<PAGE> 1
Filed Pursuant to Rule 424(b)(5)
Registration No. 333-38071
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED DECEMBER 12, 1997)
8,000,000 SHARES
[CRESCENT LOGO]
6 3/4% SERIES A CONVERTIBLE CUMULATIVE PREFERRED SHARES
(LIQUIDATION PREFERENCE $25.00 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 84 office properties
with an aggregate of approximately 30.3 million net rentable square feet, 90
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.
Distributions on the 6 3/4% Series A Convertible Cumulative Preferred Shares
of beneficial interest of the Company (the "Series A Preferred Shares") offered
hereby 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 year, commencing on 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). See "Description of Series A Preferred Shares --
Distributions."
Series A Preferred Shares are convertible at any time, in whole or in part,
at the option of the holders thereof into common shares of beneficial interest
of the Company (the "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. See
"Description of Series A Preferred Shares." On February 12, 1998, the last
reported sale price of the Common Shares on the New York Stock Exchange (the
"NYSE") was $34.625 per share. See "Price Range of Common Shares and
Distributions."
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. See
"Description of Series A 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
and 8.0% of the issued and outstanding Common Shares.
Application has been made to list the Series A Preferred Shares on the NYSE
under the symbol "CEIPrA."
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>
<S> <C> <C> <C>
===========================================================================================================================
UNDERWRITING
PRICE TO DISCOUNT AND PROCEEDS TO
PUBLIC(1) COMMISSION(2) COMPANY(3)
- ---------------------------------------------------------------------------------------------------------------------------
Per Share $25.00 $1.00 $24.00
- ---------------------------------------------------------------------------------------------------------------------------
Total(4) $200,000,000 $8,000,000 $192,000,000
===========================================================================================================================
</TABLE>
(1) Plus accrued distributions, if any, from the date of original issue.
(2) For information regarding indemnification of the Underwriter, see
"Underwriting."
(3) Before deducting expenses payable by the Company, estimated at $750,000.
(4) The Company has granted the Underwriter a 30-day option to purchase up to
1,200,000 additional shares solely to cover over-allotments, if any. If
such option is exercised in full, the total Price to Public, Underwriting
Discount and Commission and Proceeds to Company will be $230,000,000,
$9,200,000 and $220,800,000, respectively. See "Underwriting."
------------------------
The Series A Preferred Shares offered hereby are being offered by the
Underwriter named herein subject to prior sale, when, as and if accepted by the
Underwriter, and subject to certain conditions. It is expected that certificates
for the Series A Preferred Shares offered hereby will be available for delivery
on or about February 19, 1998, at the offices of Smith Barney Inc., 333 West
34th Street, New York, New York 10001.
------------------------
SALOMON SMITH BARNEY
February 13, 1998
<PAGE> 2
------------------------
The Underwriter may engage in transactions that stabilize, maintain or otherwise
affect the price of the Series A Preferred Shares offered hereby. Such
transactions may include stabilizing transactions and the purchase of Series A
Preferred Shares to cover short positions. For a description of these
activities, see "Underwriting."
<PAGE> 3
PROSPECTUS SUPPLEMENT SUMMARY
The following Prospectus Supplement Summary is qualified in its entirety by
reference to the more detailed information and financial statements appearing
elsewhere in this Prospectus Supplement or in the accompanying Prospectus or
incorporated therein by reference.
On December 31, 1996, Crescent Real Estate Equities Company, a Texas real
estate investment trust ("Crescent Equities"), became the successor to Crescent
Real Estate Equities, Inc., a Maryland corporation (the "Predecessor
Corporation"), through the merger of the Predecessor Corporation and CRE Limited
Partner, Inc., a subsidiary of the Predecessor Corporation, into Crescent
Equities. The term "Company" includes, unless the context otherwise requires,
Crescent Equities, the Predecessor Corporation, Crescent Real Estate Equities
Limited Partnership, a Delaware limited partnership (the "Operating
Partnership"), 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.
Unless otherwise indicated, all information presented in this Prospectus
Supplement assumes no exercise of the Underwriter's over-allotment option.
Historical information has been adjusted, as applicable, to reflect the
Company's two-for-one stock split, effected on March 26, 1997, in the form of a
100% share dividend.
Certain matters discussed within this Prospectus Supplement are
forward-looking statements within the meaning of the federal securities laws.
Although the Company believes that the expectations reflected in such
forward-looking statements are based upon reasonable assumptions, there can be
no assurance that these expectations will be realized. Factors that could cause
actual results to differ materially from current expectations include the
failure of the pending investment to close, changes in general economic
conditions, changes in local real estate conditions, changes in industries in
which the Company's principal tenants compete, the failure to timely lease
unoccupied square footage, the failure to timely re-lease occupied square
footage upon expiration of leases, the inability to generate sufficient revenues
to meet debt service payments and operating expenses, the unavailability of
equity and debt financing and other risks described in this Prospectus
Supplement or in the accompanying Prospectus or incorporated therein by
reference.
THE COMPANY
The Company is a fully integrated real estate company, operated as a real
estate investment trust for federal income tax purposes (a "REIT"), which owns a
portfolio of real estate assets (the "Properties") located primarily in 21
metropolitan submarkets in Texas and Colorado. The Properties include 84 office
properties (the "Office Properties") with an aggregate of approximately 30.3
million net rentable square feet, 90 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 operate
approximately 79 refrigerated warehouses with an aggregate of approximately 368
million cubic feet (the "Refrigerated Warehouse Investment"). See "Properties"
and "Recent Developments" for a more detailed description of the Company's
Properties, including the proposed acquisition of a corporation (the "Pending
Investment") that owns four full-service casino/hotels and two riverboat casinos
(collectively, the "Casino/Hotel Properties").
Upon completion of the Pending Investment, the Company will have completed
over $5.8 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 $2.7 billion of which will have been
completed since the closing of the public offering of its Common Shares on
October 15, 1997 (the "October 1997 Offering").
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<PAGE> 4
The Company's business objective is the maximization of total return to
shareholders through increases in distributions and share price. From the
Initial Offering through February 12, 1998, the total return to shareholders was
approximately 210.8%, with distributions having increased by approximately 31.9%
and the market price per Common Share having increased by approximately 177.0%.
From January 1, 1997 through February 12, 1998, the total return to shareholders
was approximately 36.5%, with distributions having increased by approximately
24.6% and the market price per Common Share having increased by approximately
31.3%.
INVESTMENT STRATEGY
Management believes that it will be able to identify substantial
opportunities for future real estate investments from a variety of sources,
including life insurance companies and pension funds seeking to reduce their
direct real estate investments, public and private real estate companies,
corporations divesting of nonstrategic real estate assets, public and private
sellers requiring complex disposition structures and other domestic and
international sources. The Company intends to continue utilizing its extensive
network of relationships, its ability to identify underperforming assets, its
market reputation and its ready access to low-cost equity and debt capital to
achieve favorable returns on invested capital and growth in cash flow by:
- acquiring high-quality office properties at prices significantly below
their estimated replacement cost in selected core markets and submarkets
that management expects to experience above-average population and
employment growth; and
- employing the corporate, transactional and financial skills of the
Company's management team to structure innovative investments in other
types of real estate assets (such as its recent Refrigerated Warehouse
Investment, its acquisition of the Behavioral Healthcare Facilities and
its proposed investment in the Casino/Hotel Properties).
The Company believes that its proven ability to structure innovative
transactions provides it with a unique competitive advantage in making real
estate investments and enhances its ability to execute its investment strategy.
OPERATING AND FINANCING STRATEGIES
The Company seeks to enhance its operating performance and financial
position by:
- applying well-defined leasing strategies in order to capture the
significant potential rental growth in the Company's existing portfolio
of Office Properties as occupancy and rental rates increase with the
recovery of the markets and submarkets in which the Company has invested;
- achieving a high tenant retention rate at the Company's Office Properties
through quality service, individualized attention to its tenants and
active preventive maintenance programs;
- empowering management and employing compensation formulas linked directly
with enhanced operating performance of the Company and its Properties;
and
- optimizing the use of debt and other sources of financing to create a
flexible and conservative capital structure that will allow the Company
to continue its investment strategy.
Upon the closing of this offering (the "Offering"), the Company's trust
managers and senior management will beneficially own approximately 14.7% of the
Company's equity (consisting of Common Shares, preferred shares of beneficial
interest (the "Preferred Shares") and units of ownership interest in the
Operating Partnership ("Units"), including vested options to purchase Common
Shares and Units). This ownership percentage includes the approximately 10.6%
ownership position of Richard E. Rainwater, the Chairman of the Board of Trust
Managers, the approximately 2.0% ownership position of John C. Goff, the Vice
Chairman of the Board of Trust Managers, and the approximately 1.5% ownership
position of Gerald W. Haddock, the President, Chief Executive Officer and Trust
Manager.
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<PAGE> 5
PROPERTIES
The following table sets forth for the nine months ended September 30,
1997, the Company's pro forma earnings before interest expense, depreciation,
amortization and minority interest ("EBIDA"), on a percentage basis, by type of
Property, after giving effect to the investments completed after January 1,
1997, as if they had occurred on January 1, 1997.
<TABLE>
<CAPTION>
PERCENT OF
PROPERTY TYPE EBIDA
------------- ----------
<S> <C>
Office Properties........................................... 60%
Behavioral Healthcare Facilities............................ 13
Hotel Properties............................................ 11
Refrigerated Warehouse Investment........................... 8
Residential Development Properties.......................... 6
Retail Properties........................................... 2
---
100%
===
</TABLE>
The following table sets forth for the nine months ended September 30,
1997, the Company's pro forma EBIDA, on a percentage basis, by type of Property,
after giving effect to the Pending Investment and the investments completed
after January 1, 1997, as if they had occurred on January 1, 1997.
<TABLE>
<CAPTION>
PERCENT OF
PROPERTY TYPE EBIDA
------------- ----------
<S> <C>
Office Properties........................................... 43%
Casino/Hotel Properties..................................... 28
Behavioral Healthcare Facilities............................ 9
Hotel Properties............................................ 8
Refrigerated Warehouse Investment........................... 6
Residential Development Properties.......................... 5
Retail Properties........................................... 1
---
100%
===
</TABLE>
OFFICE PROPERTIES
The following table provides an overview of the Office Properties as of
December 31, 1997 and the states, cities and submarkets in which they are
located, after giving effect to the investments in Office Properties completed
after January 1, 1997, as if they had occurred on January 1, 1997.
<TABLE>
<CAPTION>
PERCENT
OF PERCENT
PERCENT COMPANY LEASED AT
TOTAL OF TOTAL ANNUALIZED COMPANY
NUMBER OF COMPANY COMPANY RENTAL OFFICE
STATE, CITY, SUBMARKET PROPERTIES NRA(1) NRA(1) REVENUES(2) PROPERTIES
- ---------------------------------------------------------- ---------- ----------- -------- ----------- ----------
<S> <C> <C> <C> <C> <C>
TEXAS
DALLAS
Central Business District ("CBD")..................... 3 3,859,554 14% 14% 84%
Far North Dallas...................................... 8 1,938,220 7 6 98
Uptown/Turtle Creek................................... 4 1,929,521 6 9 94(4)
Las Colinas........................................... 4 1,273,662 4 7 97
Richardson/Plano...................................... 5 719,267 2 2 100
LBJ Freeway........................................... 3 697,897 2 2 93
Stemmons Freeway...................................... 1 634,381 2 2 92
Central Expressway.................................... 2 413,721 1 1 86
-- ----------- --- --- ---
Subtotal/Weighted Average........................... 30 11,466,223 38% 43% 92%
-- ----------- --- --- ---
FORT WORTH
CBD................................................... 1 954,895 3% 2% 53%(4)
-- ----------- --- --- ---
HOUSTON
Richmond-Buffalo Speedway............................. 10 4,286,277 14% 14% 85%
CBD................................................... 3 2,764,418 9 9 92
West Loop/Galleria(3)................................. 4 1,677,375 6 4 91
The Woodlands......................................... 12 812,227 3 3 99
Katy Freeway.......................................... 1 414,251 1 1 100
-- ----------- --- --- ---
Subtotal/Weighted Average........................... 30 9,954,548 33% 31% 90%
-- ----------- --- --- ---
AUSTIN
CBD(3)................................................ 4 1,584,530 5% 6% 88%(4)
Northwest............................................. 1 232,301 1 1 79(4)
Southwest............................................. 1 99,792 0 0 95
-- ----------- --- --- ---
Subtotal/Weighted Average........................... 6 1,916,623 6% 7% 87%
-- ----------- --- --- ---
</TABLE>
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<PAGE> 6
<TABLE>
<CAPTION>
PERCENT
OF PERCENT
PERCENT COMPANY LEASED AT
TOTAL OF TOTAL ANNUALIZED COMPANY
NUMBER OF COMPANY COMPANY RENTAL OFFICE
STATE, CITY, SUBMARKET PROPERTIES NRA(1) NRA(1) REVENUES(2) PROPERTIES
- ---------------------------------------------------------- ---------- ----------- -------- ----------- ----------
<S> <C> <C> <C> <C> <C>
COLORADO
DENVER
Cherry Creek.......................................... 4 810,567 3% 2% 86%(4)
CBD................................................... 2 735,388 2 2 98
Denver Technology Center ("DTC")...................... 1 309,862 1 1 87
-- ----------- --- --- ---
Subtotal/Weighted Average........................... 7 1,855,817 6% 5% 91%
-- ----------- --- --- ---
COLORADO SPRINGS........................................ 1 252,857 1% 1% 100%
-- ----------- --- --- ---
LOUISIANA
NEW ORLEANS
CBD................................................... 2 1,270,241 4% 2% 77%(4)
-- ----------- --- --- ---
FLORIDA
MIAMI
CBD................................................... 1 782,686 3% 3% 79%
-- ----------- --- --- ---
ARIZONA
PHOENIX
Downtown/CBD.......................................... 1 476,373 2% 2% 89%
Camelback Corridor.................................... 1 86,451 0 0 67
-- ----------- --- --- ---
Subtotal/Weighted Average........................... 2 562,824 2% 2% 85%
-- ----------- --- --- ---
NEBRASKA
OMAHA
CBD................................................... 1 409,850 1% 1% 100%
-- ----------- --- --- ---
NEW MEXICO
ALBUQUERQUE
CBD................................................... 1 366,236 1% 1% 83%(4)
-- ----------- --- --- ---
CALIFORNIA
SAN FRANCISCO
South of Market/CBD................................... 1 276,420 1% 1% 83%(4)
-- ----------- --- --- ---
SAN DIEGO
University Tower Centre ("UTC")....................... 1 195,733 1% 1% 85%
-- ----------- --- --- ---
TOTAL/WEIGHTED AVERAGE............................ 84 30,264,953 100% 100% 88%(4)
== =========== === === ===
</TABLE>
- ---------------
(1) NRA means net rentable area in square feet.
(2) Represents percent of annualized office property rental revenues based on
December 1997 rental revenues.
(3) Includes three properties acquired in the Houston West Loop/Galleria
submarket and one property acquired in the Austin CBD submarket subsequent
to December 31, 1997.
(4) Leases have been executed at certain Properties in these submarkets but had
not commenced as of December 31, 1997. If such leases had commenced as of
December 31, 1997, the percent leased for all Office Properties in the
Company's submarkets would have been 92%. The total percent leased at the
Company Office Properties would have been as follows: Dallas Uptown/Turtle
Creek -- 98%; Fort Worth CBD -- 100%; Austin CBD -- 92%; Austin
Northwest -- 100%; Denver Cherry Creek -- 94%; New Orleans CBD -- 79%;
Albuquerque CBD -- 96%; and San Francisco South of Market/CBD -- 91%.
S-6
<PAGE> 7
LEASE EXPIRATIONS OF OFFICE PROPERTIES
The following table sets forth a schedule of lease expirations for leases
in place at the Office Properties owned as of December 31, 1997(1), for each of
the 10 years beginning with 1998, assuming that none of the tenants exercises
renewal options and excluding an aggregate 3,960,556 square feet of unleased
space.
<TABLE>
<CAPTION>
PERCENTAGE ANNUAL
OF TOTAL FULL-SERVICE
NET RENTABLE ANNUAL RENT PER
AREA PERCENTAGE OF ANNUAL FULL-SERVICE SQUARE
NUMBER OF REPRESENTED LEASED NET FULL-SERVICE RENT FOOT OF NET
TENANTS WITH BY EXPIRING RENTABLE AREA RENT UNDER REPRESENTED RENTABLE
YEAR OF LEASE EXPIRING LEASES REPRESENTED BY EXPIRING BY EXPIRING AREA
EXPIRATION LEASES (SQUARE FEET) EXPIRING LEASES LEASES(2) LEASES EXPIRING(2)
------------- ------------ ------------- ---------------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
1998........................ 405 2,428,639 9.2% $38,618,805 8.0% $15.90
1999........................ 417 3,460,313 13.2 58,821,258 12.2 17.00
2000........................ 370 3,304,189 12.6 60,090,554 12.5 18.19
2001........................ 284 3,664,850 13.9 62,862,853 12.9 17.15
2002........................ 275 3,264,901 12.4 60,972,293 12.6 18.68
2003........................ 72 1,416,369 5.4 23,770,191 4.9 16.78
2004........................ 70 2,561,029 9.7 49,035,329 10.2 19.15
2005........................ 43 1,838,884 7.0 35,564,229 7.4 19.34
2006........................ 20 521,177 2.0 10,096,070 2.1 19.37
2007........................ 20 1,123,076 4.3 19,197,510 4.0 17.09
2008 and thereafter......... 27 2,720,970 10.3 63,611,272 13.2 23.38
</TABLE>
- ---------------
(1) Includes four Office Properties acquired subsequent to December 31, 1997.
(2) Calculated based on base rent payable as of the expiration date of the lease
for net rentable square feet expiring, without giving effect to free rent or
scheduled rent increases that would be taken into account under generally
accepted accounting principles and including adjustments for expenses
payable by or reimbursable from tenants based on current levels.
S-7
<PAGE> 8
OFFICE PROPERTY MARKET INFORMATION
The following graph provides information regarding vacancy levels and
weighted average quoted market rental rates at year end for each of the years
from 1992 through 1997 for Class A office properties in all submarkets in which
the Company has invested.
CLASS A OFFICE
VACANCY AND QUOTED MARKET RENT
FOR ALL COMPANY SUBMARKETS
[CHART]
- ---------------
(1) Weighted average based on total net rentable square feet of Class A office
properties in all Company submarkets.
Source: Compiled from third-party sources
BEHAVIORAL HEALTHCARE FACILITIES
On June 17, 1997, the Company acquired substantially all of the real estate
assets of the domestic hospital provider business of Magellan Health Services,
Inc., as previously owned and operated by a wholly owned subsidiary of Magellan
Health Services, Inc. The transaction involved various components, the principal
component of which was the acquisition of the 90 Behavioral Healthcare
Facilities (and two additional behavioral healthcare facilities which
subsequently were sold) for approximately $387.2 million. The Behavioral
Healthcare Facilities, which are located in 27 states, are leased to a single
tenant (and its subsidiaries) under a triple-net lease. The tenant, Charter
Behavioral Health Systems, LLC ("CBHS"), is a Delaware limited liability company
formed to operate the Behavioral Healthcare Facilities and owned 50% by a
subsidiary of Magellan Health Services, Inc. and 50% by Crescent Operating,
Inc., an affiliate of the Company.
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<PAGE> 9
HOTEL PROPERTIES
The following table sets forth certain information about the Hotel
Properties, including investments in Hotel Properties completed after December
31, 1997, for the years ended December 31, 1997 and 1996. The information for
the Hotel Properties is based on available rooms, except for Canyon Ranch-Tucson
and Canyon Ranch-Lenox, which are destination health and fitness resorts that
measure performance based on available guest nights.
<TABLE>
<CAPTION>
AVERAGE AVERAGE REVENUE PER
OCCUPANCY DAILY AVAILABLE
RATE RATE ROOM
------------- ------------- -------------
YEAR ENDED YEAR ENDED YEAR ENDED
YEAR DECEMBER 31, DECEMBER 31, DECEMBER 31,
COMPLETED/ ------------- ------------- -------------
HOTEL PROPERTY(1) LOCATION RENOVATED ROOMS 1997 1996 1997 1996 1997 1996
----------------- -------- -------------- ----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
FULL-SERVICE/LUXURY HOTELS
Denver Marriott City Center Denver, CO 1982/1994 613 80% 79% $117 $108 $ 94 $ 85
Four Seasons Hotel-Houston Houston, TX 1982 399 67 65 161 142 108 93
Hyatt Regency Albuquerque Albuquerque, NM 1990 395 74 77 98 93 73 71
Omni Austin Hotel(2) Austin, TX 1986 314 78 76 103 102 81 77
Hyatt Regency Beaver Creek Avon, CO 1989 295 66 67 229 207 151 139
Sonoma Mission Inn & Spa Sonoma, CA 1927/1987/1997 198(3) 87 92 210 181 183 166
Ventana Country Inn Big Sur, CA 1975/1982/1988 62 84 83 337 312 282 258
----- -- -- ---- ---- ---- ----
TOTAL/WEIGHTED AVERAGE 2,276(3) 75% 75% $149 $136 $112 $102
===== == == ==== ==== ==== ====
DESTINATION HEALTH AND FITNESS RESORTS
Canyon Ranch-Tucson Tucson, AZ 1980 250(4) 81%(5) 80%(5) $503(6) $479(6) $387(7) $366(7)
Canyon Ranch-Lenox Lenox, MA 1989 202(4) 80 (5) 81 (5) 445(6) 407(6) 347(7) 320(7)
----- -- -- ---- ---- ---- ----
TOTAL/WEIGHTED AVERAGE 452 81% 81% $477 $446 $370 $345
===== == == ==== ==== ==== ====
</TABLE>
- ---------------
(1) Because of the Company's status as a REIT for federal income tax purposes,
it does not operate the Hotel Properties and has leased the Hotel Properties
to subsidiaries of Crescent Operating, Inc. pursuant to long-term leases.
See "Properties -- Hotel Properties."
(2) Acquired subsequent to December 31, 1997.
(3) Includes, for the period from July 1, 1997 through December 31, 1997, 30
additional rooms completed in July 1997.
(4) Represents available guest nights, which is the maximum number of guests
that the resort can accommodate per night.
(5) Represents the number of paying and complimentary guests for the period,
divided by the maximum number of available guest nights for the period.
(6) Represents the average daily "all-inclusive" guest package charges for the
period, divided by the average daily number of paying guests for the period.
(7) Represents the total "all-inclusive" guest package charges for the period,
divided by the maximum number of available guest nights for the period.
REFRIGERATED WAREHOUSE INVESTMENT
On October 31, 1997, the Company completed the Refrigerated Warehouse
Investment. The Company owns an indirect 38% interest in each of two
corporations that currently own and operate approximately 79 refrigerated
warehouses with an aggregate of approximately 368 million cubic feet. The
aggregate purchase price for the 100% interest in the corporations was
approximately $1.0 billion (including transaction costs associated with the
acquisition), approximately $400 million of which represents the Company's
portion of the purchase price.
RESIDENTIAL DEVELOPMENT PROPERTIES
The Company owns economic interests in five Residential Development
Corporations through the real estate mortgages (the "Residential Development
Property Mortgages") relating to and the non-voting common stock in these
Residential Development Corporations. The Residential Development Corporations
in turn, through joint ventures or partnership arrangements, own interests in
the 12 Residential Development Properties. The Residential Development
Corporations are responsible for the continued development and the day-to-day
operations of the Residential Development Properties.
RETAIL PROPERTIES
The Company owns seven Retail Properties, which in the aggregate contain
approximately 771,000 net rentable square feet. As of December 31, 1997, the
Retail Properties were 95% leased.
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<PAGE> 10
CRESCENT OPERATING, INC.
Crescent Operating, Inc. was established by the Company in April 1997, and
all of its outstanding common stock was distributed in a spin-off, effective
June 12, 1997, to those persons who were limited partners of the Operating
Partnership or shareholders of the Company on May 30, 1997. Crescent Operating,
Inc. and the Operating Partnership are parties to an agreement (the
"Intercompany Agreement") pursuant to which each has agreed to provide the other
with rights to participate in certain transactions. Crescent Operating, Inc. is
a lessee and operator of various assets owned by the Operating Partnership.
As a result of the formation of Crescent Operating, Inc. and the execution
of the Intercompany Agreement, persons who own equity interests in both Crescent
Operating, Inc. and the Company have the opportunity to participate in the
benefits of both the real estate investments of the Company (including ownership
of real estate assets) and the lease of certain of such assets and the ownership
of other non-real estate assets by Crescent Operating, Inc.
RECENT DEVELOPMENTS
PENDING INVESTMENT
Station Casinos, Inc. On January 16, 1998, the Company entered into an
agreement and plan of merger (the "Merger Agreement") pursuant to which Station
Casinos, Inc. ("Station") will merge (the "Merger") with and into the Company.
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. 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.
As part of the transactions associated with the Merger, it is presently
anticipated that certain operating assets and the employees of Station will be
transferred to a limited liability company (the "Station Lessee") immediately
prior to the Merger. The Station Lessee will be owned 50% by Crescent Operating,
Inc. or another affiliate established by the Company, 24.9% by an entity owned
by three of the existing directors of Station (including its Chairman, President
and Chief Executive Officer) and 25.1% by a separate entity owned by other
members of Station management. 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 lease will provide for base and percentage rent but the amount of
the rent has not yet been determined. The Station Lessee will be required to
maintain the properties in good condition at its own expense. The Company will
also enter into a Right of First Refusal and Noncompetition Agreement with the
Station Lessee. See "Recent Developments -- Pending Investment."
In order to effect the Merger, the Company will issue 0.466 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 new class of Preferred Shares will rank pari passu with the
Series A Preferred Shares (as defined below) offered hereby as to rights to
receive distributions and to participate in distributions or payments upon any
liquidation, dissolution or winding up of the Company.
The total value of 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 $919
million in existing indebtedness of Station and its subsidiaries, is
approximately $1.75 billion.
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.
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<PAGE> 11
Consummation of the Merger is subject to various conditions. The Company
anticipates that the Merger and the associated transactions will be consummated
in the third quarter of 1998, although there can be no assurance that the Merger
will be consummated on the terms described in this Prospectus Supplement or at
all.
COMPLETED INVESTMENTS
U.S. Home Building. On October 15, 1997, the Company acquired the U.S. Home
Building, a 21-story Class A office building located in the West Loop/Galleria
suburban office submarket of Houston, Texas, for approximately $45 million. The
U.S. Home Building is located approximately five miles west of downtown Houston
and approximately 2.5 miles west of the Company's Greenway Plaza properties.
Built in 1982, the building is located on approximately 1.9 acres and contains
approximately 400,000 net rentable square feet.
Bank One Center. On October 22, 1997, the Company, together with affiliates
of TrizecHahn Corporation ("Trizec"), acquired Bank One Center, a 60-story Class
A office building located in the CBD submarket of Dallas, Texas, from two
unaffiliated entities. The acquisition was made through a newly formed limited
partnership in which the Company and Trizec each own a 50% interest, for an
aggregate purchase price of approximately $238 million. Of the approximately
$238 million purchase price, approximately $83 million was funded through
capital contributions of $41.5 million from each of the Company and Trizec, and
the remaining approximately $155 million was funded through two loans to the
newly formed limited partnership provided by The Travelers Insurance Company.
Construction of the office property was completed in 1987. Situated on a
2.88-acre site, Bank One Center contains approximately 1.5 million net rentable
square feet.
Americold Corporation and URS Logistics, Inc. On October 31, 1997, the
Company, through two newly formed subsidiaries, initially acquired a 40%
interest in each of two partnerships, one of which owns Americold Corporation
("Americold") and one of which owns URS Logistics, Inc. ("URS"). Vornado Realty
Trust ("Vornado") acquired the remaining 60% interest in the partnerships.
Americold and URS are the two largest suppliers of refrigerated warehouse space
in the United States.
One of the partnerships acquired all of the common stock of Americold
through the merger of a subsidiary of Vornado into Americold, and the other
partnership acquired all of the common stock of URS through the merger of a
separate subsidiary of Vornado into URS. As a result of the acquisition, the
Americold partnership and the URS partnership became the owners and operators of
approximately 79 refrigerated warehouses, with an aggregate of approximately 368
million cubic feet, that are operated pursuant to arrangements with national
food suppliers such as Tyson Foods, Kraft Foods, ConAgra and Pillsbury.
The aggregate purchase price for the acquisition of Americold and URS was
approximately $1.0 billion (including transaction costs associated with the
acquisition), approximately $400 million of which represents the Company's
portion of the purchase price. Of the approximately $1.0 billion aggregate
purchase price, the purchase price for the acquisition of Americold was
approximately $632 million (consisting of approximately $112 million in cash for
the purchase of the equity, approximately $151 million in cash for the repayment
of certain outstanding bonds issued by Americold, approximately $367 million in
retention of debt and approximately $2 million in transaction costs), and the
purchase price for the acquisition of URS was approximately $372 million
(consisting of approximately $173 million in cash for the purchase of the
equity, approximately $192 million in retention of debt and approximately $7
million in transaction costs).
On December 30, 1997 and effective October 31, 1997, in order to permit the
Company to continue to satisfy certain REIT qualification requirements, the
Company sold all of the voting common stock, representing a 5% economic
interest, in each of the two subsidiaries to Crescent Operating, Inc. As a
result, the Company currently owns a 38% interest in each of the Americold
partnership and URS partnership, through its ownership of all of the nonvoting
common stock, representing a 95% economic interest, in each of the two newly
formed subsidiaries.
Fountain Place. On November 7, 1997, the Company acquired Fountain Place, a
60-story Class A office building located in the CBD submarket of Dallas, Texas,
approximately three blocks west of the Company's Trammell Crow Center Office
Property, for approximately $114 million. Built in 1986 and designed by
S-11
<PAGE> 12
renowned architect I.M. Pei, the building, situated on approximately 1.8 acres,
contains approximately 1.2 million net rentable square feet.
Ventana Country Inn. On December 19, 1997, the Company acquired for
approximately $30 million the Ventana Country Inn, a 62-room resort Hotel
Property located in Big Sur, California. The Ventana Country Inn is situated on
a 243-acre wooded site in the foothills of the Santa Lucia Mountains overlooking
the Pacific Ocean. The purchase also included an adjacent 72-acre parcel of
undeveloped land offering the potential for single-family residential
development. A subsidiary of Crescent Operating, Inc. will market and operate
the Ventana Country Inn jointly with the Company's Sonoma Mission Inn & Spa
Hotel Property pursuant to a lease with the Company.
Energy Centre. On December 22, 1997, the Company acquired Energy Centre, a
39-story Class A office building located in the CBD submarket of New Orleans,
Louisiana. Built in 1984, the building, located on approximately 1.28 acres,
contains approximately 762,000 net rentable square feet. Energy Centre was
acquired for approximately $75 million.
Austin Centre. On January 23, 1998, the Company acquired Austin Centre, a
mixed-use property developed in 1986, including a Class A office building
containing approximately 344,000 net rentable square feet, the 314-room Omni
Austin Hotel Property and 61 apartments located on approximately 1.75 acres. The
property is located in the CBD submarket of Austin, Texas, four blocks from the
state capitol building and was acquired for approximately $96.9 million. A
subsidiary of Crescent Operating, Inc. will oversee the marketing and operations
of the Omni Austin Hotel Property pursuant to a lease with the Company.
Post Oak Central. On February 13, 1998, the Company acquired Post Oak
Central, a three-building Class A office complex located in the West
Loop/Galleria suburban office submarket of Houston, Texas. Built between 1974
and 1981 and designed by renowned architects Philip Johnson and John Burgee, the
buildings are located on approximately 17.3 acres and contain approximately 1.3
million net rentable square feet. Post Oak Central was acquired for
approximately $155.3 million.
TRANSACTIONS WITH MERRILL LYNCH INTERNATIONAL
On December 12, 1997, the Company entered into two transactions with
Merrill Lynch International. In one transaction, the Company sold 5,375,000
Common Shares to Merrill Lynch International for approximately $205 million and
received approximately $199.9 million in net proceeds. In the other transaction,
the Company entered into a swap agreement (the "Swap Agreement") with Merrill
Lynch International relating to 5,375,000 Common Shares (the "Settlement
Shares"), pursuant to which Merrill Lynch International will sell, as directed
by the Company on or before December 12, 1998, a sufficient number of Common
Shares to achieve net sales proceeds equal to the market value of the Settlement
Shares on December 12, 1997 (approximately $204.9 million), plus a forward
accretion component, minus an adjustment for the Company's distribution rate.
The precise number of Common Shares that will be required to be sold pursuant to
the Swap Agreement will depend primarily on the market price of the Common
Shares at the time of settlement. If such number of Common Shares is greater
than the number of Settlement Shares as a result of a decrease in the market
price of the Common Shares, the Company will deliver additional Common Shares to
Merrill Lynch International. If such number of Common Shares is less than the
number of Settlement Shares as a result of an increase in the market price of
the Common Shares, Merrill Lynch International will deliver Common Shares or, at
the option of the Company, cash to the Company.
FINANCING ACTIVITIES
On December 19, 1997, the Company's line of credit from a consortium of
banks led by BankBoston, N.A. (the "Credit Facility") was increased to $550
million. The Credit Facility is unsecured and expires in June 2000.
On February 13, 1998, the Company increased the maximum borrowings
available under its bridge loan with BankBoston, N.A. to $250 million. The
increase in the maximum borrowings available and the additional borrowings
thereunder were made in connection with the funding of the purchase price of
Post Oak Central. The bridge loan is unsecured and expires in March 1998.
S-12
<PAGE> 13
THE OFFERING
For a more complete description of the terms of the 6 3/4% Series A
Convertible Cumulative Preferred Shares (the "Series A Preferred Shares")
offered hereby (the "Offering"), see "Description of Series A Preferred Shares."
SECURITIES OFFERED 6 3/4% Series A Preferred Shares.
DISTRIBUTIONS Distributions on the Series A Preferred Shares
offered hereby are cumulative from the date of
issue and are payable quarterly in arrears on or
about the fifteenth day of February, May, August
and November of each year, commencing on 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). Distributions
on the Series A Preferred Shares will accrue
whether or not the Company has earnings, whether or
not there are funds legally available for the
payment of such distributions and whether or not
such distributions are authorized.
CONVERSION RIGHTS The Series A Preferred Shares are convertible, in
whole or in part, at the option of the holder at
any time, unless previously redeemed, 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.
LIQUIDATION PREFERENCE $25.00 per share, plus an amount equal to accrued
and unpaid dividends.
REDEMPTION 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
may be redeemed at the option of the Company, in
whole or in part, at a redemption price of $25.00
per share, plus distributions accrued and unpaid to
the redemption date, if any.
VOTING RIGHTS If distributions on the Series A Preferred Shares
are in arrears for six or more quarterly periods,
whether or not such quarterly periods are
consecutive, holders of Series A 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 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. In addition, certain
changes that would be materially adverse to the
rights of holders of the Series A Preferred Shares
cannot be made without the affirmative vote of
two-thirds of the Series A 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). See
"Description of Preferred Shares -- Voting Rights"
in the accompanying Prospectus.
RANKING The Series A 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.
NYSE LISTING Application has been made to list the Series A
Preferred Shares on the NYSE under the symbol
"CEIPrA." 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 of
the Series A Preferred Shares on the NYSE.
USE OF PROCEEDS The net proceeds from the Offering will be used to
reduce amounts outstanding under the Credit
Facility.
S-13
<PAGE> 14
SUMMARY SELECTED FINANCIAL DATA
The following table sets forth certain summary financial information for
the Company on a consolidated pro forma and historical basis and for the
Rainwater Property Group (the Company's predecessor) on a combined historical
basis, which consists of the combined financial statements of the entities that
contributed Properties in exchange for Units or Common Shares in connection with
the formation of the Company. Such information should be read in conjunction
with "Selected Financial Data."
The pro forma information for the year ended December 31, 1996 assumes
completion, in each case as of January 1, 1996 in determining operating and
other data, of (i) the Company's public offering of its Common Shares that
closed on October 2, 1996 (the "October 1996 Offering") and the additional
public offering of 450,000 Common Shares that closed on October 9, 1996 and the
use of the net proceeds therefrom to repay approximately $168 million of
indebtedness and to fund approximately $289 million of Property acquisitions in
the fourth quarter of 1996 and the first quarter of 1997, (ii) the Company's
public offering of its Common Shares that closed on April 28, 1997 (the "April
1997 Offering") and the additional public offering of 500,000 Common Shares that
closed on May 14, 1997 and the use of the net proceeds therefrom to fund
approximately $593.5 million of Property acquisitions and other investments in
the second quarter of 1997, (iii) the Company's offering of 4,700,000 Common
Shares to an affiliate of Union Bank of Switzerland (the "UBS Offering") and the
use of the net proceeds therefrom to repay approximately $145 million of
indebtedness incurred under the Credit Facility, (iv) the Operating
Partnership's offering of an aggregate principal amount of $400 million of
senior notes (the "Note Offering") and the use of the net proceeds therefrom to
fund approximately $337.6 million of the purchase price of two Properties and to
repay approximately $57.2 million of indebtedness incurred under the Credit
Facility and other short-term indebtedness, (v) the Company's public offering of
its Common Shares that closed on October 15, 1997 (the "October 1997 Offering")
and the use of the net proceeds therefrom to fund approximately $45 million of
the purchase price of one Property and to repay approximately $325.1 million of
short-term indebtedness and indebtedness incurred under the Credit Facility,
(vi) the Company's offering of 5,375,000 Common Shares to Merrill Lynch
International (the "Merrill Offering") and the use of the net proceeds therefrom
to repay approximately $199.9 million of indebtedness under the Credit Facility,
(vii) this Offering and the use of the net proceeds therefrom to repay
approximately $191.3 million of indebtedness under the Credit Facility, (viii)
Property acquisitions, other investments and related financing and share
issuances during 1996, 1997 and 1998, and (ix) the Pending Investment and
related financing, including approximately $1.05 billion for refinancing and/or
assumption of indebtedness and associated refinancing and transaction costs, in
connection with the Merger.
The pro forma information for the nine months ended September 30, 1997
assumes completion, in each case as of January 1, 1997 in determining operating
and other data, and, in each case as of September 30, 1997 in determining
balance sheet data, of (i) the April 1997 Offering and the additional public
offering of 500,000 common shares that closed on May 14, 1997 and the use of the
net proceeds therefrom to fund approximately $593.5 million of Property
acquisitions and other investments in the second quarter of 1997, (ii) the UBS
Offering and the use of the net proceeds therefrom to repay approximately $145
million of indebtedness incurred under the Credit Facility, (iii) the Note
Offering and the use of the net proceeds therefrom to fund approximately $337.6
million of the purchase price of two Properties and to repay approximately $57.2
million of indebtedness incurred under the Credit Facility and other short-term
indebtedness, (iv) the October 1997 Offering and the use of the net proceeds
therefrom to fund approximately $45 million of the purchase price of one
Property and to repay approximately $325.1 million of short-term indebtedness
and indebtedness incurred under the Credit Facility, (v) the Merrill Offering
and the use of the net proceeds therefrom to repay approximately $199.9 million
of indebtedness under the Credit Facility, (vi) this Offering and the use of the
net proceeds therefrom to repay approximately $191.3 million of indebtedness
under the Credit Facility, (vii) Property acquisitions, other investments and
related financing and share issuances during 1997 and 1998, and (viii) the
Pending Investment and related financing, including approximately $1.05 billion
for refinancing and/or assumption of indebtedness and associated refinancing and
transaction costs, in connection with the Merger.
S-14
<PAGE> 15
CRESCENT REAL ESTATE EQUITIES COMPANY
CONSOLIDATED PRO FORMA AND HISTORICAL FINANCIAL DATA AND
RAINWATER PROPERTY GROUP COMBINED HISTORICAL FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
COMPANY
-----------------------------------------------------------------------------------------------------
FOR THE
PERIOD FROM
PRO FORMA MAY 5, 1994
NINE MONTHS ENDED SEPTEMBER 30, YEAR ENDED YEAR ENDED YEAR ENDED TO
----------------------------------------- DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1997 1996 1996 1996 1995 1994
------------ ------------ ----------- ------------ ------------ ------------ ------------
PRO FORMA ACTUAL ACTUAL (UNAUDITED)
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Total revenue.......... $ 581,679 $ 303,260 $ 137,427 $ 739,354 $ 208,861 $ 129,960 $ 50,343
Operating income
(loss)................ 120,883 81,148 23,668 136,831 44,101 30,858 10,864
Income (loss) before
minority interests and
extraordinary item.... 135,131 84,266 26,735 150,851 47,951 36,358 12,595
Net Income per Common
Share................. $ .79 $ .83 $ .42 $ .85 $ .70 $ .66 $ .26
BALANCE SHEET DATA (AT
PERIOD END):
Total assets........... $ 6,166,549 $ 3,612,033 $ 1,213,212 $ -- $ 1,730,922 $ 964,171 $ 538,354
Total debt............. 2,904,504 1,776,904 664,483 -- 667,808 444,528 194,642
Total shareholders'
equity................ 3,059,771 1,607,855 388,292 -- 865,160 406,531 235,262
OTHER DATA:
Funds from Operations
before minority
interests(1).......... $ 272,493 $ 134,615 $ 55,741 $ 335,576 $ 87,616 $ 64,475 $ 32,723
Cash distribution
declared per share.... -- $ .99 $ .86 -- $ 1.16 $ 1.05 $ .65
Weighted average Common
Shares outstanding and
issuable in exchange
for Units............. 147,124,058 100,592,573 58,116,124 147,124,058 64,684,842 54,182,186 44,997,716
Cash flow provided by
(used in):
Operating
activities.......... $ --(2) $ 134,888 $ 49,550 $ --(2) $ 77,384 $ 65,011 $ 21,642
Investing
activities.......... --(2) (1,865,395) (221,450) --(2) (513,038) (421,406) (260,666)
Financing
activities.......... --(2) 1,751,997 169,336 --(2) 444,315 343,079 265,608
<CAPTION>
RAINWATER PROPERTY GROUP
---------------------------------
FOR THE
PERIOD
FROM
JANUARY 1, YEAR ENDED
1994 TO DECEMBER 31,
MAY 4, --------------------
1994 1993 1992
---------- -------- ---------
<S> <C> <C> <C>
OPERATING DATA:
Total revenue.......... $ 21,185 $ 57,168 $ 49,586
Operating income
(loss)................ (1,599) (53,024) (36,612)
Income (loss) before
minority interests and
extraordinary item.... (1,599) (53,024) (36,612)
Net Income per Common
Share................. -- -- --
BALANCE SHEET DATA (AT
PERIOD END):
Total assets........... -- $290,869 $ 296,291
Total debt............. -- 278,060 548,517
Total shareholders'
equity................ -- 2,941 (328,240)
OTHER DATA:
Funds from Operations
before minority
interests(1).......... -- -- --
Cash distribution
declared per share.... -- -- --
Weighted average Common
Shares outstanding and
issuable in exchange
for Units............. -- -- --
Cash flow provided by
(used in):
Operating
activities.......... $ 2,455 $ 9,313 $ (640)
Investing
activities.......... (2,379) (20,572) (8,924)
Financing
activities.......... (21,310) 28,861 14,837
</TABLE>
- ---------------
(1) Funds from Operations ("FFO"), based on the revised definition adopted by
the Board of Governors of the National Association of Real Estate Investment
Trusts ("NAREIT"), and as used herein, means net income (loss) available to
holders of Common Shares (determined in accordance with generally accepted
accounting principles), excluding gains (or losses) from debt restructuring
and sales of property, plus depreciation and amortization of real estate
assets, and after adjustments for unconsolidated partnerships and joint
ventures. For a more detailed description of FFO, see "Selected Financial
Data."
(2) Pro forma information relating to operating, investing and financing
activities has not been included because management believes that the data
would not be meaningful due to the number of assumptions required in order
to calculate this data.
S-15
<PAGE> 16
THE COMPANY
The Company is a fully integrated real estate company, operated as a REIT,
which owns a portfolio of Properties located primarily in 21 metropolitan
submarkets in Texas and Colorado. The Properties include 84 Office Properties
with an aggregate of approximately 30.3 million net rentable square feet, 90
Behavioral Healthcare Facilities, seven full-service Hotel Properties with a
total of 2,276 rooms and two destination health and fitness resort Hotel
Properties that can accommodate up to 452 guests daily, the Residential
Development Property Mortgages relating to and non-voting common stock in the
five Residential Development Corporations, which in turn, through joint ventures
or partnership arrangements, own interests in 12 Residential Development
Properties, and seven Retail Properties with an aggregate of approximately
771,000 net rentable square feet. The Company also owns an indirect 38% interest
in each of two corporations that currently own and operate approximately 79
refrigerated warehouses with an aggregate of approximately 368 million cubic
feet. In addition, the Company has entered into the Merger Agreement relating to
the Pending Investment in the six Casino/Hotel Properties.
On a pro forma basis, after giving effect to the investments completed
after January 1, 1997, as if they had occurred on January 1, 1997, the Office
Properties, the Behavioral Healthcare Facilities, the Hotel Properties, the
Refrigerated Warehouse Investment, the Residential Development Properties and
the Retail Properties would have accounted for approximately 60%, 13%, 11%, 8%,
6% and 2%, respectively, of the Company's EBIDA for the nine months ended
September 30, 1997. On a pro forma basis, after giving effect to the Pending
Investment and investments completed after January 1, 1997, as if they had
occurred on January 1, 1997, the Office Properties, the Casino/Hotel Properties,
the Behavioral Healthcare Facilities, the Hotel Properties, the Refrigerated
Warehouse Investment, the Residential Development Properties and the Retail
Properties would have accounted for approximately 43%, 28%, 9%, 8%, 6%, 5%, and
1%, respectively, of the Company's EBIDA for the nine months ended September 30,
1997.
The business objective of the Company is the maximization of total return
to shareholders through increases in distributions and share price. From the
Initial Offering through February 12, 1998, the total return to shareholders was
210.8%, with distributions having increased by approximately 31.9% and the
market price per Common Share having increased by approximately 177.0%. From
January 1, 1997 through February 12, 1998, the total return to shareholders was
36.5%, with distributions having increased by approximately 24.6% and the market
price per Common Share having increased by approximately 31.3%.
The Company has achieved these results by employing a well-defined
investment strategy that focuses on high-quality office properties in selected
growth markets and innovative real estate investments. In addition, the Company
employs an operating strategy that is designed to capitalize on the rental
growth potential of the Company's Office Property portfolio.
INVESTMENT STRATEGY
The Company acquires premier assets and assets that have been undervalued
by utilizing its extensive network of relationships, market reputation, ready
access to low-cost equity and debt capital and ability to structure transactions
creatively. Management believes that it will be able to identify substantial
opportunities for future real estate investments from sources such as life
insurance companies and pension funds seeking to reduce their direct real estate
investments, public and private real estate companies, corporations divesting of
nonstrategic real estate assets, public and private sellers requiring complex
disposition structures and other domestic and international sources.
The Company's targeted investments include office properties that can be
acquired at significant discounts from replacement cost and that provide both a
favorable current return on invested capital and the opportunity for significant
cash flow growth through future increases in rental rates. Integral to this
investment strategy is the identification of specific markets and submarkets
that management believes will experience significant increases in demand for
office space due to the impact of factors that management expects to have a
positive effect on population and employment growth, including (i) desirable
market and submarket conditions, such as political environments favorable to
business, the availability of skilled and competitively priced labor, favorable
corporate and individual tax structures, affordable housing and a favorable
quality of
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<PAGE> 17
life (as in markets such as Albuquerque, Omaha and Austin), (ii) demographic
shifts in the United States (such as the relocation of businesses and the
migration of people from the Northeast and the West Coast to Texas, Colorado and
Arizona) and (iii) specific regional, national and global economic developments,
such as an increase in demand for natural resources and the resulting employment
growth in markets that have a significant presence in the oil and gas industry
(as in Houston and New Orleans) and an improvement in economic conditions as a
result of growth in the technology industry and/or international trade (as in
San Francisco, San Diego and Miami).
The Company also seeks innovative real estate investments that offer
superior returns on its capital investment. For example, the lease of the
Behavioral Healthcare Facilities provides the Company based on its investment in
the Behavioral Healthcare Facilities, with an attractive lease payment that
increases annually during the initial 12-year term of the lease. In addition,
the Company has completed the Refrigerated Warehouse Investment and intends to
acquire the Casino/Hotel Properties. Each of these investments gives the Company
a significant ownership position in an operating business that provides
opportunities for further strategic investments in a real estate intensive
industry.
Upon completion of the Pending Investment, the Company will have completed
over $5.8 billion of real estate investments since the Initial Offering,
approximately $2.7 billion of which will have been completed since the October
1997 Offering. Management believes that the Company's success in completing
investments is the result of several competitive advantages, including (i)
management's ability, due to its extensive network of relationships, to identify
property acquisition opportunities, often before the property is offered for
sale, (ii) the proven ability of management to identify underperforming assets
that can be acquired at market prices not reflecting their potential value,
(iii) management's skill and creativity in consummating unusual and complex
transactions, such as acquisitions of mixed-use facilities and portfolios that
include traditional real estate assets, non-traditional real estate assets and,
in certain instances, other types of income-producing or operating assets, and
transactions that satisfy the special needs of sellers and (iv) the Company's
reputation for "certainty of closure" as a result of its proven ability to
complete large, time-sensitive transactions based on its internal due diligence
capability and expertise and its ready access to capital. Management also
believes that these competitive advantages offer the Company increased
opportunities to acquire attractive properties, often on terms more favorable
than those available to other potential purchasers.
OPERATING STRATEGY
The Company maintains a well-defined leasing strategy in order to capture
the potential rental growth in its portfolio of Office Properties as the
submarkets in which the Company has invested continue to recover and occupancy
and rental rates increase. For Office Properties as of December 31, 1997 (after
giving effect to the investments completed after December 31, 1997), the
weighted average full-service rental rate (representing base rent after giving
effect to free rent and scheduled rent increases that would be taken into
account under generally accepted accounting principles and including adjustments
for expenses payable by or reimbursed from tenants) was $17.77 per square foot,
compared to an estimated weighted average full-service replacement cost rental
rate (the rate estimated by management to be necessary to justify new
construction of comparable buildings) of $27.90 per square foot. Many of the
Company's submarkets have experienced substantial rental rate growth during the
past two years. As a result, the Company has been successful in renewing or
re-leasing office space in these markets at rental rates significantly above
expiring rental rates. For Office Properties owned during the year ended
December 31, 1997, leases were signed renewing or re-leasing 1,585,769 net
rentable square feet of office space at a weighted average full-service rental
rate and an annual net effective rate (calculated as weighted average
full-service rental rate minus operating expenses) of $19.42 and $12.43 per
square foot, respectively, compared to expiring leases with a weighted average
full-service rental rate and an annual net effective rate of $15.96 and $8.94
per square foot, respectively (with each of these weighted average full-service
rental rates including free rent and scheduled rent increases that would be
taken into account under generally accepted accounting principles). This
represents increases in the weighted average full-service rental rate and in the
annual net effective rate of 22% and 39%, respectively.
The Company expects to use its substantial market share in its core office
markets and submarkets to reduce Property operating expenses. For example, in
its core markets of Dallas, Houston and Denver, the
S-17
<PAGE> 18
Company successfully negotiated bulk contracts for such services as cleaning and
elevator maintenance, resulting in discounts of approximately 5% to 10% from
contracts previously in place.
The Company focuses its operational efforts at its Office Properties on
providing quality service, individualized attention to tenants and active
preventive maintenance programs, while managing Property operating expenses to
ensure competitive pricing. Management believes that this focus on creating and
maintaining long-term relationships with its tenants will increase tenant
retention, which in turn will reduce vacancy rates and leasing costs and enhance
overall operating performance.
The Company provides its skilled management team with substantial
flexibility in conducting Company operations while offering incentives that
reward management based on compensation formulas linked directly with enhanced
operating performance. Upon the closing of the Offering, the Company's trust
managers and senior management will beneficially own approximately 14.7% of the
equity of the Company (consisting of Common Shares, Preferred Shares and Units,
including vested options to purchase Common Shares and Units). This ownership
percentage includes the approximately 10.6% ownership position of Mr. Rainwater,
the approximately 2.0% ownership position of Mr. Goff and the approximately 1.5%
ownership position of Mr. Haddock.
FINANCING STRATEGY
The Company intends to maintain a conservative capital structure with total
debt currently targeted at approximately 40% of total market capitalization. The
Company, however, consistently seeks to optimize its use of debt and other
sources of financing to create a flexible capital structure that will allow the
Company to continue its innovative investment strategy and maximize the returns
to its shareholders. It is the Company's policy that any indebtedness will be
incurred by the Operating Partnership and its subsidiaries, and that Crescent
Equities will not incur indebtedness other than short-term trade debt, employee
compensation, distributions payable or similar indebtedness that will be paid in
the ordinary course of business.
ORGANIZATION
Crescent Equities is organized as a Texas real estate investment trust. On
December 31, 1996, Crescent Equities became the successor to the Predecessor
Corporation through the merger of the Predecessor Corporation and CRE Limited
Partner, Inc., a subsidiary of the Predecessor Corporation, into Crescent
Equities.
The Company owns its assets and carries on its operations and other
activities, including providing management, leasing and development services for
certain of its Properties, through the Operating Partnership and its other
subsidiaries. The Company also has an economic interest in the development
activities of the Residential Development Corporations. The structure of the
Company is designed to facilitate and maintain its qualification as a REIT and
to permit persons contributing Properties (or interests therein) to the Company
to defer some or all of the tax liability that they otherwise might incur.
The Company's executive offices are located at 777 Main Street, Suite 2100,
Fort Worth, Texas 76102, and its telephone number is (817) 877-0477.
S-18
<PAGE> 19
RECENT DEVELOPMENTS
PENDING INVESTMENTS
Station Casinos, Inc. On January 16, 1998, the Company entered into the
Merger Agreement pursuant to which Station will merge with and into the Company.
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.
As part of the transactions associated with the Merger, it is presently
anticipated that, certain operating assets and the employees of Station will be
transferred to the Station Lessee immediately prior to the Merger. The Station
Lessee will be owned 50% by Crescent Operating, Inc. or another affiliate
established by the Company, 24.9% by an 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 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 finally 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 Operating
Partnership 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 Operating Partnership also may indirectly
bear the risks associated with any increases in expenses or decreases in
revenues. The amount of rent payable to the Operating Partnership 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 Operating Partnership'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 0.466 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 new class of Preferred Shares will rank pari passu with the
Series A Preferred Shares offered hereby as to rights to receive distributions
and to participate in distributions or payments upon any liquidation,
dissolution or winding up of the Company.
The total value of 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 $919
million in existing indebtedness of Station and its subsidiaries, is
approximately $1.75 billion.
S-19
<PAGE> 20
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 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 third 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 September
30, 1997.
U.S. Home Building. On October 15, 1997, the Company acquired the U.S. Home
Building, a 21-story Class A office building located in the West Loop/Galleria
suburban office submarket of Houston, Texas, for approximately $45 million. The
U.S. Home Building is located approximately five miles west of downtown Houston
and approximately 2.5 miles west of the Company's Greenway Plaza properties.
Built in 1982, the building is located on approximately 1.9 acres and contains
approximately 400,000 net rentable square feet. Major tenants of the U.S. Home
Building include U.S. Home Corporation and Nextel Communications, Inc.
Bank One Center. On October 22, 1997, the Company, together with affiliates
of Trizec, acquired Bank One Center, a 60-story Class A office building located
in the CBD submarket of Dallas, Texas, from two unaffiliated entities. The
acquisition was made through a newly formed limited partnership in which the
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<PAGE> 21
Company and Trizec each own a 50% interest, for an aggregate purchase price of
approximately $238 million. Of the approximately $238 million purchase price,
approximately $83 million was funded through capital contributions of $41.5
million from each of the Company and Trizec, and the remaining approximately
$155 million was funded through two loans provided to the newly formed
partnership by The Travelers Insurance Company. Construction of the office
property was completed in 1987. Situated on a 2.88-acre site, Bank One Center
contains approximately 1.5 million net rentable square feet.
Americold Corporation and URS Logistics, Inc. On October 31, 1997, the
Company, through two newly formed subsidiaries, initially acquired a 40%
interest in each of two partnerships, one of which owns Americold and one of
which owns URS. Vornado acquired the remaining 60% interest in the partnerships.
Americold and URS are the two largest suppliers of refrigerated warehouse space
in the United States.
One of the partnerships acquired all of the common stock of Americold
through the merger of a subsidiary of Vornado into Americold, and the other
partnership acquired all of the common stock of URS through the merger of a
separate subsidiary of Vornado into URS. As a result of the acquisition, the
Americold partnership and the URS partnership became the owners and operators of
approximately 79 refrigerated warehouses, with an aggregate of approximately 368
million cubic feet, that are operated pursuant to arrangements with national
food suppliers such as Tyson Foods, Kraft Foods, ConAgra and Pillsbury.
The aggregate purchase price for the acquisition of Americold and URS was
approximately $1.0 billion (including transaction costs associated with the
acquisition), approximately $400 million of which represents the Company's
portion of the purchase price. Of the approximately $1.0 billion aggregate
purchase price, the purchase price for the acquisition of Americold was
approximately $632 million (consisting of approximately $112 million in cash for
the purchase of the equity, approximately $151 million in cash for the repayment
of certain outstanding bonds issued by Americold, approximately $367 million in
retention of debt and approximately $2 million in transaction costs), and the
purchase price for the acquisition of URS was approximately $372 million
(consisting of approximately $173 million in cash for the purchase of the
equity, approximately $192 million in retention of debt and approximately $7
million in transaction costs).
On December 30, 1997 and effective October 31, 1997, in order to permit the
Company to continue to satisfy certain REIT qualification requirements, the
Company sold all of the voting common stock, representing a 5% economic
interest, in each of the two subsidiaries to Crescent Operating, Inc. As a
result, the Company currently owns a 38% interest in each of the Americold
partnership and URS partnership, through its ownership of all of the nonvoting
common stock, representing a 95% economic interest, in each of the two newly
formed subsidiaries.
The parties have not yet determined certain matters relating to the future
ownership structure and operations of Americold and URS, including
identification and division of the assets that will continue to be owned by one
of the partnerships and those that may be owned by one or more other entities
formed to conduct the business operations currently conducted by Americold and
URS, and the nature and terms of any lease that may be entered into between the
operating entity and the owner of the warehouses.
Fountain Place. On November 7, 1997, the Company acquired Fountain Place, a
60-story Class A office building located in the CBD submarket of Dallas, Texas,
approximately three blocks west of the Company's Trammell Crow Center Office
Property, for approximately $114 million. Built in 1986 and designed by renowned
architect I.M. Pei, the building, situated on approximately 1.8 acres, contains
approximately 1.2 million net rentable square feet. Major tenants of Fountain
Place include Hunt Consolidated, the United States Environmental Protection
Agency, Jenkens & Gilchrist and Principal Financial Securities, Inc.
Ventana Country Inn. On December 19, 1997, the Company acquired for
approximately $30 million the Ventana Country Inn, a 62-room resort Hotel
Property located in Big Sur, California. The Ventana Country Inn is situated on
a 243-acre wooded site in the foothills of the Santa Lucia Mountains overlooking
the Pacific Ocean. The purchase also includes an adjacent 72-acre parcel of
undeveloped land offering the potential for single-family residential
development. A subsidiary of Crescent Operating, Inc. will market and operate
the
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<PAGE> 22
Ventana Country Inn jointly with the Company's Sonoma Mission Inn & Spa Hotel
Property pursuant to a lease with the Company.
Energy Centre. On December 22, 1997, the Company acquired Energy Centre, a
39-story Class A office building located in the CBD submarket of New Orleans,
Louisiana. Built in 1984, the building, located on approximately 1.28 acres,
contains approximately 762,000 net rentable square feet. Energy Centre was
acquired for approximately $75 million. Major tenants of Energy Centre include
Chaffe, McCall, Phillips, Toler & Sarpy, L.L.P., Legg Mason Wood Walker
Incorporated and Montgomery, Barnett, Brown, Reed, Hammond & Mintz.
Austin Centre. On January 23, 1998, the Company acquired Austin Centre, a
mixed-use property including a Class A office building containing approximately
344,000 net rentable square feet and the four-star Omni Austin Hotel Property
consisting of 314 rooms and 61 apartments, located on approximately 1.75 acres.
The property is located in the CBD submarket of Austin, Texas, four blocks from
the state capitol building and was acquired for approximately $96.4 million.
Austin Centre was developed in 1986, and its major tenants include Investors
Life Insurance of North America, HCD Austin Corporation and Texas Monthly, Inc.
A subsidiary of Crescent Operating, Inc. will oversee the marketing and
operations of the Omni Austin Hotel Property pursuant to a participating
triple-net lease with the Company.
Post Oak Central. On February 13, 1997 the Company acquired Post Oak
Central, a three-building Class A office complex located in the West
Loop/Galleria suburban office submarket of Houston, Texas. Built between 1974
and 1981 and designed by renowned architects Philip Johnson and John Burgee, the
buildings are located on approximately 17.3 acres and contain approximately 1.3
million net rentable square feet. Major tenants of Post Oak Central include
Apache Corporation and Stewart Information Services Corporation. Post Oak
Central was acquired for approximately $155.3 million.
TRANSACTIONS WITH MERRILL LYNCH INTERNATIONAL
On December 12, 1997, the Company entered into two transactions with
Merrill Lynch International. In one transaction, the Company sold 5,375,000
Common Shares to Merrill Lynch International for approximately $204.9 million
and received approximately $199.9 million in net proceeds. In the other
transaction, the Company entered into the Swap Agreement with Merrill Lynch
International relating to 5,375,000 Settlement Shares, pursuant to which Merrill
Lynch International will sell, as directed by the Company on or before December
12, 1998, a sufficient number of Common Shares to achieve net sales proceeds
equal to the market value of the Settlement Shares on December 12, 1997
(approximately $204.9 million), plus a forward accretion component, minus an
adjustment for the Company's distribution rate. The precise number of Common
Shares that will be required to be sold pursuant to the Swap Agreement will
depend primarily on the market price of the Common Shares at the time of
settlement. If such number of Common Shares is greater than the number of
Settlement Shares as a result of a decrease in the market price of the Common
Shares, the Company will deliver additional Common Shares to Merrill Lynch
International. If such number of Common Shares is less than the number of
Settlement Shares as a result of an increase in the market price of the Common
Shares, Merrill Lynch International will deliver Common Shares or, at the option
of the Company, cash to the Company.
FINANCING ACTIVITIES
On December 19, 1997, the Company's Credit Facility was increased to $550
million. The Credit Facility is unsecured and expires in June 2000.
On February 13, 1998, the Company increased the maximum borrowings
available under its bridge loan with BankBoston, N.A. to $250 million. The
increase in the maximum borrowings available and the additional borrowings
thereunder were made in connection with the funding of the purchase price of
Post Oak Central. The bridge loan is unsecured and expires in March 1998.
S-22
<PAGE> 23
PROPERTIES
OFFICE PROPERTIES
The Office Properties are located primarily in Dallas/Fort Worth and
Houston, Texas. The Company's office properties in Dallas/Fort Worth and Houston
represent an aggregate of approximately 74% of its office portfolio based on
total net rentable square feet (41%, and 33% for Dallas/Fort Worth and Houston,
respectively) and, on a pro forma basis, after giving effect to the investments
completed after January 1, 1997, as if they had occurred on January 1, 1997,
would have accounted for approximately 76% of office property rental revenues
(45% and 31%, respectively) for the year ended December 31, 1997.
The following table sets forth certain information about the Office
Properties as of December 31, 1997, after giving effect to the investments
completed after December 31, 1997. Based on annualized base rental revenues from
office leases in place as of December 31, 1997 and after giving effect to the
investments completed after December 31, 1997, no single tenant would account
for more than 4% of the Company's total annualized office property rental
revenues for 1997.
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NET FULL-SERVICE
RENTABLE RENTAL RATE
YEAR AREA PERCENT PER LEASED
STATE, CITY, PROPERTY SUBMARKET COMPLETED (SQ. FT.) LEASED SQ. FT.(1) SIGNIFICANT TENANTS(2)
- ----------------------------- ------------------ --------- ----------- ------- ------------ ----------------------------
<S> <C> <C> <C> <C> <C> <C>
TEXAS
DALLAS
Bank One Center(3)........ CBD 1987 1,530,957 73% $ 18.41 Bank One Texas, N.A.; Vial,
Hamilton, Koch & Knox, LLP
The Crescent Office
Towers.................. Uptown/Turtle 1985 1,210,949 96 27.06 --
Creek
Fountain Place............ CBD 1986 1,200,266 95 14.99 Hunt Consolidated
Trammell Crow Center(4)... CBD 1984 1,128,331 87 23.28 Jones, Day, Reavis and Pogue
Stemmons Place............ Stemmons Freeway 1983 634,381 92 13.73 Aetna Life Insurance Company
Spectrum Center(6)........ Far North Dallas 1983 598,250 94 17.12 Federal Deposit Insurance
Corp.; Frito-Lay, Inc.
Waterside Commons......... Las Colinas 1986 458,739 98 13.68 Sprint Communications
Company L.P.
Caltex House.............. Las Colinas 1982 445,993 94 23.75 Caltex Petroleum Corporation
Reverchon Plaza........... Uptown/Turtle 1985 374,165 99 16.73 BloomFCA!, Inc.; Pusker
Creek Gibbon Chapin, Inc.
The Aberdeen.............. Far North Dallas 1986 320,629 100 17.31 Tricon Restaurant Services
Group, Inc.
MacArthur Center I & II... Las Colinas 1982/1986 294,069 99 17.35 Federal Home Loan Bank of
Dallas
Stanford Corporate
Centre.................. Far North Dallas 1985 265,507 100 14.80 TENET Healthcare, Inc.
The Amberton.............. Central Expressway 1982 255,052 79 10.78 Pacific Southwest Bank,
F.S.B.
Concourse Office Park..... LBJ Freeway 1972-1986 244,879 88 12.31 --
12404 Park Central........ LBJ Freeway 1987 239,103 96 18.38 Perot Systems Corporation
Palisades Central II...... Richardson/Plano 1985 237,731 100 15.68 United States Data
Corporation; Northern
Telecom, Inc.; Lyons
Partnership, L.P.
3333 Lee Parkway.......... Uptown/Turtle 1983 233,484 77(5) 18.77 PageMart Wireless, Inc.
Creek
Liberty Plaza I & II...... Far North Dallas 1981/1986 218,813 100 12.84 Intecom, Inc.; Anthem Group
Services Corporation
The Addison............... Far North Dallas 1981 215,016 100 15.09 Comp USA, Inc.
The Meridian.............. LBJ Freeway 1984 213,915 96 14.54 OpenConnect Systems
Incorporated
Palisades Central I....... Richardson/Plano 1980 180,503 100 13.64 ITEX Corporation
Walnut Green.............. Central Expressway 1986 158,669 96 13.21 Cinemark USA, Inc.
Greenway II............... Richardson/Plano 1985 154,329 100 19.38 Northern Telecom, Inc.
Addison Tower............. Far North Dallas 1987 145,886 99 13.27 --
5050 Quorum............... Far North Dallas 1981 133,594 97 14.23 --
Cedar Springs Plaza....... Uptown/Turtle 1982 110,923 91 15.08 Larkin, Meeder & Scheiwdel,
Creek Inc.
Greenway IA............... Richardson/Plano 1983 94,784 100 14.31 Northern Telecom, Inc.
Valley Centre............. Las Colinas 1985 74,861 98 13.22 --
Greenway I................ Richardson/Plano 1983 51,920 100 14.31 Northern Telecom, Inc.
One Preston Park.......... Far North Dallas 1980 40,525 87 13.55 --
----------- ---- -------
Subtotal/Weighted
Average............... 11,466,223 92% $ 17.92
----------- ---- -------
</TABLE>
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<PAGE> 24
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NET FULL-SERVICE
RENTABLE RENTAL RATE
YEAR AREA PERCENT PER LEASED
STATE, CITY, PROPERTY SUBMARKET COMPLETED (SQ. FT.) LEASED SQ. FT.(1) SIGNIFICANT TENANTS(2)
- ----------------------------- ------------------ --------- ----------- ------- ------------ ----------------------------
<S> <C> <C> <C> <C> <C> <C>
FORT WORTH
Continental Plaza......... CBD 1982 954,895 53%(5) $ 16.34 Burlington Northern Santa Fe
----------- ---- -------
Railroad
HOUSTON
Greenway Plaza Office
Portfolio(7)............ Richmond-Buffalo 1969-1982 4,286,277 85% $ 14.64 The Coastal Corporation
Speedway
Houston Center(8)......... CBD 1974-1983 2,764,418 92 17.61 --
Post Oak Central(8)(9).... West Loop/Galleria 1974-1981 1,277,598 94 13.54 Apache Corporation
The Woodlands Office
Properties(10).......... The Woodlands 1980-1996 812,227 99 14.37 --
Three Westlake Park(11)... Katy Freeway 1983 414,251 100 13.46 Amoco Production Company
U.S. Home Building........ West Loop/Galleria 1982 399,777 81 16.37 --
----------- ---- -------
Subtotal/Weighted
Average............... 9,954,548 90% $ 15.32
----------- ---- -------
AUSTIN
Frost Bank Plaza.......... CBD 1984 433,024 75% $ 17.82 --
301 Congress Avenue(12)... CBD 1986 418,338 96 22.86 IBM Corporation; Lumberman's
Investment Corporation
Bank One Tower............ CBD 1974 389,503 95 16.76 Texas Workers' Compensation
Insurance Fund
Austin Centre(9).......... CBD 1986 343,665 84(5) 17.99 Investors Life Insurance
Company of North America
The Avallon............... Northwest 1993/1997 232,301(13) 79(5) 17.10 BMC Software, Inc.
Barton Oaks Plaza One..... Southwest 1986 99,792 95 19.56 Iguana Entertainment, Inc.
----------- ---- -------
Subtotal/Weighted
Average.............. 1,916,623 87% $ 18.84
----------- ---- -------
COLORADO
DENVER
MCI Tower................. CBD 1982 550,807 98% $ 17.74 Atlantic Richfield Company
Ptarmigan Place........... Cherry Creek 1984 418,565 82(5) 15.52 Janus Capital Corporation
Regency Plaza One......... DTC 1985 309,862 87 20.24 Nextel Communications
AT&T Building............. CBD 1982 184,581 97 14.89 AT&T Corp.
The Citadel............... Cherry Creek 1987 130,652 98 18.80 --
55 Madison................ Cherry Creek 1982 137,176 77 16.43 --
44 Cook................... Cherry Creek 1984 124,174 93 17.45 Allmerica Financial
----------- ---- -------
Subtotal/Weighted
Average.............. 1,855,817 91% $ 17.36
----------- ---- -------
COLORADO SPRINGS
Briargate Office and
Research Center......... Colorado Springs 1988 252,857 100% $ 15.55 The Principal Mutual Life
----------- ---- ------- Insurance Company
LOUISIANA
NEW ORLEANS
Energy Centre............. CBD 1984 761,500 78% $ 14.54 --
1615 Poydras.............. CBD 1984 508,741 75(5) 15.09 FM Service Company
----------- ---- -------
Subtotal/Weighted
Average.............. 1,270,241 77% $ 14.76
----------- ---- -------
FLORIDA
MIAMI
Miami Center.............. CBD 1983 782,686 79% $ 22.31 --
----------- ---- -------
ARIZONA
PHOENIX
Two Renaissance Square.... Downtown/CBD 1990 476,373 89% $ 23.09 Lewis & Roca
6225 North 24th Street.... Camelback Corridor 1981 86,451 67 21.00 Employee Solutions, Inc.
----------- ---- -------
Subtotal/Weighted
Average.............. 562,824 85% $ 22.84
----------- ---- -------
NEBRASKA
OMAHA
Central Park Plaza........ CBD 1982 409,850 100% $ 14.71 Acceptance Insurance
----------- ---- ------- Company; First National
Bank of Omaha
NEW MEXICO
ALBUQUERQUE
Albuquerque Plaza......... CBD 1990 366,236 83%(5) $ 18.09 U.S. West Communications;
----------- ---- ------- Rodey, Dickason, Sloan,
Akin & Robb, P.A.
</TABLE>
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<PAGE> 25
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NET FULL-SERVICE
RENTABLE RENTAL RATE
YEAR AREA PERCENT PER LEASED
STATE, CITY, PROPERTY SUBMARKET COMPLETED (SQ. FT.) LEASED SQ. FT.(1) SIGNIFICANT TENANTS(2)
- ----------------------------- ------------------ --------- ----------- ------- ------------ ----------------------------
<S> <C> <C> <C> <C> <C> <C>
CALIFORNIA
SAN FRANCISCO
160 Spear Street.......... South of 1984 276,420 83%(5) $ 22.76 Providian National
Market/CBD
----------- ---- ------- Bancorp; Sedwick
James of California, Inc.
SAN DIEGO
Chancellor Park(14)....... UTC 1988 195,733 85% $ 20.11 Tri-Union Seafoods, L.L.C.
----------- ---- -------
TOTAL WEIGHTED
AVERAGE.............. 30,264,953 88%(5) $ 17.10
=========== ==== =======
</TABLE>
- ---------------
(1) Calculated based on base rent payable as of December 31, 1997, without
giving effect to free rent or scheduled rent increases that would be taken
into account under generally accepted accounting principles and including
adjustments for expenses payable by or reimbursable from tenants.
(2) Identifies tenants with leases that contributed 20% or more of total rental
revenue paid at the Property as of December 31, 1997, on an annualized
basis.
(3) The Company has a 50% general partner interest in the partnership that owns
Bank One Center.
(4) 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.
(5) Leases have been executed at certain Office Properties but had not
commenced as of December 31, 1997. If such leases had commenced as of
December 31, 1997, the percent leased for Office Properties would have been
92%. The total percent leased for such Properties would have been as
follows: 3333 Lee Parkway -- 98%; Continental Plaza -- 100%; Austin
Centre -- 98%; The Avallon -- 100%; Ptarmigan Place -- 99%; 1615
Poydras -- 80%; Albuquerque Plaza -- 96% and 160 Spear Street -- 91%.
(6) The Company owns the principal economic interest in Spectrum Center through
an interest in Spectrum Mortgage Associates L.P., which owns both a
mortgage note secured by Spectrum Center and the ground lessor's interest
in the land underlying the office building.
(7) Consists of 10 Office Properties.
(8) Consists of three Office Properties.
(9) Acquired subsequent to December 31, 1997.
(10) The Company has a 75% limited partner interest and an indirect
approximately 10% general partner interest in the partnership that owns the
12 Office Properties that comprise The Woodlands Office Properties.
(11) The Company owns the principal economic interest in Three Westlake Park
through its ownership of a mortgage note secured by Three Westlake Park.
(12) The Company has a 1% general partner and a 49% limited partner interest in
the partnership that owns 301 Congress Avenue.
(13) In August 1997, construction was completed on a 106,342 square foot office
property. The entire building is leased to BMC Software, Inc., which is
expected to occupy in stages over the next 19 months.
(14) The Company owns Chancellor Park through its ownership of a mortgage note
secured by the building and through its direct and indirect interests in
the partnership which owns the building.
The following table provides information for the Office Properties by
state, city and submarket as of December 31, 1997, after giving effect to the
investments completed after December 31, 1997 as if they had been completed as
of December 31, 1997.
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
PERCENT OFFICE COMPANY QUOTED
PERCENT OF LEASED AT SUBMARKET SHARE OF MARKET
TOTAL TOTAL COMPANY PERCENT OFFICE RENTAL RATE
NUMBER OF COMPANY COMPANY OFFICE LEASED/ SUBMARKET PER SQUARE
STATE, CITY, SUBMARKET PROPERTIES NRA(1) NRA(1) PROPERTIES OCCUPIED(2) NRA(1)(2) FOOT(2)(3)
- --------------------------------------- ---------- ----------- ---------- ---------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
CLASS A OFFICE PROPERTIES
TEXAS
DALLAS
CBD................................. 3 3,859,554 14% 84% 81% 21% $ 20.37
Uptown/Turtle Creek................. 4 1,929,521 6 94(7) 90 34 25.28
Far North Dallas.................... 7 1,897,695 6 98 92 30 24.12
Las Colinas......................... 4 1,273,662 4 97 94 18 25.95
Richardson/Plano.................... 5 719,267 2 100 99 20 19.01
Stemmons Freeway.................... 1 634,381 2 92 84 31 17.95
LBJ Freeway......................... 2 453,018 1 96 95 5 22.89
--- ----------- --- --- --- --- -------
Subtotal/Weighted Average......... 26 10,767,098 35% 92% 89% 20% $ 22.44
--- ----------- --- --- --- --- -------
FORT WORTH
CBD................................. 1 954,895 3% 53%(7) 84% 23% $ 17.24
--- ----------- --- --- --- --- -------
<CAPTION>
WEIGHTED
AVERAGE
COMPANY
COMPANY FULL-
QUOTED SERVICE
RENTAL RENTAL
RATE PER RATE PER
SQUARE SQUARE
STATE, CITY, SUBMARKET FOOT(4) FOOT(5)
- --------------------------------------- -------- --------
<S> <C> <C>
CLASS A OFFICE PROPERTIES
TEXAS
DALLAS
CBD................................. $ 23.18 $ 18.68
Uptown/Turtle Creek................. 29.32 23.47
Far North Dallas.................... 23.23 15.59
Las Colinas......................... 23.28 17.94
Richardson/Plano.................... 21.29 15.68
Stemmons Freeway.................... 18.75 13.73
LBJ Freeway......................... 22.17 16.50
------- -------
Subtotal/Weighted Average......... $ 23.87 $ 18.28
------- -------
FORT WORTH
CBD................................. $ 17.00 $ 16.34
------- -------
</TABLE>
S-25
<PAGE> 26
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
PERCENT OFFICE COMPANY QUOTED
PERCENT OF LEASED AT SUBMARKET SHARE OF MARKET
TOTAL TOTAL COMPANY PERCENT OFFICE RENTAL RATE
NUMBER OF COMPANY COMPANY OFFICE LEASED/ SUBMARKET PER SQUARE
STATE, CITY, SUBMARKET PROPERTIES NRA(1) NRA(1) PROPERTIES OCCUPIED(2) NRA(1)(2) FOOT(2)(3)
- --------------------------------------- ---------- ----------- ---------- ---------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
HOUSTON
CBD................................. 3 2,764,418 9% 92% 94% 11% $ 17.82
Richmond-Buffalo Speedway........... 4 1,994,274 7 96 98 51 18.01
West Loop/Galleria(6)............... 4 1,677,375 6 91 94 13 19.44
The Woodlands....................... 7 486,140 2 100 100 100 15.36
Katy Freeway........................ 1 414,251 1 100 100 15 17.69
--- ----------- --- --- --- --- -------
Subtotal/Weighted Average......... 19 7,336,458 25% 94% 95% 16% $ 18.07
--- ----------- --- --- --- --- -------
AUSTIN
CBD(6).............................. 4 1,584,530 5% 88% 93% 44% $ 23.02
Northwest........................... 1 232,301 1 79(7) 96 10 22.40
Southwest........................... 1 99,792 0 95 94 6 24.87
--- ----------- --- --- --- --- -------
Subtotal/Weighted Average......... 6 1,916,623 6% 87% 94% 25% $ 23.04
--- ----------- --- --- --- --- -------
COLORADO
DENVER
Cherry Creek........................ 4 810,567 3% 86%(7) 91% 38% $ 19.42
CBD................................. 2 735,388 2 98 94 7 18.63
DTC................................. 1 309,862 1 87 90 7 23.21
--- ----------- --- --- --- --- -------
Subtotal/Weighted Average......... 7 1,855,817 6% 91% 92% 11% $ 19.74
--- ----------- --- --- --- --- -------
COLORADO SPRINGS...................... 1 252,857 1% 100% 96% 7% $ 17.69(8)
--- ----------- --- --- --- --- -------
LOUISIANA
NEW ORLEANS
CBD................................. 2 1,270,241 4% 77%(7) 87% 14% $ 15.82
--- ----------- --- --- --- --- -------
FLORIDA
MIAMI
CBD................................. 1 782,686 3% 79% 89% 23% $ 27.39
--- ----------- --- --- --- --- -------
ARIZONA
PHOENIX
Downtown/CBD........................ 1 476,373 2% 89% 90% 27% $ 21.60
Camelback Corridor.................. 1 86,451 0 67 94 3 24.82
--- ----------- --- --- --- --- -------
Subtotal/Weighted Average......... 2 562,824 2% 85% 93% 11% $ 22.09
--- ----------- --- --- --- --- -------
NEBRASKA
OMAHA
CBD................................. 1 409,850 1% 100% 93% 32% $ 18.13
--- ----------- --- --- --- --- -------
NEW MEXICO
ALBUQUERQUE
CBD................................. 1 366,236 1% 94%(7) 95% 63% $ 18.50
--- ----------- --- --- --- --- -------
CALIFORNIA
SAN FRANCISCO
South of Market/CBD................. 1 276,420 1% 83%(7) 99% 3% $ 33.28
--- ----------- --- --- --- --- -------
SAN DIEGO
UTC................................. 1 195,733 1% 86% 92% 7% $ 25.20
--- ----------- --- --- --- --- -------
CLASS A OFFICE PROPERTIES
SUBTOTAL/WEIGHTED
AVERAGE......................... 69 26,947,738 89% 89% 92% 17% $ 20.72
=== =========== === === === === =======
<CAPTION>
WEIGHTED
AVERAGE
COMPANY
COMPANY FULL-
QUOTED SERVICE
RENTAL RENTAL
RATE PER RATE PER
SQUARE SQUARE
STATE, CITY, SUBMARKET FOOT(4) FOOT(5)
- --------------------------------------- -------- --------
<S> <C> <C>
HOUSTON
CBD................................. $ 18.76 $ 17.61
Richmond-Buffalo Speedway........... 19.00 15.43
West Loop/Galleria(6)............... 19.88 14.14
The Woodlands....................... 15.36 14.28
Katy Freeway........................ 18.55 13.46
------- -------
Subtotal/Weighted Average......... $ 18.84 $ 15.74
------- -------
AUSTIN
CBD(6).............................. $ 23.36 $ 19.03
Northwest........................... 21.00 17.10
Southwest........................... 22.00 19.56
------- -------
Subtotal/Weighted Average......... $ 23.01 $ 18.84
------- -------
COLORADO
DENVER
Cherry Creek........................ $ 20.64 $ 16.59
CBD................................. 18.50 17.00
DTC................................. 25.00 20.24
------- -------
Subtotal/Weighted Average......... $ 20.52 $ 17.36
------- -------
COLORADO SPRINGS...................... $ 17.50 $ 15.55
------- -------
LOUISIANA
NEW ORLEANS
CBD................................. $ 16.70 $ 14.76
------- -------
FLORIDA
MIAMI
CBD................................. $ 30.25 $ 22.31
------- -------
ARIZONA
PHOENIX
Downtown/CBD........................ $ 21.50 $ 23.09
Camelback Corridor.................. 21.97 21.00
------- -------
Subtotal/Weighted Average......... $ 21.57 $ 22.84
------- -------
NEBRASKA
OMAHA
CBD................................. $ 18.50 $ 14.71
------- -------
NEW MEXICO
ALBUQUERQUE
CBD................................. $ 18.00 $ 18.09
------- -------
CALIFORNIA
SAN FRANCISCO
South of Market/CBD................. $ 34.00 $ 22.76
------- -------
SAN DIEGO
UTC................................. $ 24.36 $ 20.11
------- -------
CLASS A OFFICE PROPERTIES
SUBTOTAL/WEIGHTED
AVERAGE......................... $ 21.65 $ 17.50
======= =======
</TABLE>
S-26
<PAGE> 27
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
PERCENT OFFICE COMPANY QUOTED
PERCENT OF LEASED AT SUBMARKET SHARE OF MARKET
TOTAL TOTAL COMPANY PERCENT OFFICE RENTAL RATE
NUMBER OF COMPANY COMPANY OFFICE LEASED/ SUBMARKET PER SQUARE
STATE, CITY, SUBMARKET PROPERTIES NRA(1) NRA(1) PROPERTIES OCCUPIED(2) NRA(1)(2) FOOT(2)(3)
- --------------------------------------- ---------- ----------- ---------- ---------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
CLASS B OFFICE PROPERTIES
TEXAS
DALLAS
Central Expressway.................. 2 413,721 1% 86% 89% 11% $ 15.28
LBJ Freeway......................... 1 244,879 1 88 93 2 16.94
Far North Dallas.................... 1 40,525 0 87 90 1 17.60
--- ----------- --- --- --- --- -------
Subtotal/Weighted Average......... 4 699,125 2% 87% 91% 3% $ 16.00
--- ----------- --- --- --- --- -------
HOUSTON
Richmond-Buffalo Speedway........... 6 2,292,003 8% 76% 74% 54% $ 16.52
The Woodlands....................... 5 326,087 1 97 97 100 14.46
--- ----------- --- --- --- --- -------
Subtotal/Weighted Average......... 11 2,618,090 9% 78% 75% 58% $ 16.27
--- ----------- --- --- --- --- -------
CLASS B OFFICE PROPERTIES
SUBTOTAL/WEIGHTED
AVERAGE......................... 15 3,317,215 11% 80% 88% 12% $ 16.21
=== =========== === === === === =======
CLASS A AND CLASS B OFFICE
PROPERTIES TOTAL/WEIGHTED
AVERAGE......................... 84 30,264,953 100% 88%(7) 91% 16% $ 20.22
=== =========== === === === === =======
<CAPTION>
WEIGHTED
AVERAGE
COMPANY
COMPANY FULL-
QUOTED SERVICE
RENTAL RENTAL
RATE PER RATE PER
SQUARE SQUARE
STATE, CITY, SUBMARKET FOOT(4) FOOT(5)
- --------------------------------------- -------- --------
<S> <C> <C>
CLASS B OFFICE PROPERTIES
TEXAS
DALLAS
Central Expressway.................. $ 17.73 $ 11.85
LBJ Freeway......................... 17.50 12.31
Far North Dallas.................... 17.00 13.55
------- -------
Subtotal/Weighted Average......... $ 17.61 $ 12.12
------- -------
HOUSTON
Richmond-Buffalo Speedway........... $ 17.00 $ 13.77
The Woodlands....................... 14.46 14.50
------- -------
Subtotal/Weighted Average......... $ 16.69 $ 13.88
------- -------
CLASS B OFFICE PROPERTIES
SUBTOTAL/WEIGHTED
AVERAGE......................... $ 16.88 $ 13.48
======= =======
CLASS A AND CLASS B OFFICE
PROPERTIES TOTAL/WEIGHTED
AVERAGE......................... $ 21.13 $ 17.10
======= =======
</TABLE>
- ---------------
(1) NRA means net rentable area in square feet.
(2) Market information is for Class A office space under the caption "Class A
Office Properties" and market information is for Class B office space under
the caption "Class B Office Properties." Sources are Jamison Research, Inc.
(for the Dallas CBD, Uptown/Turtle Creek, Far North Dallas, Las Colinas,
Richardson/Plano, Stemmons Freeway, LBJ Freeway and Central Expressway; Fort
Worth CBD and the New Orleans CBD submarkets), Baca Landata, Inc. (for the
Houston Richmond-Buffalo Speedway, CBD and West Loop/Galleria submarkets),
The Woodlands Corporation (for the Houston The Woodlands submarket), Cushman
& Wakefield of Texas, Inc. (for the Houston Katy Freeway submarket), CB
Commercial (for the Austin CBD, Northwest and Southwest submarkets), Cushman
& Wakefield of Colorado, Inc. (for the Denver Cherry Creek, CBD and DTC
submarkets), Turner Commercial Research (for the Colorado Springs market),
Grubb and Ellis Company (for the Phoenix-Downtown/CBD and Camelback Corridor
and San Francisco South of Market/CBD submarkets), Pacific Realty Group,
Inc. (for the Omaha CBD submarket), Building Interests, Inc. (for the
Albuquerque CBD submarket), Real Data Information Systems, Inc. (for the
Miami CBD submarket) and John Burnham & Co. (for the San Diego UTC
submarket).
(3) Represents full-service rental rates. These rates do not necessarily
represent the amounts at which available space at the Office Properties will
be leased. The weighted average subtotals and total are based on total net
rentable square feet of Company Office Properties in the submarket.
(4) For Office Properties, represents weighted average rental rates per square
foot quoted by the Company as of December 31, 1997, based on total net
rentable square feet of Company Office Properties in the submarket,
adjusted, if necessary, based on management estimates, to equivalent
full-service quoted rental rates to facilitate comparison to weighted
average Class A or Class B, as the case may be, quoted submarket rental
rates per square foot. For Office Properties acquired subsequent to December
31, 1997, represents weighted average full-service quoted market rental
rates per square foot. These rates do not necessarily represent the amounts
at which available space at the Company Office Properties will be leased.
(5) Calculated based on base rent payable for Company Office Properties and
Properties acquired subsequent to December 31, 1997 in the submarket as of
December 31, 1997, without giving effect to free rent or scheduled rent
increases that would be taken into account under generally accepted
accounting principles and including adjustments for expenses payable by
tenants, divided by total net rentable square feet of Company Office
Properties in the submarket.
(6) Includes three properties acquired in the Houston West Loop/Galleria
submarket and one property acquired in the Austin CBD submarket subsequent
to December 31, 1997.
(7) Leases have been executed at certain Properties in these submarkets but had
not commenced as of December 31, 1997. If such leases had commenced as of
December 31, 1997, the percent leased for all Office Properties in the
Company's submarkets would have been 92%. The total percent leased at the
Company's Office Properties would have been as follows: Dallas Uptown/Turtle
Creek -- 98%; Fort Worth CBD -- 100%; Austin CBD -- 92%; Austin
Northwest -- 100%; Denver Cherry Creek -- 94%; New Orleans CBD -- 79%;
Albuquerque CBD -- 96%; and San Francisco South of Market/CBD -- 91%.
(8) Represents weighted average quoted triple-net rental rates per square foot,
adjusted based on management estimates, to equivalent full-service quoted
rental rates.
S-27
<PAGE> 28
LEASE EXPIRATIONS OF OFFICE PROPERTIES
The following table sets forth a schedule of lease expirations for leases
in place at the Office Properties owned as of December 31, 1997(1), for each of
the 10 years beginning with 1998, assuming that none of the tenants exercises
renewal options and excluding an aggregate 3,960,556 square feet of unleased
space.
<TABLE>
<CAPTION>
PERCENTAGE ANNUAL
OF TOTAL FULL-SERVICE
NET RENTABLE ANNUAL RENT PER
AREA PERCENTAGE OF ANNUAL FULL-SERVICE SQUARE
NUMBER OF REPRESENTED LEASED NET FULL-SERVICE RENT FOOT OF NET
TENANTS WITH BY EXPIRING RENTABLE AREA RENT UNDER REPRESENTED RENTABLE
YEAR OF LEASE EXPIRING LEASES REPRESENTED BY EXPIRING BY EXPIRING AREA
EXPIRATION LEASES (SQUARE FEET) EXPIRING LEASES LEASES(2) LEASES EXPIRING(2)
------------- ------------ ------------- ---------------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
1998........................ 405 2,428,639 9.2% $38,618,805 8.0% $15.90
1999........................ 417 3,460,313 13.2 58,821,258 12.2 17.00
2000........................ 370 3,304,189 12.6 60,090,554 12.5 18.19
2001........................ 284 3,664,850 13.9 62,862,853 12.9 17.15
2002........................ 275 3,264,901 12.4 60,972,293 12.6 18.68
2003........................ 72 1,416,369 5.4 23,770,191 4.9 16.78
2004........................ 70 2,561,029 9.7 49,035,329 10.2 19.15
2005........................ 43 1,838,884 7.0 35,564,229 7.4 19.34
2006........................ 20 521,177 2.0 10,096,070 2.1 19.37
2007........................ 20 1,123,076 4.3 19,197,510 4.0 17.09
2008 and thereafter......... 27 2,720,970 10.3 63,611,272 13.2 23.38
</TABLE>
- ---------------
(1) Includes four Office Properties acquired subsequent to December 31, 1997.
(2) Calculated based on base rent payable as of the expiration date of the lease
for net rentable square feet expiring, without giving effect to free rent or
scheduled rent increases that would be taken into account under generally
accepted accounting principles and including adjustments for expenses
payable by or reimbursable from tenants based on current levels.
S-28
<PAGE> 29
HISTORICAL RECURRING OFFICE PROPERTY
CAPITAL EXPENDITURES, TENANT IMPROVEMENT AND LEASING COSTS
The following table sets forth annual and per square foot recurring capital
expenditures (excluding those expenditures which are recoverable from tenants)
and tenant improvement and leasing costs for the years ended December 31, 1996
and 1997, attributable to signed leases, all of which have commenced or will
commence during the next twelve months (i.e., the renewal or replacement tenant
began to pay rent) for the Office Properties consolidated in the Company's
financial statements during each of the periods presented. Tenant improvement
and leasing costs for signed leases during a particular period do not equal the
cash paid for tenant improvement and leasing costs during such period, due to
the timing of payments.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1996 1997
---------- ----------
<S> <C> <C>
CAPITAL EXPENDITURES:
Capital Expenditures (in thousands)....................... $ 1,214 $ 3,310
Per square foot........................................... $ .13 $ .15
TENANT IMPROVEMENT COSTS AND TENANT LEASING COSTS(1):
Replacement Tenant Square Feet............................ 390,945 584,116
Renewal Tenant Square Feet................................ 248,603 1,001,653
Tenant Improvement Costs (in thousands)................... $ 6,263 $ 10,958
Per square foot leased.................................... $ 9.79 $ 6.91
Tenant Leasing Costs (in thousands)....................... $ 2,877 $ 6,601
Per square foot leased.................................... $ 4.50 $ 4.16
Total (in thousands)...................................... $ 9,410 $ 17,559
Total per square foot..................................... $ 14.29 $ 11.07
Average lease term........................................ 5.3 years 6.4 years
Total per square foot per year............................ $ 2.38 $ 1.73
</TABLE>
- ---------------
(1) Excludes leasing activity for leases that have less than a one-year term
(i.e., storage and temporary space).
Capital expenditures may fluctuate in any given period subject to the
nature, extent and timing of improvements required to be made in the Company's
Property portfolio. The Company maintains an active preventive maintenance
program in order to minimize required capital improvements. In addition, capital
improvement costs are recoverable from tenants in many instances.
Tenant improvement and leasing costs also may fluctuate in any given year
depending upon factors such as the property, the term of the lease, the type of
lease (renewal or replacement tenant), the involvement of external leasing
agents and overall competitive market conditions. Management believes that
future recurring tenant improvements and leasing costs for the Company's
existing Office Property portfolio will approximate on average for "renewal
tenants" $6.00 to $8.00 per square foot or, $1.20 to $1.60 per square foot per
year based on an average five-year lease term, and for "replacement tenants"
$12.00 to $14.00 per square foot, or $2.40 to $2.80 per square foot per year
based on an average five-year lease term.
S-29
<PAGE> 30
OFFICE PROPERTY MARKET INFORMATION
The following graph provides information regarding vacancy levels and
weighted average quoted market rental rates at year end for each of the years
from 1992 through 1997 for Class A office properties in all submarkets in which
the Company has invested.
CLASS A OFFICE
VACANCY AND QUOTED MARKET RENT
FOR ALL COMPANY SUBMARKETS
[CHART]
- ---------------
(1) Weighted average based on total net rentable square feet of Class A office
properties in all Company submarkets.
Source: Compiled from third-party sources.
S-30
<PAGE> 31
The demographic conditions, economic conditions and trends (population
growth and employment growth) favoring the markets in which the Company has
invested are projected to continue to be substantially at or above the national
average, as illustrated in the following graph.
PROJECTED POPULATION AND EMPLOYMENT GROWTH
1997-2007
(% INCREASE)
<TABLE>
<CAPTION>
MEASUREMENT PERIOD
(FISCAL YEAR COVERED) POPULATION EMPLOYMENT
<S> <C> <C>
UNITED STATES 8.6 12.6
DALLAS-FORT WORTH, TX 17.8 16.9
HOUSTON, TX 11.2 12.4
AUSTIN, TX 29.7 28.7
DENVER, CO 16.6 16.2
MIAMI, FL 12.2 13.8
PHOENIX, AZ 23.2 23.4
NEW ORLEANS, LA 4.4 10.0
OMAHA, NE 11.1 14.5
ALBUQUERQUE, NM 17.2 19.3
SAN FRANCISCO, CA 14.6 14.6
COLORADO SPRINGS, CO 17.7 19.3
SAN DIEGO, CA 18.5 18.4
</TABLE>
[X] Represents projected population growth from year-end 1997 through year-end
2007.
[ ] Represents projected employment growth from year-end 1997 through year-end
2007.
- ---------------
Source: Cognetics, Inc.
S-31
<PAGE> 32
BEHAVIORAL HEALTHCARE FACILITIES
On June 17, 1997, the Company acquired substantially all of the real estate
assets of the domestic hospital provider business of Magellan Health Services,
Inc., as previously owned and operated by a wholly owned subsidiary of Magellan
Health Services, Inc. The transaction involved various components, the principal
component of which was the acquisition of the 90 Behavioral Healthcare
Facilities (and two additional behavioral healthcare facilities which
subsequently were sold) for approximately $387.2 million. The Behavioral
Healthcare Facilities, which are located in 27 states, are leased to CBHS and
its subsidiaries under a triple-net lease. CBHS is a Delaware limited liability
company, formed to operate the Behavioral Healthcare Facilities, owned 50% by a
subsidiary of Magellan Health Services, Inc. and 50% by Crescent Operating, Inc.
The lease requires the payment of annual minimum rent in the amount of
approximately $41.7 million for the period ending June 16, 1998, increasing in
each subsequent year during the 12-year term at a 5% compounded annual rate. All
maintenance and capital improvement costs are the responsibility of CBHS during
the term of the lease. In addition, the obligation of CBHS, pursuant to a
franchise agreement, to pay an approximately $78.3 million franchise fee to
Magellan Health Services, Inc. and one of its subsidiaries, as franchisor, is
subordinated to the obligation of CBHS to pay annual minimum rent to the
Company. The franchisor does not have the right to terminate the franchise
agreement due to any nonpayment of the franchise fee as a result of the
subordination of the franchise fee to the annual minimum rent. The lease is
designed to provide the Company with a secure, above-average return on its
investment as a result of the priority of annual minimum rent to the franchise
fee and the initial amount and annual escalation in the lease payments.
HOTEL PROPERTIES
The following table sets forth certain information about the Hotel
Properties, including investments in Hotel Properties completed after December
31, 1997, for the years ended December 31, 1997 and 1996. The information for
the Hotel Properties is based on available rooms, except for Canyon Ranch-Tucson
and Canyon Ranch-Lenox, which are destination health and fitness resorts that
measure their performance based on available guest nights.
<TABLE>
<CAPTION>
AVERAGE AVERAGE REVENUE PER
OCCUPANCY DAILY AVAILABLE
RATE RATE ROOM
------------- ------------- -------------
YEAR ENDED YEAR ENDED YEAR ENDED
YEAR DECEMBER 31, DECEMBER 31, DECEMBER 31,
COMPLETED/ ------------- ------------- -------------
HOTEL PROPERTY(1) LOCATION RENOVATED ROOMS 1997 1996 1997 1996 1997 1996
----------------- -------- -------------- ----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
FULL-SERVICE/LUXURY HOTELS
Denver Marriott City Center Denver, CO 1982/1994 613 80% 79% $117 $108 $ 94 $ 85
Four Seasons Hotel-Houston Houston, TX 1982 399 67 65 161 142 108 93
Hyatt Regency Albuquerque Albuquerque, NM 1990 395 74 77 98 93 73 71
Omni Austin Hotel(2) Austin, TX 1986 314 78 76 103 102 81 77
Hyatt Regency Beaver Creek Avon, CO 1989 295 66 67 229 207 151 139
Sonoma Mission Inn & Spa Sonoma, CA 1927/1987/1997 198(3) 87 92 210 181 183 166
Ventana Country Inn Big Sur, CA 1975/1982/1988 62 84 83 337 312 282 258
----- -- -- ---- ---- ---- ----
TOTAL/WEIGHTED AVERAGE 2,276(3) 75% 75% $149 $136 $112 $102
===== == == ==== ==== ==== ====
DESTINATION HEALTH AND FITNESS RESORTS
Canyon Ranch-Tucson Tucson, AZ 1980 250(4) 81%(5) 80%(5) $503(6) $479(6) $387(7) $366(7)
Canyon Ranch-Lenox Lenox, MA 1989 202(4) 80 (5) 81(5) 445(6) 407(6) 347(7) 320(7)
----- -- -- ---- ---- ---- ----
TOTAL/WEIGHTED AVERAGE 452 81% 81% $477 $446 $370 $345
===== == == ==== ==== ==== ====
</TABLE>
- ---------------
(1) Because of the Company's status as a REIT for federal income tax purposes,
it does not operate the Hotel Properties and has leased the Hotel Properties
to subsidiaries of Crescent Operating, Inc. pursuant to long-term leases.
(2) Acquired subsequent to December 31, 1997.
(3) Includes, for the period from July 1, 1997 through December 31, 1997, 30
additional rooms completed in July 1997.
(4) Represents available guest nights, which is the maximum number of guests
that the resort can accommodate per night.
(5) Represents the number of paying and complimentary guests for the period,
divided by the maximum number of available guest nights for the period.
(6) Represents the average daily "all-inclusive" guest package charges for the
period, divided by the average daily number of paying guests for the period.
(7) Represents the total "all-inclusive" guest package charges for the period,
divided by the maximum number of available guest nights for the period.
S-32
<PAGE> 33
The following table sets forth average occupancy rate, average daily rate
("ADR"), and revenue per available room ("REVPAR") for the Hotel Properties by
full-service/luxury hotels and destination health and fitness resorts for each
of the years ended December 31, 1992 through 1997. The information for the Hotel
Properties is based on available rooms, except for Canyon Ranch-Tucson and
Canyon Ranch-Lenox, which are destination health and fitness resorts, that
measure performance based on available guest nights and calculate average
occupancy rate, ADR and REVPAR as described in the footnotes to the preceding
table.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------
1992 1993 1994 1995 1996 1997
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Full-Service/Luxury Hotels
Average Occupancy Rate...................... 68% 71% 71% 74% 75% 75%
ADR......................................... $109 $112 $119 $125 $136 $149
REVPAR...................................... $ 73 $ 80 $ 85 $ 92 $102 $112
Destination Health and Fitness Resorts
Average Occupancy Rate...................... 71% 78% 78% 77% 81% 81%
ADR......................................... $380 $393 $418 $437 $446 $477
REVPAR...................................... $254 $290 $312 $321 $345 $370
</TABLE>
HOTEL LEASES
Because of the Company's status as a REIT for federal income tax purposes,
it does not operate the Hotel Properties directly. The Company has leased the
Hotel Properties to subsidiaries of Crescent Operating, Inc. (collectively, the
"Hotel Lessees") pursuant to nine separate leases. Under the leases, each having
a term of 10 years, the Hotel Lessees have assumed the rights and obligations of
the property owner under the respective management agreement with the hotel
operators, as well as the obligation to pay all property taxes and other charges
against the property. As part of each of the lease agreements for eight of the
Hotel Properties, the Company has agreed to fund all capital expenditures
relating to furniture, fixtures and equipment reserves required under the
applicable management agreements. The only exception is Canyon Ranch-Tucson, in
which the hotel lessee owns all furniture, fixtures and equipment associated
with the property and will fund all related capital expenditures. Each of the
leases provides for the payment by the lessee of the Hotel Property of (i) base
rent, with periodic rent increases, (ii) percentage rent based on a percentage
of gross room revenues above a specified amount, and (iii) a percentage of gross
food and beverage revenues above a specified amount.
RESIDENTIAL DEVELOPMENT PROPERTIES
The Company owns economic interests in five Residential Development
Corporations through the Residential Development Property Mortgages relating to
and the non-voting common stock in these Residential Development Corporations.
The Residential Development Corporations in turn, through joint ventures or
partnership arrangements, own interests in the 12 Residential Development
Properties. The Residential Development Corporations are responsible for the
continued development and the day-to-day operations of the Residential
Development Properties. The Residential Development Properties include the
following properties: The Highlands, The Reserve at Frisco, One Beaver Creek,
Market Square, Villas at Beaver Creek, Villa Montane Townhouses and Villa
Montane Club, which are located in Colorado; The Woodlands, Mira Vista, Falcon
Point and Spring Lakes, which are located in Texas; and Desert Mountain, which
is located in Arizona.
RETAIL PROPERTIES
The Company owns seven Retail Properties, which in the aggregate contain
approximately 771,000 net rentable square feet. Four of the Retail Properties,
The Woodlands Retail Properties, with an aggregate of approximately 356,000 net
rentable square feet, are located in The Woodlands, a master-planned development
located 27 miles north of downtown Houston, Texas. The Company has a 75% limited
partner interest and an indirect approximately 10% general partner interest in
the partnership that owns The Woodlands Retail
S-33
<PAGE> 34
Properties. Two of the Retail Properties, Las Colinas Plaza, with approximately
135,000 net rentable square feet, and The Crescent Atrium, with approximately
89,000 net rentable square feet, are located in submarkets of Dallas, Texas. The
remaining Retail Property, The Park Shops at Houston Center, with an aggregate
of approximately 191,000 net rentable square feet, is located in the CBD
submarket of Houston, Texas. As of December 31, 1997, the Retail Properties were
95% leased.
DESCRIPTION OF SERIES A PREFERRED SHARES
This description of the particular terms of the Series A 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 A 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 9,200,000 shares, designated 6 3/4% Series A Convertible Cumulative
Preferred Shares. When issued, the Series A Preferred Shares will be validly
issued, duly paid and nonaccessible.
The following summary of the terms and provisions of the Series A 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
and the Statement of Designation designating the Series A Preferred Shares, each
of which is available from the Company.
The registrar, transfer agent and distributions disbursing agent for the
Series A Preferred Shares will be BankBoston, N.A. (the "Transfer Agent").
Application has been made to list the Series A Preferred Shares on the NYSE
under the symbol "CEIPrA". 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 of the Series A
Preferred Shares on the NYSE.
RANKING
The Series A 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. Assuming
completion of the Pending Investment, the new class of Preferred Shares issued
in exchange for the shares of $3.50 Convertible Preferred Stock of Station will
rank pari passu with the Series A 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.
DISTRIBUTIONS
Holders of the Series A 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, cumulative cash distributions at the rate of
6 3/4% of the liquidation preference per annum (equivalent to $1.6875 per annum
per Series A Preferred Share). Distributions on the Series A Preferred Shares
offered hereby shall accrue and be cumulative from the date of original issue
and shall be payable quarterly in arrears on the fifteenth day of
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<PAGE> 35
February, May, August and November of each year or, if not a business day, the
next succeeding business day (each, a "Distribution Payment Date"). The first
distribution on the Series A Preferred Shares offered hereby, which will be paid
on May 15, 1998, will be for less than a full quarter. Such distribution and any
distribution payable on the Series A Preferred Shares for any other partial
distribution period will be computed on the basis of a 360-day year consisting
of twelve 30-day months. 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 that is not more
than 30 nor less than 10 days prior to such Distribution Payment Date (each, a
"Distribution Payment Record Date").
No distributions on the Series A 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.
Notwithstanding the foregoing, distributions on the Series A Preferred
Shares will accrue whether or not the Company has earnings, whether or not there
are funds legally available for the payment of such distributions and whether or
not such distributions are authorized. Accrued but unpaid distributions on the
Series A Preferred Shares will not bear interest and holders of the Series A
Preferred Shares will not be entitled to any distributions in excess of full
cumulative distributions as described above.
The Company intends to contribute or otherwise transfer the net proceeds of
the sale of the Series A Preferred Shares to the Operating Partnership in
exchange for 6 3/4% Series A Preferred Units in the Operating Partnership, the
economic terms of which will be substantially identical to those of the Series A
Preferred Shares. The Operating Partnership will be required to make all
required distributions on the Series A 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 A 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 A
Preferred Units as to distributions or liquidation rights, and except for
distributions required to enable the Company to maintain its qualification as a
REIT.
Any distribution payment made on the Series A 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 A 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 A 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 A
Preferred Shares to receive distributions, see "Description of Preferred
Shares -- Dividends" in the accompanying Prospectus.
LIQUIDATION PREFERENCE
In the event of any liquidation, dissolution or winding up of the affairs
of the Company, the holders of the Series A 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 $25.00 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
S-35
<PAGE> 36
capital shares of beneficial interest that rank junior to the Series A 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 A
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 A Preferred
Shares will rank senior to the Common Shares as to priority for receiving
liquidating distributions.
For further information regarding the rights of the holders of the Series A
Preferred Shares upon the liquidation, dissolution or winding up of the Company,
see "Description of Preferred Shares -- Liquidation Preference" in the
accompanying Prospectus.
REDEMPTION
The Series A Preferred Shares are not redeemable prior to February 18,
2003, except under the circumstances described below. On and after February 18,
2003, the Series A Preferred Shares may be redeemed at the option of the
Company, in whole or in part, from time to time, at a redemption price of $25.00
per share, plus all distributions accrued and unpaid on the Series A Preferred
Shares up to the date of such redemption, upon giving notice as provided below.
If fewer than all of the outstanding Series A Preferred Shares are to be
redeemed, the shares to be redeemed will be determined pro rata or by lot or in
such other manner as prescribed by the Board of Trust Managers of the Company.
In the event that such redemption is to be by lot, if as a result of such
redemption any holder of Series A Preferred Shares would own or be deemed by
virtue of certain attribution provisions of the Code, to own in excess of 9.9%
of the issued and outstanding Series A Preferred Shares because such holder's
Series A Preferred Shares were not redeemed, or were only redeemed in part,
then, except in certain instances, the Company will redeem the requisite number
of Series A Preferred Shares of such shareholder such that such shareholder will
not own or be deemed by virtue of certain attribution provisions of the Code, to
own in excess of 9.9% of the Series A Preferred Shares issued and outstanding
subsequent to such redemption.
Notice of redemption will be mailed, not less than 30 nor more than 60 days
prior to the date fixed for redemption, to each holder of record of Series A
Preferred Shares to be redeemed, notifying such holder of the Company's election
to redeem such shares, stating at least the date fixed for redemption thereof
(the "Series A Preferred Shares Redemption Date"), the redemption price, the
number of shares to be redeemed (and, if fewer than all the Series A 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 A Preferred
Shares are to be surrendered for payment.
On or after the Series A Preferred Shares Redemption Date, each holder of
Series A Preferred Shares to be redeemed must present and surrender the
certificates representing the Series A 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 A Preferred Shares are to
be redeemed, a new certificate will be issued representing the unredeemed
shares. From and after the Series A Preferred Shares Redemption Date (unless the
Company defaults in payment of the redemption price), all distributions on the
Series A Preferred Shares designated for 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 A 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 A Preferred Shares Redemption Date, may irrevocably deposit the
redemption price (including accrued and unpaid distributions) of the Series A
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 A
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 A Preferred Shares at such place on or about the
S-36
<PAGE> 37
date fixed in such redemption notice (which may not be later than the Series A
Preferred Shares Redemption Date) against payment of the redemption price
(including all accrued and unpaid distributions up to the Series A Preferred
Shares Redemption Date). Any moneys so deposited which remain unclaimed by the
holders of the Series A Preferred Shares at the end of two years after the
Series A 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 A 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 A
Preferred Shares shall be redeemed unless all outstanding Series A Preferred
Shares are simultaneously redeemed; provided, however, that the foregoing shall
not prevent the purchase or acquisition of Series A Preferred Shares pursuant to
a purchase or exchange offer made on the same terms to holders of all
outstanding Series A Preferred Shares and, unless full cumulative distributions
on all outstanding Series A 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 A Preferred
Shares (except by conversion into or exchange for shares of beneficial interest
of the Company ranking junior to the Series A Preferred Shares as to
distribution rights and liquidation preference).
Notwithstanding any other provision relating to redemption of the Series A
Preferred Shares, the Company may redeem Series A Preferred Shares at any time,
whether or not prior to February 18, 2003, 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.
The Series A Preferred Shares have no stated maturity date and will not be
subject to any sinking fund or mandatory redemption provisions. See also
"Description of Preferred Shares -- Redemption" in the accompanying Prospectus.
VOTING RIGHTS
If distributions on the Series A Preferred Shares are in arrears for six or
more quarterly periods, whether or not such quarterly periods are consecutive,
holders of Series A 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 as to which distributions are so in arrears 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. In addition, certain changes that would be materially adverse to
the rights of holders of the Series A Preferred Shares cannot be made without
the affirmative vote of two-thirds of the Series A 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).
In any matter in which the Series A 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 A Preferred Share shall be entitled to one vote.
For further information regarding the voting rights of the holders of the
Series A Preferred Shares, see "Description of Preferred Shares -- Voting
Rights" in the accompanying Prospectus.
CONVERSION RIGHTS
Subject to the restrictions on transfer and ownership described below in
"-- Ownership Limits and Restrictions on Transfer" and in "Description of Common
Shares -- Ownership Limits and Restrictions on Transfer" in the accompanying
Prospectus, Series A Preferred Shares will be convertible at any time, 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
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<PAGE> 38
adjustment as described below ("Conversion Price"). The right to convert Series
A Preferred Shares called for redemption will terminate at the close of business
on the applicable Series A Preferred Shares Redemption Date.
Conversion of Series A Preferred Shares, or a specified portion thereof,
may be effected by delivering certificates representing the Series A Preferred
Shares to be converted together with written notice of conversion and a proper
assignment of such certificates to the office of the Transfer Agent. Currently,
such office is 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.
Each conversion will be deemed to have been effected immediately prior to
the close of business on the date on which the certificates were surrendered and
notice was received by the Company (and if applicable, payment of any amount
equal to the distribution payable on such Series A Preferred Shares surrendered
for conversion shall have been received by the Company as described below) and
the conversion shall be at the Conversion Price in effect at such time and on
such date.
Holders of Series A Preferred Shares at the close of business on a
Distribution Payment Record Date will be entitled to receive the distribution
payable on such shares on the corresponding Distribution Payment Date
notwithstanding the conversion of such shares following such Distribution
Payment Record Date and prior to such Distribution Payment Date. However, Series
A Preferred Shares surrendered for conversion during the period between the
close of business on any Distribution Payment Record Date and the opening of
business on the corresponding Distribution Payment Date (except those shares
converted after the issuance of a notice of redemption with respect to a Series
A Preferred Shares Redemption Date occurring during such period or coinciding
with such Distribution Payment Date, which will be entitled to such
distribution) must be accompanied by payment of an amount equal to the
distribution payable on such shares on such Distribution Payment Date. A holder
of Series A Preferred Shares on a Distribution Payment Record Date who (or whose
transferee) tenders any such shares for conversion into Common Shares on such
Distribution Payment Date will receive the distribution payable by the Company
on such Series A Preferred Shares on such date, and the converting holder need
not include payment of the amount of such distribution upon surrender of
certificates for conversion. Except as provided above, the Company will make no
payment or allowance for unpaid distributions, whether or not in arrears, on
converted shares or for distributions on the Common Shares that are issued upon
such conversion.
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. For a further discussion of the Common Shares to be received
upon conversion of Series A Preferred Shares, see "Description of Common Shares"
in the accompanying Prospectus.
CONVERSION PRICE ADJUSTMENTS
The Conversion Price is subject to adjustment upon certain events,
including (i) the payment of distributions payable in Common Shares on any class
of shares of beneficial interest of the Company, (ii) the issuance to all
holders of Common Shares of certain rights, options or warrants entitling them
to subscribe for or purchase Common Shares at a price per share less than the
fair market value per share of Common Shares, (iii) subdivisions, combinations
and reclassifications of Common Shares, and (iv) distributions to all holders of
Common Shares or shares of beneficial interest of the Company (other than Common
Shares) or of evidences of indebtedness of the Company or assets (excluding
those rights, options, warrants and distributions referred to above and
dividends and distributions paid in cash out of equity, including revaluation
equity, applicable to Common Shares less stated capital attributable to Common
Shares). In addition to the foregoing adjustments, the Company will be permitted
to make such reductions in the Conversion Price as it considers to be advisable
in order that any event treated for federal income tax purposes as a dividend of
stock or stock rights will not be taxable to the holders of the Common Shares.
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<PAGE> 39
In case the Company shall be a party to any transaction (including, without
limitation, a merger, consolidation, statutory share exchange, tender offer for
all or substantially all of the Common Shares or sale of all or substantially
all of the Company's assets), in each case as a result of which Common Shares
will be converted into the right to receive shares of beneficial interest,
securities or other property (including cash or any combination thereof), each
Series A Preferred Share, if convertible after the consummation of the
transaction, will thereafter be convertible into the kind and amount of shares
of stock and other securities and property receivable (including cash or any
combination thereof) upon the consummation of such transaction by a holder of
that number of Common Shares or fraction thereof into which one Series A
Preferred Share was convertible immediately prior to such transaction (assuming
such holder of Common Shares failed to exercise any rights of election and
received for each Common Share the kind and amount of shares, stock, securities
and other property (including cash) receivable for each Common Share by a
plurality of non-electing Common Shares). The Company may not become a party to
any such transaction unless the terms thereof are consistent with the foregoing.
No adjustment of the Conversion Price is required to be made in any case
until cumulative adjustments amount to 1% or more of the Conversion Price. Any
adjustments not so required to be made will be carried forward and taken into
account in subsequent adjustments.
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. For
further information regarding restrictions on ownership and transfer of the
Series A Preferred Shares, see "Description of Preferred Shares -- Restrictions
on Ownership" in the accompanying Prospectus. The Company's Declaration of Trust
also provides certain restrictions on the ownership and transfer of the shares
of beneficial interest of the Company which will apply to conversions of the
Series A Preferred Shares, as well as the ownership and transfer of Series A
Preferred Shares. See "Description of Common Shares -- Ownership Limits and
Restrictions on Transfer" in the accompanying Prospectus.
DEBT STRUCTURE
The Company has an aggregate of approximately $1.7 billion of outstanding
debt at December 31, 1997. Included in this amount is $541.9 million which was
outstanding under the Credit Facility and other unsecured short-term financing
arrangements, $40.0 million of which the Company intends to maintain
outstanding. On a pro forma basis, assuming completion of the Offering and the
application of the net proceeds therefrom and the Pending Investment, the
Company's total market capitalization (based on the closing stock price on
February 12, 1998 of $34.625 per Common Share, after the full conversion of all
Units and including total indebtedness and minority interests in joint ventures)
will be approximately $8.1 billion, and the Company's debt will represent
approximately 36% of its total market capitalization.
The Company intends to maintain a conservative capital structure with total
debt currently targeted at approximately 40% of total market capitalization. The
Company, however, consistently seeks to optimize its use of debt and other
sources of financing to create a flexible capital structure that will allow the
Company to continue its innovative investment strategy and maximize the returns
to its shareholders. It is the Company's policy that any indebtedness will be
incurred by the Operating Partnership and its subsidiaries, and that Crescent
Equities will not incur indebtedness other than short-term trade debt, employee
compensation, distribution payable or similar indebtedness that will be paid in
the ordinary course of business.
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<PAGE> 40
The existing indebtedness of the Company as of December 31, 1997, is set
forth in the table below:
<TABLE>
<CAPTION>
BALANCE
INTEREST RATE AT OUTSTANDING
MAXIMUM DECEMBER 31, EXPIRATION AT DECEMBER 31,
DESCRIPTION BORROWINGS 1997 DATE 1997
----------- ---------- ---------------- ---------- -------------------
<S> <C> <C> <C> <C>
SECURED FIXED RATE DEBT:
LaSalle Note I(1)............................ $ 239,000,000 7.83% August 2027 $ 239,000,000
LaSalle Note II(2)........................... 161,000,000 7.79% March 2028 161,000,000
CIGNA Note(3)................................ 63,500,000 7.47% December 2002 63,500,000
Northwestern Life Note(4).................... 26,000,000 7.66% January 2004 26,000,000
Metropolitan Life Note I(5)(6)............... 12,109,000 8.88% September 2001 12,109,000
Nomura Funding VI Note(6)(7)................. 8,691,000 10.07% July 2020 8,691,000
Metropolitan Life Note II(8)................. 45,000,000 6.93% January 2003 45,000,000
Rigney Promissory Note(9).................... 800,000 8.50% November 2012 800,000
-------------- ----- --------------
Subtotal/Weighted Average............ $ 556,100,000 7.75% $ 556,100,000
-------------- ----- --------------
SECURED VARIABLE RATE DEBT:
LaSalle Note III(6)(10)...................... $ 115,000,000 8.07% July 1999 $ 115,000,000
Chase Manhattan Note(11)..................... 97,123,000 7.69% September 2001 97,123,000
-------------- ----- --------------
Subtotal/Weighted Average............ $ 212,123,000 7.90% $ 212,123,000
-------------- ----- --------------
UNSECURED FIXED RATE DEBT:
Notes due 2002(12)........................... $ 150,000,000 6.63% September 2002 $ 150,000,000
Notes due 2007(12)........................... 250,000,000 7.13% September 2007 250,000,000
-------------- ----- --------------
Subtotal/Weighted Average............ $ 400,000,000 6.94% $ 400,000,000
-------------- ----- --------------
UNSECURED VARIABLE RATE DEBT:
Line of Credit(13)........................... $ 550,000,000 7.14% June 2000 $ 350,000,000
BankBoston Bridge Loan(14)................... 150,000,000(15) 7.14% March 1998 91,900,000
BankBoston Note II(14)....................... 100,000,000 7.14% August 1998 100,000,000
-------------- ----- --------------
Subtotal/Weighted Average............ $ 800,000,000 7.14% $ 541,900,000
-------------- ----- --------------
TOTAL/WEIGHTED AVERAGE............... $1,968,223,000 7.38% $1,710,123,000
============== ===== ==============
</TABLE>
- ---------------
(1) The note provides for the payment of interest only through August 2002,
followed by principal amortization based on a 25-year amortization schedule
through maturity. In August 2007, the interest rate increases, and the
Company is required to remit, in addition to the monthly debt service
payment, excess property cash flow, as defined, to be applied first against
principal until the note is paid in full and thereafter, against accrued
excess interest, as defined. It is the Company's intention to repay the
note in full at such time (August 2007) by making a final payment of
approximately $220 million. The LaSalle Note I is secured by the Properties
owned by Funding I. See "Structure of the Company."
(2) The note provides for the payment of interest only through March 2003,
followed by principal amortization based on a 25-year amortization schedule
through maturity. In March 2006, the interest rate increases, and the
Company is required to remit, in addition to the monthly debt service
payment, excess property cash flow, as defined, to be applied first against
principal until the note is paid in full and thereafter, against accrued
excess interest, as defined. It is the Company's intention to repay the
note in full at such time (March 2006) by making a final payment of
approximately $154 million. The LaSalle Note II is secured by the
Properties owned by Funding II. See "Structure of the Company."
(3) The note requires payments of interest only during its term. The CIGNA Note
is secured by MCI Tower and Denver Marriott City Center.
(4) The note requires payments of interest only during its term. The
Northwestern Life Note is secured by 301 Congress Avenue.
(5) The note requires monthly payments of principal and interest and is secured
by five of The Woodlands Office Properties.
(6) The note was assumed in connection with an acquisition and was not
subsequently retired by the Company because of prepayment penalties.
(7) Under the terms of the note, principal and interest are payable based on a
25-year amortization schedule. In July 1998, the Company may defease the
note by purchasing Treasury obligations to pay the note without penalty.
The Nomura Funding VI Note is secured by Canyon Ranch-Lenox, the Property
owned by Funding VI. See "Structure of the Company." In July 2010, the
interest rate due under the note will change to a 10-year Treasury yield
plus 500 basis points or, if the Company so elects, it may repay the note
without penalty.
(8) The note requires payments of principal and interest based on a 25-year
amortization schedule through maturity, at which time the outstanding
principal balance is due and payable. The Metropolitan Life Note II is
secured by Energy Centre.
(9) The note requires quarterly payments of principal and interest based on a
15-year amortization schedule through maturity, at which time the
outstanding principal balance is due and payable. The Rigney Promissory
Note is secured by a parcel of land owned by the Company and located across
from an Office Property.
(10) The note bears interest at the rate for 30-day LIBOR plus a weighted
average rate of 2.135% (subject to a rate cap of 10%), and requires
payments of interest only during its term. The LaSalle Note III is secured
by the Properties owned by Funding III, IV and V. See "Structure of the
Company."
(11) The note bears interest at the rate for 30-day LIBOR plus 1.75 basis points
and requires payment of interest only during its term. The Chase Manhattan
Note is secured by Fountain Place.
(12) The notes are unsecured and require payments of interest only during their
terms. The interest rate on the notes is subject to temporary increase by
50 basis points in the event that a registered offer to exchange the notes
for notes of the Company with terms identical in all material respects to
the notes is not consummated or a shelf registration statement with respect
to the resale of the notes is not declared effective by the Commission on
or before the 180th day following September 22, 1997. The interest rate on
the notes also is subject to temporary or permanent increase by 37.5 basis
points in the event that, within the period from September 22, 1997 to
September 22, 1998, such notes are not assigned, an investment grade rating
(as defined in the notes) by specified rating agencies. These adjustments
may apply simultaneously.
(13) The Credit Facility is unsecured with an interest rate of the Eurodollar
rate plus 120 basis points.
(14) The note is unsecured with an interest rate of the Eurodollar rate plus 120
basis points. The note requires payments of interest only during its term.
(15) The maximum borrowings under the BankBoston Bridge Loan were increased to
$250 million subsequent to December 31, 1997. See "Recent
Developments -- Financing Activities."
S-40
<PAGE> 41
USE OF PROCEEDS
The Company intends to use the net proceeds of the Offering, estimated at
$191.3 million after estimated expenses payable by the Company, to repay
approximately $191.3 million of the amounts outstanding under the Credit
Facility. Of the amounts to be repaid under the Credit Facility, approximately
$55.3 million was used to fund the purchase price of Post Oak Central,
approximately $96.9 million was used to fund the purchase price of Austin Centre
and the Omni Austin Hotel and the remaining approximately $39.1 million was used
to fund a portion of the Refrigerated Warehouse Investment.
If the Underwriters' over-allotment option is exercised, the additional net
proceeds (which are estimated to be $28.8 million if the over-allotment option
is exercised in full) will be used to reduce further amounts outstanding under
the Credit Facility. The amounts to be repaid were used to fund a portion of the
Refrigerated Warehouse Investment.
The Credit Facility, which is unsecured and expires in June 2000, bears
interest at the Eurodollar rate plus 120 basis points.
PRICE RANGE OF COMMON SHARES AND DISTRIBUTIONS
The Common Shares have been traded on the New York Stock Exchange ("NYSE")
under the symbol "CEI" since the completion of the Initial Offering in May 1994.
For each calendar quarter indicated, the following table reflects the high and
low sales prices for the Common Shares and the distributions declared by the
Company with respect to each such quarter. All information provided in the table
below has been adjusted to reflect the two-for-one stock split effected in the
form of a 100% share dividend paid by the Company on March 26, 1997 to
shareholders of record on March 20, 1997.
<TABLE>
<CAPTION>
PRICE
----------------------
HIGH LOW DISTRIBUTIONS
---- --- -------------
<S> <C> <C> <C>
1995
First Quarter.......................................... $14 5/8 $12 1/2 $ .25
Second Quarter......................................... $16 $13 15/16 $ .25
Third Quarter.......................................... $16 3/16 $14 7/8 $.275
Fourth Quarter......................................... $17 15/16 $15 1/8 $.275
1996
First Quarter.......................................... $17 7/16 $16 1/16 $.275
Second Quarter......................................... $19 1/16 $16 11/16 $.275
Third Quarter.......................................... $21 3/16 $17 1/2 $.305
Fourth Quarter......................................... $26 5/8 $20 5/16 $.305
1997
First Quarter.......................................... $31 3/8 $25 1/8 $.305
Second Quarter......................................... $32 $25 1/8 $.305(1)
Third Quarter.......................................... $40 1/8 $30 $ .38
Fourth Quarter......................................... $40 7/8 $30 $ .38
1998
First Quarter through February 12...................... $40 3/8 $34 (2)
</TABLE>
- ---------------
(1) In addition to the regular quarterly distribution, the Company made a
one-time distribution of shares of Crescent Operating, Inc., which was
distributed to the shareholders of the Company and the partners of the
Operating Partnership, on a pro rata basis, in a spin-off effective June 12,
1997.
(2) The record date for the distribution for the first quarter of 1998 has not
yet been determined. The record date for the distribution for the first
quarter of 1998 will follow the closing of the Offering.
The last reported sale price of the Common Shares on the NYSE on February
12, 1998, was $34.625. As of December 31, 1997, there were approximately 419
holders of record of the Common Shares.
The Company's current quarterly distribution is $.38 per Common Share, an
indicated annualized distribution of $1.52 per Common Share.
The actual results of operations of the Company and the amounts actually
available for distribution will be affected by a number of factors, including
revenues received from the Properties and any additional
S-41
<PAGE> 42
properties acquired in the future, the operating and interest expenses of the
Company, the ability of tenants to meet their rent obligations, general leasing
activity in the markets in which the Office Properties are located, consumer
preferences relating to the Hotel Properties, the general condition of the
United States economy, federal, state and local taxes payable by the Company,
capital expenditure requirements and the adequacy of reserves. In addition, the
Credit Facility limits distributions to the partners of the Operating
Partnership for any four successive quarters to an amount that will not exceed
90% of funds from operations for such period and 100% of funds available for
distribution for such period.
Future distributions by the Company will be at the discretion of the Board
of Trust Managers. The Board of Trust Managers has indicated that it will review
the adequacy of the Company's distribution rate on a quarterly basis.
Under the Code, REITs are subject to numerous organizational and
operational requirements, including the requirement to distribute at least 95%
of taxable income. Pursuant to this requirement, the Company was required to
distribute $103.9 million, $41.8 million and $40.8 million for 1997, 1996 and
1995, respectively. Actual distributions by the Company were $140.8 million,
$73.4 million and $52.8 million for 1997, 1996 and 1995, respectively.
Distributions by the Company to the extent of its current and accumulated
earnings and profits for federal income tax purposes generally will be taxable
to a shareholder as ordinary dividend income. Distributions in excess of current
and accumulated earnings and profits will be treated as a nontaxable reduction
of the shareholder's basis in such shareholder's Common Shares, to the extent
thereof, and thereafter as taxable gain. Distributions that are treated as a
reduction of the shareholder's basis in its Common Shares will have the effect
of deferring taxation until the sale of the shareholder's shares. The Company
has determined that, for federal income tax purposes, none of the quarterly
distributions made for 1994, 10% of the quarterly distributions made in 1995,
38% of quarterly distributions made in 1996, and 25.7% of quarterly
distributions made in 1997, represented a return of capital to shareholders.
Given the dynamic nature of the Company's acquisition strategy and the extent to
which any future acquisitions would alter this calculation, no assurances can be
given regarding what portion, if any, of distributions for 1997 or subsequent
years will constitute a return of capital for federal income tax purposes.
S-42
<PAGE> 43
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
September 30, 1997 (i) on a historical basis and (ii) on a pro forma basis after
giving effect to the Offering and the application of the net proceeds therefrom,
as described in "Use of Proceeds," the investments completed after September 30,
1997, the Pending Investment and related investment financing. Such information
should be read in conjunction with the financial statements and notes thereto
incorporated by reference into the accompanying Prospectus.
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1997
------------------------
HISTORICAL PRO FORMA
---------- ----------
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<S> <C> <C>
Indebtedness
Credit Facility, Short-Term Indebtedness and other
Indebtedness (Unsecured)............................... $ 751,500(1) $1,197,000
Mortgage Indebtedness..................................... 625,404 767,504
Long-Term Indebtedness (Unsecured)........................ 400,000 940,000
Minority interests
Operating Partnership..................................... 110,648 110,648
Interests in Joint Venture................................ 28,396 28,396
Shareholders' equity
Common Shares, $0.01 par value, 250,000,000 shares
authorized, 102,442,050 historical and 134,430,907 pro
forma shares issued and outstanding.................... 1,024 1,343
Preferred Shares, $0.01 par value, 100,000,000 shares
authorized:
6 3/4% Series A Convertible Cumulative Preferred Shares
of beneficial interest, liquidation preference $25 per
share, 8,000,000 shares issued and outstanding........ -- 191,250
$3.50 Series B Convertible Preferred Shares of
beneficial interest, liquidation preference $50 per
share, 2,070,000 shares issued and outstanding, upon
consummation of Merger................................ -- 103,500
Paid-in capital........................................... 1,666,978 2,823,825
Deferred compensation restricted shares................... (283) (283)
Retained deficit.......................................... (59,864) (59,864)
---------- ----------
Total capitalization.............................. $3,523,803 $6,103,319
========== ==========
</TABLE>
- ---------------
(1) Credit Facility, Short-Term Indebtedness and other Indebtedness (Unsecured)
decreased to $541,900 as of December 31, 1997 as a result of the net
$209,600 of the proceeds received from the October 1997 Offering and the
Merrill Offering and borrowings obtained in connection with the acquisition
of Bank One Center, the Refrigerated Warehouse Investment, Fountain Place,
Ventana Country Inn, Energy Centre and for working capital.
S-43
<PAGE> 44
SELECTED FINANCIAL DATA
The following table sets forth certain financial information for the
Company on a consolidated pro forma and historical basis and for the Rainwater
Property Group (the Company's predecessor) on a combined historical basis, which
consists of the combined financial statements of the entities that contributed
Properties in exchange for Units or Common Shares in connection with the
formation of the Company. Such information should be read in conjunction with
the financial statements and notes thereto incorporated by reference into the
accompanying Prospectus.
The pro forma information for the year ended December 31, 1996 assumes
completion, in each case as of January 1, 1996 in determining operating and
other data, of (i) the October 1996 Offering and the additional public offering
of 450,000 Common Shares that closed on October 9, 1996 and the use of the net
proceeds therefrom to repay approximately $168 million of indebtedness and to
fund approximately $289 million of Property acquisitions in the fourth quarter
of 1996 and the first quarter of 1997, (ii) the April 1997 Offering and the
additional public offering of 500,000 Common Shares that closed on May 14, 1997
and the use of the net proceeds therefrom to fund approximately $593.5 million
of Property acquisitions and other investments in the second quarter of 1997,
(iii) the UBS Offering and the use of the net proceeds therefrom to repay
approximately $145 million of indebtedness incurred under the Credit Facility,
(iv) the Note Offering and the use of the net proceeds therefrom to fund
approximately $337.6 million of the purchase price of two Properties and to
repay approximately $57.2 million of indebtedness incurred under the Credit
Facility and other short-term indebtedness, (v) the October 1997 Offering and
the use of the net proceeds therefrom to fund approximately $45 million of the
purchase price of one Property and to repay approximately $325.1 million of
short-term indebtedness and indebtedness incurred under the Credit Facility,
(vi) the Merrill Offering and the use of the net proceeds therefrom to repay
approximately $199.9 million of indebtedness under the Credit Facility, (vii)
this Offering and the use of the net proceeds therefrom to repay approximately
$191.3 million of indebtedness under the Credit Facility, (viii) Property
acquisitions, other investment and related financing and share issuances during
1996, 1997 and 1998, and (ix) the Pending Investment and related financing,
including approximately $1.05 billion for refinancing and/or assumption of
indebtedness and associated refinancing and transaction costs in connection with
the Merger.
The pro forma information for the nine months ended September 30, 1997
assumes completion, in each case as of January 1, 1997 in determining operating
and other data, and, in each case as of September 30, 1997 in determining
balance sheet data, of (i) the April 1997 Offering and the additional public
offering of 500,000 Common Shares that closed on May 14, 1997 and the use of the
net proceeds therefrom to fund approximately $593.5 million of Property
acquisitions and other investments in the second quarter of 1997, (ii) the UBS
Offering and the use of the net proceeds therefrom to repay approximately $145
million of indebtedness incurred under the Credit Facility and other short-term
indebtedness, (iii) the Note Offering and the use of the net proceeds therefrom
to fund approximately $337.6 million of the purchase price of two Properties and
to repay approximately $57.2 million of indebtedness incurred under the Credit
Facility and other short-term indebtedness, (iv) the October 1997 Offering and
the use of the net proceeds therefrom to fund approximately $45 million of the
purchase price of one Property and to repay approximately $325.1 million of
short-term indebtedness and indebtedness incurred under the Credit Facility, (v)
the Merrill Offering and the use of the net proceeds therefrom to repay
approximately $199.9 million of indebtedness under the Credit Facility, (vi)
this Offering and the use of the net proceeds therefrom to repay approximately
$191.3 million of indebtedness under the Credit Facility, (vii) Property
acquisitions, other investments and related financing, and share issuances
during 1997 and 1998, and (viii) the Pending Investment and related financing,
including approximately $1.05 billion for refinancing and/or assumption of
indebtedness and associated refinancing and transaction costs in connection with
the Merger.
S-44
<PAGE> 45
CRESCENT REAL ESTATE EQUITIES COMPANY
CONSOLIDATED PRO FORMA AND HISTORICAL FINANCIAL DATA AND
RAINWATER PROPERTY GROUP COMBINED HISTORICAL FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
COMPANY
----------------------------------------------------------------------------------------
PRO FORMA
NINE MONTHS ENDED SEPTEMBER 30, YEAR ENDED YEAR ENDED YEAR ENDED
------------------------------------------ DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1997 1996 1996 1996 1995
------------ ------------ ----------- ------------ ------------ ------------
PRO FORMA ACTUAL ACTUAL
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Revenue --
Rental property................ $ 561,380 $ 289,752 $ 133,855 $ 717,212 $ 202,003 $ 123,489
Interest and other income...... 20,299 13,508 3,572 22,142 6,858 6,471
Residential developments(1).... -- -- -- -- -- --
Operating expenses --
Rental property operating(2)... 156,939 104,573 47,996 202,005 73,813 45,949
Corporate general and
administrative............... 9,855 9,855 3,498 10,000 4,674 3,812
Residential developments(1).... -- -- -- -- -- --
Interest expense................ 158,310 54,687 30,861 211,780 42,926 18,781
Depreciation and amortization... 132,996 50,840 29,339 175,207 40,535 28,060
Amortization of deferred
financing costs................ 2,696 2,157 2,065 3,531 2,812 2,500
Writedown of investment
property....................... -- -- -- -- -- --
------------ ------------ ----------- ------------ ----------- -----------
Operating income (loss)......... 120,883 81,148 23,668 136,831 44,101 30,858
Reorganization costs............ -- -- -- -- -- --
Equity in net income of
unconsolidated
subsidiaries(1)................ 14,248 3,118 3,067 14,020 3,850 5,500
------------ ------------ ----------- ------------ ----------- -----------
Income (loss) before minority
interests and extraordinary
item........................... $ 135,131 $ 84,266 $ 26,735 $ 150,851 $ 47,951 $ 36,358
============ ============ =========== ============ =========== ===========
Preferred distributions......... $ 15,559 $ -- $ -- $ 20,745 $ -- $ --
Net income available for Common
Shares......................... $ 106,677 $ 72,248 $ 19,571 $ 114,656 $ 37,135 $ 27,395
Net Income per Common Share..... $ .79 $ .83 $ .42 $ .85 $ .70 $ .66
BALANCE SHEET DATA (AT PERIOD
END):
Real estate, before accumulated
depreciation................... $ 5,374,759 $ 3,113,743 $ 1,238,417 -- $ 1,732,626 $ 1,006,706
Total assets.................... -- 1,730,922 964,171
Mortgages and other secured
notes
payable........................ 767,504 625,404 491,983 -- 627,808 424,528
Credit Facility and other
unsecured obligations(3)....... 2,137,000 1,151,500 172,500 -- 40,000 20,000
Total liabilities............... 2,967,734 1,865,134 694,781 -- 716,270 476,234
Minority interest in Operating
Partnership.................... 110,648 110,648 95,604 -- 120,227 71,925
Shareholders' equity............ 3,059,771 1,607,855 388,292 -- 865,160 406,531
OTHER DATA:
Funds from Operations before
minority interests(4).......... $ 272,493 $ 134,615 $ 55,741 $ 335,575 $ 87,616 $ 64,475
Cash distribution declared per
Share(5)....................... -- $ .99 $ .86 -- $ 1.16 $ 1.05
Weighted average Common Shares
outstanding and issuable upon
exchange of Units.............. 147,124,058 100,592,573 58,116,124 147,124,058 64,684,842 54,182,006
Cash flow provided by (used in):
Operating activities........... --(6) $ 134,888 $ 49,550 --(6) $ 77,384 $ 65,011
Investing activities........... --(6) (1,865,395) (221,450) --(6) (513,038) (421,406)
Financing activities........... --(6) 1,751,997 169,336 --(6) 444,315 343,079
Number of Properties (at period
end):
Office Properties.............. 84 76 37 84 53 30
Hotel Properties............... 9 7 4 9 6 3
Behavioral Healthcare
Facilities................... 90 91 0 90 0 0
Retail Properties.............. 7 7 2 7 6 2
Residential Development
Properties................... 12 12 9 12 9 9
Refrigerated Warehouse......... 79 -- -- 79 -- --
<CAPTION>
COMPANY RAINWATER PROPERTY GROUP
--------------- ---------------------------------
FOR THE
PERIOD
FOR THE FROM
PERIOD FROM JANUARY 1, YEAR ENDED
MAY 5, 1994 1994 TO DECEMBER 31,
TO DECEMBER 31, MAY 4, --------------------
1994 1994 1993 1992
--------------- ---------- -------- ---------
<S> <C> <C> <C> <C>
OPERATING DATA:
Revenue --
Rental property................ $ 49,075 $ 18,550 $ 48,232 $ 41,946
Interest and other income...... 1,268 42 605 425
Residential developments(1).... -- 2,593 8,331 7,215
Operating expenses --
Rental property operating(2)... 18,993 8,696 21,230 20,104
Corporate general and
administrative............... 1,815 -- -- --
Residential developments(1).... -- 1,428 4,077 5,714
Interest expense................ 3,493 4,867 29,226 36,245
Depreciation and amortization... 14,255 7,793 18,081 18,190
Amortization of deferred
financing costs................ 923 -- -- --
Writedown of investment
property....................... -- -- 37,578 5,945
----------- -------- -------- ---------
Operating income (loss)......... 10,864 (1,599) (53,024) (36,612)
Reorganization costs............ 1,900 -- -- --
Equity in net income of
unconsolidated
subsidiaries(1)................ 3,631 -- -- --
----------- -------- -------- ---------
Income (loss) before minority
interests and extraordinary
item........................... $ 12,595 $ (1,599) $(53,024) $ (36,612)
=========== ======== ======== =========
Preferred distributions......... $ -- $ -- $ -- $ --
Net income available for Common
Shares......................... $ 8,300 $ -- $ -- $ --
Net Income per Common Share..... $ .26 -- -- --
BALANCE SHEET DATA (AT PERIOD
END):
Real estate, before accumulated
depreciation................... $ 557,675 -- $358,400 $ 336,923
Total assets.................... 538,354 -- 290,869 296,291
Mortgages and other secured
notes
payable........................ -- -- 278,060 548,517
Credit Facility and other
unsecured obligations(3)....... 194,642 -- -- --
Total liabilities............... 209,900
Minority interest in Operating
Partnership.................... 93,192 -- -- --
Shareholders' equity............ 235,262 -- 2,941 (328,240)
OTHER DATA:
Funds from Operations before
minority interests(4).......... $ 32,723 -- -- --
Cash distribution declared per
Share(5)....................... $ .65 -- -- --
Weighted average Common Shares
outstanding and issuable upon
exchange of Units.............. 44,997,716 -- -- --
Cash flow provided by (used in):
Operating activities........... $ 21,642 $ 2,455 $ 9,313 $ (640)
Investing activities........... (260,666) (2,379) (20,572) (8,924)
Financing activities........... 265,608 (21,310) 28,861 14,837
Number of Properties (at period
end):
Office Properties.............. 10 4 4 3
Hotel Properties............... 0 0 0 0
Behavioral Healthcare
Facilities................... 0 0 0 0
Retail Properties.............. 2 2 2 2
Residential Development
Properties................... 3 3 2 1
Refrigerated Warehouse......... -- -- -- --
</TABLE>
S-45
<PAGE> 46
- ---------------
(1) The Company accounts for its investments in the Residential Development
Property Mortgages and non-voting common stock of the Residential
Development Corporations under the equity method of accounting as a result
of the noncontrolling interests held. The Company also accounts for its
investment in Woodlands Commercial Properties Company, L.P. and the
Refrigerated Warehouse Investment under the equity method of accounting.
(2) Includes real estate taxes, repairs and maintenance and other rental
property operating expenses, including property-level general and
administrative expenses.
(3) The Credit Facility was converted from a secured facility to an unsecured
facility in October 1996.
(4) FFO, based on the revised definition adopted by the Board of Governors of
NAREIT and as used herein, means net income (loss) available to holders of
Common Shares, determined in accordance with generally accepted accounting
principles ("GAAP"), excluding gains (or losses) from debt restructuring and
sales of property, plus depreciation and amortization of real estate assets,
and after adjustments for unconsolidated partnerships and joint ventures.
FFO was developed by NAREIT as a relative measure of performance and
liquidity of an equity REIT in order to recognize that income-producing real
estate historically has not depreciated on the basis determined under GAAP.
The Company considers FFO an appropriate measure of performance of an equity
REIT. However, FFO (i) does not represent cash generated from operating
activities determined in accordance with GAAP (which, unlike FFO, generally
reflects all cash effects of transactions and other events that enter into
the determination of net income), (ii) is not necessarily indicative of cash
flow available to fund cash needs and (iii) should not be considered as an
alternative to net income determined in accordance with GAAP as an
indication of the Company's operating performance, or to cash flow from
operating activities determined in accordance with GAAP as a measure of
either liquidity or the Company's ability to make distributions. The Company
has historically distributed an amount less than FFO, primarily due to
reserves required for capital expenditures, including leasing costs. An
increase in FFO does not necessarily result in an increase in aggregate
distributions because the Board of Trust Managers of the Company is not
required to increase distributions unless necessary in order to enable the
Company to maintain REIT status. Because the Company must distribute 95% of
its real estate investment trust taxable income (as defined in the Code),
however, a significant increase in FFO will generally require an increase in
distributions to shareholders and unitholders although not necessarily on a
proportionate basis. Accordingly, the Company believes that in order to
facilitate a clear understanding of the consolidated historical operating
results of the Company, FFO should be considered in conjunction with the
Company's net income (loss) and cash flows as reported in the consolidated
financial statements and notes thereto incorporated by reference into the
accompanying Prospectus. However, the Company's measure of FFO may not be
comparable to similarly titled measures for other REITs because these REITs
may not apply the modified definition of FFO in the same manner as the
Company.
(5) For 1994, distributions were taxable as ordinary dividend income.
Distributions in 1994 were paid on 45,043,360 outstanding Common Shares and
Units. For 1997, 1996 and 1995, 74%, 62% and 90%, respectively, of the
distributions were taxable as ordinary dividend income, with the remainder
treated as a return of capital. Distributions in 1995 were paid on
45,043,360, 57,636,642, 57,645,564 and 57,640,562 outstanding Common Shares
and Units for the first, second, third and fourth quarters, respectively.
Distributions in 1996 were paid on 57,640,562, 57,776,538, 84,360,692 and
85,574,200 outstanding Common Shares and Units for the first, second, third
and fourth quarters, respectively. Distributions in 1997 were paid on
109,755,561, 110,299,404 and 125,358,818 outstanding Common Shares and Units
for the first, second and third quarters, respectively.
(6) Pro forma information relating to operating, investing and financing
activities has not been included because management believes that the data
would not be meaningful due to the number of assumptions required in order
to calculate this data.
S-46
<PAGE> 47
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 53 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 1998 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 66 Trust Manager of Crescent Equities
Morton H. Meyerson 1998 59 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 2000 69 Trust Manager of Crescent Equities
Dallas E. Lucas N/A 35 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 43 Senior Vice President, Acquisitions of CREE Ltd.
William D. Miller N/A 39 Senior Vice President, Administration of CREE
Ltd. and Crescent Equities
Bruce A. Picker N/A 33 Vice President and Treasurer of CREE Ltd. and
Crescent Equities
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 40 Vice President, Corporate Leasing of CREE Ltd.
John M. Walker, Jr. N/A 47 Vice President, Acquisitions, of CREE Ltd.
John L. Zogg, Jr. N/A 34 Vice President, Leasing and Marketing of CREE
Ltd.
Murphy C. Yates N/A 51 Director of Leasing and Operations of CREE Ltd.
</TABLE>
STRUCTURE OF THE COMPANY
The Company is a fully integrated real estate company operating as a REIT
for federal income tax purposes. The Company provides management, leasing and
development services with respect to certain of its Properties. Crescent
Equities is a Texas real estate investment trust which became the successor to
the Predecessor Corporation on December 31, 1996, through the merger of the
Predecessor Corporation and CRE Limited Partner, Inc., a subsidiary of the
Predecessor Corporation, into Crescent Equities. The merger was structured to
preserve the existing business, purpose, tax status, management, capitalization
and assets, liabilities and net worth (other than due to the costs of the
transaction) of the Predecessor Corporation, and 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 also 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
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corporations that currently own and operate approximately 79 refrigerated
warehouses with an aggregate of approximately 368 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, 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, 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 Operating Partnership 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 Operating Partnership 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 Operating Partnership owns the principal economic interest in Three
Westlake Park through its ownership of a mortgage note secured by the
building.
(5) The Operating Partnership owns the principal economic interest in Trammell
Crow Center through its ownership of fee simple title to the Property
(subject to a ground lease and a leasehold estate regarding the building)
and two mortgage notes encumbering the leasehold interests in the land and
building.
(6) The Operating Partnership owns a 75% limited partner interest and an
indirect approximately 10% general partner interest in the partnerships that
own The Woodlands Office and Retail Properties.
(7) The Operating Partnership owns a 49% limited partner interest and
Crescent/301, L.L.C., a wholly owned subsidiary of CREE Ltd. and the
Operating Partnership, owns a 1% general partner interest in 301 Congress
Avenue, L.P., the partnership that owns 301 Congress Avenue.
(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.
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FEDERAL INCOME TAX CONSIDERATIONS
INTRODUCTION
The following is a summary of the material federal income tax
considerations associated with an investment in the Series A 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 Supplement, all of which are subject to change, retroactively or
prospectively, and to possibly differing interpretations. This discussion does
not purport to deal with the federal income or other tax consequences applicable
to all investors in light of their particular investment circumstances or to all
categories of investors, some of whom may be subject to special rules
(including, for example, insurance companies, tax-exempt organizations,
financial institutions, broker-dealers, foreign corporations and persons who are
not citizens or residents of the United States). No ruling on the federal, state
or local tax considerations relevant to the operation of Crescent Equities or
the Operating Partnership or to the purchase, ownership or disposition of the
Series A 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 PROSPECTIVE PURCHASER IS URGED TO CONSULT HIS OR HER OWN TAX ADVISOR
REGARDING THE SPECIFIC TAX CONSEQUENCES TO HIM OR HER OF THE PURCHASE, OWNERSHIP
AND DISPOSITION OF THE SERIES A 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
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actual stock ownership of Crescent Equities, the mix of its assets, or the
results of its operations for any particular taxable year will satisfy such
requirements. For a discussion of the tax consequences of failing to qualify as
a REIT, see "-- Taxation of Crescent Equities -- Failure to Qualify," below.
If Crescent Equities qualifies for taxation as a REIT, it generally will
not be subject to federal corporate income taxes on its net income that is
currently distributed to shareholders. This treatment substantially eliminates
the "double taxation" (at the corporate and shareholder levels) that generally
results from investments in a corporation. However, Crescent Equities will be
subject to federal income tax in the following circumstances. First, Crescent
Equities will be taxed at regular corporate rates on any undistributed "real
estate investment trust taxable income," including undistributed net capital
gains. Second, under certain circumstances, Crescent Equities may be subject to
the "alternative minimum tax" on its items of tax preference. Third, if Crescent
Equities has "net income from foreclosure property," it will be subject to tax
on such income at the highest corporate rate. "Foreclosure property" generally
means real property and any personal property incident to such real property
which is acquired as a result of a default either on a lease of such property or
on indebtedness which such property secured and with respect to which an
appropriate election is made, except that property ceases to be foreclosure
property (i) after a 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,
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regarding certain distributions and the nature of its income and assets and
properly files an election to be treated as a REIT. The Code provides that
conditions (1) through (4), inclusive, must be met during the entire taxable
year and that condition (5) must be met during at least 335 days of a taxable
year of 12 months (or during a proportionate part of a taxable year of less than
12 months).
Crescent Equities issued sufficient Common Shares pursuant to the Initial
Offering to satisfy the requirements described in (5) and (6) above. While the
existence of Exchange Rights may cause Limited Partners to be deemed to own the
Common Shares they could acquire through the Exchange Rights, the amount of
Common Shares that can be acquired at any time through the Exchange Rights is
limited to an amount which, together with any other Common Shares actually or
constructively deemed, under the Declaration of Trust, to be owned by any
person, does not exceed the Ownership Limit (as defined in the accompanying
Prospectus). See "Description of Common Shares -- Ownership Limits and
Restrictions on Transfer" in the accompanying Prospectus. Moreover, the
ownership of Common Shares generally is limited under the Ownership Limit to no
more than 8.0% of the outstanding Common Shares. In addition, the Declaration of
Trust provides for restrictions regarding the ownership or transfer of Common
Shares in order to assist Crescent Equities in continuing to satisfy the share
ownership requirements described in (5) and (6) above. See "Description of
Common Shares -- Ownership Limits and Restrictions on Transfer" in the
accompanying Prospectus.
If a REIT owns a "qualified REIT subsidiary," the Code provides that the
qualified REIT subsidiary is disregarded for federal income tax purposes, and
all assets, liabilities and items of income, deduction and credit of the
qualified REIT subsidiary are treated as assets, liabilities and such items of
the REIT itself. A qualified REIT subsidiary is a corporation all of the capital
stock of which has been owned by the REIT from the commencement of such
corporation's existence. CREE Ltd., CRE Management I Corp. ("Management I"), CRE
Management II Corp. ("Management II"), CRE Management III Corp. ("Management
III"), CRE Management IV Corp. ("Management IV"), CRE Management V Corp.
("Management V"), CRE Management VI Corp. ("Management VI"), CRE Management VII
Corp. ("Management VII"), CresCal Properties, Inc. and Crescent Commercial
Realty Corp. are qualified REIT subsidiaries, and thus all of the assets (i.e.,
the respective partnership interests in the Operating Partnership, Funding I,
Funding II, Funding III, Funding IV, Funding V, Funding VI, Funding VII, CresCal
Properties, L.P. and Crescent Commercial Realty Holdings, L.P.), liabilities and
items of income, deduction and credit of CREE Ltd., Management I, Management II,
Management III, Management IV, Management V, Management VI, Management VII,
CresCal Properties, Inc. and Crescent Commercial Realty Corp. are treated as
assets and liabilities and items of income, deduction and credit of Crescent
Equities. Unless otherwise required, all references to Crescent Equities in this
"Federal Income Tax Considerations" section refer to Crescent Equities and its
qualified REIT subsidiaries.
In the case of a REIT which is a partner in a partnership, Treasury
Regulations provide that the REIT will be deemed to own its proportionate share
of the assets of the partnership and will be deemed to be entitled to the income
of the partnership attributable to such share. In addition, the assets and gross
income (as defined in the Code) of the partnership attributed to the REIT shall
retain the same character as in the hands of the partnership for purposes of
Section 856 of the Code, including satisfying the gross income tests and the
assets tests described below. Thus, Crescent Equities' proportionate share of
the assets, liabilities and items of 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 property or
purchases or leases of real property. Second, at least 95% of Crescent Equities'
gross income
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(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
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,
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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, 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 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
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<PAGE> 54
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 the 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.
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
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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
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
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corporate securities (including as a result of increasing its interest in the
Operating Partnership either with the proceeds of the Offering or by acquiring
Units from Limited Partners upon the exercise of their Exchange Rights).
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. 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,
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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 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 proposal of the 1999 budget represents an early stage in the
legislative process. It is impossible to predict what legislation, if any,
ultimately will be enacted or what impact any legislation that is enacted would
have on Crescent Equities.
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TAXATION OF SERIES A PREFERRED SHARES
Distributions to Holders of Series A Preferred Shares. Distributions with
respect to the Series A 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 A Preferred Shares to Common Shares.
Assuming that Series A 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 A 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 A
Preferred Shares so redeemed or converted and, provided that the Series A
Preferred Shares were held as a capital asset, the holding period for the Common
Shares received will include the holding period for the Series A 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 A Preferred Shares and the fair market value of the Common Shares
exceeds the issue price of the Series A 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 A 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 A 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 A 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 A
Preferred Shares, that is not a U.S. Shareholder.
Any distribution declared by Crescent Equities in October, November or
December of any year payable to a shareholder of record on a specified date in
any such month shall be treated as both paid by Crescent Equities and received
by the shareholder on December 31 of such year, provided that the distribution
is actually paid by Crescent Equities during January of the following calendar
year. As long as Crescent Equities qualifies as a REIT, distributions made to
Crescent Equities' taxable U.S. Shareholders out of Crescent Equities' current
or accumulated earnings and profits (and not designated as capital gain
dividends) will be taken into account by such U.S. Shareholders as ordinary
income and, for corporate U.S. Shareholders, will not be eligible for the
dividends received deduction. Distributions that are properly designated as
capital gain dividends will be taxed as long-term capital gains (to the extent
they do not exceed Crescent Equities' actual net capital gain for the taxable
year) without regard to the period for which the U.S. Shareholder has held its
Common Shares or Series A 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.
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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 A 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 A 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 A Preferred Shares with "acquisition indebtedness"
within the meaning of the Code and the Common Shares or Series A Preferred
Shares and 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 A 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 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 A 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 A Preferred Shares, as described below.
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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 or
Series A Preferred 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 A
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 A 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 A 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 A Preferred Shares would be required to withhold and remit to the IRS
10% of the purchase price.
TAX ASPECTS OF THE OPERATING PARTNERSHIP AND THE SUBSIDIARY PARTNERSHIPS
The following discussion summarizes certain federal income tax
considerations applicable solely to Crescent Equities' investment in the
Operating Partnership and its subsidiary partnerships and represents the views
of Tax Counsel. The discussion does not cover state or local tax laws or any
federal tax laws other than income tax laws.
Classification of the Operating Partnership and its Subsidiary Partnerships
for Tax Purposes. In the opinion of Tax Counsel, based on the provisions of the
Operating Partnership Agreement and the partnership agreements of the various
subsidiary partnerships, certain factual assumptions and certain representations
described in the opinion, the Operating Partnership and the subsidiary
partnerships will each be treated as a partnership and neither an association
taxable as a corporation for federal income tax purposes, nor a "publicly traded
partnership" taxable as a corporation. Unlike a ruling from the IRS, however, an
opinion of counsel is not binding on the IRS or the courts, and no assurance can
be given that the IRS will not challenge the status of the Operating Partnership
and its subsidiary partnerships as partnerships for federal income tax purposes.
If for any reason the Operating Partnership were taxable as a corporation rather
than as a partnership for federal
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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 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.
S-61
<PAGE> 62
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 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
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<PAGE> 63
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.
Locke Purnell Rain Harrell (A Professional Corporation), special tax
counsel to the Company ("Special Tax Counsel"), has reviewed the discussion in
this section with respect to Texas franchise tax matters and is of the opinion
that, based on the current structure of Crescent Equities and based upon current
law, it accurately summarizes the Texas franchise tax matters expressly
described herein. Special Tax Counsel expresses no opinion on any other tax
considerations affecting Crescent Equities or a holder of Common Shares,
including, but not limited to, other Texas franchise tax matters not
specifically discussed above.
Tax Counsel has not reviewed the discussion in this section with respect to
Texas franchise tax matters and has expressed no opinion with respect thereto.
S-63
<PAGE> 64
UNDERWRITING
Subject to the terms and conditions set forth in the purchase agreement
(the "Purchase Agreement") between the Company and Smith Barney Inc. (the
"Underwriter"), the Company has agreed to sell to the Underwriter, and the
Underwriter has agreed to purchase from the Company, 8,000,000 Series A
Preferred Shares.
In the Purchase Agreement, the Underwriter has agreed, subject to the terms
and conditions set forth therein, to purchase all of the shares being sold
pursuant to the Purchase Agreement if any of such Series A Preferred Shares are
purchased.
The Underwriter has advised the Company that it proposes initially to offer
the Series A Preferred Shares to the public at the price per share set forth on
the cover page of this Prospectus Supplement and to certain dealers at such
price less a concession not in excess of $.60 per share. The Underwriter may
allow, and such dealers may re-allow, a discount not in excess of $.10 per share
on sales to certain other dealers. After the date of this Prospectus Supplement,
the initial price per share to the public and concession and discount may be
changed by the Underwriter.
The Company has granted an option to the Underwriter, exercisable during
the 30-day period after the date of this Prospectus Supplement, to purchase up
to 1,200,000 additional Series A Preferred Shares solely to cover
over-allotments, if any, at the price per share to the public set forth on the
cover page of this Prospectus Supplement, less the underwriting discount set
forth on the cover of this Prospectus Supplement. To the extent that the
Underwriter exercises this option, it will have a firm commitment, subject to
certain conditions, to purchase the number of additional Series A Preferred
Shares (not to exceed 1,200,000 Series A Preferred Shares) specified by the
Underwriter upon exercise of the option.
In the Purchase Agreement, the Company has agreed to indemnify the
Underwriter against certain civil liabilities, including liabilities under the
Securities Act of 1933 (the "Securities Act"), or to contribute to payments the
Underwriter may be required to make in respect thereof. Insofar as
indemnification of the Underwriter for liabilities arising under the Securities
Act may be permitted pursuant to such agreements, the Company has been informed
that, in the opinion of the Commission, such indemnification is against public
policy as expressed in the Securities Act and therefore is unenforceable.
In connection with the Offering, the Company and each of the officers and
trust managers of the Company has agreed not to offer, sell, contract to sell or
otherwise dispose of any capital stock of the Company or Units for a period of
90 days after the closing of the Offering without the prior written consent of
the Underwriter.
In connection with the Offering, the rules of the Commission permit the
Underwriter to engage in certain transactions that stabilize the price of the
Series A Preferred Shares. Such transactions may consist of bids or purchases
for the purpose of pegging, fixing or maintaining the price of the Series A
Preferred Shares.
If the Underwriter creates a short position in the Series A Preferred
Shares in connection with the offering, i.e., if it sells more Series A
Preferred Shares than are set forth on the cover page of this Prospectus
Supplement, the Underwriter may reduce that short position by purchasing Series
A Preferred Shares in the open market. In general, purchases of a security for
the purpose of stabilization or to reduce a short position could cause the price
of the security to be higher than it might be in the absence of such purchases.
Neither the Company nor the Underwriter makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the Series A Preferred Shares. In
addition, neither the Company nor the Underwriter makes any representation that
the Underwriter will engage in such transactions or that such transactions, once
commenced, will not be discontinued without notice.
The Underwriter has from time to time provided, and may continue to provide
in the future, various investment banking, commercial banking and/or financial
advisory services to the Company and its affiliates, for which customary
compensation has been, and will be, received.
S-64
<PAGE> 65
Application has been made to list the Series A Preferred Shares on the NYSE
under the symbol "CEIPrA." 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 of the Series A
Preferred Shares on the NYSE.
LEGAL MATTERS
The legality of the Series A 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. Certain legal matters
related to the Offering will be passed upon for the Underwriter by Hogan &
Hartson L.L.P., Washington, D.C.
S-65
<PAGE> 66
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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
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<S> <C>
PROSPECTUS SUPPLEMENT
Prospectus Supplement Summary............... S-3
The Company................................. S-16
Recent Developments......................... S-19
Properties.................................. S-23
Description of Series A Preferred Shares.... S-34
Debt Structure.............................. S-39
Use of Proceeds............................. S-41
Price Range of Common Shares and
Distributions............................. S-41
Capitalization.............................. S-43
Selected Financial Data..................... S-44
Management.................................. S-47
Structure of the Company.................... S-47
Federal Income Tax Considerations........... S-49
Underwriting................................ S-64
Legal Matters............................... S-65
PROSPECTUS
The Company................................. 2
Risk Factors................................ 2
Use of Proceeds............................. 7
Ratios of Earnings to Fixed Charges and
Preferred Shares Dividends................ 7
Description of Preferred Shares............. 7
Description of Common Shares................ 12
Description of Common Share Warrants........ 14
Certain Provisions of the Declaration of
Trust, Bylaws and Texas Law............... 15
ERISA Considerations........................ 18
Plan of Distribution........................ 20
Available Information....................... 21
Incorporation of Certain Documents by
Reference................................. 21
Experts..................................... 22
Legal Matters............................... 23
</TABLE>
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8,000,000 SHARES
CRESCENT REAL ESTATE
EQUITIES COMPANY
6 3/4% SERIES A
CONVERTIBLE CUMULATIVE
PREFERRED SHARES
(LIQUIDATION PREFERENCE
$25.00 PER SHARE)
[CRESCENT LOGO]
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PROSPECTUS SUPPLEMENT
FEBRUARY 13, 1998
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SALOMON SMITH BARNEY
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