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Filed pursuant to Rule 424(b)(5)
Registration Number 333-21905
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED MARCH 26, 1997)
4,700,000 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 4,700,000 common shares of beneficial interest (the "Common
Shares") to UBS Securities (Portfolio), LLC ("UBS Portfolio"), a U.S. affiliate
of Union Bank of Switzerland. The Common Shares offered hereby are being sold by
the Company to UBS Portfolio at a price of $31 9/16 per share. The Common Shares
are listed on the New York Stock Exchange (the "NYSE") under the symbol "CEI."
On August 11, 1997, the last reported sale price of the Common Shares on the
NYSE was $31 9/16 per share. It is expected that delivery of the Common Shares
offered hereby will be made in New York, New York, on or about August 12, 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 August 11, 1997.
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Capitalized terms used herein and not otherwise defined are as defined in
the Glossary appearing elsewhere in this Prospectus Supplement.
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
The Company is a fully integrated real estate company, operated as a REIT,
which owns a portfolio of Properties that includes 72 Office Properties with an
aggregate of approximately 21.0 million net rentable square feet, four
full-service Hotel Properties with a total of 1,471 rooms and two destination
health and fitness resort Hotel Properties that can accommodate up to 442 guests
daily, the Magellan Facilities, six Retail Properties with an aggregate of
approximately .6 million net rentable square feet and the Residential
Development Property Mortgages and non-voting common stock in the four
Residential Development Corporations. The Office Properties and the Retail
Properties are located primarily in 19 metropolitan submarkets in Texas and
Colorado.
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.
As of August 8, 1997, 97,392,627 Common Shares and 6,631,731 Units were
outstanding.
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.
RECENT DEVELOPMENTS
SPIN-OFF
In April 1997, the Company established a new Delaware corporation, Crescent
Operating, Inc. ("Crescent Operating"), to become a lessee and operator of
various assets and to perform an agreement (the "Intercompany Agreement")
between Crescent Operating and the Operating Partnership, pursuant to which each
has agreed to provide the other with rights to participate in certain
transactions. Crescent Operating's certificate of incorporation, as amended and
restated, generally prohibits Crescent Operating, 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.
The Company's Current Report on Form 8-K, dated January 29, 1997, as amended on
July 2, 1997, contains a more detailed description of the Intercompany
Agreement, the management of Crescent Operating and the interests of the
management of the Company and Crescent Operating and certain other persons in
the spin-off and in the completed investments described herein.
In connection with the formation and capitalization of Crescent Operating,
the Company provided to Crescent Operating approximately $14.1 million in the
form of cash contributions. The Company also made available $35.9 million in
loans to be used by Crescent Operating to acquire certain assets described below
and a line of credit in the amount of $20.4 million to be used by Crescent
Operating to fulfill certain ongoing obligations associated with these assets.
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On June 12, 1997, the distribution through a spin-off of all of the
outstanding common stock of Crescent Operating became effective. The
distribution was made to those persons who were limited partners of the
Operating Partnership or shareholders of Crescent Equities on May 30, 1997, on
the basis of one share of common stock of Crescent Operating for every five
Units in the Operating Partnership held on that date and one share of common
stock of Crescent Operating for every ten Common Shares of Crescent Equities
held on that date. The mailing of the shares and account statements representing
the ownership of common stock of Crescent Operating occurred on June 26, 1997.
The distribution of Crescent Operating common stock was designed to provide
the shareholders of Crescent Equities and the limited partners of the Operating
Partnership who retain both their interest in Crescent Equities or the Operating
Partnership and their interest in Crescent Operating with the ability to benefit
from both the real estate operations of Crescent Equities and the business
operations of Crescent Operating.
As a result of the spin-off of Crescent Operating, Crescent Operating
became a public company. The shares of Crescent Operating were accepted for
quotation on the OTC Bulletin Board and began trading on a when-issued basis on
June 13, 1997.
PENDING INVESTMENT
Desert Mountain. The Company has entered into a definitive agreement to
acquire Desert Mountain, a master-planned, luxury residential and recreational
community in northern Scottsdale, Arizona. Desert Mountain will be acquired from
a subsidiary of Mobil Land Development Corporation and a company owned by the
property's developer, Lyle Anderson, for approximately $229 million. Mr.
Anderson will retain an interest in the partnership that will own Desert
Mountain and will serve as Desert Mountain's development and operating manager.
Desert Mountain is an 8,300-acre property that is zoned for the development
of more than 4,500 lots, approximately 1,500 of which have been sold. Desert
Mountain also includes The Desert Mountain Club, a private golf, tennis and
fitness club serving over 1,600 members. The club offers four Jack Nicklaus
signature 18-hole golf courses, including Cochise, site of the Senior PGA Tour's
The Tradition golf tournament.
The Company intends to offer Crescent Operating the opportunity to acquire
all of the voting stock, representing a 5% equity interest, in the residential
development corporation that will be formed to make the investment in the
partnership that will own Desert Mountain. The Company will retain a 95%
nonvoting interest in this residential development corporation.
COMPLETED INVESTMENTS
The following briefly describes the Company's principal acquisitions since
the April 1997 Offering.
The Woodlands Corporation. On July 31, 1997, the Company and certain Morgan
Stanley funds (the "Morgan Stanley Group"), acquired The Woodlands Corporation,
a subsidiary of Mitchell Energy Corporation, for approximately $543 million. The
Woodlands Corporation was the principal owner, developer and operator of The
Woodlands, an approximately 27,000-acre, master-planned residential and
commercial community located 27 miles north of downtown Houston. The Woodlands,
which is approximately 50% developed, includes a shopping mall, retail centers,
office buildings, a hospital, club facilities, a community college, a
performance pavilion and numerous other amenities.
The acquisition was made through two limited partnerships, The Woodlands
Commercial Properties Company, L.P. ("Woodlands-CPC"), a limited partnership in
which the Morgan Stanley Group holds a 57.5% interest and the Company holds a
42.5% interest, and the Woodlands Land Development Company, L.P.
("Woodlands-LDC"), a limited partnership in which the Morgan Stanley Group holds
a 57.5% interest and a newly formed Residential Development Corporation, the
Woodlands Land Company, Inc. ("Landevco"), holds a 42.5% interest. The Company
is currently the sole stockholder of Landevco, although it is anticipated that
the Company will sell 100% of the voting stock, representing a 5% equity
interest, in
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Landevco to Crescent Operating. The Company is the managing general partner of
Woodlands-CPC and Landevco is the managing general partner of Woodlands-LDC.
Woodlands-CPC and Woodlands-LDC financed the acquisition price and
associated acquisition and financing costs of approximately $15 million through
a combination of approximately $369 million in borrowings and contributions from
the Company and the Morgan Stanley Group totaling approximately $189 million.
The Company financed its approximately $80 million equity contribution through
short-term borrowings bearing interest at the Eurodollar rate plus 138 basis
points.
In connection with the acquisition, Woodlands-CPC acquired The Woodlands
Corporation's 25% general partner interest in the partnership that owns
approximately 1.2 million square feet of Office and Retail Properties in The
Woodlands. The Company previously held a 75% limited partner interest in this
partnership and, as a result of the acquisition, the Company's indirect
ownership interest in these Properties increased to approximately 85%. The other
assets acquired by Woodlands-CPC include a 364-room executive conference center,
a private golf and tennis club serving approximately 1,600 members and offering
81 holes of golf, and approximately 2,900 acres of land that will support
commercial development of more than 25 million square feet of office,
multi-family, industrial, retail and lodging properties. In addition,
Woodlands-CPC acquired The Woodlands Corporation's partnership interests in
additional office and retail properties and in multi-family and light industrial
properties. Woodlands-LDC acquired approximately 6400 acres of land that will
support development of more than 20,000 lots for single-family homes. The
executive conference center, including the golf and tennis club and golf
courses, are operated and leased by a partnership owned 42.5% by Crescent
Operating and 57.5% by the Morgan Stanley Group.
Carter-Crowley Portfolio. On February 10, 1997, the Company entered into a
contract to acquire, for approximately $383.3 million, substantially all of the
assets (the "Carter-Crowley Portfolio") of Carter-Crowley Properties, Inc.
("Carter-Crowley"), an unaffiliated company controlled by the family of Donald
J. Carter. At the time the contract was executed, the Carter-Crowley Portfolio
included 14 office properties (the "Carter-Crowley Office Portfolio"), with an
aggregate of approximately 3.0 million net rentable square feet, approximately
1,216 acres of commercially zoned, undeveloped land located in the Dallas/Fort
Worth metropolitan area, two multifamily residential properties located in the
Dallas/Fort Worth metropolitan area, marketable securities, an approximately 12%
limited partner interest in the limited partnership that owns the Dallas
Mavericks NBA basketball franchise, secured and unsecured promissory notes,
certain direct non-operating working interests in various oil and gas wells, an
approximately 35% limited partner interest in two oil and gas limited
partnerships and certain other assets (including operating businesses). Pursuant
to an agreement between Carter-Crowley and the Company, Carter-Crowley
liquidated approximately $51.0 million of such assets originally included in the
Carter-Crowley Portfolio, consisting primarily of the marketable securities and
the oil and gas investments, resulting in a reduction in the total purchase
price by a corresponding amount to approximately $332.3 million. On May 9, 1997,
prior to the spin-off, the Company and Crescent Operating acquired the
Carter-Crowley Portfolio.
The Company acquired certain assets from the Carter-Crowley Portfolio, with
an aggregate purchase price of approximately $306.3 million, consisting
primarily of the Carter-Crowley Office Portfolio, the two multifamily
residential properties, the approximately 1,216 acres of undeveloped land and
the secured and unsecured promissory notes relating primarily to the Dallas
Mavericks. In addition to the promissory notes relating to the Dallas Mavericks,
the Company obtained the rights from the holders of the majority interest in the
Dallas Mavericks to a contingent $10.0 million payment if a new arena is built
within a 75-mile radius of Dallas.
The remainder of the Carter-Crowley Portfolio was purchased by Crescent
Operating utilizing cash contributions and loan proceeds that were provided to
Crescent Operating by the Company. These assets, with an allocated cost of
approximately $26.0 million, consisted primarily of the approximately 12%
limited partner interest in the limited partnership that owns the Dallas
Mavericks, an approximately 1% interest in a private venture capital fund and a
100% interest in a construction equipment sale, leasing and services company.
As of June 11, 1997, Crescent Operating sold, for approximately $12.55
million, the limited partner interest in the partnership that owns the Dallas
Mavericks to DBL Holdings, Inc., a newly formed corporation
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wholly owned by the Operating Partnership. In connection with the formation of
DBL Holdings, Inc., the Operating Partnership acquired all of the voting and
non-voting common stock of DBL Holdings, Inc. for an aggregate purchase price of
approximately $2.5 million. In addition, the Operating Partnership loaned DBL
Holdings, Inc. approximately $10.1 million. DBL Holdings, Inc. used these funds,
together with the Operating Partnership's equity contribution, to acquire the
interest in the partnership that owned the interest in the Dallas Mavericks.
Crescent Operating used the proceeds of the sale of the interest (i) to pay all
accrued interest under the loan from the Operating Partnership, in the amount of
approximately $.2 million, (ii) to make a payment of principal under the loan
from the Operating Partnership of approximately $9.9 million, and (iii) to pay a
dividend to its sole stockholder, the Operating Partnership, of approximately
$2.4 million.
On June 27, 1997, the Operating Partnership sold (at its aggregate original
cost of $126,000) one-half of the voting capital stock of DBL Holdings, Inc. to
each of Gerald W. Haddock, the President and Chief Executive Officer of Crescent
Equities and Crescent Operating, and John C. Goff, the Vice Chairman of Crescent
Equities and Crescent Operating. The Operating Partnership retained ownership of
all of the non-voting capital stock of DBL Holdings, Inc., which represents 95%
of the outstanding equity of that corporation.
The Company has allocated approximately $196.2 million (approximately
$65.40 per square foot) of the purchase price of the Carter-Crowley Portfolio to
the Carter-Crowley Office Portfolio. The Carter-Crowley Office Portfolio
contains an aggregate of approximately 3.0 million net rentable square feet in
seven suburban Dallas submarkets. The buildings, which were constructed
principally between 1980 and 1986, range in size from approximately 40,000 to
approximately 634,000 net rentable square feet and, as of December 31, 1996,
were 91% leased. The acquisition of the Carter-Crowley Office Portfolio
increased the Company's ownership of office space in the Dallas market to more
than 8.7 million net rentable square feet and to 13% of the Class A office space
in the Dallas market. The weighted average full-service rental rates for the
Carter-Crowley Office Portfolio were $12.18 per leased square foot, compared to
a weighted average quoted market rental rate for the submarkets in which the
Carter-Crowley Office Portfolio is located of $18.63 per square foot as of
December 31, 1996. The Carter-Crowley Office Portfolio has a weighted average
remaining lease term of 3.75 years. Major tenants include CompUSA, Inc., Aetna
Life Insurance Company, United States Data Corporation and Northern Telecom Inc.
Magellan Transaction. On January 29, 1997, the Company entered into an
agreement with Magellan Health Services, Inc. ("Magellan") to acquire
substantially all of the real estate assets of Magellan's domestic hospital
provider business as then owned and operated by a wholly owned subsidiary of
Magellan. The Magellan transaction involves various components, certain of which
relate to the Company and certain of which relate to Crescent Operating. Closing
of the transactions occurred on June 17, 1997.
The total purchase price for the assets acquired in the Magellan
transaction was approximately $417.2 million. Of this amount, the Company paid
approximately $387.2 million for the acquisition of the 92 behavioral healthcare
facilities constituting the Magellan Facilities and $12.5 million for the
acquisition of certain warrants to purchase shares of common stock of Magellan,
and Crescent Operating paid $5.0 million for its interest in CBHS, a Delaware
limited liability company, and $12.5 million for the acquisition of certain
warrants to purchase shares of common stock of Magellan. CBHS is owned 50% by
Crescent Operating and 50% by a wholly owned subsidiary of Magellan, subject to
potential dilution of each by up to 5% in connection with future incentive
compensation of management of CBHS.
The principal component of the transaction is the Company's acquisition of
the Magellan Facilities, which are leased to CBHS, and the subsidiaries of CBHS,
under a triple-net lease. The lease requires the payment of annual minimum rent
in the amount of $41.7 million, increasing in each subsequent year during the
12-year term at a 5% compounded annual rate. The lease provides for four,
five-year renewal options. All maintenance and capital improvement costs will be
the responsibility of CBHS during the term of the lease. In addition, CBHS will
pay annually an additional $20 million under the lease, at least $10 million of
which must be used, as directed by CBHS, for capital expenditures each year and
up to $10 million of which may be used, if requested by CBHS, to cover capital
expenditures, property taxes, insurance premiums and franchise fees. CBHS's
failure to pay the additional $20 million is not a default under the lease
unless the Company has
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expended funds for capital expenditures, property taxes, insurance premiums or
franchise fees. In connection with the Magellan transaction, the Company also
acquired warrants to purchase 1,283,311 shares of common stock of Magellan, at
an exercise price of $30.00 per share, with such warrants exercisable, in
increments, during the period from June 17, 1998 through June 17, 2009.
In connection with the closing of the Magellan transaction, Crescent
Operating acquired its interest in CBHS and certain warrants to purchase shares
of common stock of Magellan in exchange for an initial payment of $17.5 million,
with an additional $2.5 million paid to CBHS within five days following the
closing. Magellan, through its wholly owned subsidiary, acquired its interest in
CBHS in exchange for the contribution of certain assets, with an additional $2.5
million paid to CBHS in cash at the closing. In addition, each of Crescent
Operating and Magellan, through its wholly owned subsidiary, agreed to lend to
CBHS, upon request by Magellan during the five years following the closing, up
to an aggregate of $17.5 million. The Company has guaranteed this loan
obligation of Crescent Operating, and Magellan also has agreed to provide
funding to its wholly owned subsidiary if required for the subsidiary to meet
its loan obligation. Any such loans to CBHS will bear interest at the rate of
10% per annum and have a term of five years.
CBHS, as lessee of the Magellan Facilities, will be responsible for
operating the Magellan Facilities. CBHS will obtain assistance in its role as
operator of the Magellan Facilities through a franchise arrangement with an
initial term of 12 years (subject to four, five-year renewal options) entered
into between CBHS (and its subsidiaries), as franchisees, and Magellan and a
wholly owned subsidiary of Magellan (collectively, the "Franchisor"), as
franchisor. Pursuant to the franchise arrangement, the Franchisor will provide
to CBHS and its subsidiaries certain services necessary or desirable for the
operation of the business to be conducted at the Magellan Facilities (including
the provision of policies, procedures and protocols for operation of the
Magellan Facilities and of a toll-free patient referral number) in exchange for
an annual franchise fee of $78.3 million plus the greater of annual
cost-of-living adjustments or a percentage of CBHS's gross revenues, as defined
in the franchise agreement. The payment by CBHS to the Franchisor of the annual
franchise fee will be subordinated to the payment by CBHS to the Company of
annual minimum rent. In addition, the Franchisor will not have the right to
terminate the franchise agreement due to the nonpayment of the franchise fee as
a result of the subordination of the franchise fee to the annual minimum rent.
In connection with the Magellan transaction, Crescent Operating also acquired
warrants to purchase 1,283,311 shares of common stock of Magellan. These
warrants have the same terms as the warrants purchased by the Company from
Magellan. In addition, Crescent Operating issued to Magellan warrants to
purchase up to 282,508 shares of its common stock outstanding (representing
approximately 2.5% of its then-outstanding common stock plus the warrant
shares), with such warrants exercisable only in the same proportion as the
Company and Crescent Operating, in the aggregate, exercise their warrants to
purchase common stock of Magellan.
FINANCING ACTIVITIES
The Company obtained a $350 million credit facility (the "Credit Facility")
in June 1997 to enhance the Company's financial flexibility in making new real
estate investments. Advances under the Credit Facility bear interest at the
Eurodollar rate plus 138 basis points. The Credit Facility is unsecured and
expires in June 2000. The Credit Facility requires the Company to maintain
compliance with a number of customary financial and other covenants on an
ongoing basis, including leverage ratios based on book value and debt service
coverage ratios, limitations on additional secured and total indebtedness and
distributions and a minimum net worth requirement.
TRANSACTIONS WITH UBS AFFILIATES
General. The Company intends to enter into two transactions with affiliates
of Union Bank of Switzerland. In one transaction, the Company will sell the
4,700,000 Common Shares offered hereby to UBS Portfolio for approximately $148
million (approximately $145 million of net proceeds). In the other transaction,
the Company will enter into a forward share purchase agreement (the "Forward
Contract") with Union Bank of Switzerland, London Branch ("UBS/LB"). As a result
of the Company's option to settle the Forward Contract in Common Shares or cash,
as described below, the Forward Contract will permit the
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Company to benefit from increases in the market price of its Common Shares while
limiting the risk associated with decreases in the market price of its Common
Shares.
Forward Contract. Under the Forward Contract, the Company will commit to
purchase from UBS/LB, through UBS Securities LLC, acting as agent, 4,700,000
Common Shares (the "Forward Shares"). The Company may fulfill its settlement
obligations under the Forward Contract in cash or Common Shares, at its option.
The Company may elect to settle the Forward Contract in whole or in part prior
to the maturity date but not later than August 12, 1998, unless extended by
agreement of the parties. The price to be paid by the Company for the Forward
Shares will be determined on the date the Company settles the Forward Contract
and will include a forward accretion component, minus an adjustment for the
Company's distribution rate.
If the Company elects to settle its obligations under the Forward Contract
in Common Shares, the number of Common Shares to be delivered in settlement (the
"Stock Settlement Shares") will be determined by reference to the market price
of the Common Shares during an averaging period that will commence on the date
that the Company elects to begin the settlement process.
Any Common Shares delivered to UBS/LB, through UBS Securities LLC, acting
as agent, under the Forward Contract must be registered for resale by UBS/LB
under an effective registration statement. The Company intends to file the
required registration statement with the SEC within the next 60 days.
It is not expected that UBS/LB will purchase or enter into transactions
involving the public market with respect to the Common Shares at the time the
Common Shares are offered and sold to UBS Portfolio. If the Company elects to
settle its obligations under the Forward Contract in Common Shares, UBS
Securities LLC may offer and sell all or a portion of any Common Shares received
by UBS/LB as Stock Settlement Shares, and also may offer and sell Common Shares
held by other UBS affiliates, either to the public market or, under certain
circumstances, in negotiated private transactions.
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USE OF PROCEEDS
The Company intends to use the proceeds of the Offering (expected to be
approximately $145 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 a portion of the amounts
required to complete the Magellan Transaction. Advances under the Credit
Facility bear interest at the Eurodollar rate plus 138 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 41 Vice Chairman of the Board of Trust Managers of
the Company
Gerald W. Haddock....................... 1998 49 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 42 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 36 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 38 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 46 Vice President, Acquisitions, of CREE Ltd.
John L. Zogg, Jr. ...................... N/A 33 Vice President, Leasing and Marketing, of CREE
Ltd.
Murphy C. Yates......................... N/A 50 Director of Leasing and Operations, of CREE Ltd.
</TABLE>
STRUCTURE OF THE COMPANY
The Company is a fully integrated real estate company operating as a REIT
for federal income tax purposes. The Company provides management, leasing and
development services with respect to certain of its Properties. Crescent
Equities is a Texas real estate investment trust which became the successor to
the Predecessor Corporation, on December 31, 1996, through the merger of the
Predecessor Corporation and CRE Limited Partner, Inc., a subsidiary of the
Predecessor Corporation, into Crescent Equities. The merger was structured to
preserve the existing business, purpose, tax status, management, capitalization
and assets, liabilities and net worth (other than due to the costs of the
transaction) of the Predecessor Corporation, and
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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: AT&T, Bank One Tower, Carter-Crowley Office Portfolio, Canyon Ranch-
Tucson, Chancellor Park(1), Central Park Plaza, Denver Marriott City
Center, Frost Bank Plaza, Greenway I, Greenway IA, Greenway II, MCI
Tower, Sonoma Mission Inn & Spa, Spectrum Center(2), Three Westlake
Park(3), Trammell Crow Center(4), The Woodlands Office Properties(5),
The Woodlands Retail Properties(5), 44 Cook, 55 Madison, 160 Spear
Street, 1615 Poydras, 301 Congress Avenue(6), 3333 Lee Parkway and
6225 North 24th Street
Crescent Real Estate The Aberdeen, The Avallon, Caltex House, The Citadel, Continental
Funding I, L.P. Plaza, The Crescent Atrium, The Crescent Office Towers, Regency Plaza
("Funding I"): One and Waterside Commons
Crescent Real Estate Albuquerque Plaza, Barton Oaks Plaza One, Briargate Office and
Funding II, L.P. Research Center, Hyatt Regency Albuquerque, Hyatt Regency Beaver
("Funding II") Creek, Las Colinas Plaza, Liberty Plaza I & II, MacArthur Center I &
II, Ptarmigan Place, Stanford Corporate Centre, Two Renaissance
Square and 12404 Park Central
Crescent Real Estate Greenway Plaza Portfolio(7)
Funding III, IV and
V, L.P. ("Funding III,
IV and V"):
Crescent Real Estate Canyon Ranch-Lenox
Funding VI, L.P.
("Funding VI"):
Crescent Real Estate Magellan Facilities
Funding VII, L.P.
("Funding VII")
</TABLE>
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(1) 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.
(2) The Operating Partnership owns the principal economic interest in Spectrum
Center through an interest in the partnership which owns both a mortgage
note secured by the building and the ground lessor's interest in the land
underlying the building.
(3) The Operating Partnership owns the principal economic interest in Three
Westlake Park through its ownership of a mortgage note secured by the
building.
(4) The Operating Partnership owns the principal economic interest in Trammell
Crow Center through its ownership of fee simple title to the Property
(subject to a ground lease and a leasehold estate regarding the building)
and two mortgage notes encumbering the leasehold interests in the land and
building.
(5) The Operating Partnership owns, through partnerships, an approximately 85%
interest in The Woodlands Office and Retail Properties.
(6) The Operating Partnership owns a 49% limited partner interest and
Crescent/301 L.L.C., a wholly owned subsidiary of CREE Ltd. and the
Operating Partnership, owns a 1% general partner interest in 301 Congress
Avenue, L.P., the partnership that owns 301 Congress Avenue.
(7) Funding III owns the Greenway Plaza Portfolio, except for the central heated
and chilled water plant building and Coastal Tower office building, both
located within Greenway Plaza, which are owned by Funding IV and Funding V,
respectively.
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FEDERAL INCOME TAX CONSIDERATIONS
INTRODUCTION
The following is a summary of the material federal income tax
considerations associated with an investment in the Common Shares offered hereby
prepared by Shaw, Pittman, Potts & Trowbridge, tax counsel to Crescent Equities
("Tax Counsel"). This discussion is based upon the laws, regulations and
reported rulings and decisions in effect as of the date of this Prospectus
Supplement, all of which are subject to change, retroactively or prospectively,
and to possibly differing interpretations. This discussion does not purport to
deal with the federal income or other tax consequences applicable to all
investors in light of their particular investment circumstances or to all
categories of investors, some of whom may be subject to special rules
(including, for example, insurance companies, tax-exempt organizations,
financial institutions, broker-dealers, foreign corporations and persons who are
not citizens or residents of the United States). No ruling on the federal, state
or local tax considerations relevant to the operation of Crescent Equities or
the Operating Partnership or to the purchase, ownership or disposition of the
Common Shares is being requested from the Internal Revenue Service (the "IRS")
or from any other tax authority. Tax Counsel has rendered certain opinions
discussed herein and believes that if the IRS were to challenge the conclusions
of Tax Counsel, such conclusions would prevail in court. However, opinions of
counsel are not binding on the IRS or on the courts, and no assurance can be
given that the conclusions reached by Tax Counsel would be sustained in court.
EACH PROSPECTIVE PURCHASER IS URGED TO CONSULT HIS OR HER OWN TAX ADVISOR
REGARDING THE SPECIFIC TAX CONSEQUENCES TO HIM OR HER OF THE PURCHASE, OWNERSHIP
AND DISPOSITION OF THE COMMON SHARES IN AN ENTITY ELECTING TO BE TAXED AS A REAL
ESTATE INVESTMENT TRUST, INCLUDING THE FEDERAL, STATE, LOCAL, FOREIGN AND OTHER
TAX CONSEQUENCES OF SUCH PURCHASE, OWNERSHIP, DISPOSITION AND ELECTION AND OF
POTENTIAL CHANGES IN APPLICABLE TAX LAWS.
TAXATION OF CRESCENT EQUITIES
Crescent Equities has made an election to be treated as a real estate
investment trust under Sections 856 through 860 of the Code (as used in this
section, a "REIT"), commencing with its taxable year ended December 31, 1994.
Crescent Equities believes that it was organized and has operated in such a
manner so as to qualify as a REIT, and Crescent Equities intends to continue to
operate in such a manner, but no assurance can be given that it has operated in
a manner so as to qualify, or will operate in a manner so as to continue to
qualify as a REIT.
The sections of the Code relating to qualification and operation as a REIT
are highly technical and complex. The following sets forth the material aspects
of the Code sections that govern the federal income tax treatment of a REIT and
its shareholders. This summary is qualified in its entirety by the applicable
Code sections, rules and regulations promulgated thereunder, and administrative
and judicial interpretations thereof.
In the opinion of Tax Counsel, Crescent Equities qualified as a REIT under
the Code with respect to its taxable years ending on or before December 31,
1996, and is organized in conformity with the requirements for qualification as
a REIT, its manner of operation has enabled it to meet the requirements for
qualification as a REIT as of the date of this Prospectus Supplement, and its
proposed manner of operation will enable it to meet the requirements for
qualification as a REIT in the future. It must be emphasized that this opinion
is based on various assumptions relating to the organization and operation of
Crescent Equities and the Operating Partnership and is conditioned upon certain
representations made by Crescent Equities and the Operating Partnership as to
certain relevant factual matters, including matters related to the organization,
expected operation, and assets of Crescent Equities and the Operating
Partnership. Moreover, continued qualification as a REIT will depend upon
Crescent Equities' ability to meet, through actual annual operating results, the
distribution levels, stock ownership requirements and the various qualification
tests and other requirements imposed under the Code, as discussed below.
Accordingly, no assurance can be given that the actual stock ownership of
Crescent Equities, the mix of its assets, or the results of its operations for
any
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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
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
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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 the Exchange Rights may cause Limited Partners to be deemed to own
the Common Shares they could acquire through the Exchange Rights, the amount of
Common Shares that can be acquired at any time through the Exchange Rights is
limited to an amount which, together with any other Common Shares actually or
constructively deemed, under the Declaration of Trust, to be owned by any
person, does not exceed the Ownership Limit. See "Description of Common
Shares -- Ownership Limits and Restrictions on Transfer" in the accompanying
Prospectus. Moreover, the ownership of Common Shares by persons other than
contributing Limited Partners generally is limited under the Ownership Limit to
no more than 8.0% of the outstanding Common Shares. In addition, the Declaration
of Trust provides for restrictions regarding the ownership or transfer of Common
Shares in order to assist Crescent Equities in continuing to satisfy the share
ownership requirements described in (5) and (6) above. See "Description of
Common Shares -- Ownership Limits and Restrictions on Transfer" in the
accompanying Prospectus.
If a REIT owns a "qualified REIT subsidiary," the Code provides that the
qualified REIT subsidiary is disregarded for federal income tax purposes, and
all assets, liabilities and items of income, deduction and credit of the
qualified REIT subsidiary are treated as assets, liabilities and such items of
the REIT itself. A qualified REIT subsidiary is a corporation all of the capital
stock of which has been owned by the REIT from the commencement of such
corporation's existence. CREE Ltd., CRE Management I Corp. ("Management I"), CRE
Management II Corp. ("Management II"), CRE Management III Corp. ("Management
III"), CRE Management IV Corp. ("Management IV"), CRE Management V Corp.
("Management V"), CRE Management VI Corp. ("Management VI"), CRE Management VII
Corp. ("Management VII"), CresCal Properties, Inc. and Crescent Commercial
Realty Corp. are qualified REIT subsidiaries, and thus all of the assets (i.e.,
the respective partnership interests in the Operating Partnership, Funding I,
Funding II, Funding III, Funding IV, Funding V, Funding VI, Funding VII, CresCal
Properties, L.P. and Crescent Commercial Realty Holdings, L.P.), liabilities and
items of income, deduction and credit of CREE Ltd., Management I, Management II,
Management III, Management IV, Management V, Management VI, Management VII,
CresCal Properties, Inc. and Crescent Commercial Realty Corp. are treated as
assets and liabilities and items of income, deduction and credit of Crescent
Equities. Unless otherwise required, all references to Crescent Equities in this
"Federal Income Tax Considerations" section refer to Crescent Equities and its
qualified REIT subsidiaries.
In the case of a REIT which is a partner in a partnership, Treasury
Regulations provide that the REIT will be deemed to own its proportionate share
of the assets of the partnership and will be deemed to be entitled to the income
of the partnership attributable to such share. In addition, the assets and gross
income (as defined in the Code) of the partnership attributed to the REIT shall
retain the same character as in the hands of the partnership for purposes of
Section 856 of the Code, including satisfying the gross income tests and the
assets tests described below. Thus, Crescent Equities' proportionate share of
the assets, liabilities and items of income of the Operating Partnership and its
subsidiary partnerships are treated as assets, liabilities and items of income
of Crescent Equities for purposes of applying the requirements described herein.
Income Tests. In order for Crescent Equities to achieve and maintain its
qualification as a REIT, there are three requirements relating to Crescent
Equities' gross income that must be satisfied annually. First, at least 75% of
Crescent Equities' gross income (excluding gross income from prohibited
transactions) for each taxable year must consist of temporary investment income
or of certain defined categories of income derived directly or indirectly from
investments relating to real property or mortgages on real property. These
categories include, subject to various limitations, rents from real property,
interest on mortgages on real property, gains from the sale or other disposition
of real property (including interests in real property and in mortgages on real
property) not primarily held for sale to customers in the ordinary course of
business, income from foreclosure property, and amounts received as
consideration for entering into either loans secured by real property or
purchases or leases of real property. Second, at least 95% of Crescent Equities'
gross income (excluding gross
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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 Magellan 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 complete assurance that the IRS will not
assert successfully a contrary position.
The Operating Partnership will also receive fixed and contingent interest
on the Residential Development Property Mortgages. Interest on mortgages secured
by real property satisfies the 75% and 95% gross income tests only if it does
not include any amount whose determination depends in whole or in part on the
income of any person, except that (i) an amount is not excluded from the term
"interest" solely by reason of being based on a fixed percentage or percentages
of receipts or sales and (ii) income derived from a shared appreciation
provision in a mortgage is treated as gain recognized from the sale of the
secured property. Certain of the Residential Development Property Mortgages
contain provisions for contingent interest based upon property sales. In the
opinion of Tax Counsel, each of the Residential Development Property Mortgages
constitutes debt for federal income tax purposes, any contingent interest
derived therefrom will be treated as being based on a fixed percentage of sales,
and therefore all interest derived therefrom will constitute interest received
from mortgages for purposes of the 75% and 95% gross income tests. If, however,
the contingent interest provisions were instead characterized as shared
appreciation provisions, any resulting income would, because the underlying
properties are primarily held for sale to customers in the ordinary course, be
treated as income from prohibited transactions, which would not satisfy the 75%
and 95% gross income tests, which would count toward the 30% gross income test,
and which would be subject to a 100% tax.
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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 complete assurance that the IRS will not successfully
assert a contrary position.
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 CDMC's acquisition of an interest in the
partnership which owns the hotel. If such debt were recharacterized as equity,
or if the ownership of the partnership were attributed from CDMC to the
Operating Partnership, the Operating Partnership would be treated as receiving
income from hotel operations rather than interest income on the debt or dividend
income from CDMC. Furthermore, if Crescent Operating 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
were treated as a "stapled entity," the income, assets and activities of
Crescent Operating 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 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 any Residential
Development Property Mortgages will qualify as interest or principal, as the
case may be, paid on mortgages on real property for purposes of the 75% and 95%
gross income tests, (iii) amounts derived by the Operating Partnership with
respect to the stock of the Residential Development Corporations will be treated
as distributions on stock (i.e., as dividends, a return of capital, or capital
gain, depending upon the circumstances) for purposes of the 75% and 95% gross
income tests, (iv) the leases of the Hotel Properties will be treated as leases
for federal income tax purposes, and the rent payable thereunder will qualify as
"rents from real property," (v) the subordinated debt secured by the Florida
hotel will be treated as debt for federal income tax purposes, the income
payable thereunder will qualify as interest, and CDMC's ownership of the
partnership interest in the partnership which owns the hotel will not be
attributed to the Operating Partnership, (vi) Crescent Operating 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 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 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
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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. Therefore, the opinions of Tax Counsel with respect to these matters
are based upon all of the facts and circumstances and upon rulings and judicial
decisions involving situations that are considered to be analogous. Opinions of
counsel are not binding upon the IRS or any court, and there can be no complete
assurance that the IRS will not assert successfully a contrary position. If one
or more of the leases of the Hotel Properties is not a true lease, part or all
of the payments that the Operating Partnership receives from the respective
lessee may not satisfy the various requirements for qualification as "rents from
real property," or the Operating Partnership might be considered to operate the
Hotel Properties directly. In that case, Crescent Equities likely would not be
able to satisfy either the 75% or 95% gross income tests and, as a result,
likely would lose its REIT status. Similarly, if the IRS were to challenge
successfully the arrangements with the Residential Development Corporations or
Crescent Operating, 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 hereby to UBS
Portfolio, 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 Contract. In the opinion of Tax Counsel, such payments
will not constitute gross income and therefore will not be taken into account in
the application of gross income tests.
Crescent Equities anticipates that it will have certain income which will
not satisfy the 75% or the 95% gross income test and/or which will constitute
income whose receipt could cause Crescent Equities not to comply with the 30%
gross income test. For example, income from dividends on the stock of the
Residential Development Corporations and any gain recognized upon the
distribution of the common stock of Crescent Operating 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 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 the trading prices of the
Crescent Operating common stock subsequent to the distribution have been
substantially higher. 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
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to a particular property. No assurance can be given that Crescent Equities can
(a) comply with certain safe-harbor provisions of the Code which provide that
certain sales do not constitute prohibited transactions or (b) avoid owning
property that may be characterized as property held primarily for sale to
customers in the ordinary course of business.
If Crescent Equities fails to satisfy one or both of the 75% or 95% gross
income tests for any taxable year, it may nevertheless qualify as a REIT for
such year if it is entitled to relief under certain provisions of the Code.
These relief provisions generally will be available if Crescent Equities'
failure to meet such tests is due to reasonable cause and not to willful
neglect, Crescent Equities attaches a schedule of the sources of its income to
its tax return, and any incorrect information on the schedule is not due to
fraud with intent to evade tax. It is not possible, however, to state whether in
all circumstances Crescent Equities would be entitled to the benefit of these
relief provisions. As discussed above, even if these relief provisions apply, a
tax equal to approximately 100% of the corresponding net income would be imposed
with respect to the excess of 75% or 95% of Crescent Equities' gross income over
Crescent Equities' qualifying income in the relevant category, whichever is
greater.
Asset Tests. Crescent Equities, at the close of each quarter of its taxable
year, must also satisfy three tests relating to the nature of its assets. First,
at least 75% of the value of Crescent Equities' total assets must be represented
by real estate assets (including (i) its allocable share of real estate assets
held by the Operating Partnership, any partnerships in which the Operating
Partnership owns an interest, or qualified REIT subsidiaries of Crescent
Equities and (ii) stock or debt instruments held for not more than one year
purchased with the proceeds of a stock offering or long-term (at least five
years) debt offering of Crescent Equities), cash, cash items and government
securities. Second, not more than 25% of Crescent Equities' total assets may be
represented by securities other than those in the 75% asset class. Third, of the
investments included in the 25% asset class, the value of any one issuer's
securities owned by Crescent Equities may not exceed 5% of the value of Crescent
Equities' total assets, and Crescent Equities may not own more than 10% of any
one issuer's outstanding voting securities. The 25% and 5% tests generally must
be met for any quarter in which Crescent Equities acquires securities of an
issuer. Thus, this requirement must be satisfied not only on the date Crescent
Equities first acquires corporate securities, but also each time Crescent
Equities increases its ownership of corporate securities (including as a result
of increasing its interest in the Operating Partnership either with the proceeds
of the Offering or by acquiring Units from Limited Partners upon the exercise of
their Exchange Rights).
The Operating Partnership owns 100% of the non-voting stock of each
Residential Development Corporation. In addition, the Operating Partnership owns
the Residential Development Property Mortgages. As stated above, in the opinion
of Tax Counsel each of these mortgages will constitute debt for federal income
tax purposes and therefore will be treated as a real estate asset; however, the
IRS could assert that such mortgages should be treated as equity interests in
their respective issuers, which would not qualify as real estate assets. By
virtue of its ownership of partnership interests in the Operating Partnership,
Crescent Equities will be considered to own its pro rata share of these assets.
Neither Crescent Equities nor the Operating Partnership, however, will directly
own more than 10% of the voting securities of any Residential Development
Corporation and, in the opinion of Tax Counsel, Crescent Equities will not be
considered to own any of such voting securities. In addition, Crescent Equities
and its senior management believe that Crescent Equities' pro rata shares of the
value of the securities of each Residential Development Corporation do not
separately exceed 5% of the total value of Crescent Equities' total assets. This
belief is based in part upon its analysis of the estimated values of the various
securities owned by the Operating 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
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than as a partnership, Crescent Equities would violate the 10% of voting
securities and 5% of value limitations, and the treatment of any of the
Operating Partnership's subsidiary partnerships as a corporation rather than as
a partnership could also violate one or the other, or both, of these
limitations. In the opinion of Tax Counsel, for federal income tax purposes the
Operating Partnership and all the subsidiary partnerships will be treated as
partnerships and not as either associations taxable as corporations or publicly
traded partnerships. See "-- Tax Aspects of the Operating Partnership and the
Subsidiary Partnerships" below.
As noted above, the 5% and 25% value requirements must be satisfied not
only on the date Crescent Equities first acquires corporate securities, but also
each time Crescent Equities increases its ownership of corporate securities
(including as a result of increasing its interest in the Operating Partnership
either with the proceeds of the Offering or by acquiring Units from Limited
Partners upon the exercise of their Exchange Rights). Although Crescent Equities
plans to take steps to ensure that it satisfies the 5% and 25% value tests for
any quarter with respect to which retesting is to occur, there can be no
assurance that such steps (i) will always be successful; (ii) will not require a
reduction in Crescent Equities' overall interest in the various corporations; or
(iii) will not restrict the ability of the Residential Development Corporations
to increase the sizes of their respective businesses, unless the value of the
assets of Crescent Equities is increasing at a commensurate rate.
Annual Distribution Requirements. In order to qualify as a REIT, Crescent
Equities is required to distribute dividends (other than capital gain dividends)
to its shareholders in an amount at least equal to (A) the sum of (i) 95% of the
"real estate investment trust taxable income" of Crescent Equities (computed
without regard to the dividends paid deduction and Crescent Equities' net
capital gain) and (ii) 95% of the net income (after tax), if any, from
foreclosure property, minus (B) certain excess noncash income. Such
distributions must be paid in the taxable year to which they relate, or in the
following taxable year if declared before Crescent Equities timely files its tax
return for such year, and if paid on or before the date of the first regular
dividend payment after such declaration. To the extent that Crescent Equities
does not distribute all of its net capital gain or distributes at least 95%, but
less than 100%, of its "real estate investment trust taxable income," as
adjusted, it will be subject to tax thereon at regular capital gains and
ordinary corporate tax rates. Furthermore, if Crescent Equities should fail to
distribute, during each calendar year, at least the sum of (i) 85% of its "real
estate investment trust ordinary income" for such year; (ii) 95% of its "real
estate investment trust capital gain income" for such year; and (iii) any
undistributed taxable income from prior periods, Crescent Equities would be
subject to a 4% excise tax on the excess of such required distribution over the
amounts actually distributed.
Crescent Equities believes that it has made and intends to make timely
distributions sufficient to satisfy all annual distribution requirements. In
this regard, the limited partnership agreement of the Operating Partnership (the
"Operating Partnership Agreement") authorizes CREE Ltd., as general partner, to
take such steps as may be necessary to cause the Operating Partnership to
distribute to its partners an amount sufficient to permit Crescent Equities to
meet these distribution requirements. It is possible, however, that, from time
to time, Crescent Equities may experience timing differences between (i) the
actual receipt of income and actual payment of deductible expenses and (ii) the
inclusion of such income and deduction of such expenses in arriving at its "real
estate investment trust taxable income." Issues may also arise as to whether
certain items should be included in income. For example, Tax Counsel has opined
that the Operating Partnership should include in income only its share of the
interest income actually paid on the two mortgage notes secured by Spectrum
Center and Three Westlake Park, respectively, and the two mortgage notes secured
by Trammell Crow Center, all of which were acquired at a substantial discount,
rather than its share of the amount of interest accruing pursuant to the terms
of these investments, but opinions of counsel are not binding on the IRS or the
courts. In this regard, the IRS has taken a contrary view in a recent technical
advice memorandum concerning the accrual of original issue discount ("OID"). 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
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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 will be effective for taxable years beginning after the enactment
date, which is 1998 and thereafter for Crescent Equities. At that time REITs
will be permitted to earn up to one percent of their gross income from tenants,
determined on a property-by-property basis, by furnishing services which are
noncustomary or provided directly to the tenants, without causing the rental
income fail to qualify as rents from real property; the 30% gross income test
will be repealed; the REIT distribution requirements will not require
distributions with respect to certain noncash income items such as income from
the cancellation of indebtedness; the partnership attribution rules will be less
inclusive, and so less likely to cause certain rents to be treated as being from
a Related Party Tenant; and the definition of hedging income which qualifies
under the 95% gross income test will be greatly expanded.
TAXATION OF TAXABLE DOMESTIC SHAREHOLDERS
As long as Crescent Equities qualifies as a REIT, distributions made to
Crescent Equities' taxable U.S. shareholders out of Crescent Equities' current
or accumulated earnings and profits (and not designated as capital gain
dividends) will be taken into account by such U.S. shareholders as ordinary
income and, for corporate shareholders, will not be eligible for the dividends
received deduction. Distributions that are properly
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designated as capital gain dividends will be taxed as long-term capital gains
(to the extent they do not exceed Crescent Equities' actual net capital gain for
the taxable year) without regard to the period for which the shareholder has
held its Common Shares. However, corporate shareholders may be required to treat
up to 20% of certain capital gain dividends as ordinary income. Distributions in
excess of current and accumulated earnings and profits will not be taxable to a
shareholder to the extent that they do not exceed the adjusted basis of the
shareholder's Common Shares, but rather will reduce the adjusted basis of such
shares. To the extent that distributions in excess of current and accumulated
earnings and profits exceed the adjusted basis of a shareholder's Common Shares,
such distributions will be included in income as long-term capital gain (or
short-term capital gain if the shares have been held for one year or less)
assuming the shares are a capital asset in the hands of the shareholder. In
addition, any distribution declared by Crescent Equities in October, November or
December of any year payable to a shareholder of record on a specified date in
any such month shall be treated as both paid by Crescent Equities and received
by the shareholder on December 31 of such year, provided that the distribution
is actually paid by Crescent Equities during January of the following calendar
year. Shareholders may not include any net operating losses or capital losses of
Crescent Equities in their respective income tax returns.
In general, any loss upon a sale or exchange of shares by a shareholder who
has held such shares for six months or less (after applying certain holding
period rules) will be treated as a long-term capital loss to the extent of
distributions from Crescent Equities required to be treated by such shareholder
as long-term capital gain.
TAXATION OF TAX-EXEMPT SHAREHOLDERS
Most tax-exempt employees' pension trusts are not subject to federal income
tax except to the extent of their receipt of "unrelated business taxable income"
as defined in Section 512(a) of the Code ("UBTI"). Distributions by the Company
to a shareholder that is a tax-exempt entity should not constitute UBTI,
provided that the tax-exempt entity has not financed the acquisition of its
Common Shares with "acquisition indebtedness" within the meaning of the Code and
the Common Shares is not otherwise used in an unrelated trade or business of the
tax-exempt entity. In addition, certain pension trusts that own more than 10% of
a "pension-held REIT" must report a portion of the dividends that they receive
from such a REIT as UBTI. The Company has not been and does not expect to be
treated as a pension-held REIT for purposes of this rule.
TAXATION OF FOREIGN SHAREHOLDERS
The rules governing United States federal income taxation of nonresident
alien individuals, foreign corporations, foreign partnerships and other foreign
shareholders (collectively, "Non-U.S. Shareholders") are complex, and no attempt
will be made herein to provide more than a summary of such rules. Prospective
Non-U.S. Shareholders should consult with their own tax advisors to determine
the impact of federal, state and local tax laws with regard to an investment in
Common Shares, including any reporting requirements.
Distributions that are not attributable to gain from sales or exchanges by
Crescent Equities of United States real property interests and not designated by
Crescent Equities as capital gain dividends will be treated as dividends of
ordinary income to the extent that they are made out of current and accumulated
earnings and profits of Crescent Equities. Such distributions ordinarily will be
subject to a withholding tax equal to 30% of the gross amount of the
distribution, unless an applicable tax treaty reduces or eliminates that tax.
Crescent Equities expects to withhold U.S. income tax at the rate of 30% on the
gross amount of any such distribution made to a Non-U.S. Shareholder unless (i)
a lower treaty rate applies and the Non-U.S. Shareholder has filed the required
IRS Form 1001 with Crescent Equities or (ii) the Non-U.S. Shareholder files an
IRS Form 4224 with Crescent Equities claiming that the distribution is
effectively connected with the Non-U.S. Shareholder's conduct of a U.S. trade or
business. Distributions in excess of Crescent Equities' current and accumulated
earnings and profits will be subject to a 10% withholding requirement but will
not be taxable to a shareholder to the extent that such distributions do not
exceed the adjusted basis of the shareholder's Common Shares, but rather will
reduce the adjusted basis of such shares. To the extent that distributions in
excess of current and accumulated earnings and profits exceed the adjusted basis
of a Non-U.S. Shareholder's shares, such distributions will give rise to tax
liability if the Non-U.S. Shareholder would otherwise be subject to tax on any
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gain from the sale or disposition of the Common Shares, as described below. If
it cannot be determined at the time a distribution is made whether or not such
distribution will be in excess of current and accumulated earnings and profits,
the distributions would be subject to withholding at the same rate as dividends.
However, a Non-U.S. Shareholder may seek a refund from the IRS of amounts of tax
withheld in excess of the Non-U.S. Shareholder's actual U.S. tax liability.
For any year in which Crescent Equities qualifies as a REIT, distributions
that are attributable to gain from sales or exchanges by Crescent Equities of
United States real property interests will be taxed to a Non-U.S. Shareholder
under the provisions of the Foreign Investment in Real Property Tax Act of 1980,
as amended ("FIRPTA"). Under FIRPTA, distributions attributable to gain from
sales of United States real property interests are taxed to a Non-U.S.
Shareholder as if such gain were effectively connected with a United States
business. Non-U.S. Shareholders would thus be taxed at the normal capital gain
rates applicable to U.S. shareholders (subject to applicable alternative minimum
tax and a special alternative minimum tax in the case of nonresident alien
individuals). Also, distributions subject to FIRPTA may be subject to a 30%
branch profits tax in the hands of a foreign corporate shareholder not entitled
to treaty exemption. Crescent Equities is required to withhold 35% of any
distribution that could be designated by Crescent Equities as a capital gain
dividend. This amount is creditable against the Non-U.S. Shareholder's FIRPTA
tax liability.
Gain recognized by a Non-U.S. Shareholder upon a sale of Common Shares
generally will not be taxed under FIRPTA if Crescent Equities is a "domestically
controlled REIT," defined generally as a REIT in which at all times during a
specified testing period less than 50% in value of the shares was held directly
or indirectly by foreign persons. Crescent Equities is and currently expects to
continue to be a "domestically controlled REIT," and in such case the sale of
Common Shares would not be subject to taxation under FIRPTA. However, gain not
subject to FIRPTA nonetheless will be taxable to a Non-U.S. Shareholder if (i)
investment in the Common Shares is treated as effectively connected with the
Non-U.S. Shareholder's U.S. trade or business, in which case the Non-U.S.
Shareholder will be subject to the same treatment as U.S. shareholders with
respect to such gain or (ii) the Non-U.S. Shareholder is a nonresident alien
individual who was present in the United States for 183 days or more during the
taxable year and either the individual has a "tax home" in the United States or
the gain is attributable to an office or other fixed place of business
maintained by the individual in the United States, in which case gains will be
subject to a 30% tax. If the gain on the sale of Common Shares were to be
subject to taxation under FIRPTA, the Non-U.S. Shareholder would be subject to
the same treatment as U.S. shareholders with respect to such gain (subject to
applicable alternative minimum tax and a special alternative minimum tax in the
case of nonresident alien individuals), and the purchaser of the Common Shares
would be required to withhold and remit to the IRS 10% of the purchase price.
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
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the Operating Partnership's status for tax purposes might be treated as a
taxable event, in which case Crescent Equities might incur a tax liability
without any related cash distributions. See "-- Taxation of Crescent Equities,"
above. Further, items of income and deduction for the Operating Partnership
would not pass through to the respective partners, and the partners would be
treated as shareholders for tax purposes. The Operating Partnership would be
required to pay income tax at regular corporate tax rates on its net income, and
distributions to partners would constitute dividends that would not be
deductible in computing the Operating Partnership's taxable income. Similarly,
if any of the subsidiary partnerships were taxable as a corporation rather than
as a partnership for federal income tax purposes, such treatment might cause
Crescent Equities to fail to qualify as a REIT, and in any event such
partnership's items of income and deduction would not pass through to its
partners, and its net income would be subject to income tax at regular corporate
rates.
Income Taxation of the Operating Partnership and its Subsidiary
Partnerships. A partnership is not a taxable entity for federal income tax
purposes. Rather, Crescent Equities will be required to take into account its
allocable share of the Operating Partnership's income, gains, losses, deductions
and credits for any taxable year of such Partnership ending within or with the
taxable year of Crescent Equities, without regard to whether Crescent Equities
has received or will receive any cash distributions. The Operating Partnership's
income, gains, losses, deductions and credits for any taxable year will include
its allocable share of such items from its subsidiary partnerships.
Tax Allocations with Respect to Pre-Contribution Gain. Pursuant to Section
704(c) of the Code, income, gain, loss and deduction attributable to appreciated
property that is contributed to a partnership in exchange for an interest in the
partnership must be allocated for federal income tax purposes in a manner such
that the contributor is charged with the unrealized gain associated with the
property at the time of the contribution. The amount of such unrealized gain is
generally equal to the difference between the fair market value of the
contributed property at the time of contribution and the adjusted tax basis of
such property at the time of contribution (the "Book-Tax Difference"). In
general, the fair market value of the properties initially contributed to the
Operating Partnership were substantially in excess of their adjusted tax bases.
The Operating Partnership Agreement requires that allocations attributable to
each item of initially contributed property be made so as to allocate the tax
depreciation available with respect to such property first to the partners other
than the partner that contributed the property, to the extent of, and in
proportion to, such partners' share of book depreciation, and then, if any tax
depreciation remains, to the partner that contributed the property. Accordingly,
the depreciation deductions allocable will not correspond exactly to the
percentage interests of the partners. Upon the disposition of any item of
initially contributed property, any gain attributable to an excess at such time
of basis for book purposes over basis for tax purposes will be allocated for tax
purposes to the contributing partner and, in addition, the Operating Partnership
Agreement provides that any remaining gain will be allocated for tax purposes to
the contributing partners to the extent that tax depreciation previously
allocated to the noncontributing partners was less than the book depreciation
allocated to them. These allocations are intended to be consistent with Section
704(c) of the Code and with Treasury Regulations thereunder. The tax treatment
of properties contributed to the Operating Partnership subsequent to its
formation is expected generally to be consistent with the foregoing.
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.
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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 nonvoting common stock thereof held by the Operating Partnership
and interest on the Residential Development Property Mortgages held by the
Operating Partnership. The Residential Development Corporations will not qualify
as REITs and will pay federal, state and local income taxes on their taxable
incomes at normal corporate rates, which taxes will reduce the cash available
for distribution by Crescent Equities to its shareholders. Crescent Equities
anticipates that, initially, deductions for interest and amortization will
largely offset the otherwise taxable income of the Residential Development
Corporations, but there can be no assurance that this will be the case or that
the IRS will not challenge such deductions. Any federal, state or local income
taxes that the Residential Development Corporations are required to pay will
reduce the cash available for distribution by Crescent Equities to its
shareholders.
STATE AND LOCAL TAXES
Crescent Equities and its shareholders may be subject to state and local
tax in various states and localities, including those states and localities in
which it or they transact business, own property, or reside. The tax treatment
of Crescent Equities and the shareholders in such jurisdictions may differ from
the federal income tax treatment described above. Consequently, prospective
shareholders should consult their own tax advisors regarding the effect of state
and local tax laws upon an investment in the Common Shares.
In particular, the State of Texas imposes a franchise tax upon corporations
and limited liability companies that do business in Texas. The Texas franchise
tax is imposed on each such entity with respect to the entity's "net taxable
capital" and its "net taxable earned surplus" (generally, the entity's federal
taxable income, with certain adjustments). The franchise tax on net taxable
capital is imposed at the rate of 0.25% of an entity's net taxable capital. The
franchise tax rate on "net taxable earned surplus" is 4.5%. The Texas franchise
tax is generally equal to the greater of the tax on "net taxable capital" and
the tax on "net taxable earned surplus." The Texas franchise tax is not applied
on a consolidated group basis. Any Texas franchise tax that Crescent Equities is
indirectly required to pay will reduce the cash available for distribution by
Crescent Equities to shareholders. Even if an entity is doing business in Texas
for Texas franchise tax purposes, the entity is subject to the Texas franchise
tax only on the portion of the taxable capital or taxable earned surplus
apportioned to Texas.
As a Texas real estate investment trust, Crescent Equities will not be
subject directly to the Texas franchise tax. However, Crescent Equities will be
subject indirectly to the Texas franchise tax as a result of its interests in
CREE Ltd., Management I, Management II, Management III, Management IV,
Management V and Management VII, which will be subject to the Texas franchise
tax because they are general partners of
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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.,
CresWood Development, LLC, and any other corporations or limited liability
companies doing business in Texas with Texas receipts. It is expected that the
franchise tax liability of these entities will not be substantial.
The Texas legislature considered in its 1997 regular session proposals for
property tax relief in Texas. Such relief would have required increasing the
proportion of education funding costs paid by the State of Texas and reducing
the proportion paid by local property taxes. Alternatives for increasing State
of Texas revenues that have been considered include broadening the franchise tax
base to include other entities such as partnerships and real estate investment
trusts, enactment of a new gross receipts tax, enactment of a new business
activity tax, an increase in the sales tax and/or broadening the sales tax base.
The Texas House of Representatives and the Texas Senate both passed different
bills that would have broadened the franchise tax base to apply the franchise
tax to business trusts such as Crescent Equities and partnerships such as the
Operating Partnership, Funding I, Funding II, Funding III, Funding IV, Funding V
and Funding VII. However, the conference committee was not able to work out the
differences between these two bills and the Texas legislature adjourned the 1997
regular session without adopting such legislation. There can be no assurance
that the Texas legislature will not enact similar legislation in its next
regular session, beginning in 1999.
Locke Purnell Rain Harrell (A Professional Corporation), special tax
counsel to the Company ("Special Tax Counsel"), has reviewed the discussion in
this section with respect to Texas franchise tax matters and is of the opinion
that, based on the current structure of Crescent Equities and based upon current
law, it accurately summarizes the Texas franchise tax matters expressly
described herein. Special Tax Counsel expresses no opinion on any other tax
considerations affecting Crescent Equities or a holder of Common Shares,
including, but not limited to, other Texas franchise tax matters not
specifically discussed above.
Tax Counsel has not reviewed the discussion in this section with respect to
Texas franchise tax matters and has expressed no opinion with respect thereto.
S-22
<PAGE> 24
PLAN OF DISTRIBUTION
The Company has agreed, pursuant to a Purchase Agreement between the
Company and UBS Portfolio, to sell the 4,700,000 Common Shares offered hereby to
UBS Portfolio at a price of $31 9/16 per Common Share, and UBS Portfolio has
agreed, subject to the terms and conditions set forth in such Purchase
Agreement, to purchase and hold all of such Common Shares. In connection with
the sale of the Common Shares offered hereby, the Company will pay UBS
Securities LLC a placement fee equal to 2% of the gross proceeds of this
Offering.
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> 25
GLOSSARY
"April 1997 Offering" means the public offering of 24,150,000 Common Shares
that closed on April 28, 1997.
"Board of Trust Managers" means the Board of Trust Managers of Crescent
Equities.
"Book-Tax Difference" means the difference between the fair market value
and the adjusted tax basis of property at the time of its contribution to a
partnership.
"Carter-Crowley" means Carter-Crowley Properties, Inc.
"Carter-Crowley Office Portfolio" means the 14 office properties, located
in seven suburban submarkets of Dallas, Texas, with all aggregate of
approximately 3.0 million net rentable square feet acquired by the Company in
May 1997.
"Carter-Crowley Portfolio" means the assets purchased by the Company and
Crescent Operating from Carter-Crowley in May 1997.
"CBHS" means Charter Behavioral Health Systems, LLC, a Delaware limited
liability company.
"CDMC" means Crescent Development Management Corporation, a Delaware
corporation that is one of the Residential Development Corporations, which
indirectly owns interests in six Residential Development Properties in Colorado
(Cresta, Market Square, The Reserve at Frisco, One Beaver Creek, Eagle Ranch and
Villa Montane), approximately 90% of the effective interest in which is owned by
the Company through its investment in the non-voting common stock and
approximately 90% of the economic interest in which is owned by the Company
through its investments in the applicable Residential Development Property
Mortgage and non-voting common stock.
"Code" means the Internal Revenue Code of 1986, as amended.
"Common Shares" means the common shares of beneficial interest, $0.01 par
value, of Crescent Equities.
"Company" means, unless the context requires otherwise, Crescent Equities,
the Predecessor Corporation, the Operating Partnership and the other
subsidiaries of Crescent Equities.
"Credit Facility" means the Company's line of credit from the consortium of
financial institutions led by BankBoston, N.A. in the aggregate principal amount
of up to $350 million.
"CREE Ltd." means Crescent Real Estate Equities, Ltd., a Delaware
corporation that is a wholly owned subsidiary of Crescent Equities and the sole
general partner of the Operating Partnership.
"Crescent Equities" means Crescent Real Estate Equities Company, a Texas
real estate investment trust.
"Crescent Operating" means Crescent Operating, Inc., a Delaware
corporation.
"Declaration of Trust" means the Restated Declaration of Trust of Crescent
Equities, as in effect as of the date of this Prospectus Supplement.
"Exchange Rights" means the rights granted to Limited Partners of the
Operating Partnership to exchange their Units for Common Shares on a one-for-two
basis or, at the election of the Company, for cash equal to the then-current
fair market value of the number of Common Shares for which such Units are
exchangeable.
"FIRPTA" means the Foreign Investment in Real Property Tax Act of 1980, as
amended.
"Forward Contract" means the Forward Stock Purchase arrangement between the
Company and UBS/LB.
"Forward Shares" means the 4,700,000 Common Shares that the Company will
commit to purchase under the Forward Contract.
S-24
<PAGE> 26
"Franchisor" means collectively, Magellan and its wholly owned subsidiary,
as franchisor under a franchise agreement with CBHS, as franchisee.
"Funding I" means Crescent Real Estate Funding I, L.P., a Delaware limited
partnership whose 0.4% general partner is an indirect subsidiary of CREE Ltd.
and whose 99.6% limited partner is the Operating Partnership.
"Funding II" means Crescent Real Estate Funding II, L.P., a Delaware
limited partnership whose 1% general partner is an indirect subsidiary of CREE
Ltd. and whose 99% limited partner is the Operating Partnership.
"Funding III" means Crescent Real Estate Funding III, L.P., a Delaware
limited partnership whose approximately 1% general partner is an indirect
subsidiary of CREE Ltd. and whose approximately 99% limited partner is the
Operating Partnership.
"Funding IV" means Crescent Real Estate Funding IV, L.P., a Delaware
limited partnership whose approximately 1% general partners are indirect
subsidiaries of CREE Ltd. and whose approximately 99% limited partner is the
Operating Partnership.
"Funding V" means Crescent Real Estate Funding V, L.P., a Delaware limited
partnership whose approximately 1% general partner is an indirect subsidiary of
CREE Ltd. and whose approximately 99% limited partner is the Operating
Partnership.
"Funding VI" means Crescent Real Estate Funding VI, L.P., a Delaware
limited partnership whose 1% general partner is an indirect subsidiary of CREE
Ltd. and whose 99% limited partner is the Operating Partnership.
"Funding VII" means Crescent Real Estate Funding VII, L.P., a Delaware
limited partnership whose 1% general partner is an indirect subsidiary of CREE
Ltd. and whose 99% limited partner is the Operating Partnership.
"Greenway Plaza Portfolio" means the property portfolio located in Houston,
Texas that consists primarily of the Greenway Plaza Office Portfolio, a 389-room
full-service hotel and a private health and dining club.
"HADC" means Houston Area Development Corp., a Texas corporation that is
one of the Residential Development Corporations, and that directly owns the
Falcon Point Residential Development Property and the Spring Lakes Residential
Development Property, approximately 94% of the effective interest in which is
owned by the Company through its investments in the non-voting common stock and
approximately 98% of the economic interest in which is owned by the Company
through its investments in the applicable Residential Development Property
Mortgages and non-voting common stock.
"Hotel Properties" means the Hyatt Regency Beaver Creek, the Denver
Marriott City Center, the Hyatt Regency Albuquerque, Sonoma Mission Inn & Spa,
Canyon Ranch-Tucson and Canyon Ranch-Lenox.
"Initial Offering" means the initial public offering of Common Shares that
closed on May 5, 1994.
"Intercompany Agreement" means that certain intercompany agreement between
the Operating Partnership and Crescent Operating.
"IRS" means the United States Internal Revenue Service.
"Landevco" means The Woodlands Land Company, Inc., a Texas corporation that
is one of the Residential Development Corporations.
"Limited Partner(s)" means the limited partners in the Operating
Partnership, and any of them.
"Magellan" means Magellan Health Services, Inc., a Delaware corporation.
"Magellan Facilities" means the 92 behavioral healthcare facilities
acquired by the Company from certain indirect subsidiaries of Magellan.
S-25
<PAGE> 27
"Management I" means CRE Management I Corp., a Delaware corporation that is
the sole general partner of Funding I and a wholly owned subsidiary of CREE Ltd.
"Management II" means CRE Management II Corp., a Delaware corporation that
is the sole general partner of Funding II and a wholly owned subsidiary of CREE
Ltd.
"Management III" means CRE Management III Corp., a Delaware corporation
that is the sole general partner of Funding III and a wholly owned subsidiary of
CREE Ltd.
"Management IV" means CRE Management IV Corp., a Delaware corporation that
is the sole general partner of Funding IV and a wholly owned subsidiary of CREE
Ltd.
"Management V" means CRE Management V Corp., a Delaware corporation that is
the sole general partner of Funding V and a wholly owned subsidiary of CREE Ltd.
"Management VI" means CRE Management VI Corp., a Delaware corporation that
is the sole general partner of Funding VI and a wholly owned subsidiary of CREE
Ltd.
"Management VII" means CRE Management VII Corp., a Delaware corporation
that is the sole general partner of Funding VII and a wholly owned subsidiary of
CREE Ltd.
"Morgan Stanley Group" means the group of Morgan Stanley funds which is a
partner in Woodlands-CPC and Woodlands-LDC.
"MVDC" means Mira Vista Development Corporation, a Texas corporation that
is one of the Residential Development Corporations, that directly owns the Mira
Vista Residential Development Property, approximately 94% of the effective
interest in which is owned by the Company through its investments in the non-
voting common stock and approximately 98% of the economic interest in which is
owned by the Company through its investments in the applicable Residential
Development Property Mortgage and non-voting common stock.
"Non-U.S. Shareholder(s)" means one or more nonresident alien individual,
foreign corporation, foreign partnership or other foreign shareholder of the
Company.
"Offering" means the offering of 4,700,000 Common Shares offered hereby.
"Office Property(ies)" means 44 Cook, 55 Madison, 160 Spear Street, 301
Congress Avenue, 1615 Poydras, 3333 Lee Parkway, 6225 North 24th Street, 12404
Park Central, AT&T, The Aberdeen, Albuquerque Plaza, The Avallon, Bank One
Tower, Barton Oaks Plaza One, Briargate Office and Research Center, Caltex
House, the Carter-Crowley Office Portfolio, Central Park Plaza, Chancellor Park,
The Citadel, Continental Plaza, The Crescent Office Towers, Frost Bank Plaza,
Greenway I, Greenway IA, Greenway II, the Greenway Plaza Office Portfolio,
Liberty Plaza I & II, MacArthur Center I & II, MCI Tower, Ptarmigan Place,
Regency Plaza One, Spectrum Center, Stanford Corporate Centre, Three Westlake
Park, Trammell Crow Center, Two Renaissance Square, Waterside Commons and The
Woodlands Office Properties.
"Operating Partnership" means Crescent Real Estate Equities Limited
Partnership, a Delaware limited partnership, in which CREE Ltd. holds a 1%
general partner interest, Crescent Equities holds an approximately 87.0% limited
partner interest and limited partners (other than Crescent Equities) hold, in
the aggregate, an approximately 12.0% limited partner interest.
"Ownership Limit" means the prohibition on ownership, directly or by virtue
of the attribution provisions of the Code, of more than 8.0% of the issued and
outstanding Common Share by any single shareholder (or in the case of Richard E.
Rainwater and certain related persons as a group, more than 9.5% of the issued
and outstanding Common Shares) and on ownership, directly or by virtue of the
attribution provisions of the Code, of more than 9.9% of the issued and
outstanding shares of any series of preferred shares by any single shareholder.
"Predecessor Corporation" means Crescent Real Estate Equities, Inc., a
Maryland corporation which was the predecessor in interest to Crescent Equities.
S-26
<PAGE> 28
"Property(ies)" means the Office Properties, the Retail Properties, the
Hotel Properties, the Magellan Facilities, the economic interests in the
Residential Development Properties, and any of them.
"Prospectus" means the prospectus, as the same may be amended.
"Prospectus Supplement" means this prospectus supplement, as the same may
be amended.
"Purchase Agreement" means the Purchase Agreement between the Company and
UBS Portfolio.
"REIT" means a real estate investment trust.
"Related Party Tenant" means a tenant of a property owned by a REIT, 10% or
more of which is owned by the REIT or by a 10% or more owner of the REIT.
"Residential Development Corporation(s)" means CDMC, HADC, MVDC, Landevco,
and any of them.
"Residential Development Property(ies)" means the Mira Vista Residential
Development Property, the Falcon Point Residential Development Property, the
Spring Lakes Residential Development Property, The Highlands Residential
Development Property, The Reserve at Frisco Residential Development Property,
the One Beaver Creek Residential Development Property, the Cresta Residential
Development Property, the Market Square Residential Development Property, the
Eagle Ranch Residential Development Property, the Villa Montane Residential
Development Property, the undeveloped land in The Woodlands in which Landevco
has an interest, and any of them.
"Residential Development Property Mortgage(s)" means (i) the mortgage in
the principal amount of $14.4 million secured by the Mira Vista Residential
Development Property, (ii) the mortgages in the aggregate principal amount of
$14.4 million secured by the Falcon Point Residential Development Property and
the Spring Lakes Residential Development Property, and (iii) the promissory note
in the principal amount of $20.2 million (of which $16.6 million is outstanding
as of June 30, 1997), which is secured by both CDMC's limited partner interest
in a partnership that owns six Residential Development Properties located in
Colorado and the obligation of the voting shareholders to make certain
additional capital contributions to CDMC.
"Retail Properties" means Las Colinas Plaza, The Crescent Atrium and The
Woodlands Retail Properties.
"SEC" means the Securities and Exchange Commission.
"Securities Act" means the Securities Act of 1933, as amended.
"Special Tax Counsel" means Locke Purnell Rain Harrell (A Professional
Corporation), special tax counsel to the Company.
"Stock Settlement Shares" means the Common Shares to be delivered in
settlement of the Forward Contract.
"Tax Counsel" means Shaw, Pittman, Potts & Trowbridge, tax counsel to the
Company.
"Treasury Regulations" means the regulations promulgated by the United
States Department of Treasury under the Code.
"UBS/LB" means Union Bank of Switzerland, London Branch.
"UBS (Securities) Portfolio" means UBS (Securities) Portfolio, LLC, a
Delaware limited liability company that is a U.S. affiliate of Union Bank of
Switzerland.
"UBTI" means unrelated business taxable income under the Code.
"Units" means units of ownership interest in the Operating Partnership,
each of which is exchangeable on a one-for-two basis for Common Shares or, at
the option of the Company, the cash equivalent thereof, and any of them.
S-27
<PAGE> 29
============================================================
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
----
<S> <C>
PROSPECTUS SUPPLEMENT
The Company................................. S-1
Use of Proceeds............................. S-7
Management.................................. S-7
Structure of the Company.................... S-7
Federal Income Tax Considerations........... S-9
Plan of Distribution........................ S-23
Legal Matters............................... S-23
Glossary.................................... S-24
PROSPECTUS
The Company................................. 2
Risk Factors................................ 2
Use of Proceeds............................. 6
Ratios of Earnings to Fixed Charges and
Preferred Shares Dividends................ 6
Description of Preferred Shares............. 6
Description of Common Shares................ 11
Description of Common Share Warrants........ 13
Certain Provisions of the Declaration of
Trust, Bylaws and Texas Law............... 14
ERISA Considerations........................ 18
Plan of Distribution........................ 19
Available Information....................... 20
Incorporation of Certain Documents by
Reference................................. 21
Experts..................................... 21
Legal Matters............................... 21
</TABLE>
============================================================
============================================================
4,700,000 SHARES
[CRESCENT LOGO]
COMMON SHARES
------------------------
PROSPECTUS SUPPLEMENT
------------------------
August 11, 1997
============================================================
