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Filed Pursuant to Rule 424(b)(5)
Registration No. 333-21905
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED MARCH 26, 1997)
500,000 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. The Company offers
hereby 500,000 common shares of beneficial interest (the "Common Shares") to the
several U.S. underwriters (the "Underwriters") who participated in the Company's
offering of 24,150,000 Common Shares which closed on April 28, 1997 (the "April
1997 Offering"). The Common Shares offered hereby are being sold by the Company
to the Underwriters at a price of $25.875 per share so that the Underwriters may
cover a portion of their short position resulting from over-allotments in
connection with the April 1997 Offering. The Common Shares are listed on the New
York Stock Exchange (the "NYSE") under the symbol "CEI." On May 8, 1997, the
last reported sale price of the Common Shares on the NYSE was $25 3/4 per share.
It is expected that delivery of the Common Shares offered hereby will be made in
New York, New York, on or about May 14, 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 MAY 8, 1997.
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CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON SHARES OFFERED
HEREBY. SUCH TRANSACTIONS MAY INCLUDE STABILIZING TRANSACTIONS, THE PURCHASE OF
COMMON SHARES TO COVER SYNDICATE SHORT POSITIONS AND THE IMPOSITION OF PENALTY
BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
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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 located primarily in 17 metropolitan
submarkets in Texas and Colorado. The Properties include 58 Office Properties
with an aggregate of approximately 18.0 million net rentable square feet, four
full-service Hotel Properties with a total of 1,471 rooms and two destination
health and fitness resort Hotel Properties that can accommodate up to 442 guests
daily, six Retail Properties with an aggregate of approximately .6 million net
rentable square feet and the Residential Development Property Mortgages and
non-voting common stock in the three Residential Development Corporations.
The Company owns its assets and carries on its operations and other
activities, including providing management, leasing and development services for
certain of its Properties, through the Operating Partnership and its other
subsidiaries. The Company also has an economic interest in the development
activities of the Residential Development Corporations. The structure of the
Company is designed to facilitate and maintain its qualification as a REIT and
to permit persons contributing Properties (or interests therein) to the Company
to defer some or all of the tax liability that they otherwise might incur.
The Company's executive offices are located at 777 Main Street, Suite 2100,
Fort Worth, Texas 76102, and its telephone number is (817) 877-0477.
COMPLETED INVESTMENTS
The following briefly describes the Company's Property acquisitions since
the October 1996 Offering. The information regarding the replacement costs of
the Properties is based on management estimates at the times of the
acquisitions.
Greenway Plaza Portfolio. On October 7, 1996, the Company acquired from an
unaffiliated entity 10 suburban office properties with an aggregate of
approximately 4.3 million net rentable square feet (the "Greenway Plaza Office
Portfolio"), a 389-room full-service hotel, a private health and dining club, a
central plant which provides heated and chilled water to both the Greenway Plaza
Office Portfolio and third parties, and six parking garages (collectively with
the Greenway Plaza Office Portfolio, the "Greenway Plaza Portfolio"). The
aggregate cost of the Greenway Plaza Portfolio was approximately $206 million,
approximately 35% of the estimated replacement cost of the Greenway Plaza
Portfolio, which was funded through the issuance to the sellers of 1,198,664
Common Shares at $20.855 per share, the assumption of $115 million of
nonrecourse indebtedness and the payment of $66 million of cash.
Situated on 50.3 acres, the Greenway Plaza Office Portfolio, which is
located in the Richmond-Buffalo Speedway submarket of Houston, Texas, contains
approximately 2.0 million net rentable square feet of Class A office space and
approximately 2.3 million net rentable square feet of Class B office space. The
office buildings were constructed between 1969 and 1982 and range in size from
approximately 150,000 to approximately 880,000 net rentable square feet.
Structured parking accommodates approximately 11,500 cars.
The Greenway Plaza Office Portfolio was 74% leased as of December 31, 1996
(95% of the Class A office space and 56% of the Class B office space) with a
weighted average full-service rental rate per square foot of $13.42 ($14.38 for
Class A office space and $11.99 for Class B office space). The hotel and private
health and
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dining club are leased under triple-net leases with unaffiliated third parties.
The principal businesses of the tenants of the Greenway Plaza Office Portfolio
are in the industry sectors of energy service, investment management and natural
gas. Management anticipates increases in global energy demand and believes that
Houston's location at the center of the domestic petroleum industry's
production, processing and distribution network, together with continued
corporate relocations attracted by some of the lowest rental rates for Class A
office space in any major metropolitan area, will result in increased
occupancies and rental rates for the Greenway Plaza Portfolio.
Chancellor Park. On October 24, 1996, the Company acquired Chancellor Park
and an adjacent 8.03-acre tract of land located in the University Towne Centre
("UTC") submarket of San Diego, California. The aggregate purchase price was
approximately $31.1 million, of which $25.4 million was allocated to Chancellor
Park and $5.7 million was allocated to the adjacent tract of land. The
acquisition was made by the Operating Partnership and CresCal Properties, L.P.
("CresCal"), a Delaware limited partnership in which the Operating Partnership
owns a 99% limited partner interest. In this transaction, the Operating
Partnership acquired promissory notes secured by liens on Chancellor Park and
the adjacent tract of land. CresCal acquired Chancellor Park and the adjacent
tract of land, subject to the indebtedness evidenced by the promissory notes.
The portion of the purchase price allocated to Chancellor Park represents
approximately 65% of the Property's estimated replacement cost. Chancellor Park
consists of two, three-story Class A office buildings aggregating approximately
196,000 net rentable square feet. Constructed in 1988, the Property has a
three-story parking structure and surface parking that can accommodate 630 cars.
The adjacent tract of land is one of only two tracts of undeveloped land zoned
for office development in the UTC submarket. The UTC submarket contains major
medical facilities, several hotels and a major regional mall. The UTC submarket,
which is located near the exclusive residential areas of La Jolla, Del Mar and
Rancho Santa Fe, contains approximately 2.7 million net rentable square feet of
Class A office space and is currently considered one of the strongest office
markets in the San Diego metropolitan area with a 92% occupancy rate for Class A
office space. As of December 31, 1996, the weighted average full-service rental
rate for Chancellor Park was $18.19 per leased square foot, 20.2% below the
weighted average Class A quoted market rental rates for the UTC submarket of
$22.80 per square foot. The weighted average remaining lease term at Chancellor
Park as of December 31, 1996 was 3.0 years. As of December 31, 1996, Chancellor
Park was 90% leased. Management believes that the Property has potential for
significant growth in cash flow through the leasing of currently vacant space
and, as current leases expire, through the renewal or re-lease of office space
at rental rates significantly above the expiring rental rates.
The Woodlands Retail Properties. On October 31, 1996, the Company acquired
a 75% limited partner interest in Woodland Retail Equities -- '96 Limited
("WRE"), a partnership that owns four retail properties located in The
Woodlands, a master planned development located 27 miles north of downtown
Houston, Texas. These four Properties were constructed between 1981 and 1995 and
contain an aggregate of approximately 356,000 net rentable square feet. The
Woodlands Corporation owns, through a subsidiary, the remaining 25% general
partner interest in WRE and will continue to manage and lease the Properties.
The Company's investment in WRE was approximately $22.5 million, with a minimum
preferential return of 9.75%, increasing by .25% annually on January 1 of each
year beginning in 1997, to a maximum preferential return of 10.5% beginning in
January 1999. This investment represents a strategic expansion of the Company's
joint venture relationship with The Woodlands Corporation, pursuant to which the
Company also holds its 75% limited partner interest in The Woodlands Office
Properties, and the continued diversification of the Company's real estate
assets in The Woodlands. As of December 31, 1996, The Woodlands Retail
Properties were 87% leased.
Sonoma Mission Inn & Spa. On November 18, 1996, the Company acquired Sonoma
Mission Inn & Spa, a four-star luxury resort and spa located approximately 40
miles north of San Francisco, California. Constructed in 1927 and redeveloped in
1986 and 1987, Sonoma Mission Inn & Spa occupies an eight-acre site and contains
168 rooms, an approximately 13,000 square foot spa complex, approximately 7,000
square feet of meeting and banquet facilities, two full-service restaurants and
two retail outlets. A $10.0 million expansion and enhancement of the resort,
including the addition of 30 suites, is currently in process and is expected to
be completed during 1997. The resort was acquired for approximately $53.4
million, including the
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issuance of approximately $25.2 million of Units, the assumption of $19.0
million of debt which the Company subsequently retired and approximately $9.2
million in cash. In addition, a minimum of $3.5 million of deferred purchase
price will be paid in the first quarter of 2000, subject to increase depending
upon the performance of the Property. The Sonoma Mission Inn & Spa holds both
Mobil's Four Star and AAA's Four Diamond awards. In 1996, the spa was named
"Luxury Spa of the Year" by Spa Management Magazine, an industry trade journal.
Management believes that, due to its location and the amenities it offers, this
Property will continue to benefit from a low level of direct competition, which
should result in high occupancies. Occupancy for the Sonoma Mission Inn & Spa
increased to 92% for the year ended December 31, 1996 as compared to 86% for
1995. Similarly, the average daily rate increased by approximately 7.1% to $181
for the year ended December 31, 1996 from $169 in 1995 and revenue per available
room increased by approximately 13.7% to $166 for the year ended December 31,
1996 from $146 in 1995.
Canyon Ranch-Lenox. On December 11, 1996, the Company acquired Canyon
Ranch-Lenox, a destination health and fitness resort located in the Berkshire
mountains in Lenox, Massachusetts, approximately 120 miles north of New York
City. Canyon Ranch-Lenox, which opened in 1989, encompasses 120 acres and
includes 120 guest rooms, which can accommodate up to 202 guests on a daily
basis, an approximately 100,000 square foot spa complex, an approximately 10,600
square foot health and healing center offering a complete staff of health and
fitness professionals, six indoor/outdoor tennis courts and two pools. Canyon
Ranch-Lenox was acquired for approximately $30.0 million, including the
assumption of approximately $8.8 million in mortgage debt. Canyon Ranch-Lenox,
along with its "sister" spa Canyon Ranch-Tucson, another of the Company's Hotel
Properties, has consistently been voted among the top U.S. spas, according to
Conde Nast Traveler magazine. The previous owners are continuing to manage and
operate Canyon Ranch-Lenox pursuant to a 30-year management agreement. Occupancy
for Canyon Ranch-Lenox increased to 81% for the year ended December 31, 1996 as
compared to 76% for 1995. Similarly, the average daily rate increased by
approximately 4.4% to $407 for the year ended December 31, 1996 from $390 in
1995 and revenue per available room increased by approximately 11.1% to $320 for
the year ended December 31, 1996 from $288 in 1995.
160 Spear Street. On December 13, 1996, the Company acquired 160 Spear
Street, a 19-story Class A office building containing approximately 276,000 net
rentable square feet and located in the South of Market section of the CBD
submarket of San Francisco, California. The Company holds its interest in 160
Spear Street through the ownership of the lessee's interest in a long-term
ground lease that expires in July 2037. Constructed in 1984, the Property,
including a one-level, 37-space parking structure, was purchased for
approximately $35.5 million, approximately 55% of the Property's estimated
replacement cost. 160 Spear Street is located three blocks from the San
Francisco/Oakland Bay Bridge, one block from the Embarcadero BART mass transit
station and two blocks from the San Francisco Bay waterfront. As of December 31,
1996, 160 Spear Street was 20% leased, including only commenced leases, and 75%
leased, including all executed leases. All executed leases that have not yet
commenced will commence by the end of the second quarter of 1997. After giving
effect to all executed leases, three tenants lease 65% of the net rentable area,
and the major tenant, Sedgwick James, Inc., leases 38% of the building's net
rentable area. As of December 31, 1996, the weighted average full-service rental
rate for 160 Spear Street was $21.86 per leased square foot, based on executed
leases, 23.8% below the weighted average Class A quoted market rental rate of
$28.69 per square foot in the South of Market section of the CBD submarket. As
of December 31, 1996, the weighted average remaining lease term at 160 Spear
Street (including leases that have been executed but have not yet commenced) was
7.9 years. As of December 31, 1996, Class A office space in the South of Market
section of the CBD submarket was 97% leased.
Greenway I, IA and II. On December 18, 1996, the Company acquired Greenway
I, a two-story Class A office building and Greenway IA, a five-story Class A
office building, containing an aggregate of approximately 147,000 net rentable
square feet and located in the Richardson/Plano submarket of Dallas, Texas.
Constructed in 1983, Greenway I and IA, including surface parking lots which
contain 560 spaces, were purchased for approximately $17.0 million,
approximately 85% of the Properties' estimated replacement cost. On January 17,
1997, the Company acquired Greenway II, a seven-story Class A office building
containing approximately 154,000 net rentable square feet and also located in
the Richardson/Plano submarket. Constructed in 1985, Greenway II, including an
attached three-level, 560-space above ground parking
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structure, was purchased for approximately $18.2 million, approximately 80% of
the Property's estimated replacement cost. The acquisition of Greenway I, IA and
II represents the Company's entrance into the "Telecom Corridor," an area
located in the northern suburbs of Dallas and having the largest concentration
of telecommunications firms in the United States. Major telecommunications
companies in the area include Northern Telecom, Inc. ("Nortel"), DSC
Communications Corp., MCI Communications Corp., Alcatel Network Systems, Inc.
and Ericsson Radio Systems, Inc. Nortel, the largest manufacturer of
telecommunications equipment in Dallas, is the sole tenant of Greenway I and IA,
the major tenant of Greenway II, leasing approximately 90% of the Property's net
rentable area, and the major tenant in the Telecom Corridor. As of December 31,
1996, the weighted average full-service rental rate for each of Greenway I and
IA was $12.31 per leased square foot, 35.7% below the weighted average Class A
quoted market rental rate of $19.14 per square foot in the Richardson/Plano
submarket. As of December 31, 1996, the weighted average full-service rental
rate for Greenway II was $18.90 per leased square foot. Nortel's leases for
Greenway I and IA expire at the end of 1997 and its lease for Greenway II
expires in October 1999. Based on Nortel's current expansion plans and resulting
space needs, management expects Nortel to exercise its option to renew its
leases for Greenway I and IA at 90% of the weighted average Class A quoted
market rental rate per leased square foot at the time of the renewal. Greenway I
and IA were 100% leased and Greenway II was 99% leased, as of December 31, 1996.
Bank One Tower and Frost Bank Plaza. On December 23, 1996, the Company
acquired Bank One Tower, a 21-story Class A office building containing
approximately 389,000 net rentable square feet and located in the CBD submarket
of Austin, Texas. Constructed in 1974, the Bank One Tower underwent a $20
million renovation in 1994 and 1995. The Property, including an attached
eight-level, 719-space above ground parking structure, was purchased for
approximately $39.2 million, approximately 57% of the Property's estimated
replacement cost. The Property is one block from the CBD's newly completed post
office, one block from the new Warehouse Entertainment district featuring
upscale restaurants and clubs and two blocks from the Sixth Street entertainment
district. The major tenant, Texas Workers' Compensation Insurance Fund, occupies
40% of the net rentable area, and the three largest tenants occupy 64% of the
net rentable area. As of December 31, 1996, the weighted average full-service
rental rate for Bank One Tower was $14.55 per leased square foot, 27.1% below
the weighted average Class A quoted market rental rates in the CBD submarket of
$19.95 per square foot. The weighted average remaining lease term as of December
31, 1996 was 4.2 years. As of December 31, 1996, Bank One Tower was 99% leased.
On December 27, 1996, the Company acquired Frost Bank Plaza, a 24-story
Class A office building containing approximately 433,000 net rentable square
feet, which also is located in the Austin CBD submarket. The Company holds its
interest in Frost Bank Plaza through the ownership of the lessee's interests in
three long-term ground leases which expire in April and September 2080.
Constructed in 1984 and substantially renovated from 1992 through 1994, the
Property, including an attached eight-level, 514-space above ground parking
structure, was purchased for approximately $36.0 million, approximately 62% of
the Property's estimated replacement cost. As of December 31, 1996, the weighted
average full-service rental rate for Frost Bank Plaza was $16.35 per leased
square foot, 18.0% below the weighted average Class A quoted market rental rates
in the CBD submarket of $19.95 per square foot. The weighted average remaining
lease term as of December 31, 1996 was 7.6 years. As of December 31, 1996, Frost
Bank Plaza was 68% leased.
As of December 31, 1996, the Class A office occupancy rate in the Austin
CBD submarket was 90% with a weighted average Class A quoted market rental rate
of $19.95 per square foot. With Class A office occupancies of 96% to 99% in
Austin's major suburban submarkets, many tenants have focused on relocation to,
and expansion in, the CBD submarket to meet their needs for office space. Frost
Bank Plaza is one of only two Class A office buildings in Austin that can
currently accommodate new tenants which require at least 50,000 square feet of
office space. With the acquisition of Bank One Tower and Frost Bank Plaza, the
Company owns Properties containing 35% of the Class A office space in the Austin
CBD submarket and 20% of the overall Austin Class A office space.
Trammell Crow Center. On February 28, 1997, the Company acquired
substantially all of the economic interest in Trammell Crow Center, a 50-story
Class A office building constructed in 1984, which contains approximately
1,128,000 net rentable square feet and a six-level underground parking structure
that accommodates 1,154 cars. The Property is located in the cultural and
financial district of the CBD submarket
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of Dallas, Texas. The Company acquired its interest in Trammell Crow Center
through the purchase of fee simple title to the Property (subject to the
lessee's interest under a long-term ground lease and the lessee's leasehold
estate regarding the building) and two mortgage notes encumbering the leasehold
interests in the land and building, for approximately $162 million,
approximately 64% of the Property's estimated replacement cost. The Property
lies immediately across the east/west Woodall Rodgers Freeway from The Crescent
Office Towers, and management believes that, with this purchase, the Company has
obtained a dominant position in the office market for this upscale section of
Dallas. By jointly marketing these premier office properties that previously
were competitors for the city's highest profile tenants, the Company believes
that the rental rates for Trammell Crow Center will increase to levels more
consistent with the substantially higher rents at The Crescent Office Towers.
Currently, the Company quoted full-service rental rate for Trammell Crow Center
is $22.69 per square foot compared to a rate of $32.50 per square foot at The
Crescent Office Towers. Trammell Crow Center is leased primarily to law and
accounting firms, including Jones, Day, Reavis and Pogue, and Baker and Botts,
LLP, each of which leases more than 10% of the net rentable area of the
Property. As of December 31, 1996, Trammell Crow Center was 80% leased with a
weighted average remaining lease term of 5.6 years.
Denver Properties. On February 28, 1997, the Company acquired three office
buildings in Denver, Colorado, in a single transaction: 44 Cook, 55 Madison and
the AT&T office building. 44 Cook, a 10-story Class A office building
constructed in 1984 and containing approximately 122,000 net rentable square
feet, and 55 Madison, an eight-story Class A office building constructed in 1982
and containing approximately 125,000 net rentable square feet, are both located
in the Cherry Creek submarket of Denver, Colorado. 44 Cook and 55 Madison each
have underground parking structures containing 236 and 171 spaces, respectively,
and the buildings also share a four-level, 396-space parking structure. The
Cherry Creek submarket is located about three miles southeast of downtown Denver
and includes some of Denver's most prestigious single-family homes, the Denver
Country Club, Cherry Creek Mall and high-rise residential developments. With the
purchase of both 44 Cook and 55 Madison, the Company has added approximately
247,000 net rentable square feet to its office portfolio in the Cherry Creek
submarket, which, with its other Cherry Creek properties, The Citadel and
Ptarmigan Place, increases its ownership to 37% of the Class A office space in
this submarket. The weighted average full-service rental rates for 44 Cook and
55 Madison were $18.33 and $15.65 per leased square foot, respectively, as of
December 31, 1996. The weighted average Class A quoted market rental rate for
the Cherry Creek submarket was $17.84 per square foot, as of December 31, 1996.
Constructed in 1982, the AT&T office building, a 15-story office building,
contains approximately 170,000 net rentable square feet and is located in the
Denver CBD submarket. The AT&T office building has a four level, 207-space
parking structure and 12 tenants, the largest of which is AT&T Corp., which
occupies 42% of the net rentable area. The three Office Properties were acquired
for an aggregate purchase price of approximately $42.7 million, approximately
62% of the Properties' estimated replacement cost. As of December 31, 1996, 44
Cook, 55 Madison and the AT&T office building were 58%, 90% and 92% leased,
respectively.
FINANCING ACTIVITIES
The Company obtained a $175 million credit facility (the "Credit Facility")
in June 1996 to enhance the Company's financial flexibility in making new real
estate investments. Advances under the Credit Facility bear interest at the
Eurodollar rate plus 185 basis points. The Credit Facility is unsecured and
expires in March 1999. The Credit Facility requires the Company to maintain
compliance with a number of customary financial and other covenants on an
ongoing basis, including leverage ratios based on book value and debt service
coverage ratios, limitations on additional secured and total indebtedness and
distributions and a minimum net worth requirement. The Company has entered into
a commitment letter with the lender under the Credit Facility to increase the
amount of the Credit Facility to $350 million, decrease the interest rate to the
Eurodollar rate plus 138 basis points and extend the term until April 2000.
Management believes that the modification of the Credit Facility will be
completed in May 1997.
On December 26, 1996, 301 Congress Avenue, L.P., whose sole asset is 301
Congress Avenue, entered into a financing arrangement with Northwestern Mutual
Life Insurance Company for a $26 million mortgage loan secured by 301 Congress
Avenue. The loan bears interest at a fixed rate of 7.66% and has a seven-year
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term during which only interest is payable, with a final payment of the entire
original principal amount due at the end of such term. The Company is a 50%
partner in 301 Congress Avenue, L.P. Following its receipt of the loan proceeds,
301 Congress Avenue, L.P. made a distribution to the Company of approximately
$13 million.
STOCK SPLIT
On March 2, 1997, the Company declared a two-for-one stock split in the
form of a 100% share dividend. The share dividend was paid on March 26, 1997 to
shareholders of record on March 20, 1997.
USE OF PROCEEDS
The Company intends to use the proceeds of the Offering (expected to be
approximately $12.9 million) to fund future acquisitions.
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 52 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 65 Trust Manager of the Company
Morton H. Meyerson...................... 1998 58 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 68 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 42 Senior Vice President, Acquisitions, of CREE Ltd.
William D. Miller....................... N/A 38 Senior Vice President, Administration, of CREE Ltd.
Bruce A. Picker......................... N/A 32 Vice President of CREE Ltd. 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.
</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
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was structured to preserve the existing business, purpose, tax status,
management, capitalization and assets, liabilities and net worth (other than due
to the costs of the transaction) of the Predecessor Corporation, and the
economic interests and voting rights of the stockholders of the Predecessor
Corporation (who became the shareholders of Crescent Equities as a result of the
merger).
The direct and indirect subsidiaries of Crescent Equities include the
Operating Partnership; CREE Ltd.; six limited partnerships in which the
Operating Partnership owns substantially all of the economic interests directly
or indirectly, with the remaining interests owned indirectly by the Company
through six separate corporations, each of which is a wholly owned subsidiary of
CREE Ltd. and the general partner of one of the six limited partnerships. The
Company conducts all of its business through the Operating Partnership and its
other subsidiaries. The Company also has an economic interest in the development
activities of the Residential Development Corporations.
The following table sets forth, by subsidiary, the Properties owned by such
subsidiary:
<TABLE>
<S> <C>
Operating Partnership: AT&T, Bank One Tower, Canyon Ranch-Tucson, Chancellor Park,
Central Park Plaza, Denver Marriott City Center, Frost Bank
Plaza, Greenway I, Greenway IA, Greenway II, MCI Tower,
Sonoma Mission Inn & Spa, Spectrum Center(1), Three Westlake
Park(2), Trammell Crow Center(3), The Woodlands Office
Properties(4), The Woodlands Retail Properties(4), 44 Cook,
55 Madison, 160 Spear Street, 1615 Poydras, 301 Congress
Avenue(5), 3333 Lee Parkway and 6225 North 24th Street
Crescent Real Estate The Aberdeen, The Avallon, Caltex House, The Citadel,
Funding I, L.P. ("Funding Continental Plaza, The Crescent Atrium, The Crescent Office
I"): Towers, Regency Plaza One and Waterside Commons
Crescent Real Estate Albuquerque Plaza, Barton Oaks Plaza One, Briargate Office
Funding II, L.P. and Research Center, Hyatt Regency Albuquerque, Hyatt
("Funding II") Regency Beaver Creek, Las Colinas Plaza, Liberty Plaza I &
II, MacArthur Center I & II, Ptarmigan Place, Stanford
Corporate Centre, Two Renaissance Square and 12404 Park
Central
Crescent Real Estate Greenway Plaza Portfolio(6)
Funding III, IV and
V, L.P. ("Funding III,
IV and V"):
Crescent Real Estate Canyon Ranch-Lenox
Funding VI, L.P.
("Funding VI"):
</TABLE>
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(1) The Operating Partnership owns the principal economic interest in Spectrum
Center through an interest in the partnership which owns both a mortgage
note secured by the building and the ground lessor's interest in the land
underlying the building.
(2) The Operating Partnership owns the principal economic interest in Three
Westlake Park through its ownership of a mortgage note secured by the
building.
(3) The Operating Partnership owns the principal economic interest in Trammell
Crow Center through its ownership of fee simple title to the Property
(subject to a ground lease and a leasehold estate regarding the building)
and two mortgage notes encumbering the leasehold interests in the land and
building.
(4) The Operating Partnership owns a 75% limited partner interest in the
partnerships that own The Woodlands Office and Retail Properties.
(5) The Operating Partnership owns a 49% limited partner interest and
Crescent/301 L.L.C., a wholly owned subsidiary of CREE Ltd. and the
Operating Partnership, owns a 1% general partner interest in 301 Congress
Avenue, L.P., the partnership that owns 301 Congress Avenue.
(6) Funding III owns the Greenway Plaza Portfolio, except for the central heated
and chilled water plant building and Coastal Tower office building, both
located within Greenway Plaza, which are owned by Funding IV and Funding V,
respectively.
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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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<PAGE> 12
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"), CresCal Properties,
Inc. and Crescent Commercial Realty Corp. are qualified REIT subsidiaries, and
thus all of the assets (i.e., the respective partnership interests in the
Operating Partnership, Funding I, Funding II, Funding III, Funding IV, Funding
V, Funding VI, CresCal and Crescent Commercial Realty Holdings, L.P.),
liabilities and items of income, deduction and credit of CREE Ltd., Management
I, Management II, Management III, Management IV, Management V, Management VI,
CresCal Properties, Inc. and Crescent Commercial Realty Corp. are treated as
assets and liabilities and items of income, deduction and credit of Crescent
Equities. Unless otherwise required, all references to Crescent Equities in this
"Federal Income Tax Considerations" section refer to Crescent Equities and its
qualified REIT subsidiaries.
In the case of a REIT which is a partner in a partnership, Treasury
Regulations provide that the REIT will be deemed to own its proportionate share
of the assets of the partnership and will be deemed to be entitled to the income
of the partnership attributable to such share. In addition, the assets and gross
income (as defined in the Code) of the partnership attributed to the REIT shall
retain the same character as in the hands of the partnership for purposes of
Section 856 of the Code, including satisfying the gross income tests and the
assets tests described below. Thus, Crescent Equities' proportionate share of
the assets, liabilities and items of income of the Operating Partnership and its
subsidiary partnerships are treated as assets, liabilities and items of income
of Crescent Equities for purposes of applying the requirements described herein.
Income Tests. In order for Crescent Equities to achieve and maintain its
qualification as a REIT, there are three requirements relating to Crescent
Equities' gross income that must be satisfied annually. First, at least 75% of
Crescent Equities' gross income (excluding gross income from prohibited
transactions) for each taxable year must consist of temporary investment income
or of certain defined categories of income derived directly or indirectly from
investments relating to real property or mortgages on real property. These
categories include, subject to various limitations, rents from real property,
interest on mortgages on real property, gains from the sale or other disposition
of real property (including interests in real property and in mortgages on real
property) not primarily held for sale to customers in the ordinary course of
business, income from foreclosure property, and amounts received as
consideration for entering into either loans secured by real property or
purchases or leases of real property. Second, at least 95% of Crescent Equities'
gross income (excluding gross income from prohibited transactions) for each
taxable year must be derived from income qualifying under the
S-10
<PAGE> 13
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 Hotel Properties and the Retail
Properties. Rents received by Crescent Equities will qualify as "rents from real
property" in satisfying the gross income requirements for a REIT described above
only if several conditions are met. First, the amount of rent must not be based
in whole or in part on the income or profits of any person. An amount received
or accrued generally will not be excluded from the term "rents from real
property" solely by reason of being based on a fixed percentage or percentages
of receipts or sales. Second, the Code provides that rents received from a
tenant will not qualify as "rents from real property" if the REIT, or an owner
of 10% or more of the REIT, directly or constructively, owns 10% or more of such
tenant (a "Related Party Tenant"). Third, if rent attributable to personal
property leased in connection with a lease of real property is greater than 15%
of the total rent received under the lease, then the portion of rent
attributable to such personal property will not qualify as "rents from real
property." Finally, for rents to qualify as "rents from real property," a REIT
generally must not operate or manage the property or furnish or render services
to the tenants of such property, other than through an independent contractor
from whom the REIT derives no revenue, except that a REIT may directly perform
services which are "usually or customarily rendered" in connection with the
rental of space for occupancy, other than services which are considered to be
rendered to the occupant of the property.
Crescent Equities, based in part upon opinions of Tax Counsel as to whether
various tenants, including the lessees of the Hotel Properties, constitute
Related Party Tenants, believes that the income it received in 1994, 1995 and
1996 and will receive in subsequent taxable years from (i) charging rent for any
property that is based in whole or in part on the income or profits of any
person (except by reason of being based on a percentage or percentages of
receipts or sales, as described above); (ii) charging rent for personal property
in an amount greater than 15% of the total rent received under the applicable
lease; (iii) directly performing services considered to be rendered to the
occupant of property or which are not usually or customarily furnished or
rendered in connection with the rental of real property; or (iv) entering into
any lease with a Related Party Tenant, will not cause Crescent Equities to fail
to meet the gross income tests. Opinions of counsel are not binding upon the IRS
or any court, and there can be no complete assurance that the IRS will not
assert successfully a contrary position.
The Operating Partnership will also receive fixed and contingent interest
on the Residential Development Property Mortgages. Interest on mortgages secured
by real property satisfies the 75% and 95% gross income tests only if it does
not include any amount whose determination depends in whole or in part on the
income of any person, except that (i) an amount is not excluded from the term
"interest" solely by reason of being based on a fixed percentage or percentages
of receipts or sales and (ii) income derived from a shared appreciation
provision in a mortgage is treated as gain recognized from the sale of the
secured property. Certain of the Residential Development Property Mortgages
contain provisions for contingent interest based upon property sales. In the
opinion of Tax Counsel, each of the Residential Development Property Mortgages
constitutes debt for federal income tax purposes, any contingent interest
derived therefrom will be treated as being based on a fixed percentage of sales,
and therefore all interest derived therefrom will constitute interest received
from mortgages for purposes of the 75% and 95% gross income tests. If, however,
the contingent interest provisions were instead characterized as shared
appreciation provisions, any resulting income would, because the underlying
properties are primarily held for sale to customers in the ordinary course, be
treated as income from prohibited transactions, which would not satisfy the 75%
and 95% gross income tests, which would count toward the 30% gross income test,
and which would be subject to a 100% tax.
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<PAGE> 14
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. Tax Counsel is of the opinion that (i) the Residential
Development Properties or any interest therein will be treated as owned by the
Residential Development Corporations, (ii) amounts derived by the Operating
Partnership from the Residential Development Corporations under the terms of the
Residential Development Property Mortgages will qualify as interest or
principal, as the case may be, paid on mortgages on real property for purposes
of the 75% and 95% gross income tests, (iii) amounts derived by the Operating
Partnership with respect to the stock of the Residential Development
Corporations will be treated as distributions on stock (i.e., as dividends, a
return of capital, or capital gain, depending upon the circumstances) for
purposes of the 75% and 95% gross income tests, (iv) the leases of the Hotel
Properties will be treated as leases for federal income tax purposes, and the
rent payable thereunder will qualify as "rents from real property," and (v) the
subordinated debt secured by the Florida hotel will be treated as debt for
federal income tax purposes, the income payable thereunder will qualify as
interest, and CDMC's ownership of the partnership interest in the partnership
which owns the hotel will not be attributed to the Operating Partnership. Tax
Counsel has provided opinions similar to those provided with respect to the
Operating Partnership's investment in the Residential Development Corporations
with respect to its investments in certain other entities through non-voting
securities and secured debt. Investors should be aware that there are no
controlling Treasury Regulations, published rulings, or judicial decisions
involving transactions with terms substantially the same as those with respect
to the Residential Development Corporations and the leases of the Hotel
Properties. Therefore, the opinions of Tax Counsel with respect to these matters
are based upon all of the facts and circumstances and upon rulings and judicial
decisions involving situations that are considered to be analogous. Opinions of
counsel are not binding upon the IRS or any court, and there can be no complete
assurance that the IRS will not assert successfully a contrary position. If one
or more of the leases of the Hotel Properties is not a true lease, part or all
of the payments that the Operating Partnership receives from the respective
lessee may not satisfy the various requirements for qualification as "rents from
real property," or the Operating Partnership might be considered to operate the
Hotel Properties directly. In that case, Crescent Equities likely would not be
able to satisfy either the 75% or 95% gross income tests and, as a result,
likely would lose its REIT status. Similarly, if the IRS were to challenge
successfully the arrangements with the Residential Development Corporations,
Crescent Equities' qualification as a REIT could be jeopardized.
If any of the Residential Development Properties were to be acquired by the
Operating Partnership as a result of foreclosure on any of the Residential
Development Property Mortgages, or if any of the Hotel Properties were to be
operated directly by the Operating Partnership or a subsidiary partnership as a
result of a default by the lessee under the lease, such property would
constitute foreclosure property for two years following its acquisition (or for
up to an additional four years if an extension is granted by the IRS), provided
S-12
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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.
Crescent Equities anticipates that it will have certain income which will
not satisfy the 75% or the 95% gross income test and/or which will constitute
income whose receipt could cause Crescent Equities not to comply with the 30%
gross income test. For example, income from dividends on the stock of the
Residential Development Corporations will not satisfy the 75% gross income test.
It is also possible that certain income resulting from the use of creative
financing or acquisition techniques would not satisfy the 75%, 95% or 30% gross
income tests. Crescent Equities believes, however, that the aggregate amount of
nonqualifying income will not cause Crescent Equities to exceed the limits on
nonqualifying income under the 75%, 95% or 30% gross income tests.
Any gross income derived from a prohibited transaction is taken into
account in applying the 30% gross income test necessary to qualify as a REIT.
Crescent Equities believes that no asset owned by the Operating Partnership is
primarily held for sale to customers and that the sale of any of the Properties
will not be in the ordinary course of business. Whether property is held
primarily for sale to customers in the ordinary course of business depends,
however, on the facts and circumstances in effect from time to time, including
those related to a particular property. No assurance can be given that Crescent
Equities can (a) comply with certain safe-harbor provisions of the Code which
provide that certain sales do not constitute prohibited transactions or (b)
avoid owning property that may be characterized as property held primarily for
sale to customers in the ordinary course of business.
If Crescent Equities fails to satisfy one or both of the 75% or 95% gross
income tests for any taxable year, it may nevertheless qualify as a REIT for
such year if it is entitled to relief under certain provisions of the Code.
These relief provisions generally will be available if Crescent Equities'
failure to meet such tests is due to reasonable cause and not to willful
neglect, Crescent Equities attaches a schedule of the sources of its income to
its tax return, and any incorrect information on the schedule is not due to
fraud with intent to evade tax. It is not possible, however, to state whether in
all circumstances Crescent Equities would be entitled to the benefit of these
relief provisions. As discussed above, even if these relief provisions apply, a
tax equal to approximately 100% of the corresponding net income would be imposed
with respect to the excess of 75% or 95% of Crescent Equities' gross income over
Crescent Equities' qualifying income in the relevant category, whichever is
greater.
Asset Tests. Crescent Equities, at the close of each quarter of its taxable
year, must also satisfy three tests relating to the nature of its assets. First,
at least 75% of the value of Crescent Equities' total assets must be represented
by real estate assets (including (i) its allocable share of real estate assets
held by the Operating Partnership, any partnerships in which the Operating
Partnership owns an interest, or qualified REIT subsidiaries of Crescent
Equities and (ii) stock or debt instruments held for not more than one year
purchased with the proceeds of a stock offering or long-term (at least five
years) debt offering of Crescent Equities), cash, cash items and government
securities. Second, not more than 25% of Crescent Equities' total assets may be
represented by securities other than those in the 75% asset class. Third, of the
investments included in the 25% asset class, the value of any one issuer's
securities owned by Crescent Equities may not exceed 5% of the value of Crescent
Equities' total assets, and Crescent Equities may not own more than 10% of any
one issuer's outstanding voting securities. The 25% and 5% tests generally must
be met for any quarter in which Crescent Equities acquires securities of an
issuer. Thus, this requirement must be satisfied not only on the date Crescent
Equities first acquires corporate securities, but also each time Crescent
Equities increases its ownership of
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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 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
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(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 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
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income and, subject to certain limitations of the Code, corporate distributees
may be eligible for the dividends received deduction. Unless entitled to relief
under specific statutory provisions, Crescent Equities will also be disqualified
from electing to be treated as a REIT for the four taxable years following the
year during which it ceased to qualify as a REIT. It is not possible to state
whether in all circumstances Crescent Equities would be entitled to such
statutory relief.
Possible Legislation. On October 6, 1995, the House of Representatives
passed budget reconciliation legislation entitled the Tax Simplification Act of
1995, which contained various amendments to the Code, including amendments to
the provisions governing the tax treatment of REITs. The modifications to the
REIT rules were sponsored by the REIT industry and would generally have operated
to liberalize the requirements for qualification as a REIT. These modifications
would have become effective in the first taxable year following their enactment.
However, these modifications were not part of the budget reconciliation
legislation which passed Congress in 1995 and which, in any event, President
Clinton subsequently vetoed. On March 20, 1997, 18 members of the House Ways and
Means Committee introduced a substantially similar package of REIT amendments.
Whether or when modifications to the REIT rules will ultimately be enacted, or
what provisions they will contain if they are enacted, cannot be ascertained at
this time.
TAXATION OF TAXABLE DOMESTIC SHAREHOLDERS
As long as Crescent Equities qualifies as a REIT, distributions made to
Crescent Equities' taxable U.S. shareholders out of Crescent Equities' current
or accumulated earnings and profits (and not designated as capital gain
dividends) will be taken into account by such U.S. shareholders as ordinary
income and, for corporate shareholders, will not be eligible for the dividends
received deduction. Distributions that are properly designated as capital gain
dividends will be taxed as long-term capital gains (to the extent they do not
exceed Crescent Equities' actual net capital gain for the taxable year) without
regard to the period for which the shareholder has held its Common Shares.
However, corporate shareholders may be required to treat up to 20% of certain
capital gain dividends as ordinary income. Distributions in excess of current
and accumulated earnings and profits will not be taxable to a shareholder to the
extent that they do not exceed the adjusted basis of the shareholder's Common
Shares, but rather will reduce the adjusted basis of such shares. To the extent
that distributions in excess of current and accumulated earnings and profits
exceed the adjusted basis of a shareholder's Common Shares, such distributions
will be included in income as long-term capital gain (or short-term capital gain
if the shares have been held for one year or less) assuming the shares are a
capital asset in the hands of the shareholder. In addition, any distribution
declared by Crescent Equities in October, November or December of any year
payable to a shareholder of record on a specified date in any such month shall
be treated as both paid by Crescent Equities and received by the shareholder on
December 31 of such year, provided that the distribution is actually paid by
Crescent Equities during January of the following calendar year. Shareholders
may not include any net operating losses or capital losses of Crescent Equities
in their respective income tax returns.
In general, any loss upon a sale or exchange of shares by a shareholder who
has held such shares for six months or less (after applying certain holding
period rules) will be treated as a long-term capital loss to the extent of
distributions from Crescent Equities required to be treated by such shareholder
as long-term capital gain.
TAXATION OF TAX-EXEMPT SHAREHOLDERS
Most tax-exempt employees' pension trusts are not subject to federal income
tax except to the extent of their receipt of "unrelated business taxable income"
as defined in Section 512(a) of the Code ("UBTI"). Distributions by the Company
to a shareholder that is a tax-exempt entity should not constitute UBTI,
provided that the tax-exempt entity has not financed the acquisition of its
Common Shares with "acquisition indebtedness" within the meaning of the Code and
the Common Shares is not otherwise used in an unrelated trade or business of the
tax-exempt entity. In addition, certain pension trusts that own more than 10% of
a "pension-held REIT" must report a portion of the dividends that they receive
from such a REIT as UBTI. The Company has not been and does not expect to be
treated as a pension-held REIT for purposes of this rule.
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TAXATION OF FOREIGN SHAREHOLDERS
The rules governing United States federal income taxation of nonresident
alien individuals, foreign corporations, foreign partnerships and other foreign
shareholders (collectively, "Non-U.S. Shareholders") are complex, and no attempt
will be made herein to provide more than a summary of such rules. Prospective
Non-U.S. Shareholders should consult with their own tax advisors to determine
the impact of federal, state and local tax laws with regard to an investment in
Common Shares, including any reporting requirements.
Distributions that are not attributable to gain from sales or exchanges by
Crescent Equities of United States real property interests and not designated by
Crescent Equities as capital gain dividends will be treated as dividends of
ordinary income to the extent that they are made out of current and accumulated
earnings and profits of Crescent Equities. Such distributions ordinarily will be
subject to a withholding tax equal to 30% of the gross amount of the
distribution, unless an applicable tax treaty reduces or eliminates that tax.
Crescent Equities expects to withhold U.S. income tax at the rate of 30% on the
gross amount of any such distribution made to a Non-U.S. Shareholder unless (i)
a lower treaty rate applies and the Non-U.S. Shareholder has filed the required
IRS Form 1001 with Crescent Equities or (ii) the Non-U.S. Shareholder files an
IRS Form 4224 with Crescent Equities claiming that the distribution is
effectively connected with the Non-U.S. Shareholder's conduct of a U.S. trade or
business. Distributions in excess of Crescent Equities' current and accumulated
earnings and profits will be subject to a 10% withholding requirement but will
not be taxable to a shareholder to the extent that such distributions do not
exceed the adjusted basis of the shareholder's Common Shares, but rather will
reduce the adjusted basis of such shares. To the extent that distributions in
excess of current and accumulated earnings and profits exceed the adjusted basis
of a Non-U.S. Shareholder's shares, such distributions will give rise to tax
liability if the Non-U.S. Shareholder would otherwise be subject to tax on any
gain from the sale or disposition of the Common Shares, as described below. If
it 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
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would be subject to the same treatment as U.S. shareholders with respect to such
gain (subject to applicable alternative minimum tax and a special alternative
minimum tax in the case of nonresident alien individuals), and the purchaser of
the Common Shares would be required to withhold and remit to the IRS 10% of the
purchase price.
TAX ASPECTS OF THE OPERATING PARTNERSHIP AND THE SUBSIDIARY PARTNERSHIPS
The following discussion summarizes certain federal income tax
considerations applicable solely to Crescent Equities' investment in the
Operating Partnership and its subsidiary partnerships and represents the views
of Tax Counsel. The discussion does not cover state or local tax laws or any
federal tax laws other than income tax laws.
Classification of the Operating Partnership and its Subsidiary Partnerships
for Tax Purposes. In the opinion of Tax Counsel, based on the provisions of the
Operating Partnership Agreement and the partnership agreements of the various
subsidiary partnerships, certain factual assumptions and certain representations
described in the opinion, the Operating Partnership and the subsidiary
partnerships will each be treated as a partnership and neither an association
taxable as a corporation for federal income tax purposes, nor a "publicly traded
partnership" taxable as a corporation. Unlike a ruling from the IRS, however, an
opinion of counsel is not binding on the IRS or the courts, and no assurance can
be given that the IRS will not challenge the status of the Operating Partnership
and its subsidiary partnerships as partnerships for federal income tax purposes.
If for any reason the Operating Partnership were taxable as a corporation rather
than as a partnership for federal income tax purposes, Crescent Equities would
fail to qualify as a REIT because it would not be able to satisfy the income and
asset requirements. See "-- Taxation of Crescent Equities," above. In addition,
any change in the Operating Partnership's status for tax purposes might be
treated as a taxable event, in which case Crescent Equities might incur a tax
liability without any related cash distributions. See "-- Taxation of Crescent
Equities," above. Further, items of income and deduction for the Operating
Partnership would not pass through to the respective partners, and the partners
would be treated as shareholders for tax purposes. The Operating Partnership
would be required to pay income tax at regular corporate 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
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interests of the partners. Upon the disposition of any item of initially
contributed property, any gain attributable to an excess at such time of basis
for book purposes over basis for tax purposes will be allocated for tax purposes
to the contributing partner and, in addition, the Operating Partnership
Agreement provides that any remaining gain will be allocated for tax purposes to
the contributing partners to the extent that tax depreciation previously
allocated to the noncontributing partners was less than the book depreciation
allocated to them. These allocations are intended to be consistent with Section
704(c) of the Code and with Treasury Regulations thereunder. The tax treatment
of properties contributed to the Operating Partnership subsequent to its
formation is expected generally to be consistent with the foregoing.
In general, the contributing partners will be allocated lower amounts of
depreciation deductions for tax purposes and increased taxable income and gain
on sale by the Operating Partnership of one or more of the contributed
properties. These tax allocations will tend to reduce or eliminate the Book-Tax
Difference over the life of the Operating Partnership. However, the special
allocation rules of Section 704(c) of the Code do not always entirely rectify
the Book-Tax Difference on an annual basis. Thus, the carryover basis of the
contributed assets in the hands of the Operating Partnership will cause Crescent
Equities to be allocated lower depreciation and other deductions. This may cause
Crescent Equities to recognize taxable income in excess of cash proceeds, which
might adversely affect Crescent Equities' ability to comply with the REIT
distribution requirements. See "-- Taxation of Crescent Equities," above.
SALE OF PROPERTY
Generally, any gain realized by the Operating Partnership on the sale of
real property, if the property is held for more than one year, will be long-term
capital gain, except for any portion of such gain that is treated as
depreciation or cost recovery recapture.
Crescent Equities' share of any gain realized on the sale of any property
held by the Operating Partnership as inventory or other property held primarily
for sale to customers in the ordinary course of the Operating Partnership's
business, however, will be treated as income from a prohibited transaction that
is subject to a 100% penalty tax. See "-- Taxation of Crescent Equities," above.
Such prohibited transaction income will also have an adverse effect upon
Crescent Equities' ability to satisfy the income tests for status as a REIT for
federal income tax purposes. Under existing law, whether property is held as
inventory or primarily for sale to customers in the ordinary course of the
Operating Partnership's business is a question of fact that depends on all the
facts and circumstances with respect to the particular transaction. The
Operating Partnership intends to hold its properties for investment with a view
to long-term appreciation, to engage in the business of acquiring, developing,
owning and operating the properties, and to make such occasional sales of
properties as are consistent with these investment objectives.
TAXATION OF THE RESIDENTIAL DEVELOPMENT CORPORATIONS
A portion of the amounts to be used to fund distributions to shareholders
is expected to come from the Residential Development Corporations through
dividends on non-voting common stock thereof held by the Operating Partnership
and interest on the Residential Development Property Mortgages held by the
Operating Partnership. The Residential Development Corporations will not qualify
as REITs and will pay federal, state and local income taxes on their taxable
incomes at normal corporate rates, which taxes will reduce the cash available
for distribution by Crescent Equities to its shareholders. Crescent Equities
anticipates that, initially, deductions for interest and amortization will
largely offset the otherwise taxable income of the Residential Development
Corporations, but there can be no assurance that this will be the case or that
the IRS will not challenge such deductions. Any federal, state or local income
taxes that the Residential Development 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.
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The tax treatment of Crescent Equities and the shareholders in such
jurisdictions may differ from the federal income tax treatment described above.
Consequently, prospective shareholders should consult their own tax advisors
regarding the effect of state and local tax laws upon an investment in the
Common Shares.
In particular, the State of Texas imposes a franchise tax upon corporations
and limited liability companies that do business in Texas. The Texas franchise
tax is imposed on each such entity with respect to the entity's "net taxable
capital" and its "net taxable earned surplus" (generally, the entity's federal
taxable income, with certain adjustments). The franchise tax on net taxable
capital is imposed at the rate of 0.25% of an entity's net taxable capital. The
franchise tax rate on "net taxable earned surplus" is 4.5%. The Texas franchise
tax is generally equal to the greater of the tax on "net taxable capital" and
the tax on "net taxable earned surplus." The Texas franchise tax is not applied
on a consolidated group basis. Any Texas franchise tax that Crescent Equities is
indirectly required to pay will reduce the cash available for distribution by
Crescent Equities to shareholders. Even if an entity is doing business in Texas
for Texas franchise tax purposes, the entity is subject to the Texas franchise
tax only on the portion of the taxable capital or taxable earned surplus
apportioned to Texas.
As a Texas real estate investment trust, Crescent Equities will not be
subject directly to the Texas franchise tax. However, Crescent Equities will be
subject indirectly to the Texas franchise tax as a result of its interests in
CREE Ltd., Management I, Management II, Management III, Management IV and
Management V, which will be subject to the Texas franchise tax because they are
general partners of the Operating Partnership, Funding I, Funding II, Funding
III, Funding IV and Funding V, and the Operating Partnership, Funding I, Funding
II, Funding III, Funding IV and Funding V will be doing business in Texas.
It is anticipated that Crescent Equities' Texas franchise tax liability
will not be substantial because CREE Ltd., Management I, Management II,
Management III, Management IV and Management V are allocated only a small
portion of the taxable income of the Operating Partnership, Funding I, Funding
II, Funding III, Funding IV and Funding V. In addition, Management VI and
Funding VI are not anticipated to be subject to the Texas franchise tax.
The Operating Partnership, Funding I, Funding II, Funding III, Funding IV
and Funding V will not be subject to the Texas franchise tax, under the laws in
existence at the time of this Prospectus Supplement because they are
partnerships instead of corporations. There is no assurance, however, that the
Texas legislature, which is currently meeting in regular session in 1997, will
not expand the scope of the Texas franchise tax to apply to limited partnerships
such as the Operating Partnership, Funding I, Funding II, Funding III, Funding
IV and Funding V or enact other legislation which may result in subjecting
Crescent Equities to the Texas franchise tax. Any statutory change by the Texas
legislature may be applied retroactively.
In addition, it should be noted that two of the Residential Development
Corporations will be doing business in Texas and will be subject to the Texas
franchise tax. Further, Crescent/301, L.L.C. will be subject to the Texas
franchise tax because it is doing business in Texas and limited liability
companies are subject to Texas franchise tax. However, this franchise tax should
not be substantial because Crescent/301, L.L.C. owns a 1% interest in 301
Congress Avenue, L.P. Other entities that will be subject to the Texas franchise
tax include CresTex Development, LLC and its member CresCal Properties, Inc. and
any other corporations or limited liability companies doing business in Texas
with Texas receipts. It is expected that the franchise tax liability of these
entities will not be substantial.
Governor George W. Bush of Texas has announced his desire that the Texas
legislature consider in its 1997 regular session, and the Texas legislature is
currently considering, proposals for property tax relief in Texas. Such relief
would require increasing the proportion of education funding costs paid by the
State of Texas and reducing the proportion paid by local property taxes.
Alternatives for increasing State of Texas revenues that have been considered
include broadening the franchise tax base to include other entities, enactment
of a new gross receipts tax, enactment of a new business activity tax, an
increase in the sales tax and/or broadening the sales tax base. If the franchise
tax is broadened, it could be expanded to apply to partnerships such as the
Operating Partnership, Funding I, Funding II, Funding III, Funding IV and
Funding V (and possibly to business trusts such as Crescent Equities). If either
a gross receipts tax or a business activity tax was enacted, it most likely
would replace the current franchise tax. However, a gross
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receipts tax or a business activities tax could apply to partnerships such as
the Operating Partnership, Funding I, Funding II, Funding III, Funding IV and
Funding V (and possibly to business trusts such as Crescent Equities). Whether
or when any of these provisions, or any alternative provisions, will ultimately
be enacted, or what provisions they will contain if they are enacted, cannot be
ascertained at this time.
On April 7, 1997, the House Select Committee on Revenue and Public
Education Funding (the "Committee") of the Texas House of Representatives
released a draft of an omnibus tax bill (the "Draft Bill") that would
significantly expand the Texas franchise tax and the Texas sales tax. Effective
for annual reports due on or after January 1, 1998, the Draft Bill, if enacted
in such form, would broaden the franchise tax to apply not only to corporations
and limited liability companies, but to substantially all business entities
including business trusts and limited partnerships. Accordingly, the Texas
franchise tax would apply to Crescent Equities and its subsidiary partnerships
that are doing business in Texas, including the Operating Partnership, Funding
I, Funding II, Funding III, Funding IV and Funding V, and to Funding VI (as to
which the franchise tax is not expected to be substantial).
Effective on October 1, 1997, the Draft Bill, if enacted in such form,
would expand the sales tax base to include numerous items that are currently
exempt or excluded. The expansion would apply to both state sales and local
sales taxes. The state sales tax rate is 6.25% percent of the sales price of a
taxable item. The Draft Bill, if enacted in such form, would subject commercial
leases of real property to the sales tax, where the lessee uses the property in
furtherance of a trade or business.
On April 16, 1997, the Committee reported to the Texas House of
Representatives an omnibus tax bill (the "Revised Bill") that contained numerous
amendments to the Draft Bill. Like the Draft Bill, the Revised Bill would expand
the Texas franchise tax to apply to business trusts such as Crescent Equities
and to partnerships such as its subsidiary partnerships that are doing business
in Texas or that are qualified to do business in Texas. However, the Revised
Bill essentially excluded from the Texas franchise tax calculation passive
income (such as interest, rent and dividends) and passive income assets (which
are assets that generate passive income). The Revised Bill also removed from the
Draft Bill the sales tax on commercial leases of real property. The Texas House
of Representatives has amended the Revised Bill (the "Amended Revised Bill") and
has passed the Amended Revised Bill and has sent the Amended Revised Bill to the
Texas Senate.
The Senate Select Committee on Tax Reform and Public School Finance has
reported to the Texas Senate for its consideration a tax bill (the "Senate
Committee Bill") that differs from the Amended Revised Bill in numerous
respects. The Senate Committee Bill also contains the exclusion from the Texas
franchise tax calculation of passive income and passive income assets. If the
Texas Senate adopts the Senate Committee Bill (or adopts an amended version of
the Senate Committee Bill), the Amended Revised Bill and the Senate Committee
Bill (with any amendments adopted by the Texas Senate) would be sent to a
conference committee. The differences between the two versions would have to be
worked out in the conference committee and the conference committee report would
have to be approved by both the Texas House of Representatives and the Texas
Senate. There can be no assurance that the passive income and passive income
asset exclusions will be preserved.
Whether the Amended Revised Bill or the Senate Committee Bill will be
enacted in its current form or at all (or in an amended form) cannot be
ascertained at this time. Enactment of any bill will require final submission
to, and final approval by, the Texas House of Representatives, the Texas Senate
and the Governor of Texas.
Locke Purnell Rain Harrell (A Professional Corporation), special tax
counsel to the Company ("Special Tax Counsel"), has reviewed the discussion in
this section with respect to Texas franchise tax matters and is of the opinion
that, based on the current structure of Crescent Equities and based upon current
law and the pending legislation described herein, 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-21
<PAGE> 24
UNDERWRITING
Subject to the terms and conditions set forth in the purchase agreement and
related terms agreement (collectively, the "Purchase Agreement") among the
Company and each of the underwriters named below (the "Underwriters"), the
Company has agreed to sell to each of the Underwriters, for whom Merrill Lynch,
Pierce, Fenner & Smith Incorporated, Bear, Stearns & Co. Inc., Donaldson, Lufkin
& Jenrette Securities Corporation, Morgan Stanley & Co. Incorporated,
PaineWebber Incorporated and Smith Barney Inc. are acting as representatives
(the "Representatives"), and each of the Underwriters severally has agreed to
purchase from the Company, the aggregate number of Common Shares set forth below
opposite their respective names:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
- ------------------------------------------------------------ --------------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith Incorporated.......... 60,620
Bear, Stearns & Co. Inc. ................................... 60,616
Donaldson, Lufkin & Jenrette Securities Corporation......... 60,616
Morgan Stanley & Co. Incorporated........................... 60,616
PaineWebber Incorporated.................................... 60,616
Smith Barney Inc. .......................................... 60,616
Alex. Brown & Sons Incorporated............................. 5,950
BT Securities Corporation................................... 5,950
Credit Suisse First Boston Corporation...................... 5,950
Dillon, Read & Co. Inc. .................................... 5,950
A.G. Edwards & Sons, Inc. .................................. 5,950
Furman Selz LLC............................................. 5,950
Goldman, Sachs & Co. ....................................... 5,950
Lazard Freres & Co. LLC..................................... 5,950
Lehman Brothers Inc. ....................................... 5,950
Prudential Securities Incorporated.......................... 5,950
Salomon Brothers Inc ....................................... 5,950
UBS Securities LLC.......................................... 5,950
Sanford C. Bernstein & Co., Inc. ........................... 2,950
EVEREN Securities, Inc. .................................... 2,950
Fahnestock & Co. Inc. ...................................... 2,950
Friedman, Billings, Ramsey & Co., Inc. ..................... 2,950
Genesis Merchant Group Securities........................... 2,950
Hampshire Securities Corporation............................ 2,950
Hanifen, Imhoff Inc. ....................................... 2,950
Harris Webb & Garrison, Inc. ............................... 2,950
Janney Montgomery Scott Inc. ............................... 2,950
Edward D. Jones & Co., L.P. ................................ 2,950
Legg Mason Wood Walker, Incorporated........................ 2,950
McDonald & Company Securities, Inc. ........................ 2,950
Principal Financial Securities, Inc. ....................... 2,950
Rauscher Pierce Refsnes, Inc. .............................. 2,950
Raymond James & Associates, Inc. ........................... 2,950
Roney & Co., LLC ........................................... 2,950
Sands Brothers & Co., Ltd. ................................. 2,950
Southwest Securities, Inc. ................................. 2,950
Stifel, Nicolaus & Company, Incorporated.................... 2,950
Sutro & Co. Incorporated.................................... 2,950
Tucker Anthony Incorporated................................. 2,950
Wheat, First Securities, Inc. .............................. 2,950
-------
Total.......................................... 500,000
=======
</TABLE>
S-22
<PAGE> 25
The Common Shares offered hereby are being sold by the Company to the
Underwriters at a price of $25.875 per share so that the Underwriters may cover
a portion of their short position resulting from over-allotments in connection
with the April 1997 Offering. There is no discount or commission associated with
the sale of the Common Shares to the Underwriters.
In the Purchase Agreement, the several Underwriters have agreed, subject to
the terms and conditions set forth therein, to purchase all of the shares being
sold pursuant to the Purchase Agreement if any of such Common Shares are
purchased. Under certain circumstances, the commitments of nondefaulting
Underwriters may be increased.
In the Purchase Agreement, the Company has agreed to indemnify the several
Underwriters against certain civil liabilities, including liabilities under the
Securities Act of 1933 (the "Securities Act"), or to contribute to payments the
Underwriters may be required to make in respect thereof. Insofar as
indemnification of the Underwriters for liabilities arising under the Securities
Act may be permitted pursuant to such agreements, the Company has been informed
that, in the opinion of the Securities and Exchange Commission, such
indemnification is against public policy as expressed in the Securities Act and
therefore is unenforceable.
In connection with the Offering, the rules of the Securities and Exchange
Commission permit the Representatives to engage in certain transactions that
stabilize the price of the Common Shares. Such transactions may consist of bids
or purchases for the purpose of pegging, fixing or maintaining the price of the
Common Shares.
If the Underwriters create a short position in the Common Shares in
connection with the offering, i.e., if they sell more Common Shares than are set
forth on the cover page of this Prospectus Supplement, the Representatives,
respectively, may reduce that short position by purchasing Common Shares in the
open market.
The Representatives may also impose a penalty bid on certain Underwriters
and selling group members. This means that if the Representatives purchase
Common Shares in the open market to reduce the Underwriters' short position,
respectively, or to stabilize the price of the Common Shares, they may reclaim
the amount of the selling concession from the Underwriters and any selling group
members who sold those Common Shares as part of the Offering.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases. The imposition of a penalty bid
might also have an effect on the price of a security to the extent that it were
to discourage resales of the security.
Neither the Company nor any of the Underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the Common Shares. In addition, neither
the Company nor any of the Underwriters makes any representation that the
Representatives will engage in such transactions or that such transactions, once
commenced, will not be discontinued without notice.
The Common Shares are listed on the NYSE under the symbol "CEI."
LEGAL MATTERS
The legality of the Common Shares offered hereby will be passed upon for
the Company by Shaw, Pittman, Potts & Trowbridge, Washington, D.C. Certain legal
matters described under "Federal Income Tax Considerations" will be passed upon
for the Company by Shaw, Pittman, Potts & Trowbridge, which will rely, as to all
Texas franchise tax matters, upon the opinion of Locke Purnell Rain Harrell (A
Professional Corporation), Dallas, Texas. Certain legal matters related to the
Offering will be passed upon for the Underwriters by Hogan & Hartson L.L.P.,
Washington, D.C.
S-23
<PAGE> 26
GLOSSARY
"April 1997 Offering" means the public offering of 24,150,000 Common Shares
that closed on April 28, 1997.
"Board of Trust Mangers" means the Board of Trust Managers of Crescent
Equities.
"Book-Tax Difference" means the difference between the fair market value
and the adjusted tax basis of property at the time of its contribution to a
partnership.
"CBD" means central business district.
"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 The First National Bank of Boston in the aggregate
principal amount of up to $175 million.
"CREE Ltd." means Crescent Real Estate Equities, Ltd., a Delaware
corporation that is a wholly owned subsidiary of Crescent Equities and the sole
general partner of the Operating Partnership.
"CresCal" means CresCal Properties, L.P., a Delaware limited partnership
whose 1% general partner is an indirect subsidiary of CREE Ltd. and whose 99%
limited partner is the Operating Partnership.
"Crescent Equities" means Crescent Real Estate Equities Company, a Texas
real estate investment trust.
"Declaration of Trust" means the Restated Declaration of Trust of Crescent
Equities, as in effect as of the date of this Prospectus Supplement.
"Exchange Rights" means the rights granted to Limited Partners of the
Operating Partnership to exchange their Units for Common Shares on a one-for-two
basis or, at the election of the Company, for cash equal to the then-current
fair market value of the number of Common Shares for which such Units are
exchangeable.
"FIRPTA" means the Foreign Investment in Real Property Tax Act of 1980, as
amended.
"Funding I" means Crescent Real Estate Funding I, L.P., a Delaware limited
partnership whose 1% general partner is an indirect subsidiary of CREE Ltd. and
whose 99% limited partner is the Operating Partnership.
"Funding II" means Crescent Real Estate Funding II, L.P., a Delaware
limited partnership whose 1% general partner is an indirect subsidiary of CREE
Ltd. and whose 99% limited partner is the Operating Partnership.
"Funding III" means Crescent Real Estate Funding III, L.P., a Delaware
limited partnership whose 1% general partner is an indirect subsidiary of CREE
Ltd. and whose 99% limited partner is the Operating Partnership.
S-24
<PAGE> 27
"Funding IV" means Crescent Real Estate Funding IV, L.P., a Delaware
limited partnership whose 1% general partners are indirect subsidiaries of CREE
Ltd. and whose 99% limited partner is the Operating Partnership.
"Funding V" means Crescent Real Estate Funding V, L.P., a Delaware limited
partnership whose 1% general partner is an indirect subsidiary of CREE Ltd. and
whose 99% limited partner is the Operating Partnership.
"Funding VI" means Crescent Real Estate Funding VI, L.P., a Delaware
limited partnership whose 1% general partner is an indirect subsidiary of CREE
Ltd. and whose 99% limited partner is the Operating Partnership.
"Greenway Plaza Office Portfolio" means the 10 suburban office properties
with an aggregate of approximately 4.3 million net rentable square feet located
in Houston, Texas.
"Greenway Plaza Portfolio" means the property portfolio located in Houston,
Texas that consists primarily of the Greenway Plaza Office Portfolio, a 389-room
full-service hotel and a private health and dining club.
"HADC" means Houston Area Development Corp., a Texas corporation that is
one of the Residential Development Corporations, and that directly owns the
Falcon Point Residential Development Property and the Spring Lakes Residential
Development Property, approximately 94% of the effective interest in which is
owned by the Company through its investments in the non-voting common stock and
approximately 98% of the economic interest in which is owned by the Company
through its investments in the applicable Residential Development Property
Mortgages and non-voting common stock.
"Initial Offering" means the initial public offering of Common Shares that
closed on May 5, 1994.
"IRS" means the United States Internal Revenue Service.
"Limited Partner(s)" means the limited partners in the Operating
Partnership, and any of them.
"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.
"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.
"October 1996 Offering" means the public offering of Common Shares that
closed on October 2, 1996.
S-25
<PAGE> 28
"Offering" means the offering of 500,000 Common Shares offered hereby.
"Operating Partnership" means Crescent Real Estate Equities Limited
Partnership, a Delaware limited partnership, in which CREE Ltd. holds a 1%
general partner interest, Crescent Equities holds an 83.4% limited partner
interest and limited partners (other than Crescent Equities) hold, in the
aggregate, a 15.6% limited partner interest.
"Ownership Limit" means the prohibition on ownership, directly or by virtue
of the attribution provisions of the Code, of more than 8.0% of the issued and
outstanding Common Share by any single shareholder (or in the case of Richard E.
Rainwater and certain related persons as a group, more than 9.5% of the issued
and outstanding Common Shares) and on ownership, directly or by virtue of the
attribution provisions of the Code, of more than 9.9% of the issued and
outstanding shares of any series of preferred shares by any single shareholder.
"Predecessor Corporation" means Crescent Real Estate Equities, Inc., a
Maryland corporation which was the predecessor in interest to Crescent Equities.
"Property(ies)" means the Office Properties, the Retail Properties, the
Hotel Properties, the economic interests in the Residential Development
Properties, and any of them.
"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 and related terms
agreement between the Company and the Underwriters.
"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.
"Representatives" means Merrill Lynch, Pierce, Fenner & Smith Incorporated,
Bear, Stearns & Co. Inc., Dean Witter Reynolds Inc., Donaldson, Lufkin &
Jenrette Securities Corporation, PaineWebber Incorporated and Smith Barney Inc.,
the representatives of the Underwriters in the Offering.
"Residential Development Corporation(s)" means CDMC, HADC, MVDC, and any of
them.
"Residential Development Property(ies)" means the Mira Vista Residential
Development Property, the Falcon Point Residential Development Property, the
Spring Lakes Residential Development Property, The Highlands Residential
Development Property, The Reserve at Frisco Residential Development Property,
the Whitehawk Ranch Residential Development Property, the One Beaver Creek
Residential Development Property, the Cresta Residential Development Property,
the Market Square Residential Development Property, the Eagle Ranch Residential
Development Property, the Villa Montane Residential Development Property, and
any of them.
"Residential Development Property Mortgage(s)" means (i) the mortgage in
the principal amount of $14.4 million secured by the Mira Vista Residential
Development Property, (ii) the mortgages in the aggregate principal amount of
$14.4 million secured by the Falcon Point Residential Development Property and
the Spring Lakes Residential Development Property, (iii) the promissory note in
the principal amount of $20.2 million (of which $15.5 million had been advanced
as of March 31, 1997), which is secured by both CDMC's limited partner interest
in a partnership that owns six Residential Development Properties located in
Colorado and the obligation of the voting shareholders to make certain
additional capital contributions to CDMC, and (iv) the promissory note in the
principal amount of $4.0 million, of which $3.8 million had been advanced as of
March 31, 1997, secured by the Whitehawk Ranch Residential Development Property,
or any of them.
"Securities Act" means the Securities Act of 1933, as amended.
S-26
<PAGE> 29
"Special Tax Counsel" means Locke Purnell Rain Harrell (A Professional
Corporation), special tax counsel to the Company.
"Tax Counsel" means Shaw, Pittman, Potts & Trowbridge, tax counsel to the
Company.
"Treasury Regulations" means the regulations promulgated by the United
States Department of Treasury under the Code.
"UBTI" means unrelated business taxable income under the Code.
"Underwriters" means the various underwriters who have agreed to purchase
Common Shares in the Offering, and any of them.
"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.
"WRE" means Woodlands Retail Equities -- '96 Limited, a partnership in
which the Company has a 75% limited partner interest and which owns The
Woodlands Retail Properties.
S-27
<PAGE> 30
============================================================
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED OR
INCORPORATED BY REFERENCE IN THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS IN
CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. NEITHER THE
DELIVERY OF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCE, CREATE ANY IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS SUPPLEMENT OR IN THE
PROSPECTUS OR IN AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF. THIS PROSPECTUS
SUPPLEMENT AND THE PROSPECTUS DO NOT CONSTITUTE AN OFFER OR SOLICITATION BY
ANYONE IN ANY STATE IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN
WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR
TO ANYONE TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PROSPECTUS SUPPLEMENT
The Company................................. S-1
Use of Proceeds............................. S-6
Management.................................. S-6
Structure of the Company.................... S-6
Federal Income Tax Considerations........... S-8
Underwriting................................ S-22
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>
============================================================
============================================================
500,000 SHARES
[CRESCENT LOGO]
COMMON SHARES
------------------------
PROSPECTUS SUPPLEMENT
------------------------
May 8, 1997
============================================================
