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Filed Pursuant to Rule 424(b)(5)
Registration Statement No. 333-21989
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED MARCH 31, 1997)
2,000,000 SHARES
ESSEX PROPERTY TRUST, INC.
COMMON STOCK
_______________________
Essex Property Trust, Inc., a Maryland corporation ("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.
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." The Common Stock is listed on the New York Stock Exchange
(the "NYSE") under the symbol "ESS." On March 31, 1997, the last reported
sale price of the Common Stock on the NYSE was $29 7/8 per share.
_______________________
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.
_______________________
The Underwriter has agreed to purchase from the Company the Common Shares
offered hereby at a purchase price of $29 1/8 per share of Common Stock,
resulting in proceeds to the Company of $58,250,000, before deducting expenses
payable by the Company, estimated at approximately $50,000.
The shares of Common Stock offered hereby may be offered by the
Underwriter from time to time in one or more transactions on the NYSE or
otherwise, at market prices prevailing at the time of sale, at prices related
to such prevailing market prices, or at negotiated prices, but in no event at
less than $29.25 per share. The Company and the Operating Partnership (as
defined in the accompanying Prospectus) have agreed to indemnify the
Underwriter against certain liabilities, including liabilities under the
Securities Act of 1933, as amended. See "Underwriting."
The shares of Common Stock are offered by the Underwriter, subject to prior
sale, when, as and if issued to and accepted by it, and subject to the approval
of certain legal matters by counsel for the Underwriter and certain other
conditions. The Underwriter reserves 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 April 3, 1997.
_______________________
MERRILL LYNCH & CO.
The date of this Prospectus Supplement is March 31, 1997.
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Certain persons participating in this offering may engage in transactions
that stabilize, maintain, or otherwise affect the price of the shares of Common
Stock offered hereby. Such transactions may include stabilizing, the purchase
of the shares of Common Stock offered hereby to cover short positions
and the imposition of penalty bids. For a description of these activities,
see "Underwriting."
The following is qualified in its entirety by the more detailed
information appearing in the accompanying Prospectus and incorporated herein and
therein by reference. The offering of 2,000,0000 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.
The Company's multi-family residential portfolio currently consists of
ownership interests in 33 properties comprising 7,096 apartment units.
Fourteen of these properties are located in the San Francisco Bay Area, eleven
are located in the Seattle Metropolitan Area, six 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.
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered hereby . . . . . . . . 2,000,000 shares of Common Stock
Common Stock to be outstanding after the
Offering . . . . . . . . . . . . . . . . 13,596,966 shares of Common Stock(1)
Use of proceeds . . . . . . . . . . . . . . Primarily to reduce outstanding indebtedness,
with the remaining 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 15,451,966, excluding (i) shares of Common Stock that may be
issued upon conversion of Convertible Preferred Stock (as defined in the
accompanying Prospectus) and (ii) 554,039 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.
FORWARD-LOOKING STATEMENTS
The accompanying Prospectus and documents incorporated by reference therein
contain forward-looking statements within the meaning of Section 27A of the
Securities Act. Discussions containing such forward-looking statements may be
found within the accompanying Prospectus and in documents incorporated by
reference therein. In addition, when used in the accompanying Prospectus and in
the documents incorporated by reference therein, 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 the accompanying Prospectus. The Company cautions the reader, however,
that this list of risk factors may not be exhaustive.
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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 $58.2 million. The
Company intends to contribute such proceeds to Essex Portfolio, L.P. (the
"Operating Partnership"), of which the Company is the sole general partner, and
through which the Company owns substantially all of its assets and conducts
substantially all of its operations, to purchase an additional general
partnership interest in the Operating Partnership. The Operating Partnership
will use the net proceeds primarily to reduce outstanding indebtedness, with the
remaining net proceeds applied to fund the acquisition and development of
multi-family residential properties and for general corporate purposes. The
indebtedness to be repaid consists of (i) a loan in the principal amount of
$12,298,000, which loan accrues interest at the fixed rate of 7.5% per annum and
matures in June 2002, and (ii) amounts outstanding under lines of credit in the
aggregate principal amount of $34,420,000, which lines of credit accrue interest
at a variable rate which is currently approximately 7.5%.
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 (as defined in the
accompanying Prospectus) and the Registration Rights Agreement between the
Company and Tiger/Westbrook (as defined in the accompanying Prospectus) dated
July 1, 1996. Copies of such documents have been filed with the Securities and
Exchange Commission. See "Available Information" in the accompanying
Prospectus.
UNDERWRITING
Subject to the terms and conditions set forth in the Purchase Agreement
(the "Purchase Agreement") among the Company, the Operating Partnership and
Merrill Lynch, Pierce, Fenner & Smith Incorporated (the "Underwriter"), the
Company has agreed to sell to the Underwriter, and the Underwriter has agreed to
purchase from the Company, the 2,000,000 shares of Common Stock offered hereby.
The Underwriter is committed to purchase all of such shares if any are
purchased.
The Underwriter has advised the Company that it proposes to offer the
shares of Common Stock offered hereby for sale, from time to time, to
purchasers directly or through agents, or through brokers in brokerage
transactions on the NYSE, or to underwriters or dealers in negotiated
transactions or in a combination of such methods of sale, at fixed prices which
may be changed, at market prices prevailing at the time of sale, at prices
related to such prevailing market prices or at negotiated prices.
Brokers, dealers, agents and underwriters that participate in the
distribution of the shares of Common Stock offered hereby may be deemed to be
underwriters under the Securities Act of 1933, as amended (the "Securities
Act"). Those who act as underwriter, broker, dealer or agent in connection
with the sale of the shares of Common Stock offered hereby will be selected by
the Underwriter and may have other business relationships with the Company and
its subsidiaries or affiliates in the ordinary course of business.
Until the distribution of the Common Stock offered hereby is completed,
rules of the Securities and Exchange Commission may limit the ablility of the
Underwriter to bid for and purchase the Common Stock. As an exception to these
rules, the Underwriter is permitted to engage in certain transactions that
stabilize the price of the Common Stock. Such transactions consist of bids or
purchases for the purpose of pegging, fixing or maintaining the price of the
Common Stock.
If the Underwriter creates a short position in the Common Stock offered
hereby in connection with the Offering, i.e., if it sells more shares of Common
Stock than are set forth on the cover page of this Prospectus, the Underwriter
may reduce that short position by purchasing Common Stock in the open market.
In general, purchases of a security for the purpose of stabilization or
to reduce a short position could cause the price of the security to be higher
than it might be in the absence of such purchases. The imposition of a penalty
bid might also have an effect on the price of a security to the extent that it
were to discourage resales of the security.
Neither the Company nor the Underwriter makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the Common Stock. In addition, neither
the Company nor the Underwriter makes any representation that the Underwriter
will engage in such transactions or that such transactions, once commenced,
will not be discontinued without notice.
The Company and the Operating Partnership have agreed to indemnify the
Underwriter and others against certain liabilities, including liabilities under
the Securities Act or to contribute to payments the Underwriter may be require
to make in respect thereof.
The Underwriter and its 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-3
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PROSPECTUS
$200,214,250
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 $200,214,250. 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 MARCH 31, 1997.
<PAGE> 5
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, 1996 (including relevant portions of the Company's definitive
proxy statement for the 1997 annual meeting of stockholders specifically
incorporated by reference in Part III of such Form 10-K);
b. The description of the Company's Common Stock contained in the
Company's Registration Statement on Form 8-A (File No. 1- 13106).
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
2
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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.
As used herein, the terms "Company" and "Essex" mean Essex Property
Trust, Inc., a Maryland corporation, those entities controlled by Essex Property
Trust, Inc. and predecessors of Essex Property Trust, Inc., unless the context
indicates otherwise. This Prospectus contains forward-looking statements which
involve risks and uncertainties. The Company's actual results could differ
materially from those anticipated in these forward-looking statements as a
result of certain factors, including those set forth under "Risk Factors" and
elsewhere in this Prospectus.
3
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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. The
Company's multi-family residential portfolio currently consists of ownership
interests in 33 properties comprising 7,096 apartment units, fourteen of which
are located in the San Francisco Bay Area, eleven of which are located in the
Seattle metropolitan area, six 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 33 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 86.2% general partnership interest. An approximate 13.8% 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.
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 fiscal year ended December 31, 1996 was
approximately 2.12x 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 2.15x 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.
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<PAGE> 8
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 December 31, 1996, the Company had outstanding
approximately $153.2 million of indebtedness secured by certain of the
Properties.
As of December 31, 1996, the Company had approximately $42.8 million
of variable rate mortgage indebtedness, which bears interest at a floating rate
tied to either (i) the London InterBank Offered Rates ("LIBOR") or (ii) the
rate of short-term tax exempt securities. Although approximately $29.2 million
of such variable rate indebtedness is subject to the 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 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 December 31, 1996, the Company had outstanding
approximately $153.2 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, which were, as of December 31, 1996,
an aggregate of approximately $153.2 million. As of December 31, 1996, such
mortgage indebtedness and lines of credit had the following scheduled maturity
dates: 1997 - $3.0 million; 1998 - $3.2 million; 1999 - $3.5 million; 2000 -
$3.7 million; 2001 - $41.7 million; 2002 and thereafter - $98.1 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.
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<PAGE> 9
GEOGRAPHIC CONCENTRATION
Approximately 48%, 30%, 14%, and 8% of the Company's rental revenues
for the fiscal year ended December 31, 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 as requested by the Company 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 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
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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 filed by the Company on July 1, 1996 (the "Articles
Supplementary"), 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 for sale to the public. 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 13.8% limited partnership interest in the
Operating Partnership, 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 13.8% 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. As of December 31, 1996, the then current conversion price was
$21.875 per share and, therefore, each share of Convertible Preferred Stock was
convertible into approximately 1.14 shares of Common Stock. In order to provide
certain antidilution protection to the holders of the Convertible Preferred
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."
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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 11.8% 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 December 31, 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
13.0% 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 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 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 (the "Interested
Stockholder") or an affiliate of an Interested Stockholder are prohibited for
five years after the date on which the Interested Stockholder becomes an
Interested Stockholder. Thereafter, any such business combination between the
Company and the Interested Stockholder must be approved by a super-majority
vote of the stockholders unless, among other conditions, the Company's Common
Stockholders receive a Minimum Price (as defined in the MGCL) for their shares
and the consideration is received in cash or in the same form as previously paid
by the Interested Stockholder for its Common Stock. 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 requirement 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 approval of the
holders of two-thirds of the outstanding shares of Convertible Preferred Stock
in order to authorize, create or issue any class or series of stock that ranks
equal or senior to the Convertible Preferred Stock. See "Description of
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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 of Directors presently has no such intention. The Charter
provides that the Company must obtain the approval of the holders of the
Convertible Preferred Stock holding two-thirds of the outstanding shares of
Convertible Preferred Stock before the Company or the Operating Partnership may
merge or consolidate with any other entity or sell all or substantially all of
the Company's or the Operating Partnership's assets. Also, the terms of the
Convertible Preferred Stock require that the Company must obtain the approval of
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 (as defined in the Charter). 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 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 the approval of the holders of two-thirds of the
outstanding shares 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 December 31, 1996, the Company had approximately $60.5 million
of tax-exempt financing relating to its Inglenook Court Apartments, Wandering
Creek Apartments, Treetops Apartments, Meadowood Apartments and Camarillo Oaks
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
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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 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 money 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
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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.
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 26.6% as of December 31, 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 is generally not taxed on its net income distributed
to its stockholders so long as it annually distributes to its stockholders at
least
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95% of its taxable income. 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 of disqualification as a REIT. 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."
DESCRIPTION OF COMMON STOCK
STOCK - GENERAL
As of December 31, 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 December 31, 1996, there were 11,591,650 shares of Common Stock
issued and outstanding. Up to 425,400 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 December 31, 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 Company's Charter and its Bylaws. The Common
Stock is listed on the New York Stock Exchange under the symbol "ESS." Boston
EquiServe is the Company's transfer agent.
Subject to the provisions of the Charter regarding Excess Stock, 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 stock,
the holders of Common Stock are entitled to such distributions as may be
declared from time to time by the Board
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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 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 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 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.
RESTRICTIONS ON TRANSFER
In order for the Company to qualify as a REIT under the Code, among
other requirements (see Federal Income Tax Considerations - Requirements for
Qualification), 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. In
addition, shares of the Company's 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.
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"). However, the Ownership Limit provisions provide that 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
therefore 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, but is not required to, exempt holders of Equity Stock from the
Ownership Limit (the "Board Exemption") 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 providing a Board 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 a Board Exemption if 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 Internal Revenue Service (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
(unless a Board Exemption is obtained), (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.
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The Charter also provides that shares involved in a transfer or change
in capital structure that results in a person owning in excess of the Ownership
Limit (unless a Board Exemption is obtained) 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 affirmative vote of holders owning a
majority of the outstanding shares of Common Stock. In addition to preserving
the Company's status as a REIT, 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.
In general, 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 generally 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. See "Federal Income
Tax Considerations - Requirements for Qualification."
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 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
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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;
(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
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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
In order for the Company to qualify as a REIT under the Code, among
other requirements, 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. See "Federal
Income Tax Considerations - Requirements for Qualification." 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.
CONVERTIBLE PREFERRED STOCK
Pursuant to the Stock Purchase Agreement, Tiger/Westbrook 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 as requested by the Company on or
prior to June 20, 1997. On July 1, 1996, the Company filed 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, as
amended, and a registration rights agreement by and between the Company and
Tiger/Westbrook dated as of June 20, 1996 (the "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
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(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 shall not be added to 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 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.
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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.
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.
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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 1/100 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 1/100 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
preceding the day of conversion.
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, (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.
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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 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
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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."
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.
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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.
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.
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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
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
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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.
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
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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.
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, see
"Description of Common Stock - Stock - General"). 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 obtain the
approval of holders of two-thirds of the issued and outstanding shares of
Convertible Preferred Stock before the Company or the Operating Partnerships
may merge or consolidate with any other entity or sell all or substantially all
of the Company's or the Operating Partnership's assets. Also, the Charter
requires that the Company must obtain the approval 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
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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.
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 provisions 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 provisions 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 with retroactive effect. 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 " - Requirements for Qualification - 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, 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.
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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, a REIT will be
subject to federal income tax as follows. First, a REIT will be taxed at
regular corporate rates on any undistributed REIT taxable income, including
undistributed net capital gains. Second, under certain circumstances, a REIT
may be subject to the "alternative minimum tax" on its items of tax preference.
Third, if a 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 a REIT has net income from "prohibited transactions," such
income will be subject to a 100% tax. A "prohibited transaction" is a sale of
"dealer property" (defined below), excluding certain property held by the
Company for at least four years and foreclosure property. Fifth, if a 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
REIT because certain other requirements have been met, it will be subject to a
100% tax on the net income attributable to the greater of the amount by which
the REIT fails the 75% or 95% test. Sixth, if a 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 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 December 31
of the initial calendar year. Seventh, if a 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 makes 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) do not apply until after the first taxable year for which an election is
made 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
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stock and certain other information. In addition, the 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 Common 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.
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 believes its investments in
the Properties through its interest in the Operating Partnership constitute
qualified assets for purposes of the 75% asset test. In addition, the Company
may own 100% of a "qualified real estate investment trust subsidiary" as
defined in the Code. All assets, liabilities, and items of income, deduction,
and credit of a qualified real estate investment trust 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 Corporation, Essex Sacramento, Inc. and Essex Fidelity I
Corporation (the "Essex Preferred Stock Subsidiaries") and none of the voting
common stock of the Essex Preferred Stock Subsidiaries. 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 the Essex Preferred Stock Subsidiaries, 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 by the Company.
Based upon its analysis of the total estimated value of the securities
of the Essex Preferred Stock Subsidiaries owned by the Operating Partnership
relative to the estimated value of the total assets 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 each of the Essex
Preferred Stock Subsidiaries 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 test 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 Company's overall interest in the Operating
Partnership.
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
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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 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 will generally 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 must
generally 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 would otherwise not qualify as rents from real
property. Essex rents a portion of its Headquarters Building to M&M, who is
considered to be a related party tenant. Rent received by Essex from M&M will
therefore not qualify as rents from real property for purposes of satisfying
the 75% and 95% gross income tests. 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. See " -
Taxation of the Company" and "- Tax Aspects of the Company's Investment in the
Operating Partnership - Sale of the Properties."
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The Company believes that it and the Operating Partnership have held
and managed the Properties in a manner that has given rise to rental income
qualifying under the 75% and 95% gross income tests, and 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 together with dividends from
the other Essex Preferred Stock Subsidiaries will satisfy the 95%, but not the
75%, gross income tests (as discussed above). Essex intends to closely monitor
its non-qualifying income, but the Company anticipates that such income,
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 Company 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
Company 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 December 31 of the following calendar year are deemed paid December
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
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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. The Company will
closely monitor the relationship between its REIT taxable income and cash flow
and, where necessary, will borrow funds (or cause the Operating Partnership or
other affiliates to borrow funds) to satisfy the 95% 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 paid for the earlier year. Thus, the Company
will be able to maintain its REIT status and avoid being taxed on amounts
distributed as deficiency dividends following an IRS adjustment; however, the
Company will be required to pay interest and possibly penalties 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 will
also 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 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
generally not subject to federal income tax in the hands of the Company, if
such income 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.
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
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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 (the "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 real property held by the Operating Partnership for more than one year will
be long-term capital gain. The Company's share of any gain realized by the
Operating Partnership on the sale of any dealer property will generally be
treated as income from a prohibited transaction that is subject to a 100% 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) will be taken into
account by them as ordinary income. Stockholders that are corporations will
not be entitled to a dividends received deduction with respect to any
distributions by the Company. 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 his stock upon which
the capital gain dividends are paid. 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
tax-free returns of capital to the stockholder, reducing the tax basis of a
stockholder's stock by the amount of such distributions (but not below zero),
with distributions in excess of the stockholders' tax basis taxable as capital
gains (if the stock is held as a
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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 the Company's 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 correct taxpayer identification number, certifies
as to no loss of exemption from backup withholding, and otherwise complies with
applicable requirements of the backup withholding rules. The Company may
nonetheless institute backup withholding with respect to a stockholder if
advised to do so by the IRS. A stockholder that does not provide the Company
with its correct taxpayer identification number may also be subject to
penalties imposed by the IRS. Any amount paid as backup withholding will be
creditable against the stockholder's federal 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, (iii) an
estate whose income is includable in gross income for U.S. federal income tax
purposes regardless of its source, or (iv) a trust subject to the primary
supervision of a court within the United States and the control of one or more
United States fiduciaries. The discussion is based on current law and is for
general information only. The discussion addresses only certain aspects of U.S.
federal income and estate taxation and does not address the impact of any
applicable treaty.
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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%. 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 will be generally 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 additional taxation under FIRPTA (as
defined below).
3. Capital Gain Dividends. Under the Foreign Investment in Real
Property Tax Act of 1980 (the "FIRPTA"), a distribution made by the Company to
a Non-U.S. Holder, to the extent attributable to gains from disposition of a
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.
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 will generally
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 will generally 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 outstanding 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 IRS.
Capital gains, including capital gain dividends, 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
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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
through 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. Proposed Treasury
regulations have been issued concerning the withholding of tax and reporting
for certain amounts paid to non-resident individuals and foreign corporations.
These proposed 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 Preferred Stock Subsidiaries
A portion of the cash to be used by the Operating Partnership to fund
distributions to partners, including Essex, is expected to come from the Essex
Preferred Stock Subsidiaries through dividends on the non-voting stock of the
Essex Preferred Stock Subsidiaries held by the Operating Partnership. Essex
Preferred Stock Subsidiaries will pay federal and state income tax at the full
applicable corporate rates. The Essex Preferred Stock Subsidiaries 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 the Essex Preferred Stock Subsidiaries are
related through stock or partnership ownership, the allocation of certain
expenses and reimbursements thereof among Essex, the Essex Preferred Stock
Subsidiaries and the Operating Partnership could be subject to additional
scrutiny by the IRS. To the extent that the Essex Preferred Stock Subsidiaries
are required to pay federal, state or local taxes, the cash available for
distribution by Essex to stockholders will be reduced accordingly.
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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).
Possible Legislative or Other Actions Affecting Tax Consequences
Prospective investors should recognize that the present federal income
tax treatment of an investment in the Company may be modified by legislative,
judicial or administrative action at any time, and that any such action may
affect investments and commitments previously made. The rules dealing with
federal income taxation are constantly under review by persons involved in the
legislative process and by the IRS and the U.S. Treasury Department, resulting
in revisions of regulations and revised interpretations of established concepts
as well as statutory changes. Revisions in federal tax laws and interpretations
thereof could adversely affect the tax consequences of an investment in the
Company. For example, a recent federal budget proposal contains language which,
if enacted in its present form, would result in the immediate taxation of all
gain inherent in a C corporation's assets upon an election by the corporation
to become a REIT, and thus would effectively preclude the Company from
re-electing REIT status following a termination of its REIT qualification.
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.
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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, 1996 and 1995, and for the years
ended December 31, 1996 and 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 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. Morrison & Foerster
LLP will rely upon the opinion of Ballard Spahr Andrews & Ingersoll, Baltimore,
Maryland, as to certain matters of Maryland 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
Consideration--General" is based upon the opinion of Morrison & Foerster LLP.
37
<PAGE> 41
No person has been authorized to give any information or to make any
representations other than those contained in this Prospectus Supplement and
the accompanying Prospectus and, if given or made, such information or
representations must not be relied upon as having been authorized. This
Prospectus Supplement and the accompanying Prospectus do not constitute an
offer to sell or the solicitation of an offer to buy any securities other than
the securities 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
solicitation is unlawful. Neither the delivery of this Prospectus Supplement
and the accompanying Prospectus nor any sale made hereunder shall, under any
circumstances, create any implication that there has been no change in the
affairs of the Company since the date hereof or that the 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>
S-2
The Company . . . . . . . . . . . . . . . . S-2
The Offering . . . . . . . . . . . . . . . S-2
Forward-Looking Statements . . . . . . . . S-3
Use of Proceeds . . . . . . . . . . . . . . S-3
Description of Capital Stock of the Company S-3
Underwriting . . . . . . . . . . . . . . . S-3
Legal Matters . . . . . . . . . . . . . . .
PROSPECTUS
Available Information . . . . . . . . . . . 2
Incorporation of Certain Documents by
Reference . . . . . . . . . . . . . . . 2
The Company . . . . . . . . . . . . . . . . 4
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 . . . . . 26
Plan of Distribution . . . . . . . . . . . 36
Experts . . . . . . . . . . . . . . . . . . 37
Legal Matters . . . . . . . . . . . . . . . 37
</TABLE>
2,000,000 SHARES
ESSEX PROPERTY TRUST, INC.
COMMON STOCK
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PROSPECTUS SUPPLEMENT
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MERRILL LYNCH & CO.
MARCH 31, 1997
