<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 14, 1998
REGISTRATION NO. 333-44467
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 4
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
<TABLE>
<S> <C>
ESSEX PROPERTY TRUST, INC. ESSEX PORTFOLIO, L.P.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MARYLAND CALIFORNIA
(STATE OR OTHER JURISDICTION OF INCORPORATION OR (STATE OR OTHER JURISDICTION OF INCORPORATION OR
ORGANIZATION) ORGANIZATION)
77-0369576 77-0369575
(IRS EMPLOYER IDENTIFICATION NO.) (IRS EMPLOYER IDENTIFICATION NO.)
</TABLE>
KEITH R. GUERICKE
PRESIDENT AND CHIEF EXECUTIVE OFFICER
925 E. MEADOW DRIVE
PALO ALTO, CALIFORNIA 94303
(650) 494-3700
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
COPIES TO:
STEPHEN J. SCHRADER, ESQ.
JUSTIN L. BASTIAN, ESQ.
MORRISON & FOERSTER LLP
755 PAGE MILL ROAD, PALO ALTO, CALIFORNIA 94304
(650) 813-5600
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
From time to time after the effective date of this Registration Statement.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act of 1933, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<S> <C> <C> <C>
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PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF SECURITIES AMOUNT TO BE OFFERING PRICE AGGREGATE
TO BE REGISTERED(1) REGISTERED PER SHARE OFFERING PRICE
- ---------------------------------------------------------------------------------------------------------------
ESSEX PROPERTY TRUST, INC.
Common Stock(5)........................
Warrants(6)............................ $300,000,000(2) (2)(4) $300,000,000(2)
- ---------------------------------------------------------------------------------------------------------------
Guarantees(7)..........................
ESSEX PORTFOLIO, L.P.
Debt Securities(8)..................... $250,000,000(3) (3)(4) $250,000,000(3)
- ---------------------------------------------------------------------------------------------------------------
Total.............................. $550,000,000 (4) $550,000,000
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<CAPTION>
<S> <C>
- ----------------------------------------------------------------
AMOUNT OF
TITLE OF EACH CLASS OF SECURITIES REGISTRATION
TO BE REGISTERED(1) FEE(9)
- ---------------------------------------------------------------------------------------
ESSEX PROPERTY TRUST, INC.
Common Stock(5)........................
Warrants(6)............................ $88,500
- --------------------------------------------------------------------------------------------------------------
Guarantees(7)..........................
ESSEX PORTFOLIO, L.P.
Debt Securities(8)..................... $73,750
- ---------------------------------------------------------------------------------------------------------------
Total.............................. $162,250(9)(10)
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</TABLE>
(1) This Registration Statement also covers contracts which may be issued by
the Registrant under which the counterparty may be required to purchase
Common Stock or Debt Securities.
(2) In no event will the aggregate maximum offering price of shares of Common
Stock, and Warrants to purchase shares of Common Stock, sold pursuant to
this Registration Statement exceed $300,000,000. Any securities registered
hereunder may be sold separately or as units with other securities
registered hereunder.
(3) In no event will the aggregate maximum offering price of Debt Securities of
Essex Portfolio, L.P. sold pursuant to this Registration Statement exceed
$250,000,000.
(4) The proposed maximum offering price per unit (a) has been omitted pursuant
to Instruction II.D. of Form S-3 and (b) will be determined, from time to
time, by the Registrant in connection with the issuance by the Registrant
of the securities registered hereunder.
(5) Subject to footnote 2, there is being registered hereunder an indeterminate
number of shares of Common Stock as may be sold, from time to time, by
Essex Property Trust, Inc. including shares of Common Stock that may be
issued upon exercise of Warrants registered hereunder, as the case may be.
(6) Subject to footnote 2, there is being registered hereunder an indeterminate
number of Warrants representing rights to purchase Common Stock registered
hereunder.
(7) Debt Securities issued by Essex Portfolio, L.P. may be accompanied by a
Guarantee to be issued by the Company. None of the proceeds will be
received by the Company for the Guarantees.
(8) Subject to footnote 3, there are being registered hereunder an
indeterminate number of Debt Securities as may be sold from time to time by
Essex Portfolio, L.P.
(9) Calculated pursuant to Rule 457(o) of the rules and regulations under the
Securities Act of 1933, as amended. These fees have been paid in connection
with prior filings of this Registration Statement.
(10) Excludes fees of $12,763.41 previously paid in connection with the filing
of registration statement on Form S-3 (No. 333-21989), and relating to
$42,119,250 of equity securities of the Company included in the Prospectus
herein pursuant to Rule 429 under the Securities Act of 1933, as amended.
PURSUANT TO RULE 429 UNDER THE SECURITIES ACT OF 1933, THE PROSPECTUS
INCLUDED IN THIS REGISTRATION STATEMENT IS A COMBINED PROSPECTUS AND RELATED TO
REGISTRATION STATEMENT NO. 333-21989 PREVIOUSLY FILED BY THE COMPANY ON FORM S-3
AND DECLARED EFFECTIVE ON FEBRUARY 26, 1997. THE REGISTRANT HEREBY AMENDS THIS
REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS
EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE AN AMENDMENT WHICH SPECIFICALLY
STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN
ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE
REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(A) MAY DETERMINE.
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<PAGE> 2
EXPLANATORY NOTE
This Registration Statement relates to securities which may be offered from
time to time by Essex Property Trust, Inc. (the "Company") and Essex Portfolio,
L.P., a majority-owned subsidiary of the Company (the "Operating Partnership").
This Registration Statement contains a form of base prospectus (the "Base
Prospectus") relating to both the Company and the Operating Partnership which
will be used in connection with an offering of securities by the Company or the
Operating Partnership. The specific terms of the securities to be offered will
be set forth in a Prospectus Supplement relating to such securities. To the
extent securities of the Operating Partnership, which are limited to unsecured
non-convertible investment grade debt securities, are offered pursuant to the
enclosed Base Prospectus, the Base Prospectus will include the financial
statements, together with notes and schedules thereto, Selected Financial Data
and Management's Discussion and Analysis of Financial Condition and Results of
Operations of the Operating Partnership set forth on pages F-1 through F-35 of
the Base Prospectus.
<PAGE> 3
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED MAY 14, 1998
$342,119,250
ESSEX PROPERTY TRUST, INC.
COMMON STOCK AND WARRANTS
$250,000,000
GUARANTEES
ESSEX PORTFOLIO, L.P.
DEBT SECURITIES
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) warrants to purchase Common Stock
(the "Warrants"), and (iii) unconditional guarantees (the "Guarantees") of Debt
Securities (defined below) issued by Essex Portfolio, L.P. (the "Operating
Partnership"), in amounts, at prices and on terms to be determined at the time
of offering, with an aggregate public offering price of up to $342,119,250.
The Operating Partnership may from time to time offer in one or more series
unsecured non-convertible investment grade securities, which may be either
senior debt securities ("Senior Securities") or subordinated debt securities
("Subordinated Securities" and, together with the Senior Securities, the "Debt
Securities"), with an aggregate offering price of up to $250,000,000, in
amounts, at prices and on terms to be determined at the time of the offering.
The Common Stock, Warrants, Debt Securities and Guarantees (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").
The general terms of the Offered Securities in respect to which this
Prospectus is being delivered are set forth herein. Specific terms of the
Offered Securities 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 Warrants, the duration, offering price, exercise price and detachability; and
(iii) in the case of Debt Securities the specific title, aggregate principal
amount, currency, form (which may be registered, or certificated or global),
authorized denominations, maturity, rate (or manner of calculation thereof) and
time of payment of interest, terms for redemption at the option of the Operating
Partnership or repayment at the option of the holder, terms for sinking fund
payments, covenants and any initial public offering price. 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 real estate investment
trust ("REIT") for United States federal income tax purposes. To ensure that the
Company maintains its qualification as a REIT, the charter of the Company
provides that no person, with certain exceptions, may own more than 6.0% of the
value of the outstanding capital stock of the Company including any shares of
Common Stock or Preferred Stock offered hereby. See "Description of Common
Stock -- Restrictions on Transfer."
The applicable Prospectus Supplement will also contain information, where
applicable, about material 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 RISK 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 MAY , 1998.
<PAGE> 4
AVAILABLE INFORMATION
The Company is, and following the sale of any securities hereunder by the
Operating Partnership, the Operating Partnership will be, subject to the
informational requirements of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), and, in accordance therewith, the Company files, and the
Operating Partnership may be required to file, 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 of the Company 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 and/or the Operating Partnership have filed with the Commission
registration statements 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 Statements,
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, the Operating
Partnership and the Offered Securities, reference is hereby made to the
Registration Statement and such exhibits and schedules, copies of 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 (File No.
1-13106) 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, 1997;
b. The Company's Current Report on Form 8-K filed with the Commission
on April 23, 1998; and
c. The description of the Company's Common Stock contained in the
Company's Registration Statement on Form 8-A.
Each document filed by the Company and the Operating Partnership pursuant
to Sections 13(a), 13(c), 14 and 15(d) of the Exchange Act subsequent to the
date of this Prospectus and prior to the termination of the offering of all
Offered Securities to which this Prospectus relates shall be deemed to be
incorporated by reference in this Prospectus and to be part hereof from the date
of filing such documents.
Any statement contained herein or in a document incorporated or deemed to
be incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained herein
(or in the applicable Prospectus Supplement) or in any other subsequently filed
document which also is or is deemed to be incorporated by reference herein
modifies or supersedes such statement. Any such statement so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Prospectus.
Copies of all documents which are incorporated herein by reference (not
including the exhibits to such information, unless such exhibits are
specifically incorporated by reference in such information) will be provided
without charge to each person, including any beneficial owner, to whom this
Prospectus is delivered upon written or oral request. Requests should be
directed to the Investor Service Manager of the Company at 925 E. Meadow Drive,
Palo Alto, California 94303, telephone number: (650) 494-3700.
2
<PAGE> 5
As used herein, the terms "Company" and "Essex" mean Essex Property Trust,
Inc., a Maryland real estate investment trust, those entities controlled by
Essex Property Trust, Inc. and Predecessors of Essex Property Trust, Inc.,
unless the context indicates otherwise and the term "Operating Partnership"
refers to Essex Portfolio, L.P., a California limited partnership, formed on
March 15, 1994, as to which the Company owns an approximate 89.9% general
partnership interest, as of December 31, 1997 (except with regard to the section
entitled "Risk Factors," below, wherein all references to the "Company" shall be
deemed to be references to the Company and the Operating Partnership, 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.
THE COMPANY AND THE OPERATING PARTNERSHIP
The Company is a self-administered and self-managed equity real estate
investment trust ("REIT") that was formed in 1994 to continue and expand the
real estate investment and management operations conducted by Essex Property
Corporation since 1971. As of the date of this Prospectus, the Company's
multi-family residential portfolio consisted of 58 properties, comprising
approximately 12,338 apartment units, of which 22 Properties are located in
Southern California, 14 are located in the San Francisco Bay Area, 18 are
located in the Seattle metropolitan area, and four are located in the Portland,
Oregon, metropolitan area. The Company also owns two office buildings located in
Palo Alto, California, one of which houses the Company's headquarters and has
ownership interests in three retail properties, which are located in the
Portland, Oregon, metropolitan area, (collectively, the "Commercial Properties,"
and together with the Company's 58 multi-family residential properties, the
"Properties").
The Company conducts substantially all of its activities through the
Operating Partnership in which the Company owns an approximate 89.9% general
partnership interest, as of the date of this Prospectus. An approximate 10.1%
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
description of the Company's business and properties set forth herein, and in
documents incorporated by reference herein, would apply, without material
differences, to the Operating Partnership's business and 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 and the
Operating Partnership's executive offices are located at 925 E. Meadow Drive,
Palo Alto, California 94303, and the telephone number is (650) 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 to fund the acquisition and development of multi-family residential
properties and repay indebtedness. 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 year ended December 31, 1997 and the fiscal year ended
December 31, 1996 was approximately 2.76x and 2.11x, respectively. Prior to
1996, the Company did not have any outstanding preferred stock. The Company's
and the Operating Partnership's ratio of earnings to fixed charges for the
fiscal years ended December 31, 1997, ended December 31, 1996, December 31,
1995, and the period of June 13, 1994 through December 31, 1994, was
approximately 3.28x, 2.22x, 2.14x and 1.87x, respectively. The ratio of earnings
to fixed charges of the predecessor to the Company and the Operating Partnership
for the period of January 1, 1994 through June 12, 1994 and for the fiscal year
ended December 31, 1993 was approximately 1.06x and 1.03x, 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.
3
<PAGE> 6
RISK FACTORS
Prospective investors should carefully consider the following information,
which the Company currently believes represents all material risks associated
with the Offered Securities, in conjunction with the other information contained
in this Prospectus and the applicable Prospectus Supplement before purchasing
Offered Securities. For purposes of this section only, all references to the
"Company" shall be deemed to be references to the Company and the Operating
Partnership, unless the context indicates otherwise.
DEBT FINANCING; RISK OF UNCERTAINTY OF ABILITY TO REFINANCE BALLOON PAYMENTS AND
RISK OF RISING INTEREST 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, 1997, the Company had outstanding approximately
$276.6 million of indebtedness (including $58.5 million of variable rate
mortgage 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, 1997, an
aggregate of approximately $276.6 million. As of December 31, 1997, such
mortgage indebtedness and lines of credit had the following scheduled maturity
dates: 1998 - $31.1 million; 1999 - $4.5 million; 2000 - $4.8 million;
2001 - $60.9 million; 2002 and thereafter - $174.7 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.
As of December 31, 1997, the Company had approximately $58.8 million of
variable rate mortgage indebtedness, which bears interest at a floating rate
tied to 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.
ACQUISITION ACTIVITIES; RISKS THAT ACQUISITIONS WILL FAIL TO MEET EXPECTATIONS
The Company intends to actively continue to acquire multifamily residential
properties. Acquisitions of such properties entail risks that such 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. The Company
anticipates that future acquisitions will be financed, in whole or in part,
under existing credit facilities or loan commitments or other lines of credit or
other forms of secured or unsecured financing or through the issuance of
partnership units by the Operating Partnership or additional equity by the
Company. The use of equity financing, rather than debt, for future developments
or acquisitions could have a diluting effect on the interest of existing
shareholders of the Company. If new acquisitions are financed under existing
lines of credit, there is a risk that, unless substitute financing is obtained,
further availability under the lines of credit for new development may not be
available or may be available only on disadvantageous terms. In addition, there
is a risk that upon the maturity of such existing lines of credit, the lines of
credit will not be able to be refinanced or that the terms of such refinancing
will not be as favorable as the terms of the existing indebtedness. Further,
acquisitions of properties are subject to the general risks associated with real
estate investments. See "-- Adverse Effect to Property Income and Value Due to
General Real Estate Investment Risks."
4
<PAGE> 7
DEVELOPMENT ACTIVITIES; RISKS THAT DEVELOPMENTS WILL BE DELAYED OR NOT COMPLETED
The Company pursues multifamily 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 a development project may experience
delays due to, among other things, adverse weather conditions; 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. Further, development of properties is
subject to the general risks associated with real estate investments. See
"-- Adverse Effect to Property Income and Value Due to General Real Estate
Investment Risks."
THE GEOGRAPHIC CONCENTRATION OF THE PROPERTIES MAY ADVERSELY IMPACT THE
COMPANY'S INCOME DUE TO FLUCTUATIONS IN LOCAL MARKETS
Approximately 43%, 25%, 26%, and 6% of the Company's rental revenues for
the year ended December 31, 1997, were derived from Properties located in the
San Francisco Bay Area, the Seattle metropolitan area, Southern California and
the Portland metropolitan area, 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.
COMPETITION IN THE MULTIFAMILY RESIDENTIAL MARKET MAY ADVERSELY AFFECT THE
COMPANY'S OPERATIONS AND THE DEMAND FOR THE COMPANY'S PROPERTIES
There are numerous housing alternatives that compete with the multifamily
Properties in attracting residents. The multifamily Properties compete directly
with other multifamily rental apartments and single family homes that are
available for rent in the markets in which the Properties are located. The
Properties also compete for residents with new and existing homes and
condominiums. In addition, other competitors for development and acquisitions of
properties may have greater resources than the Company. If such competition
results in a reduced demand for the Company's Properties or if the Company's
competitors develop and/or acquire competing properties on a more cost-effective
basis than the Company, the Company may experience a drop in rental rates, which
may have a material adverse effect on the Company's financial position and
results of operations.
The Company faces competition from other REITs, businesses and other
entities in the acquisition, development, operation of its properties. Some of
the Company's competitors are larger and have greater financial resources than
the Company. This competition may result in a higher cost for properties the
Company wishes to acquire and/or develop.
DEBT FINANCING ON PROPERTIES MAY RESULT IN INSUFFICIENT CASH FLOW
Where possible, the Company intends to continue to use leverage to increase
the rate of return on its investments and to allow the Company to make more
investments than it otherwise could. Such use of leverage presents an additional
element of risk in the event that the cash flow from the Properties is
insufficient to meet both debt payment obligations and the distribution
requirements of the REIT provisions of the Code. To the extent the Company or
Operating Partnership determines to obtain additional debt financing in the
future, it may do so through mortgages on some or all of its properties. These
mortgages may be on recourse, non-recourse, or cross-collateralized bases. As of
December 31, 1997, the Company had mortgages on 15 Properties which were secured
by deeds of trust relating solely to those Properties, one mortgage which
5
<PAGE> 8
was cross-collateralized by 8 Properties and two mortgages each of which are
cross-collateralized by 3 Properties. The Company also held a line of credit
that was secured by 6 Properties. Holders of indebtedness which is so secured
will have a claim against these Properties and to the extent indebtedness is
cross-collateralized, lenders may seek to foreclose upon properties which are
not the primary collateral for their loan, which may, in turn, result in
acceleration of other indebtedness secured by Properties. Foreclosure of
Properties would result in a loss of income and asset value to the Operating
Partnership and the Company.
INCREASE IN DIVIDEND REQUIREMENTS AS A RESULT OF THE CONVERTIBLE PREFERRED STOCK
MAY LEAD TO A 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 Westbrook Real Estate Fund I, L.P. (formerly known as
Tiger/Westbrook Real Estate Fund, L.P.), and Westbrook Real Estate Co-Investment
Partnership I, L.P. (formerly known as Tiger/Westbrook Real Estate Co-Investment
Partnership, L.P.) (collectively, "Tiger/Westbrook"). Pursuant to the Stock
Purchase Agreement, Tiger/Westbrook has purchased 1,600,000 shares of
Convertible Preferred Stock for an aggregate purchase price of $40.0 million.
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 substantially
increased 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."
The 1,600,000 outstanding shares of Convertible Preferred Stock are
convertible at the option of the holder thereof into shares of Common Stock. If,
after June 20, 2001, the Company requires a mandatory conversion of all of the
Convertible Preferred Stock, but under no other circumstances, each of the
holders of the Convertible Preferred Stock may cause the Company to redeem any
or all of such holder's shares of Convertible Preferred Stock. Such a redemption
would decrease the amount of cash available to pay cash dividends on the Common
Stock. At such time as there ceases to be in excess of 40,000 shares of
Convertible Preferred Stock outstanding, the Company may at its option purchase
all of the outstanding shares of Convertible Preferred Stock from the holders
thereof. See "Description of Preferred Stock -- Convertible Preferred
Stock -- Redemption at Holder's Option After Notice of Mandatory Conversion." If
the Company is unable to pay dividends on the Common Stock, the Company's status
as a REIT may be jeopardized. See "Federal Income Tax
Considerations -- Requirements for Qualification -- Annual Distribution
Requirements."
Any Common Stock or other Offered Securities that may in the future be
issued pursuant to this Prospectus, upon exercise of stock options or otherwise,
will further substantially increase the costs required to continue to pay cash
dividends at current levels. The Company's ability to pay dividends will depend
in large part on the performance of its Properties and other properties that it
may acquire in the future.
The Company's ability to pay dividends on its stock is further limited by
the Maryland General Corporation Law ("MGCL"). Under the MGCL, the Company may
not make a distribution on its stock if, after giving effect to such
distribution, either (i) the Company would not be able to pay its indebtedness
as such indebtedness becomes due in the usual course of business or (ii) the
Company's total assets would be less than its total liabilities (which, in
accordance with the articles supplementary 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
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on its stock, the Company's status as a REIT may be jeopardized. See "Federal
Income Tax Considerations -- Requirements for Qualification -- Annual
Distribution Requirements."
THE REGISTRATION RIGHTS AND PREEMPTIVE RIGHTS OF THE CONVERTIBLE PREFERRED STOCK
MAY HAVE AN ADVERSE EFFECT ON THE MARKET PRICE OF THE OFFERED SECURITIES
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 as of the date of this Prospectus owned an approximate 10.1%
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 10.1% limited partnership
interest held by the Founders in the Operating Partnership is exchangeable for
an aggregate of 1,873,473 shares of Common Stock. In addition, the Operating
Partnership has invested in certain real estate partnerships (other than the
Operating Partnership). Certain partners in such limited partnerships (the
"Other Parties") have the right to have their limited partnership interests in
such partnerships redeemed for cash or, at the Company's option, for 518,386
shares of the Company's Common Stock. The Other Partners have certain "demand"
and "piggyback" registration rights with respect to the shares of Common Stock
that may be issued in exchange for such limited partnership interests. The
registration rights of the holders of the Convertible Preferred Stock, the
Founders, and the Other Partners 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."
CONVERSION OF THE CONVERTIBLE PREFERRED STOCK MAY LEAD TO SUBSTANTIAL DILUTION
TO THE HOLDERS OF COMMON STOCK
Subject to certain quantity limitations, the shares of Convertible
Preferred Stock are 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,
1997, 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 MAY BE DETRIMENTAL TO HOLDERS OF OFFERED SECURITIES
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
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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."
As of the date of this Prospectus, Tiger/Westbrook was the sole holder of
all outstanding shares of the Convertible Preferred Stock. The Company's Charter
provides that the holders of the Convertible Preferred Stock, voting as a class,
have the right to elect one member of the Board of Directors. Gregory J. Hartman
has been elected to the Board of Directors by the holders of Convertible
Preferred Stock. Mr. Hartman is a managing principal of Westbrook Real Estate
Partners, L.L.C., the managing member of the sole general partner of
Tiger/Westbrook.
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 9.0% 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.
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 the date of this Prospectus, George M. Marcus, the
Chairman of the Board of Directors of the Company, beneficially owns 1,904,601
shares of Common Stock (including shares issuable upon exchange of partnership
interests in the Operating Partnership) representing approximately 10.3% of the
outstanding shares of Common Stock (including shares issuable upon exchange of
partnership interests in the Operating Partnership). Mr. Marcus currently 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 OF TIGER/WESTBROOK FROM THE MARYLAND BUSINESS COMBINATION LAW MAY
ALLOW CERTAIN TRANSACTIONS BETWEEN THE COMPANY AND TIGER/WESTBROOK TO PROCEED
WITHOUT COMPLIANCE WITH SUCH 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 combinations 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
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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 PROVISIONS CONTAINED IN THE OPERATING PARTNERSHIP AGREEMENT, THE
CHARTER, THE BYLAWS, THE CONVERTIBLE PREFERRED STOCK AND CERTAIN PROVISIONS OF
MARYLAND LAW COULD DELAY, DEFER OR PREVENT A CHANGE IN CONTROL OF THE COMPANY
While the Company is the sole general partner of the Operating Partnership,
and generally has full and exclusive responsibility and discretion in the
management and control of the Operating Partnership, certain provisions of the
First Amended and Restated Agreement of Limited Partnership of the Operating
Partnership, as amended (the "Partnership Agreement") place limitations on the
Company's ability to act with respect to the Operating Partnership. Such
limitations could 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 interest in the stockholders. The Partnership Agreement provides that
if the limited partners own at least 5% of the outstanding units of limited
partnership interest in the Operating Partnership, the Company cannot, without
first obtaining the consent of a majority-in-interest of the limited partners in
the Operating Partnership, transfer all or any portion of the Company's general
partner interest in the Operating Partnership to another entity. Such
limitations on the Company's ability to act may result in the Company being
precluded from taking action which the Board of Directors of the Company
believes is in the best interests of the stockholders of the Company. In
addition, as of March 31, 1998, two individuals together held more than 50% of
the outstanding units of limited partnership interest in the Operating
Partnership, allowing such actions to be blocked by a small number of limited
partners.
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 Preferred Stock -- Convertible Preferred Stock -- Voting
Rights." Although the Board of Directors has no intention to issue any
additional shares of Convertible Preferred Stock or other preferred stock at the
present time, 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
the holders of the Convertible Preferred Stock holding more than 50% of the
outstanding shares of Convertible Preferred Stock before it may undergo a change
in control (as defined in the Charter).
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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 MAY LIMIT THE COMPANY'S INCOME FROM CERTAIN
PROPERTIES
As of December 31, 1997 the Company had approximately $60.3 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. The Company expects to engage in
tax-exempt financings in the future. In addition, the Internal Revenue Code of
1986, as amended (the "Code") and the regulations promulgated thereunder impose
various restrictions, conditions and requirements relating to the exclusion from
gross income for federal income tax purposes of interest on qualified bond
obligations, including requirements that at least 20% of apartment units be made
available to residents with gross incomes that do not exceed 50% of the median
income for the applicable family size as determined by the Housing and Urban
Development Department of the federal government. In addition to federal
requirements, certain state and local authorities may impose additional rental
restrictions. The bond compliance requirements and the requirements of any
future tax-exempt bond financing utilized by the Company may have the effect of
limiting the Company's income from the tax-exempt financed properties if the
Company is required to lower its rental rates to attract residents who satisfy
the median income test. If the required number of apartment homes are not
reserved for residents satisfying these income requirements, the tax-exempt
status of the bonds may be terminated, the obligations of the Company under the
bond documents may be accelerated and other contractual remedies against the
Company may be available.
ADVERSE EFFECT TO PROPERTY INCOME AND VALUE DUE TO 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.
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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.
JOINT VENTURES AND JOINT OWNERSHIP OF PROPERTIES AND PARTIAL INTERESTS IN
CORPORATIONS AND LIMITED PARTNERSHIPS COULD LIMIT THE COMPANY'S ABILITY TO
CONTROL SUCH PROPERTIES AND PARTIAL INTERESTS
Instead of purchasing properties directly, the Company may invest as a
co-venturer. Joint venturers often have equal control over the operation of the
joint venture assets. Therefore, such investments may, under certain
circumstances, involve risks such as the possibility that the co-venturer in an
investment might become bankrupt, or have economic or business interests or
goals that are inconsistent with the business interests or goals of the Company,
or be in a position to take action contrary to the instructions or the requests
of the Company or contrary to the Company's policies or objectives.
Consequently, actions by a co-venturer might result in subjecting property owned
by the joint venture to additional risk. Although the Company seeks to maintain
sufficient control of any joint venture to permit the Company's objectives to be
achieved, it may be unable to take action without the approval of its joint
venture partners or its joint venture partners could take actions binding on the
joint venture without the Company's consent. Additionally, should a joint
venture partner become bankrupt, the Company could become liable for such
partner's share of joint venture liabilities.
From time to time, the Company, through the Operating Partnership, invests
in corporations or limited partnerships which have been formed for the purpose
of acquiring or managing real property. In certain circumstances, the Operating
Partnership's interest in a particular entity may be less than a majority of the
outstanding voting interests of that entity. Therefore, the Operating
Partnership's ability to control the daily operations of such an entity may be
limited. Furthermore, the Operating Partnership may not have the power to remove
a majority of the board of directors (in the case of a corporation) or the
general partner or partners (in the case of a limited partnership) in the event
that the operations of such an entity conflict with the Operating Partnership's
objectives. In addition, the Operating Partnership's ability to dispose of its
interests in such an entity may be limited. In the event that such an entity
becomes insolvent, the Operating Partnership may lose up to its entire
investment in the entity.
INVESTMENTS IN MORTGAGES
The Company may invest in mortgages (first, second or third mortgages which
may or may not be insured by the Federal Housing Administration or guaranteed by
the Veterans Administration or otherwise guaranteed), in part as a strategy for
ultimately acquiring the underlying property. The Company anticipates that such
investment in mortgage receivables will not in the aggregate be significant. In
March 1997, the Company acquired a mortgage receivable for approximately
$785,000 which had an outstanding balance of approximately $885,000 as of
December 31, 1997, and is secured by a multifamily property. This mortgage
receivable represents the only mortgage receivable investment of the Company as
of the date of this Prospectus. 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.
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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 of removal or remediation of
such substances at a disposal or treatment facility, whether or not such
facility is owned or operated by such person. Certain environmental laws impose
liability for release of asbestos-containing materials into the air, and third
parties may seek recovery from owners or operators of real properties for
personal injuries associated with asbestos-containing materials. In connection
with the ownership (direct or indirect), operation, financing, management and
development of real properties, the Company may be considered an owner or
operator of such properties or as having arranged for the disposal or treatment
of hazardous or toxic substances and, therefore, may be potentially liable for
removal or remediation costs, as well as certain other costs, including
governmental fines and costs related to injuries to persons and property.
GENERAL UNINSURED LOSSES
The Company carries comprehensive liability, fire, extended coverage and
rental loss insurance for each of the Properties. There are, however, certain
types of extraordinary losses for which the Company does not have insurance.
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.
RISK THAT INTEREST RATE HEDGING ARRANGEMENTS CANNOT BE REFINANCED OR REPLACED
The Company has, from time to time, entered into agreements to reduce the
risks associated with increases in interest rates, and the Company may continue
to enter into such agreements. Although these agreements may provide the Company
with some protection against rising interest rates, these agreements also may
reduce the benefits to the Company when interest rates decline. There can be no
assurance that any such hedging arrangements can be refinanced or that the
Company will be able to enter into other hedging arrangements to replace
existing hedging arrangements should interest rates decline. Furthermore,
interest rate movements during the term of interest rate hedging arrangements
may result in a gain or loss on the Company's investment in the hedging
arrangement. In addition, if a hedging arrangement is not indexed to the same
rate as the indebtedness that is hedged, the Company may be exposed to losses to
the extent that the rate governing the indebtedness and the rate governing the
hedging arrangement change independently of each other. Finally, nonperformance
by the other party to the hedging arrangement may result in credit risks to the
Company. In order to minimize counterparty credit risk, the Company's policy is
to enter into hedging arrangements only with large financial institutions that
maintain an investment grade credit rating.
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.
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CHANGES IN FINANCING POLICY; NO LIMITATION ON DEBT
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 28% as of
December 31, 1997.
The organizational documents of the Company and the Operating Partnership
do not limit the amount or percentage of indebtedness that they may incur.
Accordingly, the Board of Directors of the Company could change the current
policies of the Company and the Operating Partnership regarding indebtedness. If
these policies were changed, the Company and the Operating Partnership could
become more highly leveraged, resulting in an increased risk of default on the
obligations of the Company and the Operating Partnership and in an increase in
debt service requirements that could adversely affect the financial condition
and results of operations of the Company. Such increased leverage could exceed
the underlying value of the Properties.
RISK OF A HIGHLY LEVERAGED TRANSACTION OR A CHANGE IN CONTROL IMPACTING THE
COMPANY'S ABILITY TO SERVICE INDEBTEDNESS, INCLUDING THE DEBT SECURITIES
The First Amended and Restated Agreement of Limited Partnership of the
Operating Partnership provides that a vote of at least a majority of the limited
partners is required for the Operating Partnership to sell all or substantially
all of its assets. The Operating Partnership currently does not contemplate any
such sale of its assets. However, the sale of all or substantially all of the
Operating Partnership's assets would have a material adverse effect on its
ability to service its debt obligations including the Debt Securities.
Furthermore, the Company may at any time, enter into a highly leveraged
transaction or undergo a change of control (through acquisition of securities,
the election of directors or otherwise). As the Company is the general partner
of the Operating Partnership, such a transaction could have an adverse affect on
the Operating Partnership's ability to service its debt obligations, including
the Debt Securities.
In addition, the Indenture under which Debt Securities will be issued does
not contain any provision that would afford holders of Debt Securities
protection in the event of a highly leveraged transaction, change in control
(through the acquisition of securities, the election of directors or otherwise)
or sale of all or substantially all of its assets involving the Operating
Partnership or the Company. Accordingly, except as may be set forth in any
Prospectus Supplement, the Debt Securities will not contain any protection in
the event of such a transaction. A highly leveraged transaction, a change in
control or sale of all or substantially all of the assets of the Operating
Partnership or the Company could adversely affect the Operating Partnership's
ability to meet its obligations under the Debt Securities.
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 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
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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."
YEAR 2000 COMPLIANCE
The Company utilizes a number of computer software programs and operating
systems across its entire organization, including applications used in financial
business systems and various administrative functions. To the extent that the
Company's software applications contain source code that is unable to
appropriately interpret the upcoming calendar year "2000" and beyond, some level
of modification or replacement of such applications will be necessary. In
addition, the ability of third parties with whom the Company transacts business
("Third Parties") to adequately address their "Year 2000" issues is outside of
the Company's control. The Company is currently evaluating appropriate courses
of action regarding Year 2000 compliance. The Company has contacted its current
software vendor and has determined that an upgraded package will be available
for implementation. Any costs related to Year 2000 compliance will be expensed
as incurred. Total costs are not expected to have a material impact on
operations. No assurance can be given, however, that all of the Company's or
Third Parties' systems will be Year 2000 compliant or that compliance costs or
the impact of the Company's or Third Parties' failure to achieve substantial
Year 2000 compliance will not have a material adverse effect on the Company's
future liquidity or results of operations.
DESCRIPTION OF COMMON STOCK
STOCK -- GENERAL
As of December 31, 1997, 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, 1997, there were 16,611,811 shares of Common Stock
issued and outstanding. An aggregate of 875,400 shares of Common Stock have been
reserved for issuance under the Essex Property Trust, Inc. 1994 Employee Stock
Incentive Plan, 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 1,873,473 shares of Common Stock may be
issued upon the conversion of limited partnership interests in the Operating
Partnership.
As of December 31, 1997, there were 1,600,000 shares of Convertible
Preferred Stock issued and outstanding. All such shares are convertible at the
option of the holder thereof into shares of Common Stock. The 1,600,000 shares
of Convertible Preferred Stock are convertible, with adjustments in certain
situations, into 1,828,572 shares of Common Stock, and the Company has reserved
such shares of Common Stock for issuance.
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 the its Bylaws.
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The Common Stock is listed on the New York Stock Exchange under the symbol
"ESS." Boston EquiServe is the Company's transfer agent.
The holders of the outstanding Common Stock are entitled to one vote per
share on all matters voted on by stockholders, including elections of directors.
The Charter provides that shares of Common Stock do not have cumulative voting
rights.
The shares of Common Stock offered hereby will, when issued, be fully paid
and nonassessable and will not be subject to preemptive or similar rights.
Subject to the preferential rights of any outstanding series of capital stock,
the holders of Common Stock are entitled to such distributions as may be
declared from time to time by the Board of Directors from funds available for
distribution to such holders. The Company currently pays regular quarterly
dividends to holders of Common Stock.
In the event of a liquidation, dissolution or winding up of the Company,
the holders of Common Stock are entitled to receive ratably the assets remaining
after satisfaction of all liabilities and payment of liquidation preferences and
accrued dividends, if any, on any series of capital stock that has a liquidation
preference. The rights of holders of Common Stock are subject to the rights and
preferences established by the Board of Directors for any capital stock that may
subsequently be issued by the Company.
Subject to the terms of the Convertible Preferred Stock and the Series B
Preferred Stock, the Board of Directors is authorized to reclassify any unissued
portion of the authorized shares of capital stock to provide for the issuance of
shares in other classes or series, including other classes or series of Common
Stock, to establish the number of shares in each class or series and to fix the
designation and any preferences, conversion and other rights, voting powers,
restrictions, limitations as to dividends, qualifications and terms and
conditions of redemption of such class or series. Any Common Stock offered
hereby will rank junior to the Convertible Preferred Stock and the Series B
Preferred Stock with respect to dividend rights and rights upon liquidation,
dissolution or winding up of the Company, unless the holders of the Convertible
Preferred Stock and the Series B Preferred Stock otherwise consent. The rights,
preferences, privileges and restrictions of such class or series of Common Stock
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.
Because the Board of Directors believes it is essential for the Company to
continue to qualify as a REIT, the Charter, subject to certain exceptions,
provides that no holder, other than George M. Marcus, may own, or be deemed to
own by virtue of the attribution provisions of the Code, more than 6.0% (the
"Ownership Limit") of the value of the issued and outstanding shares of stock of
the Company (the "Equity Stock"). 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 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
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<PAGE> 18
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. For example,
consistent with the preceding conditions and procedures, the Board of Directors
effected a Board Exemption in connection with the issuance and sale of shares of
the Company's Convertible Preferred Stock to Tiger/Westbrook. 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.
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
Sections 170(b), 170(c) or 501(c)(3) of the Code 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.
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DESCRIPTION OF CONVERTIBLE PREFERRED STOCK AND SERIES B PREFERRED STOCK
CONVERTIBLE PREFERRED STOCK
Pursuant to the Stock Purchase Agreement, Tiger/Westbrook purchased
1,600,000 shares of Convertible Preferred Stock for an aggregate purchase price
of $40.0 million. Tiger/Westbrook is the sole stockholder of the Convertible
Preferred Stock. 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.
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
related Articles Supplementary.
No shares of the Convertible Preferred Stock shall be offered pursuant to
this Prospectus or any Prospectus Supplement relating thereto.
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
Tiger/Westbrook as the sole holder of shares of Convertible Preferred Stock
is entitled to receive annual cumulative cash dividends, payable quarterly, in
an amount equal to the greater of (i) $2.1875 per share (8.75% of the $25.00 per
share price) or (ii) the dividend (subject to adjustment) paid with respect to
the Common Stock plus, in both cases, any accumulated but unpaid dividends on
the Convertible Preferred Stock.
Unless and until all accrued dividends on the Convertible Preferred Stock
through the last preceding dividend payment date have been paid, the Company may
not (i) declare or pay any dividend, make any distribution (other than a
distribution payable solely in shares of Common Stock), or set aside any funds
or assets for payment or distribution with regard to any Common Stock (or any
other stock junior to the Convertible Preferred Stock, together with Common
Stock ("Junior Shares")), (ii) redeem or purchase (directly or through
subsidiaries), or set aside any funds or other assets for the redemption or
purchase of, any Junior Shares or (iii) authorize, take or cause to be taken any
action as general partner of the Operating Partnership that will result in (A)
the declaration or payment by the Operating Partnership of any distribution to
its partners (other than distributions payable to the Company as general partner
that will be used by the Company to fund the payment of dividends on the
Convertible Preferred Stock (such distributions to the Company being referred to
as "Authorized GP Distributions")), or set aside any funds or assets for payment
of any distributions (other than Authorized GP Distributions) or (B) the
redemption or purchase (directly or through subsidiaries), or the setting aside
of any funds or other assets for the redemption or purchase of, any partnership
interests in the Operating Partnership.
In determining whether a distribution (other than upon voluntary or
involuntary liquidation) by dividend, redemption or other acquisition of shares
or otherwise, is permitted under the MGCL, amounts that would be needed if the
Company were to be dissolved at the time of the distribution to satisfy the
preferential rights upon dissolution of holders of the Company's Convertible
Preferred Stock whose preferential rights upon dissolution are superior to those
receiving the distribution shall not be added to the Company's total
liabilities.
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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.
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
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or on a parity with the Convertible Preferred Stock either as to dividends or
upon liquidation, (iii) amend, alter or repeal any of the provisions of the
Charter so as to impair the rights and privileges of the Convertible Preferred
Stock, (iv) amend, alter or repeal certain provisions of the Bylaws in a manner
which would adversely affect the rights of the holders of the Convertible
Preferred Stock, (v) authorize any reclassification of the Convertible Preferred
Stock, (vi) except pursuant to a conversion of the Convertible Preferred Stock,
require the exchange of Convertible Preferred Stock for other securities, or
(vii) effect a voluntary liquidation, dissolution or winding up of the Company,
the sale of substantially all of the assets of the Company, the merger or
consolidation or major recapitalization of the Company or the Operating
Partnership.
In addition, the approval of holders of a majority of the outstanding
shares of Convertible Preferred Stock, voting as a class, is required for the
Company to take any of the following actions: (i) the sale, transfer or
assignment of beneficial interests in or voting rights with respect to assets of
the Company or the Operating Partnership in excess of $45,000,000 within any
90-day period or $125,000,000 within any 360-day period; (ii) the Company's
termination of its status as a REIT; (iii) any alteration in the Company's or
the Operating Partnership's business such that (A) less than 65% of the
Company's or the Operating Partnership's assets are located in the States of
California, Oregon and Washington, (B) less than 80% of the Company's or the
Operating Partnership's assets are located west of the Mississippi River or (C)
less than 80% of the Company's or the Operating Partnership's assets are
classified as multi-family residential properties; or (iv) any change in control
of the Company or the Operating Partnership.
Conversion Rights
The Convertible Preferred Stock is subject to both conversion at the option
of the holder thereof and mandatory conversion required by the Company, subject
to the terms and conditions described below.
Optional Conversion. Currently, all of the 1,600,000 shares of Convertible
Preferred Stock are convertible 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. As of the date
hereof, no shares of Convertible Preferred Stock have been converted.
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 nonassessable 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
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warrants to the holders of its Common Stock as a class entitling them to
purchase Common Stock at a price per share less than the then Conversion Price,
(v) distributes to the holders of its Common Stock as a class any shares of
stock of the Company (other than Common Stock) or evidences of indebtedness or
assets (other than cash dividends or distributions) or rights or warrants (other
than those referred to in the previous clause) to purchase any of its
securities, (vi) subject to certain exceptions, issues or sells (or the
Operating Partnership issues or sells) any equity or debt securities which are
convertible into or exchangeable for shares of Common Stock ("Convertible
Securities") or any rights, options or warrants to purchase Common Stock at a
price per share which is less than the Conversion Price, or (vii) issues or
sells any Common Stock (other than on conversion or exchange of Convertible
Securities or exercise of rights, options or warrants to which any of the three
preceding clauses applies) for a consideration per share less than the
Conversion Price.
The Company will seek to list the shares of Common Stock required to be
delivered upon conversion of the Convertible Preferred Stock on each national
securities exchange, if any, on which the outstanding shares of Common Stock are
listed at the time of delivery of the Common Stock. The Company will pay any
documentary stamp or similar issue or transfer taxes payable in respect of the
issue or delivery of shares of Common Stock on conversion of Convertible
Preferred Stock.
Redemption at Holder's Option After Notice of Mandatory Conversion
In the event that the Company exercises its right to require a mandatory
conversion of Convertible Preferred Stock (but in no other circumstances), each
holder of Convertible Preferred Stock will have the right to require the Company
to redeem any or all the shares of Convertible Preferred Stock owned of record
by the holder, at a redemption price per share (the "Redemption Price") equal to
the applicable Redemption Percentage as defined below, multiplied by the sum of
(i) Stated Value plus (ii) the sum of all accrued dividends with regard to the
Convertible Preferred Stock through the date of redemption. As used herein, the
"Redemption Percentage" means a percentage beginning at 105% and decreasing
annually by 1% to a floor of 100%.
At such time as there are 40,000 shares or fewer of Convertible Preferred
Stock outstanding, the Company may at its option purchase all of the outstanding
shares of the Convertible Preferred Stock from the holders thereof at a price
equal to the greater of (a) 110% of the sum of the Stated Value of such shares
(together with all accrued dividends thereon) and (b) the fair market value of
such shares, which shall be equal to the fair market value of the Common Stock,
as of such date, issuable upon conversion of such shares, together with all
accrued dividends thereon.
Right of Tiger/Westbrook to Participate in Offerings
Pursuant to the terms of the Stock Purchase Agreement, Tiger/Westbrook has,
for so long as the Convertible Preferred Stock is outstanding, the preemptive
right to purchase a pro rata share on an as converted basis as of the date of
the Company Notice (as defined herein) of any stock (or options, warrants or
rights to purchase such stock or securities convertible into such stock)
(collectively, "Eligible Securities"), for the price and upon the terms
specified by the Company in its notice to Tiger/Westbrook (the "Company Notice")
of a Company issuance of Eligible Securities, which price cannot be greater than
that offered to third parties. If Tiger/Westbrook fails to timely exercise in
full its preemptive rights, then the Company may sell the unsold Eligible
Securities at any time within 180 days (60 days in the case of a public
offering) thereafter at a price and upon terms no more favorable to the
purchasers thereof than specified to Tiger/Westbrook. Tiger/Westbrook's
preemptive rights do not apply to any Eligible Securities, among other things,
(i) issuable in connection with stock splits, stock dividends or
recapitalizations as to the effects of which other adjustments are provided for,
or (ii) issuable to employees and prospective employees pursuant to any plan or
pattern of employee equity participation or 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.
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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.
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 shares
of Common Stock which are Registrable Securities 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, 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. As of the date hereof, Tiger/Westbrook has not requested registration
of any Registrable Securities.
SERIES B PREFERRED STOCK
General
On February 6, 1998 and April 20, 1998, the Operating Partnership completed
private placements of 1,200,000 and 400,00 units, respectively, of 7.875% Series
B Preferred Limited Partnership Units (the "Series B Preferred Units"),
representing a limited partnership interest in the Operating Partnership, to an
institutional investor in return for contributions to the Operating Partnership
of $60 million and $20 million, respectively. The Series B Preferred Units will
become exchangeable, on a one for one basis, in whole or in part at any time on
or after February 6, 2008 for shares of the Company's 7.875% Series B Cumulative
Redeemable Preferred Stock, par value $.0001 per share (the "Series B Preferred
Stock"); provided, however, that the Series B Preferred Units will become
immediately exchangeable if (i) full distributions for such Units with respect
to six quarterly distribution periods have not been fully paid, (ii) the holders
of such Units are notified that the Operating Partnership will become a
"publicly traded partnership" (a "PTP") within the meaning of Section 7704 of
the Code, (iii) after the third anniversary of the private placement, the
holders are notified that such exchange would not cause the Series B Preferred
Units to be considered "stock and securities" within the meaning of Section
351(e) of the Code, or (iv) if there is a substantial risk that the interest in
the Partnership of the holder of Series B Preferred Units represents more than
19.5% of the total profits or capital interest, in the Partnership for a taxable
year. Pursuant to the terms of a registration rights agreement, entered into in
connection with this private placement, the holders of Series B Preferred Stock
will have certain rights to cause the Company to register such shares of Series
B Preferred Stock. On February 10,
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1998, the Company filed Articles Supplementary reclassifying 2,000,000 shares of
its Common Stock, par value $.0001 per share, as 2,000,000 shares of Series B
Preferred Stock and setting forth the rights, preferences and privileges of the
Series B Preferred Stock. Presently, no shares of Series B Preferred Stock are
outstanding. Upon the exchange of all the Series B Preferred Units, there would
be 1,600,000 shares of Series B Preferred Stock outstanding.
The following description of the Series B Preferred Stock is in all
respects subject to and qualified in its entirety by reference to the applicable
provisions of the Charter, including the Articles Supplementary applicable to
the Series B Preferred Stock, and Bylaws. Subject to the rights of holders of
the Convertible Preferred Stock and any other parity preferred stock as to the
payment of distributions, holders of Series B Preferred Stock are entitled to
receive, when, as and if declared by the Company, out of funds legally available
for the payment of distributions, cumulative preferential cash distributions at
the rate per annum of 7.875% of the $50.00 liquidation preference per share of
Series B Preferred Stock. Such distributions are cumulative, accrue from the
original date of issuance and are payable quarterly in arrears, on or before the
15th of February, May, August and November of each year (each a "Preferred Stock
Distribution Payment Date"), commencing in each case on the first Preferred
Stock Distribution Payment Date after the original date of issuance.
No shares of Series B Preferred Stock shall be offered pursuant to this
Prospectus or any Prospectus Supplement relating thereto.
Redemption
The Series B Preferred Stock may be redeemed, at the Company's option, on
and after February 6, 2003, from time to time, at a redemption price payable in
cash equal to $50.00 per share of Series B Preferred Stock, plus any accumulated
and unpaid dividends to the date of redemption. The redemption price of the
Series B Preferred Stock (other than the portions thereof consisting of
accumulated but unpaid dividends) will be payable solely out of the sale
proceeds of capital stock of the Company.
The Corporation may not redeem fewer than all of the outstanding shares of
Series B Preferred Stock unless all accumulated and unpaid distributions have
been paid on all Series B Preferred Stock for all quarterly distribution periods
terminating on or prior to the date of redemption.
Limited Voting Rights
If at any time full distributions shall not have been timely made on any
Series B Preferred Stock with respect to any six (6) prior quarterly
distribution periods, whether or not consecutive, the holders of such Series B
Preferred Stock, voting together as a single class with the holders of each
class or series of parity preferred stock, will have the right to elect two
additional directors to the Board of Directors at a special meeting called by
the holders of record of at least 10% of the then outstanding shares of Series B
Preferred Stock, or any parity preferred stock, or at the next annual meeting of
stockholders, and at each subsequent annual meeting of stockholders or special
meeting held in place thereof, until all such distributions in arrears and
distributions for the current quarter have been paid in full. Thereafter, the
holders of Series B Preferred Stock will be divested of their voting rights and
the term of any member of the Board of Directors elected by the holders of
Series B Preferred Stock and holders of any shares of parity preferred stock
shall terminate.
In addition, while any shares of the Series B Preferred Stock are
outstanding, the Company shall not, without the affirmative vote of the holders
of at least two-thirds (2/3) of the Series B Preferred Stock outstanding at the
time (i) authorize or create, or increase the authorized or issued amount of,
any class or series of shares ranking prior to the Series B Preferred Stock with
respect to payment of distributions or rights upon liquidation, dissolution or
winding-up or reclassify any authorized shares of the Company into any such
shares, or create, authorize or issue any obligations or security convertible
into or evidencing the right to purchase any such shares or (ii) either amend,
alter or repeal the provisions of the Company's Charter (including the Articles
Supplementary pertaining to the Series B Preferred Stock) or Bylaws, that would
materially and adversely affect the preferences, other rights, voting powers,
restrictions, limitations as to dividends and other distributions,
qualifications, or terms and conditions of redemption, of any outstanding
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shares of the Series B Preferred Stock. Further, while any shares of the Series
B Preferred Stock are outstanding, the Company shall not, without the
affirmative vote of the holders of at least two-thirds (2/3) of the Series B
Preferred Stock outstanding at the time consolidate, amalgamate, merge with or
into, or convey, transfer or lease its assets substantially as an entirety to,
any corporation or other entity, unless (a) the Company is the surviving entity
and the shares of the Series B Preferred Stock remain outstanding with the terms
thereof unchanged, (b) the resulting, surviving or transferee entity is a
corporation or other entity organized under the laws of any state and
substitutes for the Series B Preferred Stock other preferred stock having
substantially the same terms and same rights as the Series B Preferred Stock,
including with respect to distributions, voting rights and rights upon
liquidation, dissolution or winding-up, or (c) such merger, consolidation,
amalgamation or asset transfer does not adversely affect the powers, special
rights, preferences and privileges of the holders of the Series B Preferred
Stock in any material respect.
The Series B Preferred Stock will have no voting rights other than as
discussed above and as otherwise provided by applicable law.
Liquidation Preference
Subject to the rights of the holders of the Convertible Preferred Stock and
any other parity preferred stock, each share of Series B Preferred Stock is
entitled to a liquidation preference of $50.00 per share, plus any accrued and
unpaid dividends, in preference to any other class or series of capital stock of
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 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
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 Common Stock will
be separately transferable; (7) the price at which each share of 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.
DESCRIPTION OF DEBT SECURITIES
The following sets forth the material terms and provisions of the Indenture
under which the Debt Securities of the Operating Partnership are to be issued.
The specific terms of the Debt Securities will be set forth in a Prospectus
Supplement relating to such Debt Securities.
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Unless otherwise specified in the applicable Prospectus Supplement, the
Debt Securities are to be issued under an Indenture, as amended or supplemented
from time to time (the "Indenture"), among the Operating Partnership, the
Company and a trustee chosen by the Operating Partnership and the Company and
qualified to act as trustee under the Trust Indenture Act of 1939, as amended
(the "TIA") (together with any other trustee(s) appointed in a supplemental
indenture with respect to a particular series, the "Trustee"). The Indenture has
been filed as an exhibit to the Registration Statement of which this Prospectus
is a part and will be available for inspection at the corporate trust office of
the Trustee, or as described above under "Available Information." The Indenture
is subject to, and governed by, the TIA. The statements made hereunder relating
to the Indenture and the Debt Securities to be issued hereunder are summaries of
all material general provisions thereof and do not purport to be complete and
are subject to, and are qualified in their entirety by reference to, all
provisions of the Indenture and such Debt Securities. The material terms of a
specific series or class of Debt Securities will be set forth in the related
Prospectus Supplement. All section references appearing herein are to sections
of the Indenture, and capitalized terms used but not defined herein shall have
the respective meanings set forth in the Indenture.
GENERAL
The Debt Securities will be direct, unsecured obligations of the Operating
Partnership and will be non-convertible investment grade securities. Except for
any series of Debt Securities which is specifically subordinated to other
indebtedness of the Operating Partnership, the Debt Securities will rank pari
passu with all other unsecured and unsubordinated indebtedness of the Operating
Partnership. Under the Indenture, the Debt Securities may be issued without
limit as to aggregate principal amount, in one or more series, in each case as
established from time to time in or pursuant to authority granted by a
resolution of the Board of Directors of the Company as sole general partner of
the Operating Partnership or as established in one or more indentures
supplemental to the Indenture. All Debt Securities of any one series need not be
issued at the same time and, unless otherwise provided, a series may be
reopened, without the consent of the Holders of the Debt Securities of such
series, for issuances of additional Debt Securities of such series (Section
301).
The Debt Securities may be unconditionally guaranteed by the Company as to
payment of principal, premium, if any, and interest. (Section 1601).
The Indenture provides that there may be more than one Trustee thereunder,
each with respect to one or more series of Debt Securities. Any Trustee under
the Indenture may resign at any time by giving written notice or may be removed
with respect to the Debt Securities of any series at any time by the Act of the
Holders of a majority in aggregate principal amount of Outstanding Securities of
such series, and a successor Trustee will be appointed to act with respect to
such series (Section 608). In the event that two or more persons are acting as
Trustee with respect to different series of Debt Securities, each such Trustee
shall be a trustee of a trust under the Indenture separate and apart from any
trust administered by any other Trustee (Section 609), and, except as otherwise
indicated herein, any action described herein to be taken by the Trustee may be
taken by each such Trustee with respect to, and only with respect to, the one or
more series of Debt Securities for which it is Trustee under the Indenture.
TERMS
Reference is made to the Prospectus Supplement relating to the series of
Debt Securities being offered for the specific terms thereof, including, but not
limited to:
(1) the title of such Debt Securities, whether such Debt Securities
are Senior Securities or Subordinated Securities and whether such Debt
Securities are guaranteed by a Guarantee;
(2) the aggregate principal amount of such Debt Securities and any
limit on such aggregate principal amount;
(3) the percentage of the principal amount at which such Debt
Securities will be issued and, if other than the principal amount thereof,
the portion of the principal amount thereof payable upon declaration of
acceleration of the maturity thereof;
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<PAGE> 27
(4) the date or dates, or the method for determining such date or
dates, on which the principal of such Debt Securities will be payable;
(5) the rate or rates (which may be fixed or variable), or the method
by which such rate or rates shall be determined, at which such Debt
Securities will bear interest, if any;
(6) the date or dates, or the method for determining such date or
dates, from which any such interest will accrue, the Interest Payment Dates
on which any such interest will be payable, the Regular Record Dates for
such Interest Payment Dates, or the method by which such Date shall be
determined, the Person to whom such interest shall be payable, and the
basis upon which interest shall be calculated if other than that of a
360-day year of twelve 30-day months;
(7) the place or places where (i) the principal of (and premium, if
any) and interest, if any, on such Debt Securities will be payable, (ii)
such Debt Securities may be surrendered for registration of transfer or
exchange and (iii) notices or demands to or upon the Operating Partnership
in respect of such Debt Securities, any applicable Guarantees and the
Indenture may be served;
(8) the period or periods within which, or the date or dates on which,
the price or prices at which and the other terms and conditions upon which
such Debt Securities may be redeemed, as a whole or in part, at the option
of the Operating Partnership, if the Operating Partnership is to have such
an option;
(9) the obligation, if any, of the Operating Partnership to redeem,
repay or repurchase such Debt Securities pursuant to any sinking fund or
analogous provisions or at the option of a Holder thereof, and the period
or periods within which, or the date or dates on which, the price or prices
at which and the terms and conditions upon which such Debt Securities are
required to be redeemed, repaid or purchased, as a whole or in part,
pursuant to such obligation;
(10) if other than U.S. dollars, the currency or currencies in which
such Debt Securities are denominated and/or payable, which may be a foreign
currency or units of two or more foreign currencies or a composite currency
or currencies, and the terms and conditions relating thereto;
(11) whether the amount of payments of principal of (and premium, if
any) or interest, if any, on such Debt Securities may be determined with
reference to an index, formula or other method (which index, formula or
method may, but need not be, based on a currency, currencies, currency unit
or units or composite currency or currencies) and the manner in which such
amounts shall be determined;
(12) any additions to, modifications of or deletions from the terms of
such Debt Securities with respect to the Events of Default or covenants or
other provisions set forth in the Indenture;
(13) whether such Debt Securities will be issued in certificated
and/or book-entry form;
(14) whether such Debt Securities will be in registered or bearer form
and, if in registered form, the denominations thereof if other than $1,000
and any integral multiple thereof and, if in bearer form, the denominations
thereof and terms and conditions relating thereto;
(15) the applicability, if any, of the defeasance and covenant
defeasance provisions of Article XIV of the Indenture, or any modification
thereof;
(16) the terms and conditions, if any, upon which such Debt Securities
may be subordinated to other indebtedness of the Operating Partnership;
(17) whether such Debt Securities will be guaranteed by the Company;
(18) whether and under what circumstances the Operating Partnership
will pay Additional Amounts as contemplated in the Indenture on such Debt
Securities in respect of any tax, assessment or governmental charge and, if
so, whether the Operating Partnership will have the option to redeem such
Debt Securities in lieu of making such payment; and
(19) any other terms of such Debt Securities not inconsistent with the
provisions of the Indenture (Section 301).
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The Debt Securities may provide for less than the entire principal amount
thereof to be payable upon declaration of acceleration of the maturity thereof
("Original Issue Discount Securities"). Special U.S. federal income tax,
accounting and other considerations applicable to the Original Issue Discount
Securities will be described in the applicable Prospectus Supplement.
The Indenture does not contain any provisions that would limit the ability
of the Operating Partnership to incur indebtedness or that would afford Holders
of Debt Securities protection in the event of a highly leveraged or similar
transaction involving the Operating Partnership. However, such provisions may be
provided with respect to a particular series of Debt Securities, and certain
restrictions on ownership and transfers of the Company's common stock and
preferred stock, designed to preserve the Company's status as a REIT, may
prevent or hinder a change of control. Reference is made to the applicable
Prospectus Supplement for information with respect to any deletions from,
modifications of or additions to the Events of Default or covenants of the
Operating Partnership that are described below, including any addition of a
covenant or other provision providing event risk or similar protection.
GUARANTEES
If specified in the applicable Prospectus Supplement, the Debt Securities
may be unconditionally and irrevocably guaranteed by Guarantees of the Company,
on a senior or subordinated basis, which will guarantee the due and punctual
payment of principal of, premium, if any, and interest on such Debt Securities,
and the due and punctual payment of any sinking fund payments thereon, when and
as the same shall become due and payable whether at a maturity date, by
declaration of acceleration, call for redemption or otherwise. The applicability
and terms of any such Guarantee relating to a series of Debt Securities will be
set forth in the Prospectus Supplement relating to such Debt Securities.
(Section 1601).
DENOMINATIONS, INTEREST, REGISTRATION AND TRANSFER
Unless otherwise described in the applicable Prospectus Supplement, the
Debt Securities of any series will be issuable in denominations of $1,000 and
integral multiples thereof (Section 302).
Unless otherwise specified in the applicable Prospectus Supplement, the
principal of (and premium, if any) and interest on any series of Debt Securities
will be payable at the corporate trust office of the Trustee, provided that, at
the option of the Holder, payment of interest may be made by check mailed to the
address of the Person entitled thereto as it appears in the Security Register or
by wire transfer of funds to such Person at an account maintained within the
United States (Sections 301, 305, 307 and 1002).
All amounts paid by the Operating Partnership to a paying agent or a
Trustee for the payment of the principal of or any premium or interest on any
Debt Security which remain unclaimed at the end of two years after the
principal, premium or interest has become due and payable will be repaid to the
Operating Partnership, and the Holder of the Debt Security thereafter may look
only to the Operating Partnership for payment thereof. (Section 1003).
Any interest not punctually paid or duly provided for on any Interest
Payment Date with respect to a Debt Security ("Defaulted Interest") will
forthwith cease to be payable to the Holder on the applicable Regular Record
Date and may either be paid to the person in whose name such Debt Security is
registered at the close of business on a special record date (the "Special
Record Date") for the payment of such Defaulted Interest to be fixed by the
Trustee, notice whereof shall be given to the Holder of such Debt Security not
less than 10 days prior to such Special Record Date, or may be paid at any time
in any other lawful manner, all as more completely described in the Indenture
(Sections 101 and 307).
Subject to certain limitations imposed upon Debt Securities issued in
book-entry form, the Debt Securities of any series will be exchangeable for
other Debt Securities of the same series, of a like aggregate principal amount
and tenor, of any authorized denominations upon surrender of such Debt
Securities at the corporate trust office of the Trustee. In addition, subject to
certain limitations imposed upon Debt Securities issued in book-entry form, the
Debt Securities of any series may be surrendered for conversion or registration
of transfer thereof at the corporate trust office of the Trustee referred to
above. Every Debt Security
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surrendered for conversion, redemption, registration of transfer or exchange
shall be duly endorsed or accompanied by a written instrument of transfer. No
service charge will be made for any registration of transfer or exchange of any
Debt Securities, but the Operating Partnership may require payment of a sum
sufficient to cover any tax or other governmental charge payable in connection
therewith (Section 305). If the applicable Prospectus Supplement refers to any
transfer agent (in addition to the Trustee) initially designated by the
Operating Partnership with respect to any series of Debt Securities, the
Operating Partnership may at any time rescind the designation of any such
transfer agent or approve a change in the location through which any such
transfer agent acts, except that the Operating Partnership will be required to
maintain a transfer agent in each Place of Payment for such series. The
Operating Partnership may at any time designate additional transfer agents with
respect to any series of Debt Securities (Section 1002).
Neither the Operating Partnership nor the Trustee shall be required to (i)
issue, register the transfer of or exchange Debt Securities of any series during
a period beginning at the opening of business 15 days before any selection of
Debt Securities of that series to be redeemed and ending at the close of
business of the day of mailing of the relevant notice of redemption; (ii)
register the transfer of or exchange any Debt Security, or portion thereof,
called for redemption, except the unredeemed portion of any Debt Security being
redeemed in part; or (iii) issue, register the transfer of or exchange any Debt
Security which has been surrendered for repayment at the option of the Holder,
except that portion, if any, of such Debt Security which is not to be so repaid
(Section 305).
MERGER, CONSOLIDATION OR SALE
The Operating Partnership may consolidate with, or sell, lease or convey
all or substantially all of its assets to, or merge with or into, any other
person, provided that (a) either the Operating Partnership shall be the
continuing person, or the successor (if other than the Operating Partnership)
formed by or resulting from any such consolidation or merger or which shall have
received the transfer of such assets shall expressly assume payment of the
principal of (and premium, if any) and interest on all of the Debt Securities
and the due and punctual performance and observance of all of the covenants and
conditions contained in the Indenture; (b) immediately after giving effect to
such transaction and treating any indebtedness which becomes an obligation of
the Operating Partnership or any Subsidiary as a result thereof as having been
incurred by the Operating Partnership or such Subsidiary at the time of such
transaction, no Event of Default under the Indenture, and no event which, after
notice or the lapse of time, or both, would become such an Event of Default,
shall have occurred and be continuing; and (c) an officers' certificate of the
Company as General Partner of the Operating Partnership and an opinion of
counsel covering such conditions shall be delivered to the Trustee (Sections 801
and 803).
CERTAIN COVENANTS
Existence. Except as permitted under "Merger, Consolidation or Sale," the
Indenture requires each of the Operating Partnership and the Company (if the
Company has guaranteed any Debt Securities) to do or cause to be done all things
necessary to preserve and keep in full force and effect its existence, rights
(partnership and statutory) and franchises; provided, however, that each of the
Operating Partnership and the Company shall not be required to preserve any
right or franchise if the Board of Directors of the Company determines that the
preservation thereof is no longer desirable in the conduct of the business of
the Operating Partnership and that the loss thereof is not disadvantageous in
any material respect to the Holders of the Debt Securities (Section 1004).
Maintenance of Properties. The Indenture requires each of the Operating
Partnership and the Company (if the Company has guaranteed any Debt Securities)
to cause all of its material properties used or useful in the conduct of its
business or the business of any Subsidiary to be maintained and kept in good
condition, repair and working order, all as in the judgment of the Operating
Partnership may be necessary so that the business carried on in connection
therewith may be properly and advantageously conducted at all times; provided,
however, that the Operating Partnership or the Company, as the case may be, and
its Subsidiaries shall not be prevented from selling or otherwise disposing of
their properties for value in the ordinary course of business. (Section 1006).
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Insurance. The Indenture requires the Operating Partnership and each of its
Subsidiaries to keep its insurable Properties insured against loss or damage
with commercially reasonable amounts and types of insurance provided by insurers
of recognized responsibility. (Section 1007).
Payment of Taxes and Other Claims. The Indenture requires each of the
Operating Partnership and the Company (if the Company has guaranteed any Debt
Securities) to pay or discharge or cause to be paid or discharged, before the
same shall become delinquent, (i) all taxes, assessments and governmental
charges levied or imposed upon it or any Subsidiary or upon its income, profits
or property or that of any Subsidiary and (ii) all lawful claims for labor,
materials and supplies which, if unpaid, might by law become a lien upon the
property of the Operating Partnership or any Subsidiary; provided, however, that
the Operating Partnership or the Company shall not be required to pay or
discharge or cause to be paid or discharged any tax, assessment, charge or claim
whose amount or applicability is being contested in good faith. (Section 1008).
Provision of Financial Information. The Operating Partnership will file
with the Trustee copies of annual reports, quarterly reports and other documents
(the "Financial Reports") which the Operating Partnership files with the
Commission or would be required to file with the Commission pursuant to Sections
13 or 15(d) of the Exchange Act if the Operating Partnership were subject to
such Sections; provided, however, that if the Operating Partnership is not
subject to such Sections, it may, in lieu of filing Financial Reports of the
Operating Partnership with the Trustee, file Financial Reports of the Company if
they would be materially the same as those that would have been filed by the
Operating Partnership with the Commission pursuant to Sections 13 or 15(d) of
the Exchange Act.
Additional Covenants. Reference is made to the applicable Prospectus
Supplement for information with respect to any additional covenants specific to
a particular series of Debt Securities.
EVENTS OF DEFAULT, NOTICE AND WAIVER
Unless otherwise provided in the Prospectus Supplement, the Indenture
provides that the following events are "Events of Default" with respect to any
series of Debt Securities issued thereunder: (a) default for 30 days in the
payment of any interest on any Debt Security of such series; (b) default in the
payment of any principal of (or premium, if any, on) any Debt Security of such
series when due; (c) default in making any sinking fund payment as required for
any Debt Security of such series; (d) default in the performance of any other
covenant or warranty of the Operating Partnership or the Company contained in
the Indenture with respect to any Debt Security of such series, continued for 60
days after written notice as provided in the Indenture; (e) default in the
payment of an aggregate principal amount exceeding $10,000,000 of any evidence
of indebtedness of the Operating Partnership or the Company (if the Company or
any subsidiary of the Company has guaranteed any indebtedness of the Operating
Partnership) or any mortgage, indenture, note, bond, capitalized lease or other
instrument under which such indebtedness is issued or by which such indebtedness
is secured, such default having continued after the expiration of any applicable
grace period and having resulted in the acceleration of the maturity of such
indebtedness, but only if such indebtedness is not discharged or such
acceleration is not rescinded or annulled; (f) certain events of bankruptcy,
insolvency or reorganization, or court appointment of a receiver, liquidator or
trustee of the Operating Partnership and the Company (if the Company has
guaranteed any Debt Securities), or any Significant Subsidiary or all or
substantially all of any of their respective property; and (g) any other Event
of Default provided with respect to a particular series of Debt Securities
(Section 501). The term "Significant Subsidiary" means each significant
Subsidiary (as defined in Regulation S-X promulgated under the Securities Act)
of the Operating Partnership or the Company, as the case may be. (Section 101).
If an Event of Default under the Indenture with respect to Debt Securities
of any series at the time Outstanding occurs and is continuing, then in every
such case the Trustee or the Holders of not less than a majority in principal
amount of the Outstanding Debt Securities of that series may declare the
principal amount (or, if the Debt Securities of that series are Original Issue
Discount Securities or Indexed Securities, such portion of the principal amount
as may be specified in the terms thereof) of all of the Debt Securities of that
series to be due and payable immediately by written notice thereof to the
Operating Partnership (if the
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Company has guaranteed any Debt Securities under such Indenture) and the
Operating Partnership (and to the Trustee if given by the Holders). However, any
time after such a declaration of acceleration with respect to Debt Securities of
such series has been made, but before a judgment or decree for payment of the
money due has been obtained by the Trustee, the Holders of not less then a
majority in principal amount of Outstanding Debt Securities of such series may
rescind and annul such declaration and its consequences if (a) the Operating
Partnership shall have paid or deposited with the Trustee all required payments
of the principal of (and premium, if any) and interest on the Debt Securities of
such series plus certain fees, expenses, disbursements and advances of the
Trustee, its agents and counsel and (b) all Events of Default, other than the
nonpayment of accelerated principal or interest with respect to Debt Securities
of such series have been cured or waived as provided in the Indenture (Section
502). The Indenture also provides that the Holders of not less than a majority
in principal amount of the Outstanding Debt Securities of any series may waive
any past default with respect to such series and its consequences, except a
default (x) in the payment of the principal of (or premium, if any) or interest
on any Debt Security of such series or (y) in respect of a covenant or provision
contained in the Indenture that cannot be modified or amended without the
consent of the Holder of each Outstanding Debt Security affected thereby
(Section 513).
The Trustee is required to give notice to the Holders of Debt Securities
within 90 days of a default under the Indenture; provided, however, that the
Trustee may withhold notice to the Holders of any series of Debt Securities of
any default with respect to such series (except a default in the payment of the
principal of (or premium, if any) or interest on any Debt Security of such
series or in the payment of any sinking fund installment in respect of any Debt
Security of such series) if the Responsible Officers of the Trustee in good
faith determines such withholding to be in the interest of such Holders (Section
601).
The Indenture provides that no Holders of Debt Securities of any series may
institute any proceedings, judicial or otherwise, with respect to the Indenture
or for any remedy thereunder, except in the case of failure of the Trustee, for
60 days, to act after it has received a written request to institute proceedings
in respect of an Event of Default from the Holders of not less than a majority
in principal amount of the Outstanding Debt Securities of that series, as well
as an offer of reasonable indemnity (Section 507). This provision will not
prevent, however, any Holder of Debt Securities from instituting suit for the
enforcement of payment of the principal of (and premium, if any) and interest on
such Debt Securities at the respective due date thereof (Section 508).
Subject to provisions in the Indenture relating to its duties in case of
default, the Trustee is under no obligation to exercise any of its rights or
powers under the Indenture at the request or direction of any Holders of Debt
Securities of any series then Outstanding under the Indenture, unless such
Holders shall have offered to the Trustee reasonable security or indemnity
(Section 602). The Holders of not less than a majority in principal amount of
the Outstanding Debt Securities of any series shall have the right to direct the
time, method and place of conducting any proceeding for any remedy available to
the Trustee, or of exercising any trust or power conferred upon the Trustee.
However, the Trustee may refuse to follow any direction which is in conflict
with any law or the Indenture, which may expose the Trustee to personal
liability or which may be unduly prejudicial to the Holders of Debt Securities
of such series not joining therein (Section 512).
Within 120 days after the close of each fiscal year, the Operating
Partnership and the Company (if the Company has guaranteed any Debt Securities)
must deliver to the Trustee a certificate, signed by one of several specified
officers of the Company, stating whether or not such officer has knowledge of
any default under the Indenture and, if so, specifying each such default and the
nature and status thereof (Section 1005).
MODIFICATION OF THE INDENTURE
Modifications and amendments of provisions of the Indenture applicable to
any series may be made only with consent of the Holders of not less than a
majority in principal amount of all Outstanding Debt Securities which are
affected by such modification or amendment; provided, however, that no such
modification or amendment may, without the consent of the Holder of each such
Debt Security affected thereby, (a) change the Stated Maturity of the principal
of, or any installment of principal of or interest (or premium, if any) on, any
such Debt Security; (b) reduce the principal amount of, or the rate or amount of
interest on, or any
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premium payable on redemption of, any such Debt Security, or reduce the amount
of principal of an Original Issue Discount Security that would be due and
payable upon declaration of acceleration of the Maturity thereof or would be
provable in bankruptcy, or adversely affect any right of repayment of the Holder
of any such Debt Security; (c) change the Place of Payment, or the coin or
currency, for payment of principal of, premium, if any, or interest on any such
Debt Security; (d) impair the right to institute suit for the enforcement of any
payment on or with respect to any such Debt Security on or after the Stated
Maturity thereof; (e) reduce the stated percentage in principal amount of
Outstanding Debt Securities of any series necessary to modify or amend the
Indenture, to waive compliance with certain provisions thereof or certain
defaults and consequences thereunder or to reduce the quorum or voting
requirements set forth in the Indenture; or (f) modify any of the foregoing
provisions or any of the provisions relating to the waiver of certain past
defaults or certain covenants, except to increase the required percentage to
effect such action or to provide that certain other provisions may not be
modified or waived without the consent of the Holder of such Debt Security
affected thereby (Section 902).
The Holders of not less than a majority in principal amount of Outstanding
Debt Securities of a particular series have the right to waive compliance by the
Operating Partnership or the Company with certain covenants in the Indenture
relating to such series (Section 1010).
Modifications of and amendments to the Indenture may be made by the
Operating Partnership and the Company (if the Company has guaranteed any Debt
Securities) and the Trustee without the consent of any Holder of Debt Securities
for any of the following purposes: (i) to evidence the succession of another
Person to the Operating Partnership as obligor under the Indenture or succession
of another Person as Guarantor; (ii) to add to the covenants of the Operating
Partnership and the Company (if the Company has guaranteed any Debt Securities)
for the benefit of the Holders of all or any series of Debt Securities or to
surrender any right or power conferred upon the Operating Partnership or the
Company in the Indenture; (iii) to add Events of Default for the benefit of the
Holders of all or any series of Debt Securities; (iv) to add or change any
provisions of the Indenture to facilitate the issuance of Debt Securities in
bearer form, or to permit or facilitate the issuance of Debt Securities in
uncertificated form, provided that such action shall not adversely affect the
interests of the Holders of the Debt Securities of any series in any material
respect; (v) to change or eliminate any provisions of the Indenture, provided
that any such change or elimination shall become effective only when there are
not Debt Securities Outstanding of any series created prior thereto which are
entitled to the benefit of such provision; (vi) to secure the Debt Securities or
Guarantees; (vii) to establish the form or terms of Debt Securities of any
series and any related Guarantees; (viii) to provide for the acceptance of
appointment by a successor Trustee or facilitate the administration of the trust
under the Indenture by more than one Trustee; (ix) to cure any ambiguity, defect
or inconsistency in the Indenture, provided that such action shall not adversely
affect the interests of Holders of Debt Securities of any series in any material
respect; and (x) to supplement any of the provisions of the Indenture to the
extent necessary to permit or facilitate defeasance and discharge of any series
of such Debt Securities, provided that such action shall not adversely affect
the interests of the Holders of the Debt Securities of any series in any
material respect (Section 901).
The Indenture provides that in determining whether the Holders of the
requisite principal amount of Outstanding Debt Securities of a series have given
any request, demand, authorization, direction, notice, consent or waiver
thereunder or whether a quorum is present at a meeting of Holders of Debt
Securities, (i) the principal amount of an Original Issue Discount Security that
shall be deemed to be outstanding shall be the amount of the principal thereof
that would be due and payable as of the date of such determination upon
declaration of acceleration of the maturity thereof, (ii) the principal amount
of a Debt Security denominated in a Foreign Currency that shall be deemed
outstanding shall be the U.S. dollar equivalent, determined on the issue date
for such Debt Security, of the principal amount (or, in the case of an Original
Issue Discount Security, the U.S. dollar equivalent on the issue date of such
Debt Security of the amount determined as provided in (i) above), (iii) the
principal amount of an Indexed Security that shall be deemed outstanding shall
be the principal face amount of such Indexed Security at original issuance,
unless otherwise provided with respect to such Indexed Security pursuant to
Section 301 of the Indenture, and (iv) Debt
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Securities owned by the Operating Partnership or any other obligor upon the Debt
Securities or any Affiliate of the Operating Partnership or of such other
obligor shall be disregarded (Section 101).
The Indenture contains provisions for convening meetings of the Holders of
Debt Securities of a series (Section 1501). A meeting may be called at any time
by the Trustee, and also, upon request, by the Operating Partnership or the
Holders of at least 25% in principal amount of the Outstanding Debt Securities
of such series, in any such case upon notice given as provided in the Indenture
(Section 1502). Except for any consent that must be given by the Holder of each
Debt Security affected by certain modifications and amendments of the Indenture,
any resolution presented at a meeting or adjourned meeting duly reconvened at
which a quorum is present may be adopted by the affirmative vote of the Holders
of a majority in principal amount of the Outstanding Debt Securities of that
series; provided, however, that, except as referred to above with respect to the
modifications of or amendments to the Indenture, any resolution with respect to
any request, demand, authorization, direction, notice, consent, waiver or other
action that may be made, given or taken by the Holders of a specified
percentage, which is less than a majority, in principal amount of the
Outstanding Debt Securities of a series may be adopted at a meeting or adjourned
meeting duly reconvened at which a quorum is present by the affirmative vote of
the Holders of such specified percentage in principal amount of the Outstanding
Debt Securities of that series. Any resolution passed or decision taken at any
meeting of Holders of Debt Securities of any series duly held in accordance with
the Indenture will be binding on all Holders of Debt Securities of that series.
The quorum at any meeting called to adopt a resolution, and at any reconvened
meeting, will be Persons holding or representing a majority in principal amount
of the Outstanding Debt Securities of a series; provided, however, that if any
action is to be taken at such meeting with respect to a consent or waiver which
may be given by the Holders of not less than a specified percentage in principal
amount of the Outstanding Debt Securities of a series, the Persons holding or
representing such specified percentage in principal amount of the Outstanding
Debt Securities of such series will constitute a quorum (Section 1504).
Notwithstanding the foregoing provisions, if any action is to be taken at a
meeting of Holders of Debt Securities of any series with respect to any request,
demand, authorization, direction, notice, consent, waiver or other action that
the Indenture expressly provides may be made, given or taken by the Holders of a
specified percentage in principal amount of all Outstanding Debt Securities
affected thereby, or of the Holders of such series and one or more additional
series: (i) there shall be no minimum quorum requirement for such meeting and
(ii) the principal amount of the Outstanding Debt Securities of such series that
vote in favor of such request, demand, authorization, direction, notice,
consent, waiver or other action shall be taken into account in determining
whether such request, demand, authorization, direction, notice, consent, waiver
or other action has been made, given or taken under the Indenture (Section
1504).
DISCHARGE, DEFEASANCE AND COVENANT DEFEASANCE
Unless otherwise provided in the Prospectus Supplement, the Operating
Partnership or the Company (if the Company has guaranteed any Debt Securities
under such Indenture) may discharge certain obligations to Holders of any series
of Debt Securities that have not already been delivered to the Trustee for
cancellation and that either have become due and payable or will become due and
payable within one year (or are scheduled for redemption within one year) by
irrevocably depositing with the Trustee, in trust, funds in such currency or
currencies, currency unit or units or composite currency or currencies in which
such Debt Securities are payable in an amount sufficient to pay the entire
indebtedness on such Debt Securities in respect of principal (and premium, if
any) and interest to the date of such deposit (if such Debt Securities have
become due and payable) or to the Stated Maturity or Redemption Date, as the
case may be, and the Operating Partnership has met the other conditions
specified in the Indenture (Section 401).
The Indenture provides that, unless otherwise provided in the Prospectus
Supplement, if the provisions of Article Fourteen are made applicable to the
Debt Securities of any series pursuant to Section 301 of the Indenture, the
Operating Partnership may elect either (a) to defease and be discharged from any
and all obligations with respect to such Debt Securities (except for the
obligation to pay principal of (and premiums, if any) and interest, if any, on
such Debt Securities; to pay Additional Amounts, if any, upon the occurrence of
certain events of tax, assessment or governmental charge with respect to such
Debt Securities; and the
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obligations to register the transfer or exchange of such Debt Securities, to
replace temporary or mutilated, destroyed, lost or stolen Debt Securities, to
maintain an office or agency in respect of such Debt Securities, to compensate
the Trustee and to hold moneys for payment in trust) ("defeasance") (Section
1402) or (b) to be released from its obligations with respect to such Debt
Securities under Sections 1006 through 1008, inclusive, of the Indenture (being
the restrictions described under "Certain Covenants") or, if provided pursuant
to Section 301 of the Indenture, its obligations with respect to any other
covenant, and any omission to comply with such obligations shall not constitute
a default or an Event of Default with respect to such Debt Securities ("covenant
defeasance") (Section 1403), in either case upon the irrevocable deposit by the
Operating Partnership or the Company, as the case may be, with the Trustee, in
trust, of any amount, in such currency or currencies, currency unit or units or
composite currency or currencies in which such Debt Securities are payable at
Stated Maturity, or Government Obligations (as defined below), or both
applicable to such Debt Securities which through the scheduled payment of
principal and interest in accordance with their terms will provide money in an
amount sufficient to pay the principal of (and premium, if any) and interest on
such Debt Securities, and any mandatory sinking fund or analogous payments
thereon, on the scheduled due dates therefor.
Such a trust may only be established if, among other things, the Operating
Partnership has delivered to the Trustee an Opinion of Counsel (as specified in
the Indenture) to the effect that the Holders of such Debt Securities will not
recognize income, gain or loss for U.S. federal income tax purposes as a result
of such defeasance or covenant defeasance and will be subject to U.S. federal
income tax on the same amounts, in the same manner and at the same times as
would have been the case if such defeasance or covenant defeasance had not
occurred, and such Opinion of Counsel, in the case of defeasance, must refer to
and be based upon a ruling of the Internal Revenue Service or a change in
applicable United States federal income tax law occurring after the date of the
Indenture (Section 1404).
"Government Obligations" means securities which are (i) direct obligations
of the United States of America or the government which issued the Foreign
Currency in which the Debt Securities of a particular series are payable, for
the payment of which its full faith and credit is pledged or (ii) obligations of
a Person controlled or supervised by and acting as an agency or instrumentality
of the United States of America or such government which issued the Foreign
Currency in which the Debt Securities of such series are payable, the payment of
which is unconditionally guaranteed as a full faith and credit obligation by the
United States of America or such other government, which, in either case, are
not callable or redeemable at the option of the issuer thereof, and shall also
include a depository receipt issued by a bank or trust company as custodian with
respect to any such Government Obligation or a specific payment of interest on
or principal of any such Government Obligation held by such custodian for the
account of the holder of a depository receipt, provided that (except as required
by law) such custodian is not authorized to make any deduction from the amount
payable to the holder of such depository receipt from any amount received by the
custodian in respect of the Government Obligation or the specific payment of
interest on or principal of the Government Obligation evidenced by such
depository receipt (Section 101).
Unless otherwise provided in the applicable Prospectus Supplement, if after
the Operating Partnership or the Company, as the case may be, has deposited
funds and/or Government Obligations to effect defeasance or covenant defeasance
with respect to Debt Securities of any series, (a) the Holder of a Debt Security
of such series is entitled to, and does, elect pursuant to Section 301 of the
Indenture or the terms of such Debt Security to receive payment in a currency,
currency unit or composite currency other than that in which such deposit has
been made in respect of such Debt Security, or (b) a Conversion Event (as
defined below) occurs in respect of the currency, currency unit or composite
currency in which such deposit has been made, the indebtedness represented by
such Debt Security shall be deemed to have been, and will be, fully discharged
and satisfied through the payment of the principal of (and premium, if any) and
interest on such Debt Security as the same becomes due out of the proceeds
yielded by converting the amount so deposited in respect of such Debt Security
into the currency, currency unit or composite currency in which such Debt
Security becomes payable as a result of such election or such cessation of usage
based on the applicable market exchange rate (Section 1405). "Conversion Event"
means the cessation of use of (i) a currency, currency unit or composite
currency either by the government of the country which issued such currency for
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the settlement of transactions by a central bank or other public institution of
or within the international banking community, (ii) the ECU either within the
European Monetary System or for the settlement of transactions by public
institutions of or within the European Communities or (iii) any currency unit or
composite currency other than the ECU for the purposes for which it was
established. (Section 101.) Unless otherwise provided in the applicable
Prospectus Supplement, all payments of principal of (and premium, if any) and
interest on any Debt Security that is payable in a Foreign Currency that cease
to be used by its government of issuance shall be made in U.S. dollars.
In the event the Operating Partnership or the Company, as the case may be,
effects covenant defeasance with respect to any Debt Securities and such Debt
Securities are declared due and payable because of the occurrence of any Event
of Default other than the Event of Default described in clause (d) under "Events
of Default, Notice and Waiver" with respect to Section 1006 through 1008 of the
Indenture (which Sections would no longer be applicable to such Debt Securities)
or described in clause (g) under "Events of Default, Notice and Waiver" with
respect to any other covenant as to which there has been covenant defeasance,
the amount in such currency, currency unit or composite currency in which such
Debt Securities are payable, and Government Obligations on deposit with the
Trustee, will be sufficient to pay amounts due on such Debt Securities at the
time of their Stated Maturity but may not be sufficient to pay amounts due on
such Debt Securities at the time of the acceleration resulting from such Event
of Default. However, the Operating Partnership and the Company (if the Company
has guaranteed any Debt Securities) would remain liable to make payment of such
amounts due at the time of acceleration.
The applicable Prospectus Supplement may further describe the provisions,
if any, permitting such defeasance or covenant defeasance, including any
modifications to the provisions described above, with respect to the Debt
Securities of a particular series.
SUBORDINATION
The terms and conditions, if any, upon which the Debt Securities are
subordinated to other indebtedness of the Operating Partnership will be set
forth in the applicable Prospectus Supplement relating thereto. Such terms will
include a description of the indebtedness ranking senior to the Debt Securities,
the restrictions on payments to the Holders of such Debt Securities while a
default with respect to such senior indebtedness in continuing, the
restrictions, if any, on payments to the Holders of such Debt Securities
following an Event of Default, and provisions requiring Holders of such Debt
Securities to remit certain payments to holders of senior indebtedness.
CERTAIN PROVISIONS OF THE COMPANY'S CHARTER AND BYLAWS
Certain provisions of the Company's Charter and Bylaws might discourage
certain types of transactions that involve an actual or threatened change of
control of the Company. The Charter provides that the Company must seek the
consent of holders of two-thirds of the issued and outstanding shares of
Convertible Preferred Stock before 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 consent of holders of more than 50% of the
issued and outstanding shares of Convertible Preferred Stock before it may
undergo a change in control. See "Description of Preferred Stock -- Convertible
Preferred Stock -- Senior Securities; Amendments; Other Matters." The Ownership
Limit may delay or impede a transaction or a change in control of the Company
that might involve a premium price for the Company's capital stock or otherwise
be in the best interest of the stockholders. See "Description of Common
Stock -- Restrictions on Transfer." Pursuant to the Company's Charter and
Bylaws, the Company's Board of Directors is divided into three classes of
directors, each class serving staggered three-year terms. The staggered terms of
directors may reduce the possibility of a tender offer or an attempt to change
control of the Company. The issuance of Preferred Stock by the Board of
Directors may also have the effect of delaying, deferring or preventing a change
in control of the Company. See "Description of Preferred Stock -- General."
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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. The following summary, as supplemented by information in any
Prospectus Supplement relating to specific Offered Securities, addresses the
material federal income tax consequences relevant to holders of such Offered
Securities.
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 conditioned upon certain representations made by the Company as
to factual matters, including its present operations, and is based upon the
assumption that the Company will continue to operate in the same manner. 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 and state income tax as if it were a domestic corporation, and its
stockholders will be taxed in the same manner as stockholders of ordinary
corporations. In this event, the Company could be subject to potentially
significant tax liabilities and the amount of cash available for distribution to
its stockholders could be reduced.
TAXATION OF THE COMPANY
In any year in which the Company qualifies as a REIT, it will generally not
be subject to federal income tax on that portion of its net income that it
distributes to stockholders. This treatment substantially eliminates
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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. (However, a REIT can elect to "pass through"
any of its taxes paid on retained capital gains to its shareholders on a pro
rata basis.) 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),
foreclosure property and property involuntarily converted. 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.
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. A REIT must also report its income based
on the calendar year.
In order to ensure compliance with the ownership tests described above, the
Company has placed certain restrictions on the transfer of the common stock and
preferred stock to prevent further concentration of stock ownership. Moreover,
to evidence compliance with these requirements, the Company must maintain
records which disclose the actual ownership of its outstanding common stock and
preferred stock. In fulfilling its obligations to maintain records, the Company
must and will demand written statements each year from the record holders of
designated percentages of its common stock and preferred stock disclosing the
actual owners of such common stock and preferred stock. A list of those persons
failing or refusing to comply with such demand must be maintained as part of the
Company's records. A stockholder failing or refusing to comply with the
Company's written demand must submit with his tax returns a similar statement
disclosing the actual ownership of common stock and preferred stock and certain
other information. In addition, the Charter provides restrictions regarding the
transfer of its shares that are intended to assist the Company in continuing
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to satisfy the share ownership requirements. See "Description of Common
Stock -- Restrictions on Transfer." Furthermore, the Company reports its income
based on the calendar year.
Although the Company intends to satisfy the shareholder demand letter rules
described in the preceding paragraph, beginning in 1998, its failure to satisfy
these requirements will not result in its disqualification as a REIT but may
result in the imposition of IRS penalties against the Company. In addition,
beginning in 1998, a REIT's failure to satisfy the requirement that not more
than 50% of the value of its outstanding stock be owned by five or fewer
individuals (as defined in the Code) during a taxable year would not result in
its disqualification as a REIT under the Code as long as (i) the REIT satisfied
the shareholder demand letter rules, and (ii) the REIT did not know, and
exercising due diligence, would not have known, whether it had failed the
requirement.
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 REIT subsidiary" as defined in the Code. All
assets, liabilities, and items of income, deduction, and credit of a qualified
REIT subsidiary will be treated as owned and realized directly by the Company.
The Operating Partnership owns 100% of the non-voting preferred stock of
Essex Management 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 Corporation, 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 respect to which retesting is to occur,
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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 (two beginning in 1998) separate percentage tests relating
to the sources of the Company's gross income which must be satisfied for each
taxable year. For purposes of these tests, where the Company invests in a
partnership, the Company will be treated as receiving its share of the income
and loss of the partnership, and the gross income of the partnership will retain
the same character in the hands of the Company as it has in the hands of the
partnership. See "-- Tax Aspects of the Company's Investment in the Operating
Partnerships -- General."
THE 75% TEST. At least 75% of the Company's gross income for the taxable
year must be "qualifying income." Qualifying income generally includes (i) rents
from real property (except as modified below); (ii) interest on obligations
collateralized by mortgages on, or interests in, real property; (iii) gains from
the sale or other disposition of interests in real property and real estate
mortgages, other than gain from property held primarily for sale to customers in
the ordinary course of the Company's trade or business ("dealer property"); (iv)
dividends or other distributions on shares in other REITs, as well as gain from
the sale of such shares; (v) abatements and refunds of real property taxes; (vi)
income from the operation, and gain from the sale, of property acquired at or in
lieu of a foreclosure of the mortgage collateralized by such property
("foreclosure property"); and (vii) commitment fees received for agreeing to
make loans collateralized by mortgages on real property or to purchase or lease
real property.
For purposes of determining whether the Company complies with the 75% test
(and 95% test described below), 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."
In addition, rents received from a tenant will not qualify as rents from
real property in satisfying the 75% test (or the 95% 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% 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." For both the related party tenant rules and
determining whether an entity qualifies as an independent contractor, certain
attribution rules of the Code apply, pursuant to which shares of a REIT held by
one entity are deemed held by another.
Under prior law, if a REIT provides impermissible services to its tenants,
all of the rent from those tenants can be disqualified from satisfying the 75%
and 95% tests. Beginning in 1998, rents will not be disqualified if a REIT
provides de minimis, impermissible services. For this purpose, services provided
to tenants of a property are considered de minimis where income derived from the
services rendered equals 1% or less of all income derived from the property
(threshold determined on a property-by-property basis). For purposes of the 1%
threshold, the amount treated as received for any service shall not be less than
150% of the direct cost incurred in furnishing or rendering the service.
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
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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% 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% tests. It is not expected
that the rent received from any related party (including M&M), together with
other income not qualifying for the 95% test described below, 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. Furthermore,
income earned on interest rate swaps and caps entered into as liability hedges
against variable rate indebtedness qualify for the 95% test (but not the 75%
test). Beginning in 1998, income earned on liability hedges against all of a
REIT's indebtedness, such as options, futures, and forward contracts, will
qualify for the 95% test (but not the 75% test). In certain cases, Treasury
Regulations treat a variable rate debt instrument and a liability hedge as a
synthetic debt instrument for all purposes of the Code. If a liability hedge
entered into by a REIT is subject to these Treasury Regulations, income earned
on the liability hedge will operate to reduce its interest expense, and,
therefore, such income will not affect the REIT's compliance with either the 75%
or 95% 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%, 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 liability hedge income (if any), will not result in
Essex's failing either the 75% or the 95% tests.
Even if the Company fails to satisfy one or both of the 75% or 95% 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% 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% test for that year.
THE 30% TEST. Prior to January 1, 1998, the Company must have derived 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. For tax
years beginning after December 31, 1997, the 30% Test has been repealed.
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
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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 this and other purposes, dividends declared on a date in
October, November, or December to stockholders of record of such month of one
calendar year and paid by January 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
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
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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 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
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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 U.S. STOCKHOLDERS GENERALLY
Dividends; Generally
As used herein, the terms "U.S. Stockholder" means a holder of shares of
Company stock who (for U.S. federal income tax purposes) (i) is a citizen or
resident of the United States, (ii) is a corporation, partnership, or other
entity created or organized in or under the laws of the United States or of any
political subdivision thereof, (iii) is an estate the income of which is subject
to U.S. federal income taxation regardless of its source or (iv) is a trust
whose administration is subject to the primary supervision of a U.S. court and
which has one or more U.S. persons who have the authority to control all
substantial decisions of the trust. Notwithstanding the preceding sentence, to
the extent provided in regulations, certain trusts in existence on August 20,
1996, and treated as U.S. persons prior to such date that elect to continue to
be treated as U.S. persons, shall also be considered U.S. Stockholders.
As long as the Company qualifies as a REIT, distributions made by the
Company out of its current or accumulated earnings and profits (and not
designated as capital gain dividends) will constitute dividends taxable to its
taxable U.S. Stockholders as ordinary income. Such distributions will not be
eligible for the dividends-received deduction otherwise available with respect
to dividends received by U.S. Stockholders that are corporations. Distributions
made by the Company that are properly designated by the Company as capital gain
dividends will be taxable to taxable U.S. Stockholders as gains (to the extent
that they do not exceed the Company's actual net capital gain for the taxable
year) from the sale or disposition of a capital asset. Depending on the period
of time the Company held the assets which produced such gains, and on certain
designations, if any, which may be made by the Company, such gains may be
taxable to noncorporate U.S. Stockholders at a 20%, 25% or 28% rate. U.S.
Stockholders that are corporations may, however, be required to treat up to 20%
of certain capital gain dividends as ordinary income. To the extent that the
Company makes distributions (not designated as capital gain dividends) in excess
of its current and accumulated earnings and profits, such distributions will be
treated first as a tax-free return of capital to each U.S. Stockholder, reducing
the adjusted basis which such U.S. Stockholder has in his shares of Company
stock for tax purposes by the amount of such distribution (but not below zero),
with distributions in excess of a U.S. Stockholder's adjusted basis in his
shares taxable as capital gain, provided that the shares have been held as a
capital asset (which, with respect to a noncorporate U.S. Stockholder, will be
taxable as long-term capital gain if the shares have been held for more than
eighteen months, midterm capital gain if the shares have been held for more than
one year but not more than eighteen months, or short-term capital gain if the
shares have been held for one year or less). Dividends declared by the Company
in October, November, or December of any year and payable to a stockholder of
record on a specified 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 on or before January
31 of the following calendar year. Stockholders may not include in their own
income tax returns any net operating losses or capital losses of the Company.
Distributions made by the Company and gain arising from the sale or
exchange by a U.S. Stockholder of shares of Company stock will not be treated as
passive activity income, and, as a result, U.S. Stockholders generally will not
be able to apply any "passive losses" against such income or gain. Distributions
made by the Company (to the extent they do not constitute a return of capital)
generally will be treated as investment income for purposes of computing the
investment interest limitation. Gain arising from the sale or other disposition
of Company stock (or distributions treated as such), however, will not be
treated as investment income under certain circumstances.
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The Company may elect to retain, rather than distribute as a capital gain
dividend, its net long-term capital gains. In such event, the Company would pay
tax on such retained net long-term capital gains. In addition to the extent
designated by the Company, a U.S. Stockholder generally would (i) include his
proportionate share of such undistributed long-term capital gains in computing
his long-term capital gains in his return for his taxable year in which the last
day of the Company's taxable year falls (subject to certain limitations as to
the amount so includable), (ii) be deemed to have paid the capital gains tax
imposed on the Company on the designated amounts included in such U.S.
Stockholder's long-term capital gains, (iii) receive a credit or refund for such
amount of tax deemed paid by it, (iv) increase the adjusted basis of his shares
by the difference between the amount of such includable gains and the tax deemed
to have been paid by him, and (v), in the case of a U.S. Stockholder that is a
corporation, appropriately adjust its earnings and profits for the retained
capital gains in accordance with Treasury Regulations (which have not yet been
issued).
Upon any sale or other taxable disposition of Company stock, a U.S.
Stockholder will recognize gain or loss for federal income tax purposes in an
amount equal to the difference between (i) the amount of cash and the fair
market value of any property received on such sale or other disposition and (ii)
the holder's adjusted basis in such shares of Company stock for tax purposes.
Such gain or loss will be capital gain or loss if the shares have been held by
the U.S. Stockholder as a capital asset and, with respect to a noncorporate U.S.
Stockholder, will be mid-term or long-term gain or loss if such shares have been
held for more than one year or more than eighteen months, respectively. In
general, any loss recognized by a U.S. Stockholder upon the sale or other
disposition of shares of Common Stock that have been held for six months or less
(after applying certain holding period rules) will be treated as a long-term
capital loss, to the extent of capital gain dividends received by such U.S.
Stockholder from the Company which were required to be treated as long-term
capital gains.
Backup Withholding
The Company must report annually to the IRS and to each U.S. stockholder
the amount of dividends paid to and the amount of tax withheld, if any, with
respect to, each U.S. stockholder. Under the backup withholding rules, a
stockholder may be subject to backup withholding at the rate of 31% with respect
to dividends paid and redemption proceeds 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 instructed 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
The IRS has issued a revenue ruling in which it held that amounts
distributed by a REIT to a tax-exempt employees' pension trust do not constitute
unrelated business taxable income ("UBTI"). Revenue rulings, however, are
interpretive in nature and are subject to revocation or modification by the IRS.
Based upon the ruling and the analysis therein, distributions by the Company to
a stockholder that is a tax-exempt entity should not constitute UBTI, provided
that the tax-exempt entity has not financed the acquisition of its shares of the
Company's stock with "acquisition indebtedness" within the meaning of the Code,
and that the shares of the Company's stock are not otherwise used in an
unrelated trade or business of the tax-exempt entity. In addition, REITs
generally treat the beneficiaries of qualified pension trusts as the beneficial
owners of REIT shares owned by such pension trusts for purposes of determining
if more than 50% of the REIT's shares are owned by five or fewer individuals.
However, if a pension trust owns more than 10% of the REIT's shares, it can be
subject to UBTI on all or a portion of REIT dividends made to it, if the Company
is treated as a "pension-held REIT." In view of the Ownership Limit, the Company
does not expect to be treated as a "pension-held REIT." See "Description of
Common Stock -- Restrictions on Transfer."
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TAXATION OF NON-U.S. STOCKHOLDERS
The rules governing U.S. federal income taxation of the ownership and
disposition of Company stock by persons that are, for purposes of such taxation,
nonresident alien individuals, foreign corporations, foreign partnerships or
foreign estates or trusts (collectively, "Non-U.S. Stockholders") are complex,
and no attempt is made herein to provide more than a brief summary of such
rules. Accordingly, the discussion does not address all aspects of U.S. federal
income tax and does not address state, local or foreign tax consequences that
may be relevant to a Non-U.S. Stockholder in light of his particular
circumstances. In addition, this discussion is based on current law, which is
subject to change, and assumes that the Company qualifies for taxation as a
REIT. The discussion addresses only certain aspects of U.S. federal income and
estate taxation and does not address the impact of any applicable treaty.
Prospective Non-U.S. Stockholders should consult with their own tax advisors to
determine the impact of federal, state, local and foreign income tax laws with
regard to an investment in Company stock, including any reporting requirements.
Distributions From the Company.
1. Ordinary Dividends. Distributions that are not attributable to gain from
sales or exchanges by the Company or the Operating Partnership of "United States
real property interests" ("USRPIs"), as defined in the Code, and not designated
by the Company as capital gains dividends will be treated as dividends of
ordinary income to the extent they are made out of current or accumulated
earnings and profits of the Company. Unless such distributions are effectively
connected with the Non-U.S. Stockholder's conduct of a U.S. trade or business
(or, if an income tax treaty applies, is attributable to a U.S. permanent
establishment of the Non-U.S. Holder), the gross amount of the distributions
will ordinarily be subject to U.S. withholding tax at a 30% or lower treaty
rate. In general, Non-U.S. Stockholders will not be considered engaged in a U.S.
trade or business (or, in the case of an income tax treaty, as having a U.S.
permanent established) solely by reason of their ownership of the Company's
stock. If income on the Company's stock is treated as effectively connected with
the Non-U.S. Stockholder's conduct of a U.S. trade or business (or, if an income
tax treaty applies, is attributable to a U.S. permanent establishment of the
Non-U.S. Stockholder), the Non-U.S. Stockholder generally will be subject to a
tax at graduated rates in the same manner as U.S. Stockholders are taxed with
respect to such distributions (and may also be subject to the 30% branch profits
tax in the case of a stockholder that is a foreign corporation).
The Company expects to withhold U.S. income tax at the rate of 30% on the
gross amount of any distributions of ordinary income made to a Non-U.S.
Stockholder unless (i) a lower treaty rate applies and proper certification is
provided or (ii) the Non-U.S. Stockholder files an IRS Form 4224 with the
Company claiming that the distribution is effectively connected with the
Non-U.S. Stockholder's conduct of a U.S. trade or business (or, if an income tax
treaty applies, is attributable to a U.S. permanent establishment of the
Non-U.S. Stockholder). Pursuant to current Treasury Regulations, dividends paid
to an address in a country outside the United States are generally presumed to
be paid to a resident of such country for purposes of ascertaining the
requirement of withholding discussed above and the applicability of an income
tax treaty rate. Under temporary Treasury Regulations, however, certain Non-U.S.
Stockholders who seek to claim the benefit of an applicable treaty rate are
required to satisfy certain certification and other requirements.
2. Non-Dividend Distributions. Unless the Company's stock constitutes a
USRPI, distributions in excess of current and accumulated earnings and profits
of the Company will not be taxable to a Non-U.S. Stockholder to the extent that
such distributions do not exceed the adjusted basis of the Non-U.S.
Stockholder's shares but rather will reduce the adjusted basis of such shares.
To the extent that such distributions exceed the adjusted basis of a Non-U.S.
Stockholder's shares of the Company's capital stock, such distributions will
give rise to tax liability if the Non-U.S. Stockholder would otherwise be
subject to tax on any gain from the sale or disposition of his shares, as
described below. If it cannot be determined at the time a distribution is made
whether or not such distribution will be in excess of current and accumulated
earnings and profits, the distributions will be subject to withholding at the
same rate as dividends. If, however, the Company's stock is treated as a USRPI,
any distributions in excess of current or accumulated earnings and profits will
generally be subject to 10% withholding and, to the extent such distributions
also exceed the adjusted basis of a Non-U.S. Stockholder's stock, they will also
give rise to gain from the sale or exchange of
43
<PAGE> 46
the stock, the tax treatment of which is described below. Amounts withheld may
be refundable if it is subsequently determined that such amounts are in excess
of the Non-U.S. Stockholder's tax liability.
3. Capital Gain Dividends. Distributions that are attributable to gain from
sales or exchanges by the Company of USRPIs ("USRPI Capital Gains"), such as
properties beneficially owned by the Company, will be taxed to a Non-U.S.
Stockholder under the provisions of the Foreign Investment in Real Property Tax
Act of 1980 ("FIRPTA"). Under FIRPTA, such distributions are taxed to a Non-U.S.
Stockholder as gain effectively connected with a U.S. trade or business,
regardless of whether such dividends are designated as capital gain dividends.
Non-U.S. Stockholders would thus be taxed at the normal capital gain rates
applicable to U.S. Stockholders (subject to applicable alternative minimum tax
and a special alternative minimum tax in the case of non-resident alien
individuals) on such distributions. Also, distributions from USRPI Capital Gains
may be subject to a 30% branch profits tax in the hands of a corporate Non-U.S.
Stockholder not entitled to treaty exemption or rate reduction. The Company is
required by applicable Treasury Regulations to withhold 35% of any distribution
consisting of USRPI Capital Gains. This amount may be creditable against the
Non-U.S. Stockholder's FIRPTA tax liability.
Other distributions attributable to the Company's capital gains, other than
its USRPI Capital Gains, generally will not be subject to taxation, unless (i)
investment in the shares is effectively connected with the Non-U.S.
Stockholder's U.S. trade or business (or, if an income tax treaty applies, it is
attributable to a U.S. permanent establishment of the Non-U.S. Stockholder), in
which case the Non-U.S. Stockholder will be subject to the same treatment as
U.S. Stockholders with respect to such gain (except that a foreign corporate
Non-U.S. Stockholder may also be subject to the 30% branch profits tax), or (ii)
the Non-U.S. Stockholder is a non-resident alien individual who is present in
the United States for 183 days or more during the taxable year and either has a
"tax home" in the United States or sold his or her shares of Company stock under
circumstances in which the sale was attributable to a U.S. office, in which case
the non-resident alien individual will be subject to a 30% tax on the
individual's capital gains.
Disposition of Stock of the Company. Gain recognized by a Non-U.S.
Stockholder upon a sale of shares of Company stock will generally not be taxed
under FIRPTA if the shares do not constitute a USRPI. Shares of Company stock
will not be considered a USRPI if the Company is a "domestically controlled
REIT," or if the shares are part of a class of stock that is regularly traded on
an established securities market and the holder owned less than 5% of the class
of stock sold during a specified testing period. A "domestically controlled
REIT" is defined generally as a REIT in which at all times during a specified
testing period less than 50% in value of the stock was held directly or
indirectly by foreign persons. The Company believes that it is, and expects that
it will continue to be, a "domestically controlled REIT," and therefore the sale
of shares will not be subject to taxation under FIRPTA. However, since the
Company's Common Stock is publicly traded, no assurance can be given to this
effect. If the gain on the sale of shares were to be subject to taxation under
FIRPTA, the Non-U.S. Stockholder would be subject to the same treatment as U.S.
Stockholders with respect to such gain (subject to applicable alternative
minimum tax and a special alternative minimum tax in the case of non-resident
alien individuals), and the purchaser of the stock may be required to withhold
10% of the purchase price and remit such amount to the IRS.
Gain not subject to FIRPTA will be taxable to a Non-U.S. Stockholder if (i)
investment in the shares is effectively connected with a United States trade or
business of the Non-U.S. Stockholder (or, if an income tax treaty applies, is
attributable to a U.S. permanent establishment of the Non-U.S. Stockholder), in
which case the Non-U.S. Stockholder will be subject to the same treatment as
U.S. Stockholders with respect to such gain, or (ii) the Non-U.S. Stockholder is
a non-resident 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,
in which case the non-resident alien individual will be subject to a 30% tax on
the individual's capital gains.
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.
44
<PAGE> 47
Information Reporting and Backup Withholding. The Company must report
annually to the IRS and to each Non-U.S. Stockholder the amount of dividends
(including any capital gain dividends) paid to, and the tax withheld with
respect to, each Non-U.S. Stockholder. 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. Stockholder resides.
U.S. backup withholding, which generally is imposed at the rate of 31% on
certain payments to persons that fail to furnish the information required under
the U.S. information reporting requirements, will generally not apply to
dividends (including any capital gain dividends) paid on stock of the Company to
a Non-U.S. Holder at an address outside the United States. However, the payment
of the proceeds from the disposition of stock of the Company to or though a U.S.
office of a broker will be subject to information reporting and backup
withholding unless the owner, under penalty of perjury, certifies, among other
things, its status as a Non-U.S. Holder, or otherwise establishes an exemption.
The payment of the proceeds from the disposition of stock to or through a
non-U.S. office of a non-U.S. broker generally will not be subject to backup
withholding and information reporting.
New Withholding Regulations. Final regulations with withholding tax on
income paid to foreign persons and related matters (the "New Withholding
Regulations") were recently promulgated. In general, the New Withholding
Regulations do not significantly alter the substantive withholding and
information reporting requirements, but unify current certification procedures
and forms and clarify reliance standards. For example, the New Withholding
Regulations adopt a certification rule which was in the proposed regulations
under which a Non-U.S. Stockholder who wishes to claim the benefit of an
applicable treaty rate with respect to dividends received from a U.S.
corporation will be required to satisfy certain certification and other
requirements. In addition, the New Withholding Regulations require a corporation
that is a REIT to treat as a dividend the portion of a distribution that is not
designated as a capital gain dividend or return of basis and apply the 30%
withholding tax (subject to any applicable deduction or exemption) to such
portion, and to apply the FIRPTA withholding rules (discussed above) with
respect to the portion of the distribution designated by the REIT as capital
gain dividend. The New Withholding Regulations will generally be effective for
payments made after December 31, 1998, subject to certain transition rules.
EXCEPT AS PROVIDED IN THIS PARAGRAPH, THE DISCUSSION SET FORTH ABOVE UNDER
"TAXATION OF NON-U.S. STOCKHOLDERS" DOES NOT TAKE THE NEW WITHHOLDING
REGULATIONS INTO ACCOUNT. PROSPECTIVE NON-U.S. STOCKHOLDERS ARE STRONGLY URGED
TO CONSULT THEIR OWN TAX ADVISORS WITH RESPECT TO THE IMPACT TO THEM OF THE NEW
WITHHOLDING REGULATIONS.
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. The 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.
45
<PAGE> 48
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 U.S. 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 (including capital gains dividends) of the Company, even though they
receive no cash. Shares of Company 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.
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".
46
<PAGE> 49
PLAN OF DISTRIBUTION
The Company and the Operating Partnership 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 and the
Operating Partnership also may, from time to time, authorize underwriters acting
as the Company's or the Operating Partnership'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 or
from the Operating Partnership 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 or the Operating
Partnership 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 or the Operating
Partnership, 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.
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 Warrants or Debt Securities 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 or the
Operating Partnership may authorize dealers acting as the Company's or Operating
Partnership's agent to solicit offers by certain institutions to purchase
Offered Securities from the Company or Operating Partnership 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 or
the Operating Partnership 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.
47
<PAGE> 50
EXPERTS
The consolidated financial statements and schedule of the Company as of
December 31, 1997 and 1996, and for each of the years in the three year period
ended December 31, 1997 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. The
consolidated financial statements and schedule of the Operating Partnership as
of December 31, 1997 and 1996 and for each of the years in the three year period
ended December 31, 1997 are included herein in reliance upon the report of KPMG
Peat Marwick LLP, independent certified accountants, 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. In addition, the description
of the Company's qualification and taxation as a REIT under the Code contained
in this Prospectus under the caption entitled "Federal Income Tax
Considerations -- General" is based upon the opinion of Morrison & Foerster LLP.
48
<PAGE> 51
ESSEX PORTFOLIO, L.P.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND OTHER INFORMATION
CONSOLIDATED FINANCIAL STATEMENTS FOR ESSEX PORTFOLIO, L.P.
AS OF DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report................................ F-2
Consolidated Balance Sheets of Essex Portfolio, L.P.
as of December 31, 1997 and 1996.......................... F-3
Consolidated Statements of Operations of Essex Portfolio,
L.P.
for the years ended December 31, 1997, 1996 and 1995...... F-4
Consolidated Statements of Partners' Capital of Essex
Portfolio, L.P.
for the years ended December 31, 1997, 1996 and 1995...... F-5
Consolidated Statements of Cash Flows of Essex Portfolio,
L.P.
for the years ended December 31, 1997, 1996 and 1995...... F-6
Notes to Consolidated Financial Statements.................. F-7
Schedule I: Real Estate and Accumulated Depreciation........ F-19
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. F-23
</TABLE>
F-1
<PAGE> 52
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Essex Portfolio, L.P.:
We have audited the accompanying consolidated balance sheets of Essex
Portfolio, L.P. and subsidiaries as of December 31, 1997 and 1996, and the
related consolidated statements of operations, partners' capital and cash flows
for each of the years in the three-year period ended December 31, 1997. In
connection with our audits of the consolidated financial statements, we have
also audited the financial statement Schedule of Real Estate and Accumulated
Depreciation as of December 31, 1997. These consolidated financial statements
and financial statement schedule are the responsibility of the management of
Essex Portfolio, L.P. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Essex
Portfolio, L.P. and subsidiaries as of December 31, 1997 and 1996, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1997, in conformity with generally accepted
accounting principles. Also, in our opinion, the related financial statement
schedule, when considered in relation to the financial statements taken as a
whole, presents fairly, in all material respects, the information set forth
therein.
KPMG Peat Marwick LLP
San Francisco, California
January 30, 1998
F-2
<PAGE> 53
ESSEX PORTFOLIO, L.P.
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1997 1996
--------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Real estate:
Rental properties:
Land and land improvements............................. $182,416 $ 90,557
Buildings and improvements............................. 548,571 303,252
-------- --------
730,987 393,809
Less accumulated depreciation............................. (58,040) (47,631)
-------- --------
672,947 346,178
Investments............................................... 2,347 8,537
Real estate under development............................. 27,422 --
-------- --------
702,716 354,715
Cash and cash equivalents................................... 4,282 42,705
Restricted cash............................................. 6,093 4,194
Notes and other related party receivables................... 9,264 2,362
Notes and other receivables................................. 8,602 5,293
Prepaid expenses and other assets........................... 3,838 3,745
Deferred charges, net....................................... 4,040 4,160
-------- --------
$738,835 $417,174
======== ========
LIABILITIES AND PARTNERS' CAPITAL
Mortgage notes payable...................................... $248,997 $153,205
Lines of credit............................................. 27,600 --
Accounts payable and accrued liabilities.................... 21,337 7,346
Distributions payable....................................... 9,189 6,286
Other liabilities........................................... 4,208 2,249
-------- --------
Total liabilities................................. 311,331 169,086
Minority interests.......................................... 3,102 1,042
Partners' capital:
General partner:
Common equity.......................................... 361,410 205,302
Preferred equity....................................... 37,505 17,505
-------- --------
398,915 222,807
Limited partners' common equity........................... 25,487 24,239
-------- --------
Total partners' capital........................... 424,402 247,046
-------- --------
$738,835 $417,174
======== ========
</TABLE>
(See accompanying notes to consolidated financial statements.)
F-3
<PAGE> 54
ESSEX PORTFOLIO, L.P.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1997 1996 1995
-------- -------- --------
(IN THOUSANDS, EXCEPT PER UNIT
AMOUNTS)
<S> <C> <C> <C>
Revenues:
Rental.................................................... $79,936 $47,780 $41,640
Interest and other income................................. 4,633 2,913 2,300
------- ------- -------
84,569 50,693 43,940
------- ------- -------
Expenses:
Property operating expenses:
Maintenance and repairs................................ 6,814 4,341 3,811
Real estate taxes...................................... 6,340 3,790 3,371
Utilities.............................................. 5,074 3,175 2,974
Administrative......................................... 5,514 2,911 2,592
Advertising............................................ 1,225 653 299
Insurance.............................................. 859 635 557
Depreciation and amortization.......................... 13,992 8,855 8,007
------- ------- -------
39,818 24,360 21,611
Interest.................................................. 12,659 11,442 10,928
Amortization of deferred financing costs.................. 509 639 1,355
General and administrative................................ 2,413 1,717 1,527
Loss from hedge termination............................... 138 42 288
------- ------- -------
Total expenses......................................... 55,537 38,200 35,709
------- ------- -------
Net income before gain on sales of real estate,
minority interests and extraordinary item............. 29,032 12,493 8,231
Gain on sales of real estate................................ 5,114 2,477 6,013
------- ------- -------
Net income before minority interests and extraordinary
item.................................................. 34,146 14,970 14,244
Minority interests.......................................... (463) (386) (352)
------- ------- -------
Income before extraordinary item....................... 33,683 14,584 13,892
Extraordinary item -- loss on early extinguishment of
debt...................................................... (361) (3,441) (154)
------- ------- -------
Net income............................................. 33,322 11,143 13,738
Dividends on preferred units................................ (2,681) (635) --
------- ------- -------
Net income available to common units................... $30,641 $10,508 $13,738
======= ======= =======
Per Operating Partnership Common Unit data:
Basic:
Net income before extraordinary item................... $ 2.00 $ 1.53 $ 1.71
Extraordinary item -- debt extinguishment.............. (0.02) (0.38) (0.02)
------- ------- -------
Net income........................................ $ 1.98 $ 1.15 $ 1.69
======= ======= =======
Weighted average number of shares outstanding during
the period............................................ 15,509 9,139 8,130
======= ======= =======
Diluted:
Net income before extraordinary item................... $ 1.96 $ 1.52 $ 1.71
Extraordinary item -- debt extinguishment.............. (0.02) (0.37) (0.02)
------- ------- -------
Net income........................................ $ 1.94 $ 1.15 $ 1.69
======= ======= =======
Weighted average number of shares outstanding during
the period............................................ 17,149 9,203 8,130
======= ======= =======
Distributions per Operating Partnership common unit......... $ 1.77 $ 1.72 $ 1.69
======= ======= =======
</TABLE>
(See accompanying notes to consolidated financial statements.)
F-4
<PAGE> 55
ESSEX PORTFOLIO, L.P.
CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
GENERAL PARTNER
-----------------------------
COMMON EQUITY PREFERRED LIMITED PARTNER
----------------- EQUITY ---------------
UNITS AMOUNT AMOUNT UNITS AMOUNT TOTAL
------ -------- --------- ----- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1994............. 6,275 $ 84,699 $ -- 1,855 $25,205 $109,904
Net income................................ -- 10,604 -- -- 3,134 13,738
Partners' distributions................... -- (10,574) -- -- (3,127) (13,701)
------ -------- ------- ----- ------- --------
Balances at December 31, 1995............. 6,275 84,729 -- 1,855 25,212 109,941
Contribution -- net proceeds from
preferred stock offering................ -- -- 17,505 -- -- 17,505
Contribution -- net proceeds from common
stock offerings......................... 5,313 126,464 -- -- -- 126,464
Contribution -- net proceeds from options
exercised............................... 4 68 -- -- -- 68
Net income................................ -- 8,246 635 -- 2,262 11,143
Partners' distributions................... -- (14,205) (635) -- (3,235) (18,075)
------ -------- ------- ----- ------- --------
Balances at December 31, 1996............. 11,592 205,302 17,505 1,855 24,239 247,046
Contribution -- net proceeds from
preferred stock......................... -- -- 20,000 -- -- 20,000
Contribution -- net proceeds from common
stock................................... 4,995 154,012 -- -- -- 154,012
Contribution -- net proceeds from options
exercised............................... 28 686 -- -- -- 686
Contributions -- net proceeds from
partners................................ -- -- -- 18 543 543
Net income................................ -- 26,636 2,681 -- 4,005 33,322
Partners' distributions................... -- (25,226) (2,681) -- (3,300) (31,207)
------ -------- ------- ----- ------- --------
Balances at December 31, 1997............. 16,615 $361,410 $37,505 1,873 $25,487 $424,402
====== ======== ======= ===== ======= ========
</TABLE>
(See accompanying notes to consolidated financial statements.)
F-5
<PAGE> 56
ESSEX PORTFOLIO, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1997 1996 1995
--------- --------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income................................................ $ 33,322 $ 11,143 $ 13,738
Minority interests........................................ 463 (215) (131)
Adjustments to reconcile net income to net cash provided
by operating activities:
Gain on sales of real estate............................ (5,114) (2,477) (6,013)
Equity in income (loss) of limited partnerships......... 209 (546) (92)
Loss on early extinguishment of debt.................... 361 3,441 154
Loss from hedge termination............................. 138 42 62
Depreciation and amortization........................... 13,992 8,855 8,007
Amortization of deferred financing costs................ 509 639 1,355
Changes in operating assets and liabilities:
Other receivables..................................... (1,377) (163) (48)
Prepaid expenses and other assets..................... (158) (2,110) (561)
Accounts payable and accrued liabilities.............. 2,738 842 (73)
Other liabilities..................................... 1,815 684 197
--------- --------- --------
Net cash provided by operating activities.......... 46,898 20,135 16,595
--------- --------- --------
Cash flows from investing activities:
Additions to rental properties............................ (247,886) (101,429) (9,516)
Increase in restricted cash............................... (1,899) (4,194) --
Issuance of notes receivable.............................. (1,932) (3,909) (500)
Repayments of notes receivable............................ -- 6,327 333
Investments in corporations and limited partnerships...... 620 665 (7,426)
Dispositions of real estate............................... 15,470 13,350 12,147
Additions to real estate under development................ (27,422) -- --
--------- --------- --------
Net cash used in investing activities.............. (263,049) (89,190) (4,962)
--------- --------- --------
Cash flows from financing activities:
Proceeds from mortgage and other notes payable and lines
of credit............................................... 204,931 91,253 21,700
Repayment of mortgage and other notes payable and lines of
credit.................................................. (164,580) (110,305) (17,195)
Additions to deferred charges............................. (752) (2,530) (930)
Additions to related party notes and other receivables.... (28,761) -- --
Repayments of related party notes and other receivables... 21,859 -- --
Contributions from stock offerings -- general partner..... 174,012 143,969 --
Increase (decrease) in offering related accounts
payable................................................. (711) 1,140 --
Contributions from stock options exercised -- general
partner................................................. 686 68 --
Net payments made in connection with costs related to the
early extinguishment of debt............................ -- (620) --
Distributions to limited partners and minority interest... (3,910) (3,189) (3,123)
Distributions to general partner.......................... (25,046) (12,009) (10,513)
--------- --------- --------
Net cash provided by (used in) financing
activities....................................... 177,728 107,777 (10,061)
--------- --------- --------
Net increase (decrease) in cash and cash equivalents........ $ (38,423) 38,722 1,572
Cash and cash equivalents at beginning of period............ 42,705 3,983 2,411
--------- --------- --------
Cash and cash equivalents at end of period.................. $ 4,282 $ 42,705 $ 3,983
========= ========= ========
Supplemental disclosure of cash flow information:
Cash paid for interest, net of amounts capitalized........ $ 12,384 $ 11,575 $ 10,927
========= ========= ========
Supplemental disclosure of non -- cash investing and
financing activities:
Mortgage note payable assumed in connection with purchase
of real estate.......................................... $ 83,041 $ 17,733 $ --
========= ========= ========
Distributions payable..................................... $ 9,189 $ 6,286 $ 3,455
========= ========= ========
</TABLE>
(See accompanying notes to consolidated financial statements.)
F-6
<PAGE> 57
ESSEX PORTFOLIO, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS, EXCEPT FOR PER UNIT AND SHARE AMOUNTS)
(1) ORGANIZATION AND BASIS OF PRESENTATION
Essex Portfolio, L.P. (the Operating Partnership) was formed in March 1994
and commenced operations on June 13, 1994, when Essex Property Trust, Inc. (the
Company), the general partner in the Operating Partnership (the General
Partner), completed its initial public offering (the Offering) in which it
issued 6,275,000 shares of common stock at $19.50 per share. The net proceeds of
the Offering of $112,071 were used by the General Partner to acquire a 77.2%
interest in the Operating Partnership. The Operating Partnership holds the
assets and liabilities and conducts the operating activities of the Company. The
Company has elected to be treated as a real estate investment trust (REIT) under
the Internal Revenue Code of 1986 (the "Code"), as amended.
The limited partners own an aggregate 10.1% interest in the Operating
Partnership at December 31, 1997. The limited partners may convert their
interests into shares of common stock or cash (based upon the trading price of
the common stock at the conversion date). The Company has reserved 1,873,473
shares of common stock for such conversions. These conversion rights may be
exercised by the limited partners at any time through 2024.
The consolidated financial statements include the financial statements of
Essex Portfolio, L.P. and the financial statements of certain limited
partnerships which own multifamily properties in which the Operating Partnership
has a majority limited partnership interest. Such limited partnerships are
managed by the Operating Partnership and are controlled by the Operating
Partnership as the majority limited partner pursuant to the terms of the
respective partnership agreement. All significant intercompany balances and
transactions have been eliminated in the consolidated financial statements.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Real Estate Rental Properties
Rental properties are recorded at cost less accumulated depreciation.
Depreciation on rental properties has been provided over the estimated useful
lives of 3 to 40 years using the straight-line method.
Maintenance and repair expenses are charged to operations as incurred.
Asset replacements and improvements are capitalized and depreciated over their
estimated useful lives.
Rental properties are pledged as collateral for the related mortgage notes
payable.
In the normal course of business, when the Operating Partnership determines
that a property is held for sale, it discontinues the periodic depreciation of
that property in accordance with the provisions of SFAS 121. Assets held for
sale are reported at the lower of the carrying amount or fair value less costs
to sell. In addition, whenever events or changes in circumstances indicate that
the carrying amount of a property to be held may not be fully recoverable, the
carrying amount will be evaluated. If the sum of the property's expected future
cash flows (undiscounted and without interest charges) is less than the carrying
amount of the property, then the Operating Partnership will recognize an
impairment loss equal to the excess of the carrying amount over the fair value
of the property. No impairment has been recorded through December 31, 1997.
Real Estate Investments
The Operating Partnership accounts for its investments in joint ventures
and corporations under the equity method of accounting.
F-7
<PAGE> 58
ESSEX PORTFOLIO, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS, EXCEPT FOR PER UNIT AND SHARE AMOUNTS)
Cash Equivalents and Restricted Cash
Highly liquid investments with a maturity of three months or less when
purchased are classified as cash equivalents. Restricted cash relates to reserve
requirements in conjunction with the Operating Partnership's tax exempt variable
rate bond financings.
Revenues
For multifamily properties, rental revenue is reported on the accrual basis
of accounting. For the retail and corporate properties, rental income is
recognized on the straight-line basis over the terms of the leases. Accrued rent
receivable relating to such leases has been included in other assets in the
accompanying balance sheets.
Interest
During 1997, the Operating Partnership capitalized $1,276 of interest
related to the development of real estate.
Deferred Charges
Deferred charges are principally comprised of mortgage loan fees and costs
which are amortized over the terms of the related mortgage notes in a manner
which approximates the effective interest method.
Interest Rate Protection, Swap, and Forward Contracts
The Operating Partnership will from time to time use interest rate
protection, swap and forward contracts to reduce its interest rate exposure on
current or identified future debt transactions. Amounts paid in connection with
such contracts are capitalized and amortized over the term of the contract or
related debt. If the contract is terminated, the gain or loss on termination is
deferred and amortized over the remaining term of the contract. If the related
debt is repaid, the unamortized portion of the deferred amount is charged to
income or the contract is marked to market, as appropriate. The Operating
Partnership's policy is to manage interest rate risk for existing or anticipated
borrowings. As indicated above, there was no exposure to unmatched positions at
December 31, 1997.
Income Taxes
No provision for income taxes has been made as the Operating Partnership's
taxable income or loss is reportable on the tax returns of the individual
partners based on their proportionate interest in the Operating Partnership.
Per Common Unit Data
Net income per common unit for the Operating Partnership is computed using
the weighted average number of common units outstanding during the period.
Income Allocation
Income is allocated to the Partners based upon the terms set forth in the
partnership agreement.
F-8
<PAGE> 59
ESSEX PORTFOLIO, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS, EXCEPT FOR PER UNIT AND SHARE AMOUNTS)
Minority Interest
Minority interest represents a 30.7 percent interest in the Pathways
property and a 15% interest in three San Diego area multi-family properties.
Reclassifications
Certain reclassifications have been made to the 1996 and 1995 balances to
conform with the 1997 presentation.
New Accounting Pronouncements
The Financial Accounting Standards Board issued SFAS No. 130, "Reporting
Comprehensive Income" and SFAS No. 131, "Disclosure about Segments of an
Enterprise and Related Information." These statements, which are effective for
periods beginning after December 15, 1997, expand or modify disclosures and,
accordingly, will have no impact on the Operating Partnership's reported
financial position, results of operations or cash flows.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting 0period.
Actual results could differ from those estimates.
(3) EQUITY TRANSACTIONS
During 1997, the Company sold additional shares of Common Stock on March
31, 1997, September 10, 1997 and December 8, 1997. In connection with these
offerings, the Company sold 2,000,000, 1,495,000 and 1,500,000 shares at $29.13,
$31.00 and $35.50 per share, respectively. The net proceeds received for these
transactions were $58,119, $46,080 and $49,814, respectively.
During 1996, the Company sold additional shares of Common Stock on August
14, 1996 and December 24, 1996. In connection with these offerings, the Company
sold 2,530,000 and 2,783,000 shares at $22.75 and $27.75 per share,
respectively. The net proceeds received for these two transactions were $53,996
and $72,468, respectively.
On June 20, 1996, the Company entered into an agreement to sell up to
$40,000 of the 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). In accordance with the agreement, on July 1, 1996,
Tiger/Westbrook purchased 340,000 shares of Convertible Preferred Stock for an
aggregate purchase price of $8,500 and loaned the Company an additional $11,500.
This loan was exchanged for 460,000 shares of Convertible Preferred Stock at
$25.00 per share on September 27, 1996 upon receiving stockholder approval.
Tiger/Westbrook purchased an additional $20,000 of Convertible Preferred Stock,
in accordance with the agreement on June 20, 1997. The outstanding Convertible
Preferred Stock is entitled to receive annual cumulative cash dividends paid
quarterly in an amount equal to the greater of (i) 8.75% of the 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. Subsequent to June 20, 1997, 25% of the 1.6 million
authorized shares of Convertible Preferred Stock is convertible into Common
Stock at the option of the holder, and thereafter, at
F-9
<PAGE> 60
ESSEX PORTFOLIO, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS, EXCEPT FOR PER UNIT AND SHARE AMOUNTS)
the beginning of each of the next three-month periods, an additional 25% of the
Convertible Preferred Stock is convertible. The conversion price per share is
$21.875, subject to certain adjustments as defined in the agreement. 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.
The net proceeds of the Company's common and preferred stock offerings were
invested or advanced to the Operating Partnership.
(4) PER UNIT DATA
Basic income per unit before extraordinary item and diluted income per unit
before extraordinary item were calculated as follows for the years ended
December 31:
<TABLE>
<CAPTION>
1997 1996 1995
----------------------------- ----------------------------- -----------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE PER UNIT AVERAGE PER UNIT AVERAGE PER UNIT
INCOME UNITS AMOUNT INCOME UNITS AMOUNT INCOME UNITS AMOUNT
------- -------- -------- ------- -------- -------- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Income before extraordinary
item......................... $33,683 $14,584 $13,892
Less: dividends on preferred
units........................ (2,681) (635) --
------- ------- -------
Basic:
Income available to common
units...................... 31,002 15,509 $2.00 13,949 9,139 $1.53 13,892 8,130 $1.71
===== ===== =====
Effect of Dilutive Securities:
Convertible preferred
units...................... 2,681 1,400 -- --(1) -- --
Options...................... -- 240 -- 64 -- --
------- ------ ------- ----- ------- -----
Diluted:
Income available to common
units plus assumed
conversions................ $33,683 17,149 $1.96 $13,949 9,203 $1.52 $13,892 8,130 $1.71
======= ====== ===== ======= ===== ===== ======= ===== =====
</TABLE>
- ---------------
(1) Conversion not considered as effect would be anti-dilutive.
(5) REAL ESTATE
Rental Properties
Rental properties consists of the following at December 31, 1997 and 1996:
<TABLE>
<CAPTION>
LAND AND BUILDINGS
LAND AND ACCUMULATED
IMPROVEMENTS IMPROVEMENTS TOTAL DEPRECIATION
------------ ------------ -------- ------------
<S> <C> <C> <C> <C>
December 31, 1997:
Apartment properties................ $178,326 $520,649 $698,975 $53,021
Retail and corporate................ 4,090 27,922 32,012 5,019
-------- -------- -------- -------
$182,416 $548,571 $730,987 $58,040
======== ======== ======== =======
December 31, 1996:
Apartment properties................ $ 86,491 $274,241 $360,732 $41,627
Retail and corporate................ 4,066 29,011 33,077 6,004
-------- -------- -------- -------
$ 90,557 $303,252 $393,809 $47,631
======== ======== ======== =======
</TABLE>
F-10
<PAGE> 61
ESSEX PORTFOLIO, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS, EXCEPT FOR PER UNIT AND SHARE AMOUNTS)
The properties are located in California, Washington and Oregon. The
operations of the Properties could be adversely affected by a recession, general
economic downturn or a natural disaster in the areas where the properties are
located.
At December 31, 1997, the Operating Partnership's three retail properties
in Portland Oregon with a carrying amount of $10,500 are held for sale. These
properties consist of approximately 235,838 square feet of retail space which
contributed $2,301 to revenues and $1,724 to net income in 1997.
During the year ended December 31, 1997, the Operating Partnership sold
four properties to third parties for $15,470 resulting in a gain of $5,114.
During the year ended December 31, 1996, the Operating Partnership sold two
properties to third parties for $13,350, resulting in a gain of $2,477. During
the year ended December 31, 1995, the Operating Partnership sold two properties
to third parties for $12,147, resulting in a gain of $6,013. The Operating
Partnership utilized Internal Revenue Code Section 1031 to defer the majority of
the taxable gains resulting from these sales.
For the years ended December 31, 1997, 1996, and 1995, depreciation expense
on real estate was $13,913, $8,820 and $7,978, respectively, and amortization of
capitalized leasing commissions was $79, $35, and $29, respectively.
Investments
The Operating Partnership owns all of the 19,000 shares of the non-voting
preferred stock of Essex Management Corporation (EMC). Management of the
Operating Partnership owns 100 percent of the common stock of EMC. EMC was
formed to provide property and asset management services to various partnerships
not controlled by the Operating Partnership, along with the neighborhood
shopping centers owned by the Operating Partnership. The Operating Partnership
accounts for its investment in EMC on the equity method of accounting.
The Operating Partnership owns all of the 62,500 and 31,800 shares of
non-voting preferred stock of Essex Sacramento, Inc. (Sacramento) and Essex
Fidelity I Corporation (Fidelity I), respectively. Management of the Company
owns 100 percent of the common stock of Sacramento and Fidelity I. Sacramento
and Fidelity I hold a 68% and 32% partnership interest respectively, in Essex
Fidelity Sacramento Partners (EFSP). EFSP owns a 20 percent equity interest in
Blythe, Limited Partnership, which was formed to acquire, manage and dispose of
a portfolio of mortgages and real estate purchased from a federal savings bank
and owns a 20 percent equity interest in Golden Bear Homes I - IV, Limited
Partnerships, which were formed to acquire, manage and dispose of residential
real properties purchased from a third party asset management company. Both
Blythe, Limited Partnership and Golden Bear Homes I - IV, Limited Partnerships
have completed their chartered business plan and are in the process of being
liquidated. The Operating Partnership accounts for its investments in Sacramento
and Fidelity I on the equity method of accounting.
The shares of non-voting preferred stock in EMC, Sacramento and Fidelity I
are entitled to a preferential dividend of $0.80 per share per annum. Through
these preferred stock investments, the Operating Partnership will be eligible to
receive a preferential liquidation value of $10.00 per share plus all cumulative
and unpaid dividends.
During 1995, the Operating Partnership acquired limited partnership
interests in Essex Bristol Partners (Bristol), Essex San Ramon Partners (San
Ramon) and Jackson School Village, L.P. (JSV). Bristol and San Ramon were formed
to acquire, own and operate multi-family rental properties located in Sunnyvale
and San Ramon, California, respectively. JSV was formed to develop and operate a
200-unit garden style apartment community in Hillsboro, Oregon. The general
partner in JSV provides development services to the partnership. The Operating
Partnership accounts for its investment in JSV on the equity method of
F-11
<PAGE> 62
ESSEX PORTFOLIO, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS, EXCEPT FOR PER UNIT AND SHARE AMOUNTS)
accounting. Prior to January 30, 1997, the Operating Partnership accounted for
its investment in Bristol and San Ramon on the equity method of accounting.
On January 30, 1997, the Operating Partnership purchased the ownership
interest of its joint venture partner, Acacia Capital Corporation (Acacia), in
Bristol and San Ramon, and is now the sole owner of these properties. The
Operating Partnership acquired Acacia's approximate 55% ownership interest in
these properties for $7,900. Concurrent with the purchase of Acacia's ownership
interest, these properties, their underlying debt and their operations have been
consolidated into the Operating Partnership's financial statements. The debt
consolidated into the balance sheet consists of an $18,520, 7.25% fixed rate
loan secured by the San Ramon property, due in December 2000, and a $12,298,
7.54% fixed rate loan, with interest fixed pursuant to an interest rate swap
agreement, secured by the Bristol property and due in June 2002. In April 1997,
the Operating Partnership repaid the loan secured by the Bristol property with a
portion of the proceeds from its sale of 2,000,000 shares of Common Stock.
In May of 1997, the Operating Partnership invested as a limited partner in
two existing partnerships which owned multi-family properties: Anchor Village
Apartments ("Anchor Village"), a 301 unit apartment community located in
Mukilteo, Washington and Highridge Apartments ("Highridge"), a 255 unit
apartment community located in Ranchos Palos Verdes, California. Anchor Village
was valued at $13,100 and Highridge was valued at $25,300. These investments
were made under arrangements whereby EMC became the general partner and the
existing partners were granted rights of redemption for their interests. Such
partners can request to be redeemed and the Operating Partnership can elect to
redeem for cash or by issuing shares its common stock. Conversion values will be
based on 98 percent of the market value of the Operating Partnership's shares at
the time of redemption multiplied the number of shares stipulated under the
above arrangements. The Operating Partnership accounts for its investments in
these properties on the equity method of accounting.
Investments consists of the following as of December 31, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
------ ------
<S> <C> <C>
Investments in joint ventures:
Limited partnership interest of 49.9% in Jackson School
Village, L.P. ......................................... $2,259 $2,032
Limited partnership interest of 1% in Highridge
Apartments............................................. (409) --
Limited partnership interest of 1% in Anchor Village
Apartments............................................. (270) --
Limited partnership interest of 45% in Essex Bristol
Partners............................................... -- 1,921
Limited partnership interest of 45% in Essex San Ramon
Partners............................................... -- 3,436
------ ------
1,580 7,389
------ ------
Investments in corporations:
Essex Management Corporation -- 19,000 shares of preferred
stock.................................................. 190 190
Essex Fidelity I Corporation -- 31,800 shares of preferred
stock.................................................. 331 331
Essex Sacramento Corporation -- 62,500 shares of preferred
stock.................................................. 122 627
------ ------
643 1,148
------ ------
Other investments........................................... 124 --
------ ------
$2,347 $8,537
====== ======
</TABLE>
F-12
<PAGE> 63
ESSEX PORTFOLIO, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS, EXCEPT FOR PER UNIT AND SHARE AMOUNTS)
(6) RECEIVABLES
Receivables consists of the following at December 31, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
------ ------
<S> <C> <C>
Notes and other related party receivables:
Note receivable from Highridge Apartments secured bearing
interest at 9%, due March, 2008........................ $2,750 $ --
Note receivable from Fidelity I and Sacramento, secured,
bearing interest at 9%, due on demand.................. -- 718
Note receivable from Fidelity I, secured, bearing interest
at 12%, due December 1998.............................. 1,580 --
Notes receivable from Fidelity I and JSV, secured, bearing
interest at 9.5 - 10%, due 2015........................ 726 726
Receivable from Highridge Apartments, non-interest
bearing, due on demand................................. 1,699 --
Other related party receivables, substantially due on
demand................................................. 2,509 918
------ ------
$9,264 $2,362
====== ======
</TABLE>
Other related party receivables consist primarily of accrued interest
income on related party notes receivable, loans to officers, advances and
accrued management fees from joint venture partnerships, and unreimbursed
expenses due from EMC.
The Company's officers and directors do not have a substantial economic
interest in these related party entities.
<TABLE>
<CAPTION>
1997 1996
------ ------
<S> <C> <C>
Notes and other receivables:
Note receivable from the co-tenants in the Pathways
property, secured, interest payable monthly at 9%,
principal due June 2001................................ $4,596 $4,728
Other receivables......................................... 4,006 565
------ ------
$8,602 $5,293
====== ======
</TABLE>
(7) RELATED PARTY TRANSACTIONS
All general and administrative expenses of the Operating Partnership and
EMC are initially borne by the Operating Partnership, with a portion
subsequently allocated to EMC based on a business unit allocation methodology,
formalized and approved by management and the board of directors. Management
believes the business unit allocation methodology so applied is reasonable.
Expenses allocated to EMC for the years ended December 31, 1997, 1996 and 1995
totaled $987, $1,752 and $2,116, respectively, and are reflected as a reduction
in general and administrative expenses in the accompanying consolidated
statements of operations.
EMC provides property management services to the Operating Partnership's
neighborhood shopping centers. The fees paid by the Operating Partnership for
the years ended December 31, 1997, 1996 and 1995, were $80, $113 and $108,
respectively, and are included in administrative expense in the accompanying
consolidated statements of operations.
Included in rental revenue in the accompanying consolidated statements of
operations are rents earned from space leased to Marcus & Millichap (M&M),
including operating expense reimbursements, of $709, $681 and $675 for the years
ended December 31, 1997, 1996 and 1995, respectively.
F-13
<PAGE> 64
ESSEX PORTFOLIO, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS, EXCEPT FOR PER UNIT AND SHARE AMOUNTS)
During the years ended December 31, 1997, 1996 and 1995, the Operating
Partnership paid brokerage commissions totaling $590, $312 and $405 to M&M on
the sales of real estate. The commissions are reflected as a reduction of the
gain on sales of real estate in the accompanying consolidated statements of
operations. EMC is entitled to receive a percentage of M&M brokerage commissions
on certain transactions in which the Operating Partnership is a party. The Board
of Directors of the Company periodically reviews the calculation of this
percentage.
Included in other income for the years ended December 31, 1997, 1996 and
1995 are $139, $820 and $183, respectively, representing dividends from EMC and
Essex Sacramento and management fees and equity income (loss) from Essex Bristol
Partners, Essex San Ramon Partners, Jackson School Village, Highridge Apartments
and Anchor Village Apartments. Interest income includes $1,286, $214 and $358
earned principally on the notes receivable from Essex Fidelity I, Essex
Sacramento, the partnerships which collectively own Highridge and the
partnerships which collectively own Anchor Village and the partnerships which
collectively own a 30.7% minority interest in Pathways Apartments for the years
ended December 31, 1997, 1996 and 1995, respectively.
(8) MORTGAGE NOTES PAYABLE
Mortgage notes payable consist of the following at December 31, 1997 and
1996:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Mortgage notes payable to a mutual life insurance company,
secured by deeds of trust, bearing interest at 7.45%,
interest only payments due through June 1996, monthly
principal and interest installments due thereafter, final
principal payment of $40,800 due June 2001................ $ 48,078 $ 50,240
Multifamily housing demand mortgage revenue bonds secured by
deed of trust on rental property, bearing interest at
7.69%, principal and interest installments due monthly,
remaining principal due June 2018. Among the terms imposed
on the property, which is security for the bonds, is that
twenty percent of the units are subject to tenant income
qualifications criteria................................... 8,915 --
Multifamily housing demand mortgage revenue bonds secured by
deeds of trust on rental properties and guaranteed by
collateral pledge agreements, payable monthly at a
variable rate as defined in the Loan Agreement
(approximately 3.9 % for December 1997), plus credit
enhancement and underwriting fees of approximately 1.9%
The bonds are convertible to a fixed rate. Among the terms
imposed on the properties, which are security for the
bonds, is that twenty percent of the units are subject to
tenant income qualification criteria. Principal balances
are due in full at various maturity dates from July 2014
through October 2026. Bonds in the aggregate of $29,220
are subject to interest rate protection agreements through
August 2003, limiting the interest rate with respect to
such bonds to a maximum interest rate of 7.2%............. 58,820 42,820
Mortgage note payable to a life insurance company, secured
by deed of trust, bearing interest at 8.78%, principal and
interest payments due monthly, final principal payment of
$8,500 due December 2002. Under certain conditions this
loan can be converted to an unsecured note payable........ 9,320 --
Mortgage note payable to a mutual life insurance company,
secured by deeds of trust, bearing interest at 7.5%,
principal and interest payments due monthly, final
principal payment of $18,200 due March 2003............... 19,845 19,991
</TABLE>
F-14
<PAGE> 65
ESSEX PORTFOLIO, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS, EXCEPT FOR PER UNIT AND SHARE AMOUNTS)
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Mortgage note payable to a life insurance company, secured
by deeds of trust, bearing interest at 7.08%, principal
and interest payments due monthly, final principal payment
of $25,500 due January 2005. Under certain conditions this
loan can be converted to an unsecured note payable........ 28,000 --
Mortgage notes payable to a life insurance company, secured
by deed of trust, bearing interest at 8.93%, interest only
payments due through March 1997, monthly principal and
interest installments due thereafter, final principal
payment of $6,900 due April 2005. Under certain conditions
this loan can be converted to an unsecured note payable... 8,027 8,100
Note payable to a life insurance company, bearing interest
at 7.25%, secured by deed of trust, interest only payments
due through January 1, 1998, thereafter principal and
interest payments monthly, final principal payment of
$18,000 due December 2000................................. 18,520 --
Mortgage note payable to a commercial bank, secured by deed
of trust, bearing interest at 7.09%, principal and
interest payments due monthly, final principal payment of
$11,600 due March 2006.................................... 14,104 14,321
Four mortgage notes payable to a mortgage finance company
bearing interest from 7.985% to 8.055%, secured by deeds
of trust, principal and interest payments due monthly,
remaining principal due March 2007........................ 17,885 --
Multifamily housing demand mortgage revenue bonds secured by
deed of trust on a rental property and guaranteed by a
collateral pledge agreement, bearing interest at 6.455%,
principal and interest payments due monthly, final
principal payment of $14,800 due January 2026. Among the
terms imposed on the property, which is security for the
bonds, is that twenty percent of the units are subject to
tenant income qualification criteria. The interest rate
will be repriced in February 2008 at the then current
tax-exempt bond rate...................................... 17,483 17,733
-------- --------
$248,997 $153,205
======== ========
</TABLE>
The aggregate scheduled maturities of mortgage notes payable are as
follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
------------------------
<S> <C>
1998.................................... $ 4,110
1999.................................... 4,455
2000.................................... 4,803
2001.................................... 60,935
2002.................................... 24,128
Thereafter................................ 150,566
--------
$248,997
========
</TABLE>
In October 1997, the Operating Partnership entered into five forward
treasury contracts for an aggregate notional amount of $67,500, locking the 10
year treasury rate at between 6.16% - 6.26%. These contracts are to limit the
interest rate exposure on identified future debt financing requirements relating
to real estate under development and a maturity of an $18,520 fixed rate loan.
These contracts will be settled no later than June 2000. If the contracts were
settled as of December 31, 1997, the Operating Partnership would be obliged to
pay approximately $1,316.
The Operating Partnership has a LIBOR based swap contract for a notional
amount of $12,298, fixing the one month LIBOR rate at 6.14%. This contract was
originally purchased to cover a variable rate loan which
F-15
<PAGE> 66
ESSEX PORTFOLIO, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS, EXCEPT FOR PER UNIT AND SHARE AMOUNTS)
was paid off in March 1997. The Operating Partnership has kept this contract in
place to limit its interest rate exposure on borrowings on its LIBOR based lines
of credit. If this contract were settled as of December 31, 1997, the Operating
Partnership would be obligated to pay approximately $91.
In addition, the Operating Partnership has entered into various other
contracts to limit its interest rate exposure on debt related transactions.
During 1997, 1996 and 1995, the Operating Partnership charged $-0-, $42, and $62
to income representing amortization of deferred costs. During 1997, 1996 and
1995, the Company charged $183, $-0-, and $226 of costs relating to the
termination of unmatched positions taken.
During the years ended December 31, 1997, 1996 and 1995, the Operating
Partnership refinanced various mortgages and incurred a loss on the early
extinguishment of debt of $361, $3,441 and $154 related to the write off of the
unamortized loan fees and prepayment penalties.
(9) LINES OF CREDIT
As of December 31, 1997 and 1996, the Operating Partnership had the
following balances outstanding under lines of credit with commercial banks:
<TABLE>
<CAPTION>
1997 1996
------- ----
<S> <C> <C>
Secured $25,110 line of credit, interest payable monthly at
the lower of 1% over the banks' prime rate or 1.5% over
the LIBOR rate, expiring April 1998....................... $ 2,600 $--
Two unsecured, aggregate $50,000 lines of credit, interest
payable monthly at the lower of 1.5% over the LIBOR rate
or .50% over the bank's prime rate, expiring March 1998... 25,000 --
------- ---
$27,600 $--
======= ===
</TABLE>
As of December 31, 1997, the thirty-day LIBOR rate was approximately 5.8%,
and the prime rate was 8.5%.
(10) LEASING ACTIVITY
The rental operations of the Operating Partnership include apartment
properties, which are rented under short term leases (generally, lease terms of
three to twelve months), and retail properties and the headquarters building,
which are rented under cancelable and noncancelable operating leases, certain of
which contain renewal options. Future minimum rental activity for the apartment
properties is not included in the following schedule due to the short-term
nature of the leases.
Future minimum rentals due under noncancelable operating leases with
tenants of the retail properties and the headquarters building are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
------------------------
<S> <C>
1998..................................... $ 3,030
1999..................................... 2,705
2000..................................... 2,205
2001..................................... 1,957
2002..................................... 976
Thereafter................................. 4,892
-------
$15,765
=======
</TABLE>
Included in this schedule is $556 due from M&M in 1998 and $248 due through
May 1999.
F-16
<PAGE> 67
ESSEX PORTFOLIO, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS, EXCEPT FOR PER UNIT AND SHARE AMOUNTS)
In addition to minimum rental payments, retail and headquarters building
tenants pay reimbursements for their pro rata share of specified operating
expenses. Such amounts totaled $905, $964 and $1,018 for the years ended
December 31, 1997, 1996 and 1995, respectively, and are included as rental
revenue and operating expenses in the accompanying consolidated statements of
operations. Certain of these leases also provide for the payment of additional
rent based on a percentage of the tenants' revenues.
(11) FAIR VALUE OF FINANCIAL INSTRUMENTS
Management believes that the carrying amounts of its financial instruments,
which include cash and cash equivalents, restricted cash, notes and other
receivables, mortgage notes payable, lines of credit, accounts payable, and
dividends payable approximate fair value as of December 31, 1997 and 1996,
because interest rates and yields for these instruments are consistent with
yields currently available to the Operating Partnership for similar instruments.
(12) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of quarterly results of operations for 1997 and
1996:
<TABLE>
<CAPTION>
QUARTER QUARTER QUARTER QUARTER
ENDED ENDED ENDED ENDED
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------- ------------ -----------
<S> <C> <C> <C> <C>
1997
Total revenues before gain on sale of real
estate...................................... $18,551 $19,580 $21,975 $24,463
Gain on sale of real estate................... -- 414 4,713 (13)
------- ------- ------- -------
Total revenues...................... $18,551 $19,994 $26,688 $24,450
======= ======= ======= =======
Extraordinary item............................ $ -- $ (104) $ -- $ (257)
======= ======= ======= =======
Net income.......................... $ 5,716 $ 7,772 $11,828 $ 8,006
======= ======= ======= =======
1996
Total revenues before gain on sale of real
estate...................................... $11,554 $11,754 $12,823 $14,562
Gain (loss) on sale of real estate............ -- 2,409 71 (3)
------- ------- ------- -------
Total revenues...................... $11,554 $14,163 $12,894 $14,559
======= ======= ======= =======
Extraordinary item............................ $(2,180) $ (665) $ (472) $ (124)
======= ======= ======= =======
Net income (loss)................... $ (74) $ 4,092 $ 2,804 $ 4,321
======= ======= ======= =======
</TABLE>
(14) 401(K) PLAN
The Operating Partnership has a 401(k) pension plan (the Plan) for all full
time employees who have completed one year of service. Employees may contribute
up to 23% of their compensation, to the maximum allowed under Section 401(k) of
the Internal Revenue Code. The Operating Partnership matches the employee
contributions for non-highly compensated personnel, up to 50% of their
compensation to a maximum of five hundred dollars per year. Operating
Partnership contributions to the Plan were approximately $41, $27, and $37 for
the years ended December 31, 1997, 1996, and 1995.
(15) COMMITMENTS AND CONTINGENCIES
A commercial bank has issued on behalf of the Operating Partnership various
letters of credit relating to financing and development transactions for an
aggregate amount of $9,931 which expire between July 1998 and June 2002.
F-17
<PAGE> 68
ESSEX PORTFOLIO, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS, EXCEPT FOR PER UNIT AND SHARE AMOUNTS)
The Operating Partnership identifies and evaluates prospective investments
on a continuous basis. In connection therewith, the Operating Partnership
initiates letters of intent and extends offers on a regular basis. At December
31, 1997, the Operating Partnership had one commitment to fund an acquisition
for $37,400.
The Operating Partnership is developing six multifamily residential
projects, which are anticipated to have an aggregate of approximately 1,330
multifamily units. The Operating Partnership expects that such projects will be
completed during the next two years. In connection with these projects, the
Operating Partnership has directly, or in cases through its joint venture
partners, entered into contractual construction related commitments with
unrelated third parties for $77,000.
Investments in real property create a potential for environmental
liabilities on the part of the owner of such real property. The Operating
Partnership carries no express insurance coverage for this type of environmental
risk. The Operating Partnership has conducted environmental studies which
revealed the presence of groundwater contamination at certain properties; such
contamination at certain of these properties was reported to have migrated
on-site from adjacent industrial manufacturing operations. The former industrial
users of the properties were identified as the source of contamination. The
environmental studies noted that certain properties are located adjacent to and
possibly down gradient from sites with known groundwater contamination, the
lateral limits of which may extend onto such properties. The environmental
studies also noted that at certain of these properties, contamination existed
because of the presence of underground fuel storage tanks, which have been
removed. Based on the information contained in the environmental studies, the
Operating Partnership believes that the costs, if any, it might bear as a result
of environmental contamination or other conditions at these properties would not
have a material adverse effect on the Operating Partnership's financial
condition or results of operations.
The Operating Partnership is involved in various lawsuits arising out of
the ordinary course of business and certain other legal matters. In the opinion
of management, the resolution of these matters will not have a material adverse
effect on the Operating Partnership's financial condition.
(16) SUBSEQUENT EVENT
Subsequent to December 31, 1997, the Operating Partnership completed the
sale of 1,200,000 units of its 7.875% Series B Cumulative Redeemable Preferred
Units to an institutional investor in a private placement, at a price of $50.00
per unit. The net proceeds of this offering were used to pay off lines of credit
and will be used to fund acquisition and development of additional multifamily
properties.
F-18
<PAGE> 69
SCHEDULE 1
PAGE 1 OF 4
ESSEX PORTFOLIO, L.P.
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
INITIAL COST COSTS
--------------------- CAPITALIZED
BUILDING AND SUBSEQUENT TO
PROPERTY UNITS LOCATION ENCUMBRANCE LAND IMPROVEMENTS ACQUISITION
-------- ----- -------- ----------- ------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Apartments:
The Apple(5) 200 Fremont, CA $ $ 996 $ 5,582 $1,173
Plumtree(5) 140 Santa Clara, CA 3,090 7,421 207
------- ------ ------- ------
-- 4,086 13,003 1,380
------- ------ ------- ------
Summerhill Park 100 Sunnyvale, CA 2,654 4,918 315
Oak Pointe 390 Sunnyvale, CA 4,842 19,776 3,746
Summerhill Commons 184 Newark, CA 1,608 7,582 389
Pathways 296 Long Beach, CA 4,083 16,757 421
Villa Rio Vista 286 Anaheim, CA 3,013 12,661 1,266
Foothill Commons 360 Bellevue, WA 2,435 9,821 1,483
Woodland Commons 236 Bellevue, WA 2,040 8,727 735
Palisades 192 Bellevue, WA 1,560 6,242 1,069
------- ------ ------- ------
48,078 22,235 86,484 9,424
------- ------ ------- ------
Marina Cove(3) 292 Santa Clara, CA -- 5,320 16,431 550
------- ------ ------- ------
Santa Fe Ridge 240 Silverdale, WA 8,027 4,137 7,925 224
------- ------ ------- ------
Wharfside Pointe 142 Seattle, WA 2,245 7,020 381
Emerald Ridge 180 Bellevue, WA 3,449 7,801 236
<CAPTION>
GROSS AMOUNT
CARRIED AT CLOSE OF PERIOD
-------------------------------------- DEPRECIABLE
LAND AND BUILDING AND ACCUMULATED DATE OF DATE LIVES
PROPERTY IMPROVEMENTS IMPROVEMENTS TOTAL(1) DEPRECIATION CONSTRUCTION ACQUIRED (YEARS)
-------- ------------ ------------ -------- ------------ ------------ -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Apartments:
The Apple(5) $ 996 $ 6,755 $ 7,751 $ 4,064 1971 4/82 3-30
Plumtree(5) 3,090 7,628 10,718 996 1975 2/94 3-30
------- ------- -------- -------
4,086 14,383 18,469 5,060
------- ------- -------- -------
Summerhill Park 2,654 5,233 7,887 1,411 1988 9/88 3-40
Oak Pointe 4,842 23,522 28,364 8,052 1973 12/88 3-30
Summerhill Commons 1,517 8,062 9,579 2,246 1987 7/87 3-40
Pathways 4,083 17,178 21,261 4,158 1975 2/91 3-30
Villa Rio Vista 2,984 13,956 16,940 6,364 1968 7/85 3-30
Foothill Commons 2,435 11,304 13,739 3,640 1978 3/90 3-30
Woodland Commons 2,040 9,462 11,502 2,955 1978 3/90 3-30
Palisades 1,560 7,311 8,871 2,412 1969/1977(2) 5/90 3-30
------- ------- -------- -------
22,115 96,028 118,143 31,238
------- ------- -------- -------
Marina Cove(3) 5,320 16,981 22,301 2,156 1974 6/94 3-30
------- ------- -------- -------
Santa Fe Ridge 4,142 8,144 12,286 747 1993 10/94 3-30
------- ------- -------- -------
Wharfside Pointe 2,252 7,394 9,646 922 1990 6/94 3-30
Emerald Ridge 3,445 8,041 11,486 939 1987 11/94 3-30
</TABLE>
F-19
<PAGE> 70
SCHEDULE 1
PAGE 2 OF 4
<TABLE>
<CAPTION>
INITIAL COST COSTS
--------------------- CAPITALIZED
BUILDING AND SUBSEQUENT TO
PROPERTY UNITS LOCATION ENCUMBRANCE LAND IMPROVEMENTS ACQUISITION
-------- ----- -------- ----------- ------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Sammamish View 153 Bellevue, WA 3,324 7,501 120
------- ------ ------- ------
19,845 9,018 22,322 737
------- ------ ------- ------
Inglenook Court 224 Bothell, WA 8,300 3,467 7,881 996
------- ------ ------- ------
Brighton Ridge 264 Renton WA 2,623 10,800 500
Landmark Apartments 285 Hillsboro, OR 3,655 14,200 208
Eastridge
Apartments 188 San Ramon, CA 6,068 13,628 278
------- ------ ------- ------
28,000 12,346 38,628 986
------- ------ ------- ------
Camarillo Oaks 564 Camarillo, CA 28,335 10,953 25,254 1,204
------- ------ ------- ------
Windsor Ridge 216 Sunnyvale, CA 14,104 4,017 10,315 298
------- ------ ------- ------
Wandering Creek 156 Kent, WA 5,300 1,285 4,980 544
------- ------ ------- ------
<CAPTION>
GROSS AMOUNT
CARRIED AT CLOSE OF PERIOD
-------------------------------------- DEPRECIABLE
LAND AND BUILDING AND ACCUMULATED DATE OF DATE LIVES
PROPERTY IMPROVEMENTS IMPROVEMENTS TOTAL(1) DEPRECIATION CONSTRUCTION ACQUIRED (YEARS)
-------- ------------ ------------ -------- ------------ ------------ -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Sammamish View 3,328 7,617 10,945 825 1986 11/94 3-30
------- ------- -------- -------
9,025 23,052 32,077 2,686
------- ------- -------- -------
Inglenook Court 3,472 8,872 12,344 1,306 1985 10/94 3-30
------- ------- -------- -------
Brighton Ridge 2,652 11,271 13,923 360 1986 12/96 3-30
Landmark Apartments 3,695 14,368 18,063 639 1990 08/96 3-30
Eastridge
Apartments 6,087 13,887 19,974 616 1988 08/96 3-30
------- ------- -------- -------
12,434 39,526 51,960 1,615
------- ------- -------- -------
Camarillo Oaks 10,902 26,509 37,411 890 1985 07/96 3-30
------- ------- -------- -------
Windsor Ridge 4,017 10,613 14,630 2,404 1989 03/89 3-40
------- ------- -------- -------
Wandering Creek 1,294 5,515 6,809 416 1986 11/95 3-30
------- ------- -------- -------
</TABLE>
<TABLE>
<CAPTION>
INITIAL COST COSTS
--------------------- CAPITALIZED
BUILDING AND SUBSEQUENT TO
PROPERTY UNITS LOCATION ENCUMBRANCE LAND IMPROVEMENTS ACQUISITION
-------- ----- -------- ----------- ------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Treetops 172 Fremont, CA 9,800 3,520 8,182 711
------- ------ ------- ------
Foothill/
Twincreeks 176 San Ramon, CA -- 5,875 13,992 168
------- ------ ------- ------
Bristol Commons 188 Sunnyvale, CA -- 5,278 11,853 450
------- ------ ------- ------
The Shores 348 San Ramon, CA 18,520 8,789 18,252 769
------- ------ ------- ------
The Laurels 164 Mill Creek, WA -- 1,559 6,430 210
------- ------ ------- ------
Meadowood 320 Simi Valley, CA 17,483 7,852 18,592 229
------- ------ ------- ------
Casa Del Mar 96 Pasadena, CA -- 1,857 4,713 32
------- ------ ------- ------
Huntington
Huntington Breakers 342 Beach, CA 16,000 9,306 22,720 32
------- ------ ------- ------
Kings Road 194 Los Angeles, CA -- 4,023 9,527 65
------- ------ ------- ------
<CAPTION>
GROSS AMOUNT
CARRIED AT CLOSE OF PERIOD
-------------------------------------- DEPRECIABLE
LAND AND BUILDING AND ACCUMULATED DATE OF DATE LIVES
PROPERTY IMPROVEMENTS IMPROVEMENTS TOTAL(1) DEPRECIATION CONSTRUCTION ACQUIRED (YEARS)
-------- ------------ ------------ -------- ------------ ------------ -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Treetops 3,574 8,839 12,413 580 1978 01/96 3-30
------- ------- -------- -------
Foothill/
Twincreeks 5,939 14,096 20,035 389 1985 02/97 3-30
------- ------- -------- -------
Bristol Commons 5,283 12,298 17,581 396 1989 01/97 3-30
------- ------- -------- -------
The Shores 8,853 18,957 27,810 613 1988 01/97 3-30
------- ------- -------- -------
The Laurels 1,593 6,606 8,199 214 1981 12/96 3-30
------- ------- -------- -------
Meadowood 7,892 18,781 26,673 691 1986 11/96 3-30
------- ------- -------- -------
Casa Del Mar 1,870 4,732 6,602 79 1972 06/97 3-30
------- ------- -------- -------
Huntington Breakers 9,307 22,751 32,058 126 1984 10/97 3-30
------- ------- -------- -------
Kings Road 4,028 9,587 13,615 136 1979 06/97 3-30
------- ------- -------- -------
</TABLE>
F-20
<PAGE> 71
SCHEDULE 1
PAGE 3 OF 4
<TABLE>
<CAPTION>
INITIAL COST COSTS
--------------------- CAPITALIZED
BUILDING AND SUBSEQUENT TO
PROPERTY UNITS LOCATION ENCUMBRANCE LAND IMPROVEMENTS ACQUISITION
-------- ----- -------- ----------- ------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Park Place/ Windsor
Court 118 Los Angeles, CA -- 3,343 7,881 61
------- ------ ------- ------
Tara Village 168 Tarzana, CA -- 3,178 7,535 192
------- ------ ------- ------
The Bluffs 224 San Diego, CA -- 3,405 7,743 41
------- ------ ------- ------
The Village
Apartments 122 Oxnard, CA -- 2,349 5,579 57
------- ------ ------- ------
Trabuco Villas 132 Lake Forest, CA -- 3,638 8,640 97
------- ------ ------- ------
Villa Scandia 118 Ventura, CA -- 1,570 3,912 55
------- ------ ------- ------
Wilshire Promenade 128 Fullerton, CA -- 3,118 7,385 76
------- ------ ------- ------
Windsor Terrace 110 Pasadena, CA -- 2,188 5,263 380
------- ------ ------- ------
Casa Mango 96 San Diego, CA -- 3,011 7,006 22
------- ------ ------- ------
Riverfront 229 San Diego, CA -- 8,637 20,119 27
------- ------ ------- ------
Bridle Trails 92 Kirkland, WA 4,271 1,500 5,930 26
------- ------ ------- ------
Castle Creek 216 Newcastle, WA -- 4,149 16,028 1
------- ------ ------- ------
Evergreen Heights 200 Kirkland, WA 9,320 3,566 13,395 65
------- ------ ------- ------
Maple Leaf 48 Seattle, WA 2,087 805 3,283 17
------- ------ ------- ------
Meadows @ Cascade 198 Vancouver, WA -- 2,261 9,070 24
------- ------ ------- ------
Spring Lake 69 Seattle, WA 2,286 838 3,399 19
------- ------ ------- ------
Stonehedge Village 196 Bothell, WA 9,241 3,167 12,603 30
------- ------ ------- ------
Village @ Cascade 192 Vancouver, WA -- 2,103 8,753 19
----- ------- ------ ------- ------
9,944
=====
<CAPTION>
GROSS AMOUNT
CARRIED AT CLOSE OF PERIOD
-------------------------------------- DEPRECIABLE
LAND AND BUILDING AND ACCUMULATED DATE OF DATE LIVES
PROPERTY IMPROVEMENTS IMPROVEMENTS TOTAL(1) DEPRECIATION CONSTRUCTION ACQUIRED (YEARS)
-------- ------------ ------------ -------- ------------ ------------ -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Park Place/ Windsor
Court 3,371 7,914 11,285 88 1988 08/97 3-30
------- ------- -------- -------
Tara Village 3,202 7,703 10,905 231 1972 01/97 3-30
------- ------- -------- -------
The Bluffs 3,416 7,773 11,189 130 1974 06/97 3-30
------- ------- -------- -------
The Village
Apartments 2,385 5,600 7,985 78 1974 07/97 3-30
------- ------- -------- -------
Trabuco Villas 3,659 8,716 12,375 53 1985 10/97 3-30
------- ------- -------- -------
Villa Scandia 1,591 3,946 5,537 66 1971 06/97 3-30
------- ------- -------- -------
Wilshire Promenade 3,136 7,443 10,579 227 1992 01/97 3-30
------- ------- -------- -------
Windsor Terrace 2,300 5,531 7,831 45 1972 09/97 3-30
------- ------- -------- -------
Casa Mango 3,021 7,018 10,039 -- 1981 12/97 3-30
------- ------- -------- -------
Riverfront 8,652 20,131 28,783 -- 1990 12/97 3-30
------- ------- -------- -------
Bridle Trails 1,514 5,942 7,456 34 1986 10/97 3-30
------- ------- -------- -------
Castle Creek 4,138 16,040 20,178 -- 1997 12/97 3-30
------- ------- -------- -------
Evergreen Heights 3,577 13,449 17,026 223 1990 06/97 3-30
------- ------- -------- -------
Maple Leaf 811 3,294 4,105 18 1986 10/97 3-30
------- ------- -------- -------
Meadows @ Cascade 2,270 9,085 11,355 25 1988 11/97 3-30
------- ------- -------- -------
Spring Lake 844 3,412 4,256 18 1986 10/97 3-30
------- ------- -------- -------
Stonehedge Village 3,183 12,617 15,800 42 1986 10/97 3-30
------- ------- -------- -------
Village @ Cascade 2,110 8,765 10,875 -- 3-30
------- ------- -------- -------
</TABLE>
F-21
<PAGE> 72
SCHEDULE 1
PAGE 4 OF 4
<TABLE>
<CAPTION>
TOTAL INITIAL COST COSTS
RENTABLE ----------------------- CAPITALIZED
SQUARE BUILDING AND SUBSEQUENT TO
PROPERTY FOOTAGE LOCATION ENCUMBRANCE LAND IMPROVEMENTS ACQUISITION
-------- -------- -------- ----------- -------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Commercial:
925 East Meadow 17,404 Palo Alto, CA 1,401 3,172 144
-------- -------- -------- -------
777 California
(4)(5) 44,827 Palo Alto, CA -- -- 6,700 8,661
-------- -------- -------- -------
Retail:
Canby Square(5) 102,403 Canby, OR $ $ 801 $ 2,507 $ 1,819
Powell Villa
Center(5) 63,645 740 1,393 1,235
Garrison Square(5) 69,790 Vancouver, WA 1,004 1,676 759
------- -------- -------- -------- -------
235,838 -- 2,545 5,576 3,813
------- -------- -------- -------- -------
298,069 $248,997 $181,695 $516,456 $32,836
======= ======== ======== ======== =======
<CAPTION>
GROSS AMOUNT
CARRIED AT CLOSE OF PERIOD
-------------------------------------- DEPRECIABLE
LAND AND BUILDING AND ACCUMULATED DATE OF DATE LIVES
PROPERTY IMPROVEMENTS IMPROVEMENTS TOTAL(1) DEPRECIATION CONSTRUCTION ACQUIRED (YEARS)
-------- ------------ ------------ -------- ------------ ------------ -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Commercial:
925 East Meadow 1,545 3,172 4,717 9 1984 11/97 3-30
-------- -------- -------- -------
777 California
(4)(5) -- 15,361 15,361 3,575 1987 7/86 3-30
-------- -------- -------- -------
Retail:
Canby Square(5) $ 802 $ 4,325 $ 5,127 $ 479 1976 1/90 3-30
Powell Villa
Center(5) 739 2,629 3,368 472 1959 1/90 3-30
Garrison Square(5) 1,004 2,435 3,439 485 1962 1/90 3-30
-------- -------- -------- -------
2,545 9,389 11,934 1,436
-------- -------- -------- -------
$182,416 $548,571 $730,987 $58,040
======== ======== ======== =======
</TABLE>
- ---------------
(1) The aggregate cost for federal income tax purposes is $504,093.
(2) Phase I was built in 1969 and Phase II was built in 1977.
(3) A portion of land is leased pursuant to a ground lease expiring in 2028.
(4) Land is leased pursuant to a ground lease expiring in 2054.
(5) These properties secure the Operating Partnership's $25,110 line of credit.
A summary of activity for real estate and accumulated depreciation is as
follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Real estate:
Balance at beginning of year................. $393,809 $284,358 $282,344
Improvements................................. 4,533 3,406 3,193
Acquisition of real estate................... 345,750 118,107 6,265
Disposition of real estate................... (13,105) (12,062) (7,444)
-------- -------- --------
Balance at end of year....................... $730,987 $393,809 $284,358
======== ======== ========
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C> <C>
Real estate: Accumulated depreciation:
Balance at beginning of year................. Balance at beginning of year................... $47,631 $40,281 $34,112
Improvements................................. Dispositions................................... (3,504) (1,470) (1,809)
Acquisition of real estate................... Depreciation expense -- Acquisitions........... 2,086 905 --
Disposition of real estate................... Depreciation expense........................... 11,827 7,915 7,978
------- ------- -------
Balance at end of year....................... Balance at end of year......................... $58,040 $47,631 $40,281
======= ======= =======
</TABLE>
F-22
<PAGE> 73
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion is based primarily on the consolidated financial
statements of the Operating Partnership for the years ended December 31, 1997,
1996 and 1995. This information should be read in conjunction with the
accompanying consolidated financial statements and notes thereto.
The Operating Partnership holds directly or indirectly all of the Company's
interests in the Properties and all of the Company's operations relating to the
Properties are conducted through the Operating Partnership The Company is the
sole general partner of the Operating Partnership and, as of December 31, 1997,
owned an 89.9% general partnership interest in the Operating Partnership.
GENERAL BACKGROUND
The Operating Partnership's revenues are generated primarily from
multifamily and commercial property rental income, which accounted for 95%, 94%,
and 95% of the Operating Partnership's revenues for the years ended December 31,
1997, 1996, and 1995, respectively. Such properties are located in California,
Washington and Oregon. Occupancy levels for the Operating Partnership's
multifamily properties in these markets have generally remained high (averaging
approximately 95% over the last five years).
Since the Operating Partnership began Operations in June 1994, the
Operating Partnership has acquired ownership interest in 43 multifamily
residential properties, of which 26 are located in California, 16 are located in
Washington and one is located in Oregon, as of December 31, 1997. In aggregate,
these acquisitions consist of a total of 7,694 units and had a total capitalized
cost of approximately $544.6 million. As part of its active portfolio management
strategy, the Operating Partnership has sold, since it began operations, five
multifamily residential properties in Northern California consisting of a total
of 579 units and three of its retail centers in Oregon at an aggregate gross
sales price of approximately $43.0 million resulting in a net aggregate gain of
approximately $14.1 million.
The Operating Partnership has committed approximately $150,000,000 relating
to six development projects comprising approximately 1,330 multifamily units to
be completed over the next two years.
Average financial occupancy rates for the year ended December 31, 1997 for
the Operating Partnership's multifamily properties are as follows:
<TABLE>
<S> <C>
Northern California.......................... 97.3%
Seattle, Washington.......................... 96.4%
Southern California.......................... 95.0%
Portland, Oregon............................. 92.6%
</TABLE>
The commercial properties were 97.2% occupied (based on square footage) as
of December 31, 1997.
F-23
<PAGE> 74
RESULTS OF OPERATIONS
COMPARISON OF YEAR ENDED DECEMBER 31, 1997 TO YEAR ENDED DECEMBER 31, 1996
Total Revenues increased by $33,876,000 or 66.8% to $84,569,000 in 1997
from $50,693,000 in 1996. The following table sets forth a breakdown of these
revenue amounts, including the revenues attributable to properties that the
Operating Partnership owned for both 1997 and 1996 ("the Same Store
Properties").
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
NUMBER OF ------------------ PERCENTAGE
PROPERTIES 1997 1996 DOLLAR CHANGE CHANGE
---------- ------- ------- ------------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Rental income
Same Store Properties
Northern California............ 7 $19,142 $16,791 $ 2,351 14.0%
Seattle Metropolitan........... 9 15,433 14,476 957 6.6
Southern California............ 2 4,872 4,780 92 1.9
Retail and commercial.......... 4 3,964 3,934 30 0.7
-- ------- ------- ------- -----
Total Same Store 22
Properties.............. 43,411 39,981 3,430 8.6%
Properties acquired/disposed of
subsequent to January 1, 1996..... 36,525 7,799 28,726 368.3%
------- ------- ------- -----
Total rental income................. 79,936 47,780 32,156 67.3
Other income........................ 4,633 2,913 1,720 59.0
------- ------- ------- -----
Total revenues...................... $84,569 $50,693 $33,876 66.8%
======= ======= ======= =====
</TABLE>
As set forth in the above table, $28,726,000 of the $33,876,000 increase in
total revenues is attributable to properties acquired or disposed of subsequent
to January 1, 1996. During this period, the Operating Partnership acquired
interests in thirty seven properties, (the "Acquisition Properties"), and
disposed of three multifamily properties and three retail shopping centers.
Of the increase in total revenues, $3,430,000 is attributable to increases
in rental income from the Same Store Properties. Rental income from the Same
Store Properties increased by approximately 8.6% to $43,411,000 in 1997 from
$39,981,000 in 1996. The majority of this increase was attributable to the seven
multifamily Same Store Properties located in Northern California, the rental
income of which increased by $2,351,000 or 14.0% to $19,142,000 in 1997 from
$16,791,000 in 1996. This $2,351,000 increase is primarily attributable to
rental rate increases which were offset by a decrease in average financial
occupancy to 97.3% for the year ended December 31, 1997 from 98.2% for the year
ended December 31,1996. The nine multifamily residential properties located in
the Seattle metropolitan area accounted for the next largest contribution to
this Same Store Properties rental income increase. The rental income of these
properties increased by $957,000 or 6.6% to $15,433,000 in 1997 from $14,476,000
in 1996. This $957,000 increase is attributable to rental rate increases as well
as increases in average financial occupancy which increased to 96.6% for 1997
from 95.6% in 1996.
The increase in total revenue also included an increase of $1,720,000
attributable to interest and other income. The most significant component of
this $1,720,000 increase was an increase in interest income of $1,402,000 which
was largely due to an increase in notes receivable.
Total Expenses increased by $17,337,000 or approximately 45.4% to
$55,537,000 in 1997 from $38,200,000 in 1996. The most significant factor
contributing to this increase is the growth in the Operating Partnership's
multifamily portfolio from 29 properties, (6,624 units) at the end of 1996 to 54
properties, (10,700 units) at December 31, 1997. Interest expense increased by
$1,217,000 or 10.6% to $12,659,000 in 1997 from $11,442,000 in 1996. Such
interest expense increase was primarily due to the net addition of outstanding
mortgage debt in connection with property and investment acquisitions. Property
operating expenses, exclusive of depreciation and amortization, increased by
$10,321,000 or 66.6% to $25,826,000 in 1997 from $15,505,000 in 1996. Of such
increase, $10,046,000 is attributable to properties acquired or disposed of
subsequent to January 1, 1996. Property operating expenses, exclusive of
depreciation and
F-24
<PAGE> 75
amortization as a percentage of rental revenues was 32.3% for 1997 and 32.5% for
1996. General and administrative expenses represent the costs of the Operating
Partnership's various acquisition and administrative departments as well as
corporate and partnership administration and non-operating expenses. Such
expenses increased by $696,000 in 1997 from the 1996 amount. This increase is
largely due to additional staffing requirements resulting from the growth of the
Operating Partnership. General and administrative expenses as a percentage of
total revenues was 2.9% for 1997 and 3.4% for 1996.
Net income increased by $22,179,000 to $33,322,000 in 1997 from $11,143,000
in 1996. The increase in net income was primarily a result of the net
contribution of acquisitions and dispositions, the increase in income from the
Same Store Properties, the increase in the gain on sales of real estate of
$2,637,000 to $5,114,000 in 1997 from $2,477,000 in 1996 and a reduction in
extraordinary loss on early extinguishment of debt of $3,080,000 to $361,000 in
1997 from $3,441,000 in 1996.
COMPARISON OF YEAR ENDED DECEMBER 31, 1996 TO YEAR ENDED DECEMBER 31, 1995.
Total Revenues increased by $6,753,000 or 15.4% to 50,693,000 in 1996 from
$43,940,000 in 1995. The following table sets forth a breakdown of these revenue
amounts, including the revenues attributable to properties that the Operating
Partnership owned for both 1996 and 1995 ("1996/1995 Same Store Properties").
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
NUMBER OF ------------------ PERCENTAGE
PROPERTIES 1997 1996 DOLLAR CHANGE CHANGE
---------- ------- ------- ------------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Rental income
1996/1995 Same Store Properties
Northern California............ 8 $17,975 $16,430 $1,545 9.4%
Seattle Metropolitan........... 8 13,430 12,853 577 4.5
Southern California............ 2 4,780 4,597 183 4.0
Retail and commercial.......... 7 4,821 4,550 271 5.9
-- ------- ------- ------ -----
Total 1996/1995 Same Store
Properties.............. 25 41,006 38,430 2,576 6.7%
Properties acquired/disposed of
subsequent to January 1, 1995..... 6,774 3,210 3,564 111.0%
------- ------- ------ -----
Total rental income................. 47,780 41,640 6,140 14.7
Other income........................ 2,913 2,300 613 26.7
------- ------- ------ -----
Total revenues...................... $50,693 $43,940 $6,753 15.4%
======= ======= ====== =====
</TABLE>
As set forth in the above table, $3,564,000 of the $6,753,000 increase in
total revenues is attributable to properties acquired or disposed of subsequent
to January 1, 1995. During this period, the Operating Partnership acquired
interests in eight properties, and disposed of two multifamily properties.
Of the increase in total revenues, $2,576,000 is attributable to increases
in rental income from the 1996/ 1995 Same Store Properties. Rental income from
the 1996/1995 Same Store Properties increased by approximately 6.7% to
$41,006,000 in 1996 from $38,430,000 in 1995. The majority of this increase was
attributable to the eight multifamily 1996/1995 Same Store Properties located in
Northern California, the rental income of which increased by $1,545,000 or 9.4%
to $17,975,000 in 1996 from $16,430,000 in 1995. This $1,545,000 increase is
primarily attributable to rental rate increases and financial occupancy for this
region increasing to 98.6% for 1996 from 98.4% in 1995. The eight multifamily
residential properties located in the Seattle metropolitan area was the next
largest regional contribution to this 1996/1995 Same Store Properties rental
income increase. The rental income of these properties increased by $577,000 or
4.5% to $13,430,000 in 1996 from $12,853,000 in 1995. This $577,000 increase is
attributable to rental rate increases and financial occupancy for this region
which increased to 95.8% in 1996 from 95.6% in 1995.
F-25
<PAGE> 76
The increase in total revenue also reflected an increase of $613,000
attributable to other income. The most significant components were an increase
in joint venture income of $437,000 and an increase in interest income of
$154,000 which was largely due to an increase in notes receivable.
Total Expenses increased by $2,491,000 or approximately 7.0% to $38,200,000
in 1996 from $35,709,000 in 1995. Interest expense increased by $514,000 or 4.7%
to $11,442,000 in 1996 from $10,928,000 in 1995. Such interest expense increase
was primarily due to the net addition of outstanding mortgage debt in connection
with property acquisitions. Property operating expenses, exclusive of
depreciation and amortization, increased by $1,901,000 or 14.0% to $15,505,000
in 1996 from $13,604,000 in 1995. Property operating expenses, exclusive of
depreciation and amortization, as a percentage of rental revenues was 32.5% for
1996 and 32.7% for 1995. Of such increase, $1,293,000 was attributable to the
properties acquired or disposed of subsequent to January 1, 1995. General and
administrative expenses represent the costs of the Operating Partnership's
various acquisition and administrative departments as well as partnership
administration and non-operating expenses. Such expenses increased by $190,000
in 1996 from the amount for 1995. This increase is largely due to additional
staffing requirements resulting from the growth of the Operating Partnership.
General and administrative expenses as a percentage of total revenues was 3.4%
for 1996 and 3.5% for 1995.
Net income decreased by $2,595,000 to $11,143,000 in 1996 from $13,738,000
in 1995. The decrease in the net income was primarily due to an extraordinary
charge of $3,441,000 related to the early extinguishment of debt, net reduction
in gains on sale of real estate of $3,536,000 from $6,013,000 in 1995 to
$2,477,000 in 1996, partially offset by the net contribution of the acquisition
properties and an increase in net operating income from the 1996/1995 Same Store
Properties.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1997, the Operating Partnership had $4,282,000 of
unrestricted cash and cash equivalents. The Operating Partnership expects to
meet its short-term liquidity requirements (during the next 12 months) by using
working capital, amounts available on lines of credit, and any net cash flow
from operations not distributed. The Operating Partnership believes that its
future net cash flows will be adequate to meet operating requirements and to
provide for payment of dividends by the Company in accordance with REIT
requirements. The Operating Partnership has credit facilities in the committed
amount of approximately $75,110,000. At December 31, 1997 the Operating
Partnership had an outstanding balance of $27,600,000 on its lines of credit.
The Operating Partnership expects to meet its long-term liquidity requirements
(beyond the next 12 months) by using working capital, amounts available on lines
of credit, any portion of undistributed net cash flow, net proceeds from public
and private debt and equity offerings, and proceeds from the disposition of
properties that may be sold from time to time. There can, however, be no
assurance that the Operating Partnership will have access to the debt and equity
markets in a timely fashion to meet long-term liquidity requirements or that
future working capital, net cash flow and borrowings under the lines of credit
will be available, or if available, will be sufficient to meet the Operating
Partnership's needs.
The Operating Partnership's total cash balances decreased $38,423,000 from
$42,705,000 as of December 31, 1996 to $4,282,000 as of December 31, 1997. This
decrease was primarily a result of $263,049,000 of cash used in investing
activities, which was offset by $46,898,000 of cash provided by operating
activities, and $177,728,000 of cash provided by financing activities. Of the
$263,049,000 net cash used in investing activities, $247,886,000 was used to
purchase and upgrade rental properties, and $27,442,000 was used to fund real
estate under development, which was offset by $15,470,000 of proceeds received
from the disposition of one multifamily and three retail properties. The
$177,728,000 net cash provided by financing activities was primarily a result of
$204,931,000 of proceeds from mortgages and other notes payable and lines of
credit, $174,012,000 net proceeds from stock offerings, (including $20,000,000
of net proceeds from a convertible preferred stock sale) and $21,859,000 of
repayments of related party notes and other receivables as offset by
$164,580,000 of repayments of mortgages and other notes payable and lines of
credit, $28,761,000 issued in related party notes and other receivables and
$28,956,000 of dividends/distributions paid.
F-26
<PAGE> 77
As of December 31, 1997, the Operating Partnership's outstanding
indebtedness under mortgages and lines of credit of consisted of $190,177,000 in
fixed rate debt, $27,600,000 of variable rate debt and $58,820,000 of debt
represented by tax exempt variable rate demand bonds, of which $29,220,000 is
capped at a maximum interest rate of 7.2%.
As of December 31, 1997, 35 of the Operating Partnership's majority owned
properties were encumbered by debt. The total amount of the outstanding debt is
$276,597,000. The agreements underlying these encumbrances contain customary
restrictive covenants which the Operating Partnership believes do not have a
material adverse effect on its operations. Currently, the Operating Partnership
is in compliance with such covenants. As of December 31, 1997, the Operating
Partnership had mortgages on 17 Properties which were secured by deeds of trust
relating solely to those Properties, one mortgage which was cross-collateralized
by 8 Properties and two mortgages each of which were cross-collateralized by 3
Properties. The Operating Partnership also held a line of credit that was
secured by 6 properties.
For the year ended December 31, 1997, non-revenue generating capital
expenditures totaled approximately $2,270,000 or an annualized $291 per weighted
average occupancy unit. The Operating Partnership expects to incur approximately
$300 per weighted average occupancy unit in non-revenue generating capital
expenditures for the year ended December 31, 1998. These expenditures do not
include the improvements required by lenders in connection with the origination
of mortgage loans, improvements to acquisition properties to correct physical
deficiencies, expenditures that the Operating Partnership expects to generate
additional revenues, and renovation expenditures required pursuant to tax-exempt
bond financings. The Operating Partnership expects that cash from operations
and/or the lines of credit will fund such expenditures. However, there can be no
assurance that the actual expenditures incurred during 1998 and/or the funding
thereof will not be significantly different than that of the Operating
Partnership's current expectations. The Operating Partnership is developing six
multifamily residential projects, which are anticipated to have an aggregate of
approximately 1,330 multifamily units. The Operating Partnership expects that
such projects will be completed during the next two years (1998 and 1999). Such
projects involve certain risks inherent in real estate development. In
connection with these development projects, the Operating Partnership has
directly, or in cases through its joint venture partners, entered into
contractual construction related commitments with unrelated third parties for
approximately $77 million. The Operating Partnership expects to fund such
commitments with some combination of its lines of credit, net proceeds from
public and/or private debt and equity offerings and any portion of undistributed
net cash flow.
The Operating Partnership pays quarterly distributions from cash available
for distribution. Until it is distributed, cash available for distribution is
invested by the Operating Partnership primarily in short-term investment grade
securities or is used by the Operating Partnership to reduce balances
outstanding under its lines of credit.
In September 1996, the Company sold $20,000,000 of its 8.75% Convertible
Preferred Stock, Series 1996A (the "Convertible Preferred Stock") to
Tiger/Westbrook Real Estate Fund, L.P., and Tiger/Westbrook Real Estate
Co-Investment Partnership, L.P., (collectively "Tiger/Westbrook"). On June 20,
1997, the Company completed the second phase of the this transaction with the
sale of an additional $20,000,000 of its Convertible Preferred Stock to
Tiger/Westbrook.
During 1996, the Company sold shares of Common Stock in public offerings in
August and December. In connection with the August and December 1996 offerings,
the Company sold 2,530,000 and 2,783,000 shares at $22.75 and $27.75 per share,
respectively. The net proceeds received for these two transactions were
$53,996,000 and $72,468,000, respectively.
During 1997, the Company sold additional shares of Common Stock in public
offerings in March, September and December. In connection with the March,
September and December 1997 offerings, the Company sold 2,000,000, 1,495,000 and
1,500,000 shares at $29.13, $31.00 and $35.50 per share, respectively. The net
proceeds received for these transactions were $58,119,000, $46,080,000 and
$49,814,000, respectively.
Subsequent to December 31, 1997, the Operating Partnership completed the
sale of 1,200,000 units of its 7.875% Series B Cumulative Redeemable Preferred
Units to an institutional investor in a private placement at
F-27
<PAGE> 78
a price of $50.00 per unit. Such units are convertible into non-voting preferred
stock of the Company after ten years from the February 1998 completion of the
sale or earlier under certain circumstances. The Operating Partnership utilized
the proceeds of this transaction to fund the acquisition of multifamily
properties, to reduce outstanding indebtedness and for general corporate
purposes.
Prior to the filing of the registration statement to which this Prospectus
is a part, the Company had approximately $42,000,000 of capacity remaining on a
previously filed registration statement which registered shares of common stock,
preferred stock, depository shares and warrants to purchase common and preferred
stock.
The Operating Partnership is currently evaluating appropriate courses of
action regarding "year 2000" compliance. The Operating Partnership has contacted
its current software vendor and has determined that an upgraded package will be
available for implementation. Total costs are not expected to have a material
impact on operations.
FUNDS FROM OPERATIONS
Industry analysts generally consider Funds from Operations an appropriate
alternative measure of performance of an equity REIT. Generally, Funds from
Operations adjusts net income for non-cash charges such as depreciation and
amortization and non-recurring gains or losses. Management generally considers
Funds from Operations to be a useful financial performance measurement of an
equity REIT because, together with net income and cash flows, Funds from
Operations provides investors with an additional basis to evaluate the
performance of a REIT and its ability to incur and service debt and to fund
acquisitions and other capital expenditures. Funds from Operations does not
represent net income or cash flows from operations as defined by generally
accepted accounting principles (GAAP) and does not necessarily indicate that
cash flows will be sufficient to fund cash needs. It should not be considered as
an alternative to net income as an indicator of the Operating Partnership's
operating performance or to cash flows as a measure of liquidity. Funds from
Operations does not measure whether cash flow is sufficient to fund all cash
needs including principal amortization, capital improvements and distributions
to stockholders. Funds from Operations also does not represent cash flows
generated from operating, investing or financing activities as defined under
GAAP. Further, Funds from Operations as disclosed by other REITs may not be
comparable to the Company's calculation of Funds from Operations. The following
table sets forth the Operating Partnership's calculation of actual Funds from
Operations for 1997, 1996 and 1995.
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE QUARTER ENDED
ENDED -------------------------------------------------------
DECEMBER 31, DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31,
1997 1997 1997 1997 1997
------------ ------------ ------------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Income before minority
interest....................... $33,785,000 $ 8,213,000 $12,612,000 $ 7,217,000 $5,743,000
Adjustments:
Depreciation and
amortization................ 13,992,000 4,129,000 3,555,000 3,220,000 3,088,000
Adjustments for unconsolidated
joint ventures.............. 941,000 251,000 242,000 448,000 0
Non-recurring items
Gains of the sales of real
estate.................... (5,114,000) 13,000 (4,713,000) (414,000) 0
Other non-recurring
items(1).................. 499,000 395,000 0 104,000 0
Minority interests............. (603,000) (162,000) (161,000) (142,000) (138,000)
----------- ----------- ----------- ----------- ----------
Funds from operations -- NAREIT
"revised definition"........ $43,500,000 $12,839,000 $11,535,000 $10,433,000 $8,693,000
=========== =========== =========== =========== ==========
Weighted average number of
Shares -- diluted(2)........... 17,152,990 19,435,950 17,860,753 16,624,396 14,557,019
</TABLE>
F-28
<PAGE> 79
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE QUARTER ENDED
ENDED -------------------------------------------------------
DECEMBER 31, DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31,
1996 1996 1996 1996 1996
------------ ------------ ------------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Income before minority
interest....................... $11,529,000 $ 4,423,000 $ 2,904,000 $ 4,184,000 $ 18,000
Adjustments:
Depreciation and
amortization................ 8,855,000 2,342,000 2,276,000 2,047,000 2,190,000
Adjustments for unconsolidated
joint ventures.............. 508,000 129,000 130,000 130,000 119,000
Non-recurring items
Gains of the sales of real
estate.................... (2,477,000) 3,000 (71,000) (2,409,000) 0
Other non-recurring
items(1).................. 3,483,000 124,000 475,000 683,000 2,201,000
Minority
interest -- Pathways........ (560,000) (144,000) (144,000) (132,000) (140,000)
----------- ----------- ----------- ----------- ----------
Funds from operations NAREIT
"revised definition"........ $21,338,000 $ 6,877,000 $ 5,570,000 $ 4,503,000 $4,388,000
=========== =========== =========== =========== ==========
Weighted average number of
Shares -- diluted(2)........... 9,533,269 11,942,857 9,878,075 8,130,000 8,130,000
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE QUARTER ENDED
ENDED -------------------------------------------------------
DECEMBER 31, DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31,
1995 1995 1995 1995 1995
------------ ------------ ------------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Income before minority
interest....................... $14,090,000 $ 7,254,000 $ 2,142,000 $ 2,682,000 $2,012,000
Adjustments:
Depreciation and
amortization................ 8,007,000 1,999,000 2,037,000 2,000,000 1,973,000
Adjustments for unconsolidated
joint ventures.............. 121,000 68,000 51,000 0 0
Non-recurring items
Gains of the sales of real
estate.................... (6,013,000) (5,224,000) 0 (789,000) 0
Other non-recurring
items(1).................. 442,000 249,000 26,000 167,000 0
Minority
interest -- Pathways........ (527,000) (155,000) (123,000) (129,000) (120,000)
----------- ----------- ----------- ----------- ----------
Funds from operations -- NAREIT
"revised definition"........ $16,120,000 $ 4,191,000 $ 4,133,000 $ 3,931,000 $3,865,000
=========== =========== =========== =========== ==========
Weighted average number of
Shares -- diluted(2)........... 8,130,000 8,130,000 8,130,000 8,130,000 8,130,000
</TABLE>
- ---------------
(1) Other non-recurring items for the years ended December 31, 1997, 1996 and
1995 consists of $138,000, $42,000 and $288,000 of loss from hedge
termination and $361,000, $3,441,000 and $154,000 of loss on the early
extinguishment of debt, respectively. These non-recurring items are excluded
from the Funds from Operations calculation since they are non-operational in
nature, infrequent in occurrence and inclusion would distort the comparative
measurement of the Operating Partnership's performance over time.
(2) Assumes conversion of all outstanding operating partnership interests in the
Operating Partnership and Convertible Preferred Stock into shares of the
Company's common stock. Also includes common stock equivalents.
The National Association of Real Estate Investment Trusts ("NAREIT"), a
leading industry group, has approved a revised definition of Funds from
Operations, which provides, in part, that the amortization of deferred financing
costs is no longer to be added back to net income in the calculation of Funds
for Operations. Consistent with the NAREIT recommendation Essex has adopted this
new definition beginning in 1996. The following table sets forth Essex's
calculation of actual Funds from Operations for 1997, 1996 and 1995 using the
revised definition.
F-29
<PAGE> 80
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The expenses, other than underwriting discounts and commissions, in
connection with the offering of the securities being registered are set forth
below. All of such expenses are estimates, except the Securities Act
registration fee.
<TABLE>
<S> <C>
Securities Act Registration Fee............................. $162,250
Fee of Rating Agencies...................................... 50,000
Printing fees............................................... 50,000
Legal fees and expenses..................................... 75,000
Accounting fees and expenses................................ 20,000
New York Stock Exchange Filing Fees......................... 25,000
Trustee expenses and fees................................... 15,000
Blue sky fees and expenses.................................. 15,000
Miscellaneous expenses...................................... 37,750
--------
Total............................................. $450,000
========
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Maryland General Corporation Law (the "MGCL") permits a Maryland
corporation to include in its charter a provision limiting the liability of its
directors and officers to the corporation and its stockholders for money damages
except for (i) actual receipt of an improper benefit or profit in money,
property or services or (ii) active and deliberate dishonesty established by a
final judgment as being material to the cause of action. The Charter contains
such a provision which limits such liability to the maximum extent permitted by
the MGCL.
The Charter authorizes the Company to obligate itself to indemnify its
present and former officers and directors and to pay or reimburse reasonable
expenses for such individuals in advance of the final disposition of a
proceeding to the maximum extent permitted from time to time by the laws of
Maryland. The Bylaws of the Company obligate it to indemnify, and advance
expenses to present, former and proposed directors and officers to the maximum
extent permitted by Maryland law. The MGCL permits a corporation to indemnify
its present and former directors and officers, among others, against judgments,
penalties, fines, settlements and reasonable expenses actually incurred by them
in connection with any proceeding to which they may be made a party by reason of
their services in those or other capacities unless it is established that (a)
the act or omission of the director or officer was material to the matter giving
rise to the proceeding and (i) was committed in bad faith or (ii) was the result
of active and deliberate dishonesty, (b) the director or officer actually
received an improper personal benefit in money, property or services, or (c) in
the case of any criminal proceeding, the director or officer had reasonable
cause to believe that the act or omission was unlawful. However, a corporation
may not indemnify for an adverse judgment in a suit by or in the right of the
corporation. In addition, the MGCL requires the Company, as conditions to
advancing expenses, to obtain (i) a written affirmation by the director or
officer of his good-faith belief that he has met the standard of conduct
necessary for indemnification by the Company as authorized by the applicable
Bylaws and (ii) a written statement by him or on his behalf to repay the amount
paid or reimbursed by the Company if it shall ultimately be determined that the
standard of conduct was not met. The Bylaws of the Company also permit the
Company to provide indemnification and advance or expenses to a present or
former director or officer who served a predecessor of the Company in such
capacity, and to any employee or agent of the Company or a predecessor of the
Company. Finally, the MGCL requires a corporation (unless its charter provides
otherwise, which the Company's charter does not) to indemnify a director or
officer who has been successful, on the merits or otherwise, in the defense of
any proceedings to which he is made a party by reason of his service in that
capacity.
II-1
<PAGE> 81
The Company has entered into indemnification agreements with each of the
directors and executive officers of the Company to provide them with
indemnification to the full extent permitted by the Charter and Bylaws of the
Company.
The Company maintains an insurance policy which provides liability coverage
for directors and officers of the Company.
ITEM 16. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
1.1* Underwriting Agreement
3.1 Articles of Amendment and Restatement of Essex dated June
22, 1995 (incorporated by reference to Exhibit 3.1 to Essex
Property Trust, Inc.'s Annual Report on Form 10-K for the
year ended December 31, 1996).
3.2 Articles Supplementary of Essex Property Trust, Inc. for the
8.75% Convertible Preferred Stock, Series 1996A,
(incorporated by reference to Exhibit 3.1 to Essex's Current
Report on Form 8-K, filed August 13, 1996).
3.3 First Amendment to Articles of Amendment and Restatement of
Essex Property Trust, Inc., (incorporated by reference to
Exhibit 3.1 to Essex's Current Report on Form 10-Q as of
September 30, 1996).
3.4 Certificate of Correction dated December 20, 1996
(incorporated by reference to Exhibit 3.4 to Essex Property
Trust, Inc.'s Annual Report on Form 10-K for the year ended
December 31, 1996).
3.5 Articles Supplementary for the 7.875% Series B Cumulative
Redeemable Preferred Stock (incorporated by reference to
Exhibit 3.1 to Essex's Current Report on Form 8-K filed
March 3, 1998).
3.6 Amended and Restated Bylaws of Essex Property Trust, Inc.,
(incorporated by reference to Exhibit 3.2 to Essex's Current
Report on Form 8-K, filed August 13, 1996).
3.7 Certificate of Amendment of the Bylaws of Essex Property
Trust, Inc., dated December 17, 1996 (incorporated by
reference to Exhibit 3.6 to Essex Property Trust, Inc.'s
Annual Report on Form 10-K for the year ended December 31,
1996).
4.1* Form of Certificate of Articles Supplementary for additional
series of Preferred Stock or for other classes or series of
Essex Property Trust, Inc.'s capital stock
4.2* Form of Warrant Agreement
4.3* Form of Deposit Agreement
4.4** Form of Indenture
5.1** Opinion of Morrison & Foerster LLP
8.1** Opinion of Morrison & Foerster LLP relating to certain tax
matters
12.1** Statement on Computation of ratio of earnings to combined
fixed charges and preferred stock (incorporated by reference
to Exhibit 12.1 to Essex Property Trust, Inc.'s Annual
Report on Form 10-K for the year ended December 31, 1997)
23.1 Consent of KPMG Peat Marwick LLP
23.2** Consent of Morrison & Foerster LLP (included in Exhibits 5.1
and 8.1)
24.1** Power of Attorney (included on page II-4)
25.1* Statement of Eligibility of Trustee on Form T-1
</TABLE>
- ---------------
* To be filed by amendment or incorporated by reference in connection with the
offering of the applicable Offered Securities.
** Previously filed.
II-2
<PAGE> 82
ITEM 17. UNDERTAKINGS
Each of the undersigned Registrants hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in this registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high and of the estimated
maximum offering price may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate the
changes in volume and price represent no more than 20 percent change in
the maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement; and
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in this registration statement
or any material change to such information in this registration
statement; provided, however, that subparagraphs (i) and (ii) do not
apply if the information required to be included in a post-effective
amendment by those paragraphs is contained in the periodic reports filed
by the Registrants pursuant to Section 13 or Section 15(d) of the
Securities Exchange Act of 1934 that are incorporated by reference in
this registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
herein, and the offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
Each of the undersigned Registrants hereby further undertakes that, for the
purposes of determining any liability under the Securities Act of 1933, each
filing of the Registrants' annual reports pursuant to Section 13(a) or Section
15(d) of the Securities Exchange Act of 1934 that is incorporated by reference
in this registration statement shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
The undersigned Registrants hereby further undertake that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance under Rule 430A and contained in
a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4), or 497(h) under the Securities Act of 1933 shall be deemed to be part
of this registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
Essex Portfolio, L.P., an undersigned Registrant, hereby further undertakes
to file an application for the purpose of determining the eligibility of the
Trustee to act under subsection (a) of Section 310 of the Trust Indenture Act in
accordance with the rules and regulations prescribed by the Commission under
Section 305(b)(2) of the Act.
II-3
<PAGE> 83
The undersigned Registrants undertake that insofar as indemnification for
liabilities arising under the Securities Act of 1933 may be permitted to
directors, officers and controlling persons of the Registrants pursuant to the
provisions described under Item 15 of this registration statement, or otherwise
(other than insurance), each such Registrant has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in such Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by the Registrant of expenses incurred or paid by a director,
officer or controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the Securities being registered, each Registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in such Act and
will be governed by the final adjudication of such issue.
II-4
<PAGE> 84
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, each Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Amendment to the
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Palo Alto, State of California, on May 14, 1998.
ESSEX PROPERTY TRUST, INC.
By: *
------------------------------------
Keith R. Guericke
Chief Executive Officer and
President
ESSEX PORTFOLIO, L.P.
by Essex Property Trust, Inc. as
General Partner
By: *
------------------------------------
Keith R. Guericke
Chief Executive Officer and
President
Pursuant to the requirements of the Securities Act of 1933, this amendment
to the Registration Statement has been signed below by the following persons in
the capacities and on the date indicated. Each person has signed this
Registration Statement (i) in their capacity as an officer or director of the
Company and (ii) as an officer and director of the Company in its capacity as
the general partner of Essex Portfolio, L.P.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
* Chairman of the Board of May 14, 1998
- -------------------------------------------------------- Directors
George M. Marcus
* Director May 14, 1998
- --------------------------------------------------------
William A. Millichap
* Director, Chief Executive May 14, 1998
- -------------------------------------------------------- Officer and President
Keith R. Guericke (Principal Executive
Officer)
* Director, Executive Vice May 14, 1998
- -------------------------------------------------------- President and Chief
Michael J. Schall Financial Officer (Principal
Financial Officer)
/s/ MARK J. MIKL Controller (Principal May 14, 1998
- -------------------------------------------------------- Accounting Officer)
Mark J. Mikl
* Director May 14, 1998
- --------------------------------------------------------
David W. Brady
* Director May 14, 1998
- --------------------------------------------------------
Robert E. Larson
</TABLE>
II-5
<PAGE> 85
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
* Director May 14, 1998
- --------------------------------------------------------
Gary P. Martin
* Director May 14, 1998
- --------------------------------------------------------
Issie N. Rabinovitch
Director
- --------------------------------------------------------
Thomas E. Randlett
Director
- --------------------------------------------------------
Willard H. Smith, Jr.
* Director May 14, 1998
- --------------------------------------------------------
Gregory J. Hartman
* Director May 14, 1998
- --------------------------------------------------------
Anthony Downs
*By: /s/ MARK J. MIKL
----------------------------------------------------
Mark J. Mikl
Attorney-in-Fact
</TABLE>
II-6
<PAGE> 86
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- ------------------------------------------------------------
<S> <C> <C>
1.1* Underwriting Agreement
3.1 Articles of Amendment and Restatement of Essex dated June
22, 1995 (incorporated by reference to Exhibit 3.1 to Essex
Property Trust, Inc.'s Annual Report on Form 10-K for the
year ended December 31, 1996).
3.2 Articles Supplementary of Essex Property Trust, Inc. for the
8.75% Convertible Preferred Stock, Series 1996A,
(incorporated by reference to Exhibit 3.1 to Essex's Current
Report on Form 8-K, filed August 13, 1996).
3.3 First Amendment to Articles of Amendment and Restatement of
Essex Property Trust, Inc., (incorporated by reference to
Exhibit 3.1 to Essex's Current Report on Form 10-Q as of
September 30, 1996).
3.4 Certificate of Correction dated December 20, 1996
(incorporated by reference to Exhibit 3.4 to Essex Property
Trust, Inc.'s Annual Report on Form 10-K for the year ended
December 31, 1996).
3.5 Articles Supplementary for the 7.875% Series B Cumulative
Redeemable Preferred Stock (incorporated by reference to
Exhibit 3.1 to Essex's Current Report on Form 8-K filed
March 3, 1998).
3.6 Amended and Restated Bylaws of Essex Property Trust, Inc.,
(incorporated by reference to Exhibit 3.2 to Essex's Current
Report on Form 8-K, filed August 13, 1996).
3.7 Certificate of Amendment of the Bylaws of Essex Property
Trust, Inc., dated December 17, 1996 (incorporated by
reference to Exhibit 3.6 to Essex Property Trust, Inc.'s
Annual Report on Form 10-K for the year ended December 31,
1996).
4.1* Form of Certificate of Articles Supplementary for additional
series of Preferred Stock or for other classes or series of
Essex Property Trust, Inc.'s capital stock
4.2* Form of Warrant Agreement
4.3* Form of Deposit Agreement
4.4** Form of Indenture
5.1** Opinion of Morrison & Foerster LLP
8.1** Opinion of Morrison & Foerster LLP relating to certain tax
matters
12.1** Statement on Computation of ratio of earnings to combined
fixed charges and preferred stock (incorporated by reference
to Exhibit 12.1 to Essex Property Trust, Inc.'s Annual
Report on Form 10-K for the year ended December 31, 1997)
23.1 Consent of KPMG Peat Marwick LLP
23.2** Consent of Morrison & Foerster LLP (included in Exhibits 5.1
and 8.1)
24.1** Power of Attorney (included on page II-4)
25.1* Statement of Eligibility of Trustee on Form T-1
</TABLE>
- ---------------
* To be filed by amendment or incorporated by reference in connection with the
offering of the applicable Offered Securities.
** Previously filed.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Partners
Essex Portfolio L.P.:
We consent to inclusion in Amendment No. 2 to the Registration Statement (File
No. 333-44467) on Form S-3 of Essex Portfolio, L.P. of our report dated January
30, 1998, relating to the consolidated balance sheets of Essex Portfolio, L.P.
as of December 31, 1997 and 1996, and the related consolidated statements of
operations, partners' capital and cash flows for the years ended December 31,
1997, 1996 and 1995 and the related consolidated financial statement schedule.
We also consent to incorporation by reference in the aforementioned registration
statement of our report dated January 30, 1998, relating to the consolidated
balance sheets of Essex Property Trust, Inc. as of December 31, 1997 and 1996,
and the related consolidated statements of operations, stockholders' equity and
cash flows of Essex Property Trust, Inc. for the years ended December 31, 1997,
1996 and 1995 and the related consolidated financial statement schedule, which
report appears in the December 31, 1997 annual report on Form 10-K.
We also consent to the reference to our firm under the heading "Experts" in the
aforementioned registration statement.
KPMG PEAT MARWICK LLP
San Francisco, California
May 14, 1998
