<PAGE>
PROSPECTUS SUPPLEMENT Filed pursuant to Rule 424(b)(5)
- --------------------- Registration No. 333-16119
(TO PROSPECTUS DATED DECEMBER 6, 1996)
2,450,000 SHARES
ESSEX PROPERTY TRUST, INC.
COMMON STOCK
---------------
Essex Property Trust, Inc. ("Essex" or the "Company") is a fully integrated,
self-administered real estate investment trust (a "REIT") focused on owning,
operating, managing, leasing, acquiring, developing and redeveloping multi-
family residential properties located throughout the west coast of the United
States. The Company currently has ownership interests in and operates 27
multi-family residential properties comprising 6,196 apartment units. Twelve
of these properties are located in the San Francisco Bay Area, nine are
located in the Seattle Metropolitan Area, four are located in Southern
California, and two are located in the Portland Metropolitan Area. The Company
also owns six retail properties which are located in the Portland Metropolitan
Area and in Eugene, Oregon, and an office building located in Palo Alto,
California that houses the Company's headquarters. Since its June 1994 initial
public offering (based on pro forma information for the quarter ended June 30,
1994) the Company has increased (i) the number of units in its multi-family
residential property portfolio by 83%, (ii) its rental revenues by 67%
(including pro forma information for all recent property transactions) and
(iii) its Funds from Operations (as defined herein) by 58% with a
corresponding increase of 22% in the weighted average number of shares of
Common Stock (as defined herein) outstanding (on a fully-diluted basis).
All of the shares of common stock, $.0001 par value per share (the "Common
Stock"), offered hereby are being offered by the Company. See "Underwriting."
Upon the closing of the offering, approximately 15% of the outstanding shares
of Common Stock (including shares issuable upon exchange of partnership units
in the Operating Partnership (as defined herein)) will be beneficially owned
by executive officers and directors of the Company. To ensure that the Company
maintains its qualification as a REIT, the charter of the Company (the
"Charter") provides that no person, with certain exceptions, may own more than
6.0% of the value of the outstanding shares of Common Stock. See "Description
of Common Stock--Restrictions on Transfer" in the accompanying Prospectus.
The Common Stock is listed on the New York Stock Exchange (the "NYSE") under
the symbol "ESS." On December 18, 1996, the last reported sale price of the
Common Stock on the NYSE was $27 7/8 per share. The Company has paid regular
quarterly distributions to holders of its Common Stock since the completion of
the Company's initial public offering. See "Price Range of Common Stock and
Distributions."
---------------
SEE "RISK FACTORS" BEGINNING ON PAGE 4 OF THE ACCOMPANYING PROSPECTUS FOR
CERTAIN CONSIDERATIONS RELEVANT TO AN INVESTMENT IN THE COMMON STOCK OFFERED
HEREBY.
---------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS TO
WHICH IT RELATES. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
================================================================================
<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2)
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share......................... $27.75 $1.49 $26.26
- -------------------------------------------------------------------------------
Total(3).......................... $67,987,500 $3,650,500 $64,337,000
================================================================================
</TABLE>
(1) The Company and the Operating Partnership have agreed to indemnify the
several Underwriters against certain liabilities, including liabilities
under the Securities Act of 1933, as amended. See "Underwriting."
(2) Before deducting expenses payable by the Company estimated at $300,000.
(3) The Company has granted the several Underwriters an option to purchase up
to an additional 333,000 shares of Common Stock on the same terms and
conditions as set forth above solely to cover over-allotments, if any. If
such option is exercised in full, the total Price to Public, the
Underwriting Discount and Proceeds to Company will be $77,228,250,
$4,146,670 and $73,081,580 , respectively. See "Underwriting."
The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, when, as and if issued to and accepted by them, and subject to
the approval of certain legal matters by counsel for the Underwriters and
certain other conditions. The Underwriters reserve the right to withdraw,
cancel or modify such offer and to reject orders in whole or in part. It is
expected that the delivery of shares of Common Stock will be made in New York,
New York, on or about December 24, 1996.
---------------
MERRILL LYNCH & CO.
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
RAYMOND JAMES & ASSOCIATES, INC.
SUTRO & CO. INCORPORATED
The date of this Prospectus Supplement is December 18, 1996.
<PAGE>
ESSEX PROPERTY TRUST, INC.
[Photograph of western United States encompassing California, Oregon and
Washington and highlighting the San Francisco, Southern California, Portland
and Seattle areas]
CAPTION: PORTLAND
485 MULTIFAMILY UNITS OWNED
6 COMMERCIAL PROPERTIES OWNED
[Photograph of exterior of Camarillo Oaks, a 371 unit multi-family residential
property in Camarillo, California]
CAPTION: CAMARILLO OAKS
PURCHASED IN AUGUST 1996, CAMARILLO OAKS IS A 371-UNIT APARTMENT COMMUNITY
LOCATED IN VENTURA COUNTY, CALIFORNIA. VENTURA COUNTY IS A SOUTHERN CALIFORNIA
MARKET POSSESSING CHARACTERISTICS FUNDAMENTAL TO ESSEX'S STRATEGY, INCLUDING
SUPPLY CONSTRAINTS, HIGH QUALITY TO LIFE, AND STRONG DEMAND FOR MULTIFAMILY
PROPERTIES.
[Photograph of exterior of The Shores, a 348-unit multi-family residential
property in San Ramon, California]
CAPTION: THE SHORES
LOCATED IN THE SAN FRANCISCO EAST BAY AREA, THE SHORES IS A 348-UNIT
MULTIFAMILY RESIDENTIAL PROPERTY PURCHASED BY ESSEX IN 1995. THE PROPERTY IS
LOCATED IN THE CITY OF SAN RAMON WITHIN MINUTES OF SEVERAL MAJOR EMPLOYMENT
CENTERS.
CAPTION: SOUTHERN CALIFORNIA
1273 MULTIFAMILY UNITS OWNED
S-2
<PAGE>
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Supplement Summary............................................ S-4
Company Markets.......................................................... S-15
Price Range of Common Stock and Distributions............................ S-22
Use of Proceeds.......................................................... S-23
Capitalization........................................................... S-23
Selected Financial and Operating Data.................................... S-24
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... S-26
Business and Growth Strategies........................................... S-30
The Properties........................................................... S-33
Tiger/Westbrook Transaction.............................................. S-38
Description of Capital Stock of the Company.............................. S-38
Management............................................................... S-39
Underwriting............................................................. S-43
Legal Matters............................................................ S-44
PROSPECTUS
<CAPTION>
PAGE
----
<S> <C>
Available Information.................................................... 2
Incorporation of Certain Documents by Reference.......................... 2
The Company.............................................................. 3
Use of Proceeds.......................................................... 4
Ratio of Earnings to Fixed Charges....................................... 4
Risk Factors............................................................. 4
Description of Common Stock.............................................. 12
Description of Preferred Stock........................................... 14
Description of Depositary Shares......................................... 21
Description of Warrants.................................................. 25
Certain Provisions of the Company's Charter and Bylaws................... 25
Federal Income Tax Considerations........................................ 25
Plan of Distribution..................................................... 36
Experts.................................................................. 37
Legal Matters............................................................ 37
</TABLE>
----------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE, IN THE OVER-THE-
COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
S-3
<PAGE>
PROSPECTUS SUPPLEMENT SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements appearing elsewhere in this Prospectus
Supplement and the accompanying Prospectus and incorporated herein and therein
by reference. The information contained in this Prospectus Supplement assumes
no exercise of the Underwriters' over-allotment option, unless indicated
otherwise. The offering of 2,450,000 shares of Common Stock made hereby is
herein referred to as the "Offering." All references to the "Company" or
"Essex" in this Prospectus Supplement and the accompanying Prospectus include
Essex Property Trust, Inc., those entities controlled by Essex Property Trust,
Inc. and predecessors of Essex Property Trust, Inc., unless the context
indicates otherwise.
THE COMPANY
Essex Property Trust, Inc. is a fully integrated, self-administered REIT
which was formed to continue and expand the real estate investment and
management operations conducted by its predecessor since 1971. The Company has
been engaged in owning, managing, leasing, acquiring, developing and
redeveloping multi-family residential properties located throughout the west
coast of the United States for over 25 years through various cycles of the real
estate market. The Company's Chairman of the Board of Directors and four most
senior executives have worked at the Company for an average of 13 years and
have an average of approximately 20 years of experience in the real estate
industry. Since its inception in 1971, the Company has acquired, developed,
managed and/or disposed of a combination of approximately 158 property and
portfolio assets in seven major metropolitan markets with an emphasis on the
west coast of the United States at an aggregate investment in excess of $880.0
million. Such properties have included various types of income-producing
properties, with a focus on multi-family residential properties. The Company's
multi-family residential property investments have involved an aggregate of
more than 15,100 apartment units.
The Company's multi-family residential portfolio currently consists of 27
properties comprising 6,196 apartment units. Twelve of these properties are
located in the San Francisco Bay Area, nine are located in the Seattle
Metropolitan Area, four are located in Southern California and two are located
in the Portland Metropolitan Area. The Company's multi-family residential
properties had an average occupancy rate (based on "Financial Occupancy," which
refers to the percentage resulting from dividing actual rents by total possible
rents as determined by valuing occupied units at contractual rates and vacant
units at market rates for the period in question) for the quarter ended
September 30, 1996 of approximately 97.2% (excluding Meadowood, which was
acquired after the quarter ended September 30, 1996, and Jackson School
Village, which is currently in lease-up). The Company also owns six retail
properties, which are located in the Portland Metropolitan Area and in Eugene,
Oregon, and an office building located in Palo Alto, California that houses the
Company's headquarters (collectively, the "Commercial Properties," and together
with the Company's 27 multi-family residential properties, the "Properties" and
each a "Property"). As of September 30, 1996, the Commercial Properties had an
average occupancy rate (based on leased and occupied square footage) of
approximately 95%. The Company's multi-family residential Properties accounted
for approximately 91% of the Company's rental revenues for the quarter ended
September 30, 1996 (excluding Meadowood and Jackson School Village) and its
Commercial Properties accounted for approximately 9% of its rental revenues for
this same period.
Since its June 1994 initial public offering (based on pro forma information
for the quarter ended June 30, 1994), the Company has increased (i) the number
of units in its multi-family residential portfolio by 83%, (ii) its rental
revenues by 67% (including pro forma information for all recent property
transactions) and (iii) its Funds from Operations by 58% with a corresponding
increase of 22% in the weighted average number of shares of Common Stock
outstanding (on a fully-diluted basis). In August 1996, the Company sold 2.53
million shares of Common Stock in a follow-on public offering (the "Subsequent
Offering") for $22.75 per share (including 330,000 shares purchased by the
Underwriters pursuant to the exercise of their "over-allotment" option). Since
the Subsequent Offering, the Company has:
. purchased ownership interests in four additional multi-family Properties,
comprising 1,164 apartment units, at a total capitalized cost of $85.2
million;
S-4
<PAGE>
. increased its quarterly dividend on the Common Stock from $.425 per share
to $.435 per share;
. substantially completed the construction and commenced the lease-up of
its Jackson School Village Property (as of December 4, 1996, the Property
was 25% occupied);
. received stockholder approval for the $40 million Convertible Preferred
Stock (as defined herein) placement (see "Tiger/Westbrook Transaction");
and
. placed or assumed approximately $46.9 million in tax-exempt bond
financing.
The Company's primary business objective is to maximize Funds from Operations
through continued active leasing, property management and active portfolio
management. The Company's strategies include increasing the occupancy for all
Properties that are not fully leased, maintaining high average occupancy rates,
increasing effective rental rates and strictly controlling operating expenses
and capital expenditures. As a result of these strategies, the Company has been
able to increase same-property revenues and earnings before interest, taxes,
depreciation and amortization ("EBITDA") for the quarter ended September 30,
1996 by 6.8% and 8.7%, respectively, over the quarter ended September 30, 1995.
The Company's leasing and property management activities are conducted by its
professionals, who have extensive experience in, and knowledge of, the local
markets in which the Company operates. The Company currently does not engage
independent property managers.
Active portfolio management is a key component to the Company's investment
philosophy. Through active portfolio management, the Company seeks to optimize
the use of its existing capital through dispositions and acquisitions. In
accordance with this strategy, the Company develops multi-family properties in
markets where it believes demand fundamentals and return expectations are
appropriate relative to construction risks and acquires properties in mature or
rebounding markets where it believes rental growth is strong and the risk of
new supply is low. The Company continually evaluates the performance of its
portfolio and disposes of properties that are underperforming or have lower
sustainable growth rates and then uses the proceeds from such sales to purchase
properties that the Company believes will have higher initial yields and growth
prospects. The Company believes the continued repositioning and fine tuning of
its portfolio results in an overall increase in return on capital.
The Company believes that selected submarkets in the San Francisco Bay Area,
Southern California, Seattle Metropolitan Area and Portland Metropolitan Area
in which the Company's Properties are currently located (the "Target Markets")
provide significant opportunities for further investment. Specifically, the
Company expects selected submarkets within its Target Markets to be supply-
constrained due to the lack of developable land, competing uses for currently
available land and a lengthy and expensive development process caused by
restrictive governmental policies. Further, each of the Target Markets is
characterized by high quality of life and a diversified and growing employment
base. This combination of supply constraints and economic growth create
attractive locations for long-term investment.
Of the 27 multi-family Properties, 16 are located in California. Over the
last two years, the California economy has begun to recover from the recession
experienced in the late 1980s and early 1990s. Based on labor statistics,
California's annual employment growth rate was approximately 2.4% between May
1995 and May 1996, compared to the national growth rate of 2.0% during the same
period. In addition, according to the Rosen Consulting Group (independent urban
economists), California's population of 31.5 million is projected to increase
1.5% annually, which is 50% greater than the anticipated national average. The
Company anticipates that California's continuing recovery, particularly in
Northern California, will positively impact the multi-family rental market in
the state.
The Company conducts substantially all of its activities through Essex
Portfolio, L.P. (the "Operating Partnership"). After giving effect to the
Offering, the Company will own an approximate 85.9% general partnership
interest and senior members of the Company's management and certain outside
investors will own an approximate 14.1% limited partnership interest in the
Operating Partnership. As the sole general partner of the Operating
Partnership, the Company has control over the management of the Operating
Partnership and over each of the Properties.
S-5
<PAGE>
RECENT DEVELOPMENTS
Increased Funds From Operations. The Company's strong operating performance
since its June 1994 initial public offering (the "IPO") has generated increased
Funds from Operations. The Company's Funds from Operations for the quarter
ended September 30, 1996 increased 58% with a corresponding increase of 22% in
the weighted average number of shares of Common Stock outstanding (on a fully-
diluted basis), over the Funds from Operations for the quarter ended June 30,
1994 (based on pro forma information for the quarter ended June 30, 1994). The
Company's Funds from Operations for the quarter ended September 30, 1996 were
approximately $5.6 million, which represented the ninth consecutive quarterly
increase in Funds from Operations since the Company's IPO.
Increased Dividend Distribution; Purchasers Entitled to Fourth Quarter 1996
Dividend. In the third quarter of 1996, the Company announced an increase of
approximately 2.4% in its regular quarterly dividend, from $.425 to $.435 per
share of Common Stock. The Company has declared a fourth quarter 1996 dividend
distribution of $.435 per share to its holders of Common Stock of record on
December 31, 1996. Payment of the dividend distribution is expected to be made
on or about January 15, 1997. It is currently expected that purchasers of
Common Stock in the Offering who hold Common Stock as of the record date will
receive the fourth quarter 1996 distribution in respect of the shares of Common
Stock offered hereby. As a result, if purchasers of the Common Stock in the
Offering continue to hold such shares on the record date for distributions over
the next twelve months, such purchasers will receive, when and if declared,
four quarterly dividend payments in addition to the fourth quarter 1996
dividend distribution.
Convertible Preferred Stock Offering. On June 20, 1996, the Company entered
into a definitive agreement to sell up to $40.0 million of the Company's 8.75%
Convertible Preferred Stock, Series 1996A (the "Convertible Preferred Stock")
at $25.00 per share to Tiger/Westbrook Real Estate Fund, L.P. and
Tiger/Westbrook Real Estate Co-Investment Partnership, L.P. (collectively,
"Tiger/Westbrook"). Under the terms of the agreement, Tiger/Westbrook has
purchased 800,000 shares of Convertible Preferred Stock for an aggregate
purchase price of $20.0 million, as of the date of this Prospectus Supplement.
Tiger/Westbrook is obligated to purchase up to an additional $20.0 million of
Convertible Preferred Stock on or prior to June 20, 1997. Holders of shares of
Convertible Preferred Stock are entitled to receive annual cumulative cash
dividends, payable quarterly, in an amount equal to the greater of (i) $2.1875
per share (8.75% of the $25.00 per share price) or (ii) the dividends (subject
to adjustment) paid with respect to the Common Stock plus, in both cases, any
accumulated but unpaid dividends on the Convertible Preferred Stock. After June
20, 1997, 25% of the 1.6 million authorized shares of Convertible Preferred
Stock are convertible into Common Stock at the option of the holder, and
thereafter, at the beginning of each next three-month period, an additional 25%
of the Convertible Preferred Stock is convertible. The conversion price per
share of Convertible Preferred Stock is $21.875, subject to adjustment under
certain circumstances. The stockholders of the Company approved the sale of the
Convertible Preferred Stock at a special meeting of the stockholders held on
September 27, 1996. Certain of the terms of the Convertible Preferred Stock may
have a material adverse effect on investment in shares of Common Stock. See
"Tiger/Westbrook Transaction" in this Prospectus Supplement, and "Description
of Preferred Stock--Convertible Preferred Stock" and "Risk Factors" in the
accompanying Prospectus.
S-6
<PAGE>
Acquisitions. The Company focuses on the acquisition of multi-family
residential properties in its Target Markets, while analyzing real estate
investment and growth trends in several additional markets throughout the west
coast of the United States. The Company's acquisition strategy includes
purchasing fully or partially leased properties, including properties in need
of renovation, that are consistent with its property and market criteria. Since
the Company's IPO in June 1994, the Company has acquired ownership interests in
fourteen multi-family residential properties, eight in California, five in
Washington and one in Oregon, consisting of a total of 3,047 units for an
aggregate total capitalized cost of approximately $198.6 million. Of the
fourteen properties, four were purchased after the Subsequent Offering using,
in part, the net proceeds of the Subsequent Offering. The following table sets
forth certain information regarding those Properties acquired after the
Subsequent Offering.
<TABLE>
<CAPTION>
NUMBER
OF OCCUPANCY CAPITALIZED
PROPERTY NAME LOCATION DATE ACQUIRED UNITS RATE(1) COST(2)
------------- --------------- ------------- ------ --------- -------------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Camarillo Oaks........ Camarillo, CA August 1996 371 93% $21.2
Eastridge............. San Ramon, CA August 1996 188 99% 19.7
Landmark.............. Hillsboro, OR August 1996 285 87% 17.9
Meadowood............. Simi Valley, CA November 1996 320 (3) 26.4
----- --- -----
Total/Weighted
Average............ 1,164 92% $85.2
===== === =====
</TABLE>
- --------
(1) Based on Financial Occupancy for the quarter ended September 30, 1996.
(2) Capitalized cost represents acquisition cost plus renovation and
reconstruction costs committed at the time of the acquisition.
(3) Meadowood was acquired after the quarter ended September 30, 1996.
Development Activity. The Company may from time to time develop new multi-
family residential properties in areas consistent with its overall growth
strategy. For its development projects, the Company targets an Unleveraged
Return of at least 10%. "Unleveraged Return" is calculated by dividing a
property's projected EBITDA, assuming stabilized occupancy of 95% and
prevailing market rental rates, by the projected total capitalized cost of the
development. The Company is currently pursuing three potential development
opportunities as described below:
. The Company, through a joint venture limited partnership, is currently
completing the development of Jackson School Village, a 200-unit
apartment complex located in Hillsboro, Oregon. The area surrounding
Hillsboro has been characterized as Oregon's "Silicon Forest" due to the
large influx of technology-related businesses in the area. The projected
total capitalized cost of the property is $11.7 million. Lease up on the
property commenced in August 1996. Although the property has not yet
achieved stabilized rent levels, the property was 25% occupied as of
December 4, 1996. In accordance with the terms of the partnership
agreement, the Company will receive 100% of the available cash flow after
debt service of the property until it has received a cumulative annual
return based on its current investment in the property of 10.77%.
Thereafter, the Company will receive 49.9% of the operating cash flow of
the property. The joint venture partnership has obtained a commitment for
an approximate $9.8 million, 10-year fixed rate mortgage at 7.75% from
Teachers Investment and Annuity Association, the proceeds of which will
be used to repay the construction loan.
. The Company has entered into a contract to purchase a 15.6-acre parcel of
land in Milpitas, California, known as McCarthy Ranch, for approximately
$10.9 million. The purchase contract requires the Company to acquire the
site within 90 days after the completion of the entitlement phase of this
project, anticipated to be in the spring of 1997. Upon closing of the
purchase, the Company expects to contribute the site to a joint venture
partnership, the terms of which are currently under negotiation. The
Company through the joint venture partnership intends to construct 374
apartment units on the property at a currently estimated projected total
capitalized cost of $45.5 million.
S-7
<PAGE>
. As part of the acquisition of The Shores, the Company acquired an
adjacent 8.1-acre parcel of land which is zoned for additional apartment
development. The Company intends to develop approximately 100 additional
apartment units as an expansion to The Shores Property. It is anticipated
that the development of additional units at The Shores will produce an
attractive incremental return from the Property as a result of (i) an
increase in the number of units available for rent with no additional
land cost and (ii) the utilization of the existing leasing office, staff
and amenities for the new units. The Company expects to begin
construction of the additional units in 1997.
There can be no assurance that the Company will have the necessary funds
available to complete these developments nor can there be any assurance that
the development budgets will not be exceeded or that all government approvals
for The Shores development or the McCarthy Ranch development will be obtained.
See "Risk Factors--Risks of Acquisition and Development Activities" in the
accompanying Prospectus for certain factors that could prevent the Company from
achieving its investment goals.
Disposition Activity. As part of its active portfolio management strategy,
the Company has sold four properties since its IPO. In November 1995 and April
1996, the Company sold Pacifica Park, a 104-unit multi-family residential
property located in Pacifica, California, and Viareggio, a 116-unit multi-
family residential property located in San Jose, California, respectively, at
an aggregate gross sales price of approximately $18.4 million resulting in a
net aggregate gain of approximately $7.7 million. The Company sold these two
properties in order to reinvest in other properties with anticipated higher
yields and/or with the potential to be financed with tax-exempt indebtedness.
In May 1995 and June 1996, the Company sold Loma Verde, a 130-unit multi-family
residential property and Westbridge, a 92-unit multi-family residential
property, respectively, at an aggregate gross sales price of approximately $8.5
million resulting in a net aggregate gain of approximately $1.0 million. These
two properties are located in the Sacramento area, which the Company believes
will not achieve the growth anticipated in other markets in which the Company
invests. During the Company's ownership, these two properties provided an
unleveraged total return (calculated based on cash generated from the sale of
the properties and the properties' EBITDA during the Company's ownership
divided by their total capitalized costs) of approximately 30%. The Company is
currently marketing and intends to sell its six neighborhood shopping centers.
Financing Activity. The Company regularly seeks to decrease its exposure to
interest rate risks. As a result of its 1996 financing activities, the
Company's percentage of fixed rate debt or debt protected by interest rate caps
has increased from 61% to 84%. The weighted average maturity on the fixed rate
portion of this debt has been extended approximately 5.1 years to a weighted
average maturity of 9.6 years and the average fixed interest rate is 7.4%.
The Company also seeks to finance properties through the use of tax-exempt
financing, which, as compared with conventional debt financing, generally
involves lower and less volatile rates and longer maturities. Since the
Subsequent Offering, the Company has negotiated or assumed approximately $46.9
million of tax exempt financing and has increased its tax exempt financing from
$13.6 million to a current level of approximately $60.5 million. See "Risk
Factors--Bond Compliance Requirements" in the accompanying Prospectus.
S-8
<PAGE>
Acquisitions and Development Pipeline. The Company maintains active
acquisition and development departments which identify, evaluate, negotiate and
consummate potential multi-family property investments. The Company has entered
into a contract to purchase an approximately 130-unit multi-family property in
Southern California with a projected total capitalized cost of approximately
$10.0 million. In addition, the Company is currently negotiating acquisitions
involving approximately 1,800 apartment units with an aggregate projected total
capitalized cost of in excess of $90.0 million. These properties include, among
others:
. in Southern California, properties containing, in the aggregate, in
excess of 1,000 units with an aggregate projected total capitalized cost
of approximately $60.0 million; and
. in the Seattle Metropolitan Area, properties containing, in the
aggregate, approximately 720 units with an aggregate projected total
capitalized cost of approximately $33.0 million.
The Company is also currently negotiating the acquisition of interests in
several land parcels in connection with potential development projects
including:
. a property in the San Francisco Bay Area for a projected total
capitalized cost of approximately $10.0 million, on which, if purchased,
the Company proposes to build (either itself or through a joint venture)
approximately 100 units; and
. a property in the Seattle Metropolitan Area for a projected total
capitalized cost of approximately $25.0 million, on which, if purchased,
the Company proposes to build (through a joint venture) approximately 270
units.
Acquisition of each of these properties and land parcels and the development
of improvements thereon are subject to a number of contingencies, including,
among others, completion of due diligence, negotiation of purchase price,
financing and the receipt of government approvals with respect to certain of
the properties, and other customary closing conditions. There can be no
assurance that any of these properties or land parcels will ultimately be
acquired or developed by the Company.
S-9
<PAGE>
THE PROPERTIES
The following table describes the Company's current multi-family residential
Properties.
<TABLE>
<CAPTION>
NUMBER
OF TOTAL RENTABLE YEAR YEAR
PROPERTY NAME(1) LOCATION UNITS SQUARE FOOTAGE COMPLETED ACQUIRED OCCUPANCY(2)
---------------- --------------- ------ -------------- --------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
The Apple............... Fremont, CA 200 146,296 1971 1982 98%
Bristol Commons(3)...... Sunnyvale, CA 188 142,668 1989 1995 99
Camarillo Oaks.......... Camarillo, CA 371 303,840 1985 1996 93
Countrywood............. Fremont, CA 137 93,495 1970 1988 100
Eastridge............... San Ramon, CA 188 174,104 1988 1996 99
Marina Cove(4).......... Santa Clara, CA 292 250,294 1974 1994 99
Meadowood............... Simi Valley, CA 320 264,568 1986 1996 (5)
Oak Pointe.............. Sunnyvale, CA 390 294,180 1973 1988 98
Pathways(6)............. Long Beach, CA 296 197,720 1975 1991 95
Plumtree................ Santa Clara, CA 140 113,260 1975 1994 98
The Shores(3)........... San Ramon, CA 348 275,888 1988 1995 98
Summerhill Commons...... Newark, CA 184 139,012 1987 1987 98
Summerhill Park......... Sunnyvale, CA 100 78,584 1988 1988 99
Treetops................ Fremont, CA 172 131,270 1978 1996 99
Villa Rio Vista......... Anaheim, CA 286 242,410 1968 1985 97
Windsor Ridge........... Sunnyvale, CA 216 161,892 1989 1989 99
Emerald Ridge........... Bellevue, WA 180 144,036 1989 1994 98
Foothill Commons........ Bellevue, WA 360 288,317 1978 1990 96
Inglenook Court......... Bothell, WA 224 183,624 1985 1994 97
Palisades............... Bellevue, WA 192 159,792 1969 1990 98
Sammamish View.......... Bellevue, WA 153 133,590 1986 1994 99
Santa Fe Ridge.......... Silverdale, WA 240 262,340 1993 1994 91
Wandering Creek......... Kent, WA 156 124,366 1986 1995 94
Wharfside Pointe........ Seattle, WA 142 119,290 1990 1994 93
Woodland Commons........ Bellevue, WA 236 172,316 1978 1990 95
Jackson School
Village(7)............. Hillsboro, OR 200 196,896 1996 1996 (8)
Landmark................ Hillsboro, OR 285 282,934 1990 1996 87
----- --------- ---- ---- ---
Total/Weighted Average 6,196 5,076,982 97%
===== ========= ===
</TABLE>
The following table describes the Commercial Properties as of September 30,
1996.
<TABLE>
<CAPTION>
NUMBER TOTAL RENTABLE YEAR YEAR
PROPERTY NAME(1) LOCATION OF TENANTS SQUARE FOOTAGE COMPLETED ACQUIRED OCCUPANCY(2)
---------------- ------------- ---------- -------------- --------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
NEIGHBORHOOD SHOPPING
CENTERS
Canby Square............ Canby, OR 16 102,565 1976 1990 95%
Cedar Mill Place........ Portland, OR 7 28,392 1975 1990 61
Powell Villa Center..... Portland, OR 12 63,645 1959 1990 100
Riviera Plaza........... Eugene, OR 11 48,420 1961 1990 94
Wichita Towne Center.... Milwaukie, OR 6 38,324 1978 1990 100
Garrison Square......... Vancouver, WA 13 69,780 1962 1990 100
--- ------- ---
Subtotal.............. 65 351,126 95
OFFICE PROPERTY
Headquarters
building(9)............ Palo Alto, CA 4 44,827 1988(10) 1986 100
--- ------- ---
Total/Weighted
Average.............. 69 395,953 95%
=== ======= ===
</TABLE>
- --------
(1) Unless otherwise specified, the Company has a 100% ownership interest in
each respective Property.
(2) For multi-family residential Properties, occupancy rates are based on
Financial Occupancy for the quarter ended September 30, 1996; for the
Commercial Properties, occupancy rates are based on leased and occupied
square footage as of September 30, 1996.
(3) The Company has an approximate 45% economic ownership interest in this
Property.
(4) A portion of this Property on which 84 units are presently located is
subject to a ground lease, which, unless extended, will expire in 2028.
(5) Purchased after the quarter ended September 30, 1996.
(6) The Company has a 69% ownership interest in this Property.
(7) The Company has a 49.9% interest in this Property.
(8) This Property is substantially complete, was 25% occupied as of December
4, 1996 but has not yet achieved a stabilized rent level.
(9) The Company owns a ground leasehold interest in the building and the land
on which the headquarters building is located. The ground lease is prepaid
until its expiration in 2054, and, unless the lease is extended, the land,
together with all improvements thereon, will revert to the owner in 2054.
(10) Represents the completion date for a major renovation.
S-10
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered hereby................ 2,450,000 shares of Common Stock
Common Stock to be outstanding after the
Offering.................................. 11,256,800 shares of Common Stock(1)
Use of proceeds............................ To fund acquisition and development
activities and for general corporate
purposes. See "Use of Proceeds."
New York Stock Exchange symbol............. "ESS"
</TABLE>
- --------
(1) If all of the partnership units in the Operating Partnership were exchanged
for Common Stock, the total number of shares of Common Stock outstanding
would be 13,111,800, excluding (i) shares of Common Stock that may be
issued upon conversion of Convertible Preferred Stock and (ii) 529,550
shares of Common Stock that may be issued pursuant to the exercise of
outstanding stock options granted to The Marcus & Millichap Company and
pursuant to the exercise of outstanding employee stock options under the
Essex Property Trust, Inc. 1994 Employee Stock Incentive Plan and the Essex
Property Trust, Inc. 1994 Non-Employee and Director Stock Incentive Plan.
DISTRIBUTION POLICY
Since its IPO, the Company has paid the following regular quarterly dividends
to its Common Stock stockholders: July 15, 1994, $.08; October 15, 1994,
$.4175; January 16, 1995, $.4175; April 17, 1995, $.4175; July 17, 1995,
$.4175; October 16, 1995, $.425; January 16, 1996, $.425; April 12, 1996,
$.425; July 15, 1996, $.425; and October 15, 1996, $.435. Notwithstanding the
increased dividend, the Company has succeeded in lowering its Funds from
Operations pay-out ratio (distributions and dividends divided by Funds from
Operations (the "FFO Pay-Out Ratio")) from approximately 84% for the quarter
ended September 30, 1995 to approximately 77% for the quarter ended September
30, 1996. Although the Company's goal is to continue to increase distributions
to its stockholders, it intends to make such increases at a rate lower than the
Company's growth rate in Funds from Operations in order to continue to decrease
its FFO Pay-Out Ratio. Future distributions by the Company will be at the
discretion of the Board of Directors and will depend on the Company's Funds
from Operations, its financial condition, capital requirements, the annual
distribution requirements under the REIT provisions of the Internal Revenue
Code of 1986, as amended (the "Code"), applicable legal restrictions and such
other factors as the Board of Directors deems relevant.
On June 20, 1996, the Company entered into a definitive agreement to sell up
to 1.6 million shares of its Convertible Preferred Stock for an aggregate
purchase price of up to $40.0 million. Under the terms of the Agreement,
Tiger/Westbrook has purchased 800,000 shares of Convertible Preferred Stock, as
of the date of this Prospectus Supplement, for an aggregate purchase price of
$20.0 million. Tiger/Westbrook is obligated to purchase up to an additional
$20.0 million of Convertible Preferred Stock on or prior to June 20, 1997. The
stockholders of the Company approved the sale of the Convertible Preferred
Stock at a special meeting of the stockholders held on September 27, 1996.
Dividends may be authorized, declared and paid on shares of Common Stock in any
fiscal quarter only if full cumulative dividends have been paid on, or
authorized and set apart on, all shares of Convertible Preferred Stock for all
prior dividends through and including the end of such quarter. Holders of
shares of Convertible Preferred Stock are entitled to receive annual cumulative
cash dividends, payable quarterly, in an amount equal to the greater of (i)
$2.1875 per share (8.75% of the $25.00 per share price) or (ii) the dividends
(subject to adjustment) paid with respect to the Common Stock plus, in both
cases, any accumulated but unpaid dividends on the Convertible Preferred Stock.
See "Tiger/Westbrook Transaction" in this Prospectus Supplement and
"Description of Preferred Stock--Convertible Preferred Stock" and "Risk
Factors" in the accompanying Prospectus. As of the date of this Prospectus
Supplement, all dividends accrued with respect to the outstanding shares of
Convertible Preferred Stock have been paid when due.
S-11
<PAGE>
FORWARD-LOOKING STATEMENTS
This Prospectus Supplement and the accompanying Prospectus and documents
incorporated by reference in each contain forward-looking statements within the
meaning of Section 27A of the Securities Act. Discussions containing such
forward-looking statements may be found in the material set forth under
"Summary," "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources," "Company Markets" and
"Business Principles and Growth Strategy" as well as within the Prospectus
Supplement and the accompanying Prospectus generally. In addition, when used in
this Prospectus Supplement and the accompanying Prospectus, the words
"believes," "anticipates," "expects," and similar expressions are intended to
identify forward-looking statements. Such statements are subject to a number of
risks and uncertainties. Actual results in the future could differ materially
from those described in the forward-looking statements as a result of the risk
factors set forth in this Prospectus Supplement and the accompanying Prospectus
and the matters set forth in this Prospectus Supplement and the accompanying
Prospectus generally. The Company cautions the reader, however, that this list
of risk factors may not be exhaustive.
S-12
<PAGE>
SUMMARY FINANCIAL AND OPERATING DATA
The following tables set forth summary financial and operating information
(i) for the Company from June 13, 1994 (completion of the Company's IPO)
through September 30, 1996, (ii) on a pro forma basis for the Company for the
year ended December 31, 1994 and (iii) on a historical combined basis for the
year ended December 31, 1993 and for the period from January 1, 1994 through
June 12, 1994 for the 20 properties in which the original limited partners in
the Operating Partnership previously held ownership interests, combined with
the financial and operating information of Essex Property Corporation ("EPC").
The unaudited pro forma financial and operating information for the year ended
December 31, 1994 is based on the ownership and operation of the 23 properties
owned as of the time of the IPO (including the properties acquired as of the
IPO) combined with the financial and operating information of EPC and is
presented as if the following had occurred on January 1, 1994: (i) the IPO was
completed, (ii) the Company qualified as a REIT, (iii) the Company used the net
proceeds from the IPO and the debt incurred in connection with the IPO to fund
a series of asset acquisitions and mortgage repayments in connection with the
IPO, and (iv) Essex Management Corporation ("EMC") was formed and certain
property and asset management contracts were assigned to EMC (such pro forma
adjustments, the "IPO Pro Forma Adjustments").
The pro forma financial and operating information should not be considered
indicative of actual results that would have been achieved had the transactions
occurred on the dates or for the periods indicated and do not purport to
indicate results of operations as of any future date or for any future period.
The following table should be read in conjunction with Management's Discussion
and Analysis of Financial Condition and Results of Operations and with all of
the financial statements and notes thereto included in this Prospectus
Supplement and the accompanying Prospectus and incorporated herein and therein
by reference.
<TABLE>
<CAPTION>
NINE NINE
MONTHS MONTHS YEAR JUNE 13, PRO FORMA JAN. 1, YEAR
ENDED ENDED ENDED 1994- YEAR ENDED 1994- ENDED
SEPT. 30, SEPT. 30, DEC. 31, DEC. 31, DEC. 31, JUNE 12, DEC. 31,
1996 1995 1995 1994 1994(1) 1994 1993
--------- --------- -------- -------- ---------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
REVENUES
Rental................. $34,123 $31,112 $41,640 $19,499 $34,154 $12,742 $26,509
Property and asset
management............ -- -- -- -- 257 1,794 3,277
Other.................. 2,008 1,706 2,300 914 1,582 275 643
------- ------- ------- ------- ------- ------- -------
Total revenues....... 36,131 32,818 43,940 20,413 35,993 14,811 30,429
EXPENSES
Property operating
expenses.............. 11,087 10,266 13,604 6,452 11,414 4,267 9,348
Depreciation and
amortization.......... 6,513 6,008 8,007 4,030 7,047 2,598 5,537
Amortization of
deferred financing
costs................. 529 1,023 1,355 773 1,407 96 219
General and
administrative........ 1,279 1,083 1,527 457 804 306 688
Property and asset
management............ -- -- -- -- -- 974 1,396
Other expenses......... 42 39 288 -- -- 314 952
Interest............... 8,738 8,198 10,928 4,304 7,086 5,924 11,902
------- ------- ------- ------- ------- ------- -------
Total expenses....... 28,188 26,617 35,709 16,016 27,758 14,479 30,042
------- ------- ------- ------- ------- ------- -------
Income before gain on
sales, minority
interest, provision for
income taxes and
extraordinary item..... 7,943 6,201 8,231 4,397 8,235 332 387
Gain on sales.......... 2,480 789 6,013 -- -- -- --
Minority interest...... (1,772) (1,755) (3,486) (1,131) (1,938) 87 161
Provision for income
taxes................. -- -- -- -- -- (267) (581)
Extraordinary item--
loss on early
extinguishment of
debt.................. (3,317) (154) (154) -- -- -- --
------- ------- ------- ------- ------- ------- -------
Income (loss) after
minority interest...... $ 5,334 $ 5,081 $10,604 $ 3,266 $ 6,297 $ 152 $ (33)
======= ======= ======= ======= ======= ======= =======
Net income (loss) per
share after minority
interest(2)............ $ 0.76 $ 0.81 $ 1.69 $ 0.52 $ 1.00 -- --
======= ======= ======= ======= ======= ======= =======
Weighted average common
stock outstanding (in
thousands)............. 6,720 6,275 6,275 6,275 6,275 -- --
</TABLE>
<TABLE>
<CAPTION>
AS OF AS OF DECEMBER 31,
SEPT. 30, --------------------------
1996 1995 1994 1993
--------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Investment in real estate (before
accumulated depreciation)............... $344,904 $284,358 $282,344 $186,447
Net investment in real estate............ 299,608 244,077 248,232 158,873
Total assets............................. 330,455 273,660 269,065 171,287
Total property indebtedness.............. 136,676 154,524 150,019 152,501
Stockholders' equity..................... 152,732 84,729 84,699 7,772
</TABLE>
S-13
<PAGE>
<TABLE>
<CAPTION>
NINE NINE
MONTHS MONTHS YEAR JUNE 13, PRO FORMA
ENDED ENDED ENDED 1994- YEAR ENDED
SEPT. 30, SEPT. 30, DEC. 31, DEC. 31, DEC. 31,
1996 1995 1995 1994 1994(1)
--------- --------- -------- -------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
<S> <C> <C> <C> <C> <C>
OTHER DATA:
FUNDS FROM OPERATIONS(3)
Net income before gain on
sales, minority interest,
provision for income taxes
and extraordinary item....... $ 7,943 $ 6,201 $ 8,231 $4,397 $ 8,235
Adjustments
Depreciation and
amortization................ 6,513 6,010 8,007 4,030 7,059
Adjustments for
unconsolidated joint
ventures.................... 381 51 121 -- --
Non-recurring items.......... 42 39 288 -- --
Minority interest............ (418) (372) (527) (260) (457)
------- ------- ------- ------ -------
Funds from Operations(3)...... $14,461 $11,929 $16,120 $8,167 $14,837
======= ======= ======= ====== =======
Weighted average number of
shares outstanding (fully
diluted)(4).................. 8,713 8,130 8,130 8,130 8,130
Funds from Operations
applicable to Essex's
stockholders................. $11,306 $ 9,209 $12,445 $6,305 $11,454
FFO Pay-Out Ratio............. 78% 86% 85% 91% 92%
Debt service coverage
ratio(5)..................... 2.7x 2.5x 2.6x 3.1x 3.4x
Gross operating margin(6)..... 68% 67% 67% 67% 67%
Average same-property monthly
rental rate per apartment
unit(7)(8)................... $ 787 $ 745 $ 749 $ 715
Average same-property monthly
operating expenses per
apartment unit(7)(9)......... $ 248 $ 243 $ 241 $ 234
Total multi-family units (at
end of period)............... 5,876 4,468 4,868 4,410 4,410
Multi-family residential
property occupancy rate(10).. 97% 97% 97% 96% 96%
Total properties (at end of
period)...................... 33 29 30 29 29
</TABLE>
- --------
(1) The unaudited pro forma financial and operating information for the year
ended December 31, 1994 is based on the ownership and operation of the 23
properties owned at the time of the IPO (including the properties acquired
as of the IPO) combined with the financial and operating information of
EPC and is presented as if the following had occurred on January 1, 1994:
(i) the IPO was completed, (ii) Essex qualified as a REIT, (iii) Essex
used the net proceeds from the IPO and debt incurred in connection with
the IPO to fund a series of asset acquisitions and mortgage repayments in
connection with the IPO and (iv) EMC was formed and certain property and
asset management contracts were assigned to it. Pro forma net cash flows
for operating, investing and financing activities have been omitted
because of the subjectivity involved in the assumptions required for
related balance sheet structure and because of the presence of disclosure
of actual cash flow information for 1994 and 1995.
(2) Per share amounts are presented only for the periods subsequent to June
13, 1994 and the pro forma 1994 period and are based upon respective
amounts divided by the weighted average outstanding shares on the
applicable dates.
(3) Industry analysts generally consider Funds from Operations to be an
appropriate measure of the performance of an equity REIT. Funds from
Operations (as currently defined by the National Association of Real
Estate Investment Trusts ("NAREIT")) represents net income (loss)
(computed in accordance with generally accepted accounting principles
("GAAP")), excluding gains (or losses) from debt restructuring, sales of
property, plus depreciation, and after adjustments for unconsolidated
partnerships and joint ventures, if any. Adjustments for unconsolidated
partnerships and joint ventures, if any, will be calculated to reflect
Funds from Operations on the same basis. Management generally considers
Funds from Operations to be a useful financial performance measurement of
an equity REIT because it provides investors with an additional basis to
evaluate the performance of a REIT. Funds from Operations does not
represent net income or cash flows from operations as defined by GAAP and
does not necessarily indicate that cash flows will be sufficient to fund
cash needs. It should not be considered as an alternative to net income as
an indicator of the Company's operating performance or to cash flows as a
measure of liquidity. Funds from Operations does not measure whether cash
flow is sufficient to fund all cash needs including principal
amortization, capital improvements and distributions to stockholders.
Funds from Operations also does not represent cash flows generated from
operating, investing or financing activities as defined under GAAP.
Further, Funds from Operations as disclosed by other REITs may not be
comparable to the Company's calculation of Funds from Operations.
(4) Assumes the conversion of all outstanding shares of Convertible Preferred
Stock, if any, and all outstanding limited partnership interests in the
Operating Partnership, into shares of Common Stock, as of the applicable
date.
(5) Debt service coverage ratio represents EBITDA divided by interest expense.
(6) Gross operating margin represents rental income less property operating
expenses divided by rental income.
(7) Same-property apartment units are those units which the Company has owned
since the IPO.
(8) Average same-property monthly rental rate per apartment unit represents
total scheduled rent for the period (actual rental rates on occupied
apartment units plus market rental rates on vacant apartment units)
divided by the number of apartment units and further divided by the number
of months in the period.
(9) Average same-property monthly expenses per apartment unit represents total
monthly operating expenses for the period divided by the total number of
apartment units and further divided by the number of months in the period.
(10) Occupancy rates are based on Financial Occupancy during the period
presented. Occupancy rates exclude Meadowood (which was purchased after
the quarter ended September 30, 1996) and Jackson School Village (which is
currently in lease-up).
S-14
<PAGE>
COMPANY MARKETS
OVERVIEW
The Company continually monitors its Target Markets and selects new markets
for investment by evaluating economic and demographic factors. These factors
are evaluated in two stages. In the first stage, the Company analyzes
indicators of the future supply of new rental space, such as building permit
data and indicators of demand for rental space, such as growth trends in
employment, population and household formation. In the second stage, the
markets in which demand is projected to exceed supply are then more closely
reviewed. The Company verifies the market's supply situation through (i)
discussions with city planning personnel and review of permit data, (ii)
review of the availability of vacant and appropriately zoned land, (iii)
review of local growth policies and the political opposition to growth, and
(iv) examination of physical limitations to growth, such as mountains and
waterways. Rental demand is also evaluated in greater detail by analyzing
major employment segments and the affordability of home ownership. The Company
also identifies the preferred submarkets for potential investment. As a result
of its second-stage analysis, the Company determines which acquisition
strategy to adopt and the targeted yield for which it will purchase properties
based on its evaluation of investment and market risk and the growth potential
of such properties.
The Company believes that selected submarkets in the San Francisco Bay Area,
Southern California, Seattle Metropolitan Area and Portland Metropolitan Area
provide significant opportunities for further investment. Specifically, the
Company expects selected submarkets within the Target Markets to be supply-
constrained due to the lack of developable land, competing uses for available
land and a lengthy and expensive development process caused by restrictive
governmental policies. Further, each of the Company's markets are known for
high quality of life, a diversified and growing employment base and active
investment markets. This combination of supply constraints and economic growth
creates the most attractive locations for long-term investment.
THE SAN FRANCISCO BAY AREA MARKET
The San Francisco Bay Area is home to a diversified group of technology and
financial businesses. The region is known for the depth and knowledge of its
skilled workforce, proximity to world-class universities and a high quality of
life. To the south of the city of San Francisco is the Silicon Valley region,
which encompasses San Jose and southern Alameda County. Many companies located
in Silicon Valley are leaders in the research, development and sale of
semiconductors, as well as in computer workstations, disk drives and
networking hardware. Some of the largest employers in the Silicon Valley
include Lockheed Martin, Hewlett-Packard, Stanford University and Medical
Center, Applied Materials, Siemens Rolm Communications, IBM, Apple, and
National Semiconductor. The Silicon Valley region is also home to a number of
small companies that are growing rapidly.
According to the Rosen Consulting Group, independent urban economists, the
San Francisco Bay Area is one of the wealthiest regions in the United States
with an expected 1996 mean household income of $84,040, which is approximately
83% greater than the expected 1996 national average of $46,027. In addition,
according to the U.S. Census Bureau 1990 data, the San Francisco Bay Area has
the State of California's highest percentage of college graduates and highest
percentage of managerial and professional occupations, and according to the
Bureau of Economic Analysis, the San Francisco Bay Area had the lowest
unemployment rate in the State of California as of May 15, 1996. Nevertheless,
in 1995, only 36% of the households in the San Francisco Bay Area could afford
a median priced, single family home. These factors, coupled with the limited
construction of new apartment units, increase rental demand.
The Company believes that its San Francisco Bay Area multi-family
residential Properties are attractive long-term investments. New supply in the
area is limited by several factors, and a high level of demand has been
generated by job growth, coupled with the high cost and relative
unaffordability of home purchases. The Company's San Francisco Bay Area
portfolio is concentrated in the Silicon Valley, which has historically
experienced relatively strong apartment demand as reflected in San Jose's
occupancy rates for projects of more
S-15
<PAGE>
than 100 units, which increased from 95.7% for year end 1994 to 97.8% for year
end 1995. In Alameda County, occupancy rates for projects with more than 100
units increased from 95.8% for year end 1994 to 96.6% for year end 1995. The
following table reflects data from various sources and generally indicates the
overall increase in market rental and occupancy rates for the Target Markets.
APARTMENT OCCUPANCY RATE AND RENT GROWTH IN THE TARGET MARKETS
<TABLE>
<CAPTION>
AVERAGE OCCUPANCY RENTAL RATES
--------------------- ----------------------
1995 1994 CHANGE 1995 1994 % CHANGE
-------- ---- ------ -------- ---- --------
<S> <C> <C> <C> <C> <C> <C>
Santa Clara County(1)............. 97.8% 95.7% 2.2% $971 $886 9.6%
Alameda County(1)................. 96.6% 95.8% 0.8% $820 $803 2.1%
Contra Costa County(1)............ 94.9% 93.9% 1.1% $760 $740 2.7%
San Francisco Bay Area(1)(2)...... 96.7% 95.6% 1.1% $872 $824 5.8%
<CAPTION>
3/96 3/95 CHANGE 3/96 3/95 % CHANGE
-------- ---- ------ -------- ---- --------
<S> <C> <C> <C> <C> <C> <C>
Seattle........................... 94.6% 94.5% 0.1% $592 $574 3.1%
<CAPTION>
3/96 3/95 CHANGE 3/96 3/95 % CHANGE
-------- ---- ------ -------- ---- --------
<S> <C> <C> <C> <C> <C> <C>
Portland(3)....................... 99.3% 96.3% 3.0% $624 $567 10.1%
<CAPTION>
1Q/96(4) 1994 CHANGE 1Q/96(4) 1994 % CHANGE
-------- ---- ------ -------- ---- --------
<S> <C> <C> <C> <C> <C> <C>
Orange County..................... 95.0% 95.5% -0.5% $802 $782 2.6%
</TABLE>
- --------
(1) Projects with more than 100 units.
(2) Refers to the counties of San Francisco, San Mateo, Santa Clara, Alameda,
Contra Costa, Solano, Marin, Sonoma and Napa (the "Nine County Bay Area").
(3) The number of units covered in the Spring 1996 report of Westland
Investment Co. was fewer than typically responded in the past.
(4) Data is for first quarter of 1996.
Sources: RealData-San Francisco Bay Area; Dupre & Scott-Seattle; Westland
Investment Co.-Portland; Research Network-Orange County
Increasing Demand: The demand for multi-family residential property in the
San Francisco Bay Area has grown substantially over the past 18 months.
According to the Rosen Consulting Group, the population of the San Francisco
Bay Area (approximately 6.3 million people in 1995) is expected to grow at an
average annual rate of 1.0% per year, representing the addition of
approximately 67,500 people per year from 1995 to 2000. In addition, the Rosen
Consulting Group estimates that the San Francisco Bay Area will add an average
of about 32,500 new households per year from 1995 to 2000. According to the
U.S. Census Bureau 1990 data, approximately 44% of the households in the San
Francisco Bay Area were rental households. In addition, according to the Rosen
Consulting Group, the recent job surge in the high technology industry has
contributed to this rental household growth. In addition, the Bureau of Labor
Statistics estimates that nonagricultural payroll jobs in Santa Clara County,
which is in the center of Silicon Valley, increased approximately 4.7%
representing the addition of approximately 39,000 jobs during the 12 months
ended May 15, 1996.
S-16
<PAGE>
EMPLOYMENT GROWTH IN THE TARGET MARKETS
(NEW JOBS IN THOUSANDS)
<TABLE>
<CAPTION>
PROJECTED
1985-1990 1990-1995 1995-2000
-------------- -------------- --------------
NEW NEW NEW
JOBS % CHANGE JOBS % CHANGE JOBS % CHANGE
----- -------- ----- -------- ----- --------
<S> <C> <C> <C> <C> <C> <C>
San Francisco Bay Area(1)......... 274.8 10.4% 11.5 0.4% 390.9 13.3%
Seattle........................... 260.4 30.4 62.9 5.6 179.2 15.2
Portland.......................... 137.0 23.2 110.4 15.2 160.8 19.2
Orange County..................... 194.4 19.9 -23.7 -2.0 152.1 13.2
</TABLE>
- --------
(1) Refers to the Nine County Bay Area.
Sources: U.S. Bureau of Labor Statistics; Rosen Consulting Group
Rental demand, as evidenced by market rental rates for apartments in the San
Francisco Bay Area, has increased significantly over the past 18 months.
Rental revenues at the Company's San Francisco Bay Area Properties (on a same-
property basis) for the quarter ended September 30, 1996 increased by
approximately 9% over the quarter ended September 30, 1995. The rental
increases (on a same-property basis) reflect only a portion of the increase in
the overall market rental rates because rental rates can only be increased
upon lease expiration. In addition, the Company typically limits the maximum
rental increase to an existing tenant to 10% per annum. As a result, the
Company estimates that, as of September 30, 1996, the difference between the
revenues generated by the Company's existing leases and current market rents,
was approximately $3.3 million per year, or approximately 14%.
Limited Supply: Notwithstanding the steady increase in demand for multi-
family residential property in the San Francisco Bay Area, the supply of new
rental housing in the region has failed to keep pace with demand over the past
ten years. According to the Rosen Consulting Group, the number of multi-family
permits issued in the San Francisco Bay Area declined from 25,200 in 1986 to
4,100 in 1995. The decline in multi-family permits issued is attributable to a
number of factors, including (i) the shortage and high cost of available land,
(ii) strict public planning procedures, (iii) high governmental fees, and (iv)
high development and construction costs. These factors, as well as other
factors, have constrained the supply of rental housing in the San Francisco
Bay Area.
SEATTLE METROPOLITAN AREA
The Company believes that certain submarkets in the Seattle Metropolitan
Area are attractive for long-term investment due to the combination of high
occupancy rates, constraints on the production of new multi-family residential
properties and increasing demand from job growth. The Company's portfolio in
the Seattle region is currently concentrated in the east-side cities such as
Bellevue, Redmond and Bothell. These areas have major employers with a
technological focus, including Microsoft Corporation and related software and
other technology oriented employers. Over the past ten years, the economic
base of the Seattle Metropolitan Area has continued to diversify from its
dependence on the Boeing Company and the aerospace industry, with significant
growth occurring in high-technology manufacturing and computer software
production. Major employers in the area include Boeing, Safeway Stores,
Weyerhaeuser, Microsoft, SeaFirst Bank, US West Telecommunications Services
and Nordstrom. The Company believes that the overall business climate of the
Seattle Metropolitan Area is excellent in light of its skilled and educated
work force, high quality of life and strong support for expansion of Pacific
Rim business.
Increasing Demand. The Rosen Consulting Group has indicated that
nonagricultural payroll employment in Seattle increased 3.0% during the 12
months ended May 15, 1996, representing the addition of about 35,000 jobs.
Unemployment in May 1996, at 4.7%, was well below the national average of
5.6%. The services and trade sectors have been the source of the greatest
number of new jobs with the service sector showing its highest rate of growth
since 1989, with a 5.5% increase in May 1996 from a year ago and an annual
average rate of increase of 3.7% during the first half of the 1990s. During
the first half of the 1990s, total employment has increased an
S-17
<PAGE>
average of 1.1% per year despite a loss of 40,000 jobs at Boeing over that
same period. Boeing announced strong orders in 1995, ending the year with
total orders for 346 new airplanes worth $31.2 billion. Boeing has also
estimated that it will deliver 200 to 210 aircraft during the year ending
December 31, 1996, and has indicated that its employment is expected to
increase during the next several years. According to the Rosen Consulting
Group, the Boeing rebound, continued growth in the high technology industries
and increased strength in diversified manufacturing should cause the Seattle
economy to strengthen in the second half of the 1990s, with the addition of
almost 180,000 new jobs. Further, according to the Rosen Consulting Group, the
strengthening economic conditions are expected to lead to annual population
growth of 1.2% from 1995 to the year 2000, representing the addition of
approximately 27,600 people per year. In addition, during the second half of
the 1990s, approximately 15,600 households are expected to be added annually.
UNEMPLOYMENT RATES IN THE TARGET MARKETS(1)
<TABLE>
<CAPTION>
UNEMPLOYMENT
RATE
------------
<S> <C>
San Francisco Bay Area(2).......................................... 4.7%
Seattle............................................................ 4.7
Portland........................................................... 4.1
Orange County...................................................... 4.3
U.S.............................................................. 5.6
</TABLE>
- --------
(1) Seasonally adjusted, May 1996.
(2) Refers to the Nine County Bay Area.
Sources: U.S. Bureau of Labor Statistics; Rosen Consulting Group
Limited Supply: During each of the last three years, annual permit activity
for the construction of multi-family residential properties in the Seattle
market has been significantly lower than the annual level of activity of each
of the preceding eight years. As illustrated below, the number of new
households formed between 1991 and 1995 exceeds the number of multi-family
permits issued in Seattle, and, consequently, demand has outpaced supply. The
Company believes that, like the San Francisco Bay Area, this market will
continue to have a restricted supply of new multi-family properties.
Geographical barriers, including Puget Sound, restrict this market's
residential property supply, as do no-growth policies such as the State of
Washington's Growth Management Act of 1990. The shortage of appropriately
zoned land for construction is expected to limit the supply of new multi-
family properties for the next several years, thereby benefiting existing
owners of multi-family residential property.
S-18
<PAGE>
LIMITED SUPPLY IN THE TARGET MARKETS
MULTI-FAMILY PERMITS VERSUS NET NEW HOUSEHOLDS: 1985-1995
[LOGO]
- --------
Source: Rosen Consulting Group
SOUTHERN CALIFORNIA
The Company believes that certain submarket areas in Southern California
represent attractive investment opportunities. The Company currently owns four
Properties located in Southern California, which have experienced significant
increases in occupancy since the completion of the Company's IPO in June 1994.
The Company believes that this region will benefit from (i) the significant
constraints on the production of multi-family properties in the areas near
major employment hubs, (ii) the reduction in the rate of job losses related to
the defense industry, and (iii) new job formations in the services and the
high-technology sectors. The Company's acquisition and development efforts are
primarily focused on selected submarkets in Orange County, Los Angeles County
and southern Ventura County.
Increasing Demand: The Company believes that Orange County's economy,
particularly in the southern portion of Orange County, has recovered from the
recession of the early 1990s. The Rosen Consulting Group reports that
nonagricultural payroll employment in Orange County increased 2.4% during 12
months ended May 15, 1996, representing the addition of approximately 27,500
jobs. According to the Rosen Consulting Group, Orange County household
formation is expected to grow 1.4% per year between December 31, 1995 and
December 31, 2000. The Rosen Consulting Group further anticipates that Orange
County's location in the lucrative Southern California market, the proximity to
a large and highly talented labor force, the presence of a major research
university, and the availability of transportation, all are expected to
contribute to growth well into the next century and that total nonagricultural
employment in Orange County is expected to grow at an annual compounded rate of
2.5% between July 1, 1995 and July 1, 2000. Consequently, the Company believes
that population and household growth will increase throughout Orange County in
the coming years, but especially in the southern portion of the County where
there is a greater amount of developable land. According to the Rosen
Consulting Group, population growth is expected to average 1.5% per year from
July 1, 1995 through July 1, 2000, for the addition of almost 40,000 people
each year, while household formation is expected to average 1.4% per year, for
the addition of about 12,700 households each year during the same period.
S-19
<PAGE>
POPULATION AND HOUSEHOLD GROWTH IN THE TARGET MARKETS
(POPULATION AND HOUSEHOLDS IN THOUSANDS)
<TABLE>
<CAPTION>
COMPOUND ANNUAL
CHANGE GROWTH RATE
------------------- -------------------
LEVEL OF 1995
POPULATION PROJECTED
1995 1990-1995 1995-2000 1990-1995 2000
---------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
San Francisco Bay Area(1)... 6,302.8 269.1 337.6 0.9% 1.0%
Seattle..................... 2,197.5 149.5 138.2 1.4 1.2
Portland.................... 1,710.1 183.6 182.7 2.3 2.1
Orange County............... 2,567.8 157.2 198.1 1.3 1.5
<CAPTION>
COMPOUND ANNUAL
CHANGE GROWTH RATE
------------------- -------------------
LEVEL OF 1995
HOUSEHOLDS PROJECTED
1995 1990-1995 1995-2000 1990-1995 2000
---------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
San Francisco Bay Area(1)... 2,354.1 98.1 162.6 0.9% 1.3%
Seattle..................... 881.0 63.6 77.8 1.5 1.7
Portland.................... 677.7 77.9 87.0 2.5 2.4
Orange County............... 874.8 46.0 63.3 1.1 1.4
</TABLE>
- --------
(1) Refers to the Nine County Bay Area.
Sources: U.S. Bureau of Labor Statistics; Rosen Consulting Group
Limited Supply: In Orange County, multi-family permits (both apartments and
condominiums) were issued for 2,376 units in 1995 and are expected to be
issued for about 3,000 new units in 1996, a pace which is substantially below
the average of 8,175 permits that were reported in 1989 and 1990. The
illustration on page S-19 indicates the extent to which the number of new
households formed exceeds construction activity in Orange County. The Company
believes that like the San Francisco Bay Area, this market will continue to
have a restricted new supply of multi-family residential properties. Commute
considerations, a restrictive and costly zoning and permit process, and the
lack of appropriately zoned land near employment centers are the most
significant obstacles to new development activity.
OTHER FACTORS INFLUENCING DEMAND IN TARGET MARKETS
Affordability of Home Ownership and Attractiveness of Rental Housing: In
addition to the foregoing demographic factors, the Company believes that
growth in multi-family residential property demand in the Target Markets will
be reinforced by the following factors: (i) the high cost of home ownership,
making home ownership a less attractive option for an increasing number of
people, (ii) a decline in home price appreciation which makes renting an
attractive financial alternative to home ownership, and (iii) the type of
industries in the Target Markets, such as high-technology companies, which
often require employees to relocate to other geographic locations. In
particular, in the San Francisco Bay Area, Southern California and Seattle
Metropolitan Areas, the cost of home ownership is significantly higher than
the national average. As a consequence of the high cost of home ownership, the
percentage of households in these target markets that rent housing is
significantly higher than the national average, as displayed in the table
below. The Company believes that such percentage will remain high because the
limited supply of both for-sale and rental housing in these markets will
continue to keep home ownership at levels that many people cannot afford.
S-20
<PAGE>
HOME OWNERSHIP AFFORDABILITY AND RENTER HOUSEHOLDS IN THE TARGET MARKETS
<TABLE>
<CAPTION>
PERCENTAGE OF
HOUSEHOLDS
ABLE TO
AFFORD MEDIAN- RENTERS AS A
PRICED PERCENTAGE OF
HOME (1995) HOUSEHOLDS(1)
-------------- -------------
<S> <C> <C>
San Francisco Bay Area(2).......................... 36% 44%
Seattle............................................ 53 39
Portland........................................... 57 38
Orange County...................................... 46 40
U.S.............................................. 55 36
</TABLE>
- --------
(1) Per 1990 Census.
(2) Refers to the Nine County Bay Area.
Sources: U.S. Bureau of Labor Statistics; Rosen Consulting Group
CALIFORNIA RECOVERY
For the past two years, the California economy has been in the midst of a
recovery from the recession the state experienced from the late 1980s to the
early 1990s. Key forces driving the recovery in California include the earlier
recovery of the national economy, continued growth in the state's high-
technology, entertainment and services industries, improvement in the state's
business climate, and growth in foreign trade, particularly with Pacific Rim
countries. According to Rosen Consulting Group, employment growth in
California is currently outpacing that of the nation as a whole, with an
annual increase in nonagricultural employment in the state of 2.4% for the 12
months ended May 15, 1996 compared to a national growth rate of 2.0% during
the same period. The statewide recovery has progressed most rapidly in
Northern California, exemplified by strong employment growth in San Jose with
an employment gain of 4.7% for the 12 months ended May 15, 1996. Although
Southern California was impacted by the recession to a greater extent due
primarily to the large reduction in the region's defense-related employment
sector, evidence of a recovery for the area is emerging, particularly in
Orange County, with an increase in nonagricultural employment of 2.4% for the
year ended May 15, 1996.
As the California recovery progresses, businesses continue to expand
throughout the state. Based on Fortune magazine's annual survey published in
its April 17, 1995 issue, the State of California increased its share of the
nation's 100 fastest-growing companies from 20% in 1993 to 27% in 1995. With
these increases in business formations and employment, personal income in
California is expected to grow at a rate of 6.0% in 1996 as compared to 4.3%
growth for the nation as a whole, according to the UCLA Business Forecast for
the Nation and California, December 1995. These factors coupled with expected
population growth in California, according to the Rosen Consulting Group, of
1.5% annually, 50% greater than the anticipated national average, should
facilitate the recovery. The Company anticipates that California's continuing
recovery, particularly in Northern California, will positively impact the
state's multi-family rental markets. As of September 30, 1996, approximately
64% of the Company's rental revenue was generated by its Properties located in
California.
S-21
<PAGE>
PRICE RANGE OF COMMON STOCK AND DISTRIBUTIONS
The Company's Common Stock has been traded on the NYSE under the symbol
"ESS" since June 6, 1994. The following table sets forth the quarterly high
and low sales prices per share reported on the NYSE, as well as the quarterly
distributions declared per share of Common Stock.
<TABLE>
<CAPTION>
HIGH LOW DISTRIBUTIONS
------- ------- -------------
<S> <C> <C> <C>
1994
Second Quarter(1)................................. $19.625 $17.250 .0800(2)
Third Quarter..................................... $19.000 $17.125 .4175
Fourth Quarter.................................... $18.000 $14.625 .4175
1995
First Quarter..................................... $16.750 $14.625 .4175
Second Quarter.................................... $18.125 $15.625 .4175
Third Quarter..................................... $18.375 $16.000 .4250
Fourth Quarter.................................... $19.750 $17.125 .4250
1996
First Quarter..................................... $21.250 $18.750 .4250
Second Quarter.................................... $22.500 $19.375 .4250
Third Quarter..................................... $24.875 $21.375 .4350
Fourth Quarter(3)................................. $28.750 $24.625 .4350(4)
</TABLE>
- --------
(1) Commencing June 6, 1994, the first date of trading of the Common Stock
following the Company's IPO.
(2) Represents an amount equivalent to a quarterly distribution of $.4175 per
share.
(3) Through December 18, 1996.
(4) To be paid on or about January 15, 1997, to Common Stock stockholders of
record on December 31, 1996.
The approximate number of holders of record of the shares of the Common
Stock was 112 as of December 1, 1996. This number does not include
stockholders whose shares are held in trust by other entities. The actual
number of stockholders is greater than this number of holders of record.
The Company has declared a fourth quarter 1996 dividend distribution of
$.435 per share to its holders of Common Stock of record on December 31, 1996.
Payment is expected to be made on or about January 15, 1997. It is currently
expected that purchasers of Common Stock in the Offering who hold Common Stock
as of the record date will receive the fourth quarter 1996 distribution in
respect of the shares of Common Stock offered hereby. As a result, if
purchasers of the Common Stock in the Offering continue to hold such shares on
the record date for distributions over the next twelve months, such purchasers
will receive, when and if declared, four quarterly dividend payments in
addition to the fourth quarter 1996 dividend distribution.
Under the Code, the portion of cash dividends that exceeds the Company's
earnings and profits is treated as a return of capital, which would not be
subject to tax, to the extent of the stockholder's adjusted basis in its
stock, and, thereafter, as gain from the sale or exchange of a capital asset.
Cash dividends in excess of earnings and profits are, in general, generated
due to the deduction of noncash expenses, primarily depreciation, in the
determination of earnings and profits, and constitute a return of capital.
<TABLE>
<CAPTION>
1995 1994
------ ------
<S> <C> <C>
Taxable portion........................................... 69.00% 68.00%
Return of capital......................................... 31.00% 32.00%
------ ------
100.00% 100.00%
====== ======
</TABLE>
Since its IPO, the Company has paid regular quarterly dividends to its
stockholders. Future distributions by the Company will be at the discretion of
the Board of Directors and will depend on the actual Funds from Operations of
the Company, its financial condition, capital requirements, the annual
distribution requirements under the REIT provisions of the Internal Revenue
Code, required distributions on the Convertible Preferred Stock, applicable
legal restrictions and such other factors as the Board of Directors deems
relevant.
S-22
<PAGE>
On June 20, 1996, the Company entered into a definitive agreement to sell up
to 1.6 million shares of its Convertible Preferred Stock for an aggregate
price of up to $40.0 million. Under the terms of the agreement,
Tiger/Westbrook has purchased 800,000 shares of Convertible Preferred Stock
for an aggregate purchase price of $20.0 million, as of the date of this
Prospectus Supplement. Tiger/Westbrook is obligated to purchase an additional
$20.0 million of Convertible Preferred Stock on or prior to June 20, 1997.
Dividends may be authorized, declared and paid on shares of Common Stock in
any fiscal quarter only if full cumulative dividends have been paid on, or
authorized and set apart on, all shares of Convertible Preferred Stock for all
prior dividends through and including the end of such quarter. Holders of
shares of Convertible Preferred Stock are entitled to receive annual
cumulative cash dividends, payable quarterly, in an amount equal to the
greater of (i) $2.1875 per share (8.75% of the $25.00 per share price) or (ii)
the dividends (subject to adjustment) paid with respect to such quarter on the
Common Stock plus, in both cases, any accumulated but unpaid dividends on the
Convertible Preferred Stock. As of the date of this Prospectus Supplement, all
dividends accrued with respect to the outstanding shares of Convertible
Preferred Stock have been paid when due.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the shares of Common Stock
offered hereby are expected to be approximately $64.0 million (approximately
$72.8 million if the Underwriters' over-allotment option is exercised in
full). The Company intends to contribute such proceeds to the Operating
Partnership, of which the Company is the sole general partner, to purchase an
additional general partnership interest in the Operating Partnership. The
Operating Partnership will use the net proceeds to fund the acquisition and
development of multi-family residential properties and for general corporate
purposes.
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
September 30, 1996, and as adjusted to give effect to the Offering. The
information set forth in the following table should be read in conjunction
with the combined financial statements and notes thereto included or
incorporated by reference in this Prospectus Supplement and the accompanying
Prospectus, and "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Liquidity and Capital Resources."
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1996
----------------------------
ACTUAL AS ADJUSTED
------------ --------------
(IN THOUSANDS)
<S> <C> <C>
Debt:
Mortgage notes payable.......................... $129,176 $129,176
Lines of credit................................. 7,500 7,500
------------ ------------
Total debt.................................... $136,676 $136,676
Minority interest................................. 25,363 25,363
Stockholders' equity:
Common Stock: $.0001 par value; 668,400,000 and
668,400,000 authorized, 8,805,500 and
11,255,500 issued and outstanding.............. 1 1
8.75% Convertible Preferred Stock, Series 1996A:
$.0001 par value, 1,600,000 and 1,600,000
authorized and 800,000 and 800,000 issued and
outstanding.................................... -- --
Excess Stock: $.0001 par value per share,
330,000,000 authorized, no shares issued or
outstanding.................................... -- --
Additional paid-in capital...................... 184,100 248,100
Accumulated deficit............................. (31,369) (31,369)
------------ ------------
Total stockholders' equity........................ 152,732 216,732
------------ ------------
Total capitalization.......................... $314,771 $378,771
============ ============
</TABLE>
S-23
<PAGE>
SELECTED FINANCIAL AND OPERATING DATA
The following tables set forth selected summary financial and operating
information (i) for the Company from the IPO through September 30, 1996, (ii)
on a pro forma basis for the Company for the year ended December 31, 1994, and
(iii) on a historical combined basis for the year ended December 31, 1993 and
for the period from January 1, 1994 through June 12, 1994 for the 20
properties in which the original limited partners in the Operating Partnership
previously held ownership interests, combined with the financial and operating
information of EPC. The unaudited pro forma financial and operating
information for the year ended December 31, 1994 is based on the ownership and
operation of the 23 properties owned as of the time of the IPO (including the
properties acquired as of the IPO) combined with the financial and operating
information of EPC and is presented as if the following had occurred on
January 1, 1994: (i) the IPO was completed, (ii) the Company qualified as a
REIT, (iii) the Company used the net proceeds from the IPO and the debt
incurred in connection with the IPO to fund a series of asset acquisitions and
mortgage repayments in connection with the IPO, and (iv) EMC was formed and
certain property and asset management contracts were assigned to EMC.
The pro forma financial and operating information should not be considered
indicative of actual results that would have been achieved had the
transactions occurred on the dates or for the periods indicated and do not
purport to indicate results of operations as of any future date or for any
future period. The following table should be read in conjunction with
Management's Discussion and Analysis of Financial Conditions and Results of
Operations and with all of the financial statements and notes thereto included
in this Prospectus Supplement and the accompanying Prospectus incorporated
herein and therein by reference.
<TABLE>
<CAPTION>
NINE NINE
MONTHS MONTHS YEAR JUNE 13, PRO FORMA JAN. 1,
ENDED ENDED ENDED 1994- YEAR ENDED 1994- YEAR ENDED
SEPT. 30, SEPT. 30, DEC. 31, DEC. 31, DEC. 31, JUNE 12, DEC. 31,
1996 1995 1995 1994 1994(1) 1994 1993
--------- --------- -------- -------- ---------- -------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
REVENUES
Rental................. $34,123 $31,112 $41,640 $19,499 $34,154 $12,742 $26,509
Property and asset
management............ -- -- -- -- 257 1,794 3,277
Other.................. 2,008 1,706 2,300 914 1,582 275 643
------- ------- ------- ------- ------- ------- -------
Total revenues....... 36,131 32,818 43,940 20,413 35,993 14,811 30,429
EXPENSES
Property operating
expenses.............. 11,087 10,266 13,604 6,452 11,414 4,267 9,348
Depreciation and
amortization.......... 6,513 6,008 8,007 4,030 7,047 2,598 5,537
Amortization of
deferred financing
costs................. 529 1,023 1,355 773 1,407 96 219
General and
administrative........ 1,279 1,083 1,527 457 804 306 688
Property and asset
management............ -- -- -- -- -- 974 1,396
Other expenses......... 42 39 288 -- -- 314 952
Interest............... 8,738 8,198 10,928 4,304 7,086 5,924 11,902
------- ------- ------- ------- ------- ------- -------
Total expenses....... 28,188 26,617 35,709 16,016 27,758 14,479 30,042
------- ------- ------- ------- ------- ------- -------
Income before gain on
sales, minority
interest, provision for
income taxes and
extraordinary item..... 7,943 6,201 8,231 4,397 8,235 332 387
Gain on sales.......... 2,480 789 6,013 -- -- -- --
Minority interest...... (1,772) (1,755) (3,486) (1,131) (1,938) 87 161
Provision for income
taxes................. -- -- -- -- -- (267) (581)
Extraordinary item--
loss on early
extinguishment of
debt.................. (3,317) (154) (154) -- -- -- --
------- ------- ------- ------- ------- ------- -------
Income (loss) after
minority interest...... $ 5,334 $ 5,081 $10,604 $ 3,266 $ 6,297 $ 152 $ (33)
======= ======= ======= ======= ======= ======= =======
Net income (loss) per
share after minority
interest(2)............ $ 0.76 $ 0.81 $ 1.69 $ 0.52 $ 1.00 -- --
======= ======= ======= ======= ======= ======= =======
Weighted average Common
Stock outstanding
(in thousands)......... 6,720 6,275 6,275 6,275 6,275 -- --
</TABLE>
<TABLE>
<CAPTION>
AS OF AS OF DECEMBER 31,
SEPT. --------------------------
30, 1996 1995 1994 1993
-------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Investment in real estate (before
accumulated depreciation)................ $344,904 $284,358 $282,344 $186,447
Net investment in real estate............. 299,608 244,077 248,232 158,873
Total assets.............................. 330,455 273,660 269,065 171,287
Total property indebtedness............... 136,676 154,524 150,019 152,501
Stockholders' equity...................... 152,732 84,729 84,699 7,772
</TABLE>
S-24
<PAGE>
<TABLE>
<CAPTION>
NINE NINE
MONTHS MONTHS YEAR JUNE 13, PRO FORMA
ENDED ENDED ENDED 1994- YEAR ENDED
SEPT. 30, SEPT. 30, DEC. 31, DEC. 31, DEC. 31,
1996 1995 1995 1994 1994(1)
--------- --------- -------- -------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
<S> <C> <C> <C> <C> <C>
OTHER DATA:
FUNDS FROM OPERATIONS(3)
Net income before gain on
sales, minority interest,
provision for income taxes
and extraordinary item....... $ 7,943 $ 6,201 $ 8,231 $4,397 $ 8,235
Adjustments
Depreciation and
amortization................ 6,513 6,010 8,007 4,030 7,059
Adjustments for
unconsolidated joint
ventures.................... 381 51 121 -- --
Non-recurring items.......... 42 39 288 -- --
Minority interest............ (418) (372) (527) (260) (457)
------- ------- ------- ------ -------
Funds from Operations(3)...... $14,461 $11,929 $16,120 $8,167 $14,837
======= ======= ======= ====== =======
Weighted average number of
shares outstanding (fully
diluted)(4).................. 8,713 8,130 8,130 8,130 8,130
Funds from Operations
applicable to Essex's
stockholders................. $11,306 $ 9,209 $12,445 $6,305 $11,454
FFO Pay-Out Ratio............. 78% 86% 85% 91% 92%
Debt service coverage
ratio(5)..................... 2.7x 2.5x 2.6x 3.1x 3.4x
Gross operating margin(6)..... 68% 67% 67% 67% 67%
Average same-property monthly
rental rate per apartment
unit(7)(8)................... $ 787 $ 745 $ 749 $ 715
Average same-property monthly
operating expenses per
apartment unit(7)(9)......... $ 248 $ 243 $ 241 $ 234
Total multi-family units (at
end of period)............... 5,876 4,468 4,868 4,410 4,410
Multi-family residential
property occupancy rate(10).. 97% 97% 97% 96% 96%
Total properties (at end of
period)...................... 33 29 30 29 29
</TABLE>
- --------
(1) The unaudited pro forma financial and operating information for the year
ended December 31, 1994 is based on the ownership and operation of the 23
properties owned at the time of the IPO (including the properties
acquired as of the IPO) combined with the financial and operating
information of EPC and is presented as if the following had occurred on
January 1, 1994: (i) the IPO was completed, (ii) Essex qualified as a
REIT, (iii) Essex used the net proceeds from the IPO and debt incurred in
connection with the IPO to fund a series of asset acquisitions and
mortgage repayments in connection with the IPO and (iv) EMC was formed
and certain property and asset management contracts were assigned to it.
Pro forma net cash flows for operating, investing and financing
activities have been omitted because of the subjectivity involved in the
assumptions required for related balance sheet structure and because of
the presence of disclosure of actual cash flow information for 1994 and
1995.
(2) Per share amounts are presented only for the periods subsequent to June
13, 1994 and the pro forma 1994 period and are based upon respective
amounts divided by the weighted average outstanding shares on the
applicable dates.
(3) Industry analysts generally consider Funds from Operations to be an
appropriate measure of the performance of an equity REIT. Funds from
Operations (as currently defined by NAREIT), represents net income (loss)
(computed in accordance with GAAP), excluding gains (or losses) from debt
restructuring, sales of property, plus depreciation, and after
adjustments for unconsolidated partnerships and joint ventures, if any.
Adjustments for unconsolidated partnerships and joint ventures, if any,
will be calculated to reflect Funds from Operations on the same basis.
Management generally considers Funds from Operations to be a useful
financial performance measurement of an equity REIT because it provides
investors with an additional basis to evaluate the performance of a REIT.
Funds from Operations does not represent net income or cash flows from
operations as defined by GAAP and does not necessarily indicate that cash
flows will be sufficient to fund cash needs. It should not be considered
as an alternative to net income as an indicator of the Company's
operating performance or to cash flows as a measure of liquidity. Funds
from Operations does not measure whether cash flow is sufficient to fund
all cash needs including principal amortization, capital improvements and
distributions to stockholders. Funds from Operations also does not
represent cash flows generated from operating, investing or financing
activities as defined under GAAP. Further, Funds from Operations as
disclosed by other REITs may not be comparable to the Company's
calculation of Funds from Operations.
(4) Assumes the conversion of all outstanding shares of Convertible Preferred
Stock, if any, and all outstanding limited partnership interests in the
Operating Partnership, into shares of Common Stock, as of the applicable
date.
(5) Debt service coverage ratio represents EBITDA divided by interest
expense.
(6) Gross operating margin represents rental income less property operating
expenses divided by rental income.
(7) Same-property apartment units are those units which the Company has owned
since the IPO.
(8) Average same-property monthly rental rate per apartment unit represents
total scheduled rent for the period (actual rental rates on occupied
apartment units plus market rental rates on vacant apartment units)
divided by the number of apartment units and further divided by the
number of months in the period.
(9) Average same-property monthly expenses per apartment unit represents
total monthly operating expenses for the period divided by the total
number of apartment units and further divided by the number of months in
the period.
(10) Occupancy rates are based on Financial Occupancy during the period
presented. Occupancy rates exclude Meadowood (which was purchased after
the quarter ended September 30, 1996) and Jackson School Village (which
is currently in lease-up).
S-25
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion is based primarily on the consolidated financial
statements of the Company as of December 31, 1994 and 1995 and for the years
ended December 31, 1994 and 1995, and as of September 30, 1996 and 1995 and
for the nine months ended September 30, 1996 and 1995. This information should
be read in conjunction with the selected financial data and the Company's
financials included elsewhere or incorporated by reference in this Prospectus
Supplement. Substantially all the assets of the Company are held by, and
substantially all operations conducted through, the Operating Partnership. The
Company is the sole general partner of the Operating Partnership and, as of
September 30, 1996 and 1995, owned an approximate 82.6%, and an approximate
77.2% general partnership interest in the Operating Partnership, respectively.
The Company believes that it currently qualifies as a REIT for federal income
tax purposes.
RESULTS OF OPERATIONS
Comparison of Nine Months Ended September 30, 1996 to Nine Months Ended
September 30, 1995
Total Revenues increased by $3,313,000 or 10.1% to $36,131,000 in the first
nine months of 1996 from $32,818,000 in the first nine months of 1995. Rental
revenues increased by $3,011,000 or 9.7% to $34,123,000 in the first nine
months of 1996 from $31,112,000 in the first nine months of 1995. Of the
$3,011,000 increase, approximately $1,802,000 relates primarily to rental rate
and occupancy level increases at properties owned by the Company during the
periods being compared, with the remainder of the increase, in the amount of
$1,209,000, due to the net effect of properties acquired or disposed of in
1995 and 1996. Rental revenues from the San Francisco Bay Area and Seattle
Metropolitan Area multifamily residential Properties increased by $1,912,000
to $26,214,000 in the first nine months of 1996 from $24,302,000 in the first
nine months of 1995. Rental revenue increased by $865,000 during the first
nine months of 1996 from the amount in the first nine months of 1995 for the
Properties located in Southern California. Approximately $736,000 of this
increase is attributable to the acquisition of a property in this region
during the third quarter of 1996. Commercial property rental revenue increased
$234,000 for the first nine months of 1996 from the amount for the third
quarter of 1995 as a result of increased occupancy.
Total Expenses increased by $1,571,000 or approximately 5.9% to $28,188,000
in the first nine months of 1996 from $26,617,000 in the first nine months of
1995. Interest expense increased by $540,000 or 6.6% to $8,738,000 in the
first nine months of 1996 from $8,198,000 in the first nine months of 1995.
The interest expense increase was primarily due to the net addition of
outstanding mortgage debt in connection with property and investment
acquisitions. Property operating expenses, exclusive of depreciation and
amortization, increased by $821,000 or 8.0% to $11,087,000 in the first nine
months of 1996 from $10,266,000 in the first nine months of 1995. Of such
increase, approximately $413,000 relates primarily to increases in property
operating expenses at properties owned by the Company during the periods being
compared, with the remainder of the increase, in the amount of $408,000,
attributable to properties acquired or disposed of in 1995 and 1996. General
and administrative expenses represent the costs of the Company's various
acquisition and administrative departments as well as partnership
administration and non-operating expenses. Such expenses increased by $196,000
in the first nine months of 1996 from the first nine months of 1995.
Net income after minority interest increased by $253,000 to $5,334,000 in
the first nine months of 1996 from $5,081,000 in the first nine months of
1995. The increase of $253,000 was reduced by the loss on the early
extinguishment of debt which was $3,163,000 greater than such loss in the same
period in 1995 and which was partially offset by gain on the sales of real
estate that was $1,691,000 greater than the gain in the same period as 1995.
The increase in net income, net of the loss on the early extinguishment of
debt and gain on the sales of real estate is primarily due to same property
net operating income increases over the prior period and contributions made by
properties acquired in 1996.
Comparison of Year Ended December 31, 1995 to Year Ended December 31, 1994
Total Revenues increased by $8,716,000 or 24.8% to $43,940,000 in 1995 from
$35,224,000 in 1994. Rental revenue increased by $9,399,000 or 29.2% to
$41,640,000 in 1995 from $32,241,000 in 1994. Rental revenue
S-26
<PAGE>
from the Northern California and Seattle multi-family residential Properties
increased by $8,918,000 or 37.8% to $32,494,000 in 1995 from $23,576,000 in
1994. Approximately $8,269,000 of the increase in rental revenue was
attributable to the properties which were acquired by the Company concurrent
with and after the IPO in 1994 and 1995. Rental revenue increased by $206,000
or 4.7% during 1995 for the two Properties located in Southern California.
Commercial property rental revenue increased by $149,000 or 3.3% during 1995.
On May 31, 1995 and November 8, 1995 the Company sold its Loma Verde and
Pacifica Park Properties, respectively. The net all cash sales price of the
two Properties was $12,147,000. The net book value of these assets was
$6,134,000 resulting in a gain on sales of real estate of $6,013,000.
Total Expenses increased by $5,214,000 or approximately 17.1% to $35,709,000
in 1995 from $30,495,000 in 1994. Interest expense increased by $700,000 or
6.8% to $10,928,000 in 1995 from $10,228,000 in 1994. Such interest expense
increase was primarily due to the acquisition of additional multi-family
Properties. Property operating expenses increased by $2,885,000 or 26.9% to
$13,604,000 in 1995 from $10,719,000 in 1994. Of such increase, $2,793,000 is
attributable to properties acquired concurrent with and after the IPO in 1994
and 1995. Property and asset management expenses relate to (i) the cost of
managing properties in which certain directors and officers of the Company and
their affiliates hold a minimal economic interest and (ii) the cost of
managing portfolios of real estate and non-performing mortgages. No such
expenses were incurred in the periods following the completion of the IPO.
Property and asset management expenses of $974,000 were incurred prior to the
completion of the IPO. Such expenses are no longer incurred due to the
establishment of EMC in connection with the IPO (the financial results of
which are not consolidated with the Company's financial statements), which has
borne all property and asset management costs since June 13, 1994. General and
administrative expenses increased by $764,000 due primarily to reduced
allocations of the Company's expenses to EMC of approximately $500,000 and the
accrual of incentive compensation related to achieving certain performance
benchmarks. Other expenses represent an allocation to the Company of costs
incurred prior to the completion of the IPO by The Marcus & Millichap Company
for executive management, incentive compensation, audit and tax services and
other matters; such expenses have not been borne by the Company since the
completion of the IPO.
Net income after minority interest increased by $7,186,000 to $10,604,000 in
1995 from $3,418,000 in 1994. The increase in net income after minority
interest was primarily due to $6,013,000 gains from the sale of two Properties
and operations from Properties acquired concurrent with and after the IPO in
1994 and 1995.
Comparison of Year Ended December 31, 1994 to Year Ended December 31, 1993
Total Revenues increased by $4,795,000 or 15.8% to $35,224,000 in 1994 from
$30,429,000 in 1993. Rental revenue increased by $5,732,000 or 21.6% to
$32,241,000 in 1994 from $26,509,000 in 1993. Approximately $5,003,000 of the
increase in rental revenue was attributable to the Properties acquired in
1994. Rental revenue from the San Francisco Bay Area and Seattle Metropolitan
Area multi-family residential Properties increased by $398,000 to $18,681,000
in 1994 from $18,283,000 in 1993. Rental revenue decreased by $130,000 during
1994 for the two Properties located in Southern California. Commercial
property rental revenue increased $461,000 generally as a result of increased
leasing activity. Property and asset management revenues decreased by
$1,483,000 or 45.2% to $1,794,000 in 1994 from $3,277,000 in 1993 due to the
transfer of such activities to EMC upon completion of the IPO. Since the
completion of the IPO, property and asset management services are being
provided by EMC, whose results are not consolidated with the results of the
Company. EMC receives an allocation of the Company's expenses, based on the
time and overhead related to those activities.
Total Expenses increased by $453,000 or approximately 1.5% to $30,495,000 in
1994 from $30,042,000 in 1993. Interest expense decreased by $1,647,000 or
14.1% to $10,228,000 in 1994 from $11,902,000 in 1993. Such interest expense
decrease was primarily due to the net reduction of outstanding mortgage debt
that was paid with the proceeds of the IPO and the two mortgage loans closed
in connection with the IPO. In addition, The Company obtained six mortgage
loans after the IPO related to acquisitions activity. Property operating
expenses increased by $1,371,000 or 14.7% to $10,719,000 in 1994 from
$9,348,000 in 1993. The component of
S-27
<PAGE>
the increase related to properties acquired at or following the completion of
the IPO was $1,700,000 which are partially offset by a reduction in management
costs of $545,000. Property and asset management expenses decreased by
$422,000 in 1994 or 30.2% to $974,000 in 1994 from $1,396,000 in 1993. Such
decreases were primarily a result of the establishment of EMC in connection
with the IPO (the financial results of which are not consolidated with the
Company's financial statements), which has borne all property and asset
management costs since June 13, 1994. General and administrative expenses
increased by $75,000 in 1994 compared to 1993.
Net income after minority interest increased by $3,451,000 to $3,418,000 in
1994 from $(33,000) in 1993. The increase in net income was largely the result
of increases in rental revenue and decreased interest costs.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1996, the Company had $6,238,000 in cash and cash
equivalents. The Company expects to meet its short-term liquidity requirements
by using this working capital, the proceeds from future sales of Convertible
Preferred Stock, amounts available on lines of credit, and any portion of net
cash flow from operations not currently distributed. The Company believes that
its future net cash flows will be adequate to meet operating requirements and
to provide for payment of dividends by the Company in accordance with REIT
requirements. The Company currently has credit facilities in the aggregate
committed amount of approximately $25,700,000. The Company is currently
finalizing documents to increase its lines of credit to $38,800,000. At
September 30, 1996, the Company had $7,500,000 outstanding on its lines of
credit, with interest rates during the year ranging from 7.2% to 7.5%. In
addition, the Company is negotiating a $100,000,000 credit facility with the
Federal National Mortgage Association ("FNMA") which would provide (i) a five-
year revolving credit facility of approximately $40,000,000, and (ii) a
permanent term loan base facility for approximately $60,000,000. When and if
completed, it is anticipated that the facility would reduce the Company's
borrowing cost.
The Company's cash balance increased $2,255,000 from $3,983,000 as of
December 31,1995 to $6,238,000 as of September 30, 1996. This increase in cash
was a result of $16,844,000 net cash provided by operating activities, and
$44,299,000 in net cash provided by financing activities, which was decreased
by $58,888,000 net cash used in investing activities. The $58,888,000 net cash
used in investing activities is a result of $72,640,000 used to purchase and
upgrade rental properties as offset in part by $13,327,000 provided by the
disposition of real estate. The significant components which contributed to
the $44,299,000 net cash provided by financing activities was a result of
$54,005,000 net proceeds from the Subsequent Offering, $18,025,000 net
proceeds from the sale of Convertible Preferred Stock, $64,383,000 of proceeds
from mortgages, other notes payable and line of credit as offset by
$82,231,000 of repayments of mortgages, other notes payable and lines of
credit and $10,365,000 of dividends/distributions paid. As of September 30,
1996, the Company's combined outstanding indebtedness under mortgages and
lines of credit consisted of $93,295,000 in fixed rate debt, (such component
includes variable rate indebtedness subject to interest rate swap agreements),
$12,480,000 in debt bears interest based on the Federal Home Loan Bank's 11th
District Cost of Funds index (the "11th District Debt"), $23,400,000 of debt
represented by tax exempt variable rate demand bonds, of which $9,800,000 is
capped at a maximum interest rate of 7.0%, and $7,500,000 of debt bears
interest based on the London Interbank Offered Rates. The Company's 11th
District Debt is subject to maximum annual payment adjustments of 7.5% and a
maximum interest rate during the term of the loans of 13%.
The Company expects to incur approximately $1,450,000 or $300 per weighted
average occupancy unit in non-revenue generating capital expenditures for the
year ended December 31, 1996. These expenditures do not include the cost of
improvements required in connection with Northwestern Mutual mortgage loans
and pursuant to tax-exempt bond financings, which costs are currently
estimated to aggregate approximately $3.1 million. The Company expects that
cash from operations and/or the lines of credit will fund such expenditures.
The Company pays quarterly dividends from cash available for distribution.
Until it is distributed, cash available for distribution is invested by the
Company primarily in short-term investment grade securities or is used by the
Company to reduce balances outstanding under its lines of credit.
S-28
<PAGE>
Tiger/Westbrook is required to purchase up to an additional $20,000,000 of
Convertible Preferred Stock on or prior to June 20, 1997.
On March 7, 1996, the Company filed a shelf registration statement (the
"Prior Registration Statement") for up to $100,000,000 of Common Stock,
preferred stock, depository shares and warrants to purchase common and
preferred stock which was declared effective by the Securities and Exchange
Commission on June 6, 1996. In late July 1996, the Company commenced a public
offering of the Common Stock. On August 20, 1996 the Company completed the
issuance of 2,530,000 shares of its Common Stock at a price of $22.75 per
share. On November 14, 1996, the Company filed a new shelf registration
statement for up to $102,442,500 (including $42,442,500 remaining capacity
under the Prior Registration Statement) of Common Stock, preferred stock,
depository shares and warrants to purchase common and preferred stock. The new
shelf registration statement was declared effective by the Securities Exchange
Commission on November 19, 1996.
The Company will utilize the proceeds of public offerings of shares of
Common Stock, sales of Convertible Preferred Stock to Tiger/Westbrook,
availability under its lines of credit, and cash balances to fund its and
future property acquisition and development activities. The Company expects to
meet certain long-term liquidity requirements such as scheduled debt
maturities and repayment of short-term financing of acquisition and
development activities through the issuance of long-term secured and unsecured
debt and offerings by the Company of additional equity securities (or limited
partnership interests in the Operating Partnership).
S-29
<PAGE>
BUSINESS AND GROWTH STRATEGIES
BUSINESS OBJECTIVES
The Company's primary business objective is to maximize Funds from
Operations through continued active leasing, property management and active
portfolio management. The Company's strategies include:
. Active Property Marketing and Management. Maximize, on a per share basis,
Funds from Operations and the capital appreciation of its property
portfolio through active property marketing and management.
. Selected Expansion of Property Portfolio. Increase, on a per share basis,
Funds from Operations through the acquisition and development of multi-
family residential properties in selected major metropolitan areas
located throughout the west coast of the United States.
. Optimal Portfolio Asset Allocations. Produce predictable financial
performance through a portfolio asset allocation program that seeks to
increase or decrease the equity invested in each market based on changes
in regional economic and local market conditions.
. Management of Capital and Financial Risk. Optimize the Company's capital
and financial risk positions by maintaining a conservative leverage
ratio, evaluating financing alternatives on an on-going basis and
minimizing the Company's cost of capital.
BUSINESS PRINCIPLES
The Company was founded on, has followed, and intends to continue to follow
the business principles set forth below:
Property Management. Through its long-standing philosophy of active property
management and a customer satisfaction approach, coupled with a discipline of
internal cost control, the Company seeks to retain tenants, maximize cash
flow, enhance property values and compete effectively for new tenants in the
marketplace. The Company's regional property managers are accountable for
overall property operations and performance. They supervise on-site managers,
monitor fiscal performance against budgeted expectations, monitor Property
performance against the performance of competing properties in the area,
prepare operating and capital budgets for executive approval, and implement
new strategies focused on enhancing tenant satisfaction, increasing revenue,
controlling expenses, and creating a more efficient operating environment. The
Company has established in-house training programs for its on-site staff.
Business Planning and Control. Real estate investment decisions are
accompanied by a multiple year plan, to which an executive and other managers
responsible for obtaining future financial performance must agree in writing.
Performance versus plan serves as a significant factor in determining
compensation.
Property Type Focus. The Company focuses on acquisition of multi-family
residential communities, containing between 75 and 400 units. The Company
believes that these types of properties offer attractive opportunities because
such properties (i) are often mispriced by real estate sellers and buyers who
lack the Company's ability to obtain and use real-time market information,
(ii) provide opportunities for value enhancement since many of these
properties have been owned by parties that either are inadequately capitalized
or lack the professional property management expertise of the Company, and
(iii) can be readily exchanged or sold during periods of changing market
conditions due to the relatively large pool of prospective and qualified
buyers for such properties.
Geographic Focus. The Company focuses its property investments in markets
that meet the following criteria:
. Major Metropolitan Areas. The Company focuses on metropolitan areas
having a regional population in excess of one million people. Real estate
markets in these areas are typically characterized by a relatively
greater number of buyers and sellers and are, therefore, more liquid.
Liquidity is an important
S-30
<PAGE>
element for implementing the Company's strategy of varying its portfolio
in response to changing market conditions.
. Supply Constraints. The Company believes that properties located in real
estate markets with limited development or redevelopment opportunities
are well-suited to produce increased rental income. In evaluating supply
constraints, the Company reviews: (i) availability of developable land
sites on which competing properties could be readily constructed; (ii)
political barriers to growth resulting from a restrictive local political
environment regarding development and redevelopment (such an environment,
in addition to the restrictions on development itself, is often
associated with a lengthy development process and expensive development
fees); and (iii) physical barriers to growth, resulting from natural
limitations to development, such as mountains or waterways.
. Rental Demand Created by High Cost of Housing. The Company concentrates
on markets in which the cost of renting is significantly lower than the
cost of owning a home. In such markets, rent levels are higher and
operating expenses, as a percentage of rent, are lower in comparison with
markets that have a lower cost of housing.
. Job Proximity. The Company believes that most renters select housing
based on its proximity to their jobs and on related commuting factors and
desire to remain within a specified travel distance from their jobs. The
Company also reviews the location of major employers relative to its
portfolio and potential acquisition properties.
Following the above criteria, the Company is currently pursuing investment
opportunities in selected markets of Northern and Southern California, the
Seattle Metropolitan Area and the Portland Metropolitan Area.
Active Portfolio Management Through Regional Economic Research and Local
Market Knowledge. The Company was founded on the belief that the key elements
of successful real estate investment and portfolio growth include extensive
regional economic research and local market knowledge. The Company utilizes
its economic research and local market knowledge to make appropriate portfolio
allocation decisions that it believes result in better overall operating
performance and lower portfolio risk. The Company maintains and evaluates:
. Regional Economic Data. The Company evaluates and reviews regional
economic factors for the markets in which it owns properties and where it
considers expanding its operations. The Company's research focuses on
regional and sub-market supply and demand, economic diversity, job
growth, market depth and the comparison of rental price to single-family
housing prices.
. Local Market Conditions. Local market knowledge includes (i) local
factors that influence whether a sub-market is desirable to tenants; (ii)
the extent to which the area surrounding a property is improving or
deteriorating; and (iii) local investment market dynamics, including the
relationship between the value of a property and its yield, the prospects
for capital appreciation and market depth.
Recognizing that all real estate markets are cyclical, the Company regularly
evaluates the results of regional economic and local market research and
adjusts asset acquisitions and portfolio allocations accordingly. The Company
actively manages the allocation of assets within its portfolio. The Company
seeks to increase its portfolio allocation in markets projected to have
economic growth and to decrease such allocations in markets projected to have
declining economic conditions. Likewise, the Company also seeks to increase
its portfolio allocation in markets that have attractive property valuations
and to decrease such allocations in markets that have inflated valuations and
low relative yields. Although the Company is generally a long-term investor,
it does not establish defined or preferred holding periods for its properties.
TAX-EXEMPT FINANCING
The Company seeks to increase its Funds from Operations per share and long-
term total returns to stockholders through the strategic use of tax-exempt
financing. Tax-exempt financing involves the issuance of low-interest bonds by
various local government agencies or municipalities for the development,
redevelopment
S-31
<PAGE>
or renovation of properties within the auspices of such agencies or
municipalities. The interest on such indebtedness is excludable from the gross
income of the recipient for federal income tax purposes. In the context of
multi-family properties, in order for the financing to qualify as tax-exempt,
the properties must comply with various federal requirements as to their use,
including an allocation of a portion of the apartment units (typically 20%)
for low-income renters. Low interest, tax-exempt financing enables the Company
to lower its cost of capital and to secure favorable, long-term financing for
its acquisitions which involve a value-added redevelopment component. The
Company strives to identify investments which will allow the Company to take
advantage of this low-cost financing source without the significant rental
loss that ordinarily is attributable to compliance with these low-income
rental requirements.
Currently, the Company has outstanding approximately $60.5 million of tax-
exempt indebtedness on five multi-family residential properties: Camarillo
Oaks, Treetops and Meadowood in California, and Inglenook Court and Wandering
Creek in Washington. Four of these Properties were purchased and then
partially refinanced through the issuance of tax-exempt bonds issued by the
City of Camarillo, California, with respect to Camarillo Oaks, the City of
Fremont, California, with respect to Treetops, and the Washington State
Housing Finance Commission, with respect to Inglenook Court and Wandering
Creek. The bonds bear interest at variable rates, which, including credit
enhancement costs, currently averages approximately 5.5% per annum. The bonds
relating to Treetops and Camarillo Oaks, in the aggregate amount of $29.2
million, are subject to seven year interest rate projection agreements
limiting the interest rate with respect to such bonds to a maximum interest
rate of 7.2%. Proceeds from the issuance of the bonds were used to renovate
and upgrade the interiors and exteriors of the units at these Properties and
to refinance certain debt. In connection with the purchase of Meadowood, the
Company assumed $17.7 million of 6.455% fixed rate tax exempt bonds issued by
the City of Simi Valley, California. These bonds will be repriced in February
2008 at the then-current tax-exempt bond rate. The Company will continue to
seek such financing when economically advantageous to the Company. However, as
a result of amendments to the Code, properties financed with tax-exempt
indebtedness in the future will be required to satisfy more stringent rental
restrictions. Therefore, there can be no assurance that the rental revenue
from properties which are financed through the issuance of tax-exempt
indebtedness in the future will not be adversely affected by such amended
restrictions. See "Risk Factors--Bond Compliance Requirements" in the
accompanying Prospectus.
VALUE-ADDED REDEVELOPMENT
The Company generally focuses its multi-family property acquisition
activities on mature, in-fill neighborhoods within its Target Markets which
are in close proximity to major employment centers, shopping and entertainment
areas, schools and well-developed transportation networks. Many of these
locations are often comprised of older housing stock. Despite this, these
neighborhoods, due to their superior locations and full buildout, are
typically characterized by a more stable base of renters, stronger, more
consistent rental growth and significant constraints on additions to the
supply of competing multi-family properties. The Company believes that the
combination of these factors creates an opportunity to acquire and redevelop
older, well-located multi-family properties with a goal of increasing both the
occupancy and rental rates. The Company generally targets a minimum
Unleveraged Return of approximately 10% on these acquisition/redevelopment
opportunities. In many situations, the Company may be able to combine this
redevelopment strategy with tax-exempt financing providing additional
enhancement to overall returns. The following is an example of the Company's
acquisition/redevelopment strategy:
. Camarillo Oaks Apartments: The Company expects to invest $2.0 million to
renovate and upgrade the Camarillo Oaks Property, including repainting of
all buildings, roofing repair and improvements, landscaping upgrades and
substantial improvement of existing recreational facilities. The
renovation may also include the conversion of existing carports to
enclosed garages, and the installation of air conditioners and
washer/dryers. In October 1996, the Company obtained tax-exempt financing
in the amount of $19.42 million in variable rate tax exempt bonds issued
by the City of Camarillo. The Camarillo bonds carry a "AAA" rating and
are enhanced by FNMA. The bonds have a seven year interest rate cap of 7%
and mature in October 2026.
S-32
<PAGE>
The Company will also selectively reposition multi-family Properties within
its existing portfolio, upgrading the profile of the property with a goal of
increasing occupancy and rental rates or attracting a more favorable renter
base. In these repositioning opportunities, the Company generally targets a
minimum Unleveraged Return of approximately 13% on its incremental investment.
The following is a description of several repositioning projects that the
Company is currently pursuing:
. The Apple Apartments. The Company is considering investing approximately
$3.2 million in a major renovation program that will encompass unit
upgrades such as new kitchens and bathrooms and common area improvements
such as improved landscaping and an upgraded leasing office.
. Treetops Apartments. The Company intends to invest approximately $925,000
to complete a substantial interior and exterior renovation of the
Property including new carpets, paint and new appliances as well as
improved landscaping and new recreational facilities. This repositioning
will be funded through $9.8 million in tax-exempt variable rate demand
bonds which the City of Fremont, California, has issued in connection
with the financing of this Property.
THE PROPERTIES
PORTFOLIO OVERVIEW
The Company's multi-family residential portfolio currently consists of 27
Properties comprising 6,196 apartment units. Twelve of these Properties are
located in the San Francisco Bay Area, nine are located in the Seattle
Metropolitan Area, four are located in Southern California, and two are
located in the Portland Metropolitan Area. The Company's multi-family
residential Properties had an average occupancy rate (based on Financial
Occupancy) for the quarter ended September 30, 1996 of approximately 97.2%
(excluding Meadowood, which was acquired after the quarter ended September 30,
1996, and Jackson School Village, which is currently in lease-up). For the
quarter ended September 30, 1996, the Commercial Properties had an average
occupancy rate (based on leased and occupied square footage) of approximately
95%. The Company's multi-family residential Properties accounted for
approximately 91% of the Company's rental revenues for the quarter ended
September 30, 1996 (excluding Meadowood and Jackson School Village) and its
Commercial Properties accounted for approximately 9% of its rental revenues
for this same period.
MULTI-FAMILY RESIDENTIAL PROPERTIES
The majority of the Company's multi-family residential Properties are
suburban garden apartments and townhomes comprising multiple clusters of two
and three-story buildings situated on three to 15 acres of land. The
Properties average 229 units, with a mix of studio, one, two and some three-
bedroom units. Most of the Company's multi-family residential Properties are
designed for and marketed to young working people in white-collar or technical
professions. The Company selects, trains and supervises a full team of on-site
service and maintenance personnel. The Company believes that its customer-
service approach enhances its ability to retain tenants and that its multi-
family residential Properties were well-built and have been well-maintained.
The capital expenditures at the multi-family residential Properties are a
relatively small percentage of gross revenue from such Properties, as compared
with other multi-family residential properties in other parts of the country
with lower rents, because of the relatively higher rents at the Properties.
S-33
<PAGE>
The following table describes the Company's multi-family residential
Properties.
<TABLE>
<CAPTION>
SEPT. 1996
RENTAL
RATES(1)
-------------
TOTAL
NUMBER RENTABLE PER 1 BR/1 2 BR/1 2 BR/2 3 BR/2
PROPERTY OF SQUARE YEAR YEAR PER SQ. STUDIO BATH BATH BATH BATH
NAME/LOCATION(2) UNITS FOOTAGE COMPLETED ACQUIRED OCCUPANCY(3) UNIT FT.(4) (UNITS) (UNITS) (UNITS) (UNITS) (UNITS)
---------------- ------ --------- --------- -------- ------------ ----- ------ ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
The Apple........ 200 146,296 1971 1982 98% $ 788 $1.08 -- 128 -- 72 --
Fremont, CA
Bristol Commons
(5)............. 188 142,668 1989 1995 99 1,085 1.43 -- 92 36 60 --
Sunnyvale, CA
Camarillo Oaks... 371 303,840 1985 1996 93 719 0.88 -- 224 7 120 20
Camarillo, CA
Countrywood...... 137 93,495 1970 1988 100 720 1.06 1 106 30 -- --
Fremont, CA
Eastridge........ 188 174,104 1988 1996 99 1,055 1.14 -- 64 60 64 --
San Ramon, CA
Marina Cove (6).. 292 250,294 1974 1994 99 958 1.12 -- 145 24 123 --
Santa Clara, CA
Meadowood........ 320 264,568 1986 1996 (7) (7) (7) -- 64 88 128 40
Simi Valley, CA
Oak Pointe....... 390 294,180 1973 1988 98 887 1.18 54 168 54 114 --
Sunnyvale, CA
Pathways (8)..... 296 197,720 1975 1991 95 805 1.21 88 164 -- 44 --
Long Beach, CA
Plumtree......... 140 113,260 1975 1994 98 941 1.16 -- 56 84 -- --
Santa Clara, CA
The Shores (5)... 348 275,888 1988 1995 98 911 1.15 32 152 -- 164
San Ramon, CA
Summerhill
Commons......... 184 139,012 1987 1987 98 828 1.10 -- 60 56 68 --
Newark, CA
Summerhill Park.. 100 78,584 1988 1988 99 1,096 1.39 -- 40 12 48 --
Sunnyvale, CA
Treetops......... 172 131,270 1978 1996 99 813 1.07 -- 116 56 --
Fremont, CA
Villa Rio Vista.. 286 242,410 1968 1985 97 604 0.71 -- 174 -- 112 --
Anaheim, CA
Windsor Ridge.... 216 161,892 1989 1989 99 988 1.32 -- 126 54 36 --
Sunnyvale, CA
Emerald Ridge.... 180 144,036 1989 1994 98 744 0.93 -- 72 36 72 --
Bellevue, WA
Foothill
Commons......... 360 288,317 1978 1990 96 609 0.76 -- 259 -- 91 10
Bellevue, WA
Inglenook Court.. 224 183,624 1985 1994 97 629 0.77 -- 56 112 56 --
Bothell, WA
Palisades........ 192 159,792 1969 1990 98 613 0.74 -- 114 38 40 --
Bellevue, WA
Sammamish View... 153 133,590 1986 1994 99 813 0.93 -- 51 30 72 --
Bellevue, WA
Santa Fe Ridge... 240 262,340 1993 1994 91 696 0.64 -- 24 12 100 104
Silverdale, WA
Wandering Creek.. 156 124,366 1986 1995 94 618 0.77 -- 72 -- 74 10
Kent, WA
Wharfside
Pointe.......... 142 119,290 1990 1994 93 813 0.97 5 92 5 35 5
Seattle, WA
Woodland
Commons......... 236 172,316 1978 1990 95 613 0.84 48 80 60 32 16
Bellevue, WA
Jackson School
Village (9)..... 200 196,896 1996 1996 (10) (10) (10) -- 32 -- 104 64
Hillsboro, OR
Landmark......... 285 282,934 1990 1996 87 741 0.75 -- 78 34 142 31
Hillsboro, OR
----- --------- --- ----- ----- --- ----- --- ----- ---
Total/Weighted
Average........ 6,196 5,076,982 97% $ 792 $0.99 228 2,809 888 1,971 300
===== ========= === ===== ===== === ===== === ===== ===
</TABLE>
- -------
(1) Represents average monthly rental rates.
(2) Unless otherwise specified, the Company has a 100% ownership interest in
each respective Property.
(3) Occupancy rates are based on Financial Occupancy for the quarter ended
September 30, 1996.
(4) Based upon scheduled rent divided by total square footage.
(5) The Company has an approximate 45% economic ownership interest in this
Property.
(6) A portion of this Property in which 84 units are presently located is
subject to a ground lease, which, unless extended, will expire in 2028.
(7) Purchased after the quarter ended September 30, 1996.
(8) The Company has a 69% ownership interest in this Property.
(9) The Company has a 49.9% ownership interest in this Property.
(10) The Property is substantially complete, was 25% occupied as of December 4,
1996, but has not yet achieved a stabilized rent level.
S-34
<PAGE>
AMENITIES OF MULTI-FAMILY RESIDENTIAL PROPERTIES
The multi-family residential Properties have a wide variety of amenities,
including swimming pools, clubhouses, covered parking, and cable television.
Many Properties offer additional amenities, such as fitness centers,
volleyball and playground areas, tennis courts and wood-burning fireplaces.
The following table shows the wide range of amenities offered by the Company's
multi-family residential Properties.
<TABLE>
<CAPTION>
CLUB PATIO,
HOUSE SPORTS/ BARBECUE PORCH, WOOD
SWIMMING SPA/ FITNESS ACTIVITY TENNIS COVERED PICNIC LAUNDRY CABLE BALCONY, EXTRA BURNING
PROPERTY NAME POOL JACUZZI CENTER ROOM COURTS PARKING AREA FACILITIES TV SUNROOM STORAGE FIREPLACE
------------- -------- ------- ------- -------- ------- ------- -------- ---------- ----- -------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
The Apple....... Yes Yes -- Yes Yes Yes Yes Yes Yes Yes Yes --
Bristol
Commons........ Yes Yes Yes Yes -- Yes -- Yes Yes Yes Yes --
Camarillo Oaks.. Yes Yes -- Yes -- Yes Yes Yes Yes Yes Yes Yes
Countrywood..... Yes Yes -- Yes -- Yes Yes Yes Yes Yes Yes --
Eastridge....... Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes
Marina Cove..... Yes Yes Yes Yes -- Yes Yes Yes Yes Yes Yes --
Meadowood....... Yes Yes Yes Yes -- Yes Yes Yes Yes Yes -- --
Oak Pointe...... Yes Yes Yes Yes -- Yes Yes Yes Yes Yes -- --
Pathways........ Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes -- --
Plumtree........ Yes Yes Yes Yes -- Yes Yes Yes Yes Yes Yes --
The Shores...... Yes Yes Yes Yes Yes Yes -- Yes Yes Yes Yes --
Summerhill
Commons........ Yes Yes -- Yes Yes Yes Yes Yes Yes Yes Yes --
Summerhill
Park........... Yes Yes -- Yes -- Yes Yes Yes Yes Yes Yes Yes
Treetops........ Yes Yes Yes Yes -- Yes -- Yes Yes Yes Yes --
Villa Rio
Vista.......... Yes Yes Yes Yes -- Yes Yes Yes Yes Yes Yes --
Windsor Ridge... Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes
Emerald Ridge... Yes Yes Yes Yes -- Yes Yes Yes Yes Yes Yes Yes
Foothill
Commons........ Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes -- Yes
Inglenook
Court.......... Yes Yes -- Yes Yes Yes Yes Yes Yes Yes Yes Yes
Palisades....... Yes Yes Yes Yes Yes -- Yes Yes Yes Yes -- --
Sammamish View.. Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes
Santa Fe Ridge.. Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes
Wandering
Creek.......... Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes
Wharfside
Pointe......... Yes Yes Yes Yes -- Yes Yes Yes Yes Yes -- Yes
Woodland
Commons........ Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes -- Yes
Jackson School
Village........ Yes Yes Yes Yes Yes Yes -- Yes Yes Yes Yes Yes
Landmark........ Yes Yes Yes Yes Yes Yes -- Yes Yes Yes Yes Yes
<CAPTION>
ALL
CORPORATE ELECTRIC
PROPERTY NAME APARTMENTS KITCHENS
------------- ---------- --------
<S> <C> <C>
The Apple....... Yes Yes
Bristol
Commons........ -- Yes
Camarillo Oaks.. Yes Yes
Countrywood..... -- Yes
Eastridge....... Yes Yes
Marina Cove..... -- --
Meadowood....... -- Yes
Oak Pointe...... Yes Yes
Pathways........ Yes Yes
Plumtree........ Yes Yes
The Shores...... Yes Yes
Summerhill
Commons........ Yes Yes
Summerhill
Park........... Yes Yes
Treetops........ -- Yes
Villa Rio
Vista.......... -- Yes
Windsor Ridge... Yes Yes
Emerald Ridge... Yes Yes
Foothill
Commons........ -- Yes
Inglenook
Court.......... -- Yes
Palisades....... -- Yes
Sammamish View.. -- --
Santa Fe Ridge.. Yes Yes
Wandering
Creek.......... -- Yes
Wharfside
Pointe......... Yes Yes
Woodland
Commons........ Yes Yes
Jackson School
Village........ Yes Yes
Landmark........ Yes Yes
</TABLE>
S-35
<PAGE>
COMMERCIAL PROPERTIES
The Company presently owns six neighborhood shopping centers, five of which
are in the Portland Metropolitan Area and one of which is located in Eugene,
Oregon. These neighborhood shopping centers contain an aggregate of
approximately 351,000 rentable square feet of space and, as of September 30,
1996, had an occupancy rate (based on leased and occupied square footage) of
approximately 95%. These Properties are located in high-traffic, in-fill
submarkets in Portland and Eugene. The tenants include a mix of national,
regional and local retailers. The Company acquired the neighborhood shopping
centers as a portfolio in 1990 and since that time has implemented an
expansion, renovation and re-leasing program at an aggregate investment of
approximately $4.1 million, which has resulted in increases in the net
operating income averaging approximately 14% per year from 1991, the first
full year of ownership, through December 31, 1995.
The Company also owns a prepaid ground leasehold interest in the office
building that houses its corporate headquarters. The Company acquired this
Property in 1986 and redeveloped it in 1988. The headquarters building has
approximately 45,000 rentable square feet of space and is a multi-tenant, one-
story office building, located in the Stanford Research Park in Palo Alto,
California. The Company occupies approximately 6,000 square feet of the
headquarters building, The Marcus & Millichap Company occupies approximately
16,000 square feet and the remaining three tenants occupy approximately 23,000
square feet.
The land on which the headquarters building is located is owned by Stanford
University, and the Company owns a ground leasehold interest in the building
and underlying land. The ground lease for the headquarters building is prepaid
until its expiration in 2054, and unless the lease is extended, the land,
together with all improvements thereon, will revert to Stanford University in
2054.
COMMERCIAL PROPERTIES
<TABLE>
<CAPTION>
SEPTEMBER
1996
TOTAL RENTAL
RENTABLE OCCUPANCY RATES
NUMBER OF SQUARE YEAR YEAR AS OF PER
PROPERTY NAME(1) LOCATION TENANTS(2) FOOTAGE COMPLETED ACQUIRED 9/30/96(3) SQ. FT.(4)
---------------- ------------- --------- -------- --------- -------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
NEIGHBORHOOD SHOPPING
CENTERS
Canby Square Canby, OR 16 102,565 1976 1990 95% $0.44
Cedar Mill Place Portland, OR 7 28,392 1975 1990 61 0.68
Powell Villa Center Portland, OR 12 63,645 1959 1990 100 1.03
Riviera Plaza Eugene, OR 11 48,420 1961 1990 94 0.63
Wichita Towne Center Milwaukie, OR 6 38,324 1978 1990 100 0.48
Garrison Square Vancouver, WA 13 69,780 1962 1990 100 0.69
--- ------- --- -----
Subtotal/Weighted
Average 65 351,126 95% $0.65
OFFICE PROPERTY
Headquarters building(5) Palo Alto, CA 4 44,827 1988(6) 1986 100% $2.37
--- ------- --- -----
Total/Weighted Average 69 395,953 95% $0.84
=== ======= === =====
</TABLE>
- --------
(1) Unless otherwise specified, the Company has a 100% ownership interest in
each respective property.
(2) Tenant information is based on September 30, 1996.
(3) Based on leased and occupied square footage at September 30, 1996.
(4) Based on average monthly scheduled rent divided by occupied square
footage.
(5) The Company owns a prepaid ground leasehold interest in this Property
which, unless extended, expires in 2054.
(6) Represents the completion date for a major renovation.
S-36
<PAGE>
The following table shows scheduled lease expirations for all leases for the
Commercial Properties for each of the next 10 years beginning with 1996,
assuming that none of the tenants exercise renewal or termination rights.
LEASE EXPIRATIONS
COMMERCIAL PROPERTIES
<TABLE>
<CAPTION>
RENTABLE PERCENTAGE OF
SQUARE ANNUAL TOTAL
FOOTAGE BASE ANNUAL BASE
NUMBER SUBJECT RENT UNDER RENT
OF LEASES TO EXPIRING EXPIRING REPRESENTED BY
YEAR OF LEASE EXPIRATION (1) EXPIRING LEASES LEASES EXPIRING LEASES
---------------------------- --------- ----------- ---------- ---------------
<S> <C> <C> <C> <C>
1996(2)........................... 11 44,864 $ 264,280 7.1%
1997(3)........................... 16 67,477 630,814 17.0
1998.............................. 12 32,056 312,717 8.4
1999.............................. 8 40,724 689,366 18.5
2000.............................. 9 55,967 517,890 13.9
2001.............................. 2 9,275 64,086 1.7
2002.............................. 5 45,543 624,041 16.8
2003 and thereafter............... 6 74,957 616,658 16.6
-------
Subtotal........................ 370,863
Vacant Square Footage........... 19,090
Occupied by the Company......... 6,000
--- ------- ---------- -----
Total......................... 69(2) 395,953 $3,719,852 100.0%
=== ======= ========== =====
</TABLE>
- --------
(1) Based on leases in place as of September 30, 1996.
(2) Represents lease expirations for the period October 1, 1996 through
December 31, 1996. With respect to such expiring leases, annual base rent
amounts reflect rental amounts paid prior to lease expiration. Includes
seven month-to-month tenancies.
(3) Includes two leases with the same tenant, both of which leases will expire
in 1997.
MANAGEMENT COMPANY
In order to maintain compliance with REIT tax rules, the Company provides
fee-based asset management and disposition services as well as third-party
property management and leasing services through EMC, of which it owns 100% of
the 19,000 shares of nonvoting preferred stock.
Asset Management. As part of its strategy for growth, the Company may enter
into joint bidding arrangements with institutional investors to acquire
portfolios of properties and performing or non-performing mortgages. Through
such joint bids, the Company will acquire the properties and mortgages in the
portfolio that meet its investment criteria. The Company has provided and will
continue to provide (through EMC) asset management services, including
property management and asset disposition services, for such institutional
investors.
Property Management. Currently, the Company provides fee-based property
management services for seven multi-family residential properties, one office
building and one retail property (collectively, the "Managed Properties").
Such services include physical and financial management as well as marketing.
The office building is owned by The Marcus & Millichap Company. Three multi-
family properties and the retail property are owned by partnerships in which
George M. Marcus or an entity controlled by Mr. Marcus is a general partner,
which general partner has a small economic interest in the applicable
partnership. Four multi-family properties are owned by partnerships related to
Tiger/Westbrook. The Company expects to continue providing management services
for the Managed Properties. Such services are provided through EMC. EMC also
manages the Commercial Properties.
S-37
<PAGE>
TIGER/WESTBROOK TRANSACTION
On June 20, 1996, the Company entered into the Stock Purchase Agreement to
sell up to $40.0 million of the Company's Convertible Preferred Stock at
$25.00 per share to Tiger/Westbrook. Under the Stock Purchase Agreement,
Tiger/Westbrook has purchased 800,000 shares of Convertible Preferred Stock
for an aggregate purchase price of $20.0 million, as of the date of this
Prospectus Supplement. Tiger/Westbrook is required to purchase up to an
additional $20.0 million of shares of Convertible Preferred Stock, on or prior
to June 20, 1997. Sale of the Convertible Preferred Stock was approved by the
stockholders of the Company at a special meeting of the stockholders held on
September 27, 1996. Pursuant to the terms of the Stock Purchase Agreement,
among other things, Tiger/Westbrook has the preemptive right to purchase a pro
rata share of certain of the Company's securities (including, without
limitation, the shares of Common Stock offered hereby). Tiger/Westbrook has
waived its preemptive rights in connection with the Offering.
The Company has submitted to a stockholders' vote a proposed amendment to
the Charter that would replace certain provisions contained therein providing
for an increase in the number of directors on the Company's board elected by
the holders of Convertible Preferred Stock upon the breach of certain
protective provisions in the Charter, and provide instead that in the event of
such a breach, the board of directors would be reduced or expanded to nine
members, as the case may be, three of which would be elected by holders of
shares of Convertible Preferred Stock, and six of which would be elected by
the holders of shares of Common Stock. As of the date of this Prospectus
Supplement, the Company has not received sufficient votes from the
stockholders to approve this amendment.
DESCRIPTION OF CAPITAL STOCK OF THE COMPANY
For a general description of the Company's capital stock, see "Description
of Common Stock," and "Description of Preferred Stock--Convertible Preferred
Stock" in the accompanying Prospectus. The description of the Company's
capital stock in the accompanying Prospectus and of certain provisions of
Maryland law do not purport to be complete and are subject to and qualified in
their entirety by reference to the Company's Charter and Bylaws and Maryland
law, and, with respect to certain rights of holders of the shares of
Convertible Preferred Stock, the Stock Purchase Agreement and the Registration
Rights Agreement between the Company and Tiger/Westbrook dated July 1, 1996.
Copies of such documents have been filed with the Securities and Exchange
Commission.
S-38
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth as of the date of this Prospectus Supplement
the executive officers and directors of the Company and certain other
significant officers of the Company and their ages.
<TABLE>
<CAPTION>
NAME AGE POSITION AND OFFICES HELD
---- --- -------------------------
<S> <C> <C>
George M. Marcus......... 55 Chairman of the Board of Directors
William A. Millichap..... 53 Director
Keith R. Guericke........ 48 Director, Chief Executive Officer and President
Michael J. Schall........ 39 Director, Executive Vice President, Chief
Financial Officer and Secretary
David W. Brady........... 57 Director
Robert E. Larson......... 58 Director
Gary P. Martin........... 49 Director
Issie N. Rabinovitch..... 50 Director
Thomas E. Randlett....... 53 Director
Willard H. Smith, Jr..... 60 Director
Gregory J. Hartman....... 37 Director
Anthony Downs............ 66 Director
John D. Eudy............. 42 Senior Vice President--Acquisitions &
Development
Craig K. Zimmerman....... 45 Senior Vice President--Acquisitions
Gerald E. Kelly.......... 52 Vice President--Property Management
Jordan E. Ritter......... 40 Vice President and General Counsel
Mark J. Mikl............. 33 Controller and Principal Accounting Officer
</TABLE>
George M. Marcus, Chairman of the Board of Directors, is the founder of, and
has been the Chairman of, The Marcus & Millichap Company since 1971,
Summerhill Homes since 1977, and EPC since 1971. Mr. Marcus is also the
Chairman of M&M Projects, Inc. and Marcus & Millichap Real Estate Investment
Brokerage Company. Mr. Marcus was one of the original founders and directors
of Plaza Commerce Bank and Mid-Peninsula Bank, both publicly held financial
institutions. Mr. Marcus continues to serve on the board of Mid-Peninsula
Bank. Mr. Marcus is also a member of the Board of Directors of both the
National Multi-Housing Council and the Apartment Industry Foundation. He is a
member of the Policy Advisory Board of the University of California at
Berkeley's Center for Real Estate and Urban Economics, the Urban Land
Institute, the National Real Estate Index Advisory Committee, the Bay Area
Council and the California Housing Council. He graduated from San Francisco
State University with a Bachelor of Science degree in Economics in 1965; he
was honored as alumnus of the year in 1989. Mr. Marcus is also a graduate of
the Harvard University Executive Management Program and the Georgetown
University Leadership Program.
William A. Millichap, Director, has been President of The Marcus & Millichap
Company and Marcus & Millichap Real Estate Investment Brokerage Company since
1984. Mr. Millichap joined G.M. Marcus & Company in 1971 as one of its first
sales associates and became a regional manager in 1974. In 1976, he became a
principal, and the name of the company was subsequently changed to The Marcus
& Millichap Company. Mr. Millichap became Executive Vice President and
President of The Marcus & Millichap Company in 1978 and 1984, respectively. He
is also Chairman of Marcus & Millichap Corporate Real Estate Services. Mr.
Millichap is a licensed real estate broker, a member of the International
Council of Shopping Centers and serves on the Board of Directors of the
California Housing Council and the National Multi-Housing Council. Mr.
Millichap received a Bachelor of Science degree in Economics from the
University of Maryland in 1965. Prior to becoming affiliated with Mr. Marcus
in 1971, he served in the United States Navy.
Keith R. Guericke, Director, is the Company's President and Chief Executive
Officer and oversees the day-to-day operations and administration of the
Company. Mr. Guericke joined the Company's predecessor, EPC, in 1977. Since
that time, he has actively participated in the acquisition, development,
management and disposition
S-39
<PAGE>
of multi-family residential complexes and retail and office properties. Prior
to joining EPC, Mr. Guericke was with Kenneth Leventhal & Company in San
Francisco. He received his Bachelor of Science degree in Accounting from
Southern Oregon College in 1971. Mr. Guericke is a member of the National
Association of Real Estate Investment Trusts, the American Institute of
Certified Public Accountants, and the Urban Land Institute.
Michael J. Schall, Director, is the Executive Vice President and Chief
Financial Officer of the Company and is responsible for the overall management
and control of the Company's financial matters, including investor relations
and reporting. He joined The Marcus & Millichap Company in 1986. He was also
the Chief Financial Officer of the Company's predecessor, EPC, in which
capacity he was responsible for accounting for multiple investment entities,
arranging both permanent and construction financing and developing a wide
range of corporate borrowing relationships. From 1982 to 1986, Mr. Schall was
the Director of Finance for Churchill International, a technology-oriented
venture capital company. From 1979 to 1982, Mr. Schall was employed in the
audit department of Ernst & Whinney, where he specialized in the real estate
and financial services industries. In 1979, Mr. Schall received his Bachelor
of Science degree from the University of San Francisco. Mr. Schall is a
Certified Public Accountant and a member of the American Institute of
Certified Public Accountants.
David W. Brady, Director, has been a Professor of Political Science at the
Graduate School of Business at Stanford University, Palo Alto, California
since 1988. He was elected Bowen H. and Janice Arthur McCoy Professor of
Political Science, Business and Environment and a John M. Olin Faculty Fellow
at Stanford University during 1988 and 1989. From 1982 to 1987, Professor
Brady was Herbert S. Autry Professor at the Department of Political Science at
Rice University in Houston, Texas. Professor Brady served as Acting Dean of
the School of Social Sciences, Rice University from 1984 to 1985, Associate
Chair of the Department of Political Science, Stanford University from 1988 to
1990, and Area Coordinator, Political Economy, Graduate School of Business,
Stanford University in 1990. Professor Brady has written numerous books and
was awarded in 1989 the Richard F. Fenno Award for Best Book of Legislative
Studies. Professor Brady received his Bachelor of Science degree from Western
Illinois University in 1963, and Master's and Doctorate degrees from the
University of Iowa in 1967 and 1970, respectively.
Robert E. Larson, Director, has been a General Partner of the Woodside Fund,
a venture capital firm based in the Silicon Valley of Northern California,
since 1983. Professor Larson currently serves as a director of Accel Graphics,
Inc., Cerebrovascular Advances, Inc., Myelos Corporation, Orion Instruments,
Inc., OsteoBiologics, Inc. and Skye Investment Advisors. He is also Chairman
of the Board of Pharmalytics, Inc., Quantitative Technology Corporation, Open
Systems Control, Inc. and Beijing CAST Systems, Inc., a joint venture in the
People's Republic of China. Prior to 1983, Professor Larson was founder,
director and President of Systems Control, Inc. and was employed by IBM
Corporation, Hughes Aircraft Company and SRI International. He was a
Consulting Professor at Stanford University from 1973 to 1988 and President of
the International Institute of Electrical and Electronic Engineers in 1982.
Professor Larson received his Bachelor of Science Degree from M.I.T. in 1960,
and his Master's and Doctorate degrees from Stanford University in 1961 and
1964, respectively.
Gary P. Martin, Director, has served since August 1995 as Vice President of
Finance and Chief Financial Officer of 3Dfx Interactive, Inc. Prior to this
position, from September 1993 to July 1995, he served as Vice President of
Finance and the Chief Financial Officer for MiniStor Peripherals Corporation,
a supplier of data storage products for the mobile computer market. From 1985
to 1993, he was Senior Vice President of Finance and Administration for Chips
and Technologies, Inc., where he also developed joint business ventures within
the Soviet Union. From 1983 to 1984, Mr. Martin was Vice President of Finance
and Chief Financial Officer for Starstruck, Inc., a company involved in space
development through private enterprise. In addition, Mr. Martin was one of the
earliest employees at Apple Computer, Inc., where he held both corporate and
European controller positions during the period from 1977 to 1983. Prior to
working at Apple Computer, Inc., from 1971 to 1977, he worked for Aero Air
Freight and National Semiconductor. Mr. Martin currently serves on the Board
of Directors of the Emergency Housing Consortium. He received a Bachelor of
Science degree in Accounting from San Jose State University in 1971.
S-40
<PAGE>
Issie N. Rabinovitch, Director, is a partner at Cheyenne Capital, a venture
capital firm. Prior to joining Cheyenne Capital, Mr. Rabinovitch served from
1990 to 1994 as President and Chief Executive Officer of Micro Power Systems,
Inc., a company engaged in the designing, manufacturing and marketing of
multiple semiconductor products. From 1985 to 1990, Mr. Rabinovitch was
President of Berkeley International Capital Corporation, a venture capital
firm. From 1983 to 1985, Mr. Rabinovitch was President of Crowntek Software
International, a software development and distribution company. Before joining
Crowntek, he was employed by the Xerox Corporation in various management
roles. Mr. Rabinovitch presently serves on the Board of Directors of
Instashred Security Systems, Inc. He received a Bachelor of Science degree
from McGill University in 1967 and a Master's of Business Administration
degree from Harvard University in 1970.
Thomas E. Randlett, Director, is a certified public accountant and has been
a principal at the Law & Economics Consulting Group, Inc. since 1992. Prior to
becoming a principal, Mr. Randlett was employed as an affiliated expert. The
firm's professional specialties include the real estate and construction,
financial institutions and transportation industries. Prior to joining the Law
& Economics Consulting Group, Mr. Randlett was a partner and senior real
estate specialist for Peat Marwick Main & Co. in northern California, where he
had been employed since 1966, and then a consultant at the New York branch of
Midland Bank from 1989 to 1990. Mr. Randlett is a former member of the Policy
Advisory Board, School of Real Estate and Urban Economics, University of
California at Berkeley and a current member of the American Institute of
Certified Public Accountants. He received a Bachelor of Arts degree from
Princeton University in 1966.
Willard H. Smith, Jr., Director, was employed at Merrill Lynch & Co. from
1979 through 1995, and served as Managing Director since 1983 in their Equity
Capital Markets Division. From 1992 through 1995, Mr. Smith's primary focus
was the REIT industry. His duties as Managing Director at Merrill Lynch
included evaluating companies' capital structure and equity requirements,
placing offerings with Merrill Lynch's retail and institutional client base,
and assessing the market's demand for potential equity security offerings. Mr.
Smith is also a Board Member of the Cohen & Steers Realty Shares, Cohen &
Steers Realty Income Fund, and the Cohen & Steers Total Return Realty Fund. He
is also a Board member of Highwoods Properties, Inc. and Realty Income
Corporation, which are both REITs. Recently, Mr. Smith joined the board of
directors of Willis Lease Finance Corporation. Prior to joining Merrill Lynch,
Mr. Smith worked at F. Eberstadt & Co. from 1971 to 1979. A member of NAREIT,
Mr. Smith received his Bachelor of Science degree in Business Administration,
and Bachelor of Science degree in Industrial Engineering from the University
of North Dakota in 1959 and 1960, respectively.
Gregory J. Hartman, Director, is a principal of Tiger/Westbrook Real Estate
Fund, L.P. and Westbrook Partners, L.L.C., national real estate investment and
management entities. Prior to joining Tiger/Westbrook, Mr. Hartman was a co-
founder of Milestone Partners, Ltd. and spent seven years with Morgan Stanley
Realty. During Mr. Hartman's last two years at Morgan Stanley Realty, he was
in charge of that firm's Western U.S. Real Estate Sales and Financing
activities. Mr. Hartman is a member of the Urban Land Institute and the
University of California at Berkeley's Center for Real Estate and Urban
Economics. Mr. Hartman received his A.B. from Dartmouth College in 1980 and an
M.B.A. from the Stanford Graduate School of Business in 1984.
Anthony Downs, Director, is a Senior Fellow at the Brookings Institution in
Washington, D.C. Brookings is a private, non-profit research organization
specializing in public policy studies. Before that, he was for 18 years a
member and then Chairman of Real Estate Research Corporation, a nationwide
consulting firm advising private and public decision-makers on real estate
investment, housing policies and urban affairs. He has served as a consultant
to many of the nation's largest corporations, to major developers, to dozens
of government agencies at local, state and national levels (including the
Department of Housing and Urban Development and the White House), and to many
private foundations. From 1967, when President Johnson appointed him to the
National Commission on Urban Problems, to 1989, when HUD Secretary Jack Kemp
appointed him to HUD's Advisory Commission on Regulatory Barriers to
Affordable Housing, he has been an advisor to HUD Secretaries of both parties.
He is also a director or trustee of the MassMutual Life Insurance Company, the
Pittway Corporation, General Growth Properties, Bedford Property Investors,
the NAACP Legal and Educational Defense Fund, the Urban Land Institute, the
National Housing Partnership Foundation and the Urban Institute. Dr. Downs
received a Ph.D. in economics from Stanford University, and is the author or
co-author of 15 books and over 400 articles.
S-41
<PAGE>
His latest books from Brookings are Stuck in Traffic (1992) and New Visions
for Metropolitan America (1994). Dr. Downs is a frequent speaker on real
estate economics, housing, urban policies and other topics. He has made over
1,000 speeches to hundreds of organizations of all types.
John D. Eudy, Senior Vice President--Acquisitions and Development, joined
Essex's predecessor, EPC, in 1985. Mr. Eudy currently is in charge of all
potential development activities for the Company. He has been responsible for
EPC's co-managed development program, which provides equity capital to
established real estate developers with proven track records. Mr. Eudy also
has been responsible for due diligence, asset management and disposition
activities with respect to real estate portfolio acquisitions. From 1980 to
1985, Mr. Eudy served in the Commercial Real Estate Investment Group of
Crocker National Bank and from 1977 to 1980 in the Project Loan Department of
Home Federal Savings. He received his Bachelor of Science degree in Finance
from San Diego State University in 1977 and is a graduate of the University of
Southern California's Management Leadership School. Mr. Eudy is presently a
member of the Urban Land Institute, the International Counsel of Shopping
Centers and the National Association of Office Parks.
Craig K. Zimmerman, Senior Vice President--Acquisitions, is responsible for
negotiating and purchasing new acquisitions for Essex, as well as the initial
redevelopment and repositioning of such assets where appropriate. He joined
Essex's predecessor, EPC, in 1984 and was responsible for the acquisition of
various multi-family residential complexes, suburban office properties and
neighborhood shopping centers. Prior to joining EPC, Mr. Zimmerman was the
Vice President of Acquisitions with Prometheus Development Company, a national
real estate developer, and a principal in Zimmerman Properties. From 1975
through 1978, Mr. Zimmerman worked as a real estate acquisitions specialist
for American Equities Corporation. In 1974, he received a Bachelor of Arts
degree in Rhetoric from the University of California at Berkeley.
Gerald E. Kelly, Vice President--Property Management, is responsible for
directing overall property management and leasing operations for Essex's
portfolio of multi-family residential, retail and corporate headquarters
properties, which together encompass several thousand units and several
million square feet of space. He is also responsible for economic and market
research for Essex. Mr. Kelly also oversees the strategic planning and
budgeting, as well as the development and implementation, of major property
renovation and capital improvement plans. Prior to joining Essex's
predecessor, EPC, in 1984, he was Director of Property Management for the
Lucky Company and the Grupe Company, real estate investment companies
headquartered in Northern California, and Western Regional Property Manager
for Aetna Diversified Properties and Fox & Carskadon Management Corp. Mr.
Kelly received his Bachelor of Science degree in Business and Industrial
Management from San Jose State University and his Master of Business
Administration degree from the University of Santa Clara. Mr. Kelly has been
awarded the designation of Certified Property Manager from the Institute of
Real Estate Management.
Jordan E. Ritter, Vice President and General Counsel, is responsible for
various legal matters of Essex and manages Essex's relations with outside
counsel. Prior to joining Essex in 1993, Mr. Ritter was a partner at the San
Francisco law firm of Landels, Ripley & Diamond, where he specialized in real
estate and environmental law. Prior to joining Landels, Ripley & Diamond in
1987, he was associated with the law firm of Cravath, Swaine & Moore in New
York City. Mr. Ritter has been involved in numerous acquisitions and
dispositions of various types of real property, financings involving real
estate of various types and real estate tax syndications, and has extensive
experience with leasing, property management and environmental issues arising
in real estate transactions. Mr. Ritter received his Doctor of Jurisprudence
from St. John's University School of Law in 1983. Mr. Ritter is a member of
the California State Bar and is a member of the New York State Bar.
Mark J. Mikl, Controller and Principal Accounting Officer of the Company,
has been employed by the Company since 1994. Prior to joining the Company, he
was a manager with the public accounting firm of Shilling & Kenyon, Inc. from
1987 until 1994, where he focused primarily on consulting, accounting and
taxation issues for real estate clients. He received a Bachelor of Science
degree in Business Administration, concentration in Accounting, and a Bachelor
of Arts degree in Economics from San Jose State University, in 1985 and 1988,
respectively. He is a Certified Public Accountant. Between 1988 and 1990, Mr.
Mikl served as the neutral chairperson for the City of San Jose's Advisory
Commission on Rents.
S-42
<PAGE>
UNDERWRITING
Subject to the terms and conditions set forth in the Purchase Agreement (the
"Purchase Agreement") among the Company, the Operating Partnership and each of
the underwriters named below (the "Underwriters"), the Company has agreed to
sell to each of the Underwriters, and each of the Underwriters, for whom
Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch"),
Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ"), Raymond James &
Associates, Inc. and Sutro & Co. Incorporated are acting as representatives
(the "Representatives"), has severally agreed to purchase from the Company the
number of shares of Common Stock set forth opposite their respective names.
The Underwriters are committed to purchase all of such shares if any are
purchased. Under certain circumstances, the commitments of non-defaulting
Underwriters may be increased as set forth in the Purchase Agreement.
<TABLE>
<CAPTION>
NUMBER OF SHARES OF
UNDERWRITERS COMMON STOCK
------------ -------------------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated................................... 447,500
Donaldson, Lufkin & Jenrette Securities Corporation..... 447,500
Raymond James & Associates, Inc. ....................... 447,500
Sutro & Co. Incorporated................................ 447,500
Dean Witter Reynolds Inc. .............................. 60,000
A.G. Edwards & Sons, Inc. .............................. 60,000
PaineWebber Incorporated................................ 60,000
Prudential Securities Incorporated...................... 60,000
Robertson, Stephens & Company LLC....................... 60,000
Smith Barney Inc. ...................................... 60,000
Crowell, Weedon & Co. .................................. 30,000
Dain Bosworth Incorporated.............................. 30,000
EVEREN Securities, Inc. ................................ 30,000
Edward D. Jones & Co., L.P. ............................ 30,000
Piper Jaffrey Inc. ..................................... 30,000
Ragen MacKenzie Incorporated............................ 30,000
The Seidler Companies Incorporated...................... 30,000
Tucker Anthony Incorporated............................. 30,000
Van Kasper & Company.................................... 30,000
Wedbush Morgan Securities............................... 30,000
---------
Total.............................................. 2,450,000
=========
</TABLE>
The Representatives have advised the Company that the Underwriters propose
to offer the shares of Common Stock to the public initially at the public
offering price set forth on the cover page of this Prospectus Supplement and
to certain dealers at such price less a concession not in excess of $.85 per
share. The Underwriters may allow, and such dealers may reallow, a discount
not in excess of $.10 per share on sales to certain other dealers. After the
commencement of the Offering, the public offering price, concession and
discount may be changed.
The Company has granted the Underwriters an option exercisable by the
Representatives, to purchase up to 333,000 additional shares of Common Stock
at the public offering price, less the underwriting discounts. Such option,
which expires 30 days after the date of this Prospectus Supplement, may be
exercised solely to cover over-allotments. To the extent the Representatives
exercise such option, each of the Underwriters will be obligated, subject to
certain conditions, to purchase approximately the same percentage of the
option shares as the number of shares to be purchased initially by that
Underwriter bears to the total number of shares to be purchased initially by
the Underwriters.
S-43
<PAGE>
The Company and the Operating Partnership have agreed to indemnify the
Underwriters and others against certain liabilities, including liabilities
under the Securities Act or to contribute to payments the Underwriters may be
required to make in respect thereof.
The Company, the Operating Partnership, The Marcus & Millichap Company and
certain officers, directors and employees of the Company and the Operating
Partnership have agreed, subject to certain exceptions, not to sell or
otherwise dispose of any shares of Common Stock or securities convertible into
or exchangeable or exercisable for shares of Common Stock (except the shares
sold to the Underwriters pursuant to the Purchase Agreement and shares
issuable in connection with the Stock Incentive Plans and shares issuable in
connection with the Stock Purchase Plan) without the prior written consent of
Merrill Lynch, for a period of 90 days after the date of this Prospectus
Supplement.
Affiliates of The Equitable Companies Incorporated, the direct or indirect
holder of 80.2% of the Common Stock of Donaldson, Lufkin & Jenrette, Inc., the
parent of DLJ, may be deemed to own 480,600 shares of the Common Stock of the
Company, representing approximately 4.3% of the 11,256,800 shares of Common
Stock that will be issued and outstanding after giving effect to this Offering
(assuming no exercise of the over-allotment option).
Certain of the Underwriters and their respective affiliates engage in
transactions with, and from time to time, have performed services for the
Company in the ordinary course of business.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Morrison & Foerster LLP, Palo Alto, California.
Morrison & Foerster LLP will rely upon the opinion of Ballard Spahr Andrews &
Ingersoll, Baltimore, Maryland, as to certain matters of Maryland law. Certain
legal matters in connection with the Offering will be passed upon for the
Underwriters by Skadden, Arps, Slate, Meagher & Flom LLP, Los Angeles,
California. Skadden, Arps, Slate, Meagher & Flom LLP from time to time
provides legal services to the Company.
S-44
<PAGE>
PROSPECTUS
$102,442,500
ESSEX PROPERTY TRUST, INC.
COMMON STOCK, PREFERRED STOCK,
DEPOSITARY SHARES AND WARRANTS
Essex Property Trust, Inc. ("Essex" or the "Company") may from time to time
offer in one or more series or classes (i) shares of its common stock, par
value $0.0001 per share (the "Common Stock"), (ii) shares or fractional shares
of its preferred stock (the "Preferred Stock"), (iii) shares of Preferred
Stock represented by Depositary Shares (the "Depositary Shares"), and (iv)
warrants to purchase Preferred Stock or Common Stock (the "Warrants"), in
amounts, at prices and on terms to be determined at the time of offering, with
an aggregate public offering price of up to $102,442,500. The Common Stock,
Preferred Stock, Depositary Shares and Warrants (collectively, the "Offered
Securities") may be offered, separately or together, in separate series in
amounts, at prices and on terms to be set forth in one or more supplements to
this Prospectus (each a "Prospectus Supplement"). To ensure that the Company
maintains its qualification as a real estate investment trust ("REIT"), the
Charter of the Company (the "Charter") provides that no person, with certain
exceptions, may own more than 6.0% of the value of the outstanding shares of
the Company's stock.
The specific terms of the Offered Securities in respect to which this
Prospectus is being delivered will be set forth in the applicable Prospectus
Supplement and will include, where applicable (i) in the case of Common Stock,
the specific title and stated value and any initial public offering price;
(ii) in the case of Preferred Stock, the specific title and stated value, any
dividend, liquidation, redemption, conversion, voting and other rights, and
any initial public offering price; (iii) in the case of Depositary Shares, the
fractional share of Preferred Stock represented by each such Depositary Share;
and (iv) in the case of Warrants, the duration, offering price, exercise price
and detachability. In addition, such specific terms may include limitations on
direct or beneficial ownership and restrictions on transfer of the Offered
Securities, in each case as may be appropriate to preserve the status of the
Company as a REIT for federal income tax purposes.
The applicable Prospectus Supplement will also contain information, where
applicable, about certain United States federal income tax considerations
relating to, and any listing on a securities exchange of, the Offered
Securities covered by such Prospectus Supplement.
The Offered Securities may be offered directly, through agents designated
from time to time by the Company, or to or through underwriters or dealers. If
any agents or underwriters are involved in the sale of any of the Offered
Securities, their names, and any applicable purchase price, fee, commission or
discount arrangement between or among them, will be set forth, or will be
calculable from the information set forth, in the applicable Prospectus
Supplement. See "Plan of Distribution." No Offered Securities may be sold
without delivery of the applicable Prospectus Supplement describing the method
and terms of the offering of such series of Offered Securities.
FOR CERTAIN FACTORS RELEVANT TO AN INVESTMENT IN THE OFFERED SECURITIES, SEE
"RISK FACTORS," COMMENCING ON PAGE 4.
----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
----------------
THE DATE OF THIS PROSPECTUS IS DECEMBER 6, 1996.
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith the Company files reports, proxy statements and other information
with the Securities and Exchange Commission (the "Commission"). Such reports,
proxy statements and other information filed can be inspected and copied at
the Commission's Public Reference Section, 450 Fifth Street, N.W., Washington,
D.C., 20549, and at the following regional offices of the Commission: Seven
World Trade Center, 13th Floor, New York, New York 10048 and 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661. Copies of such material can be
obtained from the Public Reference Section of the Commission, 450 Fifth
Street, N.W., Washington, D.C. 20549, at prescribed rates. The Commission also
maintains a site on the World Wide Web at http://www.sec.gov that contains
reports, proxy and information statements and other information regarding
registrants that file electronically with the Commission. In addition, the
Common Stock is listed on the New York Stock Exchange and similar information
concerning the Company can be inspected and copied at the offices of the New
York Stock Exchange, Inc., 20 Broad Street, New York, New York 10005.
The Company has filed with the Commission a registration statement on Form
S-3 (the "Registration Statement"), of which this Prospectus is a part, under
the Securities Act of 1933, as amended (the "Securities Act"), with respect to
the Offered Securities. This Prospectus does not contain all of the
information set forth in the Registration Statement, certain portions of which
have been omitted as permitted by the rules and regulations of the Commission.
Statements contained in this Prospectus as to the contents of any contract or
other documents are not necessarily complete, and in each instance reference
is made to the copy of such contract or other document filed as an exhibit to
the Registration Statement, each such statement being qualified in all
respects by such reference and the exhibits and schedules thereto. For further
information regarding the Company and the Offered Securities, reference is
hereby made to the Registration Statement and such exhibits and schedules
which may be obtained from the Commission at its principal office in
Washington, D.C. upon payment of the fees prescribed by the Commission.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The documents listed below have been filed by the Company under the Exchange
Act with the Commission and are incorporated herein by reference:
a. The Company's Annual Report on Form 10-K for the year ended December
31, 1995 (including relevant portions of the Company's definitive proxy
statement for the 1996 annual meeting of stockholders specifically
incorporated by reference in Part III of such Form 10-K), Annual Report on
Form 10-K/A (Amendment No. 1) filed with the Commission on May 2, 1996 for
the year ended December 31, 1995 (including relevant portions of the
Company's definite proxy statement for the 1996 annual meeting of
stockholders specifically incorporated by reference in Part III of such
Form 10-K/A) and Annual Report on Form 10-K/A (Amendment No. 2) filed with
the Commission on June 5, 1996 for the year ended December 31, 1995
(including relevant portions of the Company's definitive proxy statement
for the 1996 annual meeting of stockholders specifically incorporated by
reference in Part III of such Form 10-K/A);
b. The Company's Quarterly Report on Form 10-Q for the Quarter ended
March 31, 1996;
c. The Company's Quarterly Report on Form 10-Q for the Quarter ended June
30, 1996;
d. The Company's Quarterly Report on Form 10-Q for the Quarter ended
September 30, 1996;
e. Report on Form 8-K filed with respect to the Company dated March 31,
1996;
f. Report on Form 8-K filed with respect to the Company dated August 13,
1996;
g. Report on Form 8-K filed with respect to the Company dated August 30,
1996, as amended by Report on Form 8-K/A filed with respect to the Company
dated October 17, 1996; and
h. The description of the Company's Common Stock contained in the
Company's Registration Statement on Form 8-A (File No. 1-13106).
2
<PAGE>
Each document filed by the Company pursuant to Sections 13(a), 13(c), 14 and
15(d) of the Exchange Act subsequent to the date of this Prospectus and prior
to the termination of the offering of all Offered Securities to which this
Prospectus relates shall be deemed to be incorporated by reference in this
Prospectus and to be part hereof from the date of filing such documents.
Any statement contained herein or in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained
herein (or in the applicable Prospectus Supplement) or in any other
subsequently filed document which also is or is deemed to be incorporated by
reference herein modifies or supersedes such statement. Any such statement so
modified or superseded shall not be deemed, except as so modified or
superseded, to constitute a part of this Prospectus.
Copies of all documents which are incorporated herein by reference (not
including the exhibits to such information, unless such exhibits are
specifically incorporated by reference in such information) will be provided
without charge to each person, including any beneficial owner, to whom this
Prospectus is delivered upon written or oral request. Requests should be
directed to the Investor Service Manager of the Company at 777 California
Avenue, Palo Alto, California 94304, telephone number: (415) 494-3700.
THE COMPANY
The Company is a self-administered and self-managed equity REIT that was
formed in 1994 to continue and expand the real estate investment and
management operations conducted by Essex Property Corporation since 1971. As
of September 30, 1996, the Company's multi-family residential portfolio
consisted of 26 properties comprising 5,876 apartment units, twelve of which
are located in the San Francisco Bay Area, nine of which are located in the
Seattle metropolitan area, three of which are located in Southern California,
and two of which are located in the Portland, Oregon, metropolitan area. The
Company also owns six retail properties, which are located in the Portland,
Oregon, metropolitan area and in Eugene, Oregon, and an office building
located in Palo Alto, California that houses the Company's headquarters
(collectively, the "Commercial Properties," and together with the Company's 26
multi-family residential properties, the "Properties").
The Company conducts substantially all of its activities through Essex
Portfolio, L.P. (the "Operating Partnership") in which the Company owns an
approximate 82.6% general partnership interest. An approximate 17.4% limited
partnership interest in the Operating Partnership is owned by senior members
of the Company's management and certain outside investors. As the sole general
partner of the Operating Partnership, the Company has control over the
management of the Operating Partnership and over each of the Properties.
The Company's Common Stock is listed on the New York Stock Exchange under
the Symbol "ESS." The Company is a Maryland corporation. The Company's
executive offices are located at 777 California Avenue, Palo Alto, California
94304, and its telephone number is (415) 494-3700.
3
<PAGE>
USE OF PROCEEDS
The Company intends to invest the net proceeds of any sale of Offered
Securities in the Operating Partnership. Unless otherwise indicated in the
applicable Prospectus Supplement, the Operating Partnership intends to use
such net proceeds for general corporate purposes including, without
limitation, the acquisition and development of multi-family residential
properties and the repayment of debt. Net proceeds from the sale of the
Offered Securities initially may be temporarily invested in short-term
securities.
RATIO OF EARNINGS TO FIXED CHARGES
The Company's ratio of earnings to combined fixed charges and preferred
stock dividends for the nine months ended September 30, 1996 was approximately
2.06x and the Company's ratio of earnings to fixed charges for the fiscal year
ended December 31, 1995, and the period of June 13, 1994 through December 31,
1994, was approximately 1.66x and 1.87x, respectively. Prior to 1996, the
Company did not have any outstanding preferred stock. The ratio of earnings to
fixed charges of the Company's predecessor for the period of January 1, 1994
through June 12, 1994 and for the fiscal years ended December 31, 1993,
December 31, 1992 and December 31, 1991, was approximately 1.06x, 1.03x, 0.83x
and 0.76x, respectively. For purposes of computing these ratios, earnings have
been calculated by adding fixed charges (excluding capitalized interest) to
income (loss) from operations, before gains on sales and extraordinary items.
Fixed charges consist of interest costs, whether expensed or capitalized, and
amortization of debt discounts and deferred financing fees, whether expensed
or capitalized.
RISK FACTORS
Prospective investors should carefully consider the following information in
conjunction with the other information contained in this Prospectus and the
applicable Prospectus Supplement before purchasing Offered Securities.
DEBT FINANCING; RISK OF RISING INTEREST RATES
The Company is subject to the risks normally associated with debt financing,
including the risk that the Company's cash flow will be insufficient to meet
required payments of principal and interest, that the Company will not be able
to refinance existing indebtedness on the encumbered Properties or that the
terms of such refinancing will not be as favorable as the terms of existing
indebtedness. As of September 30, 1996, the Company had outstanding
approximately $136.7 million of indebtedness secured by certain of the
Properties.
As of September 30, 1996, the Company had approximately $43.4 million of
variable rate mortgage indebtedness, which bears interest at a floating rate
tied to either (i) the London InterBank Offered Rates ("LIBOR"), (ii) the rate
of short-term tax exempt securities or (iii) the 11th District Cost of Funds.
Although approximately $9.8 million of such variable rate indebtedness is
subject to an interest rate protection agreement which may reduce the risks
associated with fluctuations in interest rates, an increase in interest rates
will have an adverse effect on the Company's net income and results of
operations.
RISKS OF ACQUISITION AND DEVELOPMENT ACTIVITIES
The Company intends to actively continue to acquire multi-family residential
properties. Acquisitions of such properties entail risks that investments will
fail to perform in accordance with expectations. Estimates of the costs of
improvements to bring an acquired property up to standards established for the
market position intended for that property may prove inaccurate. In addition,
there are general real estate investment risks associated with any new real
estate investment.
The Company may also pursue multi-family residential property development
projects. Such projects generally require various governmental and other
approvals, the receipt of which cannot be assured. The Company's development
activities will entail certain risks, including the expenditure of funds on
and devotion
4
<PAGE>
of management's time to projects which may not come to fruition; the risk that
construction costs of a project may exceed original estimates, possibly making
the project not economical; the risk that occupancy rates and rents at a
completed project will be less than anticipated; and the risk that expenses at
a completed development will be higher than anticipated. These risks may
result in a development project causing a reduction in the funds available for
distribution.
DEBT FINANCING; UNCERTAINTY OF ABILITY TO REFINANCE BALLOON PAYMENTS
The Company is subject to the risks normally associated with debt financing,
including the risk that the Company's cash flow will be insufficient to meet
required payments of principal and interest, that the Company will not be able
to refinance existing indebtedness on the encumbered Properties or that the
terms of such refinancing will not be as favorable as the terms of existing
indebtedness. As of September 30, 1996, the Company had outstanding
approximately $136.7 million of indebtedness secured by certain of the
Properties.
The Company is not expected to have sufficient cash flows from operations to
make all of the balloon payments of principal when due under its mortgage
indebtedness and lines of credit. As of September 30, 1996, such mortgage
indebtedness and lines of credit had the following scheduled maturity dates:
1996--$0.7 million; 1997--$5.4 million; 1998--$5.7 million; 1999--$5.9
million; 2000--$3.7 million; 2001 and thereafter--$115.3 million. As a result,
the Company will be subject to risks that it will not be able to refinance
such mortgage indebtedness and the mortgaged properties could be foreclosed
upon by or otherwise transferred to the mortgagee with a consequent loss of
income and asset value to the Company, or, that the indebtedness, if any,
refinanced will have higher interest rates. An inability to make such payments
when due could cause the mortgage lender to foreclose on the Properties
securing the mortgage, which would have a material adverse effect on the
Company.
GEOGRAPHIC CONCENTRATION
Approximately 49%, 30%, 15%, and 6% of the Company's rental revenues for the
three months ended September 30, 1996, were derived from Properties located in
the San Francisco Bay, the Seattle metropolitan area, Southern California and
the Portland metropolitan area (including Eugene, Oregon), respectively. As a
result of this geographic concentration, if a local property market performs
poorly, the income from the Properties in that market could decrease and, in
turn, the ability of the Company to make expected dividends to stockholders
could be adversely affected. The performance of the economy in each of these
areas affects occupancy, market rental rates and expenses and, consequently,
has an impact on the income from the Properties and their underlying values.
The financial results of major local employers may have an impact on the cash
flow and value of certain of the properties.
RISKS ASSOCIATED WITH CONVERTIBLE PREFERRED STOCK
Increase in Dividend Requirements as a Result of Convertible Preferred
Stock; Possible Inability to Sustain Dividends. On June 20, 1996, the Company
entered into a Stock Purchase Agreement (the "Stock Purchase Agreement") to
sell up to $40.0 million of the Company's 8.75% Convertible Preferred Stock,
Series 1996A (the "Convertible Preferred Stock") at $25.00 per share to
Tiger/Westbrook Real Estate Fund, L.P., and Tiger/Westbrook Real Estate Co-
Investment Partnership, L.P. (collectively, "Tiger/Westbrook"). Pursuant to
the Stock Purchase Agreement, Tiger/Westbrook has purchased 800,000 shares of
Convertible Preferred Stock for an aggregate purchase price of $20.0 million.
Tiger/Westbrook is obligated to purchase up to an additional $20.0 million of
Convertible Preferred Stock on or prior to June 20, 1997. For a summary of the
terms and conditions of the Convertible Preferred Stock see "Description of
Preferred Stock--Convertible Preferred Stock."
The cash dividends payable on the Convertible Preferred Stock will
substantially increase the cash required to continue to pay cash dividends on
the Common Stock at current levels. The terms and conditions of the
Convertible Preferred Stock provide that dividends may be paid on shares of
Common Stock in any fiscal quarter only if full, cumulative cash dividends
have been paid on all shares of Convertible Preferred Stock in the annual
5
<PAGE>
amount equal to the greater of (i) $2.1875 per share (8.75% of the $25.00 per
share price), or (ii) the dividends (subject to adjustment) paid with respect
to the Common Stock plus, in both cases, any accumulated but unpaid dividends
on the Convertible Preferred Stock. See "Description of Preferred Stock--
Convertible Preferred Stock--Dividends."
Under certain circumstances, if, after June 20, 2001, the Company requires a
mandatory conversion of all of the Convertible Preferred Stock, but under no
other circumstances, each of the holders of the Convertible Preferred Stock
may cause the Company to redeem any or all of such holder's shares of
Convertible Preferred Stock. Such a redemption would decrease the amount of
cash available to pay cash dividends on the Common Stock. At such time as
there ceases to be in excess of 40,000 shares of Convertible Preferred Stock
outstanding, the Company may at its option purchase all of the outstanding
shares of Convertible Preferred Stock from the holders thereof. See
"Description of Preferred Stock--Convertible Preferred Stock--Redemption at
Holder's Option After Notice of Mandatory Conversion." If the Company is
unable to pay dividends on the Common Stock, the Company's status as a REIT
may be jeopardized. See "Federal Income Tax Considerations--Requirements for
Qualification--Annual Distribution Requirements."
Any Common Stock or other Offered Securities that may in the future be
issued pursuant to this Prospectus, upon exercise of stock options or
otherwise, will further substantially increase the costs required to continue
to pay cash dividends at current levels. The Company's ability to pay
dividends will depend in large part on the performance of its Properties and
other properties that it may acquire in the future.
The Company's ability to pay dividends on its stock is further limited by
the Maryland General Corporation Law ("MGCL"). Under the MGCL, the Company may
not make a distribution on its stock if, after giving effect to such
distribution, either (i) the Company would not be able to pay its indebtedness
as such indebtedness becomes due in the usual course of business or (ii) the
Company's total assets would be less than its total liabilities (which, in
accordance with the Articles Supplementary (as hereinafter defined), will not
include amounts required to satisfy the preferential rights of the Convertible
Preferred Stock upon dissolution of the Company). See "Description of
Preferred Stock--Convertible Preferred Stock--Liquidation Preference." If the
Company is unable to pay dividends on its stock, the Company's status as a
REIT may be jeopardized. See "Federal Income Tax Considerations--Requirements
for Qualification--Annual Distribution Requirements."
Risk of Adverse Effect on Market Price Due to Registration Rights and
Preemptive Rights Associated with Convertible Preferred Stock. Holders of the
Convertible Preferred Stock have certain registration rights with respect to
the Convertible Preferred Stock or shares of Common Stock issuable upon
conversion of the Convertible Preferred Stock. See "Description of Preferred
Stock--Convertible Preferred Stock--Registration Rights." Registration rights
are also held by the senior members of the Company's management and certain
outside investors (collectively, the "Founders") who own an approximate 17.4%
limited partnership interest in the Operating Partnership, as of September 30,
1996, and have certain "demand" and "piggyback" registration rights with
respect to shares of Common Stock issuable in connection with the exchange of
their limited partnership interests in the Operating Partnership. The
aggregate 17.4% limited partnership interest held by the Founders is
exchangeable for an aggregate of 1,855,000 shares of Common Stock. The
registration rights of the holders of the Convertible Preferred Stock and the
Founders could have a material adverse effect on the market price for the
Offered Securities. In addition, the Stock Purchase Agreement provides
Tiger/Westbrook with preemptive rights to purchase a pro rata share of the
Company's equity offerings. The preemptive rights could have a material
adverse effect on the market price for the Offered Securities. See
"Description of Preferred Stock--Convertible Preferred Stock--Right of
Tiger/Westbrook to Participate in Offerings."
Risk of Substantial Dilution to the Holders of Common Stock. At any time
after June 20, 1997, subject to certain quantity limitations, the shares of
Convertible Preferred Stock will be convertible, at the option of the holders,
into such number of shares of Common Stock as is determined by dividing $25.00
(plus accrued and unpaid dividends) by the conversion price then in effect.
The current conversion price is $21.875 per share and, therefore, each share
of Convertible Preferred Stock is currently convertible into approximately
1.14 shares of Common Stock. In order to provide certain antidilution
protection to the holders of the Convertible Preferred
6
<PAGE>
Stock, the conversion price is subject to reduction in certain circumstances,
including in the event that the Company issues Common Stock at a price below
the conversion price. Such reduction in the conversion price could increase
the dilution to holders of Common Stock that would arise if and when the
Convertible Preferred Stock is converted into Common Stock. Holders of Common
Stock could experience substantial dilution in their proportionate ownership,
voting power and earnings per share in the event that the Company issues a
substantial number of additional shares of Common Stock and/or Preferred
Stock, either upon conversion of the Convertible Preferred Stock, in
connection with future acquisitions or otherwise, which issuances could
adversely affect the market price of the Offered Securities. See "Description
of Preferred Stock--Convertible Preferred Stock--Conversion Rights."
Concentration of Voting Power and Consent Requirements of the Holders of the
Convertible Preferred Stock. The holders of the Convertible Preferred Stock
have significant direct and indirect influence over the Company's affairs. The
approval of holders of two-thirds of the outstanding shares of Convertible
Preferred Stock, voting as a separate class, is required to, among other
things, make certain revisions to the corporate structure of the Company,
including such revisions that would affect the rights, priority and
preferences of the Convertible Preferred Stock, and for the Company or the
Operating Partnership to merge or consolidate with another entity or for the
Company to sell all or substantially all of its assets. In addition, the
approval of holders of a majority of the outstanding shares of Convertible
Preferred Stock, voting as a separate class, is required for the Company to,
among other things, make substantial sales of its assets, change the
geographic concentration of its portfolio of Properties, or undergo a change
in control affecting the Company or the Operating Partnership. See
"Description of Preferred Stock--Convertible Preferred Stock--Voting Rights."
In addition, the holders of the Convertible Preferred Stock as a class
currently have the right to elect one director to the Company's Board of
Directors. Under certain circumstances, the holders of the Convertible
Preferred Stock will be entitled to elect up to four additional directors.
Such circumstances include the Company's failure to pay quarterly dividends on
the Convertible Preferred Stock for four quarters and the Company's breach of
certain provisions of the Charter and the Company's bylaws (the "Bylaws")
affecting the holders of the Convertible Preferred Stock. See "Description of
Preferred Stock--Convertible Preferred Stock--Voting Rights." Moreover, the
Company may not authorize or create any class or series of stock that ranks
equal or senior to the Convertible Preferred Stock with respect to the payment
of dividends or amounts upon liquidation, dissolution or winding up without
the consent of the holders of two-thirds of the outstanding shares of
Convertible Preferred Stock, voting separately as a single class. There can be
no assurance that the interests of Tiger/Westbrook, and indirectly the
director or directors elected by the holders of the Convertible Preferred
Stock, would not differ from or conflict with the interests of the holders of
Common Stock or other Offered Securities.
In addition, upon conversion of the Convertible Preferred Stock into shares
of Common Stock, the holders of the Convertible Preferred Stock would have
considerable influence with respect to the election of directors and the
approval or disapproval of significant corporate actions, since they would
hold approximately 14.6% of all outstanding shares of Common Stock (assuming
exchange of all partnership interests in the Operating Partnership into shares
of Common Stock), assuming that such conversion took place on the date of this
Prospectus and all of the authorized shares of Convertible Preferred Stock
were issued.
As of the date of this Prospectus, Tiger/Westbrook was the sole holder of
all outstanding shares of the Convertible Preferred Stock. In view of the
substantial influence of the holders of the Convertible Preferred Stock over
the Company's affairs, it should be noted that Tiger/Westbrook's interests do
not necessarily coincide with those of the holders of the Common Stock and
therefore its actions with respect to the Company will not necessarily be in
the best interests of the holders of Common Stock or other Offered Securities.
In addition, as of September 30, 1996, Mr. Marcus' beneficial ownership of
1,746,563 shares of Common Stock (including shares issuable upon exchange of
partnership interests in the Operating Partnership) represented approximately
16.4% of the outstanding shares of Common Stock (including shares issuable
upon exchange of partnership interests in the Operating Partnership). While,
as of the date of this Prospectus, Mr. Marcus does not
7
<PAGE>
have majority control of the Company, he currently has, and likely will
continue to have, significant influence with respect to the election of
directors and approval or disapproval of significant corporate actions.
Exemption from the Maryland Business Combination Law. Under the MGCL,
certain "business combinations" (including certain issuances of equity
securities) between a Maryland corporation and any Interested Stockholder or
an affiliate thereof are prohibited for five years after the date on which the
Interested Stockholder becomes an Interested Stockholder unless approved by
super-majority votes of the stockholders. Under the MGCL, an Interested
Stockholder includes any individual or entity which is the beneficial owner of
10% or more of a corporation's outstanding stock which is entitled to vote
generally in the election of directors. However, as permitted by the statute,
the Board of Directors irrevocably has elected to exempt any business
combination by the Company with Tiger/Westbrook and its affiliates from the
"business combination" provision of the MGCL. Consequently, the five-year
prohibition and the super-majority vote requirements described above will not
apply to any business combination between Tiger/Westbrook (or affiliates
thereof) and the Company. As a result, the Company may in the future enter
into business combinations with Tiger/Westbrook (or affiliates thereof),
without compliance by the Company with the super-majority vote requirements
and other provisions of the statute.
Anti-Takeover Effect of the Charter, the Bylaws, the Convertible Preferred
Stock and Certain Provisions of Maryland Law. The Company's Charter authorizes
the Board of Directors to cause the Company to issue additional shares of
Common Stock or preferred stock and to set the preferences, rights and other
terms of such preferred stock without the approval of the holders of the
Common Stock, provided that the Company must obtain the consent of the holders
of two-thirds of the outstanding shares of Convertible Preferred Stock in
order to authorize or create any class or series of stock that ranks equal or
senior to the Convertible Preferred Stock. See "Description of Preferred
Stock--Convertible Preferred Stock--Voting Rights." Although the Board of
Directors has no intention to issue any shares of Convertible Preferred Stock
or other preferred stock at the present time, other than pursuant to the Stock
Purchase Agreement, subject to the consent of the requisite holders of
Convertible Preferred Stock, it may establish one or more series of preferred
stock that could, depending on the terms of such series, delay, defer or
prevent a transaction or a change in control of the Company that might involve
a premium price for the Company's stock or otherwise be in the best interests
of the holders of Offered Securities, or that could have dividend, voting or
other rights that could adversely affect the interest of holders of Offered
Securities.
The Charter of the Company also contains other provisions that may delay,
defer or prevent a transaction or a change in control of the Company that
might involve a premium price for the stock or otherwise be in the best
interest of the stockholders or that could otherwise adversely affect the
interests of the stockholders, and the Bylaws may be amended by the Board of
Directors (subject to the consent of the holders of the Convertible Preferred
Stock in certain circumstances) to include provisions that would have a
similar effect, although the Board presently has no such intention. The
Charter provides that the Company must seek the consent of the holders of the
Convertible Preferred Stock holding two-thirds of the outstanding shares of
Convertible Preferred Stock before it or the Operating Partnership may merge
or consolidate with any other entity or sell all or substantially all of its
assets. Also, the terms of the Convertible Preferred Stock require that the
Company must obtain the consent of the holders of the Convertible Preferred
Stock holding more than 50% of the outstanding shares of Convertible Preferred
Stock before it may undergo a change in control. Additionally, the Charter
contains ownership provisions limiting the transferability and ownership of
shares of the capital stock of the Company, which may have the effect of
delaying, deferring or preventing a transaction or a change in control of the
Company. For example, subject to receiving an exemption from the Board of
Directors (see "Description of Common Stock--Restrictions on Transfer") these
ownership provisions preclude any potential acquiror from purchasing more than
6% percent in value of the Company's stock (other than qualified pension
trusts which can acquire 9.9%), thereby discouraging any tender offer which
may be attractive to the holders of the Common Stock and limiting the
opportunity for stockholders to receive a premium for their Common Stock that
might otherwise exist if an investor were attempting to assemble a block of
shares in excess of 6% of the Company's
8
<PAGE>
stock, or to otherwise effect a change in control of the Company. See
"Description of Common Stock--Restrictions on Transfer."
In addition, the MGCL restricts the voting rights of shares deemed to be
"control shares." Under the MGCL, "control shares" are those which, when
aggregated with any other shares held by the acquiror, entitle the acquiror to
exercise voting power within specified ranges. Although the Bylaws provide
that the control share provisions of the MGCL shall not apply to any
acquisition by any person of shares of stock of the Company, the provisions of
the Bylaws may be amended or eliminated by the Board of Directors at any time
in the future, provided that it obtains any required consent from the holders
of the Convertible Preferred Stock. Moreover, any such amendment or
elimination of such provision of the Bylaws may result in the application of
the control share provisions of the MGCL not only to control shares which may
be acquired in the future, but also to control shares previously acquired. If
the provisions of the Bylaws are amended or eliminated, the control share
provisions of the MGCL could delay, defer or prevent a transaction or change
in control of the Company that might involve a premium price for the Company's
stock or otherwise be in the best interests of the stockholders or that could
otherwise adversely affect the interests of the stockholders.
BOND COMPLIANCE REQUIREMENTS.
As of September 30, 1996 the Company had approximately $23.4 million of tax-
exempt financing relating to its Inglenook Court Apartments, Wandering Creek
Apartments and Treetops Apartments. The tax-exempt financing subjects these
Properties to certain deed restrictions and restrictive covenants. In
addition, the Internal Revenue Code of 1986, as amended (the "Code") and the
regulations promulgated thereunder impose various restrictions, conditions and
requirements relating to the exclusion from gross income for federal income
tax purposes of interest on qualified bond obligations, including requirements
that at least 20% of apartment units be made available to residents with gross
incomes that do not exceed 50% of the median income for the applicable family
size as determined by the Housing and Urban Development Department of the
federal government. In addition to federal requirements, certain state and
local authorities may impose additional rental restrictions. The bond
compliance requirements and the requirements of any future tax-exempt bond
financing utilized by the Company may have the effect of limiting the
Company's income from the tax-exempt financed properties if the Company is
required to lower its rental rates to attract residents who satisfy the median
income test. If the required number of apartment homes are not reserved for
residents satisfying these income requirements, the tax-exempt status of the
bonds may be terminated, the obligations of the Company under the bond
documents may be accelerated and other contractual remedies against the
Company may be available.
GENERAL REAL ESTATE INVESTMENT RISKS
Real property investments are subject to a variety of risks. The yields
available from equity investments in real estate depend on the amount of
income generated and expenses incurred. If the Properties do not generate
sufficient income to meet operating expenses, including debt service and
capital expenditures, the Company's cash flow and ability to make
distributions to its stockholders will be adversely affected. The performance
of the economy in each of the areas in which the Properties are located
affects occupancy, market rental rates and expenses and, consequently, has an
impact on the income from the Properties and their underlying values. The
financial results of major local employers may have an impact on the cash flow
and value of certain of the Properties.
Income from the Properties may be further adversely affected by, among other
things, the general economic climate, local economic conditions in which the
Properties are located, such as oversupply of space or a reduction in demand
for rental space, the attractiveness of the Properties to tenants, competition
from other available space, the ability of the Company to provide for adequate
maintenance and insurance and increased operating expenses. There is also the
risk that as leases on the Properties expire, tenants will enter into new
leases on terms that are less favorable to the Company. Income and real estate
values may also be adversely affected by such factors as applicable laws
(e.g., the Americans With Disabilities Act of 1990 and tax laws), interest
rate levels and the availability and terms of financing. In addition, real
estate investments are relatively illiquid and, therefore, will
9
<PAGE>
tend to limit the ability of the Company to vary its portfolio promptly in
response to changes in economic or other conditions. The Code also limits the
Company's ability to sell properties held for less than four years, which may
effect the Company's ability to sell properties without adverse tax effects on
holders of Offered Securities.
RISKS INVOLVED IN INVESTMENTS IN MORTGAGES
The Company may invest in mortgages, in part as a strategy for ultimately
acquiring the underlying property. In general, investments in mortgages
include the risk that the value of mortgaged property may be less than the
amounts owed, the risk that interest rates payable on the mortgages may be
lower than the Company's cost of funds, and, in the case of junior mortgages,
the risk that foreclosure of a senior mortgage would eliminate the junior
mortgage. If any of the above were to occur, cash flows from operations and
the Company's ability to make expected dividends to stockholders could be
adversely affected.
POSSIBLE ENVIRONMENTAL LIABILITIES
Under various federal, state and local laws, ordinances and regulations, an
owner or operator of real estate is liable for the costs of removal or
remediation of certain hazardous or toxic substances on or in such property.
Such laws often impose such liability without regard to whether the owner or
operator knew of, or was responsible for, the presence of such hazardous or
toxic substances. The presence of such substances, or the failure to properly
remediate such substances, may adversely affect the owner's or operator's
ability to sell or rent such property or to borrow using such property as
collateral. Persons who arrange for the disposal or treatment of hazardous or
toxic substances may also be liable for the costs or removal or remediation of
such substances at a disposal or treatment facility, whether or not such
facility is owned or operated by such person. Certain environmental laws
impose liability for release of asbestos-containing materials into the air,
and third parties may seek recovery from owners or operators of real
properties for personal injuries associated with asbestos-containing
materials. In connection with the ownership (direct or indirect), operation,
financing, management and development of real properties, the Company may be
considered an owner or operator of such properties or as having arranged for
the disposal or treatment of hazardous or toxic substances and, therefore, may
be potentially liable for removal or remediation costs, as well as certain
other costs, including governmental fines and costs related to injuries to
persons and property.
GENERAL UNINSURED LOSSES
The Company carries comprehensive liability, fire, flood, extended coverage
and rental loss insurance for each of the Properties, with policy
specifications, limits and deductibles customarily carried for similar
properties. There are, however, certain types of extraordinary losses which
are either uninsurable or not economically insurable. Further, certain of the
Properties are located in areas that are subject to earthquake activity.
Although the Company has obtained certain limited earthquake insurance
policies, should a Property sustain damage as a result of an earthquake, the
Company may sustain losses due to insurance deductibles, co-payments on
insured losses or uninsured losses.
CHANGES IN REAL ESTATE TAX AND OTHER LAWS
Costs resulting from changes in real estate tax laws generally are not
directly passed through to residential property tenants and increases in
income, service or other taxes, generally are also not passed through to
tenants under leases and may adversely affect the Company's funds from
operations and its ability to make distributions to stockholders. Similarly,
compliance with changes in (i) laws increasing the potential liability for
environmental conditions existing on properties or the restrictions on
discharges or other conditions or (ii) rent control or rent stabilization laws
or other laws regulating housing may result in significant unanticipated
expenditures, which would adversely affect the Company's Funds from Operations
and its ability to make distributions to stockholders.
10
<PAGE>
CHANGES IN FINANCING POLICY
The Company has adopted a policy of maintaining a debt-to-total-market-
capitalization ratio of less than 50%. The Company calculates debt-to-total-
market capitalization based on the ratio of the total property indebtedness to
the sum of (i) the aggregate market value of the outstanding shares of Common
Stock (based on the greater of current market price or the gross proceeds per
share from public offerings of its shares plus any undistributed net cash
flow), assuming the conversion of all limited partnership interests in the
Operating Partnership into shares of Common Stock and the conversion of all
shares of Convertible Preferred Stock into shares of Common Stock and (ii) the
total property indebtedness. Based on this calculation, the Company's debt-to-
total-market-capitalization ratio was approximately 32% as of September 30,
1996.
The organizational documents of the Company and the Operating Partnership do
not limit the amount or percentage of indebtedness that they may incur. The
Company may from time to time modify its debt policy in light of then current
economic conditions, relative costs of debt and equity securities,
fluctuations in the fair market price of the Common Stock, growth and
acquisition opportunities and other factors. Accordingly, the Company may
increase its debt-to-total-market-capitalization ratio beyond the limits
described above. If the Board of Directors determines that additional funding
is required, the Company or the Operating Partnership may raise such funds
through additional equity offerings, debt financing or retention of cash flow
(subject to provisions in the Code concerning taxability of undistributed real
estate investment trust income), or a combination of these methods.
CONSEQUENCES OF FAILURE TO QUALIFY AS A REIT
The Company has operated so as to qualify as a REIT under the Code,
commencing with its taxable year ended December 31, 1994. Although the Company
believes that it has operated in a manner which satisfies the REIT
qualification requirements, no assurance can be given that the Company will
continue to do so. A REIT generally is not taxed on income so long as it
distributes to its stockholders at least 95% of its taxable income currently.
Qualification as a REIT involves the satisfaction of numerous requirements
(some on an annual or quarterly basis) established under highly technical and
complex Code provisions for which there are only limited judicial or
administrative interpretations and involves the determination of various
factual matters and circumstances not entirely within the Company's control.
See "Federal Income Tax Considerations."
If the Company fails to qualify as a REIT in any taxable year, the Company
would generally be subject to Federal income tax (including any applicable
alternative minimum tax) at corporate rates on its taxable income for such
year. Moreover, unless entitled to relief under certain statutory provisions,
the Company would also be disqualified from treatment as a REIT for the four
taxable years following the year during which qualification is lost. This
treatment would reduce the net earnings of the Company available for
investment or distribution to stockholders because of the additional tax
liability of the Company for the years involved. In addition, distributions
would no longer be required to be made. See "Federal Income Tax
Considerations."
The Operating Partnership has received an opinion from Morrison & Foerster
LLP, counsel to the Company, stating that the Operating Partnership is
classified and treated as a partnership for Federal income tax purposes. Such
legal opinion is not binding on the Internal Revenue Service ("IRS"). If the
IRS were to challenge successfully the Operating Partnership's status as a
partnership for Federal income tax purposes, the Company would cease to
qualify as a REIT and the Company and the Operating Partnership would be
subject to Federal income tax (including any alternative minimum tax) on their
net income at corporate rates. See "Federal Income Tax Considerations--Tax
Aspects of the Company's Investment in the Operating Partnership."
11
<PAGE>
DESCRIPTION OF COMMON STOCK
STOCK--GENERAL
As of September 30, 1996, the total number of shares of all classes of
capital stock that the Company had authority to issue was 1,000,000,000
shares, consisting of 668,400,000 shares of Common Stock, par value $0.0001
per share, 1,600,000 shares of Convertible Preferred Stock, par value $0.0001
per share, and 330,000,000 shares of excess stock (the "Excess Stock").
As of September 30, 1996, there were 8,805,500 shares of Common Stock issued
and outstanding. Up to 424,900 shares of Common Stock have been reserved for
issuance under the Essex Property Trust, Inc. 1994 Employee Stock Incentive
Plan, up to 70,000 shares of Common Stock have been reserved for issuance
under the Essex Property Trust, Inc. 1994 Non-Employee and Director Stock
Incentive Plan and up to 406,500 shares of Common have been reserved for
issuance under the Essex Property Trust, Inc. 1994 Employee Stock Purchase
Plan. In addition, 220,000 shares of Common Stock have been reserved for
issuance upon the exercise of an option granted to The Marcus & Millichap
Company (the "M&M Stock Option") and an aggregate of 1,855,000 shares of
Common Stock may be issued upon the conversion of limited partnership
interests in the Operating Partnership.
As of September 30, 1996, there were 800,000 shares of Convertible Preferred
Stock issued and outstanding. Tiger/Westbrook will be required to purchase up
to an additional $20.0 million of shares of Convertible Preferred Stock on or
prior to June 30, 1997.
COMMON STOCK
The following description of the Common Stock sets forth certain general
terms and provisions of the Common Stock to which any Prospectus Supplement
may relate, including a Prospectus Supplement providing that Common Stock will
be issuable upon conversion of Preferred Stock or Depositary Shares or upon
the exercise of Warrants issued by the Company. This description is in all
respects subject to and qualified in its entirety by reference to the
applicable provisions of the Charter and the Company's Bylaws (the "Bylaws").
The Common Stock is listed on the New York Stock Exchange under the symbol
"ESS." Boston EquiServe is the Company's transfer agent.
The holders of the outstanding Common Stock are entitled to one vote per
share on all matters voted on by stockholders, including elections of
directors. The Charter provides that shares of Common Stock do not have
cumulative voting rights.
The shares of Common Stock offered hereby will, when issued, be fully paid
and nonassessable and will not be subject to preemptive or similar rights.
Subject to the preferential rights of any outstanding series of capital stock,
the holders of Common Stock are entitled to such distributions as may be
declared from time to time by the Board of Directors from funds available for
distribution to such holders. The Company currently pays regular quarterly
dividends to holders of Common Stock.
In the event of a liquidation, dissolution or winding up of the Company, the
holders of Common Stock are entitled to receive ratably the assets remaining
after satisfaction of all liabilities and payment of liquidation preferences
and accrued dividends, if any, on any series of capital stock that has a
liquidation preference. The rights of holders of Common Stock are subject to
the rights and preferences established by the Board of Directors for any
capital stock that may subsequently be issued by the Company.
Subject to limitations prescribed by Maryland law and the Charter, the Board
of Directors is authorized to reclassify any unissued portion of the
authorized shares of capital stock to provide for the issuance of shares in
other classes or series, including other classes or series of Common Stock, to
establish the number of shares in each class or series and to fix the
designation and any preferences, conversion and other rights, voting powers,
restrictions, limitations as to dividends, qualifications and terms and
conditions of redemption of such class or series. The rights, preferences,
privileges and restrictions of such class or series will be fixed by the
articles supplementary relating to such class or series. A Prospectus
Supplement will specify the terms of such class or series.
12
<PAGE>
RESTRICTIONS ON TRANSFER
For the Company to qualify as a REIT under the Code, not more than 50% of
the value of the outstanding shares of stock may be owned, directly or
indirectly, by five or fewer individuals (as defined in the Code) during the
last half of a taxable year (other than the first year) or during a
proportionate part of a shorter taxable year. Shares of Common Stock must be
beneficially owned by 100 or more persons during at least 335 days of a
taxable year of 12 months (other than the first year) or during a
proportionate part of a shorter taxable year and certain percentages of the
Company's gross income must be from particular activities (see "Federal Income
Tax Considerations--Requirements for Qualification--Gross Income Tests").
Because the Board of Directors believes it is essential for the Company to
continue to qualify as a REIT, the Charter, subject to certain exceptions,
provides that no holder, other than George M. Marcus, may own, or be deemed to
own by virtue of the attribution provisions of the Code, more than 6.0% (the
"Ownership Limit") of the value of the issued and outstanding shares of stock
of the Company (the "Equity Stock"). A qualified trust (as defined in the
Charter) generally may own up to 9.9% of the value of the outstanding shares
of Equity Stock. If George M. Marcus converts his limited partnership
interests in the Operating Partnership into shares of Common Stock, he may
exceed the Ownership Limit. The Ownership Limit provision provides that George
M. Marcus may acquire additional shares (up to 25% of the value of the
outstanding shares of Equity Stock) pursuant to conversion rights or from
other sources so long as the acquisition does not result in the five largest
beneficial owners of Equity Stock holding more than 50% of the value of the
outstanding shares of Equity Stock. The Board of Directors may exempt holders
of Equity Stock from the Ownership Limit if evidence satisfactory to the Board
of Directors is presented that such ownership will not jeopardize the
Company's status as a REIT. As a condition to such exemption, the Board of
Directors must receive an opinion of counsel and representations and
agreements from the applicant with respect to preserving the REIT status of
the Company, provided, however, the Board of Directors may not grant an
exemption from the Ownership Limit whereby the applicant would own above 25%
of the value of the outstanding shares of Equity Stock unless, in addition to
the foregoing, the Board of Directors receives a ruling from the IRS to the
effect that such an exemption will not jeopardize the Company's status as a
REIT. The Board of Directors may also increase the Ownership Limit (to a
maximum of 9.9%) and, in connection therewith, require opinions of counsel,
affidavits, undertakings or agreements as it may deem necessary or advisable
in order to preserve the REIT status of the Company. The Ownership Limit will
not apply if the Board of Directors and the stockholders of the Company
determine that it is no longer in the best interests of the Company to attempt
to qualify, or to continue to qualify, as a REIT. Any transfer of shares of
stock that would (i) create a direct ownership of shares of Equity Stock in
excess of the Ownership Limit, (ii) result in the shares of stock being owned
by fewer than 100 persons, or (iii) result in the Company's being "closely
held" under Section 856(h) of the Code, shall be null and void, and the
intended transferee will acquire no rights to the shares.
The Charter also provides that shares involved in a transfer or change in
capital structure that results in a person (other than George M. Marcus)
owning in excess of the Ownership Limit (unless an exemption is provided by
the Board of Directors) or would cause the Company to become "closely held"
within the meaning of Section 856(h) of the Code will automatically be
exchanged for shares of Excess Stock. All Excess Stock will be automatically
transferred, without action by the stockholder, to a person who is
unaffiliated with the Company, or the purported holder, as trustee (the
"Trustee") for the exclusive benefit of one or more organizations described in
Code Sections 170(b), 170(c) or 501(c)(3) as charitable beneficiary (the
"Charitable Beneficiary") and designated by resolution of the Board of
Directors. Such shares of Excess Stock held in trust are considered issued and
outstanding shares of stock of the Company. In general, the Trustee of such
shares is deemed to own the shares of Excess Stock held in trust for the
exclusive benefit of the Charitable Beneficiary on the day prior to the date
of the purported transfer or change in capital structure which resulted in the
automatic transfer.
The Ownership Limit provision will not be automatically removed even if the
real estate investment trust provisions of the Code are changed so as to no
longer contain any ownership concentration limitation or if the ownership
concentration limitation is increased. Except as otherwise described above,
any change in the Ownership Limit would require an amendment to the Charter.
Such amendments to the Charter require the
13
<PAGE>
affirmative vote of holders owning a majority of the outstanding shares of
Common Stock. In addition to preserving the Company's status as a real estate
investment trust, the Ownership Limit may have the effect of precluding an
acquisition of control of the Company without the approval of the Board of
Directors.
All certificates representing shares of Equity Stock will bear a legend
referring to the restrictions described above.
All persons who own, directly or by virtue of the attribution provisions of
the Code, more than 5% of the value of the outstanding shares of Equity Stock
(or 1% if there are fewer than 2,000 stockholders) must file written notice
with the Company containing the information specified in the Charter by
January 31 of each year. In addition, each stockholder shall upon demand be
required to disclose to the Company in writing such information with respect
to the direct, indirect and constructive ownership of shares of stock as the
Board of Directors deems necessary to determine the effect, if any, of such
ownership on the Company's status as a REIT and to ensure compliance with the
Ownership Limit.
The articles supplementary, if applicable, for the Offered Securities may
also contain provisions that further restrict the ownership and transfer of
the Offered Securities. The applicable Prospectus Supplement will specify any
additional ownership limitation relating to the Offered Securities.
DESCRIPTION OF PREFERRED STOCK
GENERAL
Subject to limitations prescribed by Maryland law and the Company's Charter,
the Board of Directors is authorized to issue, from the authorized but
unissued shares of capital stock of the Company, Preferred Stock in such
classes or series as the Board of Directors may determine and to establish
from time to time the number of shares of Preferred Stock to be included in
any such class or series and to fix the designation and any preferences,
conversion and other rights, voting powers, restrictions, limitations as to
dividends, qualifications and terms and conditions of redemption of the shares
of any such class or series, and such other subjects or matters as may be
fixed by resolution of the Board of Directors. The issuance of Preferred Stock
may have the effect of delaying, deferring or preventing a change in control
of the Company.
Preferred Stock, upon issuance against full payment of the purchase price
therefor, will be fully paid and nonassessable. The specific terms of a
particular class or series of Preferred Stock will be described in the
Prospectus Supplement relating to that class or series, including a Prospectus
Supplement providing that Preferred Stock may be issuable upon the exercise of
Warrants issued by the Company. The description of Preferred Stock set forth
below and the description of the terms of a particular class or series of
Preferred Stock set forth in a Prospectus Supplement do not purport to be
complete and are qualified in their entirety by reference to the articles
supplementary relating to that class or series. The preferences and other
terms of the Preferred Stock of each class or series will be fixed by the
articles supplementary relating to such class or series. A Prospectus
Supplement, relating to each class or series, will specify the terms of the
Preferred Stock as follows:
(1) The title and stated value of such Preferred Stock;
(2) The number of shares of such Preferred Stock offered, the liquidation
preference per share and the offering price of such Preferred Stock;
(3) The dividend rate(s), period(s), and/or payment date(s) or method(s)
of calculation thereof applicable to such Preferred Stock;
(4) Whether such Preferred Stock is cumulative or not and, if cumulative,
the date from which dividends on such Preferred Stock shall accumulate;
(5) The provision for a sinking fund, if any, for such Preferred Stock;
(6) The provision for redemption, if applicable, of such Preferred Stock;
14
<PAGE>
(7) Any listing of such Preferred Stock on any securities exchange;
(8) The terms and conditions, if applicable, upon which such Preferred
Stock will be converted into Common Stock of the Company, including the
conversion price (or manner of calculation thereof);
(9) A discussion of any material federal income tax considerations
applicable to such Preferred Stock;
(10) Any limitations on direct or beneficial ownership and restrictions
on transfer, in each case as may be appropriate to preserve the status of
the Company as a REIT;
(11) The relative ranking and preferences of such Preferred Stock as to
dividend rights and rights upon liquidation, dissolution or winding up of
the affairs of the Company;
(12) Any limitations on issuance of any class or series of preferred
stock ranking senior to or on a parity with such class or series of
Preferred Stock as to dividend rights and rights upon liquidation,
dissolution or winding up of the affairs of the Company;
(13) Any other specific terms, preferences, rights, limitations or
restrictions of such Preferred Stock; and
(14) Any voting rights of such Preferred Stock.
RANK
Unless otherwise specified in the Prospectus Supplement, the Preferred Stock
will, with respect to dividend rights and rights upon liquidation, dissolution
or winding up of the Company, rank (i) senior to all classes or series of
Common Stock and Excess Stock of the Company, and to all equity securities
ranking junior to such Preferred Stock with respect to dividend rights and
rights upon liquidation, dissolution or winding up of the Company; (ii) on a
parity with all equity securities issued by the Company the terms of which
specifically provide that such equity securities rank on a parity with the
Preferred Stock with respect to dividends rights or rights upon liquidation,
dissolution or winding up of the Company; and (iii) junior to all equity
securities issued by the Company the terms of which specifically provide that
such equity securities rank senior to the Preferred Stock with respect to
dividend rights or rights upon liquidation, dissolution or winding up of the
Company.
CONVERSION RIGHTS
The terms and conditions, if any, upon which any shares of any class or
series of Preferred Stock are convertible into Common Stock will be set forth
in the applicable Prospectus Supplement relating thereto. Such terms will
include the number of shares of Common Stock into which the shares of
Preferred Stock are convertible, the conversion price (or manner of
calculation thereof), the conversion period, provisions as to whether
conversion will be at the option of the holders of such class or series of
Preferred Stock or the Company, the events requiring an adjustment of the
conversion price and provisions affecting conversion in the event of the
redemption of such class or series of Preferred Stock.
RESTRICTIONS ON TRANSFER
For the Company to qualify as a REIT under the Code, not more than 50% in
value of its outstanding stock may be owned, directly or indirectly, by five
or fewer individuals (as defined in the Code) during the last half of a
taxable year, the stock must be beneficially owned by 100 or more persons
during at least 335 days of a taxable year of 12 months or during a
proportionate part of a shorter taxable year and certain percentages of the
Company's gross income must be from particular activities (see "Federal Income
Tax Considerations--Requirements for Qualification--Gross Income Tests"). To
enable the Company to continue to qualify as a REIT, the Charter restricts the
acquisition of shares of common stock and preferred stock. The Charter
provides that, subject to certain exceptions specified in the Charter, no
stockholder, other than George M. Marcus, may own, or be deemed to own by
virtue of the attribution provisions of the Code, more than 6.0% of the value
of the outstanding Equity Stock. See "Description of Common Stock--
Restrictions on Transfer." The applicable Prospectus Supplement will also
specify any additional ownership limitations relating to a series of Preferred
Stock.
15
<PAGE>
CONVERTIBLE PREFERRED STOCK
Pursuant to the Stock Purchase Agreement, Tiger/Westbrook has purchased
800,000 shares of Convertible Preferred Stock for an aggregate purchase price
of $20.0 million, Tiger/Westbrook is obligated to purchase up to an additional
$20.0 million of Convertible Preferred Stock on or prior to June 20, 1997. On
July 1, 1996, the Company filed Articles Supplementary (the "Articles
Supplementary") setting forth the preferences, conversion and other rights,
voting powers, restrictions, limitations as to dividends, qualifications and
terms or conditions of redemption of the Convertible Preferred Stock. The
following summarizes certain rights of the holders of the Convertible
Preferred Stock, generally, and Tiger/Westbrook, its affiliates and its
transferees, specifically. These rights arise under the Stock Purchase
Agreement and a Registration Rights Agreement as well as the Articles
Supplementary.
Ranking
The Convertible Preferred Stock ranks senior to the Common Stock with
respect to the payment of dividends and amounts upon liquidation, dissolution
or winding up of the Company. The Company may not authorize, create or
increase the authorized amount of any class or series of equity securities
that ranks equal with or senior to the Convertible Preferred Stock with
respect to the payments of dividends or amounts upon liquidation, dissolution
or winding up, without the consent of holders of two-thirds of the outstanding
shares of Convertible Preferred Stock, voting together as a class.
Dividends
Holders of shares of Convertible Preferred Stock are entitled to receive
annual cumulative cash dividends, payable quarterly, in an amount equal to the
greater of (i) $2.1875 per share (8.75% of the $25.00 per share price) or (ii)
the dividend (subject to adjustment) paid with respect to the Common Stock
plus, in both cases, any accumulated but unpaid dividends on the Convertible
Preferred Stock.
Unless and until all accrued dividends on the Convertible Preferred Stock
through the last preceding Dividend Payment Date have been paid, the Company
may not (i) declare or pay any dividend, make any distribution (other than a
distribution payable solely in shares of Common Stock), or set aside any funds
or assets for payment or distribution with regard to any Common Stock (or any
other stock junior to the Convertible Preferred Stock, together with Common
Stock ("Junior Shares")), (ii) redeem or purchase (directly or through
subsidiaries), or set aside any funds or other assets for the redemption or
purchase of, any Junior Shares or (iii) authorize, take or cause to be taken
any action as general partner of the Operating Partnership that will result in
(A) the declaration or payment by the Operating Partnership of any
distribution to its partners (other than distributions payable to the Company
as general partner that will be used by the Company to fund the payment of
dividends on the Convertible Preferred Stock (such distributions to the
Company being referred to as "Authorized GP Distributions")), or set aside any
funds or assets for payment of any distributions (other than Authorized GP
Distributions) or (B) the redemption or purchase (directly or through
subsidiaries), or the setting aside of any funds or other assets for the
redemption or purchase of, any partnership interests in the Operating
Partnership.
In determining whether a distribution (other than upon voluntary or
involuntary liquidation) by dividend, redemption or other acquisition of
shares or otherwise, is permitted under the MGCL, amounts that would be needed
if the Company were to be dissolved at the time of the distribution to satisfy
the preferential rights upon dissolution of holders of the Company's
Convertible Preferred Stock whose preferential rights upon dissolution are
superior to those receiving the distribution are not to be included in the
Company's total liabilities.
Liquidation Preference
Upon the liquidation, dissolution or winding-up of the Company the holders
of the Convertible Preferred Stock will be entitled to receive out of the
assets of the Company available for distribution to its stockholders, before
any distribution is made to holders of the Common Stock, an amount per share
(the "Liquidation Preference") equal to 105% of the sum of (i) $25.00 (the
"Stated Value") plus (ii) all accrued dividends with
16
<PAGE>
respect to the Convertible Preferred Stock to the date of final distribution
(whether or not declared). After payment of the full amount of the Liquidation
Preference, the holders of Convertible Preferred Stock will not be entitled to
any further distribution of assets of the Company.
Until the holders of the Convertible Preferred Stock have been paid the
Liquidation Preference in full, no payment will be made to any holder of
Common Stock upon the liquidation, dissolution or winding up of the Company.
If, upon such liquidation, dissolution or winding up, the assets of the
Company, or the proceeds thereof, distributable among the holders of the
shares of the Convertible Preferred Stock are insufficient to pay in full the
Liquidation Preference, then such assets, or the proceeds thereof, will be
distributed pro rata to the holders of shares of the Convertible Preferred
Stock in accordance with their respective holdings thereof.
Neither a consolidation or merger of the Company with another corporation,
nor a sale or transfer of all or any part of the Company's assets for cash or
securities, will be considered a liquidation, dissolution or winding-up of the
Company.
Voting Rights
Except as indicated below with respect to the election of directors of the
Company, certain amendments to the Charter and certain other specified
matters, the holders of shares of Convertible Preferred Stock have no voting
rights. On those matters for which the holders of the Convertible Preferred
Stock have the right to vote, each share of the Convertible Preferred Stock is
entitled to one vote.
Election of Directors
The holders of the Convertible Preferred Stock as a class ordinarily have
the right to elect one director. Under the current Charter, the holders of the
Convertible Preferred Stock, voting as a separate class, have the right, to
elect up to four additional directors, as follows: (i) if the Company breaches
any of the protective provisions discussed in "--Senior Securities;
Amendments; Other Matters" (a "Charter Breach"), the holders of the
Convertible Preferred Stock will be entitled to elect an aggregate of four
directors; and (ii) in the event of a Dividend Default (as hereinafter
defined) or in the event of both a Dividend Default and a Charter Breach, the
holders of the Preferred Stock will be entitled to elect an aggregate of five
directors. All such additional directors will be elected as soon as
practicable after any such default. A "Dividend Default" shall occur if, at
any time, dividends are not paid in full with respect to all shares of
Convertible Preferred Stock on any four Dividend Payment Dates such that
dividends due on such four dates have not been fully paid and are outstanding
in whole or in part at the same time.
In the event of a Dividend Default and/or a Charter Breach, the number of
Directors elected by the holders of the Convertible Preferred Stock at each
subsequent annual meeting of stockholders shall be increased as provided in
the previous paragraph, e.g., if a Charter Breach has occurred, the holders of
Convertible Preferred Stock shall elect four Directors at subsequent annual
meetings and, if a Dividend Default has occurred, or if both a Dividend
Default and a Charter Breach have occurred, the holders of Convertible
Preferred Stock shall elect five directors at subsequent annual meetings,
subject to classification as provided in the Bylaws.
The Company has submitted to a stockholders' vote a proposed amendment to
its Charter that would replace the provisions described in the two preceding
paragraphs and provide instead that in the event of a Dividend Default or
Charter Breach, the Board of Directors would be reduced or expanded to nine
members, as the case may be, three of which would be elected by holders of
shares of Convertible Preferred Stock, and six of which would be elected by
the holders of shares of Common Stock. As of the date of this Prospectus, the
Company has not received sufficient votes from the stockholders to approve
this amendment.
17
<PAGE>
Senior Securities; Amendments; Other Matters
The approval of holders of two-thirds of the outstanding shares of
Convertible Preferred Stock, voting as a class, is required to (i) increase
the number of authorized shares of Convertible Preferred Stock or issue any
shares of Convertible Preferred Stock other than to existing holders of
Convertible Preferred Stock, (ii) increase the authorized number of shares of
or create, reclassify or issue any class of stock ranking prior to or on a
parity with the Convertible Preferred Stock either as to dividends or upon
liquidation, (iii) amend, alter or repeal any of the provisions of the Charter
so as to impair the rights and privileges of the Convertible Preferred Stock,
(iv) amend, alter or repeal certain provisions of the Bylaws in a manner which
would adversely affect the rights of the holders of the Convertible Preferred
Stock, (v) authorize any reclassification of the Convertible Preferred Stock,
(vi) except pursuant to a conversion of the Convertible Preferred Stock,
require the exchange of Convertible Preferred Stock for other securities, or
(vii) effect a voluntary liquidation, dissolution or winding up of the
Company, the sale of substantially all of the assets of the Company, the
merger or consolidation or major recapitalization of the Company or the
Operating Partnership.
In addition, the approval of holders of a majority of the outstanding shares
of Convertible Preferred Stock, voting as a class, is required for the Company
to take any of the following actions: (i) the sale, transfer or assignment of
beneficial interests in or voting rights with respect to assets of the Company
or the Operating Partnership in excess of $45,000,000 within any 90-day period
or $125,000,000 within any 360-day period; (ii) the Company's termination of
its status as a REIT; (iii) any alteration in the Company's or the Operating
Partnership's business such that (A) less than 65% of the Company's or the
Operating Partnership's assets are located in the States of California, Oregon
and Washington, (B) less than 80% of the Company's or the Operating
Partnership's assets are located west of the Mississippi River or (C) less
than 80% of the Company's or the Operating Partnership's assets are classified
as multi-family residential properties; or (iv) any change in control of the
Company or the Operating Partnership.
Conversion Rights
The Convertible Preferred Stock is subject to both conversion at the option
of the holder thereof and mandatory conversion required by the Company,
subject to the terms and conditions described below.
Optional Conversion. Commencing on June 20, 1997, and then at the beginning
of each of the next three three-month periods thereafter, 25% of the
authorized shares of Convertible Preferred Stock will be eligible for
conversion at the option of the holder thereof. Each share of Convertible
Preferred Stock subject to conversion shall be generally convertible into a
number of fully paid and non-assessable shares of Common Stock (calculated as
to each conversion to the nearest 1/100th of a share) equal to Stated Value
plus the amount, if any, of accrued dividends as of the effective date of the
conversion, divided by the Conversion Price (as defined below) then in effect.
Notwithstanding the foregoing, in the case of the liquidation, dissolution or
winding-up of the Company, whether voluntary or involuntary, shares of
Convertible Preferred Stock shall, at the option of the holder thereof,
immediately become convertible into Common Stock.
Mandatory Conversion. If after June 20, 2001, the closing price of the
Common Stock on each of at least 20 trading days (including the trading day
immediately before the notice of mandatory conversion is delivered by the
Company) out of the preceding period of 30 consecutive trading days
immediately prior to the notice of mandatory conversion shall be greater than
the Conversion Price in effect on each of such 20 trading days, the Company
shall, subject to the holders' redemption rights (see "--Redemption at
Holder's Option After Notice of Mandatory Conversion"), have the right, to
convert all, but not less than all, of the outstanding shares of Convertible
Preferred Stock into a number of fully paid and non-assessable shares of
Common Stock (calculated as to each conversion to the nearest 1/100th of a
share) equal to Stated Value plus the amount, if any, of accrued dividends as
of the effective date of the conversion, divided by the Conversion Price then
in effect.
Fractional Shares. No fractional shares of Common Stock will be issued upon
conversion of shares of Convertible Preferred Stock. Any fractional interest
in a share of Common Stock resulting from conversion of shares of Convertible
Preferred Stock will be paid in cash (computed to the nearest cent) based on
the current market price of the Common Stock on the trading day next preceding
the day of conversion.
18
<PAGE>
Conversion Price. The "Conversion Price" per share of Convertible Preferred
Stock will initially be $21.875, and will be equitably adjusted so as to
preserve the ownership interests of the holders of the Convertible Preferred
Stock if the Company (i) pays a dividend or makes a distribution on its Common
Stock in shares of its Common Stock, (ii) subdivides its outstanding Common
Stock into a greater number of shares, or (iii) combines its outstanding
Common Stock into a smaller number of shares, (iv) issues rights or warrants
to the holders of its Common Stock as a class entitling them to purchase
Common Stock at a price per share less than the then Conversion Price, (v)
distributes to the holders of its Common Stock as a class any shares of stock
of the Company (other than Common Stock) or evidences of indebtedness or
assets (other than cash dividends or distributions) or rights or warrants
(other than those referred to in the previous clause) to purchase any of its
securities, (vi) subject to certain exceptions, issues or sells (or the
Operating Partnership issues or sells) any equity or debt securities which are
convertible into or exchangeable for shares of Common Stock ("Convertible
Securities") or any rights, options or warrants to purchase Common Stock at a
price per share which is less than the Conversion Price, or (vii) issues or
sells any Common Stock (other than on conversion or exchange of Convertible
Securities or exercise of rights, options or warrants to which any of the
three preceding clauses applies) for a consideration per share less than the
Conversion Price.
The Company will seek to list the shares of Common Stock required to be
delivered upon conversion of the Convertible Preferred Stock on each national
securities exchange, if any, on which the outstanding shares of Common Stock
are listed at the time of delivery of the Common Stock. The Company will pay
any documentary stamp or similar issue or transfer taxes payable in respect of
the issue or delivery of shares of Common Stock on conversion of Convertible
Preferred Stock.
Redemption at Holder's Option After Notice of Mandatory Conversion
In the event that the Company exercises its right to require a mandatory
conversion of Convertible Preferred Stock (but in no other circumstances),
each holder of Convertible Preferred Stock will have the right to require the
Company to redeem any or all the shares of Convertible Preferred Stock owned
of record by the holder, at a redemption price per share (the "Redemption
Price") equal to the applicable Redemption Percentage as defined below,
multiplied by the sum of (i) Stated Value plus (ii) the sum of all accrued
dividends with regard to the Convertible Preferred Stock through the date of
redemption. As used herein, the "Redemption Percentage" means a percentage
beginning at 105% and decreasing annually by 1% to a floor of 100%.
At such time as there are 40,000 shares or fewer of Convertible Preferred
Stock outstanding, the Company may at its option purchase all of the
outstanding shares of the Convertible Preferred Stock from the holders thereof
at a price equal to the greater of (a) 110% of the sum of the Stated Value of
such shares (together with all accrued dividends thereon) and (b) the fair
market value of such shares, which shall be equal to the fair market value of
the Common Stock, as of such date, issuable upon conversion of such shares,
together with all accrued dividends thereon.
Right of Tiger/Westbrook to Participate in Offerings
Pursuant to the terms of the Stock Purchase Agreement, Tiger/Westbrook has,
for so long as the Convertible Preferred Stock is outstanding, the preemptive
right to purchase a pro rata share on an as converted basis as of the date of
the Company Notice (as defined herein) of any stock (or options, warrants or
rights to purchase such stock or securities convertible into such stock)
(collectively, "Eligible Securities"), for the price and upon the terms
specified by the Company in its notice to Tiger/Westbrook (the "Company
Notice") of a Company issuance of Eligible Securities, which price cannot be
greater than that offered to third parties. If Tiger/Westbrook fails to timely
exercise in full its preemptive rights, then the Company may sell the unsold
Eligible Securities at any time within 180 days (60 days in the case of a
public offering) thereafter at a price and upon terms no more favorable to the
purchasers thereof than specified to Tiger/Westbrook. Tiger/Westbrook's
preemptive rights do not apply to any Eligible Securities, among other things,
(i) issuable in connection with stock splits, stock dividends or
recapitalizations as to the effects of which other adjustments are provided
for, or (ii) issuable to employees and prospective employees pursuant to any
plan or pattern of employee equity participation or
19
<PAGE>
issuable in connection with the Company's dividend reinvestment plan. In
addition, the Stock Purchase Agreement provides Tiger/Westbrook with
preemptive rights to purchase a pro rata share of the Company's equity
offerings.
Registration Rights
The outstanding shares of Convertible Preferred Stock, together with any
shares of Common Stock to which such shares of Convertible Preferred Stock may
be converted, are not registered under the Securities Act or the securities
laws of any state. Accordingly, such Convertible Preferred Stock or Common
Stock may be sold only in one or more transactions registered under the
Securities Act and, where applicable, state securities laws or as to which an
exemption from registration requirements of the Securities Act and, where
applicable, state securities laws is available. Pursuant to the Registration
Rights Agreement, Tiger/Westbrook may request the Company to register (at the
Company's expense) the then outstanding Convertible Preferred Stock and other
Registrable Securities (as defined herein), under the terms and conditions
described below. "Registrable Securities" means, subject to certain
exceptions, (i) the Convertible Preferred Stock, (ii) all Common Stock
issuable or issued upon conversion of the Convertible Preferred Stock, and
(iii) any Common Stock of the Company issued as a dividend or distribution or
issuable upon the conversion or exercise of any warrant, right or other
security which is issued as a dividend or other distribution with respect to,
or in exchange for or in replacement of, such Convertible Preferred Stock or
Common Stock.
After the completion of Tiger/Westbrook's purchases of Convertible Preferred
Stock, pursuant to the Stock Purchase Agreement, with respect to the
Convertible Preferred Stock, and after February 20, 1997, with respect to
Common Stock which are Registrable Securities, at Tiger/Westbrook's request,
the Company will use its best efforts to cause all outstanding Convertible
Preferred Stock or all or a portion of such Common Stock to be registered
under the Securities Act (including, under certain circumstances pursuant to
an offering on a continuous or delayed basis in the future (a "Shelf
Registration")), subject to certain limitations, including, without
limitation, as to the value of the shares included in the registration
(generally, a minimum of $7,000,000 or, in the case of a Shelf Registration,
all of the applicable Registrable Securities outstanding), size of the
registration (the registration must be for all of the outstanding Convertible
Preferred Stock or at least 25% of Tiger/Westbrook's Common Stock), and timing
(the Company is not required to make more than one registration per year).
With respect to a Shelf Registration, the Company shall use its best efforts
to keep the Shelf Registration continuously effective for up to two years.
Subject to certain limitations, if, on or after June 20, 1997, the Company
registers (or decides to issue under its current Shelf Registration) any
Common Stock, at the request of Tiger/Westbrook, the Company will use its best
efforts to register all (or any portion) of the shares of Common Stock (but
not Convertible Preferred Stock) as specified by Tiger/Westbrook.
Tiger/Westbrook's registration rights are assignable to any transferee of the
Convertible Preferred Stock or Common Stock owned by Tiger/Westbrook,
provided, only Tiger/Westbrook may request registration pursuant to the
Registration Rights Agreement.
Stockholder Approval and Amendment to Charter
At the September 27, 1996 special meeting of the stockholders, the
stockholders approved the sale of up to $40.0 million of Convertible Preferred
Stock to Tiger/Westbrook and certain amendments to the Charter relating to the
ownership limit provisions described in the section entitled "Description of
Common Stock--Restrictions on Transfer" in order to facilitate the Convertible
Preferred Stock sale. See "--Election of Directors." As of the date of this
Prospectus, the Company has received insufficient votes from the stockholders
to approve a proposed amendment to the Charter to cause certain modifications
to the composition of the Board of Directors in the event of a Dividend
Default or a Charter Breach. See "--Election of Directors." However, as of the
date of this Prospectus, the Company is continuing to solicit such votes.
20
<PAGE>
DESCRIPTION OF DEPOSITARY SHARES
GENERAL
The Company may issue Depositary Shares, each of which will represent a
fractional interest of a share of a particular class or series of Preferred
Stock, as specified in the applicable Prospectus Supplement. Shares of a class
or series of Preferred Stock represented by Depositary Shares will be
deposited under a separate Deposit Agreement (each, a "Deposit Agreement")
among the Company, the depositary named therein (the "Preferred Stock
Depositary") and the holders from time to time of the depositary receipts
issued by the Preferred Stock Depositary which will evidence the Depositary
Shares ("Depositary Receipts"). Subject to the terms of the Deposit Agreement,
each owner of a Depositary Receipt will be entitled, in proportion to the
fractional interest of a share of a particular class or series of Preferred
Stock represented by the Depositary Shares evidenced by such Depositary
Receipt, to all the rights and preferences of the class or series of the
Preferred Stock represented by such Depositary Shares (including dividend,
voting, conversion, redemption and liquidation rights).
The Depositary Shares will be evidenced by Depositary Receipts issued
pursuant to the applicable Deposit Agreement. Immediately following the
issuance and delivery of the Preferred Stock by the Company to a Preferred
Stock Depositary, the Company will cause such Preferred Stock Depositary to
issue, on behalf of the Company, the Depositary Receipts. Copies of the
applicable form of Deposit Agreement and Depositary Receipt may be obtained
from the Company upon request, and the statements made hereunder relating to
the Deposit Agreement and the Depositary Receipt to be issued thereunder are
summaries of certain anticipated provisions thereof and do not purport to be
complete and are subject to, and qualified in their entirety by reference to,
all of the provisions of the applicable Deposit Agreement and related
Depositary Receipts.
DIVIDENDS AND OTHER DISTRIBUTIONS
The Preferred Stock Depositary will distribute all cash dividends or other
cash distributions received in respect of a class or series of Preferred Stock
to the record holders of Depositary Receipts evidencing the related Depositary
Shares in proportion to the number of the Depositary Receipts owned by such
holders, subject to certain obligations of holders to file proofs,
certificates and other information and to pay certain charges and expenses to
such Preferred Stock Depositary.
In the event of a distribution other than in cash, the Preferred Stock
Depositary will distribute property received by it to the record holders of
Depositary Receipts entitled thereto, subject to certain obligations of
holders to file proofs, certificates and other information and to pay certain
charges and expenses to the Preferred Stock Depositary, unless such Preferred
Stock Depositary determines that it is not feasible to make such distribution,
in which case the Preferred Stock Depositary may, with the approval of the
Company, sell such property and distribute the net proceeds from such sale to
such holders.
No distribution will be made in respect of any Depositary Share to the
extent that it represents any class or series of Preferred Stock converted
into Excess Stock or otherwise converted or exchanged.
WITHDRAWAL OF STOCK
Upon surrender of the Depositary Receipts at the corporate trust office of
the Preferred Stock Depositary (unless the related Depositary Shares have
previously been called for redemption or converted or converted into Excess
Stock or otherwise), the holders thereof will be entitled to delivery at such
office, to or upon each such holder's order, of the number of whole or
fractional shares of the class or series of Preferred Stock and any money or
other property represented by the Depositary Shares evidenced by such
Depositary Receipts. Holders of Depositary Receipts will be entitled to
receive whole or fractional shares of the related class or series of Preferred
Stock on the basis of the proportion of Preferred Stock represented by each
Depositary Share as specified in the applicable Prospectus Supplement, but
holders of such shares of Preferred Stock will not thereafter be entitled to
receive Depositary Shares therefor. If the Depositary Receipts delivered by
the holder evidence a number of Depositary Shares in excess of the number of
Depositary Shares representing the number of shares of Preferred Stock to be
withdrawn, the Preferred Stock Depositary will deliver to such holder at the
same time a new Depositary Receipt evidencing such excess number of Depositary
Shares.
21
<PAGE>
REDEMPTION OF DEPOSITARY SHARES
Whenever the Company redeems shares of Preferred Stock held by the Preferred
Stock Depositary, the Preferred Stock Depositary will redeem as of the same
redemption date the number of the Depositary Shares representing shares of
such class or series of Preferred Stock so redeemed, provided the Company
shall have paid in full to the Preferred Stock Depositary the redemption price
of the Preferred Stock to be redeemed plus an amount equal to any accrued and
unpaid dividends thereon to the date fixed for redemption. The redemption
price per Depositary Share will be equal to the corresponding proportion of
the redemption price and any other amounts per share payable with respect to
such class or series of Preferred Stock. If fewer than all the Depositary
Shares are to be redeemed, the Depositary Shares to be redeemed will be
selected pro rata (as nearly as may be practicable without creating fractional
Depositary Shares) or by any other equitable method determined by the Company
that will not result in the issuance of any Excess Stock.
From and after the date fixed for redemption, all dividends in respect of
the shares of a class of series of Preferred Stock so called for redemption
will cease to accrue, the Depositary Shares so called for redemption will no
longer be deemed to be outstanding and all rights of the holders of the
Depositary Receipts evidencing the Depositary Shares so called for redemption
will cease, except the right to receive any moneys payable upon such
redemption and any money or other property to which the holders of such
Depositary Receipts were entitled upon such redemption upon surrender thereof
to the Preferred Stock Depositary.
VOTING OF THE PREFERRED STOCK
Upon receipt of notice of any meeting at which the holders of a class or
series of Preferred Stock deposited with the Preferred Stock Depositary are
entitled to vote, the Preferred Stock Depositary will mail the information
contained in such notice of meeting to the record holders of the Depositary
Receipts evidencing the Depositary Shares which represent such class or series
of Preferred Stock. Each record holder of Depositary Receipts evidencing
Depositary Shares on the record date (which will be the same date as the
record date for such class or series of Preferred Stock) will be entitled to
instruct the Preferred Stock Depositary as to the exercise of the voting
rights pertaining to the amount of Preferred Stock represented by such
holder's Depositary Shares. The Preferred Stock Depositary will vote the
amount of such class or series of Preferred Stock represented by such
Depositary Shares in accordance with such instructions, and the Company will
agree to take all reasonable action which may be deemed necessary by the
Preferred Stock Depositary in order to enable the Preferred Stock Depositary
to do so. The Preferred Stock Depositary will abstain from voting the amount
of Preferred Stock represented by such Depositary Shares to the extent it does
not receive specific instructions from the holders of Depositary Receipts
evidencing such Depositary Shares. The Preferred Stock Depositary will not be
responsible for any failure to carry out any instruction to vote, or for the
manner or effect of any such vote made, as long as any such action or non-
action is in good faith and does not result from negligence or willful
misconduct of the Preferred Stock Depositary.
LIQUIDATION PREFERENCE
In the event of the liquidation, dissolution or winding up of the Company
whether voluntary or involuntary, the holders of each Depositary Receipt will
be entitled to the fraction of the liquidation preference accorded each share
of Preferred Stock represented by the Depositary Share evidenced by such
Depositary Receipt as set forth in the applicable Prospectus Supplement.
CONVERSION OF PREFERRED STOCK
The Depositary Shares, as such, will not be convertible into Common Stock or
any other securities or property of the Company, except in connection with
certain exchanges in connection with the preservation of the Company's status
as a REIT. See "Description of Common Stock--Restrictions on Transfer."
Nevertheless, if so specified in the applicable Prospectus Supplement relating
to an offering of Depositary Shares, the Depositary Receipts may be
surrendered by holders thereof to the applicable Preferred Stock Depositary
with written
22
<PAGE>
instructions to the Preferred Stock Depositary to instruct the Company to
cause conversion of a class or series of Preferred Stock represented by the
Depositary Shares evidenced by such Depositary Receipts into whole shares of
Common Stock, other shares of a class or series of Preferred Stock (including
Excess Stock) of the Company or other shares of stock, and the Company has
agreed that upon receipt of such instructions and any amounts payable in
respect thereof, it will cause the conversion thereof utilizing the same
procedures as those provided for delivery of Preferred Stock to effect such
conversion. If the Depositary Shares evidenced by a Depositary Receipt are to
be converted in part only, a Depositary Receipt or Receipts will be issued for
any Depositary Shares not to be converted. No fractional shares of Common
Stock will be issued upon conversion, and if such conversion will result in a
fractional share being issued, an amount will be paid in cash by the Company
equal to the value of the fractional interest based upon the closing price of
the Common Stock on the last business day prior to the conversion.
AMENDMENT AND TERMINATION OF A DEPOSIT AGREEMENT
The form of Depositary Receipt evidencing Depositary Shares which represent
the Preferred Stock and any provision of the Deposit Agreement may at any time
be amended by agreement between the Company and the Preferred Stock
Depositary. However, any amendment that materially and adversely alters the
rights of the holders of Depositary Receipts or that would be materially and
adversely inconsistent with the rights granted to the holders of the related
Preferred Stock will not be effective unless such amendment has been approved
by the existing holders of at least two-thirds of the applicable Depositary
Shares evidenced by the applicable Depositary Receipts then outstanding. No
amendment shall impair the right, subject to certain anticipated exceptions in
the Deposit Agreements, of any holder of Depositary Receipts to surrender any
Depositary Receipt with instructions to deliver to the holder the related
class or series of Preferred Stock and all money and other property, if any,
represented thereby, except in order to comply with law. Every holder of an
outstanding Depositary Receipt at the time any such amendment becomes
effective shall be deemed, by continuing to hold such Depositary Receipt, to
consent and agree to such amendment and to be bound by the applicable Deposit
Agreement as amended thereby.
The Deposit Agreement may be terminated by the Company upon not less than 30
days' prior written notice to the Preferred Stock Depositary if (i) such
termination is necessary to preserve the Company's status as a REIT or (ii) a
majority of each series or class of Preferred Stock subject to such Deposit
Agreement consents to such termination, whereupon the Preferred Stock
Depositary will deliver or make available to each holder of Depositary
Receipts, upon surrender of the Depositary Receipts held by such holder, such
number of whole or fractional shares of each Preferred Stock as are
represented by the Depositary Shares evidenced by such Depositary Receipts
together with any other property held by Preferred Stock Depositary with
respect to such Depositary Receipts. The Company has agreed that if the
Deposit Agreement is terminated to preserve the Company's status as a REIT,
then the Company will use its best efforts to list each class or series of
Preferred Stock issued upon surrender of the related Depositary Shares. In
addition, the Deposit Agreement will automatically terminate if (i) all
outstanding Depositary Shares shall have been redeemed, (ii) there shall have
been a final distribution in respect of each class or series of Preferred
Stock in connection with any liquidation, dissolution or winding up of the
Company and such distribution shall have been distributed to the holders of
the Depositary Receipts evidencing the Depositary Shares representing such
class or series of Preferred Stock or (iii) each share of the related
Preferred Stock shall have been converted into stock of the Company not so
represented by Depositary Shares.
CHARGES OF A PREFERRED STOCK DEPOSITARY
The Company will pay all transfer and other taxes and governmental charges
arising solely from the existence of the Deposit Agreement. In addition, the
Company will pay the fees and expenses of the Preferred Stock Depositary in
connection with the performance of its duties under the Deposit Agreement.
However, holders of Depositary Receipts will pay the fees and expenses of the
Preferred Stock Depositary for any duties requested by such holders to be
performed which are outside of those expressly provided for in the Deposit
Agreement.
23
<PAGE>
RESIGNATION AND REMOVAL OF DEPOSITARY
The Preferred Stock Depositary may resign at any time by delivering to the
Company notice of its election to do so, and the Company may at any time
remove the Preferred Stock Depositary, any such resignation or removal to take
effect upon the appointment of a successor Preferred Stock Depositary. A
successor Preferred Stock Depositary must be appointed within 60 days after
delivery of the notice of resignation or removal and must be a bank or trust
company having its principal office in the United States and having a combined
capital and surplus of at least $50,000,000.
MISCELLANEOUS
The Preferred Stock Depositary will forward to holders of Depositary
Receipts any reports and communications from the Company which are received by
the Preferred Stock Depositary with respect to the related Preferred Stock.
Neither the Preferred Stock Depositary nor the Company will be liable if it
is prevented from or delayed in, by law or any circumstances beyond its
control, performing its obligations under the Deposit Agreement. The
obligations of the Company and the Preferred Stock Depositary under the
Deposit Agreement will be limited to performing their duties thereunder in
good faith and without negligence (in the case of any action or inaction in
the voting of a class or series of Preferred Stock represented by the
Depositary Shares), gross negligence or willful misconduct, and the Company
and the Preferred Stock Depositary will not be obligated to prosecute or
defend any legal proceeding in respect of any Depositary Receipts, Depositary
Shares or shares of a class or series of Preferred Stock represented thereby
unless satisfactory indemnity is furnished. The Company and the Preferred
Stock Depositary may rely on written advice of counsel or accountants, or
information provided by persons presenting shares of Preferred Stock
represented thereby for deposit, holders of Depositary Receipts or other
persons believed in good faith to be competent to give such information, and
on documents believed in good faith to be genuine and signed by a proper
party.
In the event a Preferred Stock Depositary shall receive conflicting claims,
requests or instructions from any holders of Depositary Receipts, on the one
hand, and the Company, on the other hand, the Preferred Stock Depositary shall
be entitled to act on such claims, requests or instructions received from the
Company.
24
<PAGE>
DESCRIPTION OF WARRANTS
The Company has no Warrants outstanding (other than options issued under the
Company's stock option plans and the M&M Stock Option). The Company may issue
Warrants for the purchase of Preferred Stock or Common Stock. Warrants may be
issued independently or together with any other Offered Securities offered by
any Prospectus Supplement and may be attached to or separate from such Offered
Securities. Each series of Warrants will be issued under a separate warrant
agreement (each, a "Warrant Agreement") to be entered into between the Company
and a warrant agent specified in the applicable Prospectus Supplement (the
"Warrant Agent"). The Warrant Agent will act solely as an agent of the Company
in connection with the Warrants of such series and will not assume any
obligation or relationship of agency or trust for or with any provisions of
the Warrants offered hereby. Further terms of the Warrants and the applicable
Warrant Agreements will be set forth in the applicable Prospectus Supplement.
The applicable Prospectus Supplement will describe the terms of the Warrants
in respect of which this Prospectus is being delivered, including, where
applicable, the following: (1) the title of such Warrants; (2) the aggregate
number of such Warrants; (3) the price or prices at which such Warrants will
be issued; (4) the designation, terms and number of shares of Preferred Stock
or Common Stock purchasable upon exercise of such Warrants; (5) the
designation and terms of the Offered Securities, if any, with which such
Warrants are issued and the number of such Warrants issued with each such
Offered Security; (6) the date, if any, on and after which such Warrants and
the related Preferred Stock or Common Stock will be separately transferable;
(7) the price at which each share of Preferred Stock or Common Stock
purchasable upon exercise of such Warrants may be purchased; (8) the date on
which the right to exercise such Warrants shall commence and the date on which
such right shall expire; (9) the minimum or maximum amount of such Warrants
which may be exercised at any one time; (10) information with respect to book-
entry procedures, if any; (11) a discussion of certain federal income tax
considerations; and (12) any other terms of such Warrants, including terms,
procedures and limitations relating to the exchange and exercise of such
Warrants.
CERTAIN PROVISIONS OF THE COMPANY'S CHARTER AND BYLAWS
Certain provisions of the Company's Charter and Bylaws might discourage
certain types of transactions that involve an actual or threatened change of
control of the Company. The Charter provides that the Company must seek the
consent of holders of two-thirds of the issued and outstanding shares of
Convertible Preferred Stock before it or the Operating Partnerships may merge
or consolidate with any other entity or sell all or substantially all of its
assets. Also, the Charter requires that the Company must obtain the consent of
holders of more than 50% of the issued and outstanding shares of Convertible
Preferred Stock before it may undergo a change in control. See "Description of
Preferred Stock--Convertible Preferred Stock--Senior Securities; Amendments;
Other Matters." The Ownership Limit may delay or impede a transaction or a
change in control of the Company that might involve a premium price for the
Company's capital stock or otherwise be in the best interest of the
stockholders. See "Description of Common Stock--Restrictions on Transfer."
Pursuant to the Company's Charter and Bylaws, the Company's Board of Directors
is divided into three classes of directors, each class serving staggered
three-year terms. The staggered terms of directors may reduce the possibility
of a tender offer or an attempt to change control of the Company. The issuance
of Preferred Stock by the Board of Directors may also have the effect of
delaying, deferring or preventing a change in control of the Company. See
"Description of Preferred Stock--General."
FEDERAL INCOME TAX CONSIDERATIONS
The following summary of material federal income tax considerations is based
on current law and does not purport to deal with all aspects of taxation that
may be relevant to particular stockholders in light of their personal
investment or tax circumstances, or to certain types of stockholders
(including insurance companies, financial institutions and broker-dealers, tax
exempt organizations, foreign corporations and persons who are not citizens or
residents of the United States) subject to special treatment under the federal
income tax laws. Certain Federal Income Tax Considerations relevant to holders
of the Offered Securities may be provided in the applicable Prospectus
Supplement relating thereto.
25
<PAGE>
EACH PROSPECTIVE PURCHASER IS ADVISED TO CONSULT HIS OWN TAX ADVISOR
REGARDING THE SPECIFIC TAX CONSEQUENCES TO HIM OF THE PURCHASE, OWNERSHIP AND
SALE OF THE OFFERED SECURITIES AND OF THE COMPANY'S ELECTION TO BE TAXED AS A
REAL ESTATE INVESTMENT TRUST, INCLUDING THE FEDERAL, STATE, LOCAL, FOREIGN
INCOME AND OTHER TAX CONSEQUENCES OF SUCH PURCHASE, OWNERSHIP, SALE AND
ELECTION, AND OF POTENTIAL CHANGES IN APPLICABLE TAX LAWS.
GENERAL
The Company believes that since its formation it has operated, and intends
to continue to operate, in a manner that permits it to satisfy the
requirements for taxation as a REIT under the applicable provisions of the
Code. No assurance can be given, however, that such requirements will be met.
The sections of the Code relating to qualification and operation as a REIT
are highly technical and complex. The following sets forth the material
aspects of the Code sections that govern the federal income tax treatment of a
REIT and its stockholders. This summary is qualified in its entirety by the
applicable Code provisions, rules and regulations thereunder, and
administrative and judicial interpretations thereof, all of which are subject
to change which may apply retroactively. Morrison & Foerster LLP has acted as
tax counsel to the Company in connection with Company's election to be taxed
as a REIT.
In the opinion of Morrison & Foerster LLP, commencing with the Company's
taxable year ended December 31, 1994, the Company has been organized in
conformity with the requirements for qualification as a REIT, and its method
of operation has and will enable it to continue to meet the requirements for
qualification and taxation as a REIT under the Code. It must be emphasized
that this opinion is based on various assumptions and is conditioned upon
certain representations made by the Company as to factual matters. Such
representations are set forth in a certificate of the Company filed with the
opinion of Morrison & Foerster LLP relating to certain tax matters which has
been filed as an exhibit to the Registration Statement of which this
Prospectus is a part. Moreover, such qualification and taxation as a REIT
depends upon the Company's ability to meet, through actual annual operating
results, distribution levels and diversity of stock ownership, the various
qualification tests imposed under the Code discussed below, the results of
which will not be reviewed by Morrison & Foerster LLP. Accordingly, no
assurance can be given that the actual results of the Company's operations for
any particular taxable year will satisfy such requirements. See "--Failure to
Qualify." An opinion of counsel is not binding on the IRS, and no assurance
can be given that the IRS will not challenge the Company's eligibility for
taxation as a REIT.
If the Company fails to qualify as a REIT in any year, however, it will be
subject to federal income tax as if it were a domestic corporation, and its
stockholders will be taxed in the same manner as stockholders of ordinary
corporations. In this event, the Company could be subject to potentially
significant tax liabilities and the amount of cash available for distribution
to its stockholders could be reduced.
TAXATION OF THE COMPANY
In any year in which the Company qualifies as a REIT, in general it will not
be subject to federal income tax on that portion of its net income that it
distributes to stockholders. This treatment substantially eliminates the
"double taxation" on income at the corporate and stockholder levels that
generally results from investment in a corporation. However, the REIT will be
subject to federal income tax as follows: First, the REIT 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, the REIT may be subject to the "alternative minimum
tax" on its items of tax preference. Third, if the REIT has (i) net income
from the sale or other disposition of "foreclosure property" which is held
primarily for sale to customers in the ordinary course of business or
(ii) other nonqualifying income from foreclosure property, it will be subject
to tax at the highest corporate rate on such income. Fourth, if the REIT has
net income from prohibited transactions (which are, in general, certain sales
or other dispositions of property held primarily for sale to customers in the
ordinary course of business
26
<PAGE>
other than foreclosure property), such income will be subject to a 100% tax.
Fifth, if the REIT should fail to satisfy the 75% gross income test or the 95%
gross income test (as discussed below), and has nonetheless maintained its
qualification as a real estate investment trust 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 the REIT fails the 75% or
95% test. Sixth, if the REIT 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 net income for such year, and (iii) any undistributed taxable income from
prior periods, the REIT would be subject to a 4% excise tax on the excess of
such required distribution over the amounts actually distributed. For purposes
of the excise tax, dividends declared in October, November, or December of one
calendar year and paid by January 31 of the following calendar year are deemed
paid January 31 of the initial calendar year. Seventh, if the REIT acquires
any asset from a C corporation (i.e., generally a corporation subject to full
corporate-level tax) in a transaction in which the basis of the asset in the
REIT's hands is determined by reference to the basis of the asset (or any
other property) in the hands of the C corporation, and the REIT recognizes
gain on the disposition of such asset during the 10 year period beginning on
the date on which such asset was acquired by the REIT, then, to the extent of
any built-in gain at the time of acquisition, such gain will be subject to tax
at the highest regular corporate rate, assuming the REIT will make an election
pursuant to IRS Notice 88-19.
REQUIREMENTS FOR QUALIFICATION
The Code defines a real estate investment trust 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
by 100 or more persons; (6) 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) at any time during the last half of each taxable
year; and (7) which meets certain other tests, described below, regarding the
nature of income and assets. The Code provides that conditions (1) to (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. Conditions (5)
and (6) will not apply until after the first taxable year for which an
election is made by the Company to be taxed as a REIT.
In order to ensure compliance with the ownership tests described above, the
Company has placed certain restrictions on the transfer of the common stock
and preferred stock to prevent further concentration of stock ownership.
Moreover, to evidence compliance with these requirements, the Company must
maintain records which disclose the actual ownership of its outstanding common
stock and preferred stock. In fulfilling its obligations to maintain records,
the Company must and will demand written statements each year from the record
holders of designated percentages of its common stock and preferred stock
disclosing the actual owners of such common stock and preferred stock. A list
of those persons failing or refusing to comply with such demand must be
maintained as part of the Company's records. A stockholder failing or refusing
to comply with the Company's written demand must submit with his tax returns a
similar statement disclosing the actual ownership of common stock and
preferred stock and certain other information. In addition, the Company's
Charter provides restrictions regarding the transfer of its shares that are
intended to assist the Company in continuing to satisfy the share ownership
requirements. See "Description of Capital Stock--Restrictions on Transfer."
In the case of a REIT that 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
character of the assets and gross income of the partnership shall retain the
same character in the hands of the REIT for purposes of Section 856 of the
Code, including satisfying the gross income tests and the asset tests,
described below. Thus, the Company's proportionate share of the assets,
liabilities and items of income of the Operating Partnership will be treated
as assets, liabilities and items of income of the Company for purposes of
applying the requirements described below.
27
<PAGE>
Asset Tests
At the close of each quarter of the Company's taxable year, the Company must
satisfy two tests relating to the nature of its assets. First, at least 75% of
the value of the Company's total assets must be represented by interests in
real property, interests in mortgages on real property, shares in other REITs,
cash, cash items and government securities (as well as certain temporary
investments in stock or debt instruments purchased with the proceeds of new
capital raised by the Company). Second, although the remaining 25% of the
Company's assets generally may be invested without restriction, securities in
this class may not exceed either (i) 5% of the value of the Company's total
assets as to any one non-government issuer, or (ii) 10% of the outstanding
voting securities of any one issuer. The Company's investment in the
Properties through its interest in the Operating Partnership constitutes
qualified assets for purposes of the 75% asset test. In addition, the Company
may own 100% of "qualified real estate investment trust subsidiaries" as
defined in the Code. All assets, liabilities, and items of income, deduction,
and credit of such a qualified REIT subsidiary will be treated as owned and
realized directly by the Company.
The Operating Partnership owns 100% of the non-voting preferred stock of
Essex Management Company, Essex Sacramento, Inc. and Essex Fidelity I
Corporation and none of the voting common stock. By virtue of its partnership
interest in the Operating Partnership, the Company will be deemed to own its
pro rata share of the assets of the Operating Partnership, including the
securities of Essex Management Company, Essex Sacramento, Inc. and Essex
Fidelity I Corporation, as described above. Because the Operating Partnership
will not own any of the voting securities of Essex Management Company, Essex
Sacramento, Inc. and Essex Fidelity I Corporation and, in each case, the
preferred stock's approval right is limited to certain fundamental corporate
actions that could adversely affect the preferred stock as a class, the 10%
limitation on holdings of voting securities of any one issuer will not be
exceeded.
Based upon its analysis of the total estimated value of the Essex Management
Company, Essex Sacramento, Inc. and Essex Fidelity I Corporation securities to
be owned by the Operating Partnership relative to the estimated value of the
total assets to be owned by the Operating Partnership and the other assets of
the Company, the Company believes that its pro rata share of the preferred
non-voting stock of Essex Management Company, Essex Sacramento, Inc. and Essex
Fidelity I Corporation to be held by the Operating Partnership represents, in
each case, less than 5% of the Company's total assets and, together with any
other nonqualifying assets represents less than 25% of the Company's total
assets. Although the Company plans to take steps to ensure that it satisfies
the 5% value tax for any quarter with respects to which retesting is to occur,
there can be no assurance that such steps will always be successful or will
not require a reduction in the Operating Partnership's overall interest in the
Company.
Gross Income Tests
There are three separate percentage tests relating to the sources of the
Company's gross income which must be satisfied for each taxable year. For
purposes of these tests, where the Company invests in a partnership, the
Company will be treated as receiving its share of the income and loss of the
partnership, and the gross income of the partnership will retain the same
character in the hands of the Company as it has in the hands of the
partnership. See "--Tax Aspects of the Company's Investment in the Operating
Partnerships--General."
THE 75% TEST. At least 75% of the Company's gross income for the taxable
year must be "qualifying income." Qualifying income generally includes (i)
rents from real property (except as modified below); (ii) interest on
obligations collateralized by mortgages on, or interests in, real property;
(iii) gains from the sale or other disposition of interests in real property
and real estate mortgages, other than gain from property held primarily for
sale to customers in the ordinary course of the Company's trade or business
("dealer property"); (iv) dividends or other distributions on shares in other
REITs, as well as gain from the sale of such shares; (v) abatements and
refunds of real property taxes; (vi) income from the operation, and gain from
the sale, of property acquired at or in lieu of a foreclosure of the mortgage
collateralized by such property ("foreclosure
28
<PAGE>
property"); and (vii) commitment fees received for agreeing to make loans
collateralized by mortgages on real property or to purchase or lease real
property.
Rents received from a tenant will not, however, qualify as rents from real
property in satisfying the 75% test (or the 95% gross income test described
below) if the Company, or an owner of 10% or more of the Company, directly or
constructively owns 10% or more of such tenant (a "related party tenant"). In
addition, 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. Moreover, an amount received or
accrued generally will not qualify as rents from real property (or as interest
income) for purposes of the 75% and 95% gross income tests if it is based in
whole or in part on the income or profits of any person. Rent or interest will
not be disqualified, however, solely by reason of being based on a fixed
percentage or percentages of receipts or sales. Finally, for rents received to
qualify as rents from real property, the Company generally must not operate or
manage the property or furnish or render services to tenants, other than
through an "independent contractor" from whom the Company derives no revenue.
The "independent contractor" requirement, however, does not apply to the
extent that the services provided by the Company are "usually or customarily
rendered" in connection with the rental of space for occupancy only, and are
not otherwise considered "rendered to the occupant."
The Company, through the Operating Partnership (which will not be an
independent contractor), will provide certain services with respect to the
Properties and any newly acquired Properties. The Company believes that the
services provided by the Operating Partnership are usually or customarily
rendered in connection with the rental of space of occupancy only, and
therefore that the provision of such services will not cause the rents
received with respect to the Properties to fail to qualify as rents from real
property for purposes of the 75% and 95% gross income tests. Essex does not
intend to rent to any related party (other than with respect to the
Headquarters Building), to base any rent on the income or profits of any
person (other than rents that are based on a fixed percentage or percentages
of receipts or sales), or to charge rents that otherwise would not qualify as
rents from real property. Essex does anticipate renting a portion of its
Headquarters Building to M&M, who would be considered a related party tenant.
The portion of rent received by Essex from M&M, therefore, would not qualify
as rents from real property for purposes of satisfying the 75% and 95% gross
income test. It is not expected that the rent received from any related party
(including M&M) will constitute in the aggregate more than 4% of Essex's gross
income with respect to any taxable year.
THE 95% TEST. In addition to deriving 75% of its gross income from the
sources listed above, at least 95% of the Company's gross income for the
taxable year must be derived from the above-described qualifying income, or
from dividends, interest or gains from the sale or disposition of stock or
other securities that are not dealer property. Dividends and interest on any
obligation not collateralized by an interest on real property are included for
purposes of the 95% test, but not for purposes of the 75% test. For purposes
of determining whether the Company complies with the 75% and 95% income tests,
gross income does not include income from prohibited transactions. A
"prohibited transaction" is a sale of dealer property, excluding certain
property held by the Company for at least four years and foreclosure property.
See "--Taxation of the Company" and "--Tax Aspects of the Company's Investment
in the Operating Partnership--Sale of the Properties."
The Company believes that it and the Operating Partnership has held and
managed the Properties in a manner that has given rise to rental income
qualifying under the 75% and 95% gross income tests. Gains on sales of the
Properties will generally qualify under the 75% and 95% gross income tests.
Essex Management Corporation also anticipates receiving fee income in
consideration of the performance of property management and other services
with respect to properties not owned by Essex or the Operating Partnership;
however, substantially all income derived by Essex from Essex Management
Corporation will be in the form of dividends on Essex Management Corporation's
preferred stock owned by the Operating Partnership. Such dividends will
satisfy the 95%, but not the 75%, gross income tests (as discussed above).
Essex intends to closely monitor its non-qualifying income and anticipates
that non-qualifying income on its other investments
29
<PAGE>
and activities, including such dividend income and interest rate swap or cap
income (if any), will not result in Essex's failing either the 75% or the 95%
gross income tests.
Even if the Company fails to satisfy one or both of the 75% or 95% gross
income tests for any taxable year, it may still qualify as a REIT for such
year if it is entitled to relief under certain provisions of the Code. These
relief provisions will generally be available if: (i) the Company's failure to
comply was due to reasonable cause and not to willful neglect; (ii) the
Company reports the nature and amount of each item of its income included in
the 75% and 95% gross income tests on a schedule attached to its tax return;
and (iii) any incorrect information on this schedule is not due to fraud with
intent to evade tax. It is not possible, however, to state whether in all
circumstances the Company would be entitled to the benefit of these relief
provisions. If these relief provisions apply, the Company will, however, still
be subject to a special tax upon the greater of the amount by which it fails
either the 75% or 95% gross income test for that year.
THE 30% TEST. The Company must derive less than 30% of its gross income for
each taxable year from the sale or other disposition of (i) real property held
for less than four years (other than foreclosure property and involuntary
conversions), (ii) stock or securities held for less than one year, and (iii)
property in a prohibited transaction. The Company does not anticipate that it
will have any substantial difficulty in complying with this test.
Annual Distribution Requirements
The Company, in order to qualify as a REIT, is required to distribute
dividends (other than capital gain dividends) to its stockholders each year in
an amount at least equal to (A) the sum of (i) 95% of the Company's REIT
taxable income (computed without regard to the dividends paid deduction and
the REIT's net capital gain) and (ii) 95% of the net income (after tax), if
any, from foreclosure property, minus (B) the sum of certain items of non-cash
income. Such distributions must be paid in the taxable year to which they
relate, or in the following taxable year if declared before the Company timely
files its tax return for such year and if paid on or before the first regular
dividend payment after such declaration. To the extent that the Company does
not distribute all of its net capital gain or distributes at least 95%, but
less than 100%, of its REIT taxable income, as adjusted, it will be subject to
tax on the undistributed amount at regular capital gains or ordinary corporate
tax rates, as the case may be. Furthermore, if the REIT should fail to
distribute during each calendar year at least the sum of (i) 85% of its REIT
ordinary income for such year, (ii) 95% of its REIT capital gain income for
such year, and (iii) any undistributed taxable income from prior periods, the
REIT would be subject to a 4% excise tax on the excess of such required
distribution over the amounts actually distributed. For purposes of the excise
tax, dividends declared in October, November, or December of one calendar year
and paid by January 31 of the following calendar year are deemed paid January
31 of the initial calendar year.
The Company believes that it has made timely distributions sufficient to
satisfy the annual distribution requirements. In this regard, the partnership
agreement of the Operating Partnership authorizes the Company, 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 the
Company to meet these distribution requirements. It is possible that in the
future the Company may not have sufficient cash or other liquid assets to meet
the 95% distribution requirement, due to timing differences between the actual
receipt of income and actual payment of expenses on the one hand, and the
inclusion of such income and deduction of such expenses in computing the
Company's REIT taxable income on the other hand. Further, as described below,
it is possible that, from time to time, the Company may be allocated a share
of net capital gain attributable to the sale of depreciated property that
exceeds its allocable share of cash attributable to that sale. To avoid any
problem with the 95% distribution requirement, the Company will closely
monitor the relationship between its REIT taxable income and cash flow and, if
necessary, will borrow funds (or cause the Operating Partnership or other
affiliates to borrow funds) in order to satisfy the distribution requirement.
The Company (through the Operating Partnership) may be required to borrow
funds at times when market conditions are not favorable.
Under certain circumstances, the Company may be able to rectify a failure to
meet the distribution requirement for a year as a result of an adjustment to
the Company's tax return by the IRS by paying "deficiency dividends" to
shareholders in a later year, which may be included in the Company's deduction
for dividends
30
<PAGE>
paid for the earlier year. Thus, the Company may be able to avoid being taxed
on amounts distributed as deficiency dividends; however, the Company will be
required to pay interest based on the amount of any deduction taken for
deficiency dividends.
Failure to Qualify
If the Company fails to qualify for taxation as a REIT in any taxable year
and the relief provisions do not apply, the Company will be subject to tax
(including any applicable alternative minimum tax) on its taxable income at
regular corporate rates. Distributions to stockholders in any year in which
the Company fails to qualify will not be deductible by the Company, nor will
they be required to be made. In such event, to the extent of the Company's
current and accumulated earnings and profits, all distributions to
stockholders will be taxable as ordinary income, and, subject to certain
limitations in the Code, corporate distributees may be eligible for the
dividends received deduction. Unless entitled to relief under specific
statutory provisions, the Company also will be disqualified from taxation as a
REIT for the four taxable years following the year during which qualification
was lost. It is not possible to state whether the Company would be entitled to
such statutory relief.
TAX ASPECTS OF THE COMPANY'S INVESTMENT IN THE OPERATING PARTNERSHIP
The following discussion summarizes certain federal income tax
considerations applicable solely to the Company's investment in the Operating
Partnership. The discussion does not cover state or local tax laws or any
federal tax laws other than income tax laws. It should be noted that the
Company has not received an opinion of counsel with respect to the disclosure
in the following discussion.
General
The Company holds a direct ownership interest in the Operating Partnership.
In general, partnerships are "pass-through" entities which are not subject to
federal income tax. Rather, partners are allocated their proportionate shares
of the items of income, gain, loss, deduction and credit of a partnership, and
are potentially subject to tax thereon, without regard to whether the partners
receive a distribution from the partnership. The Company includes its
proportionate share of the foregoing Operating Partnership items for purposes
of the various REIT income tests and in the computation of its REIT taxable
income. See "--Taxation of the Company" and "--Requirements for
Qualification--Gross Income Tests." Any resultant increase in the Company's
REIT taxable income increases its distribution requirements (see "--
Requirements for Qualification--Annual Distribution Requirements"), but is not
generally subject to federal income tax in the hands of the Company is
distributed by the Company to its stockholders. Moreover, for purposes of the
REIT asset tests (see "--Requirements for Qualification--Asset Tests"), the
Company includes its proportionate share of assets held by the Operating
Partnership.
Entity Classification
The Company's interest in the Operating Partnership involves special tax
considerations, including the possibility of a challenge by the Internal
Revenue Service (the "Service") of the status of the Operating Partnership as
a partnership (as opposed to an association taxable as a corporation) for
federal income tax purposes. If the Operating Partnership were to be treated
as an association, it would be taxable as a corporation. In such a situation,
the Operating Partnership would be required to pay income tax at corporate
rates on its net income, and distributions to its partners would constitute
dividends that would not be deductible in computing net income. In addition,
the character of the Company's assets and items of gross income would change,
which would preclude the Company from satisfying the asset test and possibly
the income tests (see "--Requirements for Qualification--Asset Tests" and "--
Gross Income Tests"), and in turn would prevent the Company from qualifying as
a REIT. See "--Requirements for Qualification--Failure to Qualify" above for a
discussion of the effect of the Company's failure to meet such tests for a
taxable year. The Operating Partnership has received an opinion from Morrison
& Foerster LLP, counsel to the Company, stating that the Operating Partnership
is classified and treated as a partnership for federal income tax purposes.
Such legal opinion is not binding on the
31
<PAGE>
IRS. If the IRS were to challenge successfully the Operating Partnership's
status as a partnership for federal income tax purposes, the Company would
cease to qualify as a REIT and the Company and the Operating Partnership would
be subject to Federal income tax (including any alternative minimum tax) on
their net income at corporate rates. The Company also believes that each of
the partnerships in which the Operating Partnership owns interests would be
classified and treated as a partnership for Federal income tax purposes.
Tax Allocations with Respect to the Properties
Pursuant to Section 704(c) of the Code, income, gain, loss and deduction
attributable to appreciated or depreciated property that is contributed to a
partnership in exchange for an interest in the partnership (such as the
Properties), must be allocated in a manner such that the contributing partner
is charged with, or benefits from, respectively, the unrealized gain or
unrealized loss associated with the property at the time of the contribution.
The amount of such unrealized gain or unrealized loss is generally equal to
the difference between the fair market value of contributed property at the
time of contribution, and the adjusted tax basis of such property at the time
of contribution (a "Book-Tax Difference"). Such allocations are solely for
federal income tax purposes and do not affect the book capital accounts or
other economic or legal arrangements among the partners. The Operating
Partnership was formed by way of contributions of appreciated property
(including the Properties). Consequently, the partnership agreement of the
Operating Partnership requires such allocations to be made in a manner
consistent with Section 704(c) of the Code.
In general, the limited partners of the Operating Partnership will be
allocated lower amounts of depreciation deductions for tax purposes and
increased taxable income and gain on sale by the Operating Partnership of the
contributed assets (including the Properties). This will tend to eliminate the
Book-Tax Difference over the life of the Operating Partnership. However, the
special allocation rules under Section 704(c) do not always entirely rectify
the Book-Tax Difference on an annual basis or with respect to a specific
taxable transaction such as a sale. Thus, the carryover basis of the
contributed assets in the hands of the Operating Partnership may cause the
Company to be allocated lower depreciation and other deductions, and possibly
greater amounts of taxable income in the event of a sale of such contributed
assets in excess of the economic or book income allocated to it as a result of
such sale. This may cause the Company to recognize taxable income in excess of
cash proceeds, which might adversely affect the Company's ability to comply
with the REIT distribution requirements. See "--Requirements for
Qualification--Annual Distribution Requirements." With respect to any property
purchased or to be purchased by the Operating Partnership (other than through
the issuance of interests in the Operating Partnership) subsequent to the
formation of the Company, such property will initially have a tax basis equal
to its fair market value and the special allocation provisions described above
will not apply.
Sale of the Properties
Generally, any gain realized by the Operating Partnership on the sale of
property held by the Operating Partnership 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. The Company's share of any gain
realized by the Operating Partnership on the sale of any dealer property
generally will be treated as income from a prohibited transaction that is
subject to a 100% penalty tax. See "Taxation of the Company" and "--
Requirements for Qualification--Gross Income Tests--The 95% Test." Under
existing law, whether property is dealer property 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 the 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 the Properties as are consistent with the Company's
investment objectives. Based upon such investment objectives, the Company
believes that in general the Properties should not be considered dealer
property and that the amount of income from prohibited transactions, if any,
will not be material.
TAXATION OF TAXABLE DOMESTIC STOCKHOLDERS
As long as the Company qualifies as a REIT, distributions made to the
Company's taxable domestic stockholders out of current or accumulated earnings
and profits (and not designated as capital gain dividends)
32
<PAGE>
will be taken into account by them as ordinary income. Stockholders that are
corporations will not be entitled to a dividends received deduction.
Distributions that are designated as capital gain dividends will be taxed as
long-term capital gains (to the extent they do not exceed the Company's actual
net capital gain for the taxable year) without regard to the period for which
the stockholder has held its stock. However, corporate stockholders may be
required to treat up to 20% of certain capital gain dividends as ordinary
income. To the extent that the Company makes distributions in excess of
current and accumulated earnings and profits, these distributions are treated
first as a tax-free return of capital to the stockholder, reducing the tax
basis of a stockholder's stock by the amount of such distribution (but not
below zero), with distributions in excess of the stockholders' tax basis
taxable as capital gains (if the stock is held as a capital asset). In
addition, any dividend declared by the Company in October, November or
December of any year and payable to a stockholder of record on a specific date
in any such month shall be treated as both paid by the Company and received by
the stockholder on December 31 of such year, provided that the dividend is
actually paid by the Company during January of the following calendar year.
Stockholders may not include in their individual income tax returns any net
operating losses or capital losses of the Company.
In general, any loss upon a sale or exchange of Common Stock by a
stockholder who has held such stock 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 the Company required to be treated by such
stockholder as long-term capital gains.
Backup Withholding
The Company must report annually to the IRS and to each domestic stockholder
the amount of dividends paid to and the amount of tax withheld, if any, with
respect to, each domestic stockholder. Under the backup withholding rules, a
stockholder may be subject to backup withholding at the rate of 31% with
respect to dividends paid unless such stockholder (a) is a corporation or
comes within certain other exempt categories and, when required, demonstrates
this fact, or (b) provides a taxpayer identification number, certifies as to
no loss of exemption from backup withholding, and otherwise complies with
applicable requirements of the backup withholding rules. A stockholder that
does not provide the Company with its correct taxpayer identification number
may also be subject to penalties imposed by the Service. Any amount paid as
backup withholding will be creditable against the stockholder's income tax
liability.
TAXATION OF TAX-EXEMPT STOCKHOLDERS
Based upon a published ruling by the IRS, distributions by the Company to a
stockholder that is a tax-exempt entity will not constitute "unrelated
business taxable income" ("UBTI") provided that the tax-exempt entity has not
financed the acquisition of its shares with "acquisition indebtedness" within
the meaning of the Code and the shares are not otherwise used in an unrelated
trade or business of the tax-exempt entity.
Notwithstanding the preceding paragraph, however, a portion of the dividends
paid by the Company may be treated as UBTI to certain domestic private pension
trusts if the Company is treated as a "pension-held REIT." The Company
believes that it is not, and does not expect to become a "pension-held REIT."
If the Company were to become a pension-held REIT, these rules generally would
only apply to certain pension trusts that hold more than 10% of the Company's
stock.
TAXATION OF FOREIGN STOCKHOLDERS
The following is a discussion of certain anticipated U.S. federal income and
estate tax consequences of the ownership and disposition of the Company's
stock applicable to Non-U.S. Holders of such stock. A "Non-U.S. Holder" is any
person other than (i) a citizen or resident of the United States, (ii) a
corporation or partnership created or organized in the United States or under
the laws of the United States or of any state thereof, or (iii) an estate or
trust whose income is includable in gross income for U.S. federal income tax
purposes regardless of its
33
<PAGE>
source. The discussion is based on current law and is for general information
only. The discussion addresses only certain and not all aspects of U.S.
federal income and estate taxation.
Distributions From the Company.
1. Ordinary Dividends. The portion of dividends received by Non-U.S. Holders
payable out of the Company's earnings and profits which are not attributable
to capital gains of the Company and which are not effectively connected with a
U.S. trade or business of the Non-U.S. Holder will be subject to U.S.
withholding tax at the rate of 30% (unless reduced by treaty). In general,
Non-U.S. Holders will not be considered engaged in a U.S. trade or business
solely as a result of their ownership of stock of the Company. In cases where
the dividend income from a Non-U.S. Holder's investment in stock of the
Company is (or is treated as) effectively connected with the Non-U.S. Holder's
conduct of a U.S. trade or business, the Non-U.S. Holder generally will be
subject to U.S. tax at graduated rates, in the same manner as U.S.
stockholders are taxed with respect to such dividends (and may also be subject
to the 30% branch profits tax in the case of a Non-U.S. Holder that is a
foreign corporation).
2. Non-Dividend Distributions. Unless the Company's stock constitutes a
USRPI (as defined below), distributions by the Company which are not dividends
out of the earnings and profits of the Company will not be subject to U.S.
income or withholding tax. If it cannot be determined at the time a
distribution is made whether or not such distribution will be in excess of
current and accumulated earnings and profits, the distribution will be subject
to withholding at the rate applicable to dividends. However, the Non-U.S.
Holder may seek a refund of such amounts from the IRS if it is subsequently
determined that such distribution was, in fact, in excess of current and
accumulated earnings and profits of the Company. If the Company's stock
constitutes a USRPI, such distribution shall be subject to 10% withholding tax
and may be subject to taxation under FIRPTA (as defined below).
3. Capital Gain Dividends. Under the Foreign Investment in Real Property Tax
Act of 1980 ("FIRPTA"), a distribution made by the Company to a Non-U.S.
Holder, to the extent attributable to gains from dispositions of United States
Real Property Interests ("USRPIs") such as the properties beneficially owned
by the Company ("USRPI Capital Gains"), will be considered effectively
connected with a U.S. trade or business of the Non-U.S. Holder and subject to
U.S. income tax at the rate applicable to U.S. individuals or corporations,
without regard to whether such distribution is designated as a capital gain
dividend. In addition, the Company will be required to withhold tax equal to
35% of the amount of dividends to the extent such dividends constitute USRPI
Capital Gains. Distributions subject to FIRPTA, in limited circumstances, may
also be subject to a 30% branch profits tax in the hands of a foreign
corporate stockholder that is not entitled to treaty exemption.
Disposition of Stock of the Company. Unless the Company's stock constitutes
a USRPI, a sale of such stock by a Non-U.S. Holder generally will not be
subject to U.S. taxation under FIRPTA. The stock will not constitute a USRPI
if the Company is a "domestically controlled REIT." A domestically controlled
REIT is a REIT in which, at all times during a specified testing period, less
than 50% in value of its shares is held directly or indirectly by Non-U.S.
Holders. The Company believes that it is, and it expects to continue to be a
domestically controlled REIT, and therefore that the sale of the Company's
stock will not be subject to taxation under FIRPTA. Because the Company's
stock will be publicly traded, however, no assurance can be given the Company
will continue to be a domestically controlled REIT.
If the Company does not constitute a domestically controlled REIT, a Non-
U.S. Holder's sale of stock generally will still not be subject to tax under
FIRPTA as a sale of a USRPI provided that (i) the stock is "regularly traded"
(as defined by applicable Treasury regulations) on an established securities
market and (ii) the selling Non-U.S. Holder held 5% or less of the Company's
out-standing stock at all times during a specified testing period.
If gain on the sale of stock of the Company were subject to taxation under
FIRPTA, the Non-U.S. Holder would be subject to the same treatment as a U.S.
stockholder with respect to such gain (subject to applicable alternative
minimum tax and a special alternative minimum tax in the case of nonresident
alien individuals) and the purchaser of the stock could be required to
withhold 10% of the purchase price and remit such amount to the Service.
34
<PAGE>
Capital gains not subject to FIRPTA will nonetheless be taxable in the
United States to a Non-U.S. Holder in two cases: (i) if the Non-U.S. Holder's
investment in the stock of the Company is effectively connected with a U.S.
trade or business conducted by such Non-U.S. holder, the Non-U.S. Holder will
be subject to the same treatment as a U.S. stockholder with respect to such
gain, or (ii) if the Non-U.S. Holder is a nonresident alien individual who was
present in the United States for 183 days or more during the taxable year and
has a "tax home" in the United States, the nonresident alien individual will
be subject to a 30% tax on the individual's capital gain.
Estate Tax. Stock of the Company owned or treated as owned by an individual
who is not a citizen or resident (as specially defined for U.S. federal estate
tax purposes) of the United States at the time of death will be includable in
the individual's gross estate for U.S. federal estate tax purposes, unless an
applicable estate tax treaty provides otherwise. Such individual's estate may
be subject to U.S. federal estate tax on the property includable in the estate
for U.S. federal estate tax purposes.
Information Reporting and Backup Withholding. The Company must report
annually to the IRS and to each Non-U.S. Holder the amount of dividends
(including any capital gain dividends) paid to, and the tax withheld with
respect to, each Non-U.S. Holder. These reporting requirements apply
regardless of whether withholding was reduced or eliminated by an applicable
tax treaty. Copies of these returns may also be made available under the
provisions of a specific treaty or agreement with the tax authorities in the
country in which the Non-U.S. Holder resides.
U.S. backup withholding, which generally is imposed at the rate of 31% on
certain payments to persons that fail to furnish the information required
under the U.S. information reporting requirements, will generally not apply to
dividends (including any capital gain dividends) paid on stock of the Company
to a Non-U.S. Holder at an address outside the United States. However, the
payment of the proceeds from the disposition of stock of the Company to or
though a U.S. office of a broker will be subject to information reporting and
backup withholding unless the owner, under penalty of perjury, certifies,
among other things, its status as a Non-U.S. Holder, or otherwise establishes
an exemption. The payment of the proceeds from the disposition of stock to or
through a non-U.S. office of a non-U.S. broker generally will not be subject
to backup withholding and information reporting.
These information reporting, backup withholding and withholding rules are
under review by the United States Treasury and their application to the
Company's stock could be changed by future regulations. The IRS recently
issued proposed Treasury regulations concerning the withholding of tax and
reporting for certain amounts paid to non-resident individuals and foreign
corporations. The proposed Treasury regulations, if adopted in their present
form, would be effective for payments made after December 31, 1997.
Prospective investors should consult their tax advisors concerning the
potential adoption of such proposed Treasury regulations and the potential
effect on their ownership of the Company's stock.
OTHER TAX CONSIDERATIONS
Essex Management Corporation
A portion of the cash to be used by the Operating Partnership to fund
distributions to partners, including Essex, is expected to come from Essex
Management Corporation through dividends on the non-voting stock that will be
held by the Operating Partnership. Essex Management Corporation will pay
federal and state income tax at the full applicable corporate rates. Essex
Management Corporation will attempt to minimize the amount of such taxes, but
there can be no assurance whether or to what extent measures taken to minimize
taxes will be successful. Because Essex, the Operating Partnership and Essex
Management Corporations are related through stock or partnership ownership,
the allocation of certain expenses and reimbursements thereof among Essex,
Essex Management Corporation and the Operating Partnership could be subject to
additional scrutiny by the IRS. To the extent that Essex Management
Corporation is required to pay federal, state or local taxes, the cash
available for distribution by Essex to stockholders will be reduced
accordingly.
35
<PAGE>
Dividend Reinvestment Program
Under the Company's dividend reinvestment program, stockholders
participating in the program will be deemed to have received the gross amount
of any cash distributions which would have been paid by the Company to such
stockholders had they not elected to participate. These deemed distributions
will be treated as actual distributions from the Company to the participating
stockholders and will retain the character and tax effect applicable to
distributions from the Company generally. See "Federal Income Tax
Considerations--Taxation of Taxable Domestic Stockholders." Participants in
the dividend reinvestment program are subject to federal income tax on the
amount of the deemed distributions to the extent that such distributions
represent dividends or gains, even though they receive no cash. Shares of
Common Stock received under the program will have a holding period beginning
with the day after purchase, and a tax basis equal to their cost (which is the
gross amount of the deemed distribution).
State and Local Taxes
The Company and its stockholders may be subject to state or local taxation
in various jurisdictions, including those in which it or they transact
business or reside. The state and local tax treatment of the Company and its
stockholders may not conform to the federal income tax consequences discussed
above. Consequently, prospective stockholders should consult their own tax
advisers regarding the effect of state and local tax laws on an investment in
the Common Stock of the Company.
It should be noted that the Company has not obtained an opinion of counsel
with respect to the foregoing disclosure in subsections entitled "Taxation of
Taxable Domestic Stockholders," "Taxation of Tax-Exempt Stockholders,"
"Taxation of Foreign Stockholders" and "Other Tax Considerations".
PLAN OF DISTRIBUTION
The Company may sell the Offered Securities to one or more underwriters for
public offering and sale by them or may sell the Offered Securities to
investors directly or through agents, which agents may be affiliated with the
Company. Any such underwriter or agent involved in the offer and sale of the
Offered Securities will be named in the applicable Prospectus Supplement.
Sales of Offered Securities offered pursuant to any applicable Prospectus
Supplement may be effected from time to time in one or more transactions at a
fixed price or prices which may be changed, at prices related to the
prevailing market prices at the time of sale, or at negotiated prices. The
Company also may, from time to time, authorize underwriters acting as the
Company's agents to offer and sell the Offered Securities upon the terms and
conditions as set forth in the applicable Prospectus Supplement. In connection
with the sale of Offered Securities, underwriters may be deemed to have
received compensation from the Company in the form of underwriting discounts
or commissions and may also receive commissions from purchasers of Offered
Securities for whom they may act as agent. Underwriters may sell Offered
Securities to or through dealers, and such dealers may receive compensation in
the form of discounts, concessions or commissions from the underwriters and/or
commissions from the purchasers for whom they may act as agent.
Any underwriting compensation paid by the Company to underwriters or agents
in connection with the offering of Offered Securities, and any discounts,
concessions or commissions allowed by underwriters to participating dealers,
will be set forth in the applicable Prospectus Supplement. Underwriters,
dealers and agents participating in the distribution of the Offered Securities
may be deemed to be underwriters, and any discounts and commissions received
by them and any profit realized by them on resale of the Offered Securities
may be deemed to be underwriting discounts and commissions under the
Securities Act. Underwriters, dealers and agents may be entitled, under
agreements entered into with the Company, to indemnification against and
contribution toward certain civil liabilities, including liabilities under the
Securities Act. Any such indemnification agreements will be described in the
applicable Prospectus Supplement.
36
<PAGE>
Unless otherwise specified in the related Prospectus Supplement, each series
of Offered Securities will be a new issue with no established trading market,
other than the Common Stock which is listed on the New York Stock Exchange.
Any shares of Common Stock sold pursuant to a Prospectus Supplement will be
listed on such exchange, subject to official notice of issuance. The Company
may elect to list any series of Preferred Stock, Depositary Shares or Warrants
on any exchange, but it is not obligated to do so. It is possible that one or
more underwriters may make a market in a series of Offered Securities, but
will not be obligated to do so and may discontinue any market making at any
time without notice. Therefore, no assurance can be given as to the liquidity
of the trading market for the Offered Securities.
If so indicated in the applicable Prospectus Supplement, the Company may
authorize dealers acting as the Company's agent to solicit offers by certain
institutions to purchase Offered Securities from the Company at the public
offering price set forth in such Prospectus Supplement pursuant to Delayed
Delivery Contracts ("Contracts") providing for payment and delivery on the
date or dates stated in such Prospectus Supplement. Each Contract will be for
an amount not less than, and the aggregate principal amount of Offered
Securities sold pursuant to Contracts shall be not less nor more than, the
respective amounts stated in the applicable Prospectus Supplement.
Institutions with whom Contracts, when authorized, may be made include
commercial and savings banks, insurance companies, pension funds, investment
companies, educational and charitable institutions, and other institutions but
will in all cases be subject to the approval of the Company. Contracts will
not be subject to any conditions except (i) the purchase by an institution of
the Offered Securities covered by its Contracts shall not at the time of
delivery be prohibited under the laws of any jurisdiction in the United States
to which such institution is subject, and (ii) if the Offered Securities are
being sold to underwriters, the Company shall have sold to such underwriters
the total principal amount of the Offered Securities less the principal amount
thereof covered by Contracts.
Certain of the underwriters and their affiliates may be customers of, engage
in transactions with and perform services for, the Company in the ordinary
course of business.
EXPERTS
The consolidated financial statements and schedule of Essex Property Trust,
Inc. (the "Company") as of December 31, 1995 and 1994, and for the year ended
December 31, 1995 and for the period June 13, 1994 through December 31, 1994
and of Essex Partners Properties (the "Predecessor") for the period January 1,
1994 through June 12, 1994 and the year ended December 31, 1993 and the
financial statements audited by KPMG Peat Marwick LLP included in Form 8-K
dated August 30, 1996, as amended by Form 8-K/A dated October 17, 1996, have
been incorporated by reference herein and in the registration statement in
reliance upon the reports of KPMG Peat Marwick LLP, independent certified
accountants, incorporated by reference herein, and upon the authority of said
firm as experts in accounting and auditing.
LEGAL MATTERS
The validity of the Offered Securities will be passed upon for the Company
by Morrison & Foerster LLP, Palo Alto, California by attorneys licensed to
practice under Maryland State law. In addition, the description of the
Company's qualification and taxation as a REIT under the Code contained in
this Prospectus under the caption entitled "Federal Income Tax
Considerations--General" is based upon the opinion of Morrison & Foerster LLP.
37
<PAGE>
ESSEX PROPERTY TRUST, INC.
(CAPTIONS FOR BACK COVER)
[Photograph of exterior of Jackson School Village, a 200-unit multi-family
residential property in Hillsboro, Oregon]
[Two photographs of interior of Jackson School Village]
CAPTION: JACKSON SCHOOL VILLAGE
LOCATED IN HILLSBORO, OREGON'S "SILICON FOREST," JACKSON SCHOOL VILLAGE IS A
200-UNIT MULTIFAMILY COMMUNITY WITH A FULL AMENITY PACKAGE. RESIDENTS ENJOY A
HOME THEATER, EXERCISE ROOM AND BUSINESS CENTER. DEVELOPED IN 1996, JACKSON
SCHOOL VILLAGE IS CURRENTLY IN THE LEASE-UP STAGE.
CAPTION: TREETOPS
ACQUIRED BY ESSEX IN 1996, TREETOPS APARTMENTS IS LOCATED IN THE SAN FRANCISCO
EAST BAY CITY OF FREMONT. THIS APARTMENT COMMUNITY IS CONVENIENTLY LOCATED
NEAR SHOPPING, SCHOOL AND MAJOR TRANSPORTATION CORRIDORS INCLUDING THE BAY
AREA RAPID TRANSIT (BART) SYSTEM.
[Bar graph depicting growth in quarterly Funds from operations and weighted
average shares outstanding-fully diluted from September 1994 through September
1996]
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRE-
SENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS SUPPLEMENT AND THE
ACCOMPANYING PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTA-
TIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED. THIS PROSPECTUS SUP-
PLEMENT AND THE ACCOMPANYING PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL
OR THE SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURI-
TIES TO WHICH IT RELATES OR AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER
TO BUY SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITA-
TION IS UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS SUPPLEMENT AND THE
ACCOMPANYING PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUM-
STANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS
OF THE COMPANY SINCE THE DATE HEREOF OR THAT INFORMATION CONTAINED HEREIN OR
THEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
---------------
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Supplement Summary............................................ S-4
Company Markets.......................................................... S-15
Price Range of Common Stock and Distributions............................ S-22
Use of Proceeds.......................................................... S-23
Capitalization........................................................... S-23
Selected Financial and Operating Data.................................... S-24
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... S-26
Business and Growth Strategies........................................... S-30
The Properties........................................................... S-33
Tiger/Westbrook Transaction.............................................. S-38
Description of Capital Stock of the Company.............................. S-38
Management............................................................... S-39
Underwriting............................................................. S-43
Legal Matters............................................................ S-44
PROSPECTUS
Available Information.................................................... 2
Incorporation of Certain Documents by Reference.......................... 2
The Company.............................................................. 3
Use of Proceeds.......................................................... 4
Ratio of Earnings to Fixed Charges....................................... 4
Risk Factors............................................................. 4
Description of Common Stock.............................................. 12
Description of Preferred Stock........................................... 14
Description of Depositary Shares......................................... 21
Description of Warrants.................................................. 25
Certain Provisions of the Company's Charter and Bylaws................... 25
Federal Income Tax Considerations........................................ 25
Plan of Distribution..................................................... 36
Experts.................................................................. 37
Legal Matters............................................................ 37
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
2,450,000 SHARES
ESSEX PROPERTY TRUST, INC.
COMMON STOCK
---------------
PROSPECTUS SUPPLEMENT
---------------
MERRILL LYNCH & CO.
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
RAYMOND JAMES & ASSOCIATES, INC.
SUTRO & CO. INCORPORATED
DECEMBER 18, 1996
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
