sold pursuant to an effective registration statement under the Securities Act
(provided the securities are registered under the Exchange Act within 120 days
after the end of the fiscal year of the issuer during which the offering
occurred). The Securities will be sold in an offering registered under the
Securities Act and registered under Section 12(b) of the Exchange Act.
The DOL Regulation provides that a security is "widely held" only if it is
part of a class of securities that is owned by 100 or more investors independent
of the issuer and of one another. However, a class of securities will not fail
to be "widely held" solely because the number of independent investors falls
below 100 subsequent to the initial public offering as a result of events beyond
the issuer's control. The Company expects the Securities to be "widely held"
upon completion of any offering.
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The DOL Regulation provides that whether a security is "freely
transferable" is a factual question to be determined on the basis of all the
relevant facts and circumstances. The DOL Regulation further provides that when
a security is part of an offering in which the minimum investment is $10,000 or
less, as will be the case with any offering, certain restrictions ordinarily
will not affect, alone or in combination, the finding that such securities are
freely transferable. The Company believes that the restrictions imposed under
the Declaration of Trust on the transfer of the Securities are limited to
restrictions on transfer generally permitted under the DOL Regulation and are
not likely to result in the failure of the Securities to be "freely
transferable." See "Common Shares -- Ownership Limits and Restrictions on
Transfer." The DOL Regulation only establishes a presumption in favor of a
finding of free transferability and, therefore, no assurance can be given that
the Department of Labor and the U.S. Treasury Department would not reach a
contrary conclusion with respect to the Securities. Any additional transfer
restrictions imposed on the transfer of the Securities will be discussed in the
applicable Prospectus Supplement.
Assuming that the Securities will be "widely held" and "freely
transferable," the Company believes that the Securities will be publicly offered
securities for purposes of the DOL Regulation and that the assets of the Company
will not be deemed to be "plan assets" of any plan that invests in the
Securities.
PLAN OF DISTRIBUTION
The Company may sell the Securities to one or more underwriters for public
offering and sale by them or may sell the Securities to investors directly or
through agents. Any such underwriter or agent involved in the offer and sale of
the Securities will be named in the applicable Prospectus Supplement.
Underwriters may offer and sell the Securities at a fixed price or prices,
which may be changed, related to the prevailing market prices at the time of
sale, or at negotiated prices. The Company also may, from time to time,
authorize underwriters acting as the Company's agents to offer and sell the
Securities upon the terms and conditions set forth in an applicable Prospectus
Supplement. In connection with the sale of Securities, underwriters may be
deemed to have received compensation from the Company in the form of
underwriting discounts or commissions and may also receive commissions from
purchasers of Securities for whom they may act as agent. Underwriters may sell
the Securities to or through dealers, and such dealers may receive compensation
in the form of discounts, concessions from the underwriters or commissions from
the purchasers for whom they may act as agent.
Any underwriting compensation paid by the Company to underwriters or agents
in connection with the offering of Securities and any discounts, concessions or
commissions allowed by underwriters to participating dealers will be set forth
in the applicable Prospectus Supplement. Underwriters, dealers and agents
participating in the distribution of the Securities may be deemed to be
underwriters, and any discounts and commissions received by them and any profit
realized by them on resale of the Securities may be deemed to be underwriting
discounts and commissions under the Securities Act. Underwriters, dealers and
agents may be entitled, under agreements entered into with the Company, to
indemnification against and contribution toward certain civil liabilities,
including liabilities under the Securities Act.
If so indicated in the applicable Prospectus Supplement, the Company will
authorize dealers acting as the Company's agents to solicit offers by certain
institutions to purchase Securities from the Company at the public offering
price set forth in such Prospectus Supplement pursuant to delayed delivery
contracts ("Contracts") providing for payment and delivery on the date or dates
stated in such Prospectus Supplement. Each Contract will be for an amount not
less than, and the aggregate principal amount of Securities sold pursuant to
Contracts shall be not less or more than, the respective amounts stated in the
applicable Prospectus Supplement. Institutions with whom Contracts, when
authorized, may be made include commercial and savings banks, insurance
companies, pension funds, investment companies, educational and charitable
institutions, and other institutions, but will in all cases be subject to the
approval of the Company. Contracts will not be subject to any conditions except
(i) the purchase by an institution of the Securities covered by its Contracts
shall not at the time of delivery be prohibited under the laws of any
jurisdiction in the United States to which such institution is subject and (ii)
if the Securities are being sold to underwriters, the Company shall
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<PAGE> 44
have sold to such underwriters the total principal amount of the Securities less
the principal amount thereof covered by Contracts.
Certain of the underwriters and their affiliates may be customers of,
engage in transactions with and perform services for the Company and its
subsidiaries in the ordinary course of business.
AVAILABLE INFORMATION
The Company is subject to the information requirements of the Exchange Act,
and, in accordance therewith, files reports and other information with the
Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information can be inspected at the Public Reference
Section maintained by the Commission at Judiciary Plaza, Room 1024, 450 Fifth
Street, N.W., Washington, D.C. 20549 and the following regional offices of the
Commission: Citicorp Center, Suite 1400, 500 West Madison Street, Chicago,
Illinois 60661-2511 and Seven World Trade Center, Suite 1300, New York, New York
10048. Copies of such material can be obtained from the Public Reference Section
of the Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C.
20549, at prescribed rates. The Commission also maintains a Web site
(http://www.sec.gov) that contains reports, proxy and information statements and
other information regarding registrants that file electronically with the
Commission. In addition, the Company's Common Shares are listed on the New York
Stock Exchange and such reports, proxy statements and other information
concerning the Company can be inspected at the offices of the New York Stock
Exchange, 20 Broad Street, New York, New York 10005.
The Company has filed with the Commission a Registration Statement, of
which this Prospectus is a part, under the Securities Act, with respect to the
Securities offered hereby. This Prospectus does not contain all of the
information set forth in the Registration Statement, certain portions of which
have been omitted as permitted by the rules and regulations of the Commission.
Statements contained in this Prospectus as to the contents of any contract or
other documents are not necessarily complete, and in each instance, reference is
made to the copy of such contract or documents filed as an exhibit to the
Registration Statement, each such statement being qualified in all respects by
such reference and the exhibits and schedules thereto.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The documents listed below have been filed under the Exchange Act by the
Company (Exchange Act file number 1-13038) with the Commission and are
incorporated herein by reference:
1. The Company's Registration Statement on Form 8-B filed on March
24, 1997 registering the Common Shares of the Company under
Section 12(b) of the Exchange Act.
2. The Proxy Statement in connection with the Company's 1997 Annual
Meeting of Stockholders.
3. The Company's Annual Report on Form 10-K for the year ended
December 31, 1996, as amended on April 30, 1997 and May 16, 1997.
4. The Company's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1997.
5. The Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1997, as amended on August 28, 1997.
6. The Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1997, as amended on December 5, 1997.
7. The Company's Current Report on Form 8-K dated January 29, 1997
and filed March 24, 1997, as amended on April 9, 1997, April 24,
1997, May 23, 1997 and July 2, 1997.
8. The Company's Current Report on Form 8-K dated February 28, 1997
and filed March 17, 1997, as amended on March 21, 1997.
9. The Company's Current Report on Form 8-K dated April 9, 1997 and
filed April 10, 1997, as amended on April 24, 1997.
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<PAGE> 45
10. The Company's Current Report on Form 8-K dated April 22, 1997 and
filed April 24, 1997.
11. The Company's Current Report on Form 8-K dated May 8, 1997 and
filed May 12, 1997.
12. The Company's Current Report on Form 8-K dated June 20, 1997 and
filed September 30, 1997, as amended on October 1, 1997.
13. The Company's Current Report on Form 8-K dated July 22, 1997 and
filed July 23, 1997.
14. The Company's Current Report on Form 8-K dated August 11, 1997 and
filed August 13, 1997.
15. The Company's Current Report on Form 8-K dated September 22, 1997
and filed September 22, 1997.
16. The Company's Current Report on Form 8-K dated September 22, 1997
and filed September 30, 1997, as amended on October 1, 1997.
17. The Company's Current Report on Form 8-K dated September 28, 1997
and filed October 27, 1997, as amended on November 25, 1997.
18. The Company's Current Report on Form 8-K dated September 30, 1997
and filed September 30, 1997, as amended on October 1, 1997.
19. The Company's Current Report on Form 8-K dated September 30, 1997
and filed October 1, 1997, as amended on October 9, 1997.
20. The Company's Current Report on Form 8-K dated October 8, 1997 and
filed October 14, 1997.
21. The Company's Current Report on Form 8-K dated October 22, 1997
and filed October 28, 1997.
All documents filed subsequent to the date of this Prospectus pursuant to
Section 13(a), 13(c), 14 or 15(d) of the Exchange Act and prior to termination
of the offering of all Securities to which this Prospectus relates shall be
deemed to be incorporated by reference in this Prospectus and shall be part
hereof from the date of filing of such document.
Any statement contained herein or in a document incorporated or deemed to
be incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained in this
Prospectus (in the case of a statement in a previously filed document
incorporated or deemed to be incorporated by reference herein), in any
accompanying Prospectus Supplement relating to a specific offering of Securities
or in any other subsequently filed document that is also incorporated or deemed
to be incorporated by reference herein, modifies or supersedes such statement.
Any such statement so modified or superseded shall not be deemed, except as so
modified or superseded, to constitute a part of this Prospectus or any
accompanying Prospectus Supplement. Subject to the foregoing, all information
appearing in this Prospectus and each accompanying Prospectus Supplement is
qualified in its entirety by the information appearing in the documents
incorporated by reference.
The Company undertakes to provide without charge to each person to whom a
copy of this Prospectus has been delivered, upon the written or oral request of
any such person, a copy of any or all of the documents incorporated by reference
in this Prospectus (other than exhibits and schedules thereto, unless such
exhibits or schedules are specifically incorporated by reference into the
information that this Prospectus incorporates). Written or telephonic requests
for copies should be directed to Crescent Real Estate Equities Company, 777 Main
Street, Suite 2100, Fort Worth, Texas 76102, Attention: Company Secretary
(telephone number: (817) 877-0477).
EXPERTS
The financial statements and schedule incorporated in this Prospectus by
reference to the Company's Annual Report on Form 10-K for the year ended
December 31, 1996, as amended, have been audited by Arthur Andersen LLP,
independent public accountants, as indicated in their report with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in giving said report.
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The financial statements incorporated in this Prospectus by reference to
the Company's Current Reports on Form 8-K (i) dated January 29, 1997 and filed
on March 24, 1997, as amended on April 9, 1997, April 24, 1997, May 23, 1997 and
July 2, 1997, (ii) dated February 28, 1997 and filed on March 17, 1997, as
amended on March 21, 1997, (iii) dated June 20, 1997 and filed on September 30,
1997, as amended on October 1, 1997, (iv) dated September 22, 1997 and filed on
September 30, 1997, as amended on October 1, 1997, (v) dated September 30, 1997
and filed on September 30, 1997, as amended on October 1, 1997, and (vi) dated
October 22, 1997 and filed on October 28, 1997, respectively, have been audited
by Arthur Andersen LLP, independent public accountants, as indicated in their
report with respect thereto, and are included herein in reliance upon the
authority of said firm as experts in giving said report.
LEGAL MATTERS
The legality of the issuance of the Securities will be passed upon for the
Company by Shaw, Pittman, Potts & Trowbridge, Washington, D.C. Certain legal
matters relating to 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.
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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 UNDERWRITER. NEITHER THE
DELIVERY OF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCE, CREATE ANY IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS SUPPLEMENT OR IN THE
PROSPECTUS OR IN AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF. THIS PROSPECTUS
SUPPLEMENT AND THE PROSPECTUS DO NOT CONSTITUTE AN OFFER OR SOLICITATION BY
ANYONE IN ANY STATE IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN
WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR
TO ANYONE TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
PROSPECTUS SUPPLEMENT
The Company................................. S-2
Risk Factors................................ S-2
Use of Proceeds............................. S-7
Management.................................. S-7
Structure of the Company.................... S-8
Federal Income Tax Considerations........... S-9
Plan of Distribution........................ S-23
Legal Matters............................... S-23
PROSPECTUS
The Company................................. 2
Risk Factors................................ 2
Use of Proceeds............................. 7
Ratios of Earnings to Fixed Charges and
Preferred Shares Dividends................ 7
Description of Preferred Shares............. 7
Description of Common Shares................ 12
Description of Common Share Warrants........ 14
Certain Provisions of the Declaration of
Trust, Bylaws and Texas Law............... 15
ERISA Considerations........................ 18
Plan of Distribution........................ 20
Available Information....................... 21
Incorporation of Certain Documents by
Reference................................. 21
Experts..................................... 22
Legal Matters............................... 23
</TABLE>
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5,375,000 SHARES
[CRESCENT LOGO]
COMMON SHARES
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PROSPECTUS SUPPLEMENT
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December 12, 1997
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