<PAGE> 1
Filed Pursuant to Rule 424(b)(5)
Registration No. 333-38071
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED DECEMBER 12, 1997)
6,948,734 SHARES
[CRESCENT LOGO]
SERIES B CONVERTIBLE PREFERRED SHARES
(LIQUIDATION PREFERENCE $32.38 PER SHARE)
------------------------
Crescent Real Estate Equities Company (collectively with its subsidiaries,
the "Company") is a fully integrated real estate company operated as a real
estate investment trust for federal income tax purposes (a "REIT"). The Company
owns a portfolio of real estate assets located primarily in 21 metropolitan
submarkets in Texas and Colorado. The portfolio includes 88 office properties
with an aggregate of approximately 31.3 million net rentable square feet, 89
behavioral healthcare facilities, seven full-service hotels with a total of
2,276 rooms and two destination health and fitness resorts, seven retail
properties and economic interests in five residential development corporations.
The Company is one of the largest publicly held REITs in the United States. Upon
completion of the Pending Investment (as described herein), the portfolio will
also include four full-service casino/hotels with a total of 1,995 rooms and two
riverboat casinos.
The Series B Convertible Preferred Shares of beneficial interest ("Series B
Preferred Shares") offered hereby will convert automatically into fully paid and
nonassessable common shares of beneficial interest of the Company (the "Common
Shares") at the Conversion Rate (as calculated and defined in the Statement of
Designation attached hereto as Annex A) on the third anniversary of the date of
issuance. The Series B Preferred Shares will also be convertible, at the option
of the holder thereof, at any time from and after the second anniversary of the
date of issuance or upon the occurrence of certain events. See "Description of
Shares B Preferred Shares -- Conversion Rights."
The Series B Preferred Shares are not redeemable except under the limited
circumstances listed in the Statement of Designation attached hereto as Annex A.
The Series B Preferred Shares have no stated maturity date, will not be entitled
to the benefit of any sinking fund or mandatory redemption provisions, and will
not be convertible into any other securities of the Company. See "Description of
Series B Preferred Shares -- Redemption."
To ensure that the Company maintains its qualification as a REIT for federal
income tax purposes, ownership by any person generally is limited to 9.9% of the
issued and outstanding preferred shares of beneficial interest of the Company.
The Board of Trust Managers of the Company may waive this limitation with regard
to any person that is not an individual, subject to certain conditions. See
"Description of Series B Preferred Shares -- Ownership Limits and Restrictions
on Transfer."
SEE "RISK FACTORS" AT PAGE 2 IN THE ACCOMPANYING PROSPECTUS FOR CERTAIN
FACTORS RELEVANT TO AN INVESTMENT IN THE COMPANY.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS TO WHICH IT
RELATES. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
==============================================================================================================
UNDERWRITING
PRICE TO DISCOUNT AND PROCEEDS TO
PUBLIC COMMISSION COMPANY(1)
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share $32.38 $0 $32.38
- --------------------------------------------------------------------------------------------------------------
Total $225,000,006.92 $0 $225,000,006.92
==============================================================================================================
</TABLE>
(1)Before deducting expenses payable by the Company, estimated at $250,000.
THE DATE OF THIS PROSPECTUS SUPPLEMENT IS JUNE 29, 1998
<PAGE> 2
THE COMPANY
On December 31, 1996, Crescent Real Estate Equities Company, a Texas real
estate investment trust ("Crescent Equities"), became the successor to Crescent
Real Estate Equities, Inc., a Maryland corporation (the "Predecessor
Corporation"), through the merger of the Predecessor Corporation and CRE Limited
Partner, Inc., a subsidiary of the Predecessor Corporation, into Crescent
Equities. The term "Company" includes, unless the context otherwise requires,
Crescent Equities, the Predecessor Corporation, Crescent Real Estate Equities
Limited Partnership, a Delaware limited partnership (the "Operating
Partnership"), Crescent Real Estate Equities, Ltd., a Delaware corporation which
is the sole general partner of the Operating Partnership ("CREE Ltd."), and the
other subsidiaries of Crescent Equities.
The Company is a fully integrated real estate company, operated as a real
estate investment trust for federal income tax purposes (a "REIT"), which owns a
portfolio of real estate assets (the "Properties") located primarily in 21
metropolitan submarkets in Texas and Colorado. The Properties include 88 office
properties (the "Office Properties") with an aggregate of approximately 31.3
million net rentable square feet, 89 behavioral healthcare facilities (the
"Behavioral Healthcare Facilities"), seven full-service hotels with a total of
2,276 rooms and two destination health and fitness resorts that can accommodate
up to 452 guests daily (collectively, the "Hotel Properties"), the real estate
mortgages relating to and non-voting common stock in five residential
development corporations (the "Residential Development Corporations"), which in
turn, through joint venture or partnership arrangements, own interests in 12
residential development properties (the "Residential Development Properties"),
and seven retail properties with an aggregate of approximately 771,000 net
rentable square feet (the "Retail Properties"). The Company also owns an
indirect 38% interest in each of two corporations that currently own and/or
operate approximately 89 refrigerated warehouses with an aggregate of
approximately 424.5 million cubic feet (the "Refrigerated Warehouse
Investment"). Such corporations have entered into an agreement to acquire an
additional five refrigerated warehouses with an aggregate of approximately 60.9
million cubic feet. In addition, the Company has entered into an agreement
relating to the proposed acquisition (the "Pending Investment") of a corporation
that owns four full-service casino/hotels with a total of 1,995 rooms and two
riverboat casinos (collectively, the "Casino/Hotel Properties").
Upon completion of the Pending Investment, the Company will have completed
over $6.0 billion of real estate investments since the closing of the initial
public offering of its common shares (the "Common Shares") on May 5, 1994 (the
"Initial Offering"), approximately $2.2 billion of which will have been
completed since December 31, 1997.
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 and the operating
activities of the Refrigerated Warehouse Investment. The structure of the
Company is designed to facilitate and maintain its qualification as a REIT and
to permit persons contributing Properties (or interests therein) to the Company
to defer some or all of the tax liability that they otherwise might incur.
As of June 29, 1998, 120,867,102 Common Shares, 6,576,851 units of
ownership interest in the Operating Partnership ("Units") and 8,000,000 shares
of 6 3/4% Series A Convertible Cumulative Preferred Shares of beneficial
interest, par value $.01 per share (the "Series A Preferred Shares") were
outstanding.
The Company's executive offices are located at 777 Main Street, Suite 2100,
Fort Worth, Texas 76102, and its telephone number is (817) 321-2100.
PENDING INVESTMENTS
The following briefly describes the Pending Investment in the Casino/Hotel
Properties. A more detailed description of the Pending Investment in
Casino/Hotel Properties is contained in the Company's Current Report on Form 8-K
dated January 16, 1998 and filed January 27, 1998, as amended on February 13,
1998, April 27, 1998 and June 10, 1998.
S-3
<PAGE> 3
Station Casinos, Inc. On January 16, 1998, the Company entered into an
Agreement and Plan of Merger (as subsequently amended, the "Merger Agreement")
pursuant to which Station Casinos, Inc. ("Station") will merge with and into the
Company (the "Merger"). Station is an established multi-jurisdictional casino/
hotel company that owns and operates, through wholly owned subsidiaries, six
distinctly themed Casino/Hotel Properties, four of which are located in Las
Vegas, Nevada, one of which is located in Kansas City, Missouri and one of which
is located in St. Charles, Missouri. The Merger Agreement also provides for
certain alternative structures to facilitate the combinations of the businesses
of the Company and Station. As a result of the Merger, the Company will acquire
the real estate and other assets of Station, except to the extent operating
assets are transferred immediately prior to the Merger, as described below.
It is presently anticipated that, as part of the transactions associated
with the Merger, but immediately prior to the Merger, certain operating assets
and the employees of Station will be transferred to a new limited liability
company (the "Station Lessee"). The Station Lessee will be owned 50% by Crescent
Operating, Inc. or another entity designated by the Company, 24.9% by a newly
formed entity (the "Management Entity") owned by three of the existing directors
of Station (including its Chairman, President and Chief Executive Officer) and
25.1% by a separate newly formed entity (the "Secondary Management Entity")
owned by other members of Station management. It is anticipated that the Station
Lessee will operate the six Casino/Hotel Properties currently operated by
Station pursuant to a lease with the Company. The lease will have a 10-year
term, with one five-year renewal option. The Station Lessee will be required to
maintain the Casino/Hotel Properties in good condition at its expense. The
Company will establish and maintain a reserve account to be used under certain
circumstances for the purchase of furniture, fixtures and equipment with respect
to the Casino/Hotel Properties, to be used from time to time to replace
furniture, fixtures and equipment. Under the lease, the Company also will have a
right of first refusal to acquire, and thereafter to include under the lease,
any additional casino and/or hotel properties which the Station Lessee desires
to acquire or operate.
The lease will provide for base and percentage rent but the amount of rent
has not yet been determined. It is anticipated, however, that total rental
payments under the lease will exceed 20% of total rental revenues on an
annualized basis. As a result of the percentage rent payments, the Company will
participate in the economic operations of the Casino/Hotel Properties only
through its indirect participation in gross revenues. To the extent that
operations of the Casino/Hotel Properties may affect the ability of the Station
Lessee to pay rent, the Company also may indirectly bear the risks associated
with any increases in expenses or decreases in revenues. The amount of rent
payable to the Company under the leases with respect to the Casino/Hotel
Properties will depend on the ability of the Station Lessee to maintain and
increase revenues from the Casino/Hotel Properties. Accordingly, the Company's
results of operations and its ability to meet its obligations will be affected
by such factors as changes in general and local economic conditions, the level
of demand for the services of the Casino/Hotel Properties, competition in the
hotel/casino industry and other factors related to the operation of the
Casino/Hotel Properties.
In order to effect the Merger, the Company will issue .466 Common Shares of
the Company for each share of common stock of Station (including each restricted
share) that is issued and outstanding immediately prior to the Merger. In
addition, the Company will create a new class of Preferred Shares which will be
exchanged, upon consummation of the Merger, for the shares of $3.50 Convertible
Preferred Stock of Station outstanding immediately prior to the Merger.
The Merger transaction, including the Company's issuance of Common Shares
and Preferred Shares in connection with consummation of the Merger and the
Company's assumption and/or refinancing of approximately $900 million in
existing indebtedness of Station and its subsidiaries, is currently valued at
approximately $1.731 billion.
In connection with the transaction, the Company will also enter into a
right of first refusal and noncompetition agreement with the Station Lessee.
Under the agreement, the Company will grant the Station Lessee a right of first
refusal as to any lease arrangement (a "master lease") for a casino/hotel
property (defined as real estate on which hotel and casino or other
gaming-related operations are conducted) in which the operators of the business
conducted at the property prior to the date the property is owned or acquired by
the Company will cease to operate such business. The Station Lessee will grant
the Company a right of first
S-4
<PAGE> 4
refusal to invest, directly or indirectly, (i) in casino/hotel properties
(including the opportunity to provide services related to real estate or to
invest in a hotel property), real estate mortgages, real estate derivatives, or
entities that invest primarily in or have a substantial portion of their assets
in such types of real estate assets or (ii) any other casino/hotel-related
investments that can be structured as REIT-suitable investments. In addition,
without the prior written consent of the Management Entity, the Company,
Crescent Operating, Inc. and their affiliates may not own, operate or otherwise
engage in activities related to any casino/hotel properties other than
casino/hotel properties operated and leased by the Station Lessee or an entity
under its control, provided that the Company may own a casino/hotel property if
a master lease arrangement already exists at the property, if casino/hotel
activities conducted at the property are incidental to the primary business
operations at the property or if the sellers or operators desire to enter into a
master lease arrangement with the Company. Under the agreement, without the
prior written consent of the Company, neither the Management Entity, the
Secondary Management Entity, nor any of the affiliates of either, may own,
operate or otherwise engage in any activities related to casino/hotel properties
that are not operated and leased by the Station Lessee or an entity under its
control.
In connection with the Merger, the Company also has agreed to purchase up
to $115 million of a new class of convertible preferred stock of Station prior
to consummation of the Merger. The purchase will be made in increments, or in a
single transaction upon call by Station subject to certain conditions, whether
or not the Merger is consummated.
Consummation of the Merger is subject to various conditions, including
Station's receipt of the approval of two-thirds of the holders of both its
common stock and its preferred stock, expiration or termination of the waiting
period under the Hart-Scott-Rodino Antitrust Improvements Act of 1974, and the
receipt by the Company and certain of its officers, trust managers and
affiliates of the approvals required under applicable gaming laws. The Company
anticipates that the Merger and the associated transactions will be consummated
in the fourth quarter of 1998. Certain individuals who own in the aggregate
approximately 41% of the outstanding capital stock of Station have agreed to
vote in favor of the Merger. There can be no assurance that the Merger will be
consummated on the terms described in this Prospectus Supplement or at all.
The Company will be entitled to receive a break-up fee of $54 million if
the Merger Agreement is terminated (i) by either the Company or the Board of
Directors of Station if any required approval of the Merger by the holders of
each class of capital stock of Station shall not have been obtained by reason of
the failure to obtain the required vote of stockholders, (ii) by the Company if
the Board of Directors of Station shall not recommend the Merger or shall
recommend a superior proposal or (iii) by the Board of Directors of Station if
it receives a superior proposal that the Company does not match or exceed.
COMPLETED INVESTMENTS
The following briefly describes the Company's investments since March 31,
1998.
Datran Center. On May 1, 1998, the Company acquired, subject to a ground
lease, Datran Center, two Class A office buildings, containing approximately
472,000 net rentable square feet located in the South Dade/Kendall submarket of
Miami, Florida. The purchase price was approximately $71 million of which
approximately $47 million was funded through the assumption of two mortgage
notes encumbering the leasehold interests in the land and the building and the
remaining balance of approximately $24 million through a borrowing under the
Company's $550 million credit facility with a consortium of banks led by
BankBoston, N.A. (the "Credit Facility").
SERIES A PREFERRED STOCK OFFERING
On February 19, 1998, the Company completed a public offering of 8,000,000
Series A Preferred Shares in an aggregate principal amount of $200 million. The
Company used the net proceeds from the offering, equal to approximately $191.3
million, to repay certain amounts outstanding under the Credit Facility.
Distributions on the Series A Preferred Shares are cumulative from the date
of original issue and are payable quarterly in arrears on or about the fifteenth
day of February, May, August and November of each
S-5
<PAGE> 5
year, commencing May 15, 1998, at the rate of 6 3/4% of the liquidation
preference per annum (equivalent to $1.6875 per annum per Series A Preferred
Share).
The Series A Preferred Shares are convertible at any time, in whole or in
part, at the option of the holders thereof, into Common Shares at a conversion
price of $40.86 per Common Share (equivalent to a conversion rate of .6119
Common Shares per Series A Preferred Share), subject to adjustment in certain
circumstances. The Series A Preferred Shares generally are not redeemable prior
to February 18, 2003. On and after February 18, 2003, the Series A Preferred
Shares will be redeemable, in whole or in part, at the option of the Company, at
a redemption price of $25.00 per share, plus accrued and unpaid distributions,
if any. The Series A Preferred Shares have no stated maturity date and will not
be entitled to the benefit of any sinking fund or mandatory redemption
provisions.
The Series A Preferred Shares rank senior to the Common Shares, and will
rank pari passu with the Series B Preferred Shares, as to rights to receive
distributions and to participate in distributions or payments upon any
liquidation, dissolution or winding up of the Company.
The Series A Preferred Shares are listed on the New York Stock Exchange,
Inc. ("NYSE") under the symbol "CEIPrA."
DESCRIPTION OF SERIES B PREFERRED SHARES
This description of the particular terms of the Series B Preferred Shares
offered hereby supplements, and to the extent inconsistent therewith replaces,
the description of the general terms and provisions of the Preferred Shares set
forth in the accompanying Prospectus, to which description reference is hereby
made.
GENERAL
The Board of Trust Managers of the Company is authorized to issue up to
100,000,000 Preferred Shares, in one or more series, with such designations,
powers, preferences and rights of the shares of such series and the
qualifications, limitations or restrictions thereon, including, but not limited
to, the fixing of the distribution rights, distribution rate or rates,
conversion rights, voting rights and terms of redemption (including sinking fund
provisions), the redemption price or prices, and the liquidation preferences, in
each case, if any, as the Board of Trust Managers of the Company may determine,
without any further vote or action by the shareholders.
The Series B Preferred Shares are being issued pursuant to a Statement of
Designation that sets forth the terms of a series of Preferred Shares consisting
of up to 6,948,734 shares, designated Series B Convertible Preferred Shares.
When issued, the Series B Preferred Shares will be validly issued, fully paid
and nonassessable.
The following summary of the terms and provisions of the Series B Preferred
Shares does not purport to be complete and is qualified in its entirety by
reference to the pertinent sections of the Declaration of Trust of the Company,
which is available from the Company, and the Statement of Designation
designating the Series B Preferred Shares (the "Statement of Designation"),
which is attached as Annex A to this Prospectus Supplement. Capitalized terms
used herein without definition have the meanings set forth in the Statement of
Designation.
The issued and outstanding Common Shares of the Company are listed on the
NYSE under the symbol "CEI," and application also has been made to list the
Common Shares issuable upon conversion or redemption of the Series B Convertible
Shares on the NYSE.
RANKING
The Series B Preferred Shares will rank senior to the Common Shares as to
rights to receive distributions and to participate in distributions or payments
upon any liquidation, dissolution or winding up of the Company. The Series B
Preferred Shares will rank pari passu with the Company's Series A Preferred
Shares and, assuming completion of the Pending Investment in the Casino/Hotel
Properties, the new class of
S-6
<PAGE> 6
Preferred Shares issued in exchange for the shares of $3.50 Convertible
Preferred Stock of Station as to rights to receive distributions and to
participate in distributions or payments upon any liquidation, dissolution or
winding up of the Company.
DISTRIBUTIONS
Holders of the Series B Preferred Shares shall be entitled to receive, when
and as authorized by the Board of Trust Managers, out of funds legally available
for the payment of distributions, any extraordinary cash distribution (generally
excluding any regular quarterly cash distribution), stock distribution (other
than distributions of Common Shares) and other non-cash distributions (including
distributions of preemptive or subscription rights for securities, other than
(i) rights relating to Common Shares and (ii) the rights referenced in Exhibit D
to the Statement of Designation) that may be made from time to time to the
holders of the Common Shares, provided, however, that the holders of the Series
B Preferred Shares shall not be entitled to receive, except as otherwise
determined by the Board of Trust Managers, any distribution paid in order to
preserve the status of the Company as a REIT for federal income tax purposes.
Distributions will be payable to holders of record as they appear in the share
records of the Company at the close of business on the applicable record date,
which shall be such date designated by the Board of Trust Managers of the
Company for the payment of distributions.
No distributions on the Series B Preferred Shares shall be authorized by
the Board of Trust Managers of the Company or be paid or set apart for payment
by the Company at such time as the terms and provisions of any agreement of the
Company, including any agreement relating to its indebtedness, prohibits such
authorization, payment or setting apart for payment or provides that such
authorization, payment or setting apart for payment would constitute a breach
thereof or a default thereunder, or if such authorization or payment shall be
restricted or prohibited by law.
Accrued and unpaid distributions on the Series B Preferred Shares will not
bear interest and holders of the Series B Preferred Shares will not be entitled
to any distributions in excess of the distributions described above and in the
Statement of Designation attached hereto as Annex A.
The Company intends to contribute or otherwise transfer the net proceeds of
the sale of the Series B Preferred Shares to the Operating Partnership in
exchange for Series B Preferred Units in the Operating Partnership, the economic
terms of which will be substantially identical to those of the Series B
Preferred Shares. The Operating Partnership will be required to make all
required distributions on the Series B Preferred Units (which will mirror the
payments of distributions, including accrued and unpaid distributions upon
redemption, and of the liquidation preference amount on the Series B Preferred
Shares) prior to any distribution of cash or assets to the holders of the Units
or to the holders of any other interests in the Operating Partnership, except
for any other series of preferred units ranking on a parity with the Series B
Preferred Units as to distributions or liquidation rights, and except for
distributions required to enable the Company to maintain its qualification as a
REIT. The Operating Partnership currently has 8,000,000 Series A Preferred Units
outstanding issued in connection with the Company's issuance of the Series A
Preferred Shares.
Any distribution payment made on the Series B Preferred Shares shall first
be credited against the earliest accrued but unpaid distribution due with
respect to such shares which remains payable.
If, for any taxable year, the Company elects to designate as "capital gain
distributions" (as defined in Section 857 of the Internal Revenue Code of 1986,
as amended (the "Code") any portion (the "Capital Gains Amount") of the
distributions paid or made available for the year to the holders of all classes
of shares (the "Total Distributions"), then the portion of the Capital Gains
Amount that will be allocable to the holders of Series B Preferred Shares will
be the Capital Gains Amount multiplied by a fraction, the numerator of which
will be the total distributions (within the meaning of the Code) paid or made
available to the holders of the Series B Preferred Shares for the year and the
denominator of which shall be the Total Distributions.
For further information regarding the rights of the holders of the Series B
Preferred Shares to receive distributions, see the Statement of Designation
attached hereto as Annex A and "Description of Preferred Shares -- Dividends" in
the accompanying Prospectus.
S-7
<PAGE> 7
LIQUIDATION PREFERENCE
In the event of any liquidation, dissolution or winding up of the affairs
of the Company, the holders of the Series B Preferred Shares are entitled to be
paid out of the assets of the Company legally available for distribution to its
shareholders liquidating distributions in cash or property at its fair market
value as determined by the Company's Board of Trust Managers in the amount of a
liquidation preference of $32.38 per share, plus an amount equal to any accrued
and unpaid distributions to the date of such liquidation, dissolution or winding
up, before any distribution of assets is made to holders of Common Shares or any
other capital shares of beneficial interest that rank junior to the Series B
Preferred Shares as to liquidation rights. After payment of the full amount of
the liquidating distributions to which they are entitled, the holders of Series
B Preferred Shares will have no right or claim to any of the remaining assets of
the Company. The consolidation or merger of the Company with or into any other
entity or the sale, lease, transfer or conveyance of all or substantially all of
the property or business of the Company shall not be deemed to constitute a
liquidation, dissolution or winding up of the Company. The Series B Preferred
Shares will rank senior to the Common Shares and pari passu with the Series A
Preferred Shares and, assuming completion of the Pending Investment in the
Casino/Hotel Properties, the new Class of Preferred Shares issued in exchange
for the Shares of $3.50 Convertible Preferred Stock of Station as to priority
for receiving liquidating distributions.
For further information regarding the rights of the holders of the Series B
Preferred Shares upon the liquidation, dissolution or winding up of the Company,
see the Statement of Designation attached hereto as Annex A and "Description of
Preferred Shares -- Liquidation Preference" in the accompanying Prospectus.
REDEMPTION
The Series B Preferred Shares are not redeemable except under the
circumstances described below and in the Statement of Designation attached
hereto as Annex A.
The Series B Preferred Shares shall be redeemable at the Redemption Price
(as calculated and defined in the Statement of Designation attached hereto as
Annex A) by the Company at its option, in whole but not in part, if the Company
Compound Annual Return on the first or second anniversary of the Issue Date, as
the case may be, is 1,000 basis points or more below the NAREIT Compound Annual
Return.
Each holder of Series B Preferred Shares on the Series B Preferred Shares
Redemption Date shall be entitled, at such holder's election, to receive the
Redemption Price in cash or Common Shares (subject to certain exceptions related
to the maintenance of the Company's status as a REIT). The number of Common
Shares to be delivered in payment of the Redemption Price shall equal the
Redemption Price divided by the Average Share Price on the Series B Preferred
Redemption Date. Common Shares issued upon redemption of the Series B Preferred
Shares will be issued pursuant to the registration statement of which this
Prospectus Supplement and the accompanying Prospectus are a part.
Notice of redemption will be mailed, not less than five days after the date
giving rise to the Company's right to redeem, to each holder of record of Series
B Preferred Shares to be redeemed, notifying such holder of the Company's
election to redeem such shares, stating the effective date of such redemption
(the "Series B Preferred Shares Redemption Date"), which shall be a date no more
than 10 business days after the date giving rise to the Company's right to
redeem the number of shares to be redeemed (and, if fewer than all the Series B
Preferred Shares are to be redeemed, the number of shares to be redeemed from
such holder) and the place(s) where the certificates representing the Series B
Preferred Shares are to be surrendered for payment or the other procedures for
redemption.
On or after the Series B Preferred Shares Redemption Date, each holder of
Series B Preferred Shares to be redeemed must present and surrender the
certificates representing the Series B Preferred Shares to the Company at the
place designated in such notice and thereupon the redemption price of such
shares will be paid to or on the order of the person whose name appears on such
certificates as the owner thereof and each surrendered certificate will be
canceled. In the event that fewer than all the Series B Preferred Shares are to
be redeemed, a new certificate will be issued representing the unredeemed
shares. From and after the Series B Preferred Shares Redemption Date, all
distributions on the Series B Preferred Shares designated for
S-8
<PAGE> 8
redemption in such notice will cease to accrue and all rights of the holders
thereof, except the right to receive the redemption price thereof (including all
accrued and unpaid distributions up to the Series B Preferred Shares Redemption
Date), will cease and terminate and such shares will not thereafter be
transferred (except with the consent of the Company) on the Company's books, and
such shares shall not be deemed to be outstanding for any purpose whatsoever. At
its election, the Company, prior to the Series B Preferred Shares Redemption
Date, may irrevocably deposit the redemption price (plus any accrued and unpaid
distributions) of the Series B Preferred Shares so called for redemption (the
holders of which elect to receive the Redemption Price in cash) in trust for the
holders thereof with a bank or trust company, in which case such notice to
holders of the Series B Preferred Shares to be redeemed will (i) state the date
of such deposit, (ii) specify the office of such bank or trust company as the
place of payment of the redemption price and (iii) call upon such holders to
surrender the certificates representing such Series B Preferred Shares at such
place on or about the date fixed in such redemption notice (which may not be
later than the Series B Preferred Shares Redemption Date) against payment of the
redemption price (including all accrued and unpaid distributions up to the
Series B Preferred Shares Redemption Date). Any moneys so deposited which remain
unclaimed by the holders of the Series B Preferred Shares at the end of two
years after the Series B Preferred Shares Redemption Date will be returned by
such bank or trust company to the Company.
Notwithstanding the foregoing, unless full cumulative distributions on all
outstanding Series B Preferred Shares have been paid or declared and a sum
sufficient for the payment thereof set apart for payment for all past
distribution periods and the then-current distribution period, no Series B
Preferred Shares shall be redeemed unless all outstanding Series B Preferred
Shares are simultaneously redeemed; provided, however, that the foregoing shall
not prevent the purchase or acquisition of Series B Preferred Shares pursuant to
a purchase or exchange offer made on the same terms to holders of all
outstanding Series B Preferred Shares and, unless full cumulative distributions
on all outstanding Series B Preferred Shares have been paid or declared and a
sum sufficient for the payment thereof set apart for payment for all past
distribution periods and the then-current distribution period, the Company shall
not purchase or otherwise acquire directly or indirectly any Series B Preferred
Shares (except by conversion into or exchange for shares of beneficial interest
of the Company ranking junior to the Series B Preferred Shares as to
distribution rights and liquidation preference).
Notwithstanding any other provision relating to redemption of the Series B
Preferred Shares, the Company may redeem Series B Preferred Shares at any time,
in whole or in part, if the Board of Trust Managers determines that such
redemption (i) is necessary or advisable to preserve the Company's status as a
REIT or (ii) is reasonable or appropriate in order to comply with any laws,
rules or regulations of any gaming authority. If fewer than all of the
outstanding Series B Preferred Shares are to be redeemed, the shares to be
redeemed will be determined pro rata or in such other manner as prescribed by
the Board of Trust Managers of the Company.
The Series B Preferred Shares have no stated maturity date and will not be
subject to any sinking fund or mandatory redemption provisions. See also the
Statement of Designation attached hereto as Annex A and "Description of
Preferred Shares -- Redemption" in the accompanying Prospectus.
VOTING RIGHTS
If distributions on the Series B Preferred Shares are in arrears or the
Company fails to honor its conversion or redemption obligations with respect to
the Series B Preferred Shares, holders of Series B Preferred Shares (voting
separately as a class with all other series of Preferred Shares upon which like
voting rights have been conferred and are exercisable) will be entitled to vote,
at a special meeting called by the holders of record of at least 10% of any
series of Preferred Shares upon which such voting rights have been conferred or
at the next annual meeting of shareholders, for the election of two additional
trust managers to serve on the Board of Trust Managers of the Company until all
distribution arrearages have been paid and all conversion and redemption
obligations have been satisfied. In addition, certain changes that would be
materially adverse to the rights of holders of the Series B Preferred Shares
cannot be made without the affirmative vote of two-thirds of the Series B
Preferred Shares (voting separately as a class with all other series of
Preferred Shares upon which like voting rights have been conferred and are
exercisable).
S-9
<PAGE> 9
In any matter in which the Series B Preferred Shares are entitled to vote
(as expressly provided in the Company's Declaration of Trust, Statement of
Designation or as may be required by law), including any action by written
consent, each Series B Preferred Share shall be entitled to one vote.
For further information regarding the voting rights of the holders of the
Series B Preferred Shares, see the Statement of Designation attached as Annex A
to this Prospectus Supplement and "Description of Preferred Shares -- Voting
Rights" in the accompanying Prospectus.
CONVERSION RIGHTS
On the third anniversary of the Issue Date, each share of Series B
Preferred Shares shall automatically convert into fully paid and nonassessable
Common Shares at the Conversion Rate (as calculated and defined in the Statement
of Designation attached hereto as Annex A). Each holder of Series B Preferred
Shares thereupon (i) shall surrender all certificates evidencing Series B
Preferred Shares, duly endorsed for cancellation, at the office of the Transfer
Agent, or such other place or places, if any, as the Board of Trust Managers
shall designate and (ii) shall state in writing the name or names in which such
holder wishes the certificate or certificates of Common Shares to be issued and
the address(es) to which such certificate or certificates shall be delivered.
Currently, the principal corporate trust office of the Transfer Agent,
BankBoston, N.A., c/o Boston EquiServe, L.P., attn: Corporate Reorganization,
150 Royall Street, Canton, Massachusetts 02021, or by hand to STARS, 55
Broadway, 3rd Floor, New York, New York 10006.
The Series B Preferred Shares shall be deemed to have been converted as of
the close of business on the third anniversary of the Issue Date, at the
Conversion Rate then in effect, and the person(s) or entity(ies) entitled to
receive the Common Shares issuable upon conversion shall be treated for all
purposes as the record holder or holders of such Common Shares as of the close
of business on such date.
Each holder of the Series B Preferred Shares shall have the right, at the
option of such holder, to convert each Series B Preferred Share, in whole, but
not in part, into fully paid and nonassessable Common Shares, at the Conversion
Rate, at any time from and after the occurrence of any one of the following
events: (i) the second anniversary of the Issue Date; (ii) the reduction to less
than $4.0 billion of the Company's total equity market capitalization for a
period of 20 consecutive trading days (calculated as (A) the Average Share Price
on the calculation date multiplied by the total number of Common Shares
outstanding, plus (B) for each series or class of preferred shares of beneficial
interest for which there is an established trading market, the Average Preferred
Share Price multiplied by the total number of all preferred shares of beneficial
interest of such series or class, plus (C) the Initial Investment for the Series
B Preferred Shares, plus (D) the price paid for all outstanding shares of any
other series of preferred shares of beneficial interest for which there is no
established trading market, plus (E) the Average Share Price on the calculation
date multiplied by twice the actual number of Common Shares issuable and
outstanding upon an exchange of all Units in the Operating Partnership); (iii) a
Change in Control of the Company; (iv) the Company's failure to qualify as a
"real estate operating company" for purposes of ERISA; or (v) the occurrence of
an Event of Default.
Before any holder of shares of the Preferred Shares shall be entitled to
convert Series B Preferred Shares into Common Shares, such holder (i) shall
surrender the certificate or certificates therefor, duly endorsed to the Company
or in blank, at the offices of the Transfer Agent, or such other place or
places, if any, as the Board of Trust Managers shall designate, (ii) shall give
written notice to the Company of such holder's election to convert the Series B
Preferred Shares and (iii) shall state in writing the name or names in which
such holder wishes the Common Shares to be issued and registered. The Series B
Preferred Shares shall be deemed to have been converted as of the close of
business on the date of the surrender of such shares for conversion as provided
above, and the person(s) or entity(ies) entitled to receive the Common Shares
issuable upon conversion shall be treated for all purposes as the record holder
or holders of such Common Shares as of the close of business on such date, and
such conversion shall be at the Conversion Rate in effect at such time and on
such date on which such shares have been surrendered and such notice received by
the Company.
Common Shares issued upon conversion of the Series B Preferred Shares will
be issued pursuant to the registration statement of which this Prospectus
Supplement and the accompanying Prospectus are a part.
S-10
<PAGE> 10
Fractional Common Shares are not to be issued upon conversion but, in lieu
thereof, the Company will pay a cash adjustment based on the current market
price of the Common Shares on the trading day immediately prior to the
conversion date. See also the Statement of Designation attached as Annex A to
this Prospectus Supplement.
For a further discussion of the Common Shares to be received upon
conversion of Series B Preferred Shares, see "Description of Common Shares" in
the accompanying Prospectus.
OWNERSHIP LIMITS AND RESTRICTIONS ON TRANSFER
In order to maintain the Company's qualification as a REIT for federal
income tax purposes, ownership by any person of the Company's outstanding shares
of beneficial interest is restricted in the Company's Declaration of Trust. The
Board of Trust Managers of the Company may waive this limitation with regard to
any person that is not an individual, subject to certain conditions, and has
waived this limitation as to the Investors (as defined in "Plan of
Distribution") and certain of their affiliates in connection with their
ownership of the Series B Preferred Shares and the Common Shares issuable upon
conversion or redemption of the Series B Preferred Shares. For further
information regarding restrictions on ownership and transfer of the Series B
Preferred Shares, see "Description of Preferred Shares -- Restrictions on
Ownership" in the accompanying Prospectus.
USE OF PROCEEDS
The Company intends to use the net proceeds of the Offering, estimated at
$224.75 million after estimated expenses payable by the Company, to repay
approximately $170 million of the amounts outstanding under the Company's
short-term loan with BankBoston, N.A. (the "BankBoston Bridge Loan") and to make
an investment of approximately $55 million in five additional refrigerated
warehouses. Of the amounts to be repaid under the BankBoston Bridge Loan,
approximately $100 million was used to fund a portion of the purchase price of
Post Oak Central, approximately $30 million was used to fund the purchase price
of Ventana Country Inn, approximately $25 million was used to fund a portion of
the purchase price of Energy Centre and the remaining approximately $15 million
was used for working capital and other general corporate purposes.
The BankBoston Bridge Loan, which is unsecured and expires in July 1998,
bears interest at the Eurodollar rate plus 120 basis points.
As a result of the Company's Pending Investment in the Casino/Hotel
Properties, the Company is subject to certain gaming-related regulatory
requirements. The Company will not use any of the proceeds from this offering
(i) to construct gaming facilities, (ii) to acquire any direct or indirect
interest in gaming facilities, (iii) to finance the operation of any gaming
facilities, (iv) to retire or extend obligations incurred for one or more of
such purposes or (v) for any other gaming-related purpose (collectively,
"Gaming-Related Purposes"). In order to ensure that no proceeds from this
offering will be used for Gaming-Related Purposes, upon receipt, the proceeds
will be segregated and deposited in a separate Company bank account. All
disbursements from such bank account will be signed by the Vice President and
Treasurer or the Chief Financial Officer of the Company and will be available
for audit.
S-11
<PAGE> 11
MANAGEMENT
Set forth below is information with respect to the members of the Board of
Trust Managers, all of whom joined the Predecessor Corporation as directors in
1994 (except Melvin Zuckerman who became a director in 1996) and the executive
officers.
<TABLE>
<CAPTION>
NAME TERM EXPIRES AGE POSITION
---- ------------ --- --------
<S> <C> <C> <C>
Richard E. Rainwater 2000 54 Chairman of the Board of Trust Managers of
Crescent Equities
John C. Goff 1999 42 Vice Chairman of the Board of Trust Managers of
Crescent Equities
Gerald W. Haddock 2001 50 President, Chief Executive Officer and Sole
Director of CREE Ltd., and President, Chief
Executive Officer and Trust Manager of Crescent
Equities
Anthony M. Frank 2000 67 Trust Manager of Crescent Equities
Morton H. Meyerson 2001 60 Trust Manager of Crescent Equities
William F. Quinn 2000 50 Trust Manager of Crescent Equities
Paul E. Rowsey, III 1999 43 Trust Manager of Crescent Equities
Melvin Zuckerman 1999 70 Trust Manager of Crescent Equities
Dallas E. Lucas N/A 36 Senior Vice President, Chief Financial and
Accounting Officer of Crescent Equities and
CREE Ltd.
David M. Dean N/A 37 Senior Vice President, Law and Secretary of
Crescent Equities and CREE Ltd.
James M. Eidson, Jr. N/A 44 Senior Vice President, Acquisitions of CREE Ltd.
Bruce A. Picker N/A 34 Vice President and Treasurer of CREE Ltd. and
Crescent Equities
William D. Miller N/A 39 Vice President, Administration of Crescent
Equities and Senior Vice President,
Administration of CREE Ltd.
Joseph D. Ambrose III N/A 47 Vice President, Administration of CREE Ltd.
Jerry R. Crenshaw, Jr. N/A 34 Vice President and Controller of CREE Ltd.
Barry L. Gruebbel N/A 43 Vice President, Property Management of CREE Ltd.
Howard W. Lovett N/A 41 Vice President, Corporate Leasing of CREE Ltd.
John L. Zogg, Jr. N/A 34 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 was structured to
preserve the existing business, purpose, tax status, management, capitalization
and assets, liabilities and net worth (other than due to the costs of the
transaction) of the Predecessor Corporation, and the economic interests and
voting rights of the stockholders of the Predecessor Corporation (who became the
shareholders of Crescent Equities as a result of the merger).
The direct and indirect subsidiaries of Crescent Equities include the
Operating Partnership; CREE Ltd.; seven single purpose limited partnerships in
which the Operating Partnership owns substantially all of the economic interests
directly through its approximately 99% limited partner interest in such seven
limited partnerships, with the remaining interests owned indirectly by the
Company through seven separate corporations, each of which is a wholly owned
subsidiary of CREE Ltd. and is the approximately 1% general partner of one of
the seven limited partnerships. The Company conducts all of its business through
the Operating Partnership and its other subsidiaries. The Company also has an
economic interest in the development activities of the Residential Development
Corporations. The Company owns the real estate mortgages and non-voting common
stock representing interests ranging from approximately 40% to 95% in the
Residential Development Corporations. In addition, the Company owns an indirect
38% interest in each of two corporations that currently own and operate
approximately 89 refrigerated warehouses with an aggregate of
S-12
<PAGE> 12
approximately 424.5 million cubic feet. The Company also has a 42.5% partnership
interest in a partnership whose primary holdings consist of a 364-room executive
conference center and general partner interests ranging from one to 50% in
additional office, retail, multi-family and industrial properties.
The following table sets forth, by subsidiary, the Properties owned by such
subsidiary:
<TABLE>
<S> <C>
Operating Partnership: The Addison, Addison Tower, The Amberton, AT&T Building,
Austin Centre, Bank One Center(1), Bank One Tower, Canyon
Ranch-Tucson, Cedar Springs Plaza, Central Park Plaza,
Chancellor Park(2), Concourse Office Park, Datran Center,
Denver Marriott City Center, Energy Centre, Fountain Place,
Four Seasons-Houston, Frost Bank Plaza, Greenway I, Greenway
IA, Greenway II, Houston Center Office Properties, MCI
Tower, The Meridian, Miami Center, Omni Austin Hotel, One
Preston Park, Palisades Central I, Palisades Central II, The
Park Shops at Houston Center, Post Oak Central, Reverchon
Plaza, Sonoma Mission Inn & Spa, Spectrum Center(3),
Stemmons Place, Three Westlake Park(4), Trammell Crow
Center(5), U.S. Home Building, Washington Harbour, The
Woodlands Office Properties(6), The Woodlands Retail
Properties(6), Valley Centre, Ventana Country Inn, Walnut
Green, 44 Cook, 55 Madison, 160 Spear Street, 301 Congress
Avenue(7), 1615 Poydras, 3333 Lee Parkway, 5050 Quorum and
6225 North 24th Street
Crescent Real Estate The Aberdeen, The Avallon, Caltex House, The Citadel,
Funding I, L.P. ("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(8)
Funding III, IV and
V, L.P. ("Funding III,
IV and V"):
Crescent Real Estate Canyon Ranch-Lenox
Funding VI, L.P.
("Funding VI"):
Crescent Real Estate Behavioral Healthcare Facilities
Funding VII, L.P.
("Funding VII"):
</TABLE>
- ---------------
(1) The Company owns a 50% interest in the limited partnership that owns Bank
One Center.
(2) The Company owns Chancellor Park through its ownership of the mortgage note
secured by the building and through its direct and indirect interests in the
partnership which owns the building.
(3) The Company owns the principal economic interest in Spectrum Center through
an interest in Spectrum Mortgage Associates, L.P., which owns both a
mortgage note secured by the building and the ground lessor's interest in
the land underlying the building.
(4) The Company owns the principal economic interest in Three Westlake Park
through its ownership of a mortgage note secured by the building.
(5) The Company owns the principal economic interest in Trammell Crow Center
through its ownership of fee simple title to the Property (subject to a
ground lease and a leasehold estate regarding the building) and two mortgage
notes encumbering the leasehold interests in the land and building.
(6) The Company owns a 75% limited partner interest and an indirect
approximately 10% general partner interest in the partnerships that own The
Woodlands Office and Retail Properties.
(7) The Company owns a 49% limited partner interest and Crescent/301, L.L.C., a
wholly owned subsidiary of CREE Ltd. and the Company, owns a 1% general
partner interest in 301 Congress Avenue, L.P., the partnership that owns 301
Congress Avenue.
(8) Funding III owns the Greenway Plaza Portfolio, except for the central heated
and chilled water plant building and Coastal Tower office building, both
located within Greenway Plaza, which are owned by Funding IV and Funding V,
respectively.
S-13
<PAGE> 13
FEDERAL INCOME TAX CONSIDERATIONS
INTRODUCTION
The following is a summary of the material federal income tax
considerations associated with an investment in the Series B Preferred 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, 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
Series B Preferred 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 RIGHTS HOLDER 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 SERIES B PREFERRED SHARES IN AN ENTITY ELECTING TO BE TAXED
AS A REAL ESTATE INVESTMENT TRUST, INCLUDING THE FEDERAL, STATE, LOCAL, FOREIGN
AND OTHER TAX CONSEQUENCES OF SUCH PURCHASE, OWNERSHIP, DISPOSITION AND ELECTION
AND OF POTENTIAL CHANGES IN APPLICABLE TAX LAWS.
TAXATION OF CRESCENT EQUITIES
Crescent Equities has made an election to be treated as a real estate
investment trust under Sections 856 through 860 of the Code (as used in this
section, a "REIT"), commencing with its taxable year ended December 31, 1994.
Crescent Equities believes that it was organized and has operated in such a
manner so as to qualify as a REIT, and Crescent Equities intends to continue to
operate in such a manner, but no assurance can be given that it has operated in
a manner so as to qualify, or will operate in a manner so as to continue to
qualify as a REIT.
The sections of the Code relating to qualification and operation as a REIT
are highly technical and complex. The following discussion sets forth the
material aspects of the Code sections that govern the federal income tax
treatment of a REIT and its shareholders. This summary is qualified in its
entirety by the applicable Code sections, rules and regulations promulgated
thereunder, and administrative and judicial interpretations thereof.
In the opinion of Tax Counsel, Crescent Equities qualified as a REIT under
the Code with respect to its taxable years ending on or before December 31,
1997, 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
S-14
<PAGE> 14
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 three-year period (which in certain cases may be extended
by the IRS) or, if earlier, (ii) when the REIT engages in construction on the
property (other than for completion of certain improvements) or for more than 90
days uses the property in a business conducted other than through an independent
contractor. "Net income from foreclosure property" means (a) the net gain from
disposition of foreclosure property which is held primarily for sale to
customers in the ordinary course of business or (b) other net income from
foreclosure property which would not satisfy the 75% gross income test
(discussed below). Property is not eligible for the election to be treated as
foreclosure property if the loan or lease with respect to which the default
occurs (or is imminent) was made, entered into or acquired by the REIT with an
intent to evict or foreclose or when the REIT knew or had reason to know that
default would occur. Fourth, if Crescent Equities has "net income derived from
prohibited transactions," such income will be subject to a 100% tax. The term
"prohibited transaction" generally includes a sale or other disposition of
property (other than foreclosure property) that is held primarily for sale to
customers in the ordinary course of business. Fifth, if Crescent Equities should
fail to satisfy the 75% gross income test or the 95% gross income test (as
discussed below), but has nonetheless maintained its qualification as a REIT
because certain other requirements have been met, it will be subject to a 100%
tax on the net income attributable to the greater of the amount by which
Crescent Equities fails the 75% or 95% test. Sixth, if, during each calendar
year, Crescent Equities fails to distribute at least the sum of (i) 85% of its
"real estate investment trust ordinary income" for such year, (ii) 95% of its
"real estate investment trust capital gain net income" for such year, and (iii)
any undistributed taxable income from prior periods, Crescent Equities will be
subject to a 4% excise tax on the excess of such required distribution over the
amounts actually distributed. Seventh, if Crescent Equities acquires any asset
from a C corporation (i.e., a corporation generally subject to full corporate
level tax) in a transaction in which the basis of the asset in Crescent
Equities' hands is determined by reference to the basis of the asset (or any
other property) in the hands of the corporation, and Crescent Equities
recognizes gain on the disposition of such asset during the 10-year period
beginning on the date on which such asset was acquired by Crescent Equities,
then, to the extent of such property's "built-in" gain (the excess of the fair
market value of such property at the time of acquisition by Crescent Equities
over the adjusted basis in such property at such time), such gain will be
subject to tax at the highest regular corporate rate applicable (as provided in
regulations promulgated by the United States Department of Treasury under the
Code ("Treasury Regulations") that have not yet been promulgated). (The results
described above with respect to the recognition of "built-in gain" assume that
Crescent Equities will make an election pursuant to IRS Notice 88-19.)
Requirements of Qualification. The Code defines a REIT as a corporation,
trust or association (1) which is managed by one or more trustees or directors;
(2) the beneficial ownership of which is evidenced by transferable shares, or by
transferable certificates of beneficial interest; (3) which would be taxable as
a domestic corporation, but for Sections 856 through 860 of the Code; (4) which
is neither a financial institution nor an insurance company subject to certain
provisions of the Code; (5) the beneficial ownership of which is held (without
reference to any rules of attribution) by 100 or more persons; (6) during the
last half of each taxable year not more than 50% in value of the outstanding
stock of which is owned, directly or indirectly, by five or fewer individuals
(as defined in the Code); and (7) which meets certain other tests, described
below,
S-15
<PAGE> 15
regarding certain distributions and the nature of its income and assets and
properly files an election to be treated as a REIT. The Code provides that
conditions (1) through (4), inclusive, must be met during the entire taxable
year and that condition (5) must be met during at least 335 days of a taxable
year of 12 months (or during a proportionate part of a taxable year of less than
12 months).
Crescent Equities issued sufficient Common Shares pursuant to the Initial
Offering to satisfy the requirements described in (5) and (6) above. While the
existence of the rights granted to the Limited Partners to exchange their Units
for Common Shares (the "Exchange Rights") may cause limited partners of the
Operating Partnership ("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." Moreover, the ownership of Common Shares generally is
limited under the Ownership Limit to no more than 8.0% of the outstanding Common
Shares. In addition, the Declaration of Trust provides for restrictions
regarding the ownership or transfer of Common Shares in order to assist Crescent
Equities in continuing to satisfy the share ownership requirements described in
(5) and (6) above. See "Description of Common Shares -- Ownership Limits and
Restrictions on Transfer."
If a REIT owns a "qualified REIT subsidiary," the Code provides that the
qualified REIT subsidiary is disregarded for federal income tax purposes, and
all assets, liabilities and items of income, deduction and credit of the
qualified REIT subsidiary are treated as assets, liabilities and such items of
the REIT itself. A qualified REIT subsidiary is a corporation all of the capital
stock of which has been owned by the REIT from the commencement of such
corporation's existence. CREE Ltd., CRE Management I Corp. ("Management I"), CRE
Management II Corp. ("Management II"), CRE Management III Corp. ("Management
III"), CRE Management IV Corp. ("Management IV"), CRE Management V Corp.
("Management V"), CRE Management VI Corp. ("Management VI"), CRE Management VII
Corp. ("Management VII"), CresCal Properties, Inc. and Crescent Commercial
Realty Corp. are qualified REIT subsidiaries, and thus all of the assets (i.e.,
the respective partnership interests in the Operating Partnership, Funding I,
Funding II, Funding III, Funding IV, Funding V, Funding VI, Funding VII, CresCal
Properties, L.P. and Crescent Commercial Realty Holdings, L.P.), liabilities and
items of income, deduction and credit of CREE Ltd., Management I, Management II,
Management III, Management IV, Management V, Management VI, Management VII,
CresCal Properties, Inc. and Crescent Commercial Realty Corp. are treated as
assets and liabilities and items of income, deduction and credit of Crescent
Equities. Unless otherwise required, all references to Crescent Equities in this
"Federal Income Tax Considerations" section refer to Crescent Equities and its
qualified REIT subsidiaries.
In the case of a REIT which is a partner in a partnership, Treasury
Regulations provide that the REIT will be deemed to own its proportionate share
of the assets of the partnership and will be deemed to be entitled to the income
of the partnership attributable to such share. In addition, the assets and gross
income (as defined in the Code) of the partnership attributed to the REIT shall
retain the same character as in the hands of the partnership for purposes of
Section 856 of the Code, including satisfying the gross income tests and the
assets tests described below. Thus, Crescent Equities' proportionate share of
the assets, liabilities and items of income of the Operating Partnership and its
subsidiary partnerships are treated as assets, liabilities and items of income
of Crescent Equities for purposes of applying the requirements described herein.
Income Tests. In order for Crescent Equities to achieve and maintain its
qualification as a REIT, there are currently two 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
S-16
<PAGE> 16
property or purchases or leases of real property. Second, at least 95% of
Crescent Equities' gross income (excluding gross income from prohibited
transactions) for each taxable year must be derived from income qualifying under
the 75% test and from dividends, other types of interest and gain from the sale
or disposition of stock or securities, or from any combination of the foregoing.
In addition, for each taxable year before 1998, 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 have represented 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, 1996 and 1997 and expects to satisfy
the two current tests for subsequent taxable years.
The bulk of the Operating Partnership's income is currently derived from
rents with respect to the Office Properties, the Behavioral Healthcare
Facilities, the Hotel Properties and the Retail Properties. Rents received by
Crescent Equities will qualify as "rents from real property" in satisfying the
gross income requirements for a REIT described above only if several conditions
are met. First, the amount of rent must not be based in whole or in part on the
income or profits of any person. An amount received or accrued generally will
not be excluded from the term "rents from real property" solely by reason of
being based on a fixed percentage or percentages of receipts or sales. Second,
the Code provides that rents received from a tenant will not qualify as "rents
from real property" if the REIT, or an owner of 10% or more of the REIT,
directly or constructively, owns 10% or more of such tenant (a "Related Party
Tenant"). Third, if rent attributable to personal property leased in connection
with a lease of real property is greater than 15% of the total rent received
under the lease, then the portion of rent attributable to such personal property
will not qualify as "rents from real property." Finally, for rents to qualify as
"rents from real property," a REIT generally must not operate or manage the
property or furnish or render services to the tenants of such property, other
than through an independent contractor from whom the REIT derives no revenue,
except that a REIT may directly perform services which are "usually or
customarily rendered" in connection with the rental of space for occupancy,
other than services which are considered to be rendered to the occupant of the
property. However, a REIT is currently permitted to earn up to one percent of
its gross income from tenants, determined on a property-by-property basis, by
furnishing services that are noncustomary or provided directly to the tenants,
without causing the rental income to fail to qualify as rents from real
property.
Crescent Equities, based in part upon opinions of Tax Counsel as to whether
various tenants, including CBHS and the lessees of the Hotel Properties,
constitute Related Party Tenants, believes that the income it received in 1994,
1995, 1996 and 1997 and will receive in subsequent taxable years from (i)
charging rent for any property that is based in whole or in part on the income
or profits of any person (except by reason of being based on a percentage or
percentages of receipts or sales, as described above); (ii) charging rent for
personal property in an amount greater than 15% of the total rent received under
the applicable lease; (iii) directly performing services considered to be
rendered to the occupant of property or which are not usually or customarily
furnished or rendered in connection with the rental of real property; or (iv)
entering into any lease with a Related Party Tenant, will not cause Crescent
Equities to fail to meet the gross income tests. Opinions of counsel are not
binding upon the IRS or any court, and there can be no assurance that the IRS
will not assert a contrary position successfully.
The Operating Partnership will also receive fixed and contingent interest
on the Residential Development Property Mortgages. Interest on mortgages secured
by real property satisfies the 75% and 95% gross income tests only if it does
not include any amount the determination of which depends in whole or in part on
the 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
S-17
<PAGE> 17
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
subject to a 100% tax.
In connection with the 1997 distribution by Crescent Equities of the common
stock of Crescent Operating, Inc., Crescent Equities was required to recognize
gain equal to the excess, if any, of the fair market value of the assets
distributed over the basis of Crescent Equities in them. In the opinion of Tax
Counsel, such gain constituted gain on the sale of stock or securities for
purposes of the gross income tests. Opinions of counsel are not binding upon the
IRS or any court, and there can be no assurance that the IRS will not assert a
contrary position successfully.
In applying the 95% and 75% gross income tests to Crescent Equities, it is
necessary to consider the form in which certain of its assets are held, whether
that form will be respected for federal income tax purposes, and whether, in the
future, such form may change into a new form with different tax attributes (for
example, as a result of a foreclosure on debt held by the Operating
Partnership). For example, the Residential Development Properties are primarily
held for sale to customers in the ordinary course of business, and the income
resulting from such sales, if directly attributed to Crescent Equities, would
not qualify under the 75% and 95% gross income tests. In addition, such income
would be considered "net income from prohibited transactions" and thus would be
subject to a 100% tax. The income from such sales, however, will be earned by
the Residential Development Corporations rather than by the Operating
Partnership and will be paid to the Operating Partnership in the form of
interest and principal payments on the Residential Development Property
Mortgages or distributions with respect to the stock in the Residential
Development Corporations held by the Operating Partnership. In similar fashion,
the income earned by the Hotel Properties, if directly attributed to Crescent
Equities, would not qualify under the 75% and 95% gross income tests because it
would not constitute "rents from real property." Such income is, however, earned
by the lessees of these Hotel Properties and what the Operating Partnership
receives from the lessees of these Hotel Properties is rent. Comparable issues
are raised by the Operating Partnership's acquisition of subordinated debt
secured by a Florida hotel and by the acquisition of an interest in the
partnership which owns the hotel by Crescent Development Management Corporation
("CDMC"), one of the Residential Development Corporations. If such debt were
recharacterized as equity, or if the ownership of the partnership were
attributed from CDMC to the Operating Partnership, the Operating Partnership
would be treated as receiving income from hotel operations rather than interest
income on the debt or dividend income from CDMC. Furthermore, if Crescent
Operating, Inc. were treated for federal income tax purposes as not separate
from or an agent of either Crescent Equities or the Operating Partnership, or if
Crescent Equities and Crescent Operating, Inc. were treated as a "stapled
entity," the income, assets and activities of Crescent Operating, Inc. would be
considered to be the income, assets and activities of Crescent Equities, with
the result that Crescent Equities would fail to meet the 95% and 75% gross
income tests or the asset tests discussed below. A similar consequence might
follow if the loan of approximately $35.9 million from the Operating Partnership
to Crescent Operating, Inc. does not constitute debt for federal income tax
purposes.
Tax Counsel is of the opinion that (i) the Residential Development
Properties or any interest therein will be treated as owned by the Residential
Development Corporations, (ii) amounts derived by the Operating Partnership from
the Residential Development Corporations under the terms of the Residential
Development Property Mortgages will qualify as interest or principal, as the
case may be, paid on mortgages on real property for purposes of the 75% and 95%
gross income tests, (iii) amounts derived by the Operating Partnership with
respect to the stock of the Residential Development Corporations will be treated
as distributions on stock (i.e., as dividends, a return of capital, or capital
gain, depending upon the circumstances) for purposes of the 75% and 95% gross
income tests, (iv) the leases of the Hotel Properties will be treated as leases
for federal income tax purposes, and the rent payable thereunder will qualify as
"rents from real property," (v) the subordinated debt secured by the Florida
hotel will be treated as debt for federal income tax purposes, the income
payable thereunder will qualify as interest, and CDMC's ownership of the
partnership interest in the partnership which owns the hotel will not be
attributed to the Operating Partnership, (vi) Crescent Operating, Inc. will be
treated for federal income tax purposes as a corporate entity separate from and
not an agent of either Crescent
S-18
<PAGE> 18
Equities or the Operating Partnership, and Crescent Operating, Inc. and Crescent
Equities will not be treated as a stapled entity for federal income tax
purposes; and (vii) the loan of approximately $35.9 million from the Operating
Partnership to Crescent Operating, Inc. will constitute debt for federal income
tax purposes. Tax Counsel has provided opinions similar to those provided with
respect to the Operating Partnership's investment in the Residential Development
Corporations with respect to its investments in certain other entities through
non-voting securities and secured debt. Investors should be aware that there are
no controlling Treasury Regulations, published rulings, or judicial decisions
involving transactions with terms substantially the same as those with respect
to the Residential Development Corporations, the leases of the Hotel Properties
and the relationship among Crescent Equities, the Operating Partnership and
Crescent Operating, Inc. Therefore, the opinions of Tax Counsel with respect to
these matters are based upon all of the facts and circumstances and upon rulings
and judicial decisions involving situations that are considered to be analogous.
Opinions of counsel are not binding upon the IRS or any court, and there can be
no assurance that the IRS will not assert successfully a contrary position. If
one or more of the leases of the Hotel Properties is not a true lease, part or
all of the payments that the Operating Partnership receives from the respective
lessee may not satisfy the various requirements for qualification as "rents from
real property," or the Operating Partnership might be considered to operate the
Hotel Properties directly. In that case, Crescent Equities likely would not be
able to satisfy either the 75% or 95% gross income tests and, as a result,
likely would lose its REIT status. Similarly, if the IRS were to challenge
successfully the arrangements with the Residential Development Corporations or
Crescent Operating, Inc., Crescent Equities' qualification as a REIT could be
jeopardized.
If any of the Residential Development Properties were to be acquired by the
Operating Partnership as a result of foreclosure on any of the Residential
Development Property Mortgages, or if any of the Hotel Properties were to be
operated directly by the Operating Partnership or a subsidiary partnership as a
result of a default by the lessee under the lease, such property would
constitute foreclosure property for three years following its acquisition (or
for up to an additional three years if an extension is granted by the IRS),
provided that (i) the Operating Partnership or its subsidiary partnership
conducts sales or operations through an independent contractor; (ii) the
Operating Partnership or its subsidiary partnership does not undertake any
construction on the foreclosed property other than completion of improvements
which were more than 10% complete before default became imminent; and (iii)
foreclosure was not regarded as foreseeable at the time Crescent Equities
acquired the Residential Development Property Mortgages or leased the Hotel
Properties. For so long as any of these properties constitutes foreclosure
property, the income from such sales would be subject to tax at the maximum
corporate rates and would qualify under the 75% and 95% gross income tests.
However, if any of these properties does not constitute foreclosure property at
any time in the future, income earned from the disposition or operation of such
property will not qualify under the 75% and 95% gross income tests.
With regard to the sale of Common Shares to an affiliate of Union Bank of
Switzerland as well as the sale of Common Shares to Merrill Lynch International,
it is possible that Crescent Equities may receive certain payments in Common
Shares, depending on the market price of the Common Shares upon settlement of
the forward share purchase agreements. In the opinion of Tax Counsel, such
payments will not constitute gross income and therefore will not be taken into
account in the application of gross income tests.
Crescent Equities anticipates that it will have certain income which will
not satisfy the 75% or the 95% gross income test. For example, income from
dividends on the stock of the Residential Development Corporations and any gain
recognized upon the distribution of the common stock of Crescent Operating, Inc.
will not satisfy the 75% gross income test. Furthermore, the amount of gain
Crescent Equities recognized upon this distribution depended upon the fair
market value of the common stock of Crescent Operating, Inc. at the time of the
distribution. Prior to the distribution, the Board of Trust Managers of Crescent
Equities determined that the value of this stock was $.99 per share, but there
can be no assurance that the IRS will agree with this determination in light of
various factors including subsequent trading prices. It is also possible that
certain income resulting from the use of creative financing or acquisition
techniques would not satisfy the 75% or 95% 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% or 95% gross income tests.
S-19
<PAGE> 19
If Crescent Equities fails to satisfy one or both of the 75% or 95% gross
income tests for any taxable year, it may nevertheless qualify as a REIT for
such year if it is entitled to relief under certain provisions of the Code.
These relief provisions generally will be available if Crescent Equities'
failure to meet such tests is due to reasonable cause and not to willful
neglect, Crescent Equities attaches a schedule of the sources of its income to
its tax return, and any incorrect information on the schedule is not due to
fraud with intent to evade tax. It is not possible, however, to state whether in
all circumstances Crescent Equities would be entitled to the benefit of these
relief provisions. As discussed above, even if these relief provisions apply, a
tax equal to approximately 100% of the corresponding net income would be imposed
with respect to the excess of 75% or 95% of Crescent Equities' gross income over
Crescent Equities' qualifying income in the relevant category, whichever is
greater.
Asset Tests. Crescent Equities, at the close of each quarter of its taxable
year, must also satisfy three tests relating to the nature of its assets. First,
at least 75% of the value of Crescent Equities' total assets must be represented
by real estate assets (including (i) its allocable share of real estate assets
held by the Operating Partnership, any partnerships in which the Operating
Partnership owns an interest, or qualified REIT subsidiaries of Crescent
Equities and (ii) stock or debt instruments held for not more than one year
purchased with the proceeds of a stock offering or long-term (at least five
years) debt offering of Crescent Equities), cash, cash items and government
securities. Second, not more than 25% of Crescent Equities' total assets may be
represented by securities other than those in the 75% asset class. Third, of the
investments included in the 25% asset class, the value of any one issuer's
securities owned by Crescent Equities may not exceed 5% of the value of Crescent
Equities' total assets, and Crescent Equities may not own more than 10% of any
one issuer's outstanding voting securities. The 25% and 5% tests generally must
be met for any quarter in which Crescent Equities acquires securities of an
issuer. Thus, this requirement must be satisfied not only on the date Crescent
Equities first acquires corporate securities, but also each time Crescent
Equities increases its ownership of corporate securities (including as a result
of increasing its interest in the Operating Partnership either with the proceeds
of the Offering or by acquiring Units from Limited Partners upon the exercise of
their Exchange Rights).
The Operating Partnership owns 100% of the non-voting stock of each
Residential Development Corporation. In addition, the Operating Partnership owns
the Residential Development Property Mortgages. As stated above, in the opinion
of Tax Counsel each of these mortgages will constitute debt for federal income
tax purposes and therefore will be treated as a real estate asset; however, the
IRS could assert that such mortgages should be treated as equity interests in
their respective issuers, which would not qualify as real estate assets. By
virtue of its ownership of partnership interests in the Operating Partnership,
Crescent Equities will be considered to own its pro rata share of these assets.
Neither Crescent Equities nor the Operating Partnership, however, will directly
own more than 10% of the voting securities of any Residential Development
Corporation at the end of any quarter of Crescent Equities' taxable year, and,
in the opinion of Tax Counsel, Crescent Equities will not be considered to own
any of such voting securities. In addition, Crescent Equities and its senior
management believe that Crescent Equities' pro rata shares of the value of the
securities of each Residential Development Corporation do not separately exceed
5% of the total value of Crescent Equities' total assets. This belief is based
in part upon its analysis of the estimated values of the various securities
owned by the Operating Partnership relative to the estimated value of the total
assets owned by the Operating Partnership. No independent appraisals will be
obtained to support this conclusion, and Tax Counsel, in rendering its opinion
as to the qualification of Crescent Equities as a REIT, is relying on the
conclusions of Crescent Equities and its senior management as to the value of
the various securities and other assets. There can be no assurance, however,
that the IRS might not contend that the values of the various securities held by
Crescent Equities through the Operating Partnership separately exceed the 5%
value limitation or, in the aggregate, exceed the 25% value limitation or that
the voting securities of the Residential Development Corporations should be
considered to be owned by Crescent Equities. Finally, if the Operating
Partnership were treated for tax purposes as a corporation rather than as a
partnership, Crescent Equities would violate the 10% of voting securities and 5%
of value limitations, and the treatment of any of the Operating Partnership's
subsidiary partnerships as a corporation rather than as a partnership could also
violate one or the other, or both, of these limitations. In the opinion of Tax
Counsel, for federal income tax purposes the Operating Partnership and all the
subsidiary partnerships will be treated as partnerships and not as either
S-20
<PAGE> 20
associations taxable as corporations or publicly traded partnerships. See
"-- Tax Aspects of the Operating Partnership and the Subsidiary Partnerships"
below.
As noted above, the 5% and 25% value requirements must be satisfied not
only on the date Crescent Equities first acquires corporate securities, but also
each time Crescent Equities increases its ownership of corporate securities
(including as a result of increasing its interest in the Operating Partnership
either with the proceeds of the Offering or by acquiring Units from Limited
Partners upon the exercise of their Exchange Rights). Although Crescent Equities
plans to take steps to ensure that it satisfies the 5% and 25% value tests for
any quarter with respect to which retesting is to occur, there can be no
assurance that such steps (i) will always be successful; (ii) will not require a
reduction in Crescent Equities' overall interest in the various corporations; or
(iii) will not restrict the ability of the Residential Development Corporations
to increase the sizes of their respective businesses, unless the value of the
assets of Crescent Equities is increasing at a commensurate rate.
Annual Distribution Requirements. In order to qualify as a REIT, Crescent
Equities is required to distribute dividends (other than capital gain dividends)
to its shareholders in an amount at least equal to (A) the sum of (i) 95% of the
"real estate investment trust taxable income" of Crescent Equities (computed
without regard to the dividends paid deduction and Crescent Equities' net
capital gain) and (ii) 95% of the net income (after tax), if any, from
foreclosure property, minus (B) certain excess noncash income. Such
distributions must be paid in the taxable year to which they relate, or in the
following taxable year if declared before Crescent Equities timely files its tax
return for such year, and if paid on or before the date of the first regular
dividend payment after such declaration. To the extent that Crescent Equities
does not distribute all of its net capital gain or distributes at least 95%, but
less than 100%, of its "real estate investment trust taxable income," as
adjusted, it will be subject to tax thereon at regular capital gains and
ordinary corporate tax rates. Furthermore, if Crescent Equities should fail to
distribute, during each calendar year, at least the sum of (i) 85% of its "real
estate investment trust ordinary income" for such year; (ii) 95% of its "real
estate investment trust capital gain income" for such year; and (iii) any
undistributed taxable income from prior periods, Crescent Equities would be
subject to a 4% excise tax on the excess of such required distribution over the
amounts actually distributed.
Crescent Equities believes that it has made and intends to make timely
distributions sufficient to satisfy all annual distribution requirements. In
this regard, the limited partnership agreement of the Operating Partnership (the
"Operating Partnership Agreement") authorizes CREE Ltd., as general partner, to
take such steps as may be necessary to cause the Operating Partnership to
distribute to its partners an amount sufficient to permit Crescent Equities to
meet these distribution requirements. It is possible, however, that, from time
to time, Crescent Equities may experience timing differences between (i) the
actual receipt of income and actual payment of deductible expenses and (ii) the
inclusion of such income and deduction of such expenses in arriving at its "real
estate investment trust taxable income." Issues may also arise as to whether
certain items should be included in income. For example, Tax Counsel has opined
that the Operating Partnership should include in income only its share of the
interest income actually paid on the two mortgage notes secured by Spectrum
Center and Three Westlake Park, respectively, and the two mortgage notes secured
by Trammell Crow Center, all of which were acquired at a substantial discount,
rather than its share of the amount of interest accruing pursuant to the terms
of these investments, but opinions of counsel are not binding on the IRS or the
courts. In this regard, the IRS has taken a contrary view in a recent technical
advice memorandum concerning the accrual of original issue discount. 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.
S-21
<PAGE> 21
Tax Counsel has opined that the four mortgage notes secured by Spectrum Center,
Three Westlake Park and Trammell Crow Center, were not modified in the hands of
the Operating Partnership. Based on the foregoing, Crescent Equities may have
less cash available for distribution in a particular year than is necessary to
meet its annual 95% distribution requirement or to avoid tax with respect to
capital gain or the excise tax imposed on certain undistributed income for such
year. To meet the 95% distribution requirement necessary to qualify as a REIT or
to avoid tax with respect to capital gain or the excise tax imposed on certain
undistributed income, Crescent Equities may find it appropriate to arrange for
borrowings through the Operating Partnership or to pay distributions in the form
of taxable share dividends.
Under certain circumstances, Crescent Equities may be able to rectify a
failure to meet the distribution requirement for a year by paying "deficiency
dividends" to stockholders in a later year, which may be included in Crescent
Equities' deduction for dividends paid for the earlier year. Thus, Crescent
Equities may be able to avoid being taxed on amounts distributed as deficiency
dividends; however, Crescent Equities will be required to pay interest based
upon the amount of any deduction taken for deficiency dividends.
Ownership Information. Pursuant to applicable Treasury Regulations, in
order to be treated as a REIT, Crescent Equities must maintain certain records
and request certain information from its shareholders designed to disclose the
actual ownership of its Equity Shares (as defined in the accompanying
Prospectus). Crescent Equities believes that it has complied and intends to
continue to comply with such requirements.
Failure to Qualify. If Crescent Equities fails to qualify as a REIT in any
taxable year and the relief provisions do not apply, Crescent Equities will be
subject to tax (including any applicable alternative minimum tax) on its taxable
income at regular corporate rates. Distributions to shareholders in any year in
which Crescent Equities fails to qualify as a REIT will not be deductible by
Crescent Equities; nor will they be required to be made. If Crescent Equities
fails to qualify as a REIT, then, to the extent of Crescent Equities' current
and accumulated earnings and profits, all distributions to shareholders will be
taxable as ordinary income and, subject to certain limitations of the Code,
corporate distributees may be eligible for the dividends received deduction.
Unless entitled to relief under specific statutory provisions, Crescent Equities
will also be disqualified from electing to be treated as a REIT for the four
taxable years following the year during which it ceased to qualify as a REIT. It
is not possible to state whether in all circumstances Crescent Equities would be
entitled to such statutory relief.
Pending Legislation. On February 2, 1998, President Clinton released a
proposed budget for fiscal year 1999. The budget proposal contained a variety of
proposed income tax changes, four of which pertain to REITs. First, a regular
corporation with a fair market value of more than $5,000,000 which elects REIT
status or merges into a REIT would be treated as if it had liquidated and
distributed all its assets to its shareholders, and its shareholders had then
contributed the assets to the electing or existing REIT. This deemed liquidation
would cause the regular corporation to be taxed as if it had sold its assets for
fair market value and would cause its shareholders to be taxed as if they had
sold their stock for fair market value. The proposal would be effective for
elections that are first effective for a taxable year beginning after January 1,
1999, and for mergers after December 31, 1998. Second, five REITs were allowed
to continue as stapled entities with regular corporations (i.e., the stock of
the REIT is traded together with the stock of the regular corporation) despite
the general prohibition of this structure under Section 269A of the Code,
enacted in 1984. For any properties acquired on or after the first date of
congressional committee action with respect to the budget proposal (the
"Committee Action Date"), where the stapled regular corporation undertakes
activities or services relating to the properties, the REITs would be made
subject to Section 269A. Third, under current law, REITs may not own more than
10% of the voting stock of a regular corporation. Under the proposal, they also
would not be permitted to own more than 10% of the value of all classes of stock
of a corporation. This prohibition would apply to stock acquired on or after the
Committee Action Date. REITs would continue to be allowed to own corporations
whose stock they owned prior to the Committee Action Date, but this
grandfathered status would terminate if, after the Committee Action Date, the
corporation engaged in a new trade or business or acquired substantial new
assets or the REIT acquired additional stock in a corporation. Fourth, a new
ownership restriction would be imposed on REITs, prohibiting any one person from
owning more than 50% of the total combined voting power of all voting stock or
more than 50% of the total value of shares of all classes of stock of the REIT.
Current law already contains ownership restrictions applicable to individuals;
this new limitation
S-22
<PAGE> 22
would affect owners other than individuals. It would be effective for entities
electing REIT status for taxable years beginning on or after the Committee
Action Date.
The Chairmen of the House Ways and Means Committee and the Senate Finance
Committee have introduced legislation to enact the proposal concerning stapled
REITs effective March 26, 1998, and such legislation (but not any of the other
proposals) is currently part of the IRS restructuring legislation that was
passed by the Senate on May 7, 1998. It is not clear whether any of the other
proposals will be introduced or enacted and, if they are, their effective dates.
Additional proposals affecting REITs may be made by the President or his
administration or by members of Congress. It is impossible to predict the nature
of those proposals, whether they would be enacted, and their effect on Crescent
Equities. There can be no assurance, however, that changes in legislation would
not have a material adverse effect on Crescent Equities.
TAXATION OF SERIES B PREFERRED SHARES
Distributions to Holders of Series B Preferred Shares. Distributions with
respect to the Series B Preferred Shares will be taxable as described below in
"-- Taxation of Taxable Domestic Shareholders," "-- Taxation of Tax-Exempt
Shareholders" and "-- Taxation of Foreign Shareholders."
Redemption or Conversion of Series B Preferred Shares to Common Shares.
Assuming that Series B Preferred Shares will not be redeemed or converted at a
time when there are distributions in arrears, in general, no gain or loss will
be recognized for federal income tax purposes upon the redemption or conversion
of the Series B Preferred Shares at the option of the holder solely into Common
Shares. The basis that a holder will have for tax purposes in the Common Shares
received will be equal to the adjusted basis the holder had in the Series B
Preferred Shares so redeemed or converted and, provided that the Series B
Preferred Shares were held as a capital asset, the holding period for the Common
Shares received will include the holding period for the Series B Preferred
Shares redeemed or converted. A holder, however, will generally recognize gain
or loss on the receipt of cash in lieu of a fractional Common Share in an amount
equal to the difference between the amount of cash received and the holder's
adjusted basis in such fractional share.
If a redemption or conversion occurs when there is a dividend arrearage on
the Series B Preferred Shares and the fair market value of the Common Shares
exceeds the issue price of the Series B Preferred Shares, a portion of the
Common Shares received might be treated as a dividend distribution taxable as
ordinary income.
Adjustments to Conversion Price. Under Section 305 of the Code, holders of
preferred stock may be deemed to have received a constructive distribution of
stock that is taxable as a dividend where the conversion ration is adjusted to
reflect a cash or property distribution with respect to the common stock into
which it is convertible. An adjustment to the conversion price made pursuant to
a bona fide, reasonable adjustment formula that has the effect of preventing
dilution of the interest of the holders, however, will generally not be
considered to result in a constructive distribution of stock. Certain of the
possible adjustments provided in the Series B Preferred Shares may not qualify
as being pursuant to a bona fide, reasonable adjustment formula. If a
nonqualifying adjustment were made, the holders of Series B Preferred Shares
might be deemed to have received a taxable stock dividend.
TAXATION OF TAXABLE DOMESTIC SHAREHOLDERS
For purposes of this summary, a "U.S. Shareholder" means a beneficial owner
of Common Shares or Series B Preferred Shares who or that is for U.S. federal
income tax purposes (i) a citizen or resident of the United States, (ii) a
corporation created or organized in or under the laws of the United States or
any state or political subdivision thereof, (iii) an estate the income of which
is subject to United States federal income taxation regardless of its source,
(iv) a trust if a court within the United States is able to exercise primary
jurisdiction over administration of the trust and one or more U.S. persons have
authority to control all substantial decisions of the trust, or (v) a
partnership to the extent the interest therein is owned by any of the persons
described in clauses (i), (ii), (iii), or (iv) above. As used herein, the term
"Non-U.S. Shareholder" means a beneficial owner of Common Shares or Series B
Preferred Shares that is not a U.S. Shareholder.
S-23
<PAGE> 23
Any distribution declared by Crescent Equities in October, November or
December of any year payable to a shareholder of record on a specified date in
any such month shall be treated as both paid by Crescent Equities and received
by the shareholder on December 31 of such year, provided that the distribution
is actually paid by Crescent Equities during January of the following calendar
year. As long as Crescent Equities qualifies as a REIT, distributions made to
Crescent Equities' taxable U.S. Shareholders out of Crescent Equities' current
or accumulated earnings and profits (and not designated as capital gain
dividends) will be taken into account by such U.S. Shareholders as ordinary
income and, for corporate U.S. Shareholders, will not be eligible for the
dividends received deduction. Distributions that are properly designated as
capital gain dividends will be taxed as long-term capital gains (to the extent
they do not exceed Crescent Equities' actual net capital gain for the taxable
year) without regard to the period for which the U.S. Shareholder has held its
Common Shares or Series B Preferred Shares. However, corporate U.S. Shareholders
may be required to treat up to 20% of certain capital gain dividends as ordinary
income. In addition, Crescent Equities may elect to retain and pay income tax on
its net long-term capital gains. If Crescent Equities so elects, each U.S.
Shareholder will take into income the U.S. Shareholder's share of the retained
capital gain as long-term capital gain and will receive a credit or refund for
that U.S. Shareholder's share of the tax paid by Crescent Equities. The U.S.
Shareholder will increase the basis of such U.S. Shareholder's shares by an
amount equal to the excess of the retained capital gain included in the U.S.
Shareholder's income over the tax deemed paid by such U.S. Shareholder.
Distributions in excess of current and accumulated earnings and profits will not
be taxable to a U.S. Shareholder to the extent that they do not exceed the
adjusted basis of the shareholder's Common Shares or Series B Preferred Shares,
but rather will reduce the adjusted basis of such shares. To the extent that
distributions in excess of current and accumulated earnings and profits exceed
the adjusted basis of a U.S. Shareholder's Common Shares or Series B Preferred
Shares, such distributions will be included in income as long-term capital gain
(or short-term capital gain if the shares have been held for one year or less)
assuming the shares are a capital asset in the hands of the U.S. Shareholder.
U.S. Shareholders may not include any net operating losses or capital losses of
Crescent Equities in their respective income tax returns.
In general, any loss upon a sale or exchange of shares by a U.S.
Shareholder who has held such shares for six months or less (after applying
certain holding period rules) will be treated as a long-term capital loss to the
extent of distributions from Crescent Equities required to be treated by such
U.S. Shareholder as long-term capital gain.
TAXATION OF TAX-EXEMPT SHAREHOLDERS
Most tax-exempt employees' pension trusts are not subject to federal income
tax except to the extent of their receipt of "unrelated business taxable income"
as defined in Section 512(a) of the Code ("UBTI"). Distributions by the Company
to a shareholder that is a tax-exempt entity should not constitute UBTI,
provided that the tax-exempt entity has not financed the acquisition of its
Common Shares or Series B Preferred Shares with "acquisition indebtedness"
within the meaning of the Code and the Common Shares or Series B Preferred
Shares are not otherwise used in an unrelated trade or business of the
tax-exempt entity. In addition, certain pension trusts that own more than 10% of
a "pension-held REIT" must report a portion of the dividends that they receive
from such a REIT as UBTI. The Company has not been and does not expect to be
treated as a pension-held REIT for purposes of this rule.
TAXATION OF FOREIGN SHAREHOLDERS
The rules governing United States federal income taxation of 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 or Series B Preferred
Shares, including any reporting requirements.
Distributions that are not attributable to gain from sales or exchanges by
Crescent Equities of United States real property interests and not designated by
Crescent Equities as capital gain dividends will be treated as dividends of
ordinary income to the extent that they are made out of current or accumulated
earnings and profits of Crescent Equities. Such distributions ordinarily will be
subject to a withholding tax equal to 30% of
S-24
<PAGE> 24
the gross amount of the distribution, unless an applicable tax treaty reduces
that tax. A number of U.S. tax treaties that reduce the rate of withholding tax
on corporate dividends do not reduce, or reduce to a lesser extent, the rate of
withholding applied to dividends from a REIT. Crescent Equities expects to
withhold U.S. income tax at the rate of 30% on the gross amount of any such
distribution made to a Non-U.S. Shareholder unless (i) a lower treaty rate
applies (and, with regard to payments on or after January 1, 1999, the Non-U.S.
Shareholder (1) files IRS Form W-8 with Crescent Equities and, (2) if the Common
Shares or Series B Preferred Shares are not traded on an established securities
market, acquires a taxpayer identification number from the IRS) or (ii) the
Non-U.S. Shareholder has filed an IRS Form 4224 (or, with respect to payments on
or after January 1, 1999, files IRS Form W-8) with Crescent Equities claiming
that the distribution is effectively connected with the Non-U.S. Shareholder's
conduct of a U.S. trade or business. Distributions in excess of Crescent
Equities' current and accumulated earnings and profits will be treated as a
return of capital to the extent of the adjusted basis of a Non-U.S.
Shareholder's shares and thereafter as capital gain, which will be taxable to
the extent that the Non-U.S. Shareholder would otherwise be subject to tax on
any gain from the sale or disposition of the Common Shares or Series B Preferred
Shares, as described below. Distributions in excess of current and accumulated
earnings and profits are currently subject to withholding at the same 30% or
lower treaty rate applicable to ordinary income dividends, but a Non-U.S.
Shareholder may seek a refund of amounts of tax withheld in excess of the
Non-U.S. Shareholder's actual U.S. tax liability, provided the required
information is furnished to the IRS. Beginning with payments made on or after
January 1, 1999, Crescent Equities will be permitted, but not required, to make
reasonable estimates of the extent to which distributions exceed current and
accumulated earnings and profits. Such distributions will generally be subject
to a 10% withholding tax, which may be refunded to the extent it exceeds the
shareholder's actual U.S. tax liability, provided the required information is
furnished to the IRS.
For any year in which Crescent Equities qualifies as a REIT, distributions
that are attributable to gain from sales or exchanges by Crescent Equities of
United States real property interests will be taxed to a Non-U.S. Shareholder
under the provisions of the Foreign Investment in Real Property Tax Act of 1980,
as amended ("FIRPTA"). Under FIRPTA, distributions attributable to gain from
sales of United States real property interests are taxed to a Non-U.S.
Shareholder as if such gain were effectively connected with a United States
business. Non-U.S. Shareholders would thus be taxed at the normal capital gain
rates applicable to U.S. shareholders (subject to applicable alternative minimum
tax and a special alternative minimum tax in the case of nonresident alien
individuals). Also, distributions subject to FIRPTA may be subject to a 30%
branch profits tax in the hands of a foreign corporate shareholder, subject to
possible exemption or rate reduction under an applicable tax treaty. Crescent
Equities is required to withhold 35% of any distribution that could be
designated by Crescent Equities as a capital gain dividend. This amount is
creditable against the Non-U.S. Shareholder's FIRPTA tax liability.
Gain recognized by a Non-U.S. Shareholder upon a sale of Common Shares
generally will not be taxed under FIRPTA if Crescent Equities is a "domestically
controlled REIT," defined generally as a REIT in which at all times during a
specified testing period less than 50% in value of the shares was held directly
or indirectly by foreign persons. Crescent Equities believes that it is, and
currently expects to continue to be, a "domestically controlled REIT," and in
such case the sale of Common Shares or Series B Preferred 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 or Series B Preferred Shares is treated as effectively connected
with the Non-U.S. Shareholder's U.S. trade or business or (ii) the Non-U.S.
Shareholder is a nonresident alien individual who was present in the United
States for 183 days or more during the taxable year and certain other conditions
are met. Effectively connected gain realized by a foreign corporate shareholder
may be subject to an additional 30% branch profits tax, subject to possible
exemption or rate reduction under an applicable tax treaty. If the gain on the
sale of Common Shares or Series B Preferred Shares is subject to taxation under
FIRPTA, the Non-U.S. Shareholder would be subject to the same treatment as U.S.
Shareholders with respect to such gain (subject to the additional 30% branch
profits tax and a special alternative minimum tax in the case of nonresident
alien individuals), and the purchaser of the Common Shares or Series B Preferred
Shares would be required to withhold and remit to the IRS 10% of the purchase
price.
S-25
<PAGE> 25
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 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
S-26
<PAGE> 26
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. 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
S-27
<PAGE> 27
income, with certain adjustments). The franchise tax on net taxable capital is
imposed at the rate of 0.25% of an entity's net taxable capital. The franchise
tax rate on "net taxable earned surplus" is 4.5%. The Texas franchise tax is
generally equal to the greater of the tax on "net taxable capital" and the tax
on "net taxable earned surplus." The Texas franchise tax is not applied on a
consolidated group basis. Any Texas franchise tax that Crescent Equities is
indirectly required to pay will reduce the cash available for distribution by
Crescent Equities to shareholders. Even if an entity is doing business in Texas
for Texas franchise tax purposes, the entity is subject to the Texas franchise
tax only on the portion of the taxable capital or taxable earned surplus
apportioned to Texas.
As a Texas real estate investment trust, Crescent Equities will not be
subject directly to the Texas franchise tax. However, Crescent Equities will be
subject indirectly to the Texas franchise tax as a result of its interests in
CREE Ltd., Management I, Management II, Management III, Management IV,
Management V and Management VII, which will be subject to the Texas franchise
tax because they are general partners of the Operating Partnership, Funding I,
Funding II, Funding III, Funding IV, Funding V and Funding VII, and the
Operating Partnership, Funding I, Funding II, Funding III, Funding IV, Funding V
and Funding VII will be doing business in Texas.
It is anticipated that Crescent Equities' Texas franchise tax liability
will not be substantial because CREE Ltd., Management I, Management II,
Management III, Management IV, Management V and Management VII are allocated
only a small portion of the taxable income of the Operating Partnership, Funding
I, Funding II, Funding III, Funding IV, Funding V and Funding VII. In addition,
Management VI and Funding VI are not anticipated to be subject to the Texas
franchise tax.
The Operating Partnership, Funding I, Funding II, Funding III, Funding IV,
Funding V and Funding VII will not be subject to the Texas franchise tax, under
the laws in existence at the time of this Prospectus Supplement because they are
partnerships instead of corporations. There is no assurance, however, that the
Texas legislature will not expand the scope of the Texas franchise tax to apply
to limited partnerships such as the Operating Partnership, Funding I, Funding
II, Funding III, Funding IV, Funding V and Funding VII or enact other
legislation which may result in subjecting Crescent Equities to the Texas
franchise tax. Any statutory change by the Texas legislature may be applied
retroactively.
In addition, it should be noted that three of the Residential Development
Corporations will be doing business in Texas and will be subject to the Texas
franchise tax. Further, Crescent/301, L.L.C. will be subject to the Texas
franchise tax because it is doing business in Texas and limited liability
companies are subject to Texas franchise tax. However, this franchise tax should
not be substantial because Crescent/301, L.L.C. owns a 1% interest in 301
Congress Avenue, L.P. Other entities that will be subject to the Texas franchise
tax include CresTex Development, LLC and its member CresCal Properties, Inc. and
any other corporations or limited liability companies doing business in Texas
with Texas receipts. It is expected that the franchise tax liability of these
entities will not be substantial.
The Texas legislature considered in its 1997 regular session proposals for
property tax relief in Texas. Such relief would have required increasing the
proportion of education funding costs paid by the State of Texas and reducing
the proportion paid by local property taxes. Alternatives for increasing State
of Texas revenues that have been considered include broadening the franchise tax
base to include other entities such as partnerships and real estate investment
trusts, enactment of a new gross receipts tax, enactment of a new business
activity tax, an increase in the sales tax and/or broadening the sales tax base.
The Texas House of Representatives and the Texas Senate both passed different
bills that would have broadened the franchise tax base to apply the franchise
tax to business trusts such as Crescent Equities and partnerships such as the
Operating Partnership, Funding I, Funding II, Funding III, Funding IV, Funding V
and Funding VII. However, the conference committee was not able to work out the
differences between these two bills and the Texas legislature adjourned the 1997
regular session without adopting such legislation. There can be no assurance
that the Texas legislature will not enact similar legislation in its next
regular session, beginning in 1999. A committee of the Texas House of
Representatives is currently studying alternative methods and formulas to fund
education in anticipation of the next regular session.
S-28
<PAGE> 28
Locke Purnell Rain Harrell (A Professional Corporation), special tax
counsel to the Company ("Special Tax Counsel"), has reviewed the discussion in
this section with respect to Texas franchise tax matters and is of the opinion
that, based on the current structure of Crescent Equities and based upon current
law, it accurately summarizes the Texas franchise tax matters expressly
described herein. Special Tax Counsel expresses no opinion on any other tax
considerations affecting Crescent Equities or a holder of Common Shares,
including, but not limited to, other Texas franchise tax matters not
specifically discussed above.
Tax Counsel has not reviewed the discussion in this section with respect to
Texas franchise tax matters and has expressed no opinion with respect thereto.
PLAN OF DISTRIBUTION
The Company has agreed, pursuant to a Stock Purchase Agreement dated as of
June 5, 1998, as amended (the "Purchase Agreement") by and between the Company
and The Prudential Insurance Company of America, Strategic Value Investors, LLC,
Strategic Value Investors International, LLC, and Strategic Value Investors II,
LLC (the "Investors"), to sell the 6,948,734 Series B Preferred Shares offered
hereby to the Investors for a total purchase price of $225,000,006.92
(representing a price per share equal to 32.38, as calculated pursuant to the
terms of the Purchase Agreement), and the Investors have agreed to purchase all
of such Series B Preferred Shares. The Series B Preferred Shares are being
offered directly to the Investors, and not through underwriters or the selling
efforts of brokers and dealers. No underwriter's or other discounts or
commissions will be paid in connection with the offering of the Series B
Preferred Shares.
LEGAL MATTERS
The legality of the Series B Preferred Shares offered hereby will be passed
upon for the Company by Shaw Pittman Potts & Trowbridge, Washington, D.C.
Certain legal matters described under "Federal Income Tax Considerations" will
be passed upon for the Company by Shaw Pittman Potts & Trowbridge, which will
rely, as to all Texas franchise tax matters, upon the opinion of Locke Purnell
Rain Harrell (A Professional Corporation), Dallas, Texas.
S-29
<PAGE> 29
[This page has been left blank intentionally.]
<PAGE> 30
STATEMENT OF DESIGNATION
OF
SERIES B CONVERTIBLE PREFERRED SHARES
OF
CRESCENT REAL ESTATE EQUITIES COMPANY
The undersigned, the President and Chief Executive Officer of Crescent Real
Estate Equities Company, a real estate investment trust organized and existing
under the Texas Real Estate Investment Trust Act, as amended (the "Company"),
certifies that pursuant to the authority granted to and vested in the Board of
Trust Managers of the Company by the provisions of the Restated Declaration of
Trust of the Company, the Board of Trust Managers, acting through an authorized
committee thereof, has adopted the following resolution designating a new series
of preferred shares of the Company.
RESOLVED, that pursuant to the authority expressly granted to and vested in
the Board of Trust Managers of the Company by the provisions of the Restated
Declaration of Trust of the Company, the Board of Trust Managers hereby
establishes a series of preferred shares of beneficial interest designated
Series B Convertible Preferred Shares of beneficial interest, par value $.01 per
share (the "Series B Preferred Shares"), and authorizes the issuance thereof,
and hereby fixes the designation and number thereof and the voting powers,
preferences and relative, participating, optional and other special rights of
such shares, and the qualifications, limitations or restrictions thereof as
follows:
A. CERTAIN DEFINITIONS.
Unless the context otherwise requires, the terms defined in this Paragraph
A shall have, for all purposes of this Statement of Designation, the meanings
herein specified (with terms defined in the singular having comparable meanings
when used in the plural).
(1) "Average Share Price" shall mean the average of the Closing Prices
of the Common Shares for each day in the 20 consecutive trading day period
ending on the date that is two days prior to the date with respect to which
the Average Share Price must be determined, after excluding from such
calculation the two highest Closing Prices and the two lowest Closing
Prices; provided, however, that if the Common Shares begin to trade
ex-dividend at any point within such period, then the Average Share Price
shall equal the amount determined pursuant to the preceding formula after
deducting the value of such distributions per Common Share from the closing
price of the Common Shares for each day in such period on which the Common
Shares did not trade ex-dividend.
(2) "Average Preferred Share Price" shall mean the average of the
Preferred Share Closing Prices for each day in the 20 consecutive trading
day period ending on the date that is two days prior to the date with
respect to which the Average Preferred Share Price must be determined,
after excluding from such calculation the two highest closing prices and
the two lowest closing prices; provided, however, that if the Preferred
Shares begin to trade ex-dividend at any point within such period, then the
Average Preferred Share Price shall equal the amount determined pursuant to
the preceding formula after deducting the value of such distributions per
Preferred Share from the closing price of the Preferred Shares for each day
in such period on which the Preferred Shares did not trade ex-dividend.
(3) "Cash Value" shall mean, except as provided in subparagraph (3) of
paragraph B, (i) as to any non-cash Extraordinary Distribution made in the
form of Company securities or other securities that are listed or admitted
to trading on a national securities exchange on the payment date for such
distribution, the Cash Value shall equal the closing price of such
securities on such exchange (with the closing price of such securities
computed as the last sales price, regular way, of a share of such
securities on such payment date or, in the event no such sale takes place
on such day, the average of the closing bid and asked prices, regular way,
on such payment date); provided, however, that if any holder of Series B
Preferred Shares shall sell all or substantially all (which, for purposes
hereof, shall mean eighty percent (80%) or more) of such securities
distributed to such holder within ten (10) business days following such
distribution, then all such securities distributed to such holder shall be
valued for all purposes at the lesser
A-1
<PAGE> 31
of (x) the closing price of such securities (computed as described above)
on the payment date for such distribution and (y) such holder's actual
average per share "at market" sale price for such securities; (ii) as to
all other non-cash Extraordinary Distributions, the Cash Value shall equal
the actual net proceeds realized by such holder of Series B Preferred
Shares upon a sale of the property constituting such non-cash Extraordinary
Distribution; provided, further, that as to any non-cash Extraordinary
Distribution that is neither made in the form of securities listed or
admitted to trading on a national securities exchange on the payment date
for such distribution nor sold by a holder of Series B Preferred Shares
within ten (10) business days following such distribution, the Cash Value
shall be the value at the time of such Extraordinary Distribution as
determined in good faith by the Board of Trust Managers of the Company with
respect to all holders of Common Shares, Series B Preferred Shares and
other securities of the Company entitled to receive such Extraordinary
Distribution and (iii) as to any non-cash distribution which is not an
Extraordinary Distribution, the Cash Value shall be the value at the time
of such distribution determined in good faith by the Board of Trust
Managers of the Company with respect to all holders of Common Shares,
Series B Preferred Shares and other securities of the Company entitled to
receive such distribution. In the case of a sale of the distributed
securities or other property constituting a non-cash Extraordinary
Distribution that occurs within ten (10) business days following an
Extraordinary Distribution, the holder of such securities or the holder of
such property shall certify to the Company in writing, within two (2)
business days following such sale, (i) the date on which such sale of
securities or property occurred, (ii) the amount or portion of such
securities sold, and (iii) the average per share "at market" sale price for
any such securities sold or the net proceeds realized by the holders for
any such other property sold. Notwithstanding anything herein to the
contrary, the Company shall have the option to determine the Cash Value of
a non-cash Extraordinary Distribution in accordance with the foregoing, but
without reference to any sale of the distributed securities or other
property constituting a non-cash Extraordinary Distribution, unless the
holder shall have provided to the Company, in accordance with the
provisions of the preceding sentence, the notice specified therein on or
prior to the date on which the Cash Value of such non-cash Extraordinary
Distribution is required to be calculated under the terms of this Statement
of Designation. Notwithstanding anything herein to the contrary, if at any
time there are twenty (20) or more holders of record of the Series B
Preferred Shares, then, thereafter, all references in this definition to a
holder shall be deemed to be a reference to all record holders, in the
aggregate.
(4) "Change in Control" shall mean each occurrence of any of the
following: (i) the acquisition, directly or indirectly, by any individual
or entity or group (as such term is used in Section 13(d)(3) of the
Exchange Act) of beneficial ownership (as defined in Rule 13d-3 under the
Exchange Act, except that such individual or entity shall be deemed to have
beneficial ownership of all shares that any such individual or entity has
the right to acquire, whether such right is exercisable immediately or only
after the passage of time) of more than 25% of the Company's outstanding
capital stock with voting power, under ordinary circumstances, to elect
trust managers of the Company; (ii) during any period of two consecutive
years, those individuals who at the beginning of such period constituted
the Board of Trust Managers of the Company (together with any new trust
managers whose election by such Board of Trust Managers or whose nomination
for election by the shareholders of the Company was approved by a vote of
66 2/3% of the Board of Trust Managers of the Company then in office who
were either trust managers at the beginning of such period, or whose
election or nomination for election was previously so approved) cease for
any reason to constitute a majority of the Board of Trust Managers then in
office; or (iii) (A) the Company consolidates with or merges into another
entity or conveys, transfers or leases outside the ordinary course of the
Company's business all or substantially all of its assets (including, but
not limited to, real property investments) to any individual or entity, or
(B) any corporation consolidates with or merges into the Company, which in
the case of a merger or consolidation under either (A) or (B) above is
pursuant to a transaction in which the outstanding voting capital stock of
the Company is reclassified or changed into or exchanged for cash,
securities (unless the holders of the exchanged securities of the Company
immediately after such transaction beneficially own at least a majority of
the securities into which such exchange was made) or other property;
provided, however, that the events described in clause (iii) above shall
not be deemed to be a Change in Control if the sole purpose of such
A-2
<PAGE> 32
event is that the Company is seeking to change its domicile or to change
its form of organization from a statutory real estate investment trust to a
corporation.
(5) "Closing Price" shall mean the last sale price, regular way, of a
Common Share on a particular day or, in the event no such sale takes place
on such day, the average of the closing bid and asked prices, regular way,
in either case on the New York Stock Exchange, or, if the Common Shares are
not listed or admitted to trading on such Exchange, on the principal
national securities exchange on which the Common Shares are listed or
admitted to trading or, if the Common Shares are not listed or admitted to
trading on any national securities exchange, the average of the closing bid
and asked prices as furnished by Prudential Securities Incorporated or, if
approved by the holders of a majority of the Series B Preferred Shares
(which approval shall not be unreasonably withheld), as furnished by any
other member of the National Association of Securities Dealers, Inc.,
selected from time to time by the Company for that purpose.
(6) "Code" shall mean the Internal Revenue Code of 1986, as amended.
(7) "Common Shares" shall mean the currently existing class of common
shares of beneficial interest of the Company, par value $.01 per share.
(8) "Company" shall mean Crescent Real Estate Equities Company, a real
estate investment trust organized and existing under the Texas Real Estate
Investment Trust Act, as amended.
(9) "Company Compound Annual Return" shall mean the compound annual
return that an investor would have received if such investor had owned a
Common Share (as such Common Share is adjusted for stock splits, reverse
stock splits, subdivisions of Common Shares, or any combinations,
reclassifications or distributions of Common Shares) during the period
commencing on the Issue Date and ending on the effective date of a
conversion or a Series B Preferred Shares Redemption Date, as applicable,
and such investor had reinvested all cash distributions, and the Cash Value
of all non-cash distributions (other than distributions of Common Shares),
paid (including distributions deemed to have been paid in accordance with
subparagraph 3(a) of Paragraph B) during such time in respect of such
Common Share (and in respect of all Common Shares into which such
distributions are deemed reinvested in accordance herewith) in Common
Shares at a price equal to the Closing Price on the date such distributions
were paid (or deemed to have been paid). The return will be calculated
based on the Average Share Price on the Issue Date and on the date of
conversion or redemption, as applicable, of Series B Preferred Shares. An
example of the calculation of the Company Compound Annual Return is set
forth in Exhibit A.
(10) "Conversion Rate" shall mean the number of Common Shares issuable
upon conversion of each of the Series B Preferred Shares, as set forth in
subparagraph (3) of paragraph (C) below. An example of the calculation of
the Conversion Rate is set forth in Exhibit A.
(11) "Dividend Shares" shall mean, except as provided to the contrary
in subparagraph (3) of paragraph B, the number of Common Shares which would
have been acquired if (i) the Cash Value of any Extraordinary Distributions
actually received (or deemed to have been received in accordance with
subparagraph 3(a) of paragraph B) by the holders of the Series B Preferred
Shares had been reinvested in Common Shares at a price equal to the Closing
Price on the date on which such Extraordinary Distributions were paid (or
deemed to have been paid in accordance with subparagraph 3(a) of paragraph
B), and (ii) all cash distributions paid in respect of all Common Shares
into which distributions are deemed reinvested in accordance herewith,
during the period commencing on the record date for such Extraordinary
Distribution and ending on the effective date of a conversion of Series B
Preferred Shares or a Series B Preferred Shares Redemption Date, as
applicable, had been reinvested in Common Shares at a price equal to the
Closing Price on the date such distributions were paid (or deemed to have
been paid in accordance with subparagraph 3(a) of paragraph B), with such
number of shares computed under (i) and (ii) adjusted from time to time to
reflect any stock splits, reverse stock splits, or subdivisions of Common
Shares, or any combinations, reclassifications or distributions of Common
Shares.
A-3
<PAGE> 33
(12) "ERISA" shall mean the Employees Retirement Income Security Act
of 1974, as amended.
(13) "Event of Default" shall mean any of the events specified in
Exhibit C hereto.
(14) "Extraordinary Distributions" shall mean any extraordinary cash
distribution (excluding any regular quarterly cash distribution), stock
distribution (other than distributions of Common Shares) and other non-cash
distributions (including distributions of preemptive or subscription rights
for securities, other than (i) rights relating to Common Shares and (ii)
the rights referenced in Exhibit D hereto) that may be made from time to
time to the holders of the Common Shares; provided, however, that any
distribution paid in order to preserve the status of the Company as a REIT
for federal income tax purposes that is accompanied or preceded by an
opinion of legal counsel, as described below, shall not be considered an
Extraordinary Distribution regardless of the time of payment of any such
distribution unless the Company elects to treat such distribution as an
Extraordinary Distribution by complying with the provisions of subparagraph
(3) of paragraph B hereof. Notwithstanding the foregoing, a distribution
shall not be deemed to have been paid in order to preserve the Company's
status as a REIT unless the distribution is accompanied or preceded by an
opinion of legal counsel selected and employed by the Company (and
acceptable to the holders of the Series B Preferred Shares as provided in
the following sentence) for the purpose of rendering an opinion confirming
the necessity or advisability of such distribution in order to preserve the
status of the Company as a REIT for federal income tax purposes. For
purposes of this subparagraph (14), the opinion of Shaw, Pittman, Potts &
Trowbridge or of any other legal counsel selected and employed by the
Company for the purpose of rendering such opinion and approved (which
approval shall not be unreasonably withheld) by the holders of a majority
of the Series B Preferred Shares shall be acceptable.
(15) "Initial Investment" shall mean $225,000,006.92.
(16) "Initial Investors" shall mean The Prudential Insurance Company
of America, a New Jersey corporation, Strategic Value Investors, L.L.C., a
Delaware limited liability company, Strategic Value Investors
International, L.L.C., a Delaware limited liability company and Strategic
Value Investors II, L.L.C., a Delaware limited liability company.
(17) "Investment Return" as of any date shall mean an amount equal to
the aggregate of the following amounts:
<TABLE>
<CAPTION>
TIER INVESTMENT RETURN COMPONENT
- ---- ---------------------------
<S> <C>
I The NAREIT Return; plus
II 75% of the Company Compound Annual Return in excess of the
NAREIT Return, up to and including the NAREIT Return plus
500 basis points; plus
III 50% of the Company Compound Annual Return in excess of the
NAREIT Return plus 500 basis points up to and including the
NAREIT Return plus 1,000 basis points; plus
IV 25% of the Company Compound Annual Return in excess of the
NAREIT Return plus 1000 basis points up to and including the
NAREIT Return plus 2,000 basis points; plus
V 10% of the Company Compound Annual Return in excess of the
NAREIT Return plus 2,000 basis points.
</TABLE>
An example of the calculation of the Investment Return is set forth in
Exhibit A.
(18) "Issue Date" shall mean the first date on which Series B
Preferred Shares are issued and sold to one or more of the Initial
Investors.
(19) "Junior Shares" shall have the meaning set forth in subparagraph
(2) of paragraph (B) hereof.
(20) "NAREIT" shall mean the National Association of Real Estate
Investment Trusts.
A-4
<PAGE> 34
(21) "NAREIT Return" shall mean the compound annual return calculated
by using the total return (calculated in accordance with Exhibit B) for a
portfolio of equity real estate investment trust stocks, excluding health
care stocks, as computed by NAREIT in its NAREIT Total Return Series for
Equity REITs Excluding Health Care REITs. The NAREIT Return shall be
calculated for the period commencing on the Issue Date and ending on the
effective date of a conversion or the Series B Preferred Shares Redemption
Date, as applicable, of Series B Preferred Shares. If the NAREIT Return is
not available for any reason for all or any portion of the period of
calculation, then the index for determining the NAREIT Return for such
period or portion of the period shall be the Standard & Poor's Equity REIT
Index ) and if the Standard & Poor's Equity REIT Index is not available for
any such period, the reference index shall be a reasonably equivalent
alternative real estate investment trust equity index (excluding health
care stocks) selected or compiled in good faith by the Company and approved
by the holders of a majority of the Series B Preferred Shares (which
approval shall not be unreasonably withheld). If the calculation of the
NAREIT Return is modified then (i) the Company and those persons who or
which are holders of the Preferred Shares at the time of the modification,
will promptly (and in any event within thirty (30 days) negotiate a
mutually acceptable amendment hereto modifying the calculation of the terms
"Company Compound Annual Return," "Dividend Shares" and "NAREIT Return" and
any other term the calculation or application of which is required to be
modified in order for the calculation of the Conversion Rate to remain
consistent with the modification of the NAREIT Return and (ii) if the
Company and such holders shall have failed to execute and deliver a
mutually acceptable amendment on or before the effective date of the
conversion or redemption, the NAREIT Return shall be calculated by a "Big
4" accounting firm chosen by the Company and approved by the holders of a
majority of the Series B Preferred Shares (which approval shall not be
unreasonably withheld). Such accounting firm shall calculate the NAREIT
Return in accordance with Exhibit B. The costs associated with employment
of such accounting firm shall be borne one-half ( 1/2) by the Company and
one-half ( 1/2) by the holders of the Series B Preferred Shares.
(22) "Parity Shares" shall have the meaning set forth in subparagraph
(2) of paragraph B hereof.
(23) "Preferred Share Closing Price" shall mean the last sale price,
regular way, of the preferred shares of beneficial interest of a class or
series on a particular day or, in the event no such sale takes place on
such day, the average of the closing bid and asked prices, regular way, in
either case on the New York Stock Exchange, or, if the preferred shares of
beneficial interest of such class or series are not listed or admitted to
trading on such Exchange, on the principal national securities exchange on
which the preferred shares of beneficial interest of such class or series
are listed or admitted to trading or, if the preferred shares of beneficial
interest of such class or series are not listed or admitted to trading on
any national securities exchange, the average of the closing bid and asked
prices as furnished by Prudential Securities Incorporated or, if approved
by the holders of a majority of the Series B Preferred Shares (which
approval shall not be unreasonably withheld), as furnished by any other
member of the National Association of Securities Dealers, Inc., selected
from time to time by the Company for that purpose.
(24) "Redemption Price" shall have the meaning set forth in
subparagraph (1) of paragraph (D).
(25) "REIT" shall mean a real estate investment trust under Section
856 of the Code.
(26) "Series B Preferred Shares" shall mean the Series B Convertible
Preferred Shares of beneficial interest, par value $.01 per share.
(27) "Series B Preferred Shares Redemption Date" shall have the
meaning set forth in subparagraph (4) of paragraph (D).
(28) "Securities Act" shall mean the Securities Act of 1933, as
amended.
(29) "Transfer Agent" shall mean BankBoston, N.A., or such other agent
or agents of the Company as may be designated by the Board of Trust
Managers or their designee as the transfer agent for the Series B Preferred
Shares.
A-5
<PAGE> 35
B. SERIES B PREFERRED SHARES.
(1) Designation and Number of Shares. The number of shares which shall
constitute the Series B Preferred Shares shall be 6,948,734.
(2) Relative Seniority. In respect of rights to receive distributions and
to participate in distributions or payments in the event of any liquidation,
dissolution or winding up of the Company, the Series B Preferred Shares shall
rank (i) pari passu with all other preferred shares of beneficial interest of
the Company, whether in existence as of the date hereof or subsequently created
(the "Parity Shares"), and (ii) senior to the Common Shares and any other class
or series of shares of beneficial interest of the Company ranking, as to
distributions and upon liquidation, junior (collectively, the "Junior Shares")
to the Parity Shares, whether in existence as of the date hereof or subsequently
created.
(3) Distributions.
(a) The holders of the Series B Preferred Shares shall receive,
payable and calculated as described in this subparagraph (3) and in
subparagraph (3) of paragraph A, all Extraordinary Distributions; provided,
however, that (i) if the record date for any such Extraordinary
Distribution does not occur with respect to a Series B Preferred Share
prior to the effective date of the conversion or redemption of such Series
B Preferred Share, then the Company shall have no obligation to pay such
Extraordinary Distribution, and (ii) if the record date for any such
Extraordinary Distribution with respect to a Series B Preferred Share
occurs prior to the effective date of the conversion or redemption of such
Series B Preferred Share, then the Company shall be obligated, subject to
the following sentence, to pay such Extraordinary Distribution to the
holder of record of such Series B Preferred Share, who is the holder on the
record date for such Extraordinary Distribution; and provided, further,
that if the payment date for such Extraordinary Distribution occurs with
respect to such Series B Preferred Share either after the effective date of
such conversion or redemption or less than ten (10) business days prior
thereto, the Cash Value of the Extraordinary Distribution shall be the
value determined in good faith by the Board of Trust Managers of the
Company. If the record date for any Extraordinary Distribution occurs prior
to the effective date of any conversion of a Series B Preferred Share (i)
pursuant to subparagraph (1) of paragraph C hereof or (ii) pursuant to
subparagraph (2) of paragraph C (but, in the case of a conversion pursuant
to subparagraph (2) of paragraph C, only if such Extraordinary Distribution
is declared following receipt of notice from the record holder of such
Series B Preferred Share of such holder's intention to convert such
Preferred Share) or of any redemption pursuant to paragraph D hereof, and
the payment date for such Extraordinary Distribution occurs either after,
or less than ten (10) business days prior to, such conversion or
redemption, then the record holder of such Series B Preferred Share shall
have the right, at the option of such holder and in satisfaction of the
Company's obligation with respect to such Extraordinary Distribution, to
receive either (A) cash in an amount equal to the Cash Value of such
Extraordinary Distribution (as determined in good faith by the Board of
Trust Managers of the Company with respect to all holders of Common Shares
entitled to receive such distributions) or (B) such Extraordinary
Distribution. Any Extraordinary Distribution described in the preceding
sentence shall be deemed to have been actually received on the earlier to
occur of the conversion date or the Series B Preferred Shares Redemption
Date and the payment date, by the record holder of such Series B Preferred
Share and reinvested at (i) the Closing Price, if such distribution is
actually received on or prior to the conversion date or Series B Preferred
Shares Redemption Date or (ii) the Average Share Price, if deemed received
on the conversion date or Series B Preferred Shares Redemption Date for
purposes of the calculation of Dividend Shares. The holders of the Series B
Preferred Shares shall receive any cash distribution payable to the holders
of Common Shares (including any regular quarterly cash distribution) with
respect to which the record date occurs prior to the effective date of a
conversion of a Series B Preferred Share (i) pursuant to subparagraph (1)
of paragraph C hereof or (ii) pursuant to subparagraph (2) of paragraph C
(but, in the case of a conversion pursuant to subparagraph (2) of paragraph
C, only if such Extraordinary Distribution is declared following receipt of
notice from the record holder of such Series B Preferred Share of such
holder's intention to convert such Preferred Share) or a redemption and the
payment date occurs after such effective date, provided that the amount of
such cash distribution shall be included in the calculation of Dividend
Shares and deemed reinvested at
A-6
<PAGE> 36
the Average Share Price on the conversion date or the Series B Preferred
Shares Redemption Date. Extraordinary Distributions required to be paid
pursuant hereto shall be payable, on the date on which the Common Shares
distribution is payable to the holders of the Common Shares, to Persons who
are holders of record of the Series B Preferred Shares on the date for
determining the holders of record of Common Shares entitled to receive the
Common Shares distribution to which the Extraordinary Distribution relates.
(b) The amount of a distribution and any cash distribution any holder
is entitled to receive under subparagraph 3(a) above, if any, payable on
each Series B Preferred Share shall equal the amount of such distribution
that would have been paid on a single Common Share that was issued and
outstanding on the Issue Date, assuming such Common Share had been properly
adjusted for stock splits, reverse stock splits, or subdivisions of Common
Shares, or any combinations, reclassifications or distributions of Common
Shares.
(c) If any Series B Preferred Shares are outstanding, no full
distributions shall be declared or paid or set apart for payment on any
other class or series of Parity Shares or Junior Shares for any period for
which Extraordinary Distributions are required to be paid on the Series B
Preferred Shares in accordance with the provisions of this subparagraph (3)
unless the required distributions have been declared and paid or declared
and a sum sufficient for the payment thereof has been set apart for such
payment on the Series B Preferred Shares. If such distributions are not
paid in full, or not declared in full and a sum sufficient for such full
payment is not set apart for the payment thereof, upon the Series B
Preferred Shares and if distributions are not paid in full, or not declared
in full and a sum sufficient for such full payment is not set apart for the
payment thereof, upon any class or series of Parity Shares, then all such
distributions declared upon Series B Preferred Shares and upon any other
class or series of Parity Shares shall be paid or declared pro rata so that
in all cases the amount of distributions paid or declared per share on the
Series B Preferred Shares and Parity Shares shall bear to each other the
same ratio that accumulated distributions per share, including
distributions accrued or in arrears, if any, on the Series B Preferred
Shares and Parity Shares bear to each other. Except as provided in the
preceding sentence, unless all distributions required to be paid on the
Series B Preferred Shares in accordance with the provisions of this
subparagraph (3) have been paid or declared and a sum sufficient for such
full payment set apart for payment for all applicable distribution periods,
no distributions (other than distributions consisting of Common Shares or
any other Junior Shares) shall be declared or paid or set apart for payment
or other distribution upon the Common Shares, or, except as provided above,
on any other Junior Shares or Parity Shares, nor shall any Common Shares or
any other Junior Shares or Parity Shares be redeemed, purchased or
otherwise acquired for any consideration (or any payment made to or
available for a sinking fund for the redemption of any such shares by the
Company or any subsidiary of the Company (except by conversion into or
exchange for Junior Shares). Holders of the Series B Preferred Shares shall
not be entitled to any distributions, whether payable in cash, property or
shares of beneficial interest, in excess of distributions as herein
provided. No interest or sum of money in lieu of interest shall be payable
in respect of any distribution payment or payments on the Series B
Preferred Shares that may be in arrears.
Except as provided in this Statement of Designation, the Series B
Preferred Shares shall not be entitled to participate in the earnings or
assets of the Company.
C. CONVERSION.
Holders of Series B Preferred Shares shall have the right to convert all or
a portion of such shares into Common Shares, as follows.
(1) Automatic Conversion of Series B Preferred Shares. On the third
anniversary of the Issue Date, each share of Series B Preferred Shares shall
automatically convert into fully paid and nonassessable Common Shares at the
Conversion Rate (as defined below). Each holder of shares of Series B Preferred
Shares thereupon (i) shall surrender all certificates evidencing Series B
Preferred Shares, duly endorsed for cancellation (or, if the Series B Preferred
Shares are book entry securities, deliver written notice of
A-7
<PAGE> 37
cancellation in a form reasonably acceptable to the Transfer Agent), at the
offices of the Transfer Agent, or such other place or places, if any, as the
Board of Trust Managers shall designate and (ii) shall state in writing the name
or names in which such holder wishes the certificate or certificates of Common
Shares to be issued and the address(es) to which such certificate or
certificates shall be delivered or, at each holder's option, the name or names
in which such shares shall be registered in the Transfer Agent's books and
records for book entry securities of the Company. The Company, as soon as
practicable thereafter, shall issue and deliver to such holder of the Series B
Preferred Shares, or to its nominee or nominees, at the address provided to the
Company by the holder thereof, certificates for the number of full Common Shares
to which such holder or such holder's nominee or nominees shall be entitled, and
any fractional interest in respect of a Common Share arising upon such
conversion shall be settled as provided in subparagraph (4). The Series B
Preferred Shares shall be deemed to have been converted as of the close of
business on the third anniversary of the Issue Date, at the Conversion Rate then
in effect, and the person(s) or entity(ies) entitled to receive the Common
Shares issuable upon conversion shall be treated for all purposes as the record
holder or holders of such Common Shares as of the close of business on such
date. Such conversion shall be deemed to have occurred on the third anniversary
of the Issue Date unless the share transfer books of the Company shall be closed
on that date, in which event such person or persons shall be deemed to have
become such holder or holders of record at the close of business on the next
succeeding day on which such share transfer books are open, but such conversion
shall be at the Conversion Rate in effect on the third anniversary of the Issue
Date. Except as otherwise expressly provided herein in connection with
subparagraph (3) of paragraph B and the calculation of the Conversion Rate, no
payment or adjustment shall be made in respect of cash distributions on the
Common Shares or the Series B Preferred Shares upon conversion of the Series B
Preferred Shares.
(2) Conversion of Series B Preferred Shares at Holder's Option. Each holder
of the Series B Preferred Shares shall have the right, at the option of such
holder, to convert each Series B Preferred Share, in whole, but not in part,
into fully paid and nonassessable Common Shares, at the Conversion Rate, at any
time from and after the occurrence of any one of the following events: (i) the
second anniversary of the Issue Date; (ii) the reduction to less than $4.0
billion of the Company's total equity market capitalization for a period of 20
consecutive trading days (calculated as (A) the Average Share Price on the
calculation date multiplied by the total number of Common Shares outstanding,
plus (B) for each series or class of preferred shares of beneficial interest for
which there is an established trading market, the Average Preferred Share Price
multiplied by the total number of all preferred shares of beneficial interest of
such series or class, plus (C) the Initial Investment for the Series B Preferred
Shares, plus (D) the price paid for all outstanding shares of any other series
of preferred shares of beneficial interest for which there is no established
trading market, plus (E) the Average Share Price on the calculation date
multiplied by the actual number of Common Shares issuable upon an exchange of
all Units (excluding any Units held by the Company or its subsidiaries) in
Crescent Real Estate Equities Limited Partnership, a Delaware limited
partnership); (iii) a Change in Control of the Company; (iv) the Company's
failure to qualify as a "real estate operating company" for purposes of ERISA;
or (v) the occurrence of an Event of Default. The Company shall, upon request of
any holder of Series B Preferred Shares, provide such holder with copies of such
financial statements, compliance certificates and other materials as the Company
is required to deliver to the Trustee of its 6 5/8% Notes Due 2002 and 7 1/8%
Notes Due 2007 (the "Trustee"), in each case with such certifications as are
required to be delivered to the Trustee, and in each case to the extent
reasonably necessary to determine if an Event of Default has occurred.
Before any holder of shares of the Preferred Shares shall be entitled to
convert Series B Preferred Shares into Common Shares, such holder (i) shall
surrender the certificate or certificates therefor, duly endorsed to the Company
or in blank (or, if the Series B Preferred Shares are book entry securities,
deliver written notice of such endorsement in a form reasonably acceptable to
the Transfer Agent), at the offices of the Transfer Agent, or such other place
or places, if any, as the Board of Trust Managers shall designate, (ii) shall
give written notice to the Company of such holder's election to convert the
Series B Preferred Shares and (iii) shall state in writing the name or names in
which such holder wishes the Common Shares to be issued and registered. The
Company, as soon as practicable thereafter, shall issue and deliver to such
holder of Series B Preferred Shares, or to its nominee or nominees, at the
address provided to the Company by the holder thereof, certificates or
confirmation of book entry registration by the Company's transfer agent for the
A-8
<PAGE> 38
number of full Common Shares to which such holder or such holder's nominee or
nominees shall be entitled, and any fractional interest in respect of a Common
Share arising upon such conversion shall be settled as provided in subparagraph
(4). The Series B Preferred Shares shall be deemed to have been converted as of
the close of business on the date of the surrender of such shares for conversion
as provided above, and the person(s) or entity(ies) entitled to receive the
Common Shares issuable upon conversion shall be treated for all purposes as the
record holder or holders of such Common Shares as of the close of business on
such date, and such conversion shall be at the Conversion Rate in effect at such
time and on such date on which such shares have been surrendered and such notice
received by the Company. Except as otherwise expressly provided herein in
connection with the calculation of the Conversion Rate, no payment or adjustment
shall be made in respect of cash distributions on the Common Shares or the
Series B Preferred Shares upon conversion of Series B Preferred Shares.
(3) Conversion Rate. The number of Common Shares issuable upon conversion
of each of the Series B Preferred Shares (the "Conversion Rate") shall be
determined according to the following formula:
(a) (1 plus the Investment Return as of the date of conversion)(N),
multiplied by the Initial Investment (where N is an exponent that equals
the number of years from the Issue Date to the effective date of a
conversion), minus
(b) (the Average Share Price at conversion multiplied by the Dividend
Shares), divided by
(c) the Average Share Price at conversion, divided by
(d) the aggregate number of Series B Preferred Shares issued to the
Initial Investors;
provided, however, that if the application of the Conversion Rate
calculated as described above would result, upon conversion of the Series B
Preferred Shares into Common Shares, in the issuance of Common Shares at a
conversion price that is less than the then-applicable per share par value
of the Common Shares, then the Conversion Rate shall be adjusted such that
the conversion price of the Common Shares issuable upon such conversion
shall equal at least the then-applicable per share par value of the Common
Shares.
(4) Cash in Lieu of Fractional Shares. No fractional shares or scrip
representing fractions of Common Shares shall be issued upon conversion of the
Series B Preferred Shares. Instead of any fractional interest in a Common Share
that would otherwise be deliverable upon the conversion of a Series B Preferred
Share, the Company shall pay to the holder of such share an amount in cash based
upon the Closing Price on the trading day immediately preceding the date of
conversion. If more than one Series B Preferred Share shall be surrendered for
conversion at one time by the same holder, the number of full Common Shares
issuable upon conversion thereof shall be computed on the basis of the aggregate
number of Series B Preferred Shares so surrendered.
(5) Certain Covenants Relating to Conversion.
(a) The Company covenants that it will at all times reserve and keep
available, free from preemptive rights, out of the aggregate of its
authorized but unissued Common Shares, for the purpose of effecting
conversion of the Series B Preferred Shares, the full number of Common
Shares deliverable upon the conversion of all outstanding Series B
Preferred Shares not theretofore converted. For purposes of this subsection
(a), the number of Common Shares that shall be deliverable upon the
conversion of all outstanding Series B Preferred Shares shall be computed
as if at the time of computation all such outstanding shares were held by a
single holder.
(b) The Company covenants that any Common Shares issued upon
conversion of the Series B Preferred Shares shall be validly issued, fully
paid and nonassessable and shall not be subject to restrictions on transfer
except as required under applicable law or the Company's Restated
Declaration of Trust, and such issuance shall not require further
registration or exemption under the Securities Act.
(c) The Company shall use its reasonable best efforts to list the
Common Shares required to be delivered upon conversion of the Series B
Preferred Shares, prior to such delivery, upon each national securities
exchange, if any, upon which the outstanding Common Shares are listed at
the time of such delivery.
A-9
<PAGE> 39
(d) Prior to the delivery of any securities that the Company shall be
obligated to deliver upon conversion of the Series B Preferred Shares, the
Company shall use its reasonable best efforts to comply with all federal
and state laws and regulations thereunder requiring the registration of
such securities with, or any approval of or consent to the delivery thereof
by, any governmental authority.
(e) The Company will pay any and all documentary stamp or similar
issue or transfer taxes payable in respect of the issue or delivery of
Common Shares or other securities or property on conversion of the Series B
Preferred Shares pursuant hereto; provided, however, that the Company shall
not be required to pay any tax that may be payable in respect of any
transfer involved in the issue or delivery of Common Shares or other
securities or property in a name other than that of the holder of the
Series B Preferred Shares to be converted, and no such issue or delivery
shall be made unless and until the person requesting such issue or delivery
has paid to the Company the amount of any such tax or has established, to
the reasonable satisfaction of the Company, that such tax has been paid.
(f) Except as otherwise provided herein, each holder of Series B
Preferred Shares called for redemption by the Company or otherwise
converted into Common Shares shall be the record holder of the Common
Shares which such holder is entitled to receive on account of such
redemption or conversion as of the date such redemption or conversion is
deemed to have occurred under the terms of this Statement of Designation.
D. REDEMPTION OF SERIES B PREFERRED SHARES.
(1) Redemption by the Company. In addition to the Company's right to redeem
the Series B Preferred Shares under the circumstances specified in subparagraphs
(2) and (7) below, the Series B Preferred Shares shall be redeemable by the
Company at its option, in whole but not in part, if the Company Compound Annual
Return at the close of business on the first or second anniversary of the Issue
Date, as the case may be, is 1,000 basis points or more below the NAREIT Return.
The redemption price (the "Redemption Price") for each Series B Preferred Share
shall be calculated as of the Series B Preferred Shares Redemption Date (as
defined in subparagraph (4) below) and shall equal:
(a) (1 plus the NAREIT Return as of the Series B Preferred Shares
Redemption Date(N), multiplied by the Initial Investment (where N is an
exponent that equals the number of years from the Issue Date to the Series
B Preferred Shares Redemption Date), plus
(b) 5% multiplied by the Initial Investment, minus
(c) the Average Share Price of the Common Shares on the Series B
Preferred Shares Redemption Date, multiplied by the Dividend Shares,
divided by
(d) the aggregate number of Series B Preferred Shares outstanding on
the Issue Date.
Each holder of Series B Preferred Shares on the Series B Preferred Shares
Redemption Date shall be entitled, at such holder's election, to receive the
Redemption Price in cash or Common Shares, subject to subparagraphs (2) and (7).
The number of Common Shares to be delivered in payment of the Redemption Price
shall equal the Redemption Price divided by the Average Share Price on the
Series B Preferred Shares Redemption Date.
(2) Redemption Relating to REIT Status. The Series B Preferred Shares may
be redeemed at any time at the option of the Company, in whole or from time to
time in part, at a price per Series B Preferred Share equal to the greater of
(i) the price per Series B Preferred Share equal to the Conversion Rate
multiplied by the Average Share Price at the close of business on the Series B
Preferred Shares Redemption Date or (ii) the Redemption Price, if the Board of
Trust Managers reasonably determines in good faith that such a redemption is
necessary or advisable to preserve the status of the Company as a REIT for
federal income tax purposes, subject to the provisions below. Any redemption
made pursuant to this subparagraph (2) will be accompanied or preceded by an
opinion of legal counsel selected and employed by the Company (subject to the
last sentence of this subparagraph (2)) for the purpose of rendering an opinion
confirming the necessity or advisability of such redemption (and, if applicable,
the necessity or advisability of making any required
A-10
<PAGE> 40
redemption payment in cash, in which case the Company may make such redemption
payment in accordance with such opinion notwithstanding any contrary election by
the holder whose Series B Preferred Shares are the subject of the redemption) in
order to preserve the status of the Company as a REIT for federal income tax
purposes. For purposes of this subparagraph (2), the opinion of Shaw, Pittman,
Potts & Trowbridge or of any other legal counsel selected and employed by the
Company for the purpose of rendering such opinion and approved (which approval
shall not be unreasonably withheld) by the holders of a majority of the Series B
Preferred Shares shall be acceptable.
(3) Partial Redemption. If fewer than all of the outstanding Series B
Preferred Shares are to be redeemed pursuant to subparagraph (2) above, the
Series B Preferred Shares to be redeemed will be determined pro rata or in such
other manner determined by the Company's Board of Trust Managers in its sole
discretion to be reasonable and equitable to all of the holders of Series B
Preferred Shares, provided that such method satisfies any applicable
requirements of any securities exchange on which the Series B Preferred Shares
are listed.
(4) Notice of Redemption. Notice of redemption must be sent within five (5)
business days of the date giving rise to the Company's right to redeem and
provide for redemption on the date that is no more than ten (10) business days
after the date giving rise to the Company's right to redeem (the "Series B
Preferred Shares Redemption Date"), to each holder of record of Series B
Preferred Shares to be redeemed, notifying such holder of the Company's election
to redeem such shares, stating the Series B Preferred Shares Redemption Date,
the number of shares to be redeemed (and, if fewer than all the Series B
Preferred Shares are to be redeemed, the number of shares to be redeemed from
such holder), the place(s) where the Series B Preferred Share certificates are
to be surrendered for payment, and the date on which such holder's conversion
rights, if any, as to the Series B Preferred Shares shall terminate.
Distributions on the Series B Preferred Shares will cease to accrue on the
Series B Preferred Shares Redemption Date; provided, however, that, persons who
were holders of record of Series B Preferred Shares on the record date for any
distribution(s) that are accrued and unpaid shall be entitled to receive all
such distributions.
For purposes of this paragraph D, the dates that give rise to the Company's
right to redeem the Series B Preferred Shares are as follows: (i) for purposes
of a redemption pursuant to subparagraph (1) above, the first or second
anniversary of the Issue Date, as the case may be, (ii) for purposes of a
redemption pursuant to subparagraph (2) above, the date on which the Board of
Trust Managers first determines, in good faith, that the redemption of all or a
portion of the Series B Preferred Shares is necessary or advisable to preserve
the status of the Company as a REIT for federal income tax purposes, and (iii)
for purposes of a redemption pursuant to subparagraph (7) below, the earlier of
the date that is thirty (30) days after the Company's notice to a record or
beneficial owner in accordance with subparagraph (7)(i) or the date that is
prescribed by a Gaming Authority (as defined below).
(5) Procedures for Redemption. On or after the Series B Preferred Shares
Redemption Date, each holder of Series B Preferred Shares to be redeemed must
present and surrender his Series B Preferred Share certificates, if any, to the
Company at the place designated in such notice and thereupon the redemption
price of such Series B Preferred Shares will be paid to or on the order of the
Person whose name appears on such Series B Preferred Share certificates, if any,
as the owner thereof (or, if the Series B Preferred Shares are book entry
securities, the redemption price of such Series B Preferred Shares will be paid
to the Person whose name appears as the holder thereof in the records of the
Transfer Agent), and each such Series B Preferred Share certificate surrendered
will be canceled. From and after the Series B Preferred Shares Redemption Date,
all distributions on the Series B Preferred Shares designated for redemption in
such notice will cease to accrue and all rights of the holders thereof
(including conversion rights), except the right to receive the redemption price
thereof (including any accrued and unpaid distributions up to the Series B
Preferred Shares Redemption Date), will cease and terminate and such shares will
not thereafter be transferred (except with the consent of the Company) on the
Company's books, and such Series B Preferred Shares shall not be deemed to be
outstanding for any purpose whatsoever. At its election, the Company, prior to
the date of payment of the Redemption Price pursuant to this subparagraph (5),
may irrevocably deposit the Redemption Price (including any accrued and unpaid
distributions) of the Series B Preferred Shares so called for redemption in
trust for the holders thereof with a bank or trust company, in which case such
notice to holders of the Series B
A-11
<PAGE> 41
Preferred Shares to be redeemed will (i) state the date of such deposit, (ii)
specify the office of such bank or trust company as the place of payment of the
Redemption Price and (iii) call upon such holders to surrender the Series B
Preferred Share certificates, if any, representing such shares at such place on
or about the date fixed in such redemption notice against payment of the
Redemption Price (including all accrued and unpaid distributions up to the
Series B Preferred Shares Redemption Date). Any moneys so deposited which remain
unclaimed by the holders of the Series B Preferred Shares at the end of two
years after the Series B Preferred Shares Redemption Date will be returned by
such bank or trust company to the Company. In the event any holder elects to be
redeemed in cash rather than Common Shares, the Company shall pay the required
amount of cash to the holder within three (3) business days after the Series B
Preferred Shares Redemption Date, without interest. If the Company fails to pay
the Redemption Price on or before the third (3rd) business day following the
Series B Preferred Shares Redemption Date, such amount thereafter shall bear
interest at the annual rate of LIBOR plus 1.25%, compounded monthly, up to and
including the fifth (5th) business day following the Series B Preferred Shares
Redemption Date. If the Company fails to pay the Redemption Price on or before
the fifth (5th) business day following the Series B Preferred Shares Redemption
Date, such amount thereafter shall continue to bear interest at the annual rate
of LIBOR plus 4.00%, compounded monthly, until the date of payment.
Notwithstanding the foregoing, nothing contained in this paragraph (D) shall
permit the Company to delay making any required payment to the holders of the
Series B Preferred Shares beyond three (3) business days after the Series B
Preferred Shares Redemption Date.
(6) Payment of Distributions. Notwithstanding the foregoing, unless all
Extraordinary Distributions payable with respect to the Series B Preferred
Shares have been paid to the holders thereof, or declared and a sum sufficient
for the payment thereof set apart for payment to the holders thereof, no Series
B Preferred Shares shall be redeemed (except pursuant to subparagraph (2)
above), which redemption shall not affect or limit the Company's obligation to
pay such Extraordinary Distributions after such redemption; provided, however,
that the foregoing shall not prevent the purchase or acquisition of Series B
Preferred Shares pursuant to a purchase or exchange offer made on the same terms
to holders of all outstanding Series B Preferred Shares, which purchase or
acquisition shall not affect the Company's obligation to pay all Extraordinary
Distributions payable prior to the date of such purchase or acquisition.
(7) Redemption Attributable to Certain Regulatory Requirements. If at any
time the Company is subject to the jurisdiction of an agency or other authority
of any state, county, city or other political subdivision with respect to any
activities of the Company or any of its subsidiaries related to gaming (a
"Gaming Authority"), and such Gaming Authority either finds a holder or a record
or beneficial owner of a holder to be unsuitable or is unable to make a
determination because a holder or any such record or beneficial owner is unable
or unwilling to provide the requisite information, then notwithstanding any
other provision of this Statement of Designation, the Company shall have the
right, by written notice to such record or beneficial owner, (i) to require such
record or beneficial owner of Series B Preferred Shares to dispose of such
owner's Series B Preferred Shares within thirty (30) days or, if applicable,
within the time prescribed by such Gaming Authority, whichever is earlier, and
(ii) if such disposition is not made in accordance with clause (i), to redeem
each Series B Preferred Share of such owner at the greater of (A) the price per
Series B Preferred Share equal to the Conversion Rate multiplied by the Average
Share Price on the Series B Preferred Shares Redemption Date or (B) the
Redemption Price, on the terms set forth above (other than subparagraphs (3) and
(6) of this paragraph (D), which subparagraphs shall not apply to any such
redemption). Notwithstanding anything to the contrary set forth in subparagraph
(1), the Company shall have the right and obligation to pay the Redemption Price
for any redemption pursuant to this subparagraph (7) in cash.
(8) No Maturity Date or Sinking Fund Provisions. The Series B Preferred
Shares have no stated maturity date and will not be subject to any sinking fund
or, except as provided above, to mandatory redemption.
E. VOTING RIGHTS.
(1) General. Except as required by law or as provided below, the holders of
the Series B Preferred Shares shall not be entitled to vote at any meeting of
the shareholders for election of Trust Managers or for
A-12
<PAGE> 42
any other purposes or otherwise to participate in any action taken by the
Company or the shareholders thereof, or to receive notice of any meeting of
shareholders.
(2) Method of Voting. In any matter in which the Series B Preferred Shares
are entitled to vote (as expressly provided herein or as may be required by
law), including any action by written consent, each Series B Preferred Share
shall be entitled to one vote.
(3) Right to Elect Trust Managers. In the event that at any time or from
time to time, the Company is in arrears in the payment of Extraordinary
Distributions on the Series B Preferred Shares or the Company failed to honor
its conversion or redemption obligations, the holders of the Series B Preferred
Shares, voting separately as a class with all other series of Preferred Shares
upon which rights to elect trust managers upon arrearages in distributions have
been conferred and are exercisable, will be entitled to vote for the election of
two additional trust managers of the Company at a special meeting called by the
holders of record of at least ten percent (10%) of any series of Preferred
Shares so in arrears (unless such request is received less than 90 days before
the date fixed for the next annual or special meeting of the shareholders) or at
the next annual meeting of shareholders, and all other trust managers of the
Company shall be elected by the holders of the Company's Common Shares. In such
case, the entire Board of Trust Managers of the Company will be increased by two
trust managers. Voting rights of the holders of the Series B Preferred Shares
shall continue at each subsequent annual meeting until all Extraordinary
Distributions in arrears on such Series B Preferred Shares shall have been fully
paid or declared and a sum sufficient for the payment thereof set aside for
payment. At such time, the term of office of the trust managers so elected by
the holders of Preferred Shares shall terminate forthwith and the number of
members of the Board of Trust Managers automatically shall be decreased by two.
(4) Certain Additional Voting Rights. As long as any Series B Preferred
Shares remain outstanding, the Company will not, without the affirmative vote or
consent of the holders of at least two-thirds of the Series B Preferred Shares
outstanding at the time, given in person or by proxy, either in writing or at a
meeting (such series voting separately as a class) (i) authorize or create, or
increase the authorized or issued amount of, any class or series of shares of
beneficial interest ranking prior to the Series B Preferred Shares with respect
to the payment of distributions to which the Series B Preferred Shares would be
entitled or prior to the distribution of assets upon liquidation, dissolution or
winding up or reclassify any authorized shares of beneficial interest of the
Company into such shares, or create, authorize or issue any obligation or
security convertible into or evidencing the right to purchase any such shares;
(ii) authorize or undertake a share exchange that would affect the Series B
Preferred Shares (unless the Series B Preferred Shares shall be converted into
or exchanged for convertible preferred shares having preferences, conversion or
other rights, voting powers, restrictions, limitations as to dividends,
qualifications and terms or conditions of redemption thereof identical (except
for changes that do not materially and adversely affect the holders of the
Series B Preferred Shares) to that of a Series B Preferred Share); or (iii)
amend, alter or repeal the provisions of the Declaration of Trust or this
Statement of Designation or By-Laws, whether by merger, consolidation or
otherwise (an "Event"), so as to materially and adversely affect any right,
preference, privilege or voting power of the Series B Preferred Shares or the
holders thereof; provided, however, with respect to the occurrence of any of the
Events set forth in (ii) above, so long as the Series B Preferred Shares (or
shares into which the Series B Preferred Shares have been converted in any
successor entity to the Company) remain outstanding with the terms thereof
materially unchanged, taking into account that upon the occurrence of an Event,
the Company may not be the surviving entity, the occurrence of any such Event
shall not be deemed to materially and adversely affect such rights, preferences,
privileges or voting power of holders of Series B Preferred Shares; and
provided, further, that (x) any increase in the amount of the authorized
Preferred Shares or the creation or issuance of any other Series B Preferred
Shares, or (y) any increase in the amount of authorized Series B Preferred
Shares, in each case ranking on a parity with or junior to the Series B
Preferred Shares with respect to payment of distributions or the distribution of
assets upon liquidation, dissolution or winding up, shall not be deemed to
materially and adversely affect such rights, preferences, privileges or voting
power.
The foregoing voting provisions will not apply if, at or prior to the time
when the act with respect to which such vote would otherwise be required shall
be effected, all outstanding Series B Preferred Shares shall have
A-13
<PAGE> 43
been redeemed or called for redemption and sufficient funds shall have been
deposited in trust to effect such redemption.
F. LIQUIDATION PREFERENCE.
(1) Preference. Upon the voluntary or involuntary dissolution, liquidation
or winding up of the Company, the holders of the Series B Preferred Shares then
outstanding shall be entitled to receive and to be paid out of the assets of the
Company legally available for distribution to its shareholders, before any
payment or distribution shall be made on any Junior Shares, the amount of $32.38
per Series B Preferred Share, plus an amount equal to distributions accrued and
unpaid thereon to the date fixed for such dissolution, liquidation or winding up
of the Company.
(2) Limitation on Rights. After the payment to the holders of the Series B
Preferred Shares of the full preferential amounts provided for in this paragraph
(F), the holders of the Series B Preferred Shares as such shall have no right or
claim to any of the remaining assets of the Company.
(3) Rights Upon Company's Failure to Pay Liquidation Preference. If, upon
any voluntary or involuntary dissolution, liquidation, or winding up of the
Company, the amounts payable with respect to the preference value of the Series
B Preferred Shares and any Parity Shares are not paid in full, the holders of
the Series B Preferred Shares and of such Parity Shares shall share ratably in
any such distribution of assets of the Company in proportion to the full
respective preferential amounts to which they are entitled.
(4) Sale of Assets, Merger, and Consolidation Not a Liquidation. Neither
the sale, lease or conveyance of all or substantially all the property or
business of the Company, nor the merger or consolidation of the Company into or
with any other entity, or the merger or consolidation of any other entity into
or with the Company or a statutory share exchange, shall be deemed to be a
dissolution, liquidation or winding up, voluntary or involuntary, of the Company
for the purposes of this paragraph (F).
(5) Shares to be Retired. All Series B Preferred Shares which shall have
been issued and reacquired in any manner by the Company shall be restored to the
status of authorized but unissued Preferred Shares, without designation as to
series.
G. COVENANT OF COMPANY.
During the 20 consecutive trading days used for the determination of the
Average Share Price preceding the first, second and third anniversary of the
Issue Date, the Company will not announce, implement or conduct any share
buy-back or repurchase program or increase distributions if such act could
reasonably be expected to have the effect of increasing the Average Share Price.
H. EXCLUSION OF OTHER RIGHTS.
Except as may otherwise be required by law, the Series B Preferred Shares
shall not have any voting powers, preferences and relative, participating,
optional or other special rights, other than those specifically set forth in
this Statement of Designation (as such Statement of Designation may be amended
from time to time) and in the Declaration of Trust. The Series B Preferred
Shares shall have no preemptive or subscription rights.
I. HEADINGS OF SUBDIVISIONS.
The headings of the various subdivisions hereof are for convenience of
reference only and shall not affect the interpretation of any of the provisions
hereof.
J. SEVERABILITY OF PROVISIONS.
If any one or more of the voting powers, preferences and relative,
participating, optional and other special rights of the Series B Preferred
Shares and qualifications, limitations and restrictions thereof set forth in
this Statement of Designation (as such Statement of Designation may be amended
from time to time) are invalid, unlawful or incapable of being enforced by
reason of any rule of law or public policy, all other voting powers,
A-14
<PAGE> 44
preferences and relative, participating, optional and other special rights of
Series B Preferred Shares and qualifications, limitations and restrictions
thereof set forth in this Statement of Designation (as so amended) which can be
given effect without the invalid, unlawful or unenforceable voting powers,
preferences and relative, participating, optional or other special rights of
Series B Preferred Shares and qualifications, limitations and restrictions
thereof herein set forth shall be deemed dependent upon any other such voting
powers, preferences and relative, participating, optional or other special right
of Series B Preferred Shares and qualifications, limitations and restrictions
thereof unless so expressed herein.
K. ADOPTION.
This Statement of Designation was duly adopted by the Board of Trust
Managers of the Company. Shareholder action was not required.
* * *
IN WITNESS WHEREOF, I hereby certify that I, Gerald W. Haddock, am the
President and Chief Executive Officer of Crescent Real Estates Equities Company
(the "Company") and that as such, I am authorized to execute and file with the
County Clerk of Tarrant County, Texas this Statement of Designation (the
"Statement of Designation") on behalf of the Company and I further certify on
behalf of the Company that this Statement of Designation was authorized by the
Board of Trust Managers by unanimous written consent dated as of June 26, 1998
and is still in full force and effect as of the date hereof. I further certify
that my signature to this document is my free act and deed, that to the best of
my knowledge, information and belief, the matters and facts set forth herein are
true in all material respects and that this statement is made under penalty of
perjury.
Dated: June 29, 1998
CRESCENT REAL ESTATE EQUITIES
COMPANY
/s/ GERALD W. HADDOCK
------------------------------------
Name: Gerald W. Haddock
Title: President and Chief
Executive Officer
The undersigned, David M. Dean, the Senior Vice President, Law and
Secretary of the Company, hereby certifies that Gerald W. Haddock is the
President and Chief Executive Officer of the Company and that the signature set
forth above is his genuine signature.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 29th day
of June, 1998.
/s/ DAVID M. DEAN
------------------------------------
Name: David M. Dean
Title: Senior Vice President, Law
and Secretary
A-15
<PAGE> 45
STATE OF TEXAS
COUNTY OF TARRANT
This instrument was acknowledged before me on June 29, 1998, by Gerald W.
Haddock, President and Chief Executive Officer of Crescent Real Estate Equities
Company, a Texas real estate investment trust, on behalf of said real estate
investment trust.
/s/ ELIZABETH ANN HAYS
------------------------------------
Notary Public -- State of Texas
ELIZABETH ANN HAYS
------------------------------------
Printed Name of Notary Public
My Commission expires:
July 30, 2000
- ------------------------------------------------------
STATE OF TEXAS
COUNTY OF TARRANT
This instrument was acknowledged before me on June 29, 1998, by David M.
Dean.
/s/ ELIZABETH ANN HAYS
------------------------------------
Notary Public -- State of Texas
ELIZABETH ANN HAYS
------------------------------------
Printed Name of Notary Public
My Commission expires:
July 30, 2000
- ------------------------------------------------------
A-16
<PAGE> 46
EXHIBIT A
EXAMPLE OF CALCULATION OF
COMPANY COMPOUND ANNUAL RETURN,
CONVERSION RATE, AND INVESTMENT RETURN
RETURN AND CONVERSION ANALYSIS
CEI COMPOUND ANNUAL RETURN CALCULATION - AS DEFINED BY SECTION A(8)
<TABLE>
<CAPTION>
YEAR 1 YEAR 2 YEAR 3
------------ ------------ ------------
<S> <C> <C> <C>
Initial shares..................................... 6,428,571 6,685,864 6,935,833
Shares purchased with dividend dollars............. 257,293 249,969 242,296
------------ ------------ ------------
Total shares....................................... 6,685,864 6,935,833 7,178,129
Share price at year end............................ $ 43.36 $ 53.71 $ 66.54
------------ ------------ ------------
Share value at year end............................ $289,899,063 $372,523,590 $477,632,704
Share value at beginning of year................... $225,000,000 $289,899,063 $372,523,590
------------ ------------ ------------
Annual gain........................................ $ 64,899,063 $ 82,624,527 $105,109,114
Annual return...................................... 28.8% 28.5% 28.2%
COMPOUND ANNUAL RETURN................... 28.5%
</TABLE>
INVESTMENT RETURN -- AS DEFINED BY SECTION A(15)
<TABLE>
<S> <C>
NAREIT Compound Annual Return............................... 12.00%
0-500 bps - 75%............................................. 3.75%
501-1000 bps - 50%.......................................... 2.50%
1001-2000 bps - 25%......................................... 1.63%
2001+bps - 10%.............................................. 0.00%
-----
Investment Return................................. 19.88%
</TABLE>
CONVERSION RATE -- AS DEFINED BY SECTION C(2)
<TABLE>
<S> <C>
(1 plus the Investment Return)(3 years)................ 172.3%
Multiplied by the Initial Investment................... 225,000,000
-----------
387,675,000
Minus the Avg. share price at conversion multiplied by
the dividend shares.................................. --
-----------
387,675,000
Divided by Average Share Price......................... 66.54
-----------
5,826,195
Divided by the aggregate number of Series B
Preferred shares issued.............................. 6,428,571
-----------
Conversion Rate.............................. 0.9063
</TABLE>
Note: All sections references refer to the Statement of Designation of Series B
Convertible Preferred Shares of Crescent Real Estate Equities Company
A-17
<PAGE> 47
ASSUMPTIONS*
<TABLE>
<S> <C>
Value of offering........................................... 225,000,000
CEI Average Share Price at Issuance......................... $ 35.00
Equivalent common shares issued............................. 6,428,571
CEI Current Quarterly Dividend.............................. $ 0.38
CEI annual dividend growth rate (increase occurs for 4Q
dividend)................................................. 15.00%
Extraordinary dividends..................................... $ --
Year 1 stock price growth rate -- quarterly................. 5.50%
Year 2 stock price growth rate -- quarterly................. 5.50%
Year 3 stock price growth rate -- quarterly................. 5.50%
NAREIT Return............................................... 12.00%
</TABLE>
CEI HYPOTHETICAL RETURN DETAIL
CEI STOCK PRICE TABLE
<TABLE>
<CAPTION>
YEAR 1Q 2Q 3Q 4Q
---- ------ ------ ------ ------
<S> <C> <C> <C> <C>
1.................................................. $36.93 $38.96 $41.10 $43.36
2.................................................. 45.74 48.26 50.91 53.71
3.................................................. 56.66 59.78 63.07 66.54
</TABLE>
CEI DIVIDEND PER SHARE TABLE
<TABLE>
<CAPTION>
YEAR 1Q 2Q 3Q 4Q TOTAL
---- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
1.............................................. $0.38 $0.38 $0.38 $0.44 $1.58
2.............................................. 0.44 0.44 0.44 0.51 1.83
3.............................................. 0.51 0.51 0.51 0.59 2.12
</TABLE>
CASH DIVIDENDS PAID
<TABLE>
<CAPTION>
YEAR 1Q 2Q 3Q 4Q TOTAL
---- ---------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
1....................... $2,442,857 $2,467,993 $2,492,065 $2,912,228 $10,315,143
2....................... 2,941,780 2,970,079 2,997,158 3,504,003 12,413,020
3....................... 3,537,275 3,569,114 3,599,564 4,197,874 14,903,827
-----------
37,631,990
</TABLE>
- ---------------
* The prices, amounts, dividends, growth rates, holding periods and other facts
specified herein are used in this exhibit solely for purposes of illustration
and are not intended and do not purport to include, predict or limit the
actual performance of the Series B Preferred Shares, and fail to, among other
things, assume facts in which Extraordinary Distributions have been made to
the holders.
A-18
<PAGE> 48
EXHIBIT B
CALCULATION OF NAREIT RETURN
The NAREIT indices are market weighted performance measures that represent
all tax-qualified REITs on the New York Stock Exchange, American Stock Exchange
and NASDAQ National Market System. The NAREIT performance indices have been the
industry standard for over 25 years.
The Dividend Yield calculation is a follows:
YLD(t) = the sum of [S(t)*(D*f)/r+S(t)*D(s)/r(s)]
----------------------------------------
the Sum of [S(t)*P(t)]
Where:
<TABLE>
<S> <C>
t = time or current period
S = Common Shares outstanding
D = last ex-date ordinary cash dividend amount
f = frequency of regular dividend (most REITs pay regular
dividends quarterly or 4 times a year)
P = Price of stock
D(s) = Special cash dividend distributions made over the previous
12 months. For REITs these are typically called deficiency
or special dividends and are related to the 95% pay
requirement. Liquidating distributions, special capital
gain distributions, rights offerings, spinoffs or stock
distributions are not included for dividend yield
purposes.
r = ratio of new shares to old when stock distribution or
split has been made effective since the last ex-date
dividend event
r(s) = ratio of new shares to old when stock distribution or
split has been made effective since the last ex-date of
special cash distribution event
</TABLE>
The Price Return calculation is as follows:
PR = the sum of [S(t-1)*(P(t)+D(x))*r(t)]- the sum of [S(t-1)*P(t-1)]
----------------------------------------------------------------
the sum of [S(t-1)*P(t-1)]
Where:
<TABLE>
<S> <C>
t = time or current period
t-1 = previous period
P = Price of stock
S = Common Shares outstanding
D(x) = Any special distributions not considered in the dividend
yield calculation included on the ex-date of the
distribution. The value of spinoff distributions is based
upon either first day trading close of the stock if
available or management's estimate of value which is
usually identified in a proxy/prospectus.
r(t) = the ratio of new stock to old when stock distribution or
split has been made effective
</TABLE>
The calculation for the Share Price index is as follows:
PRindex = PRindex(t-1)*(1+PR(t))
Where:
<TABLE>
<S> <C>
t = time or current period
t-1 = previous period
PRindex = index value for Share Price index
PR = share price return
</TABLE>
All references to ex-date distributions should be references to payable
date distributions.
A-19
<PAGE> 49
The Total Return calculation is as follows:
TR = the sum of [S(t-1)*(P(t)+D)*r(t)]-the sum of[S(t-1)*P(t-1)]
-----------------------------------------------------------
the sum of [S(t-1)*P(t-1)]
Where:
<TABLE>
<S> <C>
t = time or current period
t-1 = previous period
P = Price of stock
S = Common Shares outstanding
D = All ex-date distributions. The value of spinoff
distributions is based upon either first day trading close
of the stock if available or management's estimate of
value, which is usually identified in a proxy/ prospectus.
r(t) = the ratio of new stock to old when stock distribution or
split has been made effective
</TABLE>
The Total Return Index calculation is as follows:
TRIndex = TRIndex(t-1)-(1+TR(t))
Where:
<TABLE>
<S> <C>
t = time or current period
t-1 = previous period
TRIndex = Total Return index value
TR = Total Return
</TABLE>
Specific rates of return are calculated as follows:
Monthly = (TRIndex(yymmdd)-TRIndex(yymm-1dd))
-----------------------------------
TRIndex(yymm-1dd)
Where:
<TABLE>
<S> <C>
TRIndex(yymmdd) = current total return index value as defined by date where
YY = year, mm = month and dd = day
TRIndex(yymm-1dd) = total return index value one month previous
</TABLE>
Year to date = (TRIndex(yymmdd)-TRIndex(yy1231))
---------------------------------
TRIndex(yy-11231)
Where:
<TABLE>
<S> <C>
TRIndex(yymmdd) = current total return index value as defined by date where
YY = year, mm = month and dd = day
TRIndex(yy-11231) = total return index value on December 31 of previous year
</TABLE>
One year return = (TRIndex(yymmdd)-TRIndex([(yy-1)(mmdd]))
----------------------------------------
TRIndex([(yy-1)(mmdd]))
Where:
<TABLE>
<S> <C>
TRIndex(yymmdd) = current total return index value as defined by date where
YY = year, mm = month and dd = day
TRIndex(yy-1)mmdd]) = total return index value one year prior
</TABLE>
A-20
<PAGE> 50
X year annualized rate of return =
[1(+TRIndex(yymmdd) - TRIndex([(yy-X)mmdd])(+)(1/X)-1]
------------------------------------------------------
TRIndex([(yy-x)mmdd)])
Where:
<TABLE>
<S> <C>
TRIndex(yymmdd) = current total return index value as defined by date where
YY=year, mm=month and dd=day
TRIndex([(yy-X)mmdd)]) = total return index value x years prior
</TABLE>
In addition, the following are calculation examples of r, the stock split
ratio:
When there is a 2 for 1 stock split the r value is 2
When there is a 10% stock dividend the r value is 1.1
When there is a reverse 1 for 2 stock split the r value is .5
A-21
<PAGE> 51
EXHIBIT C
EVENTS OF DEFAULT
Each of the events listed in paragraphs (a), (b), (c) and (d) below shall
constitute an "Event of Default" 60 days following written notice of such a
default from the record holders of a majority of the Series B Preferred Shares
provided that the events listed in paragraphs (a), (b), (c) and (d) below shall
not constitute an "Event of Default" if (i) such default is cured prior to the
end of such 60-day period or (ii) the corresponding default is waived prior to
the end of such 60-day period under the Company's 6 5/8% Notes Due 2002 or
7 1/8% Notes Due 2007 (the "Notes") in accordance with the provisions of such
Notes and the related Indenture. In addition, a declaration of acceleration
under the Notes as a result of any of the events listed in paragraphs (a), (b),
(c) and (d) below shall constitute an "Event of Default."
(a) The incurrence by the Company or any Subsidiary of any Debt other
than intercompany Debt (representing Debt to which the only parties are the
Company and any of its Subsidiaries, but only so long as such Debt is held
solely by the Company and any Subsidiary) that is subordinate in right of
payment to the Securities, if, immediately after giving effect to the
incurrence of such additional Debt, the aggregate principal amount of all
outstanding Debt of the Company and its Subsidiaries on a consolidated
basis determined in accordance with GAAP is greater than 60% of the sum of
(i) Total Assets as of the end of the fiscal quarter covered in the
Company's most recent quarterly or annual financial statements, as the case
may be, most recently required to be filed with the Securities and Exchange
Commission, prior to the incurrence of such additional Debt and (ii) the
increase or decrease in Total Assets from the end of such quarter
including, without limitation, any increase in Total Assets resulting from
the incurrence of such additional Debt (such increase or decrease, together
with the Total Assets, is referred to as the "Adjusted Total Assets"); and
(b) The incurrence by the Company or any Subsidiary of any Secured
Debt of the Company or any Subsidiary if, immediately after giving effect
to the incurrence of such additional Secured Debt, the aggregate principal
amount of all outstanding Secured Debt of the Company and its Subsidiaries
on a consolidated basis is greater than 40% of the Adjusted Total Assets;
and
(c) The incurrence by the Company or any Subsidiary of any Debt, other
than intercompany Debt, if the ratio of the Consolidated Income Available
for Debt Service to the Annual Debt Service Charge for the period
consisting of the four consecutive fiscal quarters most recently ended
prior to the date on which such additional Debt is to be incurred shall
have been less than 1.5 to 1 on a pro forma basis after giving effect to
the incurrence of such Debt and to the application of the proceeds
therefrom, and calculated on the assumption that (i) such Debt and any
other Debt incurred by the Company or its Subsidiaries since the first day
of such four-quarter period, which was outstanding at the end of such
period, had been incurred at the beginning of such period and continued to
be outstanding throughout such period, and the application of the proceeds
of such Debt, including to refinance other Debt, had occurred at the
beginning of such period, (ii) the repayment or retirement of any other
Debt by the Company or its Subsidiaries since the first day of such
four-quarter period had been repaid or retired at the beginning of such
period (except that, in determining the amount of Debt so repaid or
retired, the amount of Debt under any revolving credit facility shall be
computed based upon the average daily balance of such Debt during such
period), (iii) in the case of Acquired Indebtedness or Debt incurred in
connection with any acquisition since the first day of the four-quarter
period, the related acquisition had occurred as of the first day of the
period with the appropriate adjustments with respect to the acquisition
being included in the pro forma calculation, and (iv) in the case of any
increase or decrease in Total Assets, or any other acquisition or
disposition by the Company or any Subsidiary of any asset or group of
assets, since the first day of such four-quarter period, including, without
limitation, by merger, stock purchase or sale, or asset purchase or sale,
such increase, decrease, or other acquisition or disposition or any related
repayment of Debt had occurred as of the first day of such period with the
appropriate adjustments to revenues, expenses and Debt levels with respect
to such increase, decrease or other acquisition or disposition being
included in such pro forma calculation; and
A-22
<PAGE> 52
(d) The failure of the Company to maintain Total Unencumbered Assets
of not less than 150% of the aggregate outstanding principal amount of all
outstanding Unsecured Debt of the Company and its Subsidiaries on a
consolidated basis.
* * * * * *
The capitalized terms set forth above shall have the following respective
meanings:
"Acquired Indebtedness" means Debt of a person (i) existing at the
time the person becomes a Subsidiary or (ii) assumed in connection with the
acquisition of assets from the person, in each case, other than Debt
incurred in connection with, or in contemplation of, the person becoming a
Subsidiary or that acquisition. Acquired Indebtedness shall be deemed to be
incurred on the date of the related acquisition of assets from any person
or the date the acquired person becomes a Subsidiary.
"Adjusted Total Assets" has the meaning set forth in subparagraph (a)
above.
"Annual Debt Service Charge," as of any date, means the amount which
is expensed in any 12-month period for Consolidated Interest Expense of the
Company and its Subsidiaries.
"Consolidated Income Available for Debt Service" for any period means
Consolidated Net Income plus amounts which have been deducted in
determining Consolidated Net Income during such period for (i) Consolidated
Interest Expense, (ii) provision for taxes of the Company and its
Subsidiaries based on income, (iii) amortization (other than amortization
of debt discount) and depreciation, (iv) provisions for losses from sales
or joint ventures, (v) increases in deferred taxes and other non-cash
items, (vi) changes resulting from a change in accounting principles and
(vii) charges for early extinguishment of debt, and less amounts which have
been added in determining Consolidated Net Income during such period for
(a) provisions for gains from sales or joint ventures and (b) decreases in
deferred taxes and other non-cash items.
"Consolidated Interest Expense" means, for any period, and without
duplication, all interest (including the interest component of rentals on
leases reflected in accordance with GAAP as capitalized leases on the
Company's consolidated balance sheet, letter of credit fees, commitment
fees and other like financial charges) and all amortization of debt
discount on all Debt (including, without limitation, payment-in-kind, zero
coupon and other securities) of the Company and its Subsidiaries, but
excluding legal fees, title insurance charges and other out-of-pocket fees
and expenses incurred in connection with the issuance of Debt, all
determined in accordance with GAAP.
"Consolidated Net Income" for any period means the amount of net
income (or loss) of the Company and its Subsidiaries for such period
determined on a consolidated basis in accordance with GAAP.
"Debt" of any person means, without duplication, any indebtedness of
such person, whether or not contingent, in respect of (i) borrowed money
evidenced by bonds, notes, debentures or similar instruments, (ii)
indebtedness secured by any mortgage, pledge, lien, charge, encumbrance or
any security interest existing on property owned by such person, (iii) the
reimbursement obligations, contingent or otherwise, in connection with any
letters of credit actually issued or amounts representing the balance
deferred and unpaid of the purchase price of any property except any such
balance that constitutes an accrued expense or trade payable or (iv) any
lease of property by such person as lessee which is reflected on such
person's consolidated balance sheet as a capitalized lease in accordance
with GAAP; in the case of items of indebtedness under (i) through (iii)
above to the extent that any such items (other than letters of credit)
would appear as a liability on such person's consolidated balance sheet in
accordance with GAAP, and also includes, to the extent not otherwise
included, any obligation by such person to be liable for, or to pay, as
obligor, guarantor or otherwise (other than for purposes of collection in
the ordinary course of business), indebtedness of another person (other
than such person and its Subsidiaries) (it being understood that "Debt"
shall be deemed to be incurred by the Company and its Subsidiaries on a
consolidated basis whenever the Company and its Subsidiaries on a
consolidated basis
A-23
<PAGE> 53
shall create, assume, guarantee or otherwise become liable in respect
thereof; Debt of a Subsidiary of the Company existing prior to the time it
became a Subsidiary of the Company shall be deemed to be incurred upon such
Subsidiary's becoming a Subsidiary of the Company, and Debt of a person
existing prior to a merger or consolidation of such person with the Company
or any Subsidiary of the Company in which such person is the successor of
the Company or such Subsidiary shall be deemed to be incurred upon the
consummation of such merger or consolidation); provided, however, that the
term Debt shall not include any such indebtedness that has been the subject
of an "in substance" defeasance in accordance with GAAP.
"GAAP" means generally accepted accounting principles consistently
applied.
"Secured Debt" means, without duplication, Debt secured by any
mortgage, trust deed, deed of trust, deed to secure Debt, security
agreement, pledge, conditional sale or other title retention agreement,
capitalized lease, or other like agreement granting or conveying security
title to or a security interest in real property or other tangible assets.
Secured Debt shall be deemed to be incurred (i) on the date the Company or
any Subsidiary creates, assumes, guarantees or otherwise becomes liable in
respect thereof if it is secured in the manner described in the preceding
sentence on such date or (ii) on the date the Company or any Subsidiary
first secures such Debt in the manner described in the preceding sentence
if such Debt was not so secured on the date it was incurred.
"Significant Subsidiary" means any Subsidiary which is a "significant
subsidiary" (as defined in Article 1, Rule 1-02 of Regulation S-X,
promulgated under the Securities Act of 1933, as amended) of the Company.
"Subsidiary" means (i) a corporation, partnership, limited liability
company, trust, real estate investment trust or other entity 50% or more of
the voting power of the voting equity securities of which are owned,
directly or indirectly, by the Company or by one or more Subsidiaries of
the Company, (ii) a partnership, limited liability company, trust, real
estate investment trust, or other entity not treated as a corporation for
federal income tax purposes 50% or more of the value of the equity
interests of which are owned, directly or indirectly, by the Company or by
one or more other Subsidiaries of the Company and (iii) one or more
corporations which, either individually or in the aggregate, would be
Significant Subsidiaries (as defined above, except that the investment,
asset and equity thresholds for purposes of this definition shall be 5%),
50% or more of the value of the equity interests of which are owned,
directly or indirectly, by the Company or by one or more Subsidiaries.
"Total Assets" as of any date means the sum of (i) Undepreciated Real
Estate Assets and (ii) all other assets of the Company and its Subsidiaries
on a consolidated basis determined in accordance with GAAP (but excluding
intangibles and accounts receivable).
"Total Unencumbered Assets" as of any date means the sum of (i) those
Undepreciated Real Estate Assets not securing any portion of Secured Debt
and (ii) all other assets of the Company and its Subsidiaries on a
consolidated basis not securing any portion of Secured Debt determined in
accordance with GAAP (but excluding intangibles and accounts receivable).
"Undepreciated Real Estate Assets" as of any date means the cost
(original cost plus capital improvements) of real estate assets of the
Company and its Subsidiaries on such date, before depreciation and
amortization, determined on a consolidated basis in accordance with GAAP.
"Unsecured Debt" means Debt of the Company or any Subsidiary that is
not Secured Debt.
A-24
<PAGE> 54
EXHIBIT D
PROPOSED FORMATION OF CASINO PARTNERSHIP
AND RELATED RIGHTS OFFERING
Following the completion of the merger (the "Merger") of Station Casinos,
Inc. ("Station") with and into the Company, the Company intends to contribute
substantially all of the real estate assets acquired from Station to a new
partnership (the "Casino Partnership") that will invest principally in casinos,
other gaming properties and other real estate properties in Las Vegas, Nevada.
The Company initially would own all of the Casino Partnership, but expects to
offer holders of its Common Shares and holders of units in the Operating
Partnership rights to acquire common or preferred equity interests in the Casino
Partnership, or in a real estate investment trust which would hold interests in
the Casino Partnership. The record date for any such offering would follow the
closing of the Merger. It is expected that any proceeds raised through such an
offering would be used to prepay indebtedness assumed in connection with the
Merger or to fund new acquisitions or developments. At this time, the terms of
any such offering and the type of securities that may be offered have not been
determined. Each of the proposed transactions is contingent upon the completion
of the Merger.
A-25
<PAGE> 55
[This page has been left blank intentionally.]
<PAGE> 56
============================================================
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS SUPPLEMENT AND PROSPECTUS IN CONNECTION WITH THE OFFER CONTAINED
HEREIN, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR BY THE UNDERWRITER. THIS
PROSPECTUS SUPPLEMENT AND PROSPECTUS DOES NOT CONSTITUTE AN OFFER OF ANY
SECURITIES OTHER THAN THOSE TO WHICH IT RELATES OR AN OFFER TO SELL, OR A
SOLICITATION OF AN OFFER TO BUY, THOSE TO WHICH IT RELATES IN ANY STATE TO ANY
PERSON TO WHOM IT IS NOT LAWFUL TO MAKE SUCH OFFER IN SUCH STATE. THE DELIVERY
OF THIS PROSPECTUS SUPPLEMENT AND PROSPECTUS AT ANY TIME DOES NOT IMPLY THAT THE
INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THIS DATE.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PROSPECTUS SUPPLEMENT
The Company................................. S-3
Description of Series B Preferred Shares.... S-6
Use of Proceeds............................. S-11
Management.................................. S-12
Structure of the Company.................... S-12
Federal Income Tax Considerations........... S-14
Plan of Distribution........................ S-29
Legal Matters............................... S-29
Annex A -- Statement of Designation......... A-1
PROSPECTUS
The Company................................. 2
Risk Factors................................ 2
Use of Proceeds............................. 7
Ratios of Earnings to Fixed Charges and
Preferred Shares Dividends................ 7
Description of Preferred Shares............. 7
Description of Common Shares................ 12
Description of Common Share Warrants........ 14
Certain Provisions of the Declaration of
Trust, Bylaws and Texas Law............... 15
ERISA Considerations........................ 18
Plan of Distribution........................ 20
Available Information....................... 21
Incorporation of Certain Documents by
Reference................................. 21
Experts..................................... 22
Legal Matters............................... 23
</TABLE>
============================================================
============================================================
6,948,734 SHARES
CRESCENT REAL ESTATE
EQUITIES COMPANY
SERIES B CONVERTIBLE
PREFERRED SHARES
(LIQUIDATION PREFERENCE
$32.38 PER SHARE)
[CRESCENT LOGO]
------------
PROSPECTUS SUPPLEMENT
JUNE 29, 1998
------------
============================================================
